So What Might Happen if We Get to August 3 With No Deficit Deal?

The fast and furious reports on the state of play with the US debt ceiling theatrics is getting more and more amusing. If we didn’t have a stake in the outcome, this would make for great theater.

The Telegraph blares “Obama and Republicans ‘close to deal‘.” That’s actually not inaccurate. but the problem appears to be Obama is now trading with his real allies, the Republicans, who want entitlement cuts as much as the President does, and also realize they have more to lose than he does if there is no deal. So they are now motivated to get something done.

A lot of Democrats, by contrast, are fiercely opposed to the pact under discussion, which consists of $3 trillion of cuts and no tax increases, or more accurately, an immediate commitment to cuts, and tax increases possibly coming via a to-be-brokered tax reform. The Democrats see the trap being laid for them; reform/increases later is likely to be no reform. (Separately, this package will kill the economy, a consideration that pretty much everyone is ignoring, proving Keynes correct: “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”).

The latest update at the Wall Street Journal was cautious:

With prospects of a government default looming in early August, leaders on both sides denied Thursday that a deal was close…Both sides warned that an agreement is not near. “There is no deal,” Mr. Boehner told radio host Rush Limbaugh. White House spokesman Jay Carney used similar language. And White House officials said Mr. Obama has never considered an agreement that did not include revenue increases.

A good deal can change in the next few days, but the window of opportunity narrows as time passes. And that is why the Treasury’s apparent refusal to consider options for working around the debt ceiling looks colossally irresponsible. This is similar to the behavior of the financial regulators pre-Lehman: they placed all their chips on one outcome, that of a private sector bailout, and failed even to find out what a bankruptcy would look like (at a minimum, if Lehman had prepared a longer-form filing, the implosion would have been less disruptive).

But this “all in” strategy is by design. Obama has long wanted entitlement “reform,” as in gutting; Paul Jay of Real News Network pointed out to me today that Obama told conservatives at a dinner hosted by George Will in the first week after his inauguration that he planned to turn to it once he got the economy in better shape. So this is a variant of a negotiating strategy famously used by J.P. Morgan: lock people in a room until they come up with a deal. But the J.P. Morgan approach used time to his advantage; here the fixed time frame makes this more like a form of Russian roulette with more than one cylinder loaded.

It is also worth noting that what starts happening on August 3, assuming no deal, is “selective” default. It isn’t clear if and when Treasuries would be at risk of having payments skipped, and I would assume Social Security would also get high priority. But with Treasuries, the bigger risk is not a missed payment (which would certainly be made up later) but a downgrade, which is expected to force certain types of investors who are limited to AAA securities to dump their holdings.

A useful article in the Economist describes how Wall Street, which had heretofore assumed that there was no way the US would (effectively) voluntarily skip some interest payment, is now scrambling to figure out how to position themselves should such an event come to pass. Many observers had assumed that the repo market, on which dealers depend to fund themselves and collateralize derivatives positions, would go into chaos (the belief was that counterparties would demand bigger haircuts). But the Economist argues that does not appear to be the case:

SIFMA, a trade group for large banks and fund managers, recently gathered members together to discuss issues like how to rewire their systems to pass IOUs rather than actual interest payments to investors, should a default occur. “It’s one of those Murphy’s Law things. If we do it, it won’t prove necessary. If we don’t, we’ll be scrambling like crazy with a day to go,” says one participant.

But the moneymen hardly have all the bases covered. “I really thought I understood this market, until I tried to map all of the possible consequences of a breakdown,” sighs a bond-market veteran. That is hardly surprising, given that Treasury prices are used as the reference rate for most other credit markets. Moreover, some $4 trillion of Treasury debt—nearly half of the total—is used as collateral in futures, over-the-counter derivatives and the repurchase (repo) markets, a crucial source of short-term loans for financial firms, according to analysts at JPMorgan Chase.

Some fear that a default could cause a 2008-style crunch in repo markets, with the raising of “haircuts” on Treasuries leading to margin calls. The reality would be more complicated. For one thing, it’s not clear that there is a viable alternative as the “risk-free” benchmark. One banker jokes that AAA-rated Johnson & Johnson is “not quite as liquid”. In a flight to safety triggered by a default, much of the money bailing out of risky assets could end up in Treasury debt. Increased demand for collateral to secure loans could even push up its price.

Then there is the impact of a ratings downgrade. Money-market funds, which hold $684 billion of government and agency securities, are allowed to hold government paper that has been downgraded a notch. Other investors, such as some insurers, can only hold top-rated securities but their investment boards are likely to approve requests to rewrite their covenants, especially if a lower rating looks temporary. “It would be a full-employment act for lawyers,” says Lou Crandall of Wrightson ICAP, a research firm. There’s a surprise.

