June 23, 2011

Can I Buy a Clue, Vanna?

Hatched by Dafydd

I readily admit that I'm quite ignorant when it comes to macroeconomics. (I was a math major; we try to avoid actual numbers.)

I do know a bit about household (and micro-sized business) finances, given that I have negotiated eighteen book contracts, prepared my own federal and state taxes for several decades, negotiated the sale of our previous condo and purchase of our current house, managed to stay solvent, managed to avoid overdrafts, and managed to stay out of prison. I also worked on the Contracts Committee and the Grievance Committee of Science Fiction and Fantasy Writers of America for several years, delving into other people's contracts and financial disputes.

But as my best buddy Clinton says (I don't mean Bill), a man's got to know his limitations. And as my close pal Donald says (I don't mean Trump), known unknowns are much less dangerous than unknown unknowns. So I cheerfully own that I'm clueless when it comes to the economy of an entire country (or lone superpower, as in the present case -- so far). I'm hoping one of youse readers can comment and explain to me why, in the event that the Republican walk-a-way from the debt-ceiling negotiations becomes permanent, my cockamamie prescription for what to do next is wrongheaded and unworkable.

Here's the setup:

House Majority Leader Eric Cantor pulled out of talks with Vice President Joe Biden on a deficit reduction-debt ceiling deal, saying they had reached an impasse over Democratic demands for tax increases to be paired with spending cuts wanted by the GOP.

The Virginia Republican said in a statement that the Republican-dominated House simply won't support tax increases, and that he wouldn't participate in the budget meeting scheduled for Thursday. Cantor said that it's time for President Barack Obama to weigh in directly on the budget because Democrats insist on negotiating some tax increases.

Sen. Jon Kyl of Arizona, who is representing Senate Republicans in the talks, also dropped out. White House press secretary Jay Carney declared the talks "in abeyance" but said they had been successful in identifying areas of common ground.

Here are the allegedly dire consequences upon epic fail of the talks:

There are only 5 1/2 weeks remaining until an Aug. 2 deadline for enacting an increase in the nation's debt limit to prevent a U.S. default. Economists warn that could damage the nation's credit rating and force the government to pay higher interest rates to continue to borrow the $125 billion a month it needs to finance its operations.

Reuters apes the Associated Press:

Negotiators had hoped to reach a budget deal by next week that would give lawmakers political cover to raise the $14.3 trillion debt ceiling before the Treasury Department runs out of money to pay the country's bills.

Default could occur if Congress does not act by August 2, pushing the United States back into recession and sending markets plunging around the globe.

Now please bear with me, as my main man Pete (I don't mean Sneaky) would say, because I must be making an elementary and risible oops. Anyone with actual training in economics, feel free to leap in with both feet in the fire! But I have long been under the impression that a "default" occurs only when a person, corporation, group, or other entity fails to meet a payment by the mandated deadline.

And as I understand (or wildly misunderstand), in the case of a government, "default" only occurs if it fails to pay the interest on its national debt. For the United States, that interest would be the interest on Treasury bills and other debt instruments held by individuals -- mostly American citizens -- or by other countries. Here, look at this chart from Business Insider:



U.S. National Debt Pie Chart

U.S. National Debt Pie Chart

(It's not really germane to the point, but I think it's interesting.)

I've always thought that so long as the interest on T-bills and similar instruments is paid on maturity to Americans and others who own them, we're not in defaut.

My touchstone here is in my personal finances and in the book contracts: Darn near every month, various creditors -- the mortgage company, the gas company, water and power, credit-card companies, car insurance, medical and dental professionals and facilities, the gym, and so forth, send us letters enclosing bills. Each bill lists an amount due and a "pay by" date.

A couple of times a month, I gather all the current bills together and write the creditors a bunch of checks. This money is deducted from our income that month. From the remainder, we pay for food, clothing, gasoline, vodka, and other necessities. Then when all that is allotted, we spend on entertainment, books, CDs, and suchlike frivolities. Finally, whatever still remains we can invest or hold in a savings account or give away to lovable tramps who come to our back door.

You may note, by the order in which I wrote the above, that we always pay the bills first, before spending on anything else. If a particular month has more bills than usual, we spend less on current purchases (duh). If a particular month is lighter in the bill department, we have more disposable income, allowing us to buy more stuff or invest more in stocks or mutuals or gold. But we pay the bills first.

And so long as we pay each creditor by its due date, we're not in default on our debt, and they can't take us to court or jack up our interest rate or otherwise take vengeance against us.

This all seems straightforward to me; but I reckon it must be completely different with a government. Because otherwise there would be a very simple way, a scheme, a strategy to ensure that our government never finds itself in default, thus never suffering the dire consequences that Reuters and AP threaten is about to engulf us, now that House Majority Leader Eric Cantor (R-VA, 100%) and Sen. Jon Kyl (R-AZ, 96%) have "walked away" from the negotiations to raise the limit on the national credit card.

