Tuesday, July 18, 2017

Could The US Default Due To A Complexity Catastrophe?

Definitely.

Front  page story in today's Washington Post by Damien Paletta reports that "Treasury chief hurtles toward fiasco," the fiasco being a failure to raise the US debt ceiling in time to avoid a default.  Trump has declared that Sec Mnuchin is responsible for this matter, which he should be, but somehow has not made a sufficiently definitive statement to keep his former Freedom Caucus big cheese OMB director, Mulvaney, from opining that Mnuchin is an out of it New York finance guy (Goldman Sachs even) who is not well connected in Washington, and he, Mulvaney, thinks that the dumb games he played as a Congressman threatening to default are appropriate for  somebody in charge of all this.  The deadline is approaching, although it might be somewhere between early September and mid-October, but at some point if the debt ceiling is not raised, the US will seriously default, something we have not seen, and I doubt that any deal Mulvaney might propose would get through this dysfunctional Congress.  And the article reports that while Mnuchin wants a "clean raise" before  the Congress really shuts down in August, well, according to WaPo, he does not have the "stature in Washington to press through a vote on a measure" supported by all previous Treasury Secretaries.  Indeed, the article is right that he may not be able to do so, and the US may well seriously default on its debt for the first time, something the gang that Mulvaney has belonged to has declared is no big deal. We may be about to find out if that is correct or not.

In thinking about this I have come to realize that part of the problem is that this is a very complicated issue, one that few people understand, and that this lack of understanding is self-propagating: that few understand it means that there are few who can teach those who do not understand it what it is about. The upshot is that an incredibly miniscule proportion of the US population has any remote idea what all this  is about, so are not  putting any pressure on these loud mouthed Congresspeople to behave resonably. If in fact there is a default and it leads to a global financial crisis that puts the world economy back into a serious recession, well, who could have known that, and who will be to blame?

So let me get personal on how severe the lack of knowledge about this is, which is exacerbated by the fact that few media talk about it at all, or if they do so, it is with massive  ignorance.  So, over the Fourth of July weekend I was with extended family. A niece is a prominent journalist in Washington. Her brother, a nephew, was the top performer in high school on a statewide math test in California.  He is  now a wealthy high level computer game programmer in Silicon Valley.  They asked me if there was a threat of recession, as some other family members were claiming, and I said the most serious near term threat for  such would be a default by the US  failing to raise its debt ceiling, leading to a global financial  crisis.  It became clear that both of these very smart and well-informed people knew nearly nothing about this  issue. If they do not, well, probably less than 1% of the US population does, which makes it all the more likely that full-of-themselves ignorami in the House  Freedom Caucus will be all too happy to put Secy Mnuchin in his place when he comes calling for a "clean debt ceiling increase."

Why is this so hard?  Well, one thing is that few  Americans know, and neither my very well-informed and super smart relatives did, that the US is the only nation in the world to have such a stupid thing as a debt ceiling.  The vast majority of professional economists think it should be eliminated.  Congress effectively decides on this when it passes a budget, and this is just an extra nonsensical conundrum.  It is  a historical arttfact from a century ago, when right after  the 1913 passage of the amendment allowing the personal income tax, the US went into WW I, which was not supported by many in the Congress, the Congress imposed this idiotic debt ceiling to retain control over the budget  during wartime. When the war ended, it was not repealed, and we have been stuck with it since, with the vast majority of  both the Congress and the public thinking it is something sacred and important and stuck in marble, when in fact it was an unfortunate mistake that should have been repealed a century ago.

Regarding what will happen if we default, I  do not know, as that could follow many paths. But a serious catastrophe cannot be ruled out, and if  it  comes to pass it may be at least partly due to how complicated this whole thing has become, with neither the public nor most of  the Congress at all aware of what is involved here.  So, we could indeed end up with a complexity catastrophe, and if we do, let us hope that it is not too severe.

Barkley Rosser

21 comments:

Anonymous said...