In other words, this event is focusing enough minds that a lot of parties are looking at ways to get waivers or other variances to allow them to continue to hold Treasuries even in the event of a downgrade or delayed payment. But a report from Reuters on the Fed’s contingency planning makes them sound markedly less creative than their private sector counterparts (but it is important to note that Charles Plosser of the Philadelphia Fed, the key source for his story, has been a critic of the Fed’s fancy footwork in the crisis. In fact, the New York Fed is the key actor, and it has been notably, um accommodating in the past).

In addition, the New York Times reported yesterday that some hedge funds are moving into cash to buy up Treasuries in case other investors dump them. I’ve even heard of retail investors planning the same move. That does not mean the volume of buyers will be enough to offset forced sales, but it does say that fundamentally oriented investors would see this event as an opportunity, not a cause for panic.

The financial system is so tightly coupled and there are so many potential points of failure that I’m hesitant to say that the consequences of a default may be far less serious than are widely imagined. But in the Y2K scare, the considerable panic about potential catastrophic outcomes led to a tremendous amount of remediation, which served to limit problems to a few hiccups. Unlike Y2K, the remediation efforts have started very late in the game, so their is a lot more potential for disruption.

But even so, why is the Administration so willing to engage in brinksmanship? S&P expects a 50 basis point rise on the short end of the Treasury yield curve and 100 basis points on the long end, which they expect to reverberate through dollar funding markets and cause all sorts of hell. Remember, we have both Geithner and Bernanke again in powerful positions, and both went to extreme efforts to prevent damage to the financial system. Why are they merely handwringing at such a critical juncture? Might they have a trick or two up their sleeve?

I can think of at least one. I was working for Sumitomo Bank (and the only gaijin hired into the Japanese hierarchy) and was in Japan during and shortly after the 1987 crash. Initially, the reaction in Japan was one of horrified fascination, of watching a neighbor’s house burn down. It then began to occur to them that their house might burn down too.

The volume of margin calls on Black Monday and Tuesday were putting serious pressure on the Treasury market, which was beginning to seize up. On top of that, bank were understandably loath to extend credit to clearinghouses and exchanges (as we’ve discussed elsewhere, the Merc almost failed to open and would have collapsed if the head of Continental Illinois had not approved an emergency extension of credit after a $400 million failure to pay by a major customer. Had the Merc failed, the NYSE would not have opened, and its then CEO John Phelan has said it too might have failed). So keeping the Treasury markets liquid was a key priority in stabilizing the markets.

Japan is a military protectorate of the US. The Fed called the Bank of Japan and told it to support the Treasury market. The BoJ called the Japanese banks and told them to buy Treasuries. Sumitomo and the other Japanese banks complied.

I could see the same phone call being made again in the event of a default or downgrade. First, the yen is already at 78 and change, which is nosebleed territory from the Japanese perspective. The BoJ intervened once in the recent past when the yen got slightly above this level. Purchases of Treasuries is a purchase of dollars, and done on big enough scale would help lower the yen. Second, if you buy the hedgie view, buying in the face of forced (as in AAA mandate driven) and not economically motivated selling means this trade would have near term upside.

Is this scenario likely? I have no idea. Is it possible? Absolutely.

Again, I would not bet on happy outcomes. As Cate Blanchette muttered in the movie Elizabeth, “I do not like wars. They have uncertain outcomes.” And while the negotiators finally seem to have awakened to the risk of entering uncharted territory, the old rule of dealmaking is if one side’s bid is below the other side’s offer, you can’t get to a resolution. That’s where the two sides appear to be now, and even though it would be rational for both to give a bit of ground, rationality has been missing in action on this front for quite some time.

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  1. attempter

    By now they expect that bailouts, lawlessness, and changing the rules as you go along can fix anything in real time, and therefore there’s no real risk here.

    (From a reality-based point of view, there shouldn’t be any risk to real people and the real economy. Rather, this should only threaten the complete destruction of financialization once and for all. From that point of view, the people should see this as an opportunity. But then, we didn’t seize our opportunity in 2008. So in that case we’ll probably let financial havoc wreak havoc on our core economy as well.)

    Since from the elites’ point of view there’s no risk, and probably a shock doctrine opportunity, they can treat it as a political game. Obama figures it’s a win-win – he’ll either make a deal to gut entitlements and hike regressive taxes, or else he’ll get a default, use that as the pretext to gut what’s left of public interest spending, and blame it on the Republicans.

    Meanwhile the Reps figure the same thing – Obama will probably swerve at the last second, as the Dems always do. The Reps will get everything they want, while Obama and the Dems will be further discredited in the eyes of their base. or if no deal is reached, the Reps hope the voters will blame Obama in 2012.

    (But the fact that the Reps are willing to negotiate at all is possibly a sign that they’re losing confidence in themselves. As is the fact that so far they seem unable to produce a real candidate for 2012. A confident Rep would start with the confidence that the Dems will cave in completely as they always do.)

