Posts Tagged ‘Public Debt’

Long-Term Downgrade for a Short-Term “Problem”?

In Debt Ceiling, Economy, Federal Deficit, Standard & Poor's USA Downgrade on August 9, 2011 at 11:56 pm

Eugene Robinson happens to be one of my favorite liberal columnists because he writes with flair and tends to be ideologically consistent.  Whereas many writers are predictably partisan hacks, Mr. Robinson is willing to take on President Obama and the Democrat Party when he believes they are wrong. 

I take exception, however, with two points in today’s column. [1]   

Mr. Robinson says the downgrade has Republican “footprints” because he thinks S&P is afraid the GOP will force a default.  He says, “This isn’t the rationale that S&P gave, but it’s the only one that makes sense”.  Many on the Left are trying to blame the downgrade not on the party in power but on Republicans (see:  Never mind S&P’s own words about the growing debt or their repeated warnings in recent years, warnings issued before there even was a Tea Party (see

If Mr. Robinson believes S&P based – or should have based – its decision not on the growing US debt but on a near-term Republican “threat” to default, then why downgrade the long-term debt to “AA+” and keep the short-term debt at “AAA”?  Isn’t it the shorter term debt supposedly at risk of Eric Cantor?  Why worry about the 30 year T-bond and not the one year T-bill?  Mr. Robinson quotes S&P, “A new political consensus might (or might not) emerge after the 2012 elections.”  True; so why worry more about who will be in Congress 20 or 30 years from now?  

We do not know how fast the deficit will grow; we might bump up against the Debt Ceiling faster than expected, possibly before the 2012 elections if the economy dips into another recession.  Many financial commentators are predicting a new recession. [2] [3]   S&P specifically says, “we believe [the Debt Ceiling] act provides sufficient clarity to allow us to evaluate the likely course of US fiscal policy for the next few years.” [4]   The short-term “AAA” rating was affirmed even with John Boehner on the loose in the Capitol?  Wow.

Secondly, Mr. Robinson disputes the merit of any downgrade, saying:

“There is no plausible scenario under which the United States would be unable to service its debt. If political gridlock were to persist, our government would be able to pay bondholders with a combination of tax revenues and funds raised by selling more Treasury bills. And in the final analysis, as Alan Greenspan noted Sunday on “Meet the Press,” the United States “can pay any debt it has because we can always print money to do that.” [1]

Yes, it is true the US can pay bonds out of current tax receipts or just “print money”. [5]  But there is a massive risk to printing money.  Firing up the government printing press debases the currency a la Weimar Germany.  

Running the printing press would be a short-term solution.  US government debt is a series of hundreds of outstanding debt issues.  Approximately every week, a series of Treasury debt matures and needs to be replaced with a new issue.  Treasury bills mature in less than one year. [6]  As of 7/31/11, the public held $1.5 Trillion of T-bills. [7]  All mature in the next 12 months and needs to be rolled over into new Treasury debts.  Other, older series of Treasury notes and long-term Treasury bonds mature regularly throughout each year, too.  For example, 30 year Treasury bonds issued in fall 1981 mature in coming months. 

If the US government decided to inflate away debt obligations by printing money, the US Dollar would decline in value.   That would lose investor confidence.  This would precipitate a crisis:  investors would soon enough refuse to buy new issues of Treasury debt at anything like current low rates, if at all.  Imagine yourself as China, lending to the US in the expectation of receiving US Dollars for your debt upon maturity.  If your interest and principal started being paid with rapidly depreciating Dollars created out of thin air, would you want to keep lending?  You’d demand higher interest rates, if you lent at all.  Alternatively, you might be willing to lend, but only in bonds denominated in Chinese Yuan.  You know the US government cannot inflate the Yuan, because the US printing press cannot print Yuan.  Amusing as it would be, I cannot picture Timothy Geithner changing out the US Mint’s printing blocks with Chinese characters.

Running the printing press is not a feasible bond payment option. 





[5] Note that Mr. Robinson is actually stating one reason a “default” was unlikely no matter what happened in the recent Debt Ceiling controversy:  the government could have paid bond interest first out of tax revenues.  

[6] T-bills mature in less than one year.  Notes mature in 1-10 years and T-bonds mature in more than 10 years.


Picture from Wikipedia commons.

Paul Krugman, Can You Spare the Chutzpah?

In American Recovery & Reinvestment Act (Stimulus), Federal Deficit, Government Spending, Obama Administration, Standard & Poor's USA Downgrade on August 8, 2011 at 9:42 pm

Paul Krugman today mocks Standard & Poor’s downgrade of the United States credit rating and accesses blame for the rating cut. [1]   Mr. Krugman says, “And please, let’s not have the usual declarations that both sides are at fault.  Our problems are almost entirely one-sided.” 