The full faith and credit clause hasn't been put to the test yet by SCOTUS... so defaulting on debt isn't an option within constitutional limits. Congresses debt ceiling law is thus a worthless POS law used by the right on "threat" of defaulting to extract or try to extract liberal concessions on the budget. Notice however the right wing has never let it get put to the constitutional test since they know damn well the law will be overturned, taking away this political propaganda FUD factor for the public belief that they can force a default.

Anonymous said...

Also, btw, nearly everybody I know is well enough informed to discuss politics and economics and perhaps as many as 5% even up to 10% are oblivious of the issue of default and it's potential long term effect on U.S. economy and costs of borrowing. Everybody know are between ~ 30 and my age and it's about evenly mixed, and I'm not nor are those I know in an academic environment.

So on a sampling estimate basis your 1% estimate of public's understanding of the implications isn't substantiated by a long shot.

Anonymous said...

I will add that the only threats that have ever occurred with respect to letting the nation default on its debt by not raising the debt ceiling have come from the far, extreme right wing of the conservative party. The leadership of the conservative party always let's the public think this threat is real and will be used by conservatives to force budget concession by liberals. But the leadership of that party always knows it's an idle threat, as does the other party. But it makes for good press, getting the public's opinions into the budget process, besides making for great public political drama, news broadcasters and talk shows love it, as do their advertisers. It is in fact just political theater, an act upon a stage, signifying nothing to paraphrase Shakespeare.

rosserjb@jmu.edu said...

It may be that I have overstated how ignorant US people are about this matter, but in your final comment you made at least one mistake, Anonymous, although quite recently your remark about it being just theater has been true. Where you have goofed is that until recently both parties in fact played this game, with Congressional Dems playing it when they ran Congress and Republicans were in the White House. There was quite a bit of it when Reagan was prez and had to raise the debt ceiling a bunch. There would be Dems manking noises and voting against it, although always carefully staged so enough in safe seats would so that it got raised. Problem now is that too many are thinking they can actually get away with not raising it.

As it is, one reason I think you are ovestating how many understand is that you had all those Dems back then voting against raising the ceiling. If people are or were so well informed, why did these Dems feel that they needed to vote against raising it?

Anonymous said...

Rosserjb,

Actually if memory serves in the past of which you speak both parties always favored raising the debt ceiling.. it was a standard no contention vote every year and was never, not even remotely used as a threat to default on the debt tool by either party. The only difference between the parties was by how much to raise it. Not raising it wasn't ever on the table.

The first instance of using it as a threat to not raise the ceiling and default on the debt didn't occur until the tea-party far rightists took office after the 2010 midterms. You're conflating the "gov't shut-downs" which first began with Newt's leadership with defaulting on the debt by not raising the ceiling. Newt and his boys never once threatened or even remotely implied a default on the debt.

rosserjb@jmu.edu said...

No, Anonymous, I am not conflating these with govenment shutdowns. I think in reality it is true that really serious talk of not raising the debt ceiling came with the tea party, but there has been this long tradition of a Kabuki theater act where some memebers of the party not occupying the WH would make noises about not raising the debt ceiiing and would indeed actually vote against raising it, again, as I described it, deals were always carefully made so that there would be enough members of the party not in WH but controlling either house of Congress to vote for the debt ceiling increase, which was always a request coming from the Secy Treasury and WH, so that it would pass, thus allowing members in shakier districts to show how tough they were in opposing the debt ceiling incrase and voting against it.


Why this nonsense went on fits in with the main story of my post, which, if you are the same Anonymous as above, goes against your story, even if your acquaintances are well-informed on the issue. Most people are not well informed on the issue, and many of them knee jerk react negatively when they hear that the debt ceiling is increased. I mean, "debt is bad," so why would anybody in their right mind vote for more of it? That is the mentality , and that mentality has indeed become much more powerdful in a serious way in both the Congress and the administration, with not a strong offset to it coming from public opinion, as we had in the case of health care.