    If there’s no deal, I doubt there will be immediate repercussions except for public interest spending, which will be gutted. I think at least initially they will in fact prop up the zombie by simply breaking laws and rules. Treasury will certainly do anything it has to do to keep the corporate welfare gravy train flowing. Wall Street will do anything it has to do to keep looting.

    As for the longer term effects, this simply builds the Tower of Babel even higher, even more top-heavy.

      1. Foppe

        Not “the”. The start of the Iraq war was such an event, Katrina was, Paulson’s 700B bailout was, etc.. Nothing new in that regard, what’s new is the size of a single action.

        1. ambrit

          Dear Foppe;
          (Please excuse me, I’m getting ready for my new ‘gainful employment this morning, and am thus somewhat less organized in my thinking than usual.)
          Isn’t there a concept in the science of systems that says the larger and more complex a system becomes, the less understandable and manageable it becomes? If so, we must have passed the ‘comprehensibility threshold’ some time ago and are running on ‘wishful thinking’ right now.
          What we need now is a new ‘ideoclaust’ movement. But then, no one would feel passionate enough about it to ‘commit’ to any course of action.

          1. Foppe

            Probably. However, there are two ways to create complex systems: the way nature does it is by building in lots of redundancy and making sure systems cannot grow beyond a certain size, and beyond a certain amount of influence on the total ecosystem. The way economists do it is by building in as little redundancy as possible, and by allowing individual organisms to grow as large as they want to, cannibalizing the whole ecosystem (including its kin) if it so desires.
            It seems to me that trying to make the latter type coherent and understandable is a waste of time. Much better to just cut them down to size.

          2. Old Man Moses

            As someone who deals with big complex systems on a daily basis I can tell you that you are absolutely correct.

            Every variance, every exception, every new connection, every addition generally makes understanding the implications of change harder.

            Perfect example. Take a GL system for a major federal department that is in the process of changing from an old paltform to SAP. Now all those internal workflows and logic, all the legacy data and connections to other systems have to be upgraded and modified in conjunction while maintaining the existing platform until the migration is complete. Now throw in the necessary responsive changes to a connected service bus, acquisition platform, invoice management system, vendor portals etc..

            Now each of the technical changes will require changes to data with changes to applications, with the associated changes to business processes, support processes, and policy.

            While all this is going on, the other systems are going through their own upgrades and life cycle changes up to and including replacement.

            There are literally THOUSANDS of simultaniously moving pieces none of whom are ever in fixed state.

            Implimentations of this scale ALWAYS have some level of issue or failure and it is almost always because somebody forgot something. That something may be very small but the cascading effect of its failure can be enormous.

            Imagine that a business analyst forgets to document a policy change that effects the prompt pay duration for perishable goods by making it a day shorter but this will not take effect for 6 months so it is not urgent and on peoples radar. The authorities approving the system design were rushed, after all this is extra work for them apart from their regular work and they have deadlines and immediately critical issues to deal with. The new system is a year out and they just miss the error.The system gets done, and because the test scripts were built using the business models the BA created, the system passes testing. The government goes on paying as it always has…but a day late. This triggers interest payments to vendors. Nobody notices for a year but when they do they realise they now owe $9 million to 1000 vendors in interest.

            In the scope of a large complex system, missing one small, seemingly insignificant value or process or security setting can have outsized impacts.

          3. Skippy

            Data is not a steady state equation hence the problem of extraneous and missing solutions, certain expressions may introduce new solutions that were not present before.

            Skippy…hardware and software updates collide…reformatting arrrgh.

    1. ambrit

      Dear Psych;
      If ‘they’ put the same ‘gang that couldn’t shoot straight’ in charge as they did in Iraq, we’re in for a very bumpy ride.
      Snark says: “I’m in Awe of the American Shock Doctrine.”

    2. Cugel

      The only reason there’s a “crisis” is that Obama wanted and is still demanding his “Grand Bargain.” He could have stopped the Republicans dead in their tracks last year if he refused to renew the Bush tax cuts, (in which case he could have traded extending the Bush tax cuts for the rich for a deficit ceiling increase).

      OR this January he could simply have announced that SS, Medicare and Medicaid are “off the table” and then went around giving a series of nationally televised speeches explaining the consequences of default to the American people — and demanding Congress act to pass a clean debt ceiling bill.

      The Republicans would have been under fire for 7 months now and would never have put themselves in this position.

      They backed themselves into a corner BECAUSE they assumed from previous experience and all of Obama’s rhetoric that they could roll him to get whatever they want. Now it’s difficult for them to back down because they’ve been hyping this “no compromise” message all this time — so they will be embarrassed if they back down.

