Geithner Says Damage From Debt Default May Be ‘Irrevocable`

[RCG Trader]

Quote from achilles28:

Perfect. Well said.

This type of deficit-financed prosperity Americans have come to expect as "normal" is in for one hell of a shit storm. We are in serious trouble. Conservatively, the deficit and QE juice the economy by 13% GDP. That's 1.8 Trillion dollars in activity that doesn't naturally exist in the economy, today. IOW, American incomes can't afford that additional 1.8 Trillion dollars in consumption that we now associate with flat NFP and GDP numbers. That ought to shock the hell out of any financial literate. In reality, the equilibrium point for the American economy - where domestic consumption = domestic production - is at least 1300 basis points SOUTH of where we are now. And that figure doesn't include ripple effects. Government workers and their suppliers don't stuff their checks under the bed. They spend those checks into the real economy - cars, homes, vacations, education, medicine etc. The "knock-on" effects from a balanced budget would be at least 7%. That said, the true equilibrium point is about 40 million jobs south of where we are now. That's if you project the '08 losses onto a future default scenario. For perspective, the "Great Recession" erased 3.3% from GDP, peak-to-trough. Under a default, equilibrium point would be in the neighborhood of 20%. Roughly, 6 TIMES worse. Unemployment north of 25%. Catastrophe is an understatement.

I agree, Regan started this bullshit vote-pandering by getting us hooked on borrowed cash. Problem is, over time, incomes (or GDP) naturally receded from successive bouts of inflation, offshoring and bubbles/busts. That meant it took greater and greater deficits to offset the decline in real incomes and churn positive growth. This is why academic circles are perplexed as to how stimulus seemingly lost it's effectiveness. Iow, why each round of deficit-fueled stimulus produces less and less GDP growth. And the simple answer to that: it hasn't. The truth is that the American economy has actually been in contraction for a long, long time. So, in the 80's and 90's, for each 3% deficit (expressed as % of GDP) it only produced 2% in real growth because equilibrium GDP had actually shrank 1%. In the early 2000's, we (borrowed) spent 5% and it only produced 2% in real growth because equilibrium GDP was actually -3%. Now, we spend roughly 13% GDP, get 0 growth, because the actual equilibrium point is -13%. And that doesn't include ripple effects. We're in deep shit.

Just want to add, each President since Regan was faced with a certain downturn, unless they added more to the national debt. Since nobody wanted to jeopardize reelection, they continued the daisy chain. They added to the debt and passed the problem down the line to the next guy. And as each President inherited the problem, the problem kept growing because real incomes were progressively in decline and needed that much more stimulus (read: debt) to keep the economy at break-even. Now, we're at the end of the rope. The nations credit limit is nearly maxed out. And instead of the steady, moderate decline we should have felt since the 80's, we will now experience all of those very real recessions, in one sharp, devastating blow. We literally "saved up" all those recessions and they will hit us all at once. The deficit was merely a bandaid to a much deeper structural problem that was hidden - I argue, intentionally - from the American public, for a very long time.

Excellent post....we are well beyond the event horizon.

 

[Wallace]

thing is tho, no 'monster' has suddenly appeared, and as yet, no lost confidence has manifested

the only pop's been the $ rally, and while it may continue for a while, my expectation is for it to
fall further later, so I'm looking or expecting for something tangible to be visible but nothing yet
seems to exist that fits the bill

 

[GuyFawkes]

I think the only conceivable way forward for the US is a complete breakdown of the current system and the status quo.
Is sovereign default the way forward? Possibly.
Whatever it takes to get rid of the feeble minded shameless thieves and oligarchs that are making this country poor. I had hoped that the 2007/2008 start of the depression would loosen their hands from the till but the parasites have a strong grip.

The Boy Who Cried Wolf, Timmy Geithner says this may be irrevocable -please give me some of that. Anything he is against, I am for. Talk about fucking evil. Time he wheeled out Satan's little helper Buffett to tell us that the end of the world is nigh.

 

[rc8222]

House Republicans should not vote for any increase in the debt ceiling. This will guarantee the economy won't improve and will easily give the GOP the White House in 2012. Oh, in addition to the U.S. Supreme Court striking down Obamacare in June 2012.

