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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  1. Warren: I’m generally sympathetic to MMT ideas and I read this site regularly. I enjoyed Scott Fulwiler’s piece on going around the debt ceiling. In fact, I recently mentioned the $1 trillion platinum coin idea in a post on my blog. Having said that, I was surprised by the Armageddon-like tone of this post. You wrote:

    1. “…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…”

    Are you really suggesting the debt ceiling debate failure could lead to a drop in total U.S. GDP of greater than 6%, that is from positive 2% to -4% or beyond?

    And, is it accurate to say, for the first time the US would experience an unchecked downward spiral? I seem to remember in the history books a few downward spirals such as the Great Depression and earlier panics such as 1907.

    You wrote in your last sentence:

    2. “…could now bring down the entire world economy, and threaten the world social order as well.”

    Bring down the entire world economy? Threaten the world social order? Good grief, isn’t this a bit over the top?

    How do comments like these differ from standard liberal orthodoxy any time a government program is threatened? Is all government spending sacrosanct in your view?

  2. 1) the current deficit is 10% of GDP. assuming the budget has to be immediately balanced, if anything that estimate is conservative.

    2) go ahead and remove the entire social safety net. i think you’re underestimating what the humanitarian consequences and upheaval that would result.

  3. Removing the entire social safety net is absurd but making it accountable is not.
    The Medicare and Medicaid waste,fraud and over cost is mind-boggling,the incentives for fee-for-service (to the more you do the better you do financially) does not make sense. How about “fee-for-value” Why even “pay for bad service. Paying for avoidable health care conditions such as hospital-acquired infections.” “If your car fell of the lift while you were getting tires,you would accept a bill for repairing the car that had been dropped.”

    Take good look at hospital practices in billing there patients and you soon realize that the complicit and complacent sucker is the paying Government.

  4. The costs of Medicare and Medicaid are lower than comparable private insurances. That means that the main issue is not fraud and waste – these are always issues, but doesn’t look like they are the main contributors to the rising costs of insurance. Our entire healthcare system is broken. This is not the fault of Medicare and Medicaid.
    Or, I guess, you could call the wrong incentives and the inefficient care “waste”, but then again, if anything, Medicare and Medicaid do a better job at limiting those than private insurance. Which is totally unsurprising, given that the rest of the civilized world found long ago that when it comes to healthcare, socialized works better than private.

  5. Market rallied as the debt debate rages on. Maybe the market disagrees with the BS presented by Mosler.