Dysfunction Is Limiting U.S. Position Abroad, Observers Say; ‘Sadness From Our Trading Partners’

click for ginormous graphic
BN-AA001_DEBTLI_G_20131015194502
Source: WSJ

 

 

Here is the problem with using the debt ceiling as a negotiating tactic: It does permanent, long lasting damage to the reputation of the US, and hastens the day when the US Dollar is no longer the world’s reserve currency.

The damage has ALREADY made US financing more expensive, impacted consumer confidence, and shaved a few bps off of GDP. The lasting ramifications of this are even greater, and future generations will spit expletives whenever they mention the 113th Congress.

The Tea Party has made it clear: Ideology first, party second, country last. They should be treated as hostile adversaries in all future negotiations.

 

See also
Why the U.S. Should Be Downgraded (MoneyBeat)
Salmon: The default has already begun (Reuters)
The Myth that U.S. Has Never Defaulted On Its Debt (TBP)
The debt-ceiling doomsday device (FT.com)
Some are born solvent, some achieve solvency, and some have solvency thrust upon them (FT Alphaville)

Contra:
Stop Fretting: The Debt-Ceiling Crisis Is Over! (New York Magazine)

 

Source:
Fiscal Uncertainty Chips Away at U.S. Prestige
Dysfunction Is Limiting U.S. Position Abroad, Observers Say; ‘Sadness From Our Trading Partners’
Thomas Catan
WSJ, October 15, 2013
http://online.wsj.com/news/articles/SB10001424052702304330904579137880639455254

Category: Credit, Crony Capitalists, Digital Media, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

46 Responses to “Debt Ceiling Debacle Has Already Damaged the U.S.”

  1. capitalistic says:

    Arguably one of the worst manufactured crises ever. Shoot yourself in the foot and blame the bullet.

  2. louiswi says:

    Looking for an answer here.
    Why has no one challenged the debt ceiling law as un-constitutional? Clearly the 14th amendment addresses the debt issue “without question”. I should think the debt ceiling law would be easily found to be un-constitutional.

  3. RW says:

    I agree that problems created by the default threat have already started and will last far longer than people may believe possible and will also appear in some very unexpected places but I don’t think a cheaper dollar is necessarily one of those problems. In fact there good arguments it may be beneficial.

  4. Sharkbite says:

    “The lasting ramifications of this are even greater, and future generations will spit expletives whenever they mention the 113th Congress.

    The Tea Party has made it clear: Ideology first, party second, country last. They should be treated as hostile adversaries in all future negotiations.”

    Tell us how you really feel, Barry.

  5. carleric says:

    Does resistance to ever increasing debt really represent an anti-America position? Interesting opinion

    • willid3 says:

      it does when the deficit is falling. and you dont acknowledge that. it was never about that . it was always about the ACA. which was the original demand. but before making that demand, it was already known that it was a non starter.

    • DeDude says:

      Why would you think that destroying government function and credit rating would reduce national debt?

      • ilsm says:

        The last presidents to oversee reducing the debt: Eisenhower, Carter and Clinton.

        In times of crisis, war recession, etc. debt tends to rise.

        In calm times debt falls.

        Reagan, Bush II raised the debt (lowered taxes, and feed the pentagon) in otherwise calm times.

    • Frilton Miedman says:

      The “if you don’t do it my way, I’m going to destroy America” approach is.

      I imagine you’d sing a different tune if Liberals were threatening a government shut-down if we didn’t amend the Constitution to uphold animal rights.

    • rd says:

      There is a lot of room to negotiate deficit reductions and spending reductions. In the end, the best single way is to construcively build the economic growth instead of destructively shrinking it. Economic growth over the past several years as well as increased tax rates have resulted in the annual deficit has dropped dramatically over the past couple of years. It is ironic that this huge battle is being fought at the time of the lowest deficits in the past few fiscal years.

      A my way or the highway approach to negotiaton based on ideological litmus tests will never work to create a stable, long-term deficit reduction unless based on a strong majority view, which these demands were not.

      One of the things that this debacle has shown is that there is a relatively small percentage of the citizenry that are willing to crash the plane into the ground to try to achieve their ideological goals. Demographically, this segment of the population appears to be slowly shrinking so I am hopeful that a more rational debate can start to proceed over the next few years.