I held my breath a moment… wouldn’t this be the perfect place for Mr. Krugman to own up to his long advocacy of even larger deficit spending?  Alas, there’s no humility from Mr. Krugman, only chutzpah. [2]

Mr. Krugman predictably blames the “extremist right” and goes about making light of S&P.  Apparently it was the “extremist right” that demanded a trillion-dollar Stimulus program, Obama’s payroll tax cuts and the creation and continuous expansion of myriad other government spending programs the past 70 years?  Even the most cursory look at the history of the Public Debt shows neither party is blameless, but Mr. Krugman is too partisan.

Be that as it may, it is true S&P was too generous with ratings in the run-up to the financial crisis of 2008 and there is an argument S&P was late to drop the USA’s rating in 2011.  But Mr. Krugman shows chutzpah in making light of the rating drop to “AA-“.  I assume Mr. Krugman understands what rating systems are all about.  The top rating of “AAA” is intended for only the most pristine credits.  “AA+” is a good rating, just not as good as “AAA”.  The USA would have to drop another nine notches to “BB+” to be in speculative (so-called “junk”) territory.  The ratings scale works down to “C” and “D” (default).   Any honest person will admit the financial position of the United States has weakened and the country is not as creditworthy as it once was.  An “AA+” credit is still expected to repay the debt but is a bit riskier than an “AAA” credit.

Mr. Krugman is intelligent but occasionally careless.  Consider his statement: “It’s true that we’re building up debt, on which we’ll eventually have to pay interest.”  Eventually?  While rates are low today, we are paying plenty of interest.   US government interest expense was $414 billion in Fiscal 2010. [3]  Then again, this is the same Paul Krugman who also writes of “a trillion here or a trillion there” like a trillion is inconsequential.  In the rarefied spending air of a massive deficit advocate like Mr. Krugman, perhaps $414 billion is hardly anything at all.  After all, it rounds down to $0 Trillion.

Mr. Krugman said the 2009 Stimulus program was too small and he actually criticized the Obama Administration for its supposedly punctilious policies.  In his own words:

“The good news is that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, is working just about the way textbook macroeconomics said it would …  The truth, which is that the stimulus was too little of a good thing.” [4]

“it was obvious from the beginning [Obama’s Stimulus] was too small.” [5]

“Those of us who say that the stimulus was too small are often accused of after-the-fact rationalization: you said this would work, but now that it hasn’t, you’re just saying it wasn’t big enough. The quick answer to that accusation is that people like me said that the stimulus was too small in advance” [6]

“myself included, actually argued that the plan was too small and too cautious …. for the inadequate size of the stimulus plan” [7]

“[the Obama Stimulus] wouldn’t have been enough to fill the looming hole in the U.S. economy” [8]

Mr. Krugman got less deficit “Stimulus” spending than he had demanded, meaning he favored even greater debts than we actually have now.  But he has the chutzpah to ignore his own culpability and instead blames the messenger (S&P) and then blames the downgrade on, of all people, the Tea Party Republicans!  This is the same Tea Party caucus who has held partial power in the US House for a mere seven months and actually advocates cutting the deficit more than either Democrats or traditional Republicans.  Such chutzpah, Mr. Krugman!



[2] For the benefit of those not familiar with chutzpah: “Chutzpah (pronounced /ˈhʊtspə/) is the quality of audacity, for good or for bad, but it is generally used negatively. The word derives from the Hebrew word ḥuṣpâ (חֻצְפָּה), meaning “insolence”, “audacity”, and “impertinence”







Pictures from wikipedia commons.

Death By A Thousand Increases: S&P Lowers USA to AA+

In Economy, Federal Deficit on August 5, 2011 at 11:45 pm

No American can be pleased with tonight’s announcement Standard & Poor’s is lowering America’s credit rating, for the first time ever, from the gold standard “AAA” to “AA+”.  I refer readers back to my July 28 post on why an S&P downgrade has been looming for years:  There is no joy in being proven right.

We Americans see ourselves as a “shining city on a hill”.  We developed a continent and built an economic empire.  America quite literally saved Europe from itself in WWI and we saved the world in WWII.  American economic might powered our own military and supplied our Allies in Britain, China, the Soviet Union and de Gaulle’s Free French.  The United States bankrolled international organizations like the IMF and World Bank.  Wall Street was the center of world finance.  Hollywood was the center of entertainment.  America’s corporations ruled many industries.  So many people loved the very idea of America they crossed oceans and deserts to immigrate here.  The USA’s economic wherewithal made possible large garrisons in Europe, Japan, Korea and elsewhere to initiate Pax Americana and win the Cold War. 

