Why Hitting Debt Ceiling is Totally Insane (and why Platinum Coin Easing is “Reasonable”)

People are calling the Trillion Dollar coin, crazy, a farce, and even dangerous, but there is a common, mainstream proposal which is far more dangerous to our economy than the Trillion Dollar Coin.

Over the next page or so, you’ll find out exactly how this seemingly harmless proposal will result in   1,000,000 per month losing their jobs. The total economic impact will rival and perhaps even exceed the worst months of the great depression.

Hitting the Debt Ceiling without using the coin would be catastrophic to the U.S. and world economy.

Catastrophic. 

I first started doing research on this topic because of a post  by Brian Buitler post at the Talking Points Memo. I did not expect the impact to be very bad.

It turns out the impact is way, way, way worse than bad. The impact of hitting the debt ceiling would be catastrophic to the U.S. economy.

Here is the logic:

We have about a $100bn per month deficit.

The fiscal multiplier right now is close to 1.5 for new spending with monetary policy at the zero bound, according to the IMF. But this for ADDITIONAL spending. The multiplier on existing spending is probably higher. Back of the envelope, it probably ranges for 3+ on the first dollar of spending down to 1.2 on the most recent dollar of spending. Call the multiplier 1.8 across the entire range of deficit spending- and I think that is being conservative.

This puts us at 100bn * 1.8 = $180bn per month in impact to our economy. That number sounds like a lot, but we don’t have a good mental image of how much that would impact the economy.

Let’s put it into terms which are easier to understand, like an annual hit to our economy. Annualized, this would be $2.16T for the entire year. This is 14.5% of the U.S. economy! Wow! That is a huge impact.

Next, we know the rough relationship between 1% point of the economy and unemployment through Okun’s Law.

We can use Okun’s law to figure out the change in unemployment given a change in GDP. Okun’s law relates the amount of change in unemployment given a loss to the economy.

We estimate GDP would fall by 14.4%, and the Okun’s law divisor is 1.8.    Therefore a fall in GDP of gives us 14.4%/1.8 = 8% more unemployment! The current unemployment rate is 7.9%, so hitting the debt ceiling would eventually cause 16% unemployment.

How many actual jobs would be lost? That’s easy to figure out. The total non-farm payrolls today is 134 million people. We would lose approximately 8% of this if we shut off deficit spending entirely, which is 10.7 million jobs.

This is probably a high estimate – this would imply losing nearly 1 million jobs per month. But we are certainly talking losses above 600,000 per month. The impact of hitting the debt ceiling would be like the worst months of the great Recession.

This is what shutting off government deficit spending would do to our economy. It would cause 15-16% unemployment, and job losses well above 600,000 per month.

This policy of letting us hit the debt ceiling is casually thrown around, as though nothing bad would happen. Just something to jabber about on CNBC, or Sunday morning talk shows, or threaten in press conferences.

This doesn’t even take into account the impact on financial markets, or the hit to our credibility from shutting down the government. The trillion dollar coin is unusual, but laying off 10 million people and chopping 14% off our economy is way, way crazier.

What kind of insane person would consider doing something like this to the U.S. economy? If a terrorist was able to cause losses 1/100 the size of this, we would declare war, like we did after the twin towers and it’s $100bn of damage to our economy. I guess if it is CNBC hosts dismissing the Trillion Dollar Coin as something that would cause “ZIMBABWE’, it’s fine to joke around with chopping 15% off our economy.

But when sitting Senators say hitting the debt ceiling wouldn’t be bad, I start to get really worried. A senator is one of the most powerful people in the United States. Senators are the individuals who would be directly responsible for making us hit the debt ceiling. It’s like being in a bus with a drunk bus driver who is speeding down an icy road. There is a legitimate reason to be worried.

Here is Senator Pat Toomey:

“A temporary disruption because we have to furlough the workers at the Department of Education, or close down some national parks, or not cut the grass on the Mall, that’s not optimal, it’s disruptive, but it’s a hell of a lot better than the path that we’re on.”

This is a sitting Senator, talking absolute bullshit. He didn’t even bother to look at what the impact of hitting the debt ceiling might be – he literally does not care. He is tinkering with our economy on a massive scale, and can’t even be bothered to do the homework on what might happen. He thinks hitting the debt ceiling would involve furloughing a few workers, and not cutting the grass.

