Wednesday, July 27, 2011

What To Expect

Warren Mosler says politicians trying to force large spending cuts by playing politics with the debt ceiling are misreading the possible economic outcome of not increasing the cap:
So what’s a patriotic politician to do? What solves the problem and, while there will be near term pain, minimizes the total long term pain? Yes, running out the clock and doing nothing, which is exactly what’s happening. And all the while trying to make sure your opposition gets the blame for the initial pain, while positioning yourself to take credit for the good that will surely follow. Is that not what’s happening?
They are dead wrong, of course, and, consequently, we’re all dead ducks, as the price of nothing is far higher than anything I’ve seen discussed anywhere. With the automatic fiscal stabilizers disabled (Treasury spending can’t increase in a slowdown, and in fact is forced to decrease as revenues fall) the downward acceleration of the economy from the sudden cut in government spending will be far more severe than anyone has begun to imagine. The lack of general concern for what might happen is directly evidenced by the current market complacency, allowing those properly alarmed to get their hedges in place at very attractive prices.

What happens in the do nothing scenario?
Stocks go down globally, the US dollar goes up, commodities go down, US Treasury rates fall, credit sensitive interest rates rise, sales and GDP fall, unemployment rises, all in the context of a general global deflationary spiral. (emphasis mine)
I don't have any idea what might happen if they can't work out a deal.  I fear the market should react very negatively to evidence that Republicans will never raise taxes, since some revenue increases are necessary to narrowing the deficit.  If half the country refuses to ever consider increasing taxes, even to the moderate levels of the 1990s, than default is nearly certain.  The fact that so many "lawmakers" are willing to play with fire to hold the line on lunatic ideas doesn't bode well for this country.  Everything I have heard from Republicans for the past 10 years has been so backward and misguided, that I can't trust anything they say.  The Bush tax cuts were stupid, and haven't done anything good.  The wars in Iraq and Afghanistan were foolish, and were completely mismanaged by Bush.  The rampant deregulation led to the financial collapse, then any efforts to ameleorate that collapse have been fought tooth and nail.  Now they are trying to force huge spending cuts while demand in the economy is slack.  Check the UK, austerity didn't work.  If you are concerned about deficits, raise taxes on those who can afford to pay first, prior to slashing spending.  If there is one lesson from the past 30 years, it is that trickle-down economics does not work.  If the Republicans manage to drive the economy over a cliff again, they shouldn't win another election for 30 years.

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