This downgrade is a hit to our very self-image of America as #1.  Canada is now more highly rated than the USA.  Sure, the Canadians are really nice people, play great hockey, and provided us with cool rock bands like Rush and Night Ranger, but it is an affront to our American psyche to think of Canadians being a better credit risk.

How will the nation respond?  Will we waste our time name-calling and angling for partisan advantage?  Will Republicans only blame Obama and will Democrats only blame G.W. Bush?  Even a cursory look at the Public Debt graphs below shows the deficit grew in fits and starts since WWI, but exploded the past 12 years through two recessions and under Presidents and Congresses of each party.  I assure you arguing about Bush vs. Obama will not get us back to an “AAA” rating.

People will disagree about whether taxes should go up or spending should go down.  When asked if you support a program: ask yourself if you would personally pay more taxes for it?  In some cases, I would give an unequivocal “yes”.  In many others, it is not worth it.  The problem is how we too often have said “yes, I like high-speed rail and I like the idea so much I would be willing to spend $500 billion of SOMEONE ELSE’S MONEY for it.” 

How did we get here? 

This downgrade to AA- has been death by a thousand increases.   It is the result of literally thousands of programs – big and small – mostly well-intentioned… but not fully funded.  It seems many Americans perhaps took our nation’s greatness a bit too much to heart.  We let our seemingly ever-increasing prosperity allow us to be overly optimistic about paying for today’s bills.  We could pay it tomorrow because things always get better in America!  Or perhaps we weren’t really paying attention and our politicians skipped the tough choices and punted the costs to the future. 

America looked to Europe and copied many European social programs.  But we did not copy European levels of taxation.  We wanted to have our welfare state and eat it, too.  We spent for a War on Drugs.  We subsidized our farmers, exporters and college students and all manner of other things, some useful, some not so much.  We dipped deeply into the public till for generous mortgage interest deductions.  Some of us probably borrowed more than we otherwise would – and more than we knew we should – because Uncle Sam sent us a bigger tax refund check each spring if we borrowed more.  Besides, homes always go up in value, right?

We borrowed to cover our wars.  WWI and WWII were extremely expensive in terms of GDP.  Korea, Vietnam, Cold War, Gulf War, Iraq, Afghanistan and many lesser military adventures like Grenada, Lebanon, Panama, Kosovo, Libya all have been costly.   Military strength meant fiscal weakness.

Looking at the $14.3 Trillion Public Debt is seeing only part of the problem.  A sobering look is provided by considering the “off the books” debt.  As discussed by bond investor Bill Gross of PIMCO, the present value of the future liabilities of the United States is a staggering $66 trillion. [1]   Divide $66 trillion by 308 million Americans and the per capita share is a sobering $214,300 per person.  Think about that!  If you have a family of four, your family’s share of the Public Debt is about $186,000 but your share of future Medicare, Medicaid and Social Security is $857,000.  That is over a million dollars per family.  We have made promises – which should be kept – to elderly Americans.  Paying for these promises is tough now and will not get any easier as more Baby Boomers retire.

It is up to you: do you want to cut spending or do you want to pay more in taxes?  Or both?  Whatever we decide, we have to decide on something.  We need big, serious changes.  We need to get our spending under control or S&P will someday lower us again… to “AA”, “AA-” and so forth.

The full text of S&P’s downgrade is available here:


Good News: No Constitutional Crisis!

In Debt Ceiling, Obama Administration on August 3, 2011 at 7:49 am

In all the punditry about the Debt Ceiling deal becoming law today, one aspect has hardly been commented on.  It is fortunate a Constitutional crisis has been averted!

Some Democrats and liberal writers were recommending President Obama ignore the Debt Ceiling, if a deal was not completed in time, and go ahead with fresh issuance of Treasuries by invoking the 14th Amendment. [1] [2] [3]  What the  14th amendment, Section 4, says (emphasis added):

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.”

The non-partisan Congressional research Service found the 14th Amendment would not allow circumventing the Debt Ceiling. [4]   I am not a lawyer, but my read is the 14th Amendment simply states the public debt of the United States must be honored.   That would mean, in the event the Debt Ceiling was reached, the US Treasury must have paid the maturing public debts in preference before other government payments (e.g. Federal payroll, Social Security, payments to government suppliers, etc.).  The US government collects about $2 trillion in annual revenues and that money would need to go first to paying bondholders.  There is nothing in the amendment’s language suggesting the Executive Branch would have the power to ignore the Congressionally set borrowing limits by issuing new debt above the Debt Ceiling limit.  Absent a Debt Ceiling increase, the government would simply have to pay its debts first, before paying anyone else. 

