Debt Ceiling Challenge will impact how hard Wiedemer Aftershock Economy will hit U.S. (Jan 28, 2012 update)


Debt Ceiling Challenge will impact how hard Wiedemer Aftershock Economy will hit U.S. (Jan 28, 2012 update)

 

This updates my first post on this subject Jan 7.  Main point is that the US can choose ‘not to default’.  Hence I modify my 3 alternatives.  Before that we must however analyze fiscal details as they pertain to incoming revenues and then spending priorities:

http://news.investors.com/ibd-editorials/011813-641261-debt-ceiling-will-not-force-default.htm

 

Main point:

Facts reported by MarketWatch and the Bipartisan Policy Center, are that we could still meet our core obligations.  How?

• The federal government takes in about $200 billion in revenues each month.

• Interest on the national debt is around $30 billion.

• Social Security costs roughly $50 billion.

• Medicare and Medicaid cost about $50 billion.

• Active-duty military pay costs about $2.9 billion.

• Veterans affairs programs cost about $2.9 billion.

That is only $136 Billion out of $200 Billion.  The U.S. then can prioritize the extra spending such as Defense and welfare (ex Food Stamps) only to those at or below poverty level, and unemployment compensation.

 

BO called the last debt battle in 2011 a “catastrophe” that led to the lowering of the nation’s credit rating and stalled economic recovery.  No BO !!  If Congress would have only modestly (ex $500 billion for 12 months, or not even any increase), we would right now be in a much stronger fiscal position and may have then NOT had our credit downgraded.  BO – you have received six debt-ceiling increases and have added more debt than the first 42 presidents combined.  Since 2009 in nominal terms our GDP has increased about $1.8 Trillion while our debt has increased $5.8 Trillion.  At this pace all credit agencies should lower our rating.

We are not on the brink of default, and the only game we should stop playing is the one of spending more than we take in.

 

OK let us then revisit 3 options to handle the debt ceiling:

 

 

 

Debt ceiling debate will be fight of decade.  We must win NOW else our foreign creditors will later harshly restructure our debt and spending.  Argue this over and over every day over blog sites.  Tweet as many Congress representatives, not just Michele Bachmann, a champion we can rely on.

Go ahead and risk a gov shutdown.  If we had one in Aug 2011 we might today be much better off.  If we have a gov shutdown agree to no more than a $500 billion increase over 12 months.  This will be just under half our protected 12 month deficit and force us to better prioritize spending.  Again it is much better we do this than a group of sheiks, Chinese, and IMF accountants.

If not now when?  Just do it NOW.

 

Otherwise the more dire projections in Robert Wiedemer’s Aftershock Economy (ex: 50% unemployment) may come close to reality.

 

MORE DETAILS

 

Consider 3 scenarios.

 

Scenario A – March 2013 US Gov shut down for 1 month while US Treasury receives its $200 Billion a month and pays $136 Billion per month as detailed above, indefinitely while Congress debates a solution.  Default is thus avoided.  There may be an outcry from many on food stamps and unemployment compensation and some federal employees and likely many other Americans such as many receiving SS disability (some deserve it but some do not).  Let the nation then prioritize its core spending.  In time, in this scenario ‘A’, Congress finally agrees on a $500 Trillion debt ceiling increase for 12 months with Obama and Congress agreeing to pass a budget ( a 1st in 4 years), restructure and prioritize spending, including significant cuts in defense and elimination of Education, Energy, and HUD departments, selling off the PO, Amtrak, and privatizing Fannie Mae and Freddie Mac, and severely restricting the EZ ability to dubiously enroll in Social Security disability after 99 weeks employment, which by the way will be reduced to 52 weeks.

 

Scenario B –  Clone A but Obama intransigence, via executive order, direct Treasury (in few days) to prioritize welfare spending over debt interest spending , betting Congress will cave and increase debt ceiling up to Jan 2015 by $3 Trillion.  Within a few hours, foreign creditors threaten to dump majority if not all of $ denominated securities.  This is a rude awakening to Obama and he bends.  He then agrees with a joint proposal from the IMF, G20, and House Republicans  — the same $500 Billion debt ceiling extension in A.

