August 4, 1792 – the birth of Percy Bysshe Shelley, the most irritatingly sensitive of those weepy Romantic poets – and August 4, 1901 – the birth of Louis Armstrong, and thus the birth of Americans jazz (if you can forgive him that Hello Dolly business) – and August 4, 1961 – the birth of Barack Obama, in Hawaii, unless Donald Trump’s small army of highly-paid crack investigators discovers otherwise, if there ever really were any such investigators. And this year, on August 4, the Treasury Department is due to pay off thirty billion dollars in maturing short-term debt. And it looks like there’s a good chance they won’t do that. We’ll have to stiff our creditors. We’ll default. We’ve never done that before.
And how it came to this is pretty simple. The country runs on revolving credit – we borrow money to cover the money we’ve borrowed – we keep rolling over the debt. And that’s not so odd. Almost all businesses work that way, with an established line of credit that they tap into meet payroll and stock the inventory, and that they pay back, with interest, with the incoming funds from sales. They just keep rolling things over – McDonalds and General Electric use the steady stream of funds from sales, and the government uses the steady stream of funds from taxes being paid. That works fine. It smoothes things out and frees up capital.
But you don’t just stop paying. That just screws things up. Yet that is what is in the works. Over the years we’ve worked it out so that about forty cents of every dollar the government spends is from that revolving credit system – the treasury bonds we sell. Everyone wants to buy those bonds, because those bonds are so damned secure – we always pay the interest and, when due, the principle. These bonds don’t yield much – now an historic low – but people buy them anyway, just to have an ultra-safe totally secure and reliable place to park their money.
But no more – the Republicans in Congress are refusing to raise the debt ceiling, the limit of the total amount committed to the revolving credit system. That has been raised once or twice a year for decades, to make sure the total pool of credit grows with the natural growth of events. But not this year – the idea is to freeze the size of the credit pool, which would mean we could not borrow a dime more to pay off the debts we have accrued in the last decade. We just wouldn’t pay them.
Yes, the consequences are dire, but the thought is that this gives the Republicans amazing leverage. They might vote to raise the debt ceiling, maybe, if Obama gives them everything they want – two to four trillion in spending cuts and absolutely no new taxes, and no raising revenue by sneaky means – ending tax loopholes and tax subsidies for, say, giant oil companies. And they know Obama has to give in. If we go into default the markets panic and everyone scrambles to find a new safe place to park their money – probably in cash, causing a worldwide massive run on all the central banks, which don’t have that cash on hand, and will thus collapse. It’ll be the Dark Ages once again. So Obama has to give in. They have him by the short-hairs.
Of course the Republicans are saying they don’t want worldwide economic collapse. All the Treasury has to do is use what tax funds are always coming in to pay off the bondholders first, so nothing will collapse. But of course there is that forty-cents-on-the-dollar thing. Pay the bondholders and you do have to immediatley cut all government spending by forty percent. And that won’t be pretty. You’d have to shut down most of the government. But maybe that was the idea in the first place. They’ve always said government is always the problem, never the solution. And this might well end it.
And this makes the negotiations on how to resolve all this kind of absurd – with various combinations of Republicans walking out in a huff day after day. And on Wednesday, June 29, Obama had just had enough of this:
President Obama pressured Republicans on Wednesday to accept higher taxes as part of any plan to pare down the federal deficit, bluntly telling lawmakers that they “need to do their job” and strike a deal before the United States risks defaulting on its debt.
Declaring that an agreement is not possible without painful steps on both sides, Mr. Obama said that his party had already accepted the need for substantial spending cuts in programs it had long championed, and that Republicans must agree to end tax breaks for oil and gas companies, hedge funds and other corporate interests.
In a 67-minute news conference, Mr. Obama cast the budget battle as a tug of war between the interests of the rich – like owners of corporate jets, who he said get generous tax breaks – and those of the middle class, the elderly and children.
Directly challenging Republican leaders, Mr. Obama said, “Everybody else has been willing to move off their maximalist position – they need to do the same.”
Good luck with that. But he did try to slap some sense into them with this:
While the president expressed hope for a budget deal before the government’s borrowing authority expires in early August, he scolded Republican lawmakers for putting off hard decisions until the 11th hour, saying that his daughters did not procrastinate that way with their schoolwork.