      Democratic capitulation is STILL probably the final outcome. Democrats will eventually roll over. They’re just angry right now because Republicans are denying them a suitable fig-leaf they can present to angry voters (in the form of closing a few meaningless tax loopholes like deductions for corporate jet travel).

      But, give them a few extra weeks and they’ll come to agreement over the corpse of the New Deal.

  2. F. Beard

    It’s very ironic. Lending money to a government that can issue it debt-free is a privilege for the lender not a favour to the government.

    As usual, the usury and counterfeiting class think they are the dog and not the tail. In fact, they are annoying ticks.

    1. Susan the other

      I think there might be an algorithm for that. And if we need algorithms who needs “government?” Really. All we need is the algorithm police. Sorry, I’m still thinking about the last article.

  3. Robert Asher

    We can speculate until it all comes down. What we do know is that most elites do not have the broad perspective that Keynes had. Each elite business cares only about its own welfare. So the sum total of their actions could be destructive. Remember 2008. Remember Sorkin’s Too Big to Fail (should have been entitled How Goldman Sachs used the Fed and Secretary of the Treasury to get Lehman and drag the economy down. Does anyone think these people are smarter now in understanding the big picture. Look at the reluctance of the European narco dealers (I mean banks of course) who are unwilling to take a loss after the people they addicted cannot afford more drugs.

    1. psychohistorian

      So is Europe’s Shock Doctrine event going to happen as part of the America event or will happen alone?

      From my perspective it looks like the double whammy of a Shock Doctrine event that has been orchestrated by the inherited rich and their hired sociopaths.

      1. Skippy

        When humanity and all life, its self, is reduced, too an act of dubious accountancy, mark to myth, in the trillions, pushing quadrillions, with the only metric being, what is mine, century of the self, all backed by self appointment, lacking any humility or empirical backing, people forget that our minds are a chemical receptor exchange nexus, and that bums in the back street get high too, its just they don’t have the same effect.

        Skippy…how has your feed back been on mountain bikes w/ your seat?

        1. ambrit

          My Dear Velocipedial Skippy;
          Your mountain bike comment reveals a fundamental eror in your thinking. LAK’s.

          1. skippy

            Twas intentional, whilst a small but super majority (SCOTUS person hood) inflict wounds.

            I still would have a chat with an old chum, as an aside, its a down under thingy.

            Skippy…you should have seen its social effect, during and after the effects of our recant flooding. I have never seen better in my worldly travels, an off the back thingy, only to disappear after the deed is done…brilliant stuff…I love my motley mob.

          2. ambrit

            Dear Skippy;
            I’m a Pom American living in the Deep South. Remind me to tell the story about a well meaning friend who introduced a couple of Aussies to me in a French Quarter bar once. “But I thought you all had the same accent! That bruising will go down quickly, trust me. See you at work Monday!” And off he went. (They did buy me drinks after I waved off the coppers. The rest is somewhat hazy.)

          1. Skippy

            Life goes on, even in the mist of pandemonium, and that’s how *Royal We* move forward, lest we become frozen in fear or worse, apathy…eh.

            Skippy…there are those that would have it different, reduce us to pawns, take our ability to reason way, by confronting us with seemingly impossible problem sets…eh.

            PS. warmest regards mate and hope all is well with you and yours.

    1. Cedric Regula

      I think AAA MBS get downgraded too. It would be silly to think an implicit guarantee from a less than AAA entity makes MBS a AAA thingy.

  4. G3

    Want to know why Bailout Ben & Turbo tax Timmy are hand wringing? Put a gun to the rogue Dems’ heads – who are adamant against messing with the Big 3 – SS, Medicare, Medicaid – and bring them into line in the backdrop of a downgrade threat. The big 3 can’t be touched easily right – or atleast the first 2?

    1. propertius

      Defense is the largest discretionary item in the budget. That’s the real sacred cow here.

  5. Middle Seaman

    For me, Obama’s war on the poor and the middle class via his cutting of SS, Medicare, decrease in mortgage tax deduction and paying tax on health care employer contribution is on par with war crimes.

    For that reason, I hope no agreement is made and August 2 arrives and leaves Obama to deal with his own doings. It is clear to me that Obama’s bosses, i.e. the rich, will not let the country descend into chaos; it’s way too costly for them.

    Don’t you like those rich pretend progressives that brought us Obama?

    1. ambrit

      Mr Seaman;
      Sorry to quibble, but your comment on the ‘elites’ thinking gives them a bit too much credit for breadth of vision and foresight. Events can easily get out of control; witness what happened in Iraq. The same elites were supposedly ‘in control’ there too.

        1. ambrit

          My Dear Foppe;
          Will get on it tonight. Oh, the wonders of the internet! Thank you. Thank you.