    • Tobias Funke says:

      It’s never been about the debt. Never. Anxiety “about the debt” started the day that Obama won election in 2008, before that there was no concern about unfunded wars, unfunded prescription drug benefits, unfunded subsidies to the petroleum industry, or anything else on the list of Republican pet causes. Debt was never a concern then, and it’s not a concern now. What is a major concern now for every Republican is that they are not the ones that get to make all the decisions unilaterally like they did from 2000-2008, so they’ve decided that they would rather destroy the country rather than work together. if the day ever comes that another republican is elected president, the concern “about the debt” will vanish overnight.

      This hostage taking episode is about the same thing that the battle over ACA was about, and immigration, and the battle over gun control, and the denial of climate change, and fiscal austerity and literally every other issue before the government since 2008 – they are all about opposing anything and everything that Obama wants, hoping that the country will collapse while he’s President so that he can be blamed. That’s the only thing this is about. The people that purport to be more “American” than everyone else are in fact doing everything possible to subvert and undermine the country simply because they can’t stand anything less than 100% control over the country. If democrats had done anything like this between 2000-2008 Cheney would have instituted martial law and assembled death squads to round up the subversives.

      It is simply remarkable that the American people have persevered through the economic mess that Bush left at our feet in January 2009, despite the organized efforts of the Republicans to undermine any effort to improve the economy over the last 4 years.

  6. Tim says:

    Very, very insightful analysis BR. Thank you.

  7. DeDude says:

    The idea of having to vote on the debt is insane. It like having a separate vote for having your cake and eating it too. Spending and taxing is authorized by laws. If there is a gap between insufficient income from tax laws and the outlays from spending laws – you have implicitly decided to increase the debt. If you don’t want increases in debt then you either reduce spending or increase tax collection.

    • willid3 says:

      true. it does seem rather stupid to decide what you want to pay for. and then not pay for it after the fact. maybe that law needs to go away since it serves no point any more

  8. willid3 says:

    goes along with the GOP tax

    http://krugman.blogs.nytimes.com/2013/10/15/the-gop-tax/

    since they took over the house they have shave 3% from GDP. and they created all of the uncertainty they claimed others did. and they seemed to be just fine with their creation too. till they over played their hand. and i suspect they forgot that the WH did try to negotiate with them last time. but they couldnt even take a yes for an answer. so why wouldnt the WH have learned from that experience? that there was no point in talking as there would be no compromise or agreement. its always had to negotiate when the other side can’t compromise. and take yes for an answer

  9. Frilton Miedman says:

    It occurs to me that I personally represent an excellent example of the consequences.

    As a business owner, demand has been picking up recently, I’m tempted to jump on it & expand.by borrowing to increase advertising and equipping my business to handle higher volumes, I can easily grow right now if I had the resources.

    The problem, having survived 2008 and the subsequent five years of this constant threat of economic collapse by my own government has me scared to death.

    I can’t fathom taking out a large loan – only to find myself in the middle of another economic collapse, or with Republicans constantly pushing to decrease the buying power of the median, my own customers, to the benefit of the Mitt Romney’s and Dave Koch’s who will never spend a dime with my business.

    I associate this frustration and fear to one source – Republican extremists.

    • rd says:

      You clearly don’t understand that they are fighting for you. The GOP House is constantly talking about how they are protecting small business owners from the ravages of government.

      • Frilton Miedman says:

        Right, I also clearly don’t understand the GOP is “courageous” solely for referring to themselves as “courageous” for cutting spending to those most adversely affected by the ’08 crisis, to afford tax leniency to those who screwed us.

  10. scone says:

    The TP is, let us say, uninformed. (I’m being nice here.) But the dollar/Treasury system, as it stands, is starting to worry me. It reminds me of a “single point of failure” in systems theory. Wouldn’t it be better if we worked toward a more robust international system that didn’t place so much reliance on this so-called “riskless asset?” People have been floating the ‘basket of currencies’ idea for years now, maybe it’s time for another look. Better a deliberate adaptation to a new reality, than the shambolic chaos we have just been through.

    http://en.wikipedia.org/wiki/Single_point_of_failure

    • willid3 says:

      well thats been proposed before. but what currencies would you suggest? the Chinese Yuan? really? the European Euro? really? what not been noted is the dollar has been the safest of all the currencies. because the others are in much worse shape. or there isnt enough information about them to make informed choices. and without that, nobody will trust them. all that taking the dollar down will really do is make every other type of investment even less safe than it was before.

