Non-Negotiable

Said Obama: "I think that it's lowdown
To set up a Debt Ceiling showdown.
Though the House GOP
May well disagree,
It's a road I intend not to go down."

Battle lines have been drawn over the increase in the federal debt limit, which must happen by March to avoid a government shutdown and likely default.  President Barack Obama gave a press conference yesterday in which he pledged not to negotiate with the House GOP over the debt ceiling increase, saying that such crisis-fueled, eleventh-hour bargaining is no way to run the government.  The crux of the President's argument is that the Congress cannot refuse to incur the debts for the spending it has already approved; he likened it to beginning a diet by walking out on the rich meal you've just had, without paying the check. 

For their part, Republicans clearly intend to use any available leverage to force a reduction in federal outlays, regardless of default risk: House Speaker John Boehner, while acknowledging the economic harm that would come from a default, said: "The American people do not support raising the debt ceiling without reducing government spending at the same time."

However, the Washington Post's Greg Sargent thinks the Senate Democrats may hold the trump card: if the House passes a bill with both a debt ceiling increase along with big Medicare and Social Security cuts, the Senate could simply amend the bill by stripping out the cuts, and send it back.  Sargent believes that the Senate GOP is more politically realistic, and would not filibuster the amendment.

Bottom line: at this point, it's too soon to say that America has passed the era of banana republic politics.

Mint the Coin

With the Debt Ceiling coming up soon, it
Is time (although some may impugn it)
For coining a halt
To a US default
With a really big monet'ry unit.

A one-trillion coin, it is said,
Could be minted and shipped to the Fed,
In order to pay
What the US of A
Might be forced to renege on instead.

This sizeable denomination
Would be kept out of mass circulation,
The better to sidestep
That such an untried step
Precipitates hyperinflation.

When Republicans finally come round
From running bond issuance aground,
It's back to the Mint
For the Coin, where its stint
Will be wound up with melting it down.

So let's mint The Coin out of platinum!
Though objections there be, we may flatten 'em.
There are ways besides cash
'Round the Debt Ceiling clash,
But there's nothing as clever as that in 'em.

It's an idea so crazy, it just might work: the US Treasury could circumvent the looming debt ceiling showdown by minting a very large denomination platinum coin of, say, $1 trillion. The coin could be deposited in Treasury's account at the New York Fed, where the new funds could be used to pay any of the Federal government's many obligations. First proposed in a comment on an economic blog in 2010, the Coin is within the legal powers of Treasury, which "may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time." Never mind the fact that this law was intended to facilitate minting bullion coins for numismatists - it's on the books. Of course it's absurd to speak of minting a $1 trillion coin to keep the government out of default, but the debt ceiling itself is absurd, as is the threat to throw the nation into default for political purposes. So, it's a case of fighting crazy with crazier.

The "Mint The Coin" movement has been gaining steam thanks to the (only slightly tongue-in-cheek) advocacy of such leading economic writers as Bloomberg's Josh Barro and Business Insider's Joe Weisenthal. For those who fret that the issuance of a $1 trillion coin would ignite inflation of Zimbabwean proportions, a former head of the US Mint (who wrote the 1996 platinum coin law) has weighed in with a cogent explanation of why that would not happen. It all comes down to a choice: would we rather the US Treasury default, or do something absurd?

Kicking The Can Down The Cliff

Under watchful regard of a nation
In Twenty-Thirteen celebration,
Congressional members
Took leave of December
By rigging the rules of taxation.

With many a jubilant *clink*,
The deficit promised to shrink,
But much is depending
On questions of spending,
And soon we'll be back at the brink.

The prospects are less than appealing
For the next round of Washington dealing,
Especially if
There's a new Fiscal Cliff
When Treasury hits the Debt Ceiling.

As everyone knows, the US Congress passed an emergency measure on New Year's Day to avert the worst of the automatic tax hikes that were to take effect under the "Fiscal Cliff" provisions that it enacted after last year's debt ceiling fight. For those who want to know what the latest tax deal means for them personally, Matthew O'Brien has a couple of helpful charts in The Atlantic. The bottom line is that, while everyone's tax rates and payments are now less than they would have been under the full Fiscal Cliff, most Americans will see another 1.5% of their income going to taxes, and the well-to-do will feel 3-8% poorer. Ironically, some of the most fortunate taxpayers are those whose income is between $200-500 thousand. They have mostly avoided marginal tax rate increases, which apply to income above $400,000 ($450,000 for joint filers) and will not pay more in alternative minimum tax, which has been permanently "patched".