        2. ambrit

          Heavens Mr Peabody! Where’s the Wayback Machine taking us today?
          Oy, what a mess. I particularly liked the quote; “The three most dreaded words in Russian today: Harvard Trained Economist.”
          This is a new low even for ‘the usual suspects.’ But, hey, who am I kidding? These people demonstrate time and time again, they have no shame.
          Are any of these new plunderers involved in the Greek ‘bailout?’Or have they just established a new old school of political economy: Sack and Plunder?
          This was an eye opener even for this jaded lurker. Thanks.

    2. ScottW

      I am calling my mother-in-law this morning and telling her that Obama and the Gang of Thieves, I mean six, believe she is much better off than the millionaires and billionaires. I am sure she will be comforted in knowing that her social security/medicare opulent lifestyle is better situated to take a financial hit than the lifestyles of the financial elite. Shared sacrifice!

      1. Susan the other

        If we have a world of collapsing expansion the people who need to take the hit, all of the hit, are the people who bet on the foolish eternal expansion. Not the poor.

  6. Peripheral Visionary

    “But this “all in” strategy is by design. Obama has long wanted entitlement “reform,” as in gutting; Paul Jay of Real News Network pointed out to me today that Obama told conservatives at a dinner hosted by George Will in the first week after his inauguration that he planned to turn to it once he got the economy in better shape.”

    I don’t think so. I think Obama’s one goal, which drives virtually every decision he makes, is the same as it has always been: to get (re)elected. Everything he does should be considered in that light.

    In this case, I believe his simple goal is to escape responsibility for the mess. If he can pin it on Republicans, that would be ideal – even if it would mean putting the nation into default.

    Is he for cutting benefits? Sure, I guess – as long as he can pin the negative outcomes on the Republicans. He won’t put forward his own proposals, because then he would bear the primary responsibility for them, but if Republicans put a proposal for cuts forward, and he thinks it will help him get elected by appearing to be the only adult in the room, he’ll sign it – just as long as he can blame any adverse outcomes on Republicans should they occur.

    Likewise, I think he had no serious interest in getting his own budget passed. Having Congress pass his budget would mean he would have to bear responsibility for it – which could endanger his chances of getting (re)elected. Much better to let Congress put forward the serious proposals, so he could sit back and criticize them as inadequate.

    But most importantly, he isn’t going to go along with any proposal that would require this issue to be revisited next year. He’s made it perfectly clear that he won’t sign off on anything that doesn’t push the crisis out past 2012. He’s not as interested in resolving the crisis as he is in just making sure it goes away for, say, (checks calendar) one year and three months and approximately fourteen days. Because, well, all he’s interested in – all that he has ever been interested in – is getting (re)elected.

    (One has to wonder what will be next on his agenda should he get reelected in 2012. A campaign for a repeal of the 22nd Amendment, perhaps?)

    1. ep3

      I would say Obama’s goals have been to raise ALOT of campaign cash and to do “big things”. He doesn’t want to go down as “the first black president”. He wants to go down as “the guy who fixed health care, who fixed the debt, who passed financial regulation”. As long as his name is immortalized in these “big things”, he doesn’t care if they accomplish anything.

    2. umyeah

      Yes, clearly Obama has a sinister and diabolical plot in the works for his illegitimate Manchurian second term.

  7. Paul Tioxon

    It would seem that the commanding heights of capitalism are having internal dissent. Since FDR and company moved the control of capital from the hands of high finance bankers and into the control of the public, via post WWII controls and regulation, we had an economic boom uninterrupted until Eurodollar trading disrupted the Bretton Woods system, and we moved to the floating currency system of today. But of course, just as the “Golden Thread” was cut by moving off of the gold standard, deliberately but unconscious of the full consequences, the world reserve, the green thread of USD is being cut as we speak.

    Although currencies float, there is no doubt the USD is Primus inter pares. But no more, considering the Obama Shock to the confidence the world will have in the dollar after this. Capital Markets have grown too complex to perceive their systemic structure, and too big to manage, and therefore easy to disrupt by by political behavior of governments. Not only can the banksters bring themselves down, and need to be rescued by the government, but now, the government can bring down the banks, and rescue who they see fit. Obama Shock Doctrine, a lot worse or better, than ever thought possible. Perhaps the $2Trillion in corporate cash sitting on the sidelines should should be invested in material economic expansion as a hedge against financial liquidation?

    The republican free market ideologues, in attempting to diminish big government, are using the critical function of the debt ceiling as an extortionate move to crush big spending by choking off revenue via taxes or borrowing. But big government as the money making agency on the scale required by not just national but also global capitalism, is now moving the crisis to the balance the sheets of every T Bill holding fund around the world. If you attack the debt making capacity of the US Government, you are attacking the people who hold the debt, private capital as well. It is this unintended consequence that is driving those with government power into a stronger and stronger position, because they create the money that is the world reserve, the de facto “Gold Standard” among currencies. By attacking the governments capacity to generate that currency by choking off borrowing, we are moving off of the USD as the world reserve, just as we moved off of gold. And we could be seeing the battle of government vs private capital over the dollar’s destruction as the world reserve currency. The government, by taking in the Rubinists and Geithner in particular do not regulate the market in the Glass Steagall manner, but manipulate the market as Soros or Paulson would. The US Government has internalized the control mechanism of the market as bankers would via QE2 and now this, in addition to and rather than deliberation and legislation, such as Dodd Frank.