“Malia and Sasha generally finish their homework a day ahead of time,” the president said, in a tone of rising exasperation. “They don’t wait until the night before. They’re not pulling all-nighters.”
Yeah, yeah – but Boehner and his crew said the House would vote to raise the debt limit, as the White House demands, only if the administration agrees to a deal that contains deep spending cuts and no tax increases:
“The American people know tax hikes destroy jobs,” Mr. Boehner said. “They also know Washington has been on a spending binge for many years, and they will only tolerate a debt-limit increase if we stop it.”
The historical evidence is that tax hikes don’t destroy jobs – there is a direct correlation that shows the opposite, and some people do remember the high-tax booming nineties. But Boehner can say what he likes. It’s a free country. And should we stop spending? That depends on who you ask about which programs.
But the dynamic is what it is:
Senate Republicans have talked about a short-term increase in the debt ceiling, betting that the White House will accept spending cuts, with no tax increases, rather than face two votes on the issue before the 2012 election. Mr. Obama is taking aim at tax policies that benefit the rich as a way to pressure Republicans. Asserting that chief executives and hedge fund managers are paying the lowest tax rates since the 1950s, before he was born, the president, casting the issue in populist terms that some conservatives said veered into class warfare, said they could afford to pay more.
“You’ll still be able to ride on your corporate jet,” Mr. Obama said. “You’ll just have to pay a little more.”
Hell, owners of corporate jets could write off the aircrafts’ cost in fewer years, which would generate three billion over a decade. And hedge funds and private equity investors – the billionaires – could pay higher capital gains tax on their earnings, as now all their income is taxed at no more than fifteen percent ever, as they’re special people. And phasing out tax deductions and credits for oil and gas companies could raise nearly forty billion dollars – not that it matters. None of that is going to happen. But Obama was saying that refusing to increase revenues would mean cuts in programs that award college scholarships, finance the National Weather Service and medical research, and improve food safety:
“I’ve said to some of the Republican leaders: you go talk to your constituents, the Republican constituents, and ask them, are they willing to compromise their kids’ safety so that some corporate-jet owner continues to get a tax break?” Mr. Obama said. “I’m pretty sure what the answer would be.”
So Obama kind of stuck it to them. No more Mister Nice Guy. The empire strikes back. There are many ways to put it, and Ezra Klein puts it this way:
The best advice I’ve gotten for assessing the debt-ceiling negotiations was to “watch for the day when the White House goes public.” As long as the Obama administration was refusing to attack Republicans publicly, my source said, they believed they could cut a deal. And that held true. They were quiet when the negotiations were going on. They were restrained after Eric Cantor and Jon Kyl walked out last week. Press Secretary Jay Carney simply said, “We are confident that we can continue to seek common ground and that we will achieve a balanced approach to deficit reduction.” But today they went public. The negotiations have failed.
Klein argues that Obama didn’t want this fight, that he wanted a deal, and he wasn’t able to get one that was even minimally acceptable. He put two trillion in spending cuts on the table, and could not even get four hundred billion – just a sixth of that – in tax increases. So screw it:
The conventional wisdom is that now this fight moves to the people. I’d put it differently. Now this fight moves to the consequences. Neither side is going to give in the face of purely rhetorical salvos. The White House is expecting Republicans to accuse them of wanting to raise taxes. The Republicans are expecting the White House to accuse them of putting the interests of large corporations and wealthy donors in front of the needs of seniors, children and the poor. Both parties have seen the poll numbers behind their positions. If a few news conferences were going to be sufficient to end this, it would never have started.
So here is what Klein thinks is happening:
What the two parties are really doing is trying to position themselves politically to survive the consequences of their failure. We don’t yet know if we’ll get to the point where the market will panic, but it could. We’re very likely to get to the point where we have to stop funding certain government services, which could mean as little as delaying payments to military contractors and hospitals or as much as halting Social Security checks. Either way, the public is likely to ignore the political breakdown until the consequences begin. At that point, both parties are hoping they will have framed the debate such that the electorate’s fury falls squarely on the other’s shoulders. That’s what today’s news conference was about.
