Phony Debt Limit Discussions about Default

Politicians and pundits alike often invoke the constraints that individuals and collective groups (e.g., unions, churches, corporations, i.e. "persons") have in regards to how the Federal Government should manage its affairs. That is clearly not the case as the whole is greater than the sum of its parts. One important aspect is the central governments (especially larger countries) have the ability to take on more risk than any single person. This is evident for example when the business cycle heads south, the central government can "stimulate" consumption and investments or collectively called absorption through monetary and fiscal measures. Since it has virtually unlimited funds to draw on, it can alter the state of the economy at any given time.

Another aspect of its ability to take on risks is in investments. When it invests in a wide range of public goods, it has more leeway to invest in long-term projects because of the low cost of borrowing, like in basic research and development. Since it has a broader and deeper range of projects, it is less reliant on any particular project failing or succeeding. The one problem is when a project fails but leaves behind a constituency that is rent-seeking. And without prudence, it can go badly off track like Zimbabwe.

While Fiscal and Monetary policies are not applicable to family budgets or "persons", the debt issues can be translated to a person's budget constraints. No matter what instigates the debt ceiling, persons do not suddenly starve or throw granny out on the street, but reassess their income and spending streams. They also set out to prioritize the bills and consumption streams. Assuming a family with a good credit score, they may choose to pay the "debt holders" first and foremost to continue their lines of credit. Secondly, paring down only the most essential consumption goods to maintain a healthy family. The remainder (like Starbuck's) is eliminated on the short-term.

Next, think about delaying or postponing certain payments. Like if the water/gas/electricity is normally paid on the 5th but is not late until the 20th then delay it two weeks. Sell off some assets that are not being used now, like the old bike or some gold from that place called Fort Knox. Even if the Treasury states no fire sale of gold to delay debt ceiling, the Federal Reserve could swap out the assets like they did for quantitative easing. They simply swap out one asset (gold) for another one (money). After the cash flow improves then reverse the transaction.

Next try to improve receipts by encouraging and cashing income checks as fast as possible. Take on more work and make sure your cousin Vinny pays you back promptly. If you are the government, you improve cash flow operations. Why not have the IRS do a weekend/month sale? Discount for deadbeats on late and interest payments with a $1000 reduction if paid by September 1st. Better yet, why not a telethon? They even have a site dedicated to paying down the debt at Pay.gov. It is often stated that some people think their tax rates are too low, and this seems a perfect time to donate more. All we need is a good "pitch (wo)man" to get market penetration, and there is not a better spokesman than the current President.

Of course the central government is not like individuals. It has the power to "print money" and I am not referring to the Feds ability to increase money supply. An individual can write checks, but that would be slightly different than the government's ability to create actual new money. Its technical term is seigniorage . I would simply define it as the ability to sell a product less than its marginal costs, like any profit seeking business. Not only could the Treasury issue more coins and dollars, it could open the demand for $1000 bills. Certainly that would increase the M1 component of the money supply and thus through seigniorage create a surplus cash flow. Heck it might even increase the velocity of money and thus solve our lack of demand! Supply siders unit!

This discussion is not to say that the Federal Government will not have to eventually raise the debt ceiling. Any person will eventually have to balance their budget and consume less than their income stream. But it is logical to question when someone states that if we don't raise it by a certain date that it means default immediately.

3 ways Obama could bypass Congress - CNN.com
Section 4 requires the president not to put the validity of the public debt into question. If the debt ceiling is not raised in time, there will not be enough incoming revenues to pay for all of the government's bills as they come due. Therefore he has a constitutional obligation to prioritize incoming revenues to pay the public debt: interest on government bonds and any other "vested" obligations.

Misc. Links:
Moronic Monday: Still No Deal? - Seeking Alpha

Sen. Tom Coburn to unveil plan to slash federal spending by at least $9 trillion | NewsOK.com
Sen. Coburn to announce $9 trillion deficit-reduction plan | Tulsa World

Will a debt ceiling deal save America’s AAA credit rating? — Marginal Revolution

Obama Tries to Win Battle for a Debt Deal — and Public Opinion - Washington Wire - WSJ

Governors Demand Quick Debt Agreement - Washington Wire - WSJ

Sovereign debt: A few things to remember about debt | The Economist

Debt Ceiling Thoughts - Credit Slips

Smoke and mirrors

The horrifying AAA debt-issuance chart | Felix Salmon

The Horrifying AAA Debt-Issuance Chart - Seeking Alpha

A Strong 30-Year Bond Auction in the Face of Default - Seeking Alpha