Here is my cunning plan: In the event that the negotiations "collapse," and the debt ceiling isn't raised -- can't Congress simply prioritize paying interest on the national debt?

That is, when it's crafting a budget, can't Congress budget the funds to make any required payments for maturing U.S. national-debt investment instruments, such as T-bills, first, before any other budget item? Once those payments are accounted for, Congress can budget money for other purposes, such as funding departments (Defense, State, etc) and paying federal salaries, funding so-called "entitlement programs," and finally discretionary spending. Why not prioritize interest on the debt over eveything else, just as they prioritize "entitlement" spending over discretionary spending? (The analogy to the household finances is that we pay our bills first, then we pay for necessities, and finally we spend on unnecessaries.)

All right, maybe we wouldn't be able to fund all the discretionary projects we wish we could. But hey, them's the breaks. As Mason said to Dixon, "you gotta draw the line somewhere!" (I don't mean Perry and Cromwell.) But at least the national debt would be serviced, if that's the word I want. (It sounds oddly salacious.)

I realize it can't possibly be that easy, or else Congress would routinely enact a budget like that. Heck, the Democratic Senate hasn't enacted any budget at all since Barack H. Obama became president, so there must be some arcane reason why "pay the interest on the debt first" budgeting isn't possible or feasible for the wealthiest nation in all of human history.

But could somebody please enlighten me as to why not? I hate feeling so completely gormless.

Hatched by Dafydd on this day, June 23, 2011, at the time of 2:37 PM

Comments

The following hissed in response by: snochasr

I have the same Master's degree in Simple as you do, apparently. I keep pointing out that if you or I get in debt trouble, the first act towards getting out of debt trouble is cutting up the credit cards, and then making some unpleasant decisions. We might have to sell the Jag and buy a used Ford Fiesta to get to work, for example, and give up the lavish entertaining and the Country Club membership. So why isn't the first step in restoring our national fiscal sanity to NOT raise the credit limit? Never mind how unpleasant the spending decisions are afterwards, why not make this simple, sensible step first?

The above hissed in response by: snochasr [TypeKey Profile Page] at June 23, 2011 7:48 PM

The following hissed in response by: Captain Ned

Since our fiscal budget is in deficit by about $1 trillion or so, Treasury must sell $1 trillion in US debt obligations to raise the needed cash. If the debt limit is not raised, there is no legal authority to float the bonds needed to balance the books.

This is not about the interest payments due as their only tangential relation to the debt limit is through the fiscal budget deficit. What this is really about is the real cutting up of the credit card. If Treasury can't float more debt, then the fiscal budget deficit must instantly disappear, because there will be no way to fund it.

Since no one expects this massive deficit to be resolved in one fell swoop, we're stuck with the jockeying for position like we see in today's news bits.

The above hissed in response by: Captain Ned [TypeKey Profile Page] at June 23, 2011 10:50 PM

The following hissed in response by: snochasr

That is my understanding. If you cannot overspend your income by 80% any longer, and you cut up the credit cards, there are some really tough decisions that have to follow. In practical terms, I might consider increasing the ceiling just enough to pay out existing federal contract commitments (which does not, interestingly enough, include Social Security payments), and no more. That would also, I assume, give Congress enough time to fire the maid, butler, chauffeur, nanny, gardener, party-planner, hostess and at least half the mistresses.

The above hissed in response by: snochasr [TypeKey Profile Page] at June 24, 2011 4:58 AM

The following hissed in response by: MikeR

I have been asking this question for months now. Just service the debt first! So at first glance it would seem that the Republican House holds the trump card in these negotiations: We want to cut the deficit. Help us do it reasonably, or it will get cut automatically.
I have not gotten clear answers.
Of course, everyone agrees that it would be incredibly disruptive to suddenly have to cut 80% of Social Security or defense or whatever - but that isn't what everyone keeps wailing about. The bond markets don't care about our difficulties feeding our old people, they care about whether they get their interest payments.
Some people have suggested to me that the Treasury lacks the authority to prioritize debt service. You dealt with that by suggesting that Congress pass such a bill. Of course, that requires Democratic cooperation, which allows the Democrats to say that _of course_, they won't have anything to do with such an irresponsible course of action, and if the debt markets collapse, that is the Republicans' fault for their intransigence. No idea if that would work, of course. There are plenty of dumb people out there.
On the other hand, I have trouble understanding what it would mean to say that the Treasury has no authority to prioritize. What does anyone think they would do if Congress directs them to spend $100 and then hands them $60 to do it with, and no instructions? Surely they will have to prioritize whether they think they can or not. Print some more money and send it to everyone? Otherwise, they would have to say that they alone have made a choice to prioritize Medicare and defense and allow the debt markets to collapse, and try to explain why that's the Republicans' fault after all.