I realize you are playing a game of trying to catch me out on fact. It may be that everybody you knows fully understands the debt ceiling issue, but on the other facts about this, sorry, you have not pulled it off. Maybe another time, Anonymous.

rosserjb@jmu.edu said...

BTW, Anonymous, I must tell you that I do not respect people who post as "Anonymous." Can't you at least make up some silly moniker if you are not willing to put your actual name up like some of us? Posting as

Anonymous said...

Rosser, your arrogance is not justified by accomplishments. If someone wants to be anonymous, let them be. There are plenty of legitimate reasons with far more validity with your many posts that extrapolate from mere anecdotes.

Jerry Brown said...

Dear latest Anonymous @ 5:37,

When multiple people choose 'Anonymous' rather than their name or even some random letters that they choose, it is difficult to figure out which commenter you are trying to respond to, or if their comment is a continuation of an earlier comment or a new argument from a different person. I also, have less respect for the completely anonymous comment. And anonymous insult comments like your last one show both cowardice and a desire to harm rather than make an argument or illuminate. There are a lot of things wrong with that.


Anonymous said...

Jerry Brown, I agree completely: It is difficult to figure out. But that's the whole point isn't it? I mean should the comments have identities attached to discern their validity or lack thereof?

Just as you did in your post the anonymous post can be identified by the time of the post. What's the problem?

rosserjb@jmu.edu said...

Well, Anonymous July 21 at 1:32 AM, if you are the same Anonymous as all the above, I suspect that the reason nobody you know is ignorant about the details and history of debt ceiling increases, even though it appears that you yourself are inaccurately informed about some of those details, making any judgment you make regarding the knowledge of others to lack credibility, probably you are Anonymous because you have no friends, so, it is easy for none of them to fail to know such details, at least as far as your limited knowledge goes. Who would want to be a friend with someone like you?

Anonymous said...

U.S. Federal Debt Default

Likelihood: Extremely Remote to None.

There is one instance in history since 1814 that the U.S. defaulted on its debt... that was in1979 due to a series of errorse rather than legislative intent or threats. The default amounted to some Treasury Note investors ($120 million worth of $800 billion in Treasury Debt) not getting their checks in time over two month period.
Ref: http://www.politico.com/story/2013/10/debt-limit-government-default-098252
Ref: http://www.npr.org/2011/07/11/137773341/looking-at-when-the-u-s-last-defaulted-on-treasury-bonds\

According to everything I've read, raising the debt cieling to insure treasury debts would be paid on time was a routine legislative act until the tea party legisltors came to the House of Reps in 2011. This doesn't mean there were not "shut-downs".. There were 17 Shut-downs (technically) from 1976 when congress put new budgeting processes into effect. The "shut-downs" were not threats to default on the debt, rather they were for the most part funding gaps with no real world effect.

The first actual "shut-down" where some federal employees were not paid occurred with Gingriche's 1st Shutdown (5 days in Nov 1995). There was never a threat of debt default. The furloughed workers were given back-pay.

The 2nd actual "shut-down" also occurred with Gingrich. It lasted 21 day in Dec 1995 to Jan. 1996. There was never any threat of a debt default.

In no case was a threat of not paying on the debt ever at issue, neither implied by either side of the gov't debates, or considered by financial markets. These were not debt related threats, but GOP playing soft-ball to get a better deal.
Ref: https://www.washingtonpost.com/news/wonk/wp/2013/09/25/here-is-every-previous-government-shutdown-why-they-happened-and-how-they-ended/?utm_term=.602a4bb806a9

Here's a nice history table of every debt cieling change by date, amount, and administration since 1941. The debt ceiling has been changed 104 times since 1944 - 94 increases and 10 decreases
https://www.theguardian.com/news/datablog/2011/jul/15/us-debt-ceiling-historic

What's changed is the far right make-up of the GOP since 2011 ... they want to play hard-ball (as opposed to Gingrich's soft-ball). As has already been pointed out, "The full faith and credit clause hasn't been put to the test yet by SCOTUS... so defaulting on debt isn't an option within constitutional limits.". I will only add that I've yet to find any constittuional legal scholor, of either pursuasion, that finds defaulting on the debt is a Constitutional option.

