On The Debt Ceiling & Drowning the Government in the Bathtub

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The mainstream coverage of the debt ceiling standoff and the prospect of government shutdown and how that thing is seen by the people who might precipitate it is predicated upon a fundamental misunderstanding. To the Tea Partiers and Grover Norquist-Ted Cruz-Rand Paul wing of the Republican Party, a government shutdown is seen less as a potential disaster in which markets and society are sent into turmoil, and more as a potential wonderland of enforced austerity where with the government handcuffed, the creative forces of the free market are finally unleashed.

The libertarian financial analyst Mish Shedlock exemplifies these sentiments:

Looking for a reason to support a government shutdown? If so, please consider Obama Stripped to Skeleton Staff in a Government Shutdown.

Mish points to the austerity measures the government would be put under:

 A U.S. government shutdown means President Barack Obama will have fewer people to cook meals, do the laundry, clean the floors or change the light bulbs, according to a White House contingency plan.

About three-fourths of president’s 1,701-person staff would be sent home. The national security team would be cut back, fewer economists would be tracking the economy and there wouldn’t be as many budget officials to track spending.

Of the total, 438 people work directly for the president. Under a shutdown, 129 could continue working, according to the contingency plan.

Biden, who has a staff of 24, would have had to make do with 12.

Obama’s national security staff of 66 would be cut to 42. Similar staff cuts would be imposed at the White House Office of Management and Budget, the Council on Environmental Quality, the Council of Economic Advisers and the Office of National Drug Control Policy, which are all part of the president’s executive office.

Mish concludes:

Fantastic Idea

If you think that a government shutdown is a fantastic idea (I sure do), then please contact your elected representatives and let them know.

But there are at least two other factors beyond simply wanting less government that may make a government shutdown and debt default attractive to the Tea Party wing.

The first of which is that the austerian worldview exemplified by the Wall Street Journal editorial page — in which large-scale deficit spending was expected to precipitate soaring interest rates and inflation — has largely been proven wrong by events. Interest rates and inflation have remained low. The Tea Party wing of the Republican Party now has an opportunity to try to make their initially wrong predictions come true by throwing the United States into default on its debt, and sending a message to markets and international investors that the US government and US Treasury debt is not a safe asset. Whether or not a government shutdown would actually result in a debt default (the Treasury would under such an eventuality likely prioritise debt service), and whether this would actually lift interest rates significantly are other matters, but shutting down the government and defaulting on the debt would certainly enforce austerity which is what the Republicans and especially the Tea Party wing want.

The second — and perhaps the greater factor — is the desire to prevent Obamacare taking effect. Now, I am not convinced that Obamacare can bring down healthcare costs as much as a Canadian-style or European-style system. Obamacare is certainly not an ideal system, although its earlier implementation in Massachusetts does appear to be fairly successful . But it does bring the United States much closer to something approaching universal coverage. With the message of the last Republican election campaign being that 47% of the population (the “takers”) is mooching off 53% of the population (the “makers”), Obamacare is seen by the Tea Party wing and probably the Republicans in general as the last turning point on the road to socialism. And avoiding the implementation of Obamacare is something that, I think, the Republican Party and especially the Tea Party wing will go all out to do.

Now, how far the Republicans are willing to go down this road remains to be seen. The more moderate wing may be willing to settle for a deal that avoids government shutdown in return for increasing the pace of austerity. But the impending implementation of Obamacare, and the general attraction of a government shutdown will strengthen the will of the Tea Party wing to not negotiate.

Personally, while I do think we are in the long run headed toward a world of increased decentralisation and a lesser state role (primarily as the result of technology), I don’t think a government shutdown will do anything to advance the cause of human liberty. In fact, I think a longer-term shutdown would probably end in civil unrest — a lot of people are dependent on government spending for income — and market turmoil (not least because markets seem to have priced in an easy resolution to the standoff). So the standoff will almost certainly end in a deal permitting a debt ceiling increase. How much carnage will occur before then remains to be seen.

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Japanisation & the Zombie Apocalypse

America and Japan’s responses to their housing blow-ups have been eerily similar. So too have been the results.