Those who may have worried that a bipartisan agreement on taxation signals a change in the ways of Washington will be reassured to know that the deal has preserved an impressive array of obscure tax breaks for special interests, as the New York Times reports.

However... the thornier questions of cutting expenditurses (or at least, reducing their long-term growth) have been pushed off by a month, as has the always-explosive question of raising the Federal debt ceiling. Another high-stakes political standoff is therefore guaranteed, which means that the celebrated tax deal is actually not much to celebrate.

WSJ: No Debt Limit

Here is the 2nd of Dr. Goose's now regular contributions to the WSJ Total Return blog, regarding Joe Stiglitz' thoughts on the US debt/GDP ratio. I am thrilled to become a regular contributor to the Wall Street Journal's website, and hope that readers of this space will visit me there as well.

Debt Ceiling Lesson

Said Boehner: "My lasting impression
Of this Washington debt ceiling session?
It's a wonderful thing
The minority wing
May employ to extract a concession."

The budget compromise worked out in dramatic fashion on Sunday night between U.S. President Barack Obama and congressional leaders is actually not very definitive, considering the amount of time and angst that went into making it. Republicans can point to one key accomplishment: the White House’s agreement to $917 billion of spending cuts over the next ten years. As for the next $1.5 of deficit reduction, that particular can has, as they say, been kicked another six months down the road. The most important legacy of this protracted episode of brinksmanship may be that a vocal and well-organized minority can use the debt ceiling to bend the government to their will. One wonders what Denmark – the only other developed country with a debt ceiling – will make of all this.

Debt Ceiling Limericks on the Radio

David Lefkovits, the creator of Dr. Goose, sat down with Tess Vigeland of public radio's Marketplace Money to swap limericks on the debt ceiling crisis, including those sent in by her listeners.

Here is the interview, courtesy of American Public Media:



You can read the full text on the Marketplace website; the listeners' limericks can be found here.

Plan Beta for Beijing?

To the US said China: "We trust you will
Pay your bills, as you've often discussed you will,
But on Treasury debt
We may lower our bet,
And diverge to the Dow Jones Industrial."

Economists such as Shanghai-based Andy Xie have suggested that, with the political cloud of uncertainty hanging over US Treasury bonds, China - the largest foreign holder of US sovereign debt - would do well to diversify into US stocks. In doing so, it would have the benefits of strong US corporate earnings backed by rising exports to emerging market countries such as itself; proof that what goes around, comes around.



Weekend Radio Recommendation

For financially sound information
Find your town's public radio station,
Where the Marketplace crew
And Dr. Goose, too,
Will firm your financial foundation.

Tune into public radio's Marketplace Money with Tess Vigeland this weekend, as she talks debt ceiling limericks with David Lefkovits, alter ego of Dr. Goose. Find your local station and time or subscribe to the podcast.

Capitol Thrill-Seeker

A fellow who loved a good thrill
Made a bet on the debt ceiling bill,
Going 7 to 3
On a "yes" from the G.-
O.P. Caucus on Capitol Hill.

As the debt ceiling crisis heads toward the Default Date of August 2 with no resolution in sight, many are aware that this impasse has been manufactured by the Republican House majority to force spending cuts on the President and Congressional Democrats.  However, some extreme GOP representatives appear to want to force concessions on their Speaker as well.  The Wall Street Journal reports that Senators Rand Paul (R-KY) and Jim DeMint (R-SC) wrote to House colleagues that Speaker John Boehner's plan to cut $1.2 trillion in expenses doesn't go far enough.  The GOP may yet vote "yea" on a budget compromise, but don't bet your life on it.

The Too-Quiet Markets

The US is counting the days away
From default, which we surely hope stays away,
But the markets' reaction
Shows great satisfaction
Catastrophe's still quite a ways away.

Confounding the expectations of financial journalists, the international financial markets remained calm with less than a week to go before August 2, understood by all as the date on which the US Treasury could no longer pay its bills without an increase in the federal debt ceiling. Like Sherlock Holmes investigating the case of the dog that didn't bark, the Wall Street Journal contacted fixed income portfolio managers to explain this odd silence. The general answer seems to be an expectation that the immediate problem of the debt ceiling can and will be solved quickly, even if the larger problem of deficits may be thornier.