If no Debt ceiling agreement had been reached and the President had gone ahead and ignored the Debt Ceiling law, it would have been a new and forceful exertion of executive power vis-a-vis the legislature.  The US Congress has always approved the nation’s borrowing.  Loans were individually approved by Congress (e.g. the Panama Canal loan) until WWI, when the borrowing became so frequent that Congress devised the Debt Ceiling to ease the common issuance of debt.  Congress has raised the Debt Ceiling many times hence. 

If the President had unilaterally ignored the Debt Ceiling through the dubious use of the 14th Amendment, it likely would have ended with Articles of Impeachment, court cases and appeals.  It is always possible the Supreme Court could find in favor of the President using the 14th Amendment to bypass Congress and borrow at will.  An Impeachment would be  racially divisive as well as a major national trauma.  Those of us skeptical of executive power have to be pleased a Constitutional Crisis was averted.





The USA Has Defaulted Before

In Debt Ceiling on August 1, 2011 at 12:07 am


The Debt Ceiling controversy has taught many of us new things about the Public Debt and Econscius is no exception.  I had heard many times the US has never defaulted.  “No default” has been repeated enough to be accepted as fact.  For example, in January, the former chairman of the president’s Council of Economic Advisers, Austan Goolsbee, said “If we hit the debt ceiling, that’s essentially defaulting on our obligations, which is totally unprecedented in American history” [1] and Treasury Secretary Geithner said, “no responsible leader would say the United States of America, for the first time in its history, should not pay its bills, meet its obligations.” [2]

It turns out the US has defaulted three times, most recently in 1979.

In 1790, the young United States defaulted on its external and domestic debt obligations. [1]  

In 1933, President Roosevelt and his Congress repudiated the specific clause in debt contracts that investors may request their payment be made in gold. [3]

In April 1979, there was a default during the Carter Administration after a dispute over raising the Debt Ceiling with, ironically, a Democratic Congress. [4] [5]  Brady Dennis in the Washington Post wrote:

“There was one short-lived incident in the spring of 1979 that offers a glimpse of some of the problems and costs that might arise if the stalemate on Capitol Hill continues.  Then, as now, Congress had been playing a game of chicken with the debt limit, raising it to $830 billion – compared with today’s $14.3 trillion – only after Treasury Secretary W. Michael Blumenthal warned that the country was hours away from the first default in its history.”

“That last-minute approval, combined with a flood of investor demand for Treasury bills and a series of technical glitches in processing the backlog of paperwork, resulted in thousands of late payments to holders of Treasury bills that were maturing that April and May.” [6]

 Donald Marron of Forbes described:

“Investors in T-bills maturing April 26, 1979 were told that the U.S. Treasury could not make its payments on maturing securities to individual investors. The Treasury was also late in redeeming T-bills which become due on May 3 and May 10, 1979. The Treasury blamed this delay on an unprecedented volume of participation by small investors, on failure of Congress to act in a timely fashion on the debt ceiling legislation in April, and on an unanticipated failure of word processing equipment used to prepare check schedules.” [7]

This may sound like a technical default, which it was, but so is the potential default looming today. 

There are some lessons here: (1) a last-minute deal could potentially lead to a technical default because  of the possibility of back-room clerical mistakes like the Treasury Department made in 1979, (2) just because something is repeated as fact (‘the US has never defaulted’) does not mean it is true, and (3) in 1979, there was a 60 basis point (0.60%) increase in interest rates and higher rates persisted even after the technical default was cured. [7]   We cannot afford to pay any extra interest on our massive Public Debt, which argues for both sides compromising enough to get a deal.  Fortunately, as of this writing, a deal appears to be in reach.



[3]  Alex J. Pollock describes it here:





No Ceiling On The Errors of Andrew Sullivan

In Debt Ceiling, Economy, Federal Deficit, Obama Administration on July 23, 2011 at 4:36 am

The Daily Beast’s Andrew Sullivan new article contains many inaccuracies.  Let us count the errors!

(1) Sullivan says “the GOP is fundamentally the party of the Confederacy”. [1]  This is an obvious factual error if meant in a literal historic sense.  Presumably, Sullivan means this as a racist smear.  Today’s GOP is strong in many Southern states, but is also successful in many “Union” Midwest states, the Mountain West, in abolitionist New Hampshire, and in the suburban areas of the big cities of the old Union states.  I have never met a Republican advocating slavery. 