The above hissed in response by: MikeR [TypeKey Profile Page] at June 24, 2011 7:01 AM

The following hissed in response by: wtanksleyjr

The underlying problem is that our budget limitation rule is too simplistic.

First, it bans all new debt, when a routine part of the debt service involves renewing short-term debt. That stuff doesn't create a large impact on the budget because it's revolving debt; but ending the revolving would post a BIG one-time hit that might actually wipe out all ability to operate the government (I don't know the numbers).

Second, it ONLY bans new debt; it should actually have set rules for how expenditures would be charged in the runup to the debt ban, so that the big picture of a government slowdown would be addressed and a total shutdown averted (I understand shutting down offices, but do you really want Abrams tanks running out of gas?). Right now, how the government addresses a looming shutdown is a matter of executive discretion; Obama can do what he wants to make the shutdown loom more or less (note that the authority rests with the president, not any of the departments except where specifically authorized by Congress). Naturally, his incentive (as Bush's before him) is to make it worse so that Congress will be forced to act. Congress, on the other hand, will do nothing but blame Obama. Both are doing the wrong thing for the nation, but their incentives are completely decoupled from reality by the system -- and that is the real crime.

(OTOH, I'm seriously pissed that the previous congress failed to pass even a budget. That was STUPID.)

-Wm

The above hissed in response by: wtanksleyjr [TypeKey Profile Page] at June 24, 2011 8:46 AM

The following hissed in response by: Dafydd ab Hugh

Captain Ned:

Oh, of course we'd have to balance the budget if the debt ceiling isn't raised; that's clear. In the traditional analogy, if the credit card is maxed out, you can't charge any more expenses on it.

But my point is that we can easily avoid default by prioritizing the existing debt; the $1.3 trillion in cuts will just have to come from areas other than interest on the national debt, since a default and downgrading of our credit rating is so destructive.

The remaining budget in FY 2010 was about $3.26 trillion; we would have to reduce that to about $2 trillion... which is where it was all the way back in the antediluvian epoch of 2002.

We obviously have annual revenue, which should be enough to pay for most government functions to continue, though at a dimished capacity. I'll bet that if we were to put ourselves on a realistic glidepath towards budgetary balance, we'd easily get enough Republicans to join a vote to raise the debt ceiling -- just enough to keep us solvent through the transition from massive deficits to a balanced budget.

But in any event, prioritizing servicing the debt would prevent the United States defaulting on its financial obligations, which was the only point of this post.

Dafydd

The above hissed in response by: Dafydd ab Hugh [TypeKey Profile Page] at June 24, 2011 12:12 PM

The following hissed in response by: mdgiles

Uh, politicians being required to cut some of their favorite spending programs - with an election year coming up? Surely you jest. Anything to avoid being seen to make those decisions.

The above hissed in response by: mdgiles [TypeKey Profile Page] at June 24, 2011 1:42 PM

The following hissed in response by: Baggi

Dafydd,

The only thing I can think of is the money is already spent.

I'm not sure how it's done at the national level. I understand we have X number of dollars the Fed's get every month and the argument is the Federal Government should only spend those X dollars every month.

But maybe it's not a monthly thing, they just break it down monthly? Tax season is over and the income for the year is already collected.

As an example, I get paid every 2 weeks. So if I overspend this two weeks, I spend less the next two weeks to make the four weeks combined balance.

But if I get paid once a year, extrapolate out to 12 months how much I can spend a month, and then divide my money by twelve and pay myself for 12 months, that doesn't mean i'm getting money every month, it just means i'm disciplined in dividing up my income that I received one time this year.

As an example of what i'm talking about.

Let's say I make 120,000.00 a year. I get this money in January, all 120k. When people ask, I tell them I make 10k a month.

Every month I spend 15,000.00.

By the time August rolls around, i've spent 120,000.00.

Now, some people say i'm deficit spending 5,000.00 a month.

But really, i'm not. I'm spending my money that ive earned and already been paid. I won't be borrowing any money until after August rolls around, because then the money is all spent.

After August, every $1.00 is deficit spending.

Perhaps this is the case with the federal government?

I honestly don't know, but this is the only thing I can come up with.

The above hissed in response by: Baggi [TypeKey Profile Page] at June 24, 2011 10:45 PM

The following hissed in response by: MikeR

With the passage of time, I think it has become clear that default is only one of the very serious problems in not raising the debt limit. The other very serious problem is cash flow. Treasury will suddenly be faced with a zillion checks going out automatically who knows where, to a jillion different programs including Social Security, and no clear plan for how to make sure which checks are covered and which will bounce.
Money has been going out all year, and no one has been concerning themselves with making sure that the most important checks are covered.

The above hissed in response by: MikeR [TypeKey Profile Page] at July 11, 2011 5:10 PM

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