And it only gets worse:
As the parties battle this out in public, their bases will polarize and compromise will become even more difficult. Think it’s hard for Republicans to vote for taxes now? Wait till Fox News and the Tea Party spends two months defining this as the definitional vote for both the Republican Party and its leadership. Think it’s hard for President Obama to give up revenues now? Give him two months to sell his base on the idea that it’d be immoral to make a deal that doesn’t include revenues. And the more the two sides lock into their positions, the worse the consequences will have to be before one side or the other buckles and takes a deal.
Jonathan Bernstein argues the opposite – the debt limit will be raised – but only because of intense pain:
Now, this may happen after the House votes down one or more attempts; it might happen after one or more presidential vetoes, or after one or more cloture votes fail. It may happen after the nation plunges into an economic panic, or after crazed Social Security (non-) recipients and government contractors storm the Capitol. Indeed, I agree that it’s perhaps more likely than not that it will take something like that to push everyone over the line. But over that line, sooner or later, they’ll get.
And everyone knows it. Everyone knows that sooner or later Barack Obama and John Boehner are going to sign off on something — it takes a presidential signature, and there’s no conceivable way to get to 218 votes in the House without Boehner, and as I’ve said the odds are good that it needs Eric Cantor, as well. Obama knows it. Boehner knows it.
Things just have to get ugly enough. And Greg Sargent sees it this way:
The primary goal of President Obama’s presser, which just wrapped up, was obvious: He was clearly out to pick a major public fight with Republicans over tax cuts for the rich. Obama mounted a surprisingly aggressive moral case for ending high end tax cuts, casting it as a test of our society’s priorities, and argued – crucially – that anyone who fails to support ending them is fundamentally unserious about the deficit.
And he thinks that Obama’s talk about that corporate jet thing seemed deliberately designed to provoke howls of outrage and cries of “class warfare” from Republicans, “with the obvious goal of maneuvering Republicans into the role of arch defenders of the interests of the wealthy.” So it is now a battle not over government spending but over “who has the most balanced priorities and who is really working in the interests of the whole country.”
And he likes Obama saying this:
If we choose to keep those tax breaks for millionaires and billionaires, if we keep the tax break for corporate jet owners, if we choose to keep tax breaks for oil and gas companies that are making hundreds of billions of dollars, then that means we’ve got to cut some kids off from getting a college scholarship. That means we have to stop funding certain grants for medical research. That means that food safety may be compromised. That means that Medicare has to bear a greater part of the burden. These are the choices we have to make…
The Republicans say they want to reduce the deficit. Every single observer who’s not an elected official or politician says we can’t reduce our deficit in the scale and scope we need to without having a balanced approach that looks at everything. Democrats have to accept some painful spending cuts that hurt some of our constituencies that we may not like. And we’ve shown a willingness to do that for the greater good…
If you are a wealthy CEO or hedge fund manager in America right now, your taxes are lower than they’ve ever been. They’re lower than they’ve been since the 1950s. And you can afford it. You’ll still be able to ride on your corporate jet. You’ll just have to pay a little more…My believe is that the Republican leadership in Congress will hopefully sooner rather than later come to the conclusion that they need to make the right decisions for the country, that everybody else has been willing to move off their maximalist position. They need to do the same. My expectation is that they’ll do the responsible thing.
When you see the full quote that’s pretty devastating, and Obama also drew a line against cost-shifting to seniors to solve the Medicare problem:
We’re gonna have to look at entitlements. And that’s always difficult politically. But I’ve been willing to say we need to see where we can reduce the cost of health care spending and Medicare and Medicaid in the out years. Not by shifting costs on to seniors, as some have proposed, but rather by actually reducing those costs.
So Sargent is a happy camper:
While there’s good reason for skepticism that the final deal won’t contain some kind of cost shifting, it was good to hear Obama lay down that marker in those terms.
More broadly, Obama stopped just short of saying he would not accept a final deficit deal without a high end tax hike. But his presser made it clear that he will relitigate this fight and make it central to the campaign. And while we should keep in mind that Obama did ultimately cut a deal on the high-end tax cuts last time around, those who are hoping he will continue to make a strong moral argument in favor of ending them should be pleased by what they heard.
