Why Austerity?

Suddenly it seems to be all the rage.  There’s just one problem. If you actually wanted to try to prolong a recession you couldn’t do much better than imposing austerity.  Well maybe having a nuclear war would be better, but I digress. It hasn’t worked. It has never worked to bring us out of a recession or depression.

In a nutshell, here’s the problem.

The Government cuts back spending.  Now, some people will tell you about welfare mothers (usually without much in teh way of documentaion) roads to nowhere, or expensive military projects.  Which is good, except that is all examples of money that is going to employ people either directly (by employing them) or indirectly (by employing the people who clean their offices, build their roads, and deliver pizza).  Even better, there are very few jobs in teh government that can be considered truly “rich” upper class? Yeah. More usually middle class– and both those classes tend to put a lot of their money into the economy. Unlike the povertry stricken, they have money to spend, unliek the mega wealthy, they have other things to buy than super luxuries and don’t tend to stick it all into investments. In other words, the money goes back into the economy.

Fine, so Austerity hits, and those leeches on the public purse are sent packing.

Where do they go?  Well, in good times, probably to jobs in the public sector– that’s why austerity isn’t so bad in good times.

In case you haven’t noticed it’s not good times.  So they go…to the unemployment line.  Where they take money, but no longer produce anything and even better, can’t buy very much.

Now this trickles down. If you’re poor you don’t go on vacations– tough luck hotel clerk. You don’t buy as much pizza– so long delivery boy.  You don’t buy as much gas, etc, etc, etc. It has a ripple effect throughout the entire economy…

Which comes back as less in the way of tax revenues, so after this glorious move against waste, the government…

… Is worse off than it was before.

I wish this was a bad joke, but right now the people in charge aren’t simply driving for a cliff, they’ve got the accelerator pressed down against the fire wall.

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Downgrade madness

The Stock markets are falling, in the aftermath of S&P’s downgrade…and people are rushing to…

Treasury Bonds.

That’s pretty odd, given that the fears were originally a default on the part of the US, but there are two reasons for this, in my opinion.

 

1. The US is the only game in town.  The Euro is moribound with ever more bad news coming out of member nations.  It’s not just Greece any more, it’s Spain and Italy and nobody has a clue how far the contagion may go–or whether or not the more healthy members, such as Germany will continue to support the unhealthy members. Not being able to pay because congress is acting like a bunch of five year olds is bad– but better then not being able to pay because you have no money in the bank.

2.  Our debt isn’t that bad.

Contrary to the tea party hysteria, the US debt isn’t that bad– letting the Bush tax cuts expire would go a long way towards fixing it, and that would still leave us far below or traditional tax rates, even when you consider how bad they were under such noted Commies, as Ike and Nixon. In other words, and this is related to 1. it’s not that the US doesn’t have the ability to deal with the debt, it’s that we currently don’t have the will.  But the Market is, I believe considering the fact that at this point, if crunch time hits, we can deal with our debt problems and thus a real, as opposed to political, default remains outside of the realm of probability.

 

Oh, there’s another point– if the US collapses, the entire global economy goes down with us– so it’s also likely that investors realize that if the US bond market collapses, it’s not like the money you’re losing will mean anything.

 

Why taking the 14th won’t help our debt crisis.

Well, today was the day, by some accounts that was the deadline for getting our debt crisis fixed. After all, it’s not enough to pass a bill, you have to do everything that is needed to bring it down to having a practical impact.

And that isn’t going to happen.

So now, presuming no moves of compromise, a new hope is that President Obama will “take the 14th” and unilaterally raise the ceiling.

The justification for this can be found here:

Some analysts say no — Obama can simply order the Treasury to pay its bills even if Congress refuses to raise the $14.3 trillion debt ceiling.

“Preventing default is no less justified than using American military power to protect against an armed invasion without a congressional declaration of war,” Bruce Bartlett writes in Fiscal Times.

Like others, Bartlett cites a section of the 14th Amendment to the U.S. Constitution that says, “The validity of the public debt of the United States, authorized by law … shall not be questioned.”

“This could easily justify the sort of extraordinary presidential action to avoid default that I am suggesting,” Bartlett writes.

So, the president orders, and thus, everything works fine, right?

Wrong.  There are two problems with this.

1. There is no real certainty that the 14th amendment would be held to give the executive that sort of wide ranging authority.  This would be a major constitutional crisis, easily on a par with any that have come before, calling into question the separation of powers within the United States government. Some Republicans have already threatened to initiate impeachment proceedings should the president do so, and while we can’t be certain how it would turn out, we can be certain that the federal government would be paralyzed…and would you loan money to a group that might not be in power to repay you?

2.  Bond ratings aren’t simply about ability to pay, they’re about the stability of the government in question.  Third world nations aren’t simply bad risks because they don’t have any money– they’re bad risks because your money may become their money if there is a shift in power.  With a government in disarray with the executive being forced to use powers that have never been tested in the court system and congress quite possibly launching (however doomed to failure) impeachment proceedings, even a blind man would be able to see that our government is not stable, and more importantly, the question of who got paid and how might very well depend on who won the political battle.

In other words, welcome to the united states of Third Worldia.

There is no solution to this other than a debt ceiling deal, in congress.  Clever tricks won’t help, because they will, if anything, make the instability worse.  Fundamentally, the Washington political situation is at a stalemate not seen since the 1930’s, and until that is resolved, don’t be surprised if bond agencies rate us as a bad risk.