Does Sullivan mean those politicians who win in former Confederate states are illegitimate?  If so, does he also consider President Obama to also be a “Confederate” because he won Virginia, North Carolina and Florida?  Is DNC Chair Debbie Wasserman-Schultz (D-FL) a “Confederate” because she represents a district in an ex-slave state?  Sullivan’s point is nonsensical.

(2) Where was the Left-wing outrage when Senators Barrack Obama and Joe Biden both voted “for default” when they voted “no” on raising the Debt Ceiling in 2006? In fact, all 45 of the Senate’s Democrats voted “for default” on 3/16/06. [2]  Was Obama then the “anarchist”? 

(3) Sullivan writes of “the Republican refusal to countenance any way to raise revenues to tackle the massive debt incurred largely on their watch”.  Largely on whose watch?

On January 31, 2001, the Public Debt was $5.716 Trillion.  [3]

On January 31, 2007, when Nancy Pelosi and the Democrats took over the US House and Senate, the Public Debt was $8.708 Trillion. [4]

On January 31, 2009, Barrack Obama inherited a Public Debt of $10.632 Trillion. [5]

On June 30, 2011, the Public Debt hit $14.343 Trillion. [6]

The math does not support Sullivan.  The facts also show how tricky it is to access blame.  Many Presidencies split power (e.g. Republican Reagan with a Democratic House or Democrat Clinton with six years of a Republican Congress).  G.W. Bush’s last two years were shared with a Democratic Congress.  Who you blame might depend on your partisan predisposition.

The Obama deficits certainly include the impact of the Great Recession.  Nevertheless, the President exacerbated the deficit with his 2009 Stimulus and subsequent spending programs.  People seem to forget President Obama signed into law two brand new, unfunded tax cuts in February 2009 and December 2010. 

(4) Sullivan wants to excuse President Obama for $3.8 trillion of deficits on the theory it was the fault of the Republican Congress voted out of its majority in 2006.  If Obama is not to blame, how can Sullivan possibly blame “the Republicans” when so many of them took their first oath of office in January 2011?  Some 80 GOP House members first won in November 2010 and others were not in Congress for the alleged sins of Bush’s tax cuts.  Many of the newest Tea Party Members of Congress, such as US Rep. Joe Walsh (R-IL), are the same Republicans most opposed to spending increases.   How can the new Tea Party members be held responsible for the accumulated deficits of Obama, George W. Bush and every preceding President back to Woodrow Wilson?  Sullivan is inconsistent.

(5) Sullivan is angry the GOP is “opposing overwhelming public opinion on the need for a mixed package of tax hikes and spending cuts”.    A July 13 Gallup Poll found 50% of Americans want “Only/Mostly” spending cuts, of which 20% were for “only” spending cuts.  Spending cuts are prefered. [7]  This is a curious complaint coming from Sullivan, who had no regard for public opinion on unpopular matters like the “ObamaCare” health care bill.


Congress and the President need to come to an agreement to raise the Debt Ceiling.  Personally, I can accept small tax increases in the form of closing loopholes (called “tax expenditures” these days) if coupled with non-gimmick, near-term spending cuts. 

President Obama and the Democrats failed to pass a budget in 2010 and failed to negotiate a budget in 2011.  Holding out for spending cuts in exchange for raising the Debt Ceiling is a blunt instrument but is the one that was available.  Let us not forget it was President Obama who originally asked for a “clean increase” in the debt limit, meaning increase the deficit several trillion dollars with no strings attached. [8]  I am pleased President Obama has found religion and is now interested in a “big” deficit reduction package.  

Furthermore, just giving “clean” raises of the Debt Ceiling over and over again without tackling the underlying problem of spending is no long-term solution.   We need look no further than the pending default of Greece to see what will happen to the USA if we continue to blithely build up our deficit.  My hope is a deal will be worked out in coming days that is a step toward a long-term solution.  Angry press conferences and emotional rhetoric from a prominent writer like Sullivan are no help.    

The fact is it takes two to have a disagreement so if President Obama and supporters like Sullivan really believe what they say about a default, why would they not agree to the Republican “Cut Cap and Balance” position?  Why not give up their prefered tax increases – which they say are so small, anyway – if the alternative is “the country remains in more peril than we know”?



[2]  Technically, Jeffords (VT) and Lieberman (CT) were independents but caucused with the Democrats.






[8] “White House officials maintained Friday that the administration wants to see a “clean” increase to the federal debt limit” in