    The republicans are burying the US headquartered capitalism as they are trying to bury Federal Governmental Power over capital. The republicans thought that capital had completely segmented from the state, which would wither from cash starvation. But they work together, private capital under the Aegis of the guns of the state and the use of the currency of the state as well. You can’t have one, without the other.

    1. john

      It really does look like an unintended suicide pact for “Anglo Saxon” capitalism, I’ve been calling it the capitalist “Great Leap Forward” for the last year as the deficit hysterics began to dominate the agenda. The ideological system of those who extract personal wealth through finance leaves no room for a macro vision that imagines that money exists for any purpose beyond personal enrichment. This blinds them the the fiat money reality that as they attack the “deficit” they are attacking themselves: American capitalism is a kind of auto-immune disorder that is attacking its own essential functions.

  8. Frowner

    So I’m very uneducated about financial stuff and have trouble parsing some of these articles. (Thanks, Yves, for running this blog – it’s made me marginally more literate).

    For me, Obama’s war on the poor and the middle class via his cutting of SS, Medicare, decrease in mortgage tax deduction and paying tax on health care employer contribution is on par with war crimes.

    Part of the deal is to make employer contributions to health insurance taxable? Is that correct? How is that not a tax increase? It’s sure going to increase my taxes. By quite a lot.

    If people are paying a lot more taxes on employer-provided healthcare, is that going to drive more people into the private market for cheaper/crappier insurance in 2014? I feel like there’s this aspect to Obama’s policies that aims at gutting/ending employer-provided healthcare and forcing everyone into the private and non-price-controlled market.

    If this is wrong, please feel free to correct me – I’m hoping for my own sake that I’m misunderstanding the budget deal and its implications.

    1. Cameron Hoppe

      I would say that if you are able to reason and project you reasoning into future implications the way you just did your economic and financial intelligence is much greater than you think it is.

    2. attempter

      If people are paying a lot more taxes on employer-provided healthcare, is that going to drive more people into the private market for cheaper/crappier insurance in 2014? I feel like there’s this aspect to Obama’s policies that aims at gutting/ending employer-provided healthcare and forcing everyone into the private and non-price-controlled market.

      That’s exactly what the intent of the bill is. I wrote a post on that goal of the policy.

  9. PQS

    I’m with Frowner above—my literacy about these things is on par with my literacy in Greek.

    My question from the galley is: what effect will this have on my meager retirement 401K, which is sitting in bonds right now because I got tired of stocks taking 20% a year over the past few years….as a larger question, what about everyone’s retirement accounts? How would a default/downgrade affect their value?

    I know, simple stuff for big time investors, but consider me the canary in the coal mine of American knowledge about these things…..

    1. Kmurp

      Interesting: not a single response to a very practical question. I’m in the same boat…

      1. giggity

        I’m wondering the same. I’ve got about 20k sitting in mostly bonds. Unemployed at the moment. Tempted to just pull it all out and turn it into something useful.

    2. psychohistorian

      This in not investment advice but an anecdotal comment on the movement of my small IRA from Treasuries to GLD in 2008. I believe that the US dollar as the Reserve Currency for the world is on its last leg and when it goes down the dollar will take lots of folks with it. Just because I own some GLD doesn’t mean I am going to any better off when the shit hits the fan and there is social upheaval.

      While commodities in general provide for some protection from fiat money machinations, they can become their own little investment bubble. That said I am not unhappy with my investment decision to date.

  10. ep3

    So Yves, should us poor people be preparing for the sh*t to hit the fan? Most of us won’t last a couple months before we run out of money. Then most of us will be bankrupt in 3-5 months. Kind of hard to run to the bank for money when everything is locked up in securities.

  11. i

    I think there’s a larger geopolitical game being played here, interesting in its implications for world governance. I’m convinced that a decision has been made by the Geithner/Paulson, et al. to save the USA and European economies by killing the dollar.

    This is how I think it will go.

    1) The deadline for the debt ceiling comes and goes with no agreement.

    2) The bond market gets less and less stable as the government continues to stall on a debt ceiling increase. Eventually, the market for USA debt is essentially zero, at any interest rate.

    3) Our debt is now unfinanced. The part of the economy driven by government spending shrinks. The overall economy collapses, bringing on deflation.

    4) The Fed announces that it will fight deflation with money printing (called by some interesting popular name like QE3) and pumps in so much money that the USA’s currency starts looking like Zimbabwe’s.