      • scone says:

        It doesn’t matter how safe a single currency seems to be, it’s still a potential single point failure, and the tail risk, if it does fail, is immense. And we have just seen how easy it would be to cause a failure. The problem is the fragility of the system, not the status of any particular country.

        In any case, a basket of currencies need not exclude the dollar, and obviously we already have a functioning international securities market, trading currencies, bonds, futures, etc., so there are only solvable problems left to deal with.

  11. 4whatitsworth says:

    I don’t see this at all. Interest rates are just about as low as they can go.
    Also, if I were a US bond holder I would be comforted by the fact that the US has a debate before encumbering itself with more and more debt.

    Is anyone seriously making the case that the ability for a government to take on unchecked debt would lower interest rates?

    • They were seriously lower pre-Taper talk

    • DeDude says:

      “Unchecked debt” is not the issue. None of the proposals discussed have talked about “unchecked debt”. The issue is whether the government after deciding to take in a lot less as taxes than it spends, will handle the difference (deficit) by refusing to pay the bills and the creditors holding the debt that payed previous years deficits. As a US bond holder I am very uneasy about a government that appears to seriously consider not paying its debt – not because it has no other option but because it does not consider keeping its promises important. I used to think that if rates increase to X% or if debt/GDP ratios get above Y then I have to reconsider the risk of US treasuries. Now it is like “if the crazies go crazy again, this debt is not such a low risk proposition”. Since the later can happen with a moments notice, I already have had to re-evaluate the risk associated with US treasuries.

    • 4whatitsworth says:

      BR: Exactly taper moved interest rates all this political B.S. did nothing. In my mind yes the taper matters the debt ceiling conversation does not really unless it somehow manages to dramatically reduce government spending which even the republicans don’t want these days.

      DeDude: 4 letters S E L L! Worldwide inflation will likely produce negative real returns on your bonds even if interest rates stay low which as B.R. points out if the taper starts interest rates will likely rise. Why world inflation? Because the United States has so few people paying taxes and so many collecting benefits the fed will need to continue giving money away and that means that the dollar continues down against other major currencies.

  12. overdue says:

    Our international reputation (as being credit worthy) is just a facade anyway. Foreign investors must know they’ll be paid back with less valuable currency, yet they want to perpetuate the state of affairs? Why, in hopes that a bigger sucker will come along? If having the reserve currency is enabling congress to shift the bill to my children and grandchildren, then I say we need to take our medicine now. Future generations arent going to look back on just this congress. Many prior all did their part to saddle us with enormous debts and obligations.

    • Then why do thy keep lending to us?

      • Keith R says:

        BR,

        The biggest external holders of US debt are the Japanese and Chinese governments. Each country supported its export driven economic growth by keeping their currencies low against the USD. The process necessitated that they acquire large amounts of dollars, and they needed to invest them somewhere. Hence their big treasury positions.

        If the Chinese had a choice, they would surely ditch much of their dollar position. But there is no other currency that can manage to take that volume. Unless they are willing to let their currency rise against the USD, they are stuck regardless of Fitch’s opinion.

        Given that many countries can’t get rid of their existing treasury positions, and the Fed buys $0.5T of the new issues annually, then there doesn’t appear to be a great deal of danger here IMO. I am much more concerned about the impact of the taper whenever that happens.

        In any case, I expect them to get some deal done. Its too big of an opportunity to posture for things to remain screwed up.

      • LeftCoastIndependent says:

        So they can keep selling to us.

      • scone says:

        So we will continue to buy stuff from them. Financing your customers seems to be the fashion these days.

    • willid3 says:

      well because so far the dollar and treasuries are much more safe than the alternatives have been. even with the TP terrorists/anarchists trying to end the economic world.

    • DeDude says:

      I am with you Bro – NIXON TAX RATES NOW!!!

      We the current adults allowed all the unfunded tax cuts and explosion in national debt since Reagan. We should be the ones to pay for it. Those who are talking about cutting spending are just trying to hand the bill to the next generation in a different way. They say “hey we overspend and build up debt” lets drop all investments in a decent society and as the first generation ever hand our children and grandchildren a second class society in worse shape than what was handed to us. The only fair way to deal with the debt is to force the bastards that created it (by voting for irresponsible tax cuts) to pay it directly out of their own pockets – NOW.

