The New Republic

I reside in a hurricane zone, so preparedness is very important. As we approach August 3rd, I would expect markets to begin reacting. I suppose if we hit the ceiling interest rates would spike and those holding lots of bonds would suffer major losses. So wouldn't that suggest a gradual move away from bonds as we approach August 3rd? But it's not as though bonds in other markets (other than the US) offer a safer alternative. Short term US bonds would be the most likely place for money to go (where else?), forcing down yields, maybe even creating negative yields, on them, and forcing up yields, maybe by a lot, on longer term bonds. Comparing US bond rates today and a year ago, the divergence between short term and long term rates is somewhat greater but not by that much. And yields on corporate bonds have actually declined in the past month (and year). Does this suggest that the markets don't take the threat of default seriously, or are the markets as crazy as the Republicans? Or am I wrong about short term US bonds being the likely place for money to go? If we do see an increasing divergence between short and long term yields for US bonds, though, it could trigger a stampede. Who wants to be left holding a 10 year US bond yielding 3% or a 30 year US bond yielding 4% if long term rates spike to 10%? Ouch!

- rayward

July 13, 2011 at 1:25pm

We indeed are in virgin territory and the Republicans just might suffer a backlash resulting from their intransigence should the worst happen.

- liberalref

July 13, 2011 at 1:42pm

What is the upside for the Republicans, to win in the White House as a world wide depression ravages the markets? If the debt ceiling is not increased the US has to cut 44% of its spending immediately. The unemployment rate would double in no time and then double again with less money coming in the only thing left over will be money to pay the debt. I don't care what happens to the White House in this case, the whole system will be massively screwed over and all for NO reason whatsoever.

- blackton

July 13, 2011 at 2:36pm

I don't see how anyone could seriously think that an economic catastrophe caused by a failure of the House to take McConnell's deal would not hurt Republicans far more than Democrats. Obama would almost certainly agree to the proposal. McConnell won't block it in the Senate. The causal lynchpin would be House Republicans, and everyone should know it. Moreover, Democrats--and Obama in particular--could point to all the concessions they were willing to make while House Republicans said no, no, no--all because they refused to raise one more penny in revenue from the wealthiest Americans and corporations. This opposition not only runs against overall popular opinion, but even Republicans split 49-49 on raising taxes on income over $250,000 (and one could safely assume Republican majority support for raising taxes at higher levels). So Republicans have blown up the economy, and over an issue where a majority strongly disagrees with them. And Sides thinks this will hurt Democrats? I know we all have our own selection biases, but this seems like a willful disregard of the situation.

- dsimon

July 13, 2011 at 3:01pm

- McConnell knows 1.) Voters don't blame Obama for the economy, it's still Bush's mess and Wall Street and congress don't score well with independents. 2.) Defaulting would cause a chain reaction and no one will be looking at congress or candidates to take the wheel when things spin out. No, the past few months convinced Mitch he must pull strings from the Senate or he'll watch as Obama destroys the house and the GOP field. He gave the hooligans a chance and they proved to be no match for Obama. Simple: Would you favor Cantor's Crew or the president after a default?

- michaelg

July 13, 2011 at 3:12pm

It's remarkable that people seem to be taking advice to default from... Newt Gingrich? Wasn't he the lunatic who drove us over the cliff the LAST time something like this happened? And he's not even in office this time. I'm very glad that McConnell, despite his sometimes lunatic rhetoric, at least takes the right lesson from 1995. Because really, that's the biggest risk. Having manufactured this crisis out of whole cloth (since there SHOULD have been a clean bill) the biggest risk now is that they'll predict reality so badly that they think the default would be blamed on Obama. If they seriously conclude this, financial disaster is in the near future. I sure hope he means it.

- AllanL5

July 13, 2011 at 4:08pm

Clearly what McConnell is offering is preferable to the default option (which of course shouldn't even be considered an option in any sane political or economic polity). But does he paint Obama into a corner with this down the line, forcing him to repeatedly take on blame for the debt by virtue of repeatedly having to raise the debt ceiling?

- Thunderroad

July 13, 2011 at 4:13pm

- One more point, Mitch saw Obama and the DNC rake in $86 million with over half-a-million donors. Wait, his side doesn't have a candidate, a credible leader and their cash is going to wacko groups. Why would he risk a crisis that would rally Democrats to defend Obama while the GOP splinters behind the weird and unelectable? The GOP needs a year of error free politics and it doesn't look like anything related to the budget is something they've figure out. When people think about the economy they could give a shit about protecting tax expenditures.

- michaelg

July 13, 2011 at 4:15pm

One problem among many for Obama if the debt limit stays where it is that should he elect not to go Constitutional and just borrow the money without Congress's approval, it is HIM who has to decide whether to stiff pensioners, creditors or a mixture of both. Yes, he can go on the tube and tell seniors and veterans to blame House Republicans for their empty mailboxes, but then he leaves himself open to the charge that he favors the interests of bankers over regular folks. The household metaphor for the US government has exerted a pernicious influence on the debate about fiscal planning. It would be ironic if that metaphor should be extended to an underwater household where the internal debate was about whether to accept strategic default in order to keep putting food on the table.