    1) The USA has inflated its way out of most of its dollar-denominated debt.

    2) The wage and price structure of the developed world re-align to that of China and the BRICs. The USA is now competitive when it comes to manufacturing and services.

    3) Jobs come back to the USA and Europe. While the pay is poor, full employment is the norm. Prices drop on almost everything.

    4) China is left with the unpalatable choices of keeping the Yuan pegged to the dollar, thus wiping out much of the wealth of its domestic population, or letting the Yuan float, depressing its export economy. Either way, China’s economic power, and by extension, its military power, is neutralized.

    I’m sure the thinking is that “if default is inevitable, it’s better to have it happen now while the USA and Europe have military power, money and oil, rather than wait 10 years and watch China and the BRICs grow stronger and richer while the USA and Europe erode both financially and militarily.”

    1. Alex

      Unfortunately, that makes a lot of sense. However, you left off the last line:

      And then we have a war.

    2. Just Tired

      …and Obama will ultimately be found to be the 21st century equivalent of FDR…by leading us into a World War!

      1. Carl

        Why a war? The U.S. will have manipulated itself out of its debt, and so will not need to resort to war. The offended parties will be holders of U.S. debt, primarily China. But China’s military is configured only to defend itself against a possible U.S. attack, not to go on the offensive in any survivable manner. So, if the ball is in China’s court because it has been stiffed by U.S. currency inflation, and they are not in a position for an offensive war, then, why would there be war? Just asking.

        Also, the inflationary approach reduces the assets of not just China, but of everyone who is owed money, who are most of the “people who count” in Washington’s decisionmaking. So certainly this is not a preferred option, but only a last resort. We may be at that last resort stage now. Or not. So, how can we know if we are or not?

  12. Blurtman

    Under the rubric of “entitlements,” let’s also include interest payments to US treasuries bond holders. As with the Social Security trsut fund, money was lent to the USG (voluntarily, as opposed to the raided SS trust funds), with the expectation that it would be paid back.

    Obama has threatened SS payments which surely must raise the risk of the “special treasuries” that are held by the SS trust. I hope these treasuries are returning 20% a year now.

    Contrary to the statements of that souless liar Tim Geithner, the SS default threat did not roil the bond markets.

    Why did the POTUS threaten one category of entitlements, but not the other?

    1. Eric

      Is there a law that directs how the executive responds to a situation where insufficient funds are avaialble to pay all legal obligations? Just curious as the situation would appear to be one in which the executive will be obliged to ignore some laws. If you were Obama and effectively told (by the inaction of Congress) that you need to ignore some laws, why wouldn’t you choose to ignore the debt ceiling law, as opposed to laws that tell you to send checks to SS recipients, or tell you pay for new airplanes, or tell you to pay workers in the Ag department? Is the debt ceiling a higher order of law than appropriations laws are?

  13. propertius

    I’d be inclined to call their bluff if the deadline passes:

    1) Declare a full ground stop (like 9/11) and send the ATCs and TSA folks home for the duration. Nobody flies in, to, or from the United States. Not even on a private plane. A little inconvenient during peak vacation travel season, but it’s a small price to pay for solvency.

    2) Suspend all payments to government contractors. No exceptions.

    3) Send all the CIS folks home and close every port of entry. No new BMWs entering the country for the duration of the crisis. No iPads, and no cheap Chinese knickknacks, either. Anything that’s awaiting customs or agriculture inspection will just have to wait.

    4) I don’t know if this is possible, because I think the Capitol is run by the Office of the Architect of the Capitol and I don’t believe that’s part of the executive branch, but I’d shut off power and water to the Capitol and associated offices. Shared sacrifice means doing without air conditioning in DC in the summer.
    Even if you’re a Congressman. The Founding Fathers did it, after all.

    5) Shut down all Federally-managed water and power facilities (TVA, Central Valley Project, etc.). After all, we did without them during the supposed glory days of the free market. They’re obviously not essential.

    I suspect that the debt limit would be raised within hours, without a single SS payment being missed. Yes, it’s harsh – but nobody said austerity would be easy.

    1. Just Tired

      “Shared sacrifice means doing without air conditioning in DC in the summer.
      Even if you’re a Congressman. The Founding Fathers did it, after all.”

      I think the Founding Fathers went home in the summer to get away from the heat. Wouldn’t be a bad idea today.

        1. propertius

          Come to think of it, my proposal to close all ports of entry would put a pretty big dent in the imported oil supply, too. They might not be able to drive, either.

      1. rps

        Philadelphia was in the throes of treason as they planned to overthrow England. On June 14, 1775, delegates of the Continental Congress nominated George Washington as commander of the Continental Army in the Assembly Room of the Pennsylvania State House. On July 2, 1776 the date the resolution of Independence was approved in a closed session of Congress.

