Lew on the debt limit: Code red

26 Oct 2015 | Author: | No comments yet »

Congress’s Debt Ceiling Clashes Spike Economy Worries.

— Treasury Secretary Jack Lew in a USA Today op-ed: “[W]ith eight days, as of Monday, until Treasury runs out of borrowing authority on Nov. 3, some in Congress are endangering … progress by once again manufacturing a crisis for our country. American businesses have created 13.2 million jobs since early 2010, jobless claims are at 40-year lows, consumer confidence remains healthy and small businesses are planning further increases in their payrolls. Scores of times over recent decades, lawmakers have taken the country to the brink of financial catastrophe only to swerve away by voting to allow more debt. Treasury secretary said recently that the global economy could face a crisis if Congress failed to meet a November 3 deadline for raising the country’s debt ceiling — the legal limit on the amount of money the government can borrow to pay debts.

Unless the cap is raised beyond the current limit of $18.1 trillion, the Treasury is seen running out of money to pay bills in full and on time by Tuesday next week. On the contrary, it creates artificial crises with possibly calamitous economic consequences and — just as bad — discredits both political parties. After many years of spending hundreds of billions of dollars more than it collects in taxes each year, Washington’s current debt is more than $18 trillion. REAL TALK: RYAN NEEDS A WIN — From a top Dem: “Speaker Ryan can’t agree to a master bargain on the debt limit, etc. without him first having a symbolic point of contention that is a hat-tip to the … Freedom Caucus.

Separately raising the cap on total borrowing amounts to letting Congress come to a fiscal decision, then drunkenly stumble back and demand a mulligan. He writes Friday: Despite some positive news regarding Republican House leadership, short-term markets can be expected to continue to price tail risk scenarios until the path to a debt limit suspension or increase is made clear.

While the debt has been growing more slowly in recent years, it is projected to rise rapidly in the future as the larger-than-usual baby-boom generation retires and begins collecting pensions from the government, and relatively fewer people are in the workforce to pay taxes. The reality of (another) debt ceiling saga was turned up a notch this week, with the Treasury delaying the 2-year note auction out of concern they would be unable to settle that issue (5s and 7s will go on as usual)… Here we are less than two weeks from when the Treasury has said that they will be down to $30bn with no ability to raise net cash later than November 3rd, a day when Social Security payments go out. The question is … what issue will he choose and will the White House play along?” WARNING: INDUSTRIAL PROFITS SLOWING — WSJ’s Theo Francis and Kate Linebaugh: “Quarterly profits and revenue at big American companies are poised to decline for the first time since the recession, as some industrial firms warn of a pullback in spending.

Boehner made his surprise resignation announcement late last month, there was lots of talk that he could perhaps resolve a few of the stickier budget and spending issues before he left — “clean the barn up a little bit,” in his colorful expression. Treasury Secretary Jacob Lew said that without authority to borrow more, the government would have only $30 billion a day in tax receipts to meet bills, which may run $60 billion a day.

From railroads to manufacturers to energy producers, businesses say they are facing a protracted slowdown in production, sales and employment that will spill into next year. But with the clock running short and the required 218 votes in the House missing for any of the existing plans, the probability is increasing for a short-term debt ceiling increase. Remember that the Republican-led chamber is in the midst of a leadership change, with a vote for House speaker set for Thursday, Oct. 29 — mighty close to Nov. 3.

Representative Steny Hoyer of Maryland, a leading House Democrat, said a default on U.S. debt payments would cause chaos in markets, prompt lenders to demand higher interest rates, and seriously damage the U.S. and the interconnected global economy. It would be more accurate to describe the Fed’s modus operandi as one of extreme caution, and raising rates when the fed funds future puts the odds of action at close to zero just does not fit the bill. … “Assuming no action this week, then, Chair Yellen’s view that it likely will be appropriate to raise rates this year either will have to be justified by action in December, or abandoned. Congressional Republicans have so far not settled on a strategy for increasing federal borrowing power — many Republicans refuse to vote for it under any circumstances — though Republican leaders have said they would act this week. If they can’t get the policies they want through the regular democratic give-and-take, they can get it by refusing to budge and thus threaten economic calamity. This includes paying the salaries of our troops, providing benefits to veterans and Social Security recipients, and reimbursing hospitals for taking care of the sick.

House Minority Leader Nancy Pelosi, a California Democrat, told journalists Friday that the debt ceiling issue was “as serious as it gets for our economy” and could boost interest costs for home, auto and education loans. Maya MacGuineas, who heads the Committee for a Responsible Federal Budget, a research group that studies financial issues, said a U.S. default could spark a global recession or even a depression. El-Erian on Bloomberg View: “Federal Reserve officials will paint a mixed economic picture at the conclusion of the two-day meeting of the Open Market Committee that begins Tuesday. Hitting The Ceiling: Unless Congress raises the cap by Nov. 3, Treasury may be left with only incoming taxes and fees to cover expenses, which would not be enough to pay all bills. They will welcome a less alarming international context: The recent disruptions in financial markets outside the U.S. have eased, in particular when it comes to the dislocation in emerging economies. “At the same time, however, they will point to a somewhat less robust U.S. economy in which solid job creation and slightly higher inflation are offset by weaknesses elsewhere. … In all this, the Fed will refrain from taking any new policy actions.