As has also already been pointed out, neither poltical party's leadership is willing to have SCOTUS negate the debt ceiling rule since it serves both sides interests in drama and negotiations to find a suitable compromise or buckle. Gingrich tested the waters and the GOP paid the price. Shut-downs are a matter of political theater and primarily for public appeal and propagandizing.


rosserjb@jmu.edu said...

Well, Anonymous, you sort of appear to muddy the water, even though it also appears that you know better. The govt shutdowns have nothing to do with and provide no information regarding a default. Yes, 1979 was simply an error and was quickly dealt with. Yes, SCOTUS says that "thous shalt not default." But, the hard fact is we have never seen an actual default situation because while SCOTUS says "thou shalt not," it is completely unclear and unknown what should be done if in fact the Congress has not raised the debt ceiling, and the debt threatens to soar above it unless the Congress does something. Offhand, it would appear that the issue is then thrown on the Treasury to start paying or not paying bills arbitrarily, but this looks to be unconsitutional on the surface. It is supposed to pay all legally due bills that arise from Congressional authorizations to spend money. Treasury has no legal authority to make any such decisions, but if in fact we do have a failure to raise the debt ceiling, I suspect the Treasury will just stop paying some bills, although I would not want to be the Treasury Secretary in such an effectively impossible and illegal situation.

Almost certainly interest rates in the US would rise in this case, and possibly quite sharply, putting a lot of pressure on the Fed. That would certainly put an end to their slow creep to raise interest rates, among other things. The hard fact is that this is completely unprecedented territory, again because no other nation has ever been so stupid as to have such a silly thing as a debt ceiling, much less fail to raise it when the spending and taxations decisions made by the Congress with the approval of the president come crashing up against it.

Anonymous said...

Actually Barkley, the executive branch is the only enforcement agent of the law as you know, but there are two mutually exclusive laws:

1. Constitutional mandate -- "... validity of the public debt of the United States, authorized by law, ... shall not be questioned."

and

2. Congressional law -- Treasury may not exceed the debt limit in paying it's bills (bills which have been duly authorized by congress and signed by the Executive).

Since the executive is charged with enforcement it is in fact the Executive's discretion as to when it choses to enforce and to what degree enforcement shall be pursued.

But there are two sources of the laws the executive must decide upon when mutually exclusive laws exist. In this case (public debt) the constitutional law prevails over congressional law... that is it is superior law.

With no other factors involved, then the executive will chose to follow constitutional law under their oath of office and indisputable fact that constitutional law is superior to congressional law when the two are mutually exclusive.

Thus the debt will get paid. Once that act has been taken, the congress can sue -- bring the issue to the courts... presumably a request to SCOTUS, although SCOTUS has no obligation to take the case before the lower courts have taken up the case and ruled. Congress has not standing to sue before the executive defies congressional law.

What you are conjecturing is that the executive might chose to follow congressional law and defy constitutional law, and thus default on the debt to the limits of the congressional debt ceiling.

But if that were to occur then those who were due to be paid and were not can sue the U.S. for payment, interest lost, and damages incurred... and of course in the meantime the U.S. treasury bills have to be offered with increasing interest rates (even to the level of inability to sell any new treasury bills (borrow) at any price), which is to say even borrow to pay present principle due (e.g. rollover the debt)... and it's a risky proposition for investors since the issue has to be resolved by the courts, which will take time, especially if SCOTUS decides to have the lower courts decide first.

So since the impact on the US would be huge and adverse to its interests (though perhaps not adverse to the interests of anti-federalist ideologists), then the Executive will continue to pay it's debts due on time in full and put the burden on congress to sue and then the courts will take whatever time they need or want to decide whether constitutional law prevails or congress's law prevails.