The White House message is obviously taking shape. Obama and his team want the public to know the administration is committed to debt reduction and tough choices, which will include calling on broad sacrifice, but which will protect key investments in education and health care. Republicans, on the other hand, aren’t really committed to debt reduction if they’re only willing to look at one side of the budget ledger, aren’t especially concerned about education and health care, and will fight to the death to ensure the wealthy don’t have to sacrifice at all.
The phrase of the morning is “corporate-jet owner.” I started keeping count of how many times the president used the phrase, and I think I noticed four separate instances. The point was to highlight a three billion dollar perk available to those who buy these jets – a perk Republicans won’t touch because it would count as a (cue scary music) tax increase.
As the process continues, the White House message to the public will be pretty straightforward: we can have a major debt-reduction deal if only Republicans weren’t fighting so hard to protect corporate-jet owners. Why, the argument will go, won’t the GOP look out for students and seniors the way it looks out for the fat cats on the Cessna?
And then there’s Matthew Yglesias:
Failing to increase the debt ceiling in a timely manner does not, as such, require the United States to default on the interest it owes on existing debt. The Treasury Secretary has the authority to “prioritize” payments and could, therefore, renege on monies owed to defense contractors, Social Security recipients, doctors who treat Medicare patients, or anyone else who’s legally entitled to funds Congress has appropriated. In terms of America’s standing in international financial markets, this decision to pay bondholders rather than other legitimate claimants would probably be preferable, but as Treasury Secretary Timothy Geithner explained today in a letter to Senator Jim DeMint, that’s not to say it would have no consequences.
For example, “There is no guarantee that investors would continue to re-invest in new Treasury securities” once it became clear that the US political process was prepared to stiff people who are owed money. Ratings agencies have already made it clear that they would regard any prioritization scheme with suspicion. And as Geithner says, “We should not and must not gamble with the full faith and credit of the United States,” which is “too precious an asset to risk.”
In response, DeMint offered this:
Sen. Jim DeMint (R-S.C.) maintained Wednesday that the government has “numerous tools” available to avoid a default, and that one would only occur if Geithner was unwilling to use them. “Secretary Geithner’s approach to dealing with the looming debt crisis is to take his hands off the wheel and let the car careen over the cliff,” he said.
This completely fails to grasp the force of Secretary Geithner’s point. But to try to restate it, markets charge different interest rates to different sovereign states. Generally speaking, large high-income, politically stable sovereigns get the best rates. That’s because large rich countries have the greatest ability to raise the funds needed to pay off debts, and politically stable countries are the most reliable in terms of actually living up to their commitments. And the United States, as the largest, richest, and longest-running political democracy in the world, pays the lowest rates. German rates are higher than ours, and Britain and France pay higher rates than Germany’s. What Geithner is saying is that even if he avoids technical default by stiffing someone other than bondholders, this will still naturally lead some people to re-evaluate the theory that we’re the most creditworthy country on earth. People who don’t pay what they owe start looking like bad credit risks no matter who it is exactly who doesn’t get paid.
And that goes like this:
The United States would immediately have its top-notch credit rating slashed to “selective default” if it misses a debt payment on August 4, Standard & Poor’s managing director John Chambers told Reuters.
Chambers, who is also the chairman of S&P’s sovereign ratings committee, told Reuters on Tuesday that U.S. Treasury bills maturing on August 4 would be rated ‘D’ if the government fails to honor them. Unaffected Treasuries would be downgraded as well, but not as sharply, he said.
“If the U.S. government misses a payment, it goes to D,” Chambers said. “That would happen right after August 4, when the bills mature, because they don’t have a grace period.”
So even a brief default by the United States would immediately increase the country’s borrowing costs, “weighing on the fragile economic recovery and eroding the dollar’s status as a reserve currency.” You know – the start of the new Dark Ages.
Chambers also noted a default on U.S. Treasuries – a benchmark against which all other debt is measured – would dwarf any worries about U.S. credit ratings as global markets would crumble.
Well, if that happens – or when that happens – who gets the blame? The positioning had already started.
And there is Digby:
Why do I have that same disoriented feeling I had in late 2002 and early 2003 when all of Washington decided that we needed to do something ridiculously expensive and counterproductive even though it was patently obvious that it was lunacy?
Is this just the new normal?
Yes, it seems it is.