DEBT CEILING DYNAMICS REVISITED

By Warren Mosler

First, I’d guess the President will sign anything Congress passes, including short term measures.

But he might not.

And yes, there are options that allow the executive branch to continue to deficit spend if it wanted to, ranging from issuing a multi trillion dollar platinum coin to spending under cover of the 14th amendment.

However, there’s a real possibility Congress won’t pass anything for the President to sign, or that the President vetos what they do pass, and that the Treasury honora the current debt ceiling and limits spending to tax revenue.

Should that be the case, the US govt, as widely discussed, immediately goes to a ‘balanced budget’ mode, prioritizing interest payments, so there is no default by the US Treasury.

That means a lot of other bills won’t get paid.

Chairman Bernanke said that this could cut 6% off of GDP and send the US into a recession with GDP going from positive to negative.

However, falling GDP means falling revenues which means more spending cuts, and revenues falling further.

It also means the automatic fiscal stabilizers of rising transfer payments will not be funded by deficit spending and therefore not provide the support they have provided in all prior downturns.

In other words, for the first time the US would experience an unchecked downward spiral, which could make the downturn that much more severe than the Fed Chairman suggested.

And as difficult as it might be for the US, the euro member nations may be looking at something even more catastrophic.

The drop in US consumer, business, and govt spending will mean a drop in sales for euro zone exporters, possibly sending that region into negative GDP growth and falling govt revenues.

This means their current solvency and funding issues further deteriorate as the entire euro zone could experience a funding barrier and general default.

While the ECB can, operationally, write any size check required to fund the entire region, it doesn’t want to do that, and can be expected to wait until things deteriorate sufficiently to the point were there is no other choice.

Ironically, the US debt ceiling, a seemingly innocuous relic of the gold standard, where it once served to protect the nation’s gold supply and should have been eliminated when the US dollar ceased to be officially convertible into gold, could now bring down the entire world economy, and threaten the world social order as well.

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