Meanwhile it's business as usual so no adverse (or no major adverse)immediate effects.

Next, the strict constructionists on the courts will take the constitutional conditions as supreme law without much re-interpretations and thus the debt ceiling law will be unconstitutional from the strict constructionists opinions.

The liberals are likewise not going to take the congressional law as superior to the constitution's direct statement and intent, so it's a forgone conclusion (from all legal scholars opinions on the matter) that the courts will rule the debt ceiling law is secondary or unconstitutional.

Next is the matter of what congress does to change the budget laws... such that they control the debt directly by their authorizations and that is a wide-open issue which will be debated in congress until some solution or agreement is reached.

The executive can't lose by enforcing the constitution above the congressional law. But they can lose by doing the opposite.

The only caveat I have is that this all assumes a rational executive is in office... and Trump isn't rational or thus far hasn't demonstrated any rational decision making. But I'd be willing to bet that Wall Street will be the ones that Trump will decide to appease and thus the debt will get paid.

rosserjb@jmu.edu said...

This situation certainly threatens to put US policymakers into a legal contradiction. I suspect that if push comes to shove, Treasury will continue to make the interest payments and others to avoid a technical default. But that then puts the Treasury in the difficult position of illegally making choices about which bills to pay and which not to pay. Maybe once the ceiling does get raised and those bills get paid later, it will all amount to nothing like those government shutdowns where some federal employees got some salary payments delayed. But then, maybe not. In any case, a lawsuit going to the SCOTUS would be a near certainty.

Anonymous said...

The legal contradiction you say "threatens" to put lawmakers in has been the identical contradiction threatening since 1917 when the debt ceiling law was enacted. It's not a new contradiction that threatens lawmakers at all.

I'm not a lawyer nor am I particularly well informed of constitutional law, but am generally aware of what constitutional scholars have written on the potential constitutional issue of paying on debt by exceeding the debt limit from the several opinions and analysis written on the subject after 2011's "threat".

One of the general requirements to have standing to sue is that the plaintiff must be able to show damages incurred... that means actual damages, not potential damages. That means for the issue to get to the courts at all, the Executive will have to pay bills and exceed the debt ceiling law. Then and only then can congress bring suit to the courts.

What isn't clear however is what damages congress can show the courts for congress to have a basis for bringing suit.

There are no actual damages however... other than to congressional ego. Congress has already duly authorized expenditures and debts incurred by their own law as a result, and the Executive has signed those laws. Thus the congress cannot show any damages if the executive pays the bills due.

Without damages the Court can't enjoin the executive from paying congress's duly authorized bills while the constitutionality is being litigated. In fact I'm not even sure the court can even get beyond a preliminary filing if the filing cannot show damages have been incurred by congress. And since the debt ceiling is a technicality of a congressional budget negotiating process, but for which all spending including paying on debts have already been authorized by the laws congress used to pass those spending bills, then effectively the debt ceiling is both artificial and in direct contradiction with it's own prior laws, not to mention in contradiction with constitutional provisions.

It's really very simple.

Congress decides what to spend money on ... by item and amount. They pass a law to spend that money.

rosserjb@jmu.edu said...

Anonaymous of July 27 at 5:33 AM

No damages you say? There will be damages to those who do not get paid on time (or at all) who are expecting to get paid. They are (or will be) due their money, and Congress will be in violation of its own laws. To the extent the damage involves an actual default and leads to an unnecessary increase in interest rates, it could damage the whole US and possibly the world economy. What are you talking about? I know, the very narrow legal issues involved.

Why it is a problem now in a way we have not seen since 1917 is that indeed we now have a bunch of clowns both in Congress and the White House who seem to agree with you on the economics of this, that it is not a big deal. So they seem to want to play games with it and maybe not increase it as they should. That is why this is being talked about now, a new bunch is in power that does not seem to understand what those in power have understood for the past century up until now. Maybe it will all turn out to be some big nothing burger, sort of like those govt shutdowns, but plenty of us are plenty worried, and what the SCOTUS does or does not think about it is quite secondary, frankly. I am worried about the economy, not about the SCOTUS.