A group of about 40 House Republicans have joined with Democrats to sign a petition requiring a vote on renewing the Export-Import Bank, which many conservatives consider a form of corporate welfare. In previous debt limit impasses, we also saw increased financial market volatility, widening credit spreads and a decline in stock prices — all of which translates into real problems for Main Street by lowering household wealth and increasing borrowing costs for businesses. According to the non-partisan Government Accountability Office, the 2013 debt limit impasse cost the American taxpayer between $38 million and $70 million in additional borrowing costs alone. But Republican Jim Jordan of Ohio said government spending was “out of control.” In a note on his website, he said Washington was spending $6 million per minute and costing every American family $23,000 per year.

But no business or household on Earth has the job of shepherding and husbanding an entire economy; none depends on the overall level of economic growth for its revenue; none has the legal ability to determine what portion its own revenue will be; and certainly none has the legal ability to create its own supply of currency. In a floor speech Friday, the House majority leader, Republican Kevin McCarthy of California, said each American faced a government debt burden of more than $150,000. The government is a thing unto itself — a kind of pass-through point that determines the flow and direction of resources and activity throughout the economy — and it is in fact possible for the government to run, and to need to run, big deficits for very long time periods.

In September 1917, while raising funds for the United States’ entry into World War I, Congress also imposed an aggregate limit on federal debt in addition to individual issuance limits. He said he wanted “a debt ceiling that gets raised but does something about the debt.” Republicans say failing to cut the national debt will hurt the economy by soaking up much of the available loan money and drastically increasing interest costs.

– Qatar Economic and Commercial Dialogue at the State Department … CNBC debate on Wednesday night in Colorado will focus on jobs and the economy … US Chamber on Tuesday holds its 16th annual Legal Reform Summit … SEC at 09:30 a.m. Tuesday hosts the “Achieving the American Dream” leadership forum … Senate Banking at 10:00 a.m. on Wednesday holds a hearing on “The State of Rural Banking: Challenges and Consequences” … New homes sales Monday at 10:00 a.m. expected to dip to 550K from 552K … Case-Shiller home prices at 9:00 a.m. But that inescapably requires “big government” — large and generous welfare programs to move money downwards and maintain aggregate demand; investment in public infrastructure to keep the economy growing; and providing everyone a decent education, decent health care, good roads, clean water, nice parks, healthy environments, safe workplaces, and all the rest. Unless Congress acts, after Nov. 3 we will be running the government on only the cash currently available, a profoundly irresponsible course of action. By that date, we estimate that we will have less than $30 billion cash available to fund a nearly $4 trillion enterprise — clearly not enough when our net expenditures can reach as much as $60 billion on some days.

Only if we reach full employment — when all workers can easily access a job, and employers must compete for labor by hiking wages — do government borrowing and money-printing risk overheating the economy. And here’s the key thing: Precisely because full employment forces employers into competition, driving up wages, it also drives down the share of national income going to business owners, wealth holders, and the rich. It provides everyday workers more power and say in the running of their workplaces, it downgrades the sociopolitical clout of the elite, and it flattens out inequality. If you kill big government, and you kill deficit spending, then you kill the possibility of full employment: You ensure long periods of lackluster job growth and rising inequality, and you guarantee that recessions will act as shock therapy to break up work bargaining power, throw people out of the labor force, and drive down wages.

By 2025, defense spending as a share of the economy (gross domestic product) would drop to its lowest point since 1940. “Discretionary” domestic spending would fall almost 50 percent (again, as a share of GDP) from 2000 levels, squeezing many federal activities: parks, courts, research, transportation, homeland security (including border control), the FBI, regulatory activities, the Centers for Disease Control and Prevention. Paul Ryan, R-Wis., said last month that “if the United States missed a bond payment, it would shake the confidence of the world economy.” If the House speakership election goes as planned next week, Ryan would be in charge of rallying his troops behind a solution. Old drivers such as manufacturing and residential construction are spluttering, and new areas like consumption, services and innovation aren’t picking up the slack quickly enough. These are people who do not like full employment because they do not like the kind of society it creates: one in which everyone else has roughly as much power as they do — or at least enough power to contest with them over the direction of society. While time is short, I am confident that our congressional leadership will heed that call and protect the American people from unnecessary and unprecedented harm.

Stewart: “Republican presidential candidates are largely abandoning the caution of past campaigns in relations with the super PACs backing them, testing legal limits as the independent groups take over more functions from campaigns themselves. Super PACs, independent political organizations that stood on the fringes of the 2012 presidential election, are now moving to the center of the current campaign … FACTORY OBAMA PRAISED TO SHUT DOWN OVER EX-IM — NYT’s Steve Lohr: “When President Obama visited General Electric’s sprawling, red brick engine factory here in January 2014, he praised it as a sign that manufacturing in America could have a promising future. .. PROBE — FT’s Gina Chon in Washington, James Shotter in Frankfurt and Kathrin Hille in Moscow: “Deutsche Bank is facing a major escalation of a US probe into its activities in Russia, as a money laundering investigation of its Moscow unit widens to examine possible sanctions violations, said people familiar with the case.

The US Department of Justice and New York’s Department of Financial Services are expanding the scope of their probe into the bank because some of the scrutinised transactions allegedly involved US dollars and a former banker who is a US citizen … IN DEFENSE OF THE CADILLAC TAX — Greg Mankiw and Larry Summers in the NYT: “One of us, a former member of the Obama administration, remains a fan of the president. That will immediately and drastically cut everything the government does: Social Security benefits, infrastructure repair, Medicare payments, Medicaid payments, welfare aid, education, public services, the works. In the first debt limit fight in 2011, Republicans won a raft of spending cuts that ensured the recovery from the Great Recession was longer and more brutal than it otherwise needed to be.

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