As I wrote in August:

Essentially, in both the United States and Japan, credit bubbles fuelling a bubble in the housing market collapsed, leading to a stock market crash, and asset price slides, triggering deflation throughout the respective economies — much like after the 1929 crash. Policy makers in both countries — at the Bank of Japan, and Federal Reserve — set about reflating the bubble by helicopter dropping yen and dollars. Fundamental structural problems in the banking system that contributed to the initial credit bubbles — in both Japan and the United States — have not really ever been addressed. Bad businesses were never liquidated, which is why there has not been aggressive new growth. So Japan’s zombie banks, and America’s too big to fail monoliths blunder on. Policy makers “saved the system”, and ever since then have gradually dealt with slowdowns through monetary and fiscal easing.

Today Zero Hedge provide some empirical evidence for just how similar these events have been.

Stocks have followed broadly the same crisis-bailout-crisis-bailout pattern:


Money velocity has slouched at a similar rate:


Equity values relative to earnings have not recovered in either nation:


Some of those among us may say that all of this shows that Japanisation really isn’t that bad: with an ageing population, and powerful vested interests demanding consistently high government spending in spite of falling real incomes and falling real estate values, we’re about to head into a 15-year deflationary tunnel. “It won’t be pretty”, they say, “but it will be liveable.”

I think they’re wrong.

So what’s the key difference between America and Japan?

Look at the difference between Hurricane Katrina, and Fukushima.

From NewsFlash.org:

Reuters reported that Yakuza gangs have been sending trucks from the Tokyo and Kobe regions to deliver food, water, blankets and toiletries to evacuation centres in northeast Japan, the area devastated by the March 11 earthquake and tsunami which have left thousands of people dead and missing.

Not to glorify the Yakuza by any means, but compared to the looting and violence in New Orleans that followed Hurricane Katrina in August 2005, this speaks volumes about the enormous difference between Japanese and Americans in coping with natural crises or disasters.

Shortly after Hurricane Katrina left, some residents of New Orleans who remained in the city started looting stores in search of food and water that were not available to them through other means. There were also reports of carjacking, murders, thefts and rapes in the city, although many of these reports were found inaccurate due to the confusion. Then Louisiana Governor Kathleen Blanco had to temporarily deputize members of the National Guard and other federal troops to quell the looting and rioting. The governor said: “They have M16s and are locked and loaded. These troops know how to shoot and kill and I expect they will.”

Essentially Japan’s culture is a (largely) moderate, deferential, conformist, self-negating and (most importantly) united nation.

America is (largely) individualistic, greedy, bitchy and (most importantly) disunited.

From Colin Woodard’s sensational series of posts about America for Bloomberg:

The U.S. is wracked by internal discord between two blocs formed by seven of its 11 regional nations — the conservative bloc that includes the Deep South, Tidewater and much of greater Appalachia, pitted against the more liberal alliance of Yankeedom, New Netherland, the Midlands and the Left Coast. Increasingly, through American history, the conflict between these two blocs has been driving the nation apart.

The country has been exhibiting the classic symptoms of an empire in decline. Kevin Phillips — the political strategist who, back in 1969, used regional ethnography to accurately predict the ensuing 40 years of American political development – – has pointed out parallels with late imperial Holland and Britain. Like its superpower predecessors, the U.S. has built up a staggering trade deficit and sovereign debt while overreaching militarily. As financial services have come to account for a larger and larger share of national output, religious extremists have come to play a bigger and bigger role in political life.

Once a great exporter of innovations, products and financial capital, the U.S. is now deeply indebted to China, on which America relies for much of what it consumes and, increasingly, for the scientists and engineers who are needed by research and development firms and institutions. The U.S. citizenry is divided along regional lines. The country’s military has been mired in expensive and frustrating counterinsurgency wars in Mesopotamia and Central Asia, while barbarians have stormed the gates of Washington and Wall Street, killing thousands in the surprise attacks of September 2001.

Add in the damage to public confidence in the electoral system caused by the 2000 election, the near-total meltdown of the financial sector in 2008, and extreme political dysfunction in the capital, and it’s clear the U.S. hasn’t started the 21st century auspiciously.

Simply, America will blow up into secessionism, class warfare and civil unrest before standards of living for the middle class drop by anything like they have in Japan. The people will get mad as hell, and they just won’t take it anymore. They only hope for America is some kind of real recovery, coupled with new growth, and less dependence on foreign energy and goods. But with a zombified Japanised economy consisting largely of bailed-out uncompetitive failures there is little hope of that.

Civil unrest, followed by secessions, followed by a Second American revolution, is a far more likely scenario.