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Debt Ceiling Warning: Inaction Would Double Interest Rates, Crash Market

Public efforts by both House Speaker John Boehner and President Obama to convince skeptical new Republican House members to add $2 trillion to the nation’s burdensome $14 trillion debt ceiling are being reinforced by dire warnings from business leaders that failing to OK the increase will lead to inflation, an immediate doubling of interest rates and a killer Wall Street crash.

“If they don’t increase the debt, there will be a huge impact on the economy,” a Wall Street executive told Whispers on background. “Interest rates would spike. S&P and Moody’s would downgrade U.S. debt, raising the price of borrowing, there would be a market sell-off, it would be a disaster.”

While Boehner, who yesterday called for a deal that would OK the debt ceiling increase in return for trillions of dollars in spending cuts, Wall Street lobbyists and banking and business leaders are meeting with several of the new Tea Party-backed House members who pledged to stop raising the ceiling to explain the impact of standing pat.

“A lot of freshmen are new to the issue,” said one of those meeting with the new members, some of whom signed pledges not to raise the debt ceiling no matter what.

Among the specifics the sources say they are telling the new members:

— Inflation could jump, though they aren’t giving any percentage growth.

— Interest rates could double if U.S. debt is downgraded. House loans, for example, that are now below 5 percent, could surge to 9-10 percent, killing any chance of fixing the housing slump or cutting the unemployment rate, now at 9 percent.

— The stock market could suffer a 10 percent drop, far more significant than the 778 point thrashing Wall Street took when the House rejected the government’s $700 billion bank bailout plan in September 2008.

“That market sell-off will look small compared to what we’ll see,” said a Wall Street executive.

So far, the campaign to turn the naysayers around is starting to work, say those involved. Helping is the expectations that the debt ceiling won’t actually be breached until August.

While there have been warnings that the vote must come sooner due to expectations that the cap will be breached this month, officials explained that Treasury can make several moves to postpone that until about August 2.

By: Paul Bedard, U. S. News and World Report, May 10, 2011

May 10, 2011 Posted by | Banks, Businesses, Congress, Conservatives, Debt Ceiling, Deficits, Economic Recovery, Economy, Financial Institutions, GOP, Government, Government Shut Down, Jobs, Lawmakers, Lobbyists, Politics, President Obama, Republicans, Right Wing, Tea Party, Unemployment, Wall Street | , , , , , , , , , | Leave a comment

Standard And Poor’s Attempt To Influence The Political Debate

In what appears to be an attempt to influence the political debate in Washington over federal government deficits, Standards & Poor’s rating firm downgraded U.S. debt to negative from stable. Yes, the raters who blessed virtually every toxic waste subprime security they saw with AAA ratings now see problems with sovereign government debt.

The best thing to do is to ignore the raters — as markets usually do when sovereign debt gets downgraded — but this time stock indexes fell, probably because of the uncertain prospects concerning government budgeting. After all, we barely avoided a government shutdown earlier this month, and with S&P. joining the fray who knows whether the government will continue to pay its bills?

Mind you, this has nothing to do with economics, government solvency or involuntary default. A sovereign government can always make payments as they come due by crediting bank accounts — something recognized by Chairman Ben Bernanke when he said the Fed spends by marking up the size of the reserve accounts of banks.
Similarly Chairman Alan Greenspan said that Social Security can never go broke because government can meet all its obligations by “creating money.”

Instead, sovereign government spending is constrained by budgeting procedure and by Congressionally imposed debt limits. In other words, by self-imposed constraints rather than by market constraints.

Government needs to be concerned about pressures on inflation and the exchange rate should its spending become excessive. And it should avoid “crowding out” private initiative by moving too many resources to our public sector. However, with high unemployment and idle plant and equipment, no one can reasonably argue that these dangers are imminent.

Strangely enough, the ratings agencies recognized long ago that sovereign currency-issuing governments do not really face solvency constraints. A decade ago Moody’s downgraded Japan to Aaa3, generating a sharp reaction from the government. The raters back-tracked and said they were not rating ability to pay, but rather the prospects for inflation and currency depreciation. After 10 more years of running deficits, Japan’s debt-to-gross-domestic-product ratio is 200 percent, it borrows at nearly zero interest rates, it makes every payment that comes due, its yen remains strong and deflation reigns.

While I certainly hope we do not repeat Japan’s economic experience of the past two decades, I think the impact of downgrades by raters of U.S. sovereign debt will have a similar impact here: zip.

By: L. Randall Wray, The New York Times, April 18, 2011

April 19, 2011 Posted by | Bankruptcy, Banks, Congress, Debt Ceiling, Debt Crisis, Deficits, Economic Recovery, Economy, Federal Budget, Financial Institutions, Financial Reform, Government, Government Shut Down, Ideology, Politics, Social Security, Standard and Poor's | , , , , , , , , , , , | Leave a comment

“Talk Of Refusing To Raise The Debt Limit Is Just That—Talk”

The debt limit is the maximum amount of debt the federal government can legally issue at a point in time. The current limit will be reached in the next few months, prompting discussion over whether Congress should raise the limit. As with so many deliberations in Washington, though, the popular discussion on this topic is shrouded in confusion and ignorance, and masks the real issues.

 The underlying issue is simple: If you spend your income on things you want, and the charges then show up the following month on your credit card bill, would you pay those charges? Yes, of course you would. You’ve made purchases and the bill has come due.

That’s the whole question about raising the debt limit—whether Congress should allow the government to pay for spending that has already been approved by Congress. (Remember, it is Congress that authorizes all federal spending.) The answer, of course, is yes.

Now, as you’re paying your credit card bill, you may well conclude that you are spending too much or that you need to earn more income to pay for your current standard of living. But that would be a separate issue, and stiffing the people who supplied the goods you just bought not only wouldn’t resolve that problem, it would in fact make solving it harder, because your credit rating might fall if you don’t pay what you already owe.

Likewise, the separate problem for the U.S. government is how to deal with our dismal fiscal future. The nation needs to resolve the looming fiscal imbalance through spending cuts and tax increases. Not paying the bills we already owe—that is, not raising the debt limit—not only won’t solve the real problem, it would actually make a solution more difficult by undercutting the government’s creditworthiness.

In short, raising the debt limit has nothing to do with controlling future spending or with raising the taxes necessary to pay for future spending. It is just a matter of paying bills that we’ve already incurred.

Raising the debt limit is a completely ordinary event. The limit has been raised 74 times in the last 50 years and 10 times in the last 10. Debt limit increases are associated with both Republicans and Democrats. When federal debt approaches the limit, the president typically favors raising the limit and the other political party demagogues the move. That is exactly what is happening right now.

Talk of refusing to raise the debt limit is just that—talk. Not raising the limit would require Congress to annually find about $1.3 trillion in federal tax increases or spending cuts—a set of policy changes larger than the revenues currently raised by the individual income tax. So far, the legislators who say they oppose a debt limit increase have not come forth with anything near such a plan. Nor should you expect them to. They are just blowing smoke. Eventually, they will agree to raise the limit.

While voters and members of Congress may find it cathartic to channel their outrage and frustration at the underlying budget situation onto the current debt limit discussion, the real question is how to adjust future spending and taxes to bring about future fiscal stability and sanity. The sooner we get to that discussion, the better.

Refusing to raise the debt limit not only would not help solve that problem, it would actually make a solution much harder to achieve.

By: William Gale, Senior Fellow, The Brookings Institute, U. S. News and World Report, March 28, 2011

March 29, 2011 Posted by | Congress, Debt Crisis, Deficits, Economy, Federal Budget, Politics, Voters | , , , , , , , | Leave a comment

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