Senator, you are wrong. You are dangerously wrong. Hitting the debt ceiling would be catastrophic.

Hitting the debt ceiling would be so very awful, it is worth it to consider using tactics like a Trillion Dollar coin to combat the crazy. Yes, Peter Schiff and Zero Hedge will scream “ZIMBABWE”. They always do, so why would this be any different.

But people who actually bother to figure out what will happen when the coin is used will realize it should be called Platinum Coin Easing. Using a Platinum coin has nearly identical accounting to quantitative easing, therefore the impact on our economy would be nearly identical to quantitative easing.

Heck, you can ask Ben Bernanke if this is right at the next Humphrey Hawkins testimony. I bet the Beard has already pulled out his notebook and went through exactly how the Coin would work, just to see for himself. It’s his day job, and for once he would have something fun to work through.

If you are a famous economist with a big megaphone, feel free to work through it yourself! Use JKH’s work as a starting point. You’ll see – it’s Platinum Coin easing.

On one hand, we have a policy which results in job losses as large as the worst months of the recent crisis but is supported by sitting senators and goofs on CNBC. On the other hand, we have a policy which has a strange name but allows our fragile recovery to continue. One of these policies is mocked relentlessly in the mainstream, and one is a respected policy stance.

Hitting the debt ceiling is totally insane but a respected policy stance. Hitting the debt ceiling would be catastrophic for our economy. It’s insane, and using a platinum coin is “reasonable” in comparison.

 

Comments
  • wh10 January 5, 2013 at 11:27 pm

    Love the framing at the end.

    • Cullen Roche January 6, 2013 at 1:45 pm

      The thing that frustrates me most about this is how conservatives complain about tax rate uncertainty to no end. But this debt ceiling nonsense also causes enormous uncertainty. So why the contradiction?

      • Greg January 6, 2013 at 2:04 pm

        “The thing that frustrates me most about this is how conservatives complain about tax rate uncertainty to no end. But this debt ceiling nonsense also causes enormous uncertainty. So why the contradiction?”

        Well this debt ceiling uncertainty makes for a potential windfall profit if you get on the right side of the right bet. Cantor probably has shorted Treasuries again (as well as other Congress critters, I chose him because there was an article discussing Cantors portfolio a few months back).

        Wide swings in market prices makes for some very big profit opportunities.

        I wouldnt underestimate this motive. Some people are trying to make up for all their bad years in the last 5 with one black swan type event.

        They dont see an economy with people they only see a market that can be profited from massively.

        • Michael Sankowski January 6, 2013 at 10:26 pm

          At some point soon, the expectations will start to kick in, and the financial markets will begin to react. These people are seriously crazy.

          • Greg January 7, 2013 at 4:19 am

            Do you agree that this might be the goal of some of these people Michael?

            • Michael Sankowski January 7, 2013 at 8:49 am

              I don’t know. My guess is that they underestimate the impact. They really believe government spending takes money from the economy, so the economy will run better without the government spending. They think hitting the debt ceiling will cause an economic boom, not a massive recession.

              My guess is that the people most responsible for the debt ceiling crisis don’t have a good grasp of what will happen in the financial markets.

              I do not think many people are looking at the volatility as a welcome thing. Some traders yes, but most good traders think about trades in terms of probabilities. So you’ll have a scenario happening with x% chance, and if that happens, then the markets will do y, and this trade will make money z.

              We’re at very low volatilities right now in the stock market. the currency markets have been in a range for years – enough that I mostly stopped covering them. The bond market is frozen near highs.

              So overall, I don’t think “adding volatility” is a major goal. However, I’ve been fooled by before. Mosler says the republican leadership has a good grasp of the principles of MMT. I wrote a post about using MMT for evil back at the traders crucible.

              http://traderscrucible.com/2011/02/25/using-mmt-for-evil/

              I don’t support MMT like I used to, but MMT is still a far better way to understand the economy than mainstream econ.

    • Michael Sankowski January 6, 2013 at 9:46 pm

      Thx wh10.

  • Cullen Roche January 5, 2013 at 11:36 pm

    Great post Mike. I hadn’t thought of it that way. The media respects the idea of using default to push policy (which, as you noted, would have HUGE negative effects on the economy) and they disrespect the coin idea, which, while gimmicky, would have almost no negative impact on the economy.

    Bizarre.

    • Michael Sankowski January 6, 2013 at 9:55 