This is far more problematic than markets realize.

The President had a choice. The debt ceiling thing expresses ‘the will of Congress’ where Congress makes laws for the executive branch to execute. The President has also sworn to uphold the Constitution which says the President has to pay the nation’s bills. The President has so far decided to abide by the will of Congress.

And, in any case, the Republican leadership says the fight is going to be about modifying the already in place sequestrations.

So seems it’s now ‘advantage Republicans’ on the spending cuts issue.

The economy hitting the debt ceiling and going cold turkey to a balanced budget is a far more catastrophic event than even going over the full cliff would have been, as it disables the ‘automatic fiscal stabilizers’ and instead triggers a pro cyclical downward spiral in output and employment. That is, when the $25 billion/week spending cuts kick in and the economy slows, the falling tax revenues mean spending has to be cut more, nor can total spending on unemployment ‘automatically’ go up, etc.

And don’t forget about the Jan 1 FICA hike now beginning to kick in which also seems markets are not discounting.

Platinum Coin Idea Is Rejected by White House

January 12 (Reuters) — The White House on Wednesday sees little profit in the notion of minting $1 trillion platinum coin as an escape hatch to avoid a debt default if Congress balks at raising the U.S. debt limit.

28 Responses

  1. I think what we’ve got here is hubris. The President thinks he can outsmart Congress. Which is a fine thing to think when it’s about a few fat cats and whether they get a favor or not. When the people are being routinely abused by having their natural and man-made assets stolen, it’s not fine. And it’s not a game.
    When authority stands silent in the face of abuse, it becomes complicit. The President seemed to realize that in regards to Libya, after some of his advisers took him to the mat. That the 99% are being treated like dirt seems not to have registered.
    When people whose relatives have been despised and dissed get favored, they don’t seem to appreciate that they’re to be the exception that proves the rule. It would be natural for the President to conclude that his sterling qualities got him hired, not that the other side made a sham of the hiring process.
    Preconceived notions die hard and people go to great lengths to prove their are right. Being right is what counts.
    Which is why telling them they’re wrong is quite devastating.

  2. Republican leadership are playing hardball now because they are still feeling the sting of the fiscal cliff deal. So, for now they are eyeball to eyeball with the White House but when push comes to shove one of them will blink and the debt ceiling will be raised. Meanwhile, with Tsy yields having backed up so much, a long position might not be the worst thing in the world as fear of default ironically triggers a flight to quality out of Treasuries…. and into them.

  3. I don’t think Obama minds imposing big spending cuts. From his point of view, he has won the last election he will fight so he does not stand to lose personally if the economy slides into recession. He has obviously bought the idea that “the deficit” is a big problem where he could make a name for himself.
    It is widely accepted that a country with its own currency cannot be forced to default on its debt. But that is only true if the government is willing to do the equivalent of the platinum coin. In the old days when the Treasury issued notes, the problem was the limit on the amount allowed. The coin seemed to offer a way round that.
    Obviously most of the objections to using the coin were just a symptom of how confused people are about money, bonds debt etc. The only one which worried me was the suggestion that in order for it to be the sort of currency which the Fed would have to accept it would have to be a bullion coin which essentially meant having enough platinum to be worth $1 trillion. That of course would destroy the idea. This objection was based on the US Mint definition of bullion.
    Any views on this? Because the coin seems a good way of dealing with the problem even if Obama doesn’t like it.
    I prefer the government should just create Monetary Obligations Not Earning Yield, or MONEY to give it its technical name.

    1. @David Blake, though it is in contradiction with the opinion and testimony of Diehl, the former head of the Mint, there may be some validity to that bummer of a bullion (or proof coin) definition. Don’t know; no expert here. The Mint’s faq here. Also, rumor (i.e., local TV news) has it, Ben Bernanke came strongly against the idea.

    2. @David Blake, Yes, that’s the thing that I think people are not accounting for here. In macroeconomic terms, Obama is likely a deeply conservative Chicago-style anti-Keynesian. He thinks large amounts of government spending are inherently unproductive and wasteful, and crowd out private sector spending, and so doesn’t believe anything much will be harmed if we have to “do without” for a while. They might even be helped if the private sector picks up the slack by spending the “un-crowded out” funds that government borrowing is allegedly squeezing out.

      It’s hard to see how anyone could still believe this stuff, but Obama is steeped in U of Chicago thinking, and appears to be no whiz at economics – so who knows.

      If the Republicans force a spending crunch, then Obama and his Treasury Secretary get to decide which stuff to cut, and that will put him and his team in a strong position to decide which things stay cut after the debt ceiling is finally raised. He might envision a compromise in which he asks for the debt ceiling to be raised only part of the necessary way. Ultimately, legislation can be passed to cut the things that were axed during the crisis and never restored.