  13. wally says:

    The best path to debt reduction would have been fiscal generosity during the Great Recession in order to restore a well-functioning economy as quickly as possible.

    • LeftCoastIndependent says:

      Well Wally Krugman, I think a trillion dollars a year of deficits and another trillion dollars of bond buybacks is plenty of “generosity”. In fact, it’s a stimulus of about 12% of GDP, and it still doesn’t work that great. The debt grows at a faster pace than GDP and/or inflation. The problem is systemic and not economic. Or is it just plain stupidity ? Hey, I got an idea, let’s give away more jobs. (sarcasm)

      • DeDude says:

        “it still doesn’t work that great”

        What exactly did you expect?. We faced a 2 trillion loss in aggregate demand and filled that hole with a 0.8 trillion stimulus; half of which was wasted on tax cuts (something that does not work as stimulus until the economy has turned). The fact that we in spite of such underpowered response had a great recession rather than a great depression is actually a positive surprise. We have a GDP of about 1 trillion per 10 million full time workers. So yes the most important issue is to create jobs so that those people can produce something rather than sit idle. Our systemic problem is the failure to distribute work and income in a fashion that can sustain a large middle class.

  14. rd says:

    The Houston Chronicle regrets that it endorsed Ted Cruz for Senate because he has turned out to be a wanker. They are also concerned that moderate Republican politicians in Texas are being forced to turn into wanker. They profess that they are yearning for politicians who are willing to work with the other side of the aisle in the highest and best interests of Texas at all times.

    http://www.chron.com/opinion/editorials/article/Why-we-miss-Kay-Bailey-Hutchison-4898405.php?cmpid=opedhprr

  15. Justin49 says:

    Yes, debt is deflationary. And why do countries lend to us? Because they have no choice. Other countries are running a current account surplus with us. They give us goods and we give them dollars. Obviously they are going to buy Treasuries and get some return. It will always be this way until the current account changes in a meaningful way. Debt also is key to being the reserve currency. You need plenty of it for sufficient liquidity.

    Our reputation is pretty damn good. Foreign countries know we control every inch of the ocean. Military power and financial power are most definitely linked. Thus, the U.S. will be the one’s making the rules if it ever gets really ugly in the currency/trade/financial markets.

  16. Internet Tourettes says:

    The 14th amendment needs to be protected from the Tea Party cacus and their pay for the period of the shut down should be withheld….

    14th Amendment,Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

  17. DebtZero says:

    Now that’s handled DCINC can move on to getting the first budget in some 5 1/2 years passed!!

  18. rswojo says:

    IMO it would be worth it because it would drive a stake into the heart of the Tea Party. I’m really sick and tired of all their nonsense. I would love to see them idiots crash the market. TPTB would crush them and their ilk in a hurry, it would be good riddance and hopefully we would never see such astounding stupidity again.

  19. ch says:

    Barry: “Why do they keep lending to us?”

    They aren’t lending to us. The Fed is financing the whole deficit w/ a printing press, which is very, very bullish for equities. It’s why the hedgies have been getting killed since 2008 & why alpha has been negative for 2 straight years.

    The Fed is buying $1T per yr of UST & mortgage debt. Roughly $500B of UST’s, at the belly of the curve & out. US Federal deficit is what, $600-700T? The $100-200B of UST demand that can’t be covered can be taken care of at the short end of the curve by corporate cash storage needs, etc.

  20. Willy2 says:

    This is something similar what happened over in Europe. “We’re mad as hell, and we going to take it any more”.

    Robert Prechter predicted something similar in his book “Conquer the Crash”.

  21. stonedwino says:

    “The Tea Party has made it clear: Ideology first, party second, country last. They should be treated as hostile adversaries in all future negotiations.”

    You nail it, yet again BR…

  22. chartist says:

    I don’t know what part of the US you’re talking about, BR….But, here in the Midwest, we’re going gang busters in the auto industry….Again, I work for a Japanese Tier 1 supplier and we can’t hire fast enough….Overtime is mandatory to the tune of 12 hour days, 6 days a week…..Booyaaa.

  23. Eliza says:

    What I don’t understand is why on earth it took the Senate 16 days to enact the final plan…it was apparent from October 1 that the House had planned and rigged this whole ridiculous game of brinkmanship. Was it really necessary to wait until the 11th hour, while Fitch threatened a downgrade on US Treasuries? Good grief.