Breaking the Bank

Libertarians Against Raising the Debt Ceiling

Libertarian Party Chair Mark Hinkle released the following statement today:

Everything I've heard from Washington politicians about the debt limit is nonsense. I propose the simplest option: Do nothing. Don't raise the debt limit, period.

None of the deals I've heard would do anything to cut federal spending. Some reduce the rate of growth a little bit, but I'm afraid that doesn't count. And of course, some of the proposals would increase taxes, which Libertarians are totally opposed to.

The best outcome would be no deal at all. If the debt limit is not raised, then the federal government will have to cut its spending by over 40%. That would be the best outcome for the future of America, and it's certainly the preferred outcome for Libertarians.

I'm actually shocked at how resistant both the Republicans and Democrats are to making cuts. I wasn't expecting much, but their proposals are downright embarrassing.  For example, consider Speaker Boehner's plan. According to the Cato Institute, the Boehner plan doesn't cut spending. It just sets the spending increases slightly below the imaginary Congressional Budget Office (CBO) 'baseline.'

According to the CBO report released yesterday, the Boehner plan has practically no effect on the deficit in 2012, the only year that really matters. In fact, the Boehner plan actually increases Pell Grant spending by $4 billion in 2012. (So does the Reid plan in the Senate.)

Of course, the Reid plan largely takes advantage of massive errors in the CBO baseline to claim 'cuts.' (For example, the CBO predicts absurdly high levels of spending for the wars in Iraq and Afghanistan.)

As usual, Republicans and Democrats are trying to create the illusion of a high-stakes game between two vastly different visions. In fact, their visions are practically identical. I hope Americans will see through all the smoke, and consider the Libertarian option to make real reductions in the size and scope of government, across the board.

The Tea Party is starting to resemble the Libertarian Party, at least when it comes to fiscal policy...

Source: Press Release (2011, July 27), Libertarian Party.

Fiscal Policy Changes Under Two Presidents

Fiscal Policy Changes Under Two Presidents [Click to enlarge]

Source: Fallows, J (2011, July 25), The Chart That Should Accompany All Discussions of the Debt Ceiling, Atlantic.

Exoskeletal Software: The Analyst's View

Dr John D Cook (2011) draws an intriguing contrast between how analysts and programmers view software:

Analysts use expert software developed by programmers in order to produce business intelligence... [However,] there’s a major divide between the way scientists [including analysts] and programmers view the software they write... Scientists see their software as a kind of exoskeleton, an extension of themselves... The software may do the heavy lifting, but the scientists remain actively involved in its use. The software is a tool, not a self-contained product... [Conversely,] programmers see their software as something they will hand over to someone else, more like building a robot than an exoskeleton. Programmers believe it’s their job to encapsulate intelligence in software. If users have to depend on programmers after the software is written, the programmers didn’t finish their job.

I personally know more than a few analysts (myself included) who view their software as an exoskeletal extension of who they are and what they do. The exoskeleton metaphor speaks volumes about the motivations of analysts who abhor being separated from their preferred software applications. For these reasons, I advocate matching software tools to the analyst rather than the analyst to the software -- the implications for productivity and practice are immense.

Source: Cook, J D (2011, July 21), Software Exoskeletons, The Endeavor.

A Modest Suggestion for Pres Obama Regarding the Budget Impasse...

Pres Obama should put Congress on notice that if they do not pass a budget he can sign immediately, then he will redeploy half of all US servicemembers currently serving overseas back to the US and demobilize them under his authority as Commander in Chief -- such a move would reduce government spending dramatically -- the center of gravity for Republicans is defense spending and the military industrial complex -- a threat by Pres Obama to issue orders that would disrupt the staus quo on military spending would cause the Republicans to cave in to his demands for a balanced approach to reducing the deficit...

How to Purchase Gold

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How to Purchase US Treasuries

What is a Pyrrhic Victory?

Pyrrhic victory
n
a victory in which the victor's losses are as great as those of the defeated. Also called Cadmean victory [named after Pyrrhus (319-272 BC), King of Epirus, who defeated the Romans at Asculum in 279 BC but suffered heavy losses]

Source: The Free Dictionary

Lessons from Shays' Rebellion

One has to wonder whether the economic impasse in America today is at all similar to the circumstances that lead to Shays' Rebellion in 1786-87.

Greece Through the Rear-View Mirror

by Domingo Cavallo and Miranda Xafa © VoxEU.org

Thursday's EU summit in Brussels announced new plans for tackling the Eurozone crisis. This column says that restructuring of Greece's debt will reduce Greece's access to external financing without reducing its debt burden to sustainable levels. It suggests additional financial support contingent on larger haircuts.

European officials have struggled for weeks to reconcile the competing priorities of Germany and other surplus countries with those of Greece. Until Thursday's summit, the EU treated the debt crisis as a liquidity problem rather than a solvency problem. This contributed to the market turbulence and allowed the crisis to spread to Italy. This undermined confidence and threatened the stability of the euro itself.

Recognising that “re-profiling” of the debt by pushing maturities into the future is no longer sufficient, EU leaders reached an agreement that tries to address medium-term debt sustainability concerns while keeping the resulting losses for banks manageable.

