Beyond the Debt Ceiling: the Death Spiral

But if investors lose confidence in the federal government (which they should have by now) and the interest on the debt rose to an average of 10% (admittedly higher than it has been yet), the scenario of the death spiral would occur at $14.5 trillion dollars.

That is right. A death spiral is possible, if enough investors lose confidence, at below the current $16.7 trillion debt limit.

So where the real debt limit lies depends on where real investors, as a group, draw the line.

It would be interesting to ask a few people like Janet Yellen, Ben Bernanke, Lawrence Summers, Barack Obama, Jacob Lew and John Boehner exactly what they think the real debt limit is.

Even the GAO thinks "Debt held by the public at these high levels could limit the federal government's flexibility to address emerging issues and unforeseen challenges such as another economic downturn or large-scale natural disaster. Furthermore, in both the Baseline Extended and Alternative simulations, debt held by the public continues to grow as a share of GDP in the coming decades, indicating that the federal government remains on an unsustainable long-term fiscal path." [GAO Long Term Outlook]

I predict we are in for stormy fiscal weather. Today the government pays interest at a rate from practically zero on short term notes to 3.75% on 30 year bonds. I believe the Federal Reserve has gone to great lengths to keep interest rates low not just because that encourages an economic recovery, but because it puts off the day of reckoning on the real cost of the national debt.

The Republicans are right, we need to cut spending. But we have to cut spending in a way that minimized the hurt to both people and the economy. That means cutting subsidies to the rich, the upper middle class, and in particular military spending and foreign aid. But the Republicans want to cut payments for seniors and the poor.

The Democrats are right, we need more revenue, which means more taxes. We need a higher tax rate on people earning more than $50 million per year and on large inheritances. We need to close every loophole. We need to legalize and tax "street" drugs. But tax increases do result in less spending and less capital deployment, so they should be reasonable. And the Democrats, too, have been reluctant to cut military spending.

The American economy has been badly hurt by both parties and both branches of Congress and by the President these past few years. By protecting their turfs, including the Pentagon budget, they are weakening the long-term viability of the United States.

Both parties should agree to balance the budget in fiscal 2015 and start paying down the national debt in fiscal 2016. The pain will be shared by everyone, but to the extent it can be targeted by law, it should be dished out to those who have benefited most from the American economy.

Republican, Democratic and Tea Party Debacle

The rhetoric was shrill, but in the end there was much to do about nothing. The federal government has no plan for reviving the economy, and it has no plan for not going bankrupt down the road a few years. But consumers, business decision makers, and bankers were filled with terror throughout July, making the economy worse, not better. A worse economy results in lower taxes and bigger federal deficits, the opposite of what the Tea Party claims to want.

In yesterday's Disecting the Bull blog, Plenty of Stimulus, intended primarily for investors, I argued that the federal stimulus, on the whole, is plentiful.

Unfortunately, Congress and the President, as a whole, have their priorities screwed up.

Military and homeland security spending were exempt from cuts. There are economists who will tell you that military spending creates jobs, but so does make-work spending. The finished goods from military spending create no value. Also, much of the spending goes to troops garrisoned in our overseas empire, rather than into the American economy. Military and homeland security spending do not help the U.S. compete in the international arena against export powers like Germany, South Korea, and China.

Research and development, science, and education are being cut. Can you spell s-t-u-p-i-d? Sure, education money could be better targetted. We have too many English and film majors, not enough people learning technical, business, and science skills. We have way too many high school drop outs.

Regulatory agency budgets are prime targets for cuts. A lot more Americans are going to die because of lack of enforecement of safety rules than could possibly be killed by international terrorists. Banks won't get examined, impure foods will make it to supermarket shelves, passenger planes will crash in mid-air. Thank the Tea Party for that.

What is truly amazing, though, is that nothing is being done about the families being devastated by long-term unemployment. True, at least until the end of 2011 the federal government will continue to extend unemployment benefits to 2 years (most state allow for 6 months, which is fine in a normal economy or mild recession). Unemployment started rising in 2007. Of course there are food stamps, homeless shelters and Medicaid, but unemployed people are economically unproductive. Talent is being wasted when we need to be competing vigorously against the Chinese and Germans. The Republicans pray to their Holy Trinity, gold, free markets, and capitalism, but while the price of gold is up (don't worry, it's a bubble, it will fall again), our free markets have been rather lax at creating jobs.

It CEO's won't hire, government should take action. Here's what an activist President and Congress would do: impose a 95% income tax rate on CEO's of profitable companies that fail to grow their workforces. Include stock options and other benefits when calculating the tax. My guess: full employment by the end of 2011.

Get the housing market started again by allowing the Federal Reserve to loan directly to credit-worthy home buyers at the same interest rates it charges banks. Oh no, that would be socialism! Better depression, suicide, homelessness, riots, and chaos than a bit of healthy socialism.

You can talk about economics, but in the end an economy is just the aggregate of a bunch of human decision makers. You don't want people to be overconfident, or you get bubbles, but you don't want them to be overly cautious either.

The July Debacle did anything but inspire confidence. Hey hey, ho ho, the Tea Party has to go.