        The Constitution Convention was in the Summer of 1787 at Independence Hall, Philadelphia. The resolution calling the Convention specified its purpose as proposing amendments to the Articles, but the Convention decided to propose a rewritten Constitution. The Philadelphia Convention voted to keep deliberations secret, and to keep the Hall’s windows shut throughout the “hot summer”.

  14. Hugh

    So review the 14th Amendment Section 4:

    The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

    The debt ceiling is an unconstitutional placation of certain interests dating from the time of the US entrance into World War I. Obama has the Constitutional duty to pay the nation’s bills. This whole debate is a manufactured crisis, a Shock Doctrine moment, to gut entitlements to the benefit of our kleptocratic elites. It is a criminal act and all those involved belong in prison.

    1. propertius

      Particularly since Congress has already voted to appropriate the money. It seems to me that there are two conflicting Congressional mandates here – and since the most recent budget postdates the last debt ceiling, one would assume it supersedes.

  15. mock turtle

    “i says” commented that one of the goals of this shock is to drive the dollar way down and bring the costs of american labor and products in line or at least competitive with 2nd world economies.

    i agree

    i also agree with other commenters who decry this manufactured crisis as a way to weaken or dmage the so called “entitlements”… even though taxes withheld to fund the entitlements are specifically allocated and identified on your salary pay stub for the program they fund.

    not to mention that social security taxes with interest has paid in more than 2 trillion into the fund since inception than paid out to beneficiaries over the years…hardly drain on the budget now or in the short term

    and even medicare, minus the unfunded prescription drug benefit part D, is easily salvageable with a bump up in taxes.

    the elite and our leaders think they can play a successful game of “chicken” with a approaching financial-crisis-Juggernaut to precisely manipulate the politics and the rabble

    as everyone here know, things could easily spin so very badly out of control

    1. psychohistorian

      mock turtle said: “not to mention that social security taxes with interest has paid in more than 2 trillion into the fund since inception than paid out to beneficiaries over the years…hardly drain on the budget now or in the short term”

      I believe that you are mistaken about the 2 trillion SS money being in the fund. Regean and Greenspan took all the money out of the fund and turned paying for SS into a line item in the budget that is now at risk.

      Pretty sick, isn’t it?

  16. Mark P.

    “Greece should be viewed as a dress rehearsal for the United States… Greece didn’t really get any bailout funds at all. All of the bailout funds were given by European creditor governments to the banks that held the Greek bonds. And Greece was told, “Well, there’s a 50 billion euro loss on your bonds that have gone down. You have to sell off and privatize €50 billion of your land and property in the public domain.” So for every euro that the bankers lose, Greece has to sell off an equivalent amount. The idea is to carve up the government and privatize it, just like Illinois and Chicago and Wisconsin and California are doing. So it’s a dress rehearsal for what’s happening here.

    “…You’ve seen the protests in Madison, Wisconsin. And in the Greek Parliament Square, in front of the parliament building, there were signs up to say, “We are Wisconsin.” … What’s happening across the world is an attempt by the financial sector to really make its move and … they’re creating this artificial crisis as an opportunity to carve up the public domain … They’re taking the money and running, because they know that unemployment is going up. The game is over. They know that. And the only question is, how much can they take, how fast?”

    1. R Foreman

      The last act of a failed regime is to loot any remaining wealth. The question is, just when do we get the ‘big surprise’… and it’s going to be a doosey, for about 99% of the population.

      I kind of think we get a big war before that happens, but that’s just my humble opinion. When the elite realize they’re destroying the people who protect them from those evil chinese, then they either stop what they’re doing or they put us in a big war.

  17. rps

    Fun wikifacts: The problem with the United States government under the Articles of Confederation was, in the words of George Washington, “no money”.

    Congress could print money, but by 1786, the money was useless. Congress could borrow money, but could not pay it back. Nothing was paid toward the interest on debt owed to foreign governments.

    Most of the U.S. troops had not been paid. Spain closed New Orleans to American commerce. The Barbary Pirates began seizing American commercial ships. The U.S. had no funds to pay the pirates’ extortion demands. The U.S. had no more credit.

    By 1786 the United States was about to Default on its contractual obligations when the principal came due. Congress was paralyzed……..

  18. bob goodwin

    Shockingly balanced post, Yves.

    I must admit that although I am more sympathetic to the Tea party, I doubt I would have the fortitude to stick to my guns to the extent the loyal opposition has. You spilled a lot of ink into why the administration feels safe driving us to the precipice. Any insights what the calculus is on the other side? They seem to be losing the PR battle, yet forging ahead anyway.

  19. Suvikas


    Why no reference to the 2nd largest holder of Treasurys – China. They would be loath to see any losses on their holdings. How would they react to a negative event? I see them, and as you mentioned, maybe, Japan stepping in. In such a case, the Treasurys may not get hit.


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