 

Scenario C – Republicans cave.  Debt ceiling is extended by $3 Trillion, projected to last until mid 2015 with $1 Trillion in new “phantom” cuts, 90% of which “may” come into play in 2022-23.  April Jobs report lists over 50,000 jobs lost and Q1 GDP comes in flat.  Economists assert the January cliff tax increases have resulted in small businesses laying tens of thousands, but need to in order to stay in business. May through Sept also come in with losses of approx 50,000  jobs per month.  In October over 100,000 loose jobs.  Also in October, IRS reports tax revenues were $250 billion less than expected, resulting in a fiscal 2013 deficit of $1.35 Trillion.   New economic projections point to at best a 1% increase in GDP over next 14 months.  By end of 2014, deficit is now projected to be at $18.6 Trillion with GDP just at $16.0 Trillion.  Total debt is projected to be at 116% of  GDP, up from today’s (Jan 2013) 104% (GDP at $15.8 Trillion and deficit of $16.4).  By comparison the 2009 Q1 debt was $10.6 Trillion against GDP of $14.0 Trillion – ratio of 76%.  Foreign investors totally loose confidence in Obama and Congress as they see no prospect of this ratio reversing, hence jeopardizing their capital.  They decide (as a herd within hours) to dump 100′s of Billions $ denominated securities Sunday night starting in Asia as US sleeps.  Obama is awakened at 3 pm to be alerted of the possibility of a devastating October Black Monday.  At 9:30 am EST time,  we learn the US dollar has lost 20% of its value and is accelerating.  The US Treasury Secretary calls for an immediate meeting with China’s Finance Minister, the IMF, G20, and rich Arab sheiks.  Too late he is told.  The US must eliminate all welfare in excess of the poverty level.  Social Security, Medicaid, Medicare, ObamaCare, and defense are cut harshly – all are to be cut by over 50% in order for the US to reenter the credit markets.  One Saudi Arabia skeik creditor severely lambastes the Treasury Secretary for allowing his prior purchase of Treasuries being used to pay for contraceptives for rich women in GeorgeTown law school.  He replies “your country has lost its mind!  You have become a nation of free loaders, lazy obese people expecting us to pay for your cradle to grave luxuries.  This ends now and will never return!!”  China invades Taiwan.  US stands by.

 Reread AfterShock 2nd Edition Chapters 5-8 for a refresher and realize that after some severe times, the US is in the best position to regain economic prosperity again and reach new hights.  But we must get rid of the Nanny State that is restricting us.

 

Analysis of the 3 options:

 

I bet C destroys our economy and leads to few to several years of a severe Aftershock economy before recovery.

 

B will freeze creditors for few days.  With a solution in under a week confidence will be restored albeit US creditors will never hold the US as the trusted player it once was.  It will take at least a decade of sane fiscal policies to restore prior good faith, if ever.

 

A is clearly the preferred solution.  It is much better we restructure our debt ourselves.  Even if we do the odds are very high that eventually foreign creditors will have a major role in reshaping our economy and restructuring our debt.  This is given the missile of EZ money with Fed Reserve balance sheet expected to reach over $4 Trillion by end of 2013, up from $800 Billion as of 2008 (chapter 5).  This, per Wiedemer will ultimately lead to inflation well in excess of 10% and result in a $ collapse.

 

But A will have a stronger US economy being restructured; hence the Aftershock economy will be less severe, recovery will be much faster, and new and perhaps unprecedented prosperity will be under way.  Therefore – blog and tweet to as many as you can – go for option A.


Time permitting I respond to civil comments on this web site.  Twitter @Economics501

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About economics501

1 - free market Capitalist; 2 - Fitness Entrepreneur; 56 years old, VP at an Investment Bank in NYC, ex Venture Capitalist, happily married with 2 girls. Education: Rutgers and NYU. I allow Ted Hruzd, my friend to blog at will here. He has many posts here. I have known Ted since we were both students at NYU. Ted also works for an Investment Bank as a VP in Equity Global Markets. ------------------------- I was very very Socialist leaning as a 22 year old. I then strongly believed in Gov role in helping the poor. However, as a USDA Child Nutrition Programs, I personally accounted for millions of fraud, abuse, and waste of tax payer money. I came to believe that the poor would be best served with less Gov programs and more with direct aid via tax system. Then after 5 years I became a free market capitalist, was a venture capitalist in 2007 and helped start 2 high tech companies. I dedicate this site to champion free market capitalism as the best road to Prosperity. Please join in. If you disagree, fine, but please post with dignity and class and be civil. Argue with facts always.
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