(C) Daily Kos
This story was originally published by Daily Kos and is unaltered.
 . . . . . . . . . .



As the nation careens toward default, Americans need to know exactly who must be held responsible [1]

['This Content Is Not Subject To Review Daily Kos Staff Prior To Publication.', 'Backgroundurl Avatar_Large', 'Nickname', 'Joined', 'Created_At', 'Story Count', 'N_Stories', 'Comment Count', 'N_Comments', 'Popular Tags']

Date: 2023-04-26  

As explained by Mark Zandi and Bernard Yaros, analysts for Moody’s Analytics:

The Treasury debt limit—the maximum amount of debt that the Treasury can issue to the public or to other federal agencies—was hit on January 19, and since then the Treasury has been using “extraordinary measures” to come up with the additional cash needed to pay the government’s bills. Nailing down precisely when these extraordinary measures will be exhausted, and Treasury will run out of cash and thus be unable to pay everyone on time—the so-called X-date—is difficult. It depends on the timing of highly uncertain tax receipts and government expenditures. Since Moody’s Analytics began estimating the X-date early this year, we have thought it to be in mid-August. But April tax receipts are running 35% below last year’s pace, which is meaningfully weaker than anticipated. And despite weaker tax refunds than anticipated, it appears that the X-date may come as soon as early June. If not, and Treasury is able to squeak by with enough cash, then the X-date looks more likely to be in late July.

A 35% revenue shortfall is a staggering number. It quite literally means tens of billions less revenue than the government took in just last year. So, the window of time still left to forestall a default has not simply become smaller, it is about to vanish completely. There is simply not enough revenue available to the country to pay its current bills without running up against the possibility of default.

Moody’s is a non-partisan, go-to source for the business community to forecast and prepare for changing economic conditions. Because the debt ceiling debacle is directly tied to the fortunes of business and corporations, the company has delved deeply into all possible scenarios that could occur as a result of a national default. Their latest comprehensive analysis of the probable consequences of each scenario was prepared last month. At that time, they frankly acknowledged the improbability of Republicans doing anything to stop a default from occurring:

The difficulty House Republicans had electing Kevin McCarthy as Speaker, and the terms Speaker McCarthy acquiesced to—including having a battle over the debt limit with Democrats—do not augur well for a reasonably graceful resolution to the current impasse. Getting any legislation through the legislative process is tough under typical circumstances. Getting highly contentious debt limit legislation signed into law through this Congress before a potential breach will be a heavy lift.

In their March report, Moody’s also spoke directly to the seeming myopia and cluelessness of the investor class in appreciating the enormity of what is about to happen:

Another worry is that global investors are not more exercised regarding the political and procedural headwinds in addressing the debt limit. Nonplussed investors believe they have seen this movie many times and know how it ends: That after bitter political back and forth, lawmakers will find a way to come to terms before a breach. Thus, interest rates will not rise and stock prices will not fall as the X-date approaches, sending the wrong signal to lawmakers who take their cues from investors. With investors so sanguine about how this drama will play out, policymakers may believe they have nothing to worry about and fail to resolve the debt limit in time. This would be an egregious error.

Zandi and Yaros distill the debt ceiling crisis into five potential scenarios that could occur by early June: First, a clean debt limit increase; Second, a constitutional crisis brought on by Republicans forcing President Biden to invoke the 14th Amendment (which provides that the “validity of the public debt of the United States…shall not be questioned”); Third, the swift implementation of a payment prioritization plan initiated by Treasury following a default; Fourth, a full-scale adoption of the House Republicans’ budget, which seeks to thoroughly gut nearly all discretionary domestic spending except for defense; and fifth, a prolonged breach of the debt limit, with Democrats and Republicans unable to agree on a swift corrective response, and the ensuing, cascading, and disastrous effects of a U.S. default reverberating around the globe.

Except for the first scenario, all of the posited outcomes result in considerable economic damage to the country. However, given the obstinacy of the GOP and the fanatical character of its current membership, that first scenario appears highly unlikely.

At this point, it bears repeating that this crisis is entirely artificial, and the economic consequences that will result from failure to raise the debt ceiling are wholly unnecessary. The debt ceiling has been raised 78 times in the nation’s history, and during the Trump administration it was raised by many of the same House Republicans currently plotting to prevent it. This is simply Republican political brinkmanship at its worst, with no thought of the potential consequences to the rest of us.

The second possible scenario — in which President Biden bypasses the Republican-controlled House by invoking the 14th Amendment — Zandi and Yaros believe to be “tenuous” at best. It would necessitate the Supreme Court weighing in, as Republicans would certainly object. Nor do Zandi and Yaros put much stock in the oft-suggested solution of minting a “trillion-dollar coin;” as they observe, “the law authorizing platinum coins envisaged commemorative coins, not circumventing Congress’ power of the purse” (They also note that such an act would effectively politicize the Federal Reserve, inhibiting its ability to function).

Nevertheless, the authors believe that faced with the existential calamity attendant to the remaining options, President Biden’s invocation of the 14th Amendment may be the only viable approach, even though it still means considerable economic damage to the country: “The extraordinary uncertainty created by the constitutional crisis leads to a selloff in financial markets until the Supreme Court rules. GDP and jobs are briefly diminished during this period, but the economy avoids a recession and quickly rebounds.”