The Deal is Probably Not Enough

The deal implies a 21% reduction in the net present value of debt owed to bondholders, which constitutes about 70% of Greece’s total public debt. This implies a reduction of 15% in total public debt, which would bring it down from 156% to 132% of GDP. With most analysts estimating the needed debt reduction closer to 50%, this deal is unlikely to ensure debt sustainability even if Greece fully implements the medium-term fiscal plan it has just voted into law.

Since it is impossible to have a fully voluntary scheme that shifts part of the financing burden to bondholders while keeping Greece’s funding costs at sustainable levels, Greece will almost certainly get a “selective default” rating. Such a rating would complicate Greece’s access to ECB financing without ensuring that Greece will emerge from default with a sustainable debt burden.

Analogies with Argentina

The situation confronting Greece today is similar to Argentina’s situation in the summer of 2001. The economy was in recession and credit spreads had widened as market participants realised that fiscal tightening was becoming less palatable economically and politically.

At the request of the Argentine government, which still wanted to avoid what would have been considered a selective default by the rating agencies, the IMF proceeded with a substantial augmentation of the financial support already committed under the existing three-year stand-by agreement. Argentina thus missed the opportunity to restructure its debt while it still had ample reserves and bank deposits remained near peak levels.

With the benefit of hindsight, the financial resources of the international community used to bail out private creditors should instead have been used to deal with the consequences of an orderly debt restructuring, including the provision of ample liquidity and capital to the banking system.

Greek Choices

Greece is facing the same choices now. With Greece’s dim prospects for market re-access in 2012-13, the EU/IMF-supported programme has been augmented with new EU resources, with more to come from the IMF, to make up for the shortfall in private financing.

But this additional financial support is likely to be wasted on what is a lost cause. The sustainability of public finances remains in doubt, as evidenced by the still-wide credit spreads (wider than in Argentina a month before it defaulted) and the large withdrawals of bank deposits, which continue even after the approval of the medium-term fiscal plan by parliament in early July. In view of the above, IMF participation in the financing of a new programme for Greece should be conditioned on a debt restructuring involving a significant haircut.

A Lasting Solution: Debt Buyback at Market Prices

A lasting solution to the Eurozone’s debt crisis would call for the European Financial Stability Facility (EFSF) to issue AAA-rated bonds in exchange for the outstanding bonds of the countries that need to restructure their debt, taking as collateral their assets under privatisation. Greece, Ireland, and Portugal could capture the discount on the debt that the markets have already reflected. The mechanism would be a massive repurchase of the old bonds at the current market price. The cost for European taxpayers will be much lower than that associated with continuation of the ongoing bailout. The most costly scenario is that of a disorderly Greek default that would have spillover effects on other countries, very similar to the contagion generated by the collapse of Lehman Brothers in the US.

The EU and the IMF should help Greece ensure that the debt restructuring will not destabilise the banking system and will not force conversion of financial assets and obligations into a new Greek currency. Otherwise a run on the banks with large holdings of Greek debt will force “de-euroisation” in Greece in the same traumatic way that it forced “de-dollarisation” in Argentina in 2002.

The latest IMF staff report on Greece shows that public and external debt sustainability “hinges critically on full and timely implementation of fiscal, privatisation, and structural reforms... and the restoration of market access at reasonable terms in the post-programme period.” In cases where restoration of market access within the programme period is judged to be unrealistic, IMF rules encourage “comprehensive debt restructuring, to provide for an adequately financed programme and a viable medium-term payments profile.” It’s an idea whose time has come.

Republished with Permission of VoxEU.org

Spending Less versus Taxing More

Note that the debate about "spending less" versus "taxing more" is really an argument about how to implement "austerity" -- that this debate has ended in an impasse (in the US, Europe, and even California) highlights why austerity fails, which is the chronic lack of a public mandate -- austerity proposals are failing in the US and all over the world, which leaves only two other macroeconomic ways forward: default or monetary expansion -- we will see whether the US falls into default or monetary expansion in the coming months...

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What Derailed the Recovery?

An interesting question was posed in the Wall Street Journal (2011) this morning under the title, What Derailed the Economic Recovery? Three Possible Explanations. I provided my own short explantion as a posted comment in response:

The economic recovery was "derailed" by the myopic response of the Federal Reserve and Congress -- when the crisis began, the US embarked on efforts to save Federalism as the first priority, which meant bailing out or protecting "too big to fail" banks, automobile manufacturing, the defense industry, and government salaries -- unfortunately, those efforts ignored the problems on Main Street, including comsumption -- reality to date is that consumption has not been restored, probably because consumers have no money -- any money that was dispersed went to Federal and state workers, defense, and the automobile industry -- but nothing whatsoever has been done to put money directly into the hands of consumers -- at this point, Federalism is consuming all the nation's resources and then some -- anything left is being consumed by state workers and programs -- nothing is left for the consumer-at-large in America -- the US has become a safe-haven for the largest "too big to fail banks," government workers, unionized manufacturing, and the defense establishment -- public employees are a protected class, while small businesses and consumers have been "written off" in a misguided effort to save Federalism from itself...

Source: What Derailed the Economic Recovery? Three Possible Explanations (2011, July 21), Wall Street Journal.

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Jeffrey Tobin: The Ginomai Principle

An instructive and inspiring talk about value creation by my good friend, Mr Jeffrey Tobin.



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