I just spoke with a friend of mine who works on Capital Hill asking him for insights. He sez, ‘no grand bargains, the House is working on the Boehner Plan:
It won’t be a transformative grand bargain. It won’t overhaul the encrusted tax system, or the big entitlement programs of Medicare, Medicaid and Social Security. It will involve mostly domestic spending cuts, and it won’t raise much- needed new revenue. And it will require yet another panel of lawmakers to find new spending cuts down the road. But it will at least avoid a U.S. government default on its obligations.
Obama has already promised to veto the bill and House hard-liners don’t like it either. It looks like another dead end …
It also looks as if a default is inevitable, with the clock running and the hard-liners past the point of no-return. If they back down now, they will lose face … to their all- important Tea Party bases in their home districts. The process pins the entire GOP caucus to the wall. Default has ceased being a tactic and has become the end in itself.
This is a symptom of a far larger perception problem. The working mechanisms of economic activity have been disbursed or hidden so that making cause-effect observations are difficult. Instead of being dastardly, folks in charge are hunting for solutions that they are unequipped to find. Members of any establishment — and any Congressperson regardless of how amateurish is a member of the the establishment — seeks only established solutions. IMF-style austerity is an establishment solution, even though it has proven to fail over and over.
Since prediction is beyond the grasp of Economic Undertow, let’s see what’s happening now:
The GOP has made a tremendous gamble. Last weekend the GOP had the advantage. The president had conceded the tax argument to the Republicans. Now, the advantage lies with the president. His concession having been spurned by the hard-liners, there is nothing left for him to reasonably offer! No matter what he does or doesn’t do the consequences are now fixed to the GOP. The president has inherited the victory in this particular political struggle: the GOP ‘owns’ this default. This is why Obama can promise to veto GOP proposals, GOP inflexibility has removed any consequences for him doing so.
The GOP is left to pray that a default won’t trigger a deleveraging event. If the gambit fails the political consequences to the GOP will be enormous. The support for the radicals is shallow and based mostly on elite-financed race hatred for Obama-the-person — on the part of a small minority. Tea Party radicals were elected in 2010 by the GOP base because many Democrats and most Independents didn’t bother to vote. A new ‘great recession’ or worse will send all citizens to the polls and upend the error- magnet GOP.
One thing is sure, the deleveraging event — which is inevitable regardless of whether the debt ceiling is raised or not — will emerge in an area the finance establishment is not watching. This is a reason to look toward petroleum. Nobody in finance is paying attention to it. They are looking at bond markets or short-term cash and cash-swapping repo markets.
A spike above $4 per gallon gasoline means a recession, which means any GOP money-saving ‘efforts’ will be for naught. A plunge in crude prices would be accompanied by all hell breaking loose.
Fuel shortages might also emerge in the US. OPEC is annoyed with the US and OECD for dumping fuel from strategic reserves last month. They might decide to whine about ‘less valuable dollars’ and cut production. Even a short- term interruption would be disruptive … and would also cost more than any of the GOP’s deficit reducing efforts will save.
Here is a fact: the debt ceiling will be raised. It might be simply increased by a straight vote at the last minute. This would be a big defeat for the GOP. They’ve put everything on the table for this chance to bash Obama. If they can’t bash him now, they won’t get a better opportunity before the election … unless he hands them one.
If there are small market ‘irregularities’ cause by the default bogeyman, the impasse/default might last a few days past August 2d. Default promoters will feel that small market losses from default will be more than compensated for by the ‘growth benefits’ of sober- minded deficit reduction. If market irregularities are severe there will be a ceiling increase almost instantaneously.
Something not in the Tea Party’s favor: voters will remember who cut off their Social Security checks. Any GOP ‘win’ at that point is Pyrrhic.
A default will increase government borrowing costs: any debt service cost benefit from deficit reduction … will be spent on debt service!
This might be the intention, to force more funds toward lenders who have grown weary of near-zero percent yields on loans to the government. What plutocrats don’t understand is that any gains from yield will be at the expense of returns from elsewhere in the economy.
The US economy is ‘stranded’ by high fuel costs, there is little in the way of easily gained surplus money to be had. At this point, we are robbing from Peter now to repay Peter later.
Also not in Tea Party’s favor: the Party recognizes the danger of the massive public/private debt overhang but is amazingly cavalier about tempting it. What do these guys do in their spare time? Juggle jars of nitroglycerin? So far there is no ‘economic analysis on the part GOP brain trust that justifies the risks. Instead, only discussions about ephemeral political advantage. Any analysis taking place outside of the Capital and within agencies or the Treasury department. The outcome is to elevate Obama into a statesman’s role he could not possibly earn on his own.