 

[Max-E-Pad]

Geithner is a joke, I can not understand how anyone can take him seriously. What does he think is going to happen should we continue on this path?

 

[piezoe]

Quote from lfred:

I wonder at what point will any of fine gentlemen debaters point out that 800 billion a year military budget is what is really sinking the US

I'll just wait till someone points that out

I have pointed this out ad nauseum. Always to blind eyes and deaf ears of course. Usually some idiot will respond by pointing out all the "wonderful" benefits we reap from our large military expenditure, such as being able to extort all kinds of concessions from countries that hate us.

 

[shortie]

Quote from piezoe:

I have pointed this out ad nauseum. Always to blind eyes and deaf ears of course. Usually some idiot will respond by pointing out all the "wonderful" benefits we reap from our large military expenditure, such as being able to extort all kinds of concessions from countries that hate us.

cheap oil is the main benefit of US military spending. $10/barrel increase in the price of oil reduces U.S. GDP growth by 0.5%

basically the military pays for itself if it manages keep the oil price under control.

 

[piezoe]

Quote from Random.Capital:

Geithner is absolutely correct, defaulting on debt would crush the economy. But he gives a disingenuous reason - the cause would be an enormous anti-stimulus caused by removal of gov't spending. The elephant in the room is that, since Reagan, the US has an economy fundamentally based on gov't spending. It is as socialist as you'll find in the Western world.

The real question isn't whether the economy is going to get crushed - that's happening no matter what is done - the real question is when, and can a pre-emptive, intentional nose dive allow for a smoother, more controllable descent and subsequent stabilization.

If I was Obama, I would be saying the "right" things publicly, but in private, I would be telling the GOP "go for it", because the Republican Party is as opposed to massive spending cuts as is the Democratic Party.

Strangely I find myself in broad agreement with you, yet I think there is one place where you may have gone wrong in your thinking but reached the proper conclusion in spite of it. When you say: "The elephant in the room is that, since Reagan, the US has an economy fundamentally based on gov't spending. It is as socialist as you'll find in the Western world" It makes me wonder what planet you are on.

There are two statements there that I would take issue with or at least like you to reconsider. One is that Reagan's economy was any less based on government spending then subsequent economies. That is highly questionable since borrowing as a percent of GDP was extremely heavy during the Reagan presidency. The money borrowed was pumped back into the economy largely via the private defense industry, and good times were had by all. However even though tax revenues increased with decreasing tax rates during this time (Reagan was a "supply sider" "trickle down" guy) it is likely that the revenue increases where caused by government borrowing and spending coupled with inflation rather than any effect of lower tax rates. In fact the latter most likely had a small negative effect on revenue if looked at in isolation. Secondly, government spending alone does not a Socialist State create. That requires social spending. The U.S. is an example of an extremely capitalist country that heavily subsidizes the sources of private capital with tax revenues and borrowing. This is hardly a socialist concept. I can't imagine anything that would have been further removed from Karl Marx's mind than the way the USA spends its tax revenues. Virtually everything that can be privatized is privatized in the US, even things that shouldn't be, such as passport issue, and prisons.

To say that "it is as Socialist as you'll find in the Western World." is obviously an incredible overstatement, that you can't possibly mean or believe. I mean, what about Norway, Sweden, Finland, and all of Western Europe and virtually all of Central and South America and Canada? Or don't you consider these countries to be part of the Western World.

 

[piezoe]

Quote from shortie:

cheap oil is the main benefit of US military spending. $10/barrel increase in the price of oil reduces U.S. GDP growth by 0.5%

basically the military pays for itself if it manages keep the oil price under control.

Perhaps that's the same kind of thinking that led to such a marvelous economic outcome for the old Soviet Union.

Is this is an entirely new thesis of yours: military spending is responsible for keeping oil prices under control. Never mind that the U.S. Military is a huge consumer of oil.

Shortie, have you been drinking again?

 

[piezoe]

Maybe the U.S. should try paying for medical care and schools with tax dollars and financing the military with bake sales.