Dishonest Debt Ceiling Debate to Further Doom U.S. Economy

By Marshall Auerback

How misplaced fear of Greece could lead us on a path more like Japan’s.

My best guess is there will be little or no fight over the debt ceiling extension. I think the President will agree to pretty much whatever the Republicans want, and get more than enough Democrats to join him.

Best I can tell, the entire Congress agrees the deficit is a long term problem that absolutely must be addressed. The only arguments against ‘fiscal consolidation’ that I’ve seen are the ‘bleeding heart’ arguments which don’t cut it when everyone believes that Greek-type insolvency looms — despite plenty of evidence to the contrary.

Also, the ball is in the Republicans’ court, as they can’t just be against raising the debt ceiling. So, it will be up to them to take the lead and offer terms and conditions for their votes, after which enough Democrats will pretty much agree to it all, including cuts in Social Security and Medicare expenses, of one type or another, current and future.

All of which dooms the US economy to suffer from a severe lack of aggregate demand for the foreseeable future.

The one very faint glimmers hope are the Senators from CT - Joe Lieberman and Richard Blumenthal, only because they alone know that:

1. The Federal government can’t actually run out of money.
2. Paying off China is nothing more than debiting their Fed securities account and crediting their Fed reserve account, with no grand children writing any checks.
3. The Social Security issue, therefore, can’t be about solvency, only potential inflation.
4. For a given size of the Federal government. there is always a level of taxation that corresponds to full employment.
5. The trade deficit is an enormous benefit, and we can set taxes at a level where we have enough spending power to support both domestic full employment and the purchase of anything the rest of the world wants to sell us.

However, it is highly unlikely they will even attempt to be heard, because, based on their history, they don’t act with specific regard to public purpose. They are more micro-oriented, acting solely for political gain from their immediate constituents. So on this issue they will likely play along with what think is their voters’ understanding of these issues, and make no effort to educate them for the public good.

The words that come to mind when that happens are ‘intellectually dishonest.’

But I do hope I’m wrong and that at least one of them comes through for all of us.

There are also others outside of Congress who could come through and save the day. Current and senior Fed officials in the Department of Monetary Affairs are more than well versed in monetary operations, and know for a fact that operationally, Federal spending is in no case revenue dependent. And much of the CBO, including former heads, know as a fact of accounting that Federal deficit spending equals — and is in fact the only source of — net savings of financial assets for the rest of us. But it’s highly doubtful any of them will come forth to save the day.

Bottom line — believing we could be the next Greece continues to keep us on the path of becoming the next Japan.