- AaronW

July 13, 2011 at 4:40pm

The household metaphor is pernicious for all thinking about macroeconomics because it is just wrong and leads to all sort of incorrect conclusions. Worse, perhaps, it allows lots of people who know not a thing about macroeconomics to imagine that they understand it because they can analogize it to their own household. Thus, we get wildly uninformed opinions. Think Chauncey Gardner.

- roidubouloi

July 13, 2011 at 6:51pm

Sides Hello, Hello, this isn’t an economic crisis with unclairity as to how it started so the party in the Oval Office is blamed; this is not a recession; this is instant crisis with a mammoth government shutdown and default on the debt for basically the first time in history, with the party at fault very clear and easily explainable to the public as the Republicans. The precedents aren’t previous recessions; they’re much more the last government shutdown where Republicans took the blame and were severely hurt. Only this time they’re even far more to blame, and this shutdown will make the last one look like a walk in the park.

- RHSerlin

July 13, 2011 at 8:12pm

"It seems highly plausible to imagine that, if the Republicans block a debt ceiling increase, that the public will turn on them..." Thank you! Do you actually read my comments? I hope the Democrats fully take all of this into account in their planning.

- RHSerlin

July 13, 2011 at 8:21pm

A point here on the Debt Ceiling and the President's Comments regarding Social Security. I would advise the President to walk back his unplanned answer on whether Social Security Checks will go out in August. His flip response that he doesn't know, and implying they would not be mailed is a serious mistake and will be picked up by the conservative commentators. The President's error is pretty substantial and had no precedent in modern American politics. If the Goverment does not mail those checks, they are in default on a contract. Social Security Checks are not goverment aid, assitance or refunds. These are payments of obligation required to maintain ther agreement when they accepted the required deposits from the insured. I am unaware of any time the Federal Government has failed to issue a Social Security Check in its 70 year history. There have been mail strikes, and natural disasters that prevented checks from being delivered. Perhaps during WW2 and rationing there could have been delays in issuing checks, but I doubt it. What the President is implying is that Social Security is no longer in surplus, and requires new borrowing to fufill their obligations. This would be news to most Americans. Either the money is not there, or it is an optional payment by the Government depending on their ability to pay. Either way this is not what the President wants to communicate to the American Social Security Insurance Insured Individual. Granted he was responding to an Press Conference question and did not have the information in hand. But I would start immediately to walk this back through my surrogates. I would get Tim Gietner out there to let Americans know the Social Security Funds are not in deficeit. SSA Commisioner, Michael J. Astrue, needs to walk back the damaging testimony of Stephen Goss, Actuary, who reported that the Treasury had the descretion to not mail checks. Imagine the litigation if those checks do not go out on time. The only legal out for the Government is if they go into default. By choosing not to mail checks, they are altering a contract and would be open to any legal challenge. Millions will sue to get out of the system, demanding refunds. All the current folks collecting their payments would sue for late payment. This would get ugly fast. The President handed his politcial opponents a gift here and better realize this empty threat has consequences. Show us the last time the Goverment didn't write these checks and why. Does the President want to be the first one to default on the Social Security Obligations to their Policy Holders? I don't think so.

- CRS9TNR

July 13, 2011 at 8:43pm

It may be a contract in the social sense, CRS, but it is not a contract in law. Congress could reduce the benefits to zero tomorrow and no one would be entitled to a rebate. I agree with you, however, and have previously written that social security and Medicare are not at risk regardless of the outcome of the debt ceiling. Those funds hold previously issued debt that counts toward the debt ceiling and can, and indeed must be, re-sold to pay shortfalls in receipts. Nor can the government take payroll tax receipts to pay other bills as far as I know. These two programs really are off-budget. But Medicaid and various income support programs, government salaries, and bills to defense suppliers can all go unpaid. I still think that if the Fed will play ball the simple and legal way through is for the Treasury to write checks that the Fed honors. But the Fed must agree to do this.

- roidubouloi

July 13, 2011 at 10:32pm

roid, I agree abou tthe houshold metaphor, but it can be worked with. What the republicans have done, essentially is said, "I know Suzy needs braces and Johnny just broke his leg, but I am going to go to my boss, mr. potter and DEMAND that he cut my wages in half. I know his bank just made record profits and I have been pulling double over time, but times are tough and everybody needs to do their part. So, suck it up, Suzy!"

- miceelf

July 14, 2011 at 11:17am

I don't think so, micelf. The household metaphor leads people to think that "you can't spend your way out of recession" and that the appropriate response to recession is government austerity. After all, if your household income declines, should you cut back, or increase spending and borrow to do it? But the answer for government spending in a recession is in fact the exact opposite of what a household should do for its own sake, and is indeed part of the reason why the government has to move in the opposite direction of households. The unfortunate metaphor is the reason why the Republican nonsense has any appeal at all. It "makes sense" to the economically unsophisticated which is nearly everyone. That is not to say that Republican extremism does not exceed even every metaphoric justification.

- roidubouloi

July 14, 2011 at 1:28pm

Roid, there is no household on earth that would voluntarily reduce revenues as a means of dealing with debt or deficit.

- miceelf

July 14, 2011 at 1:58pm

You mean as in cut taxes?

- roidubouloi

July 14, 2011 at 6:29pm