Under their third option, prioritizing payments by the Treasury, Zandi and Yaros note that the natural priority would be to “pay investors in Treasury securities first to avoid defaulting on its debt obligations.” However, politically speaking that would be next to impossible, because it would entail making payments to investors (including many foreign investors) before paying out Social Security, Medicare and veterans’ benefits. And such an approach would be also be subject to legal challenge, necessarily prolonging the crisis:

Financial markets would be roiled. A TARP moment seems likely. This harkens to the dark day in autumn 2008 when Congress initially failed to pass the Troubled Asset Relief Program bailout of the banking system, and the stock market and other financial markets cratered. A similar crisis, characterized by spiking interest rates and plunging equity prices, would be ignited. Short-term funding markets, which are essential to the flow of credit that helps finance the economy’s day-to-day activities, likely would freeze up as well.

That course, Zandi and Yaros believe, would place the U.S. economy into an instant recession, with a possible downgrading of the nation’s debt, the loss of approximately one million jobs, and a rapid rise in the unemployment rate from its current 3.4% to nearly 5%. The stock market would sell off (although it would recover eventually) harming millions either planning to retire or pay for their children’s education at this time. Perhaps most significantly, it would significantly dampen global investors’ outlook towards the U.S. as a valued risk, for which “future generations of Americans would pay a steep economic price.”

The authors soberly analyze the consequence of adopting the Republicans’ scheme as well. Taking Republicans’ highly dubious claims that they would not wreak havoc on Social Security at face value, the GOP “plan” could only be achieved, the authors note, by “largely eliminat[ing] all defense and nondefense discretionary spending programs.” Realistically, however, and in that circumstance, Zandi and Yaros would expect the GOP endgame would be to eliminate Medicaid altogether.

Following the Republican blueprint, the economy would crater, with 2.6 million jobs lost as the result of an extremely severe recession lasting throughout 2024, and GDP 2.7% lower after ten years than it would be had the debt ceiling simply been lifted in the first place. In short, according to Zandi and Yaros, acceding to the Republican party’s plan would not only harm (and certainly kill) millions of Americans by the elimination (or near elimination) of Medicaid, it would also result in a full-blown, extended economic collapse. This is why President Biden and the Democratic-controlled Senate correctly regard the Republican “plan” as dead-on-arrival and will certainly continue to do so.

All of the above options, therefore, appear untenable to some degree. The one considered most viable, involving President Biden invoking the 14th Amendment, is also fraught with risk. And except for a clean debt limit increase, which the Republicans oppose with near-unanimity, all come with varying degrees of real economic pain for ordinary Americans.

Which leads us, unfortunately, to the last scenario, one in which Republicans force the nation to default, but do not, for political reasons, act swiftly enough to repair the damage that ensues. In that case, the authors note that “The blow to the economy would be cataclysmic.” Should the crisis continue to fester through November, the reductions in government spending would cripple U.S. economic growth for years, with “consumer, business and investor confidence” decimated, as global investors would simply stop buying U.S. securities.

The economic downturn that would ensue would be comparable to that suffered during the global financial crisis. That means real GDP would decline beginning late this year and through much of 2024, falling more than 4% peak to trough, costing the economy more than 7 million jobs, and pushing the unemployment rate above 8%. Stock prices would fall by almost a fifth at the worst of the selloff, wiping out $10 trillion in household wealth. Treasury yields, mortgage rates, and other consumer and corporate borrowing rates would initially spike, until the debt limit is resolved, decline during the subsequent deep recession, but ultimately remain elevated as investors demand compensation for the risk of a future breach (see Chart 7). The economy’s long-term growth prospects are also weakened. A decade from now, real GDP is almost 1 percentage point lower than in the Clean Debt Limit Increase scenario, there are 900,000 fewer jobs, and the full-employment, or structural, unemployment rate is 0.1 percentage point higher.

Zandi calls this scenario “Financial Armageddon.” Unfortunately, given the nihilistic and antagonistic makeup of the Republican party as it now stands, that scenario is more likely now than at any time in the nation’s history. As explained by Matt Egan, writing for CNN in 2021, the consequences of default would impact all Americans, as “Interest rates would spike, the stock market would crater, retirement accounts would take a beating, the value of the US dollar would erode and the financial reputation of the world’s only superpower would be tarnished.”

In short, nearly everyone’s lives and financial security would be put at risk (if not totally ruined) and would remain that way for a long, long time. Older Americans who carefully planned to retire on their nest egg will suddenly find themselves without any recourse. Students and young people burdened by loans will find themselves unemployed. And the poorest Americans will find their services and health care slashed, and with it their ability to survive.

It’s long past time for Americans to understand exactly what is being perpetrated here by a Republican Party that has no regard whatsoever for the lives they’re willing to destroy, all for the sake of their warped ideology. This is a wholly preventable catastrophe that only exists because one political party has collectively decided its ideological imperatives outweigh the needs of the American people. And, if, as predicted, one of Zandi and Yaros’ scenarios comes to pass, it will be Americans’ responsibility to pronounce judgment on who exactly was responsible for it.

[END]
---
[1] Url: https://www.dailykos.com/stories/2023/4/26/2165964/-As-the-nation-careens-toward-default-Americans-need-to-know-exactly-who-must-be-held-responsible

Published and (C) by Daily Kos
Content appears here under this condition or license: Site content may be used for any purpose without permission unless otherwise specified.

via Magical.Fish Gopher News Feeds:
gopher://magical.fish/1/feeds/news/dailykos/