Anonymous said...

Rosser,
Learn to read. I said congress has no damages IF the executive pays the debts due by ignoring the debt ceiling limit congress imposed. Therefore congress has no legal foundation to sue. What are congress's damages? Hurt feelings? Damaged ego's?

You can always be worried about anything if you let your imagination run wild, as is apparently the case since you said "...plenty of us are plenty worried...".

Long Term Treasury Bond rates have been dropping since Trump took office, so investor's aren't worried. See monthly rates:
https://fred.stlouisfed.org/graph/fredgraph.png?g=evYp

Or if you prefer, daily rates from start of year.
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=longtermrateYear&year=2017

10Yr LT composite (>10 Yr) daily yields started the year at 2.90%, peaked at 3.07% on March 13, hit a minimum of 2.55% on June 16, and are currently at 2.76% The current average since July start is side-ways at 2.735%

You may be "worried" but national and international money isn't worried at all.

Anonymous said...

And Rosser,
In case you think the current long term treasury rates indicate investor "worries" of default, take a look at the long term rates since 2007 to date.

Even when they were being actively threatened (2013, & 2015)the rates didn't hardly budge. The "threats" are fictional FUD propaganda.
https://fred.stlouisfed.org/graph/fredgraph.png?g=evZH

Think rationally even if you don't think Trump is rational.

The only threat comes from the tea-party faithful in the Freedom Caucus.... no more than 40 House Reps.

Who stands to lose under debt default? Wall Street, insurance Company's, major pension funds..., not to mention the federal debt with interest rates skying (hence adding to the past debts and any future borrowing needs). The people with money rely on congress and the executive to do their bidding. Do you think for even one second that those people won't make it absolutely clear that default is not an option if any of the reps or Senators from that party ever wants to hold a federal office again in the foreseeable future?

Now I'm sure Bannon and others would love to up-end the international economic system and gov'ts with them... chaos is what they want. But this chaos advocacy group are way out there on the extreme edges of any spectrum of political economy.

But the money people are the ones in charge of gov'ts not the chaos extremists.

What you appear to be worried about is a tiny group of extremist chaos advocates (the extremist extension of Libertarians) taking control of gov't. You're letting your imagination run wild. You seem to forget that the conservatives are elected by the people with money at stake and they depend on those reps to do their bidding .... especially when it comes to guarding their wealth.

A direct hit by an huge asteroid has a greater chance of occurring that a debt default. Get real.

rosserjb@jmu.edu said...

Oh dear, A, that the long term bond rate is going down and the current market is not taking into account a looming disaster, well, A, "the market" has a long record of completely missing serious things. It is a matter of public record that I called the crash of 2008 very precisely. Did you?

For the record, I think the probability is greater than 50% that reason will prevail and debt ceiling will get raised in time. But that the market is currently failing to factor in the now non-trivial probability that they will not (and is also looking at such things as the end of the collapse of the Greek economy and the broader turnaround in Europe), this is not surprising.

In the meantime, I suggest that you either tell us your real name or adopt some ridiculous fake name. As it is, I currently view as utterly beneath Extreme Contempt. Everytime you post here in the future without doing either of those, I shall tell you to go fuck yourself in hell, you worthless disgusting scumbag.

Calgacus said...

There is quite a lot of case law that puts "government obligations" - including but not limited to treasury bonds at a constitutional level of law, higher than ordinary Acts of Congress. So it is a good bet that reason would prevail.

One of the latest in this line of cases - 2004 Cherokee Nation, enforced the executive to pay an obligation, as long as there was money in the Treasury General Account, even though Congress had neglected a specific appropriation.

But of course, the principle An nescis, mi fili, quantilla prudentia mundus regatur? should always be kept in mind. And the technology of being stupid has developed since that was said.