Doesn’t anyone in the GOP know how to play this game? It would be nice to have someone in the GOP caucus get out front and make a point-by-point economic case for holding the country hostage, other than to regurgitate Grover Norquist talking points.
The Grand Ol’ Party is correct in recognizing that the US as currently constituted cannot possibly meet its obligations. They don’t have a strategy how to fix the situation, rather they demand that the other parties contrive a strategy for them … or they will ‘Do the Paulson’ and blow up the economy!
The GOP hard- liners don’t pretend to have a working economic model, either an international example or even a theory. There is the liquidationist- Austrian von Mises economic approach suggested by Congressman Ron Paul. Austrian economics has never been proved in service and the application of IMF-style austerity in the EU is provoking a political firestorm. This is the last thing the establishment in Washington desires: a Euro-style political crackup. Look to Europe: the governments in turmoil have almost all turned over their leadership. Look to the Greek, Italian, German (!), English, Irish and French publics: they are all wildly dissatisfied.
Washington?
The behavior of finance ‘managers’ in this crisis has also been unsatisfactory. Right now finance has the upper hand as its promise of calamity if billed for its own excesses is a ‘force in being’. Nobody dares to challenge finance supremacy for fears of what ‘might’ happen.
Finance managers cannot forestall default any more than governments can. With deleveraging already underway the calamity to be feared becomes simply another problem and the tycoons lose their leverage. Rupert Murdock in the dock is the warning shot across finance’ bow about finance’s ongoing change in fortunes.
Creditors should keep in mind that governments legalize confiscation and cutting heads off annoying creditors.
The ‘non-model’ approach can’t work because the country’s problem is energy rather than policy. The only way to solve the energy problem is for the country to start giving up energy waste-consumption and redesign the economy around conservation.
The malaise obviously has several causes, some of which are beyond our control. One major cause, however, is entirely our doing. We do not spend enough time focusing on our actual economic problems.We are too often occupied with distractions, rather than trying to answer a simple question: What works? What economic policies have succeeded before and are most likely to lead to the best life for the largest number of people? Instead, we’ve effectively decided that because the United States is the richest, most successful country in the world, it is guaranteed to remain so.
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When it comes to economics, we know that a market economy with a significant government role is the only proven model of success. The United States has outgrown Europe partly because of our greater comfort with market forces. China and India boomed after allowing more of a market economy. On the other hand, unencumbered market forces often lead to disaster, as 1929 and 2008 made clear.
We also know that ever-rising levels of education are crucial to a country’s success. Not only is the evidence all around us — the college wage premium has been higher than ever lately — but careful studies have found that, on the margin, education itself tends to make people wealthier, healthier and happier. The next time you hear naysayers poormouth college, ask them if they plan to send their own children.
We know that the federal government has promised more benefits than it can currently afford. The only way out of this problem involves some combination of tax increases and cuts to Medicare, Social Security and the military. Anyone who won’t get specific about which ones they favor is not a fiscal conservative.
We know this country spends vastly more on health care than any other country — about 75 percent more per person than other rich countries — without getting vastly better results. The waste in our medical system offers the best chance to reduce the deficit without harming our living standards.
Etc …
If you don’t understand what an economy is, you will miss what an economy does (or doesn’t do).
Policy acts become confused with economics which in turn has been made a substitute for high culture in our post WWII- post automobile period. You can have your Lady Gaga and I will take Stravinsky, thank you.
BTW, I dropped out of high school and never went to college. So- called higher education is not, it’s indoctrination. I’m glad I missed it.
Economics is a way to manage energy flows. Human activity is thermodynamic, modern activity more so. Our ‘economic’ crisis is more a matter of declining energy availability relative to increased demand. From an energy standpoint, our entire economy is underwater.
We humanoids are victims of our own cleverness. The operation of the economy ‘burns up’ its capital base, like burning the furniture in your house to keep warm. Now, the furniture gone, it’s time to start burning the house!
Economics is a way to manage costs associated with increasing surpluses. Our economy has run out of ‘cost sinks’ as those that remain — seniors and school children — lack the means to carry the cost burden. This is consequent to ‘Steve’s First Law of Economics’: Costs associated with managing any surplus — money, credit, water, oil, autos, armed force — rise faster than the surplus to a point where costs exceed the value of the thing itself.
The inflation cost of China’s foreign exchange surplus is greater than what the surplus can return and is bankrupting China. The negative- cash flow cost of Greece’s surplus credit has bankrupted Greece. The social and energy waste- costs of America’s automobile surplus have brought the country to the lip of catastrophe.
Along with ‘reality based politics’ the world desperately needs reality based economics, that sees things as they are. One hardy economic weed that needs to be pulled: that ‘consumption’ is really production.
What must exit is the West’s Waste-based Economy, replaced with a conservation-based version.
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