      Maybe this sounds crazy, but little about Obama’s thinking ever makes sense to me.

  4. ” The President has also sworn to uphold the Constitution which says the President has to pay the nation’s bills.”

    The Constitution says all kinds of things that are routinely flung down and danced upon by various compartments of the coercion community if the venerable document stands in the way of their agenda.

  5. “Obama has this time taken the position that doing so is Congress’s responsibility and that because a debt default would cause widespread economic damage, he does not need to offer lawmakers incentives to do so.”

    – He wants to humiliate the Congressional Republicans and show them who is really in charge. He blackmails them using their own well-developed strategy of blackmailing. This is purely political I think. NB a similar strategy is applied against AIPAC.

    Does ObamaCare (TM) about the ordinary people?

  6. Someone should tell the chief if he doesn’t change the conversation his legacy is in serious jeopardy. He needs to embrace MMT and the magic coin or they will trample all over him. They are already half way home since the chief believes we have a serious deficit problem and he is looking for some ” balanced” approach to reduce it.

    1. @Jonf, Cutting to budget, raising taxes, and putting the nation’s finances on what Obama perceives to be a “sound footing” are precisely the legacy Obama wants to establish.

      1. @jonf, Yes, but I don’t think he understands that Jonf. The guy is pure Chicago and doesn’t have a Keynesian bone in his body. He thinks government spending crowds out private spending and kills confidence fairies, and that if we cut it, private spending immediately pics up the slack. That’s my reading of him at least. He thinks the best thing he can do for the econony is slash the deficit.

  7. An inside the Beltway friend pointed out that this is a high stakes game going on, and both parties are betting us all.

    Obama is in a box, because of the original constitutional assignment of powers, plus all the accidental inter-dependencies that have accumulated ever since.
    The lunatics on the right would like nothing better than for him to do something unconstitutional.

    An innovative leader would have done something indirect before this point, but we don’t have one.

      1. @Jonf,

        Call it what you will. There were endless options.

        An adaptive electorate would have prepared and selected a good reservoir of innovative leaders by now … but we aren’t one.

        Has anyone asked “why” 3 more times? Can’t be that many deep alternatives for running this country the right way. We have to work hard to fail this badly.

        So, one key to unleashing innovation is to focus indirection at FastTransients ~5 layers deep, the optimal site for tuning & steering institutional momentum?

  8. How many people are added to the unemployment lines at $25B per week with a balanced budget? Is that what Obama wants?

  9. If i get what Warren is saying (a 50% probability in my case)..
    Hitting the debt ceiling may not lead to immediate default (as most presume) but could force a cold turkey move to a balanced budget(with all its consequences )(also assuming that it can be implemented in practice). This presumably give credence to some of the GOP telling us that default is not a given if they dont raise the ceiling .Add that to Obama throwing away all his options .The market’s belief that the GOP will let up on the ceiling at the last minute may not be such a dead certainty ..(time to jump ship ?)

    1. @Vincent, seems like there has been some sentimental rousing’s in Germany about them bringing their gold home. they aren’t as worried about being invaded by russia and having their vaults plundered as they were during the cold war? either way, i read it was only about $36B in gold….big deal. Our fed can print that amount in the blink of an eye…:-)

    2. @Vincent,

      Most of Germany’s reserves have been stored abroad since the Cold War over fears of a Soviet invasion.
      But the central bank came under pressure last year when Germany’s independent Federal Auditors’ Office last year concluded it failed to properly oversee its gold reserves. The auditor suggested the central bank should carry out regular inspections of the gold held abroad to verify its book value or change the reserves’ management.
      The auditors’ report stunned Germany, where the Bundesbank routinely tops polls of the nation’s most trusted institutions. The central bank was taken aback and maintained it didn’t see the need for more scrutiny in overseeing the reserves, saying “there is no doubt about the integrity of the foreign storage sites.”

      But the debate on the gold reserves, most of which are held by foreign authorities, caused some inevitable conspiracy theories questioning their very existence. Several politicians then jumped on the issue and called for some of the reserves to be repatriated.

      1. @Tom Hickey,

        “Most of Germany’s reserves have been stored abroad since the Cold War over fears of a Soviet invasion.”

        Wait a minute. Are you saying that the German government is (or was) more worried about the integrity of its gold inventory than it was about the lives of its citizens? That would be better for the Russians to kill Germans than to be able to steal their gold? For real?

      2. @chuck martel,

        Take a look ar what’s happening in the EZ now, and go figure. Of course, money (and to gold bugs gold is money) is more important than people’s lives judging from current behavior.

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