* * *

Is there a limerick writer in you waiting to get out? Dr. Goose will appear on Marketplace Money with Tess Vigeland this weekend, and they would like your debt ceiling limericks to add to the fun! You can post them on the Marketplace Money Facebook page, or tweet them to @radiotess.

Whence Came the Deficit?

Uncle Sam, once quite in the black,
Financially fell off the track
Through tax cuts galore,
Recession, and war
In Afghanistan and in Iraq.

The New York Times editorial page gave a lesson in US federal deficit history over the weekend. Countering the notion put forth by Grover Norquist and his Republican pledgees in Congress that the deficit results from "runaway spending" under Obama, the Times demonstrated that a combination of military spending, as well as reduced revenues from lower tax rates and a weak economy, had squandered the surplus left behind by the Clinton administration. The stimulus measures implemented by Obama, though adding to the deficit in the short term, are only temporary.

What Happens if We Default?

On a US default, we deduct,
If the GOP reps can obstruct,
Our economy's fatally,
Foolishly, finally,
Fittingly, fecklessly f***ed.

Simon Johnson writes in Project Syndicate that some Tea Party Republicans hope that a US default will radically reduce government's role in the economy,

But the consequences of any default would, ironically, actually increase the size of government relative to the US economy – the very outcome that Republican intransigents claim to be trying to avoid.
The reason is simple: a government default would destroy the credit system as we know it.

The entire dollar-based credit system is founded on the assumption that US government debt is riskless; the entire economy is founded on credit; without the one, the other will contract fitfully, fiscally and ferociously.

Hat tip to Tess Vigeland of Marketplace Money.

Confession of Congressman "X"

A fellow I tried to ignore
Cleared out the Congressional floor
With the unpleasant facts
Of budget cuts, tax,
And Medicare, pensions and war.

Writing in Politico.com, David Rogers distills the reasons that we are still no closer to a debt ceiling deal, even with financial Armageddon looming:

"The bottom line to the debt fight may be a Washington rule of thumb about the two parties:
Democrats hate tough budget votes — as evidenced by the Senate’s failure to even bring up a budget for so long. And Republicans love tough-sounding votes but often fix the deck so they lose and can score political points without having to live with the results.
That’s why the debt ceiling presents such a quandary: It requires both parties to take a tough vote — and it must pass."

Hat tip to Tyler Cowen's Marginal Revolution blog.

Warning to Washington

Said the national raters of credit:
"The Congress appears not to get it;
We may downgrade a notch
While we wait and we watch
To see how out of hand they will let it."

The August 2 deadline, by which the US Congress must raise the federal debt ceiling to avoid defaulting on Treasury bonds and other obligations, is rapidly approaching. However, both Moody's and S&P have now warned that a downgrade of America's sovereign debt rating may come earlier, if the deadline looms closer without an apparently likely political compromise. This of course has alarmed the financial community, which may finally tip the political scales toward reaching a solution.

Overheard at the White House Debt Ceiling Talks

"The Democrats promise you one thing:
There's a limit to populist plund'ring;
We can't from the Right
Stray too far, since we might
Be depending on Wall Street for funding."

Liberal commentators and legislators have begun to give voice to the grievance that President Barack Obama's deficit-fighting measures, despite the symbolism of rolling back tax breaks on luxury goods, are substantially similar to those of House Speaker John Boehner's Republicans. Marginal revenue from taxes on corporate jets would be dwarfed in size and impact by the constraints on Social Security said to be in the works. In substance if not rhetoric, both parties appear to play not to their electoral base, but their donor base.

Treasury Bill

Said Clinton: "If loopholes would close,
And the government's revenue rose,
Then the corporate rate
Could greatly abate,
As Republicans like to propose."

Former President Bill Clinton may have found a way out of the standoff between Republicans and Democrats over a budget deal to raise the federal debt limit. Mr. Clinton points out that, although the US corporate tax rate is 35%, the average rate actually paid is more like 23%. Some masters of tax avoidance pay zero, as in the notorious case of GE. Why not lower the rate to a level that everyone will actually pay, such as 25%, while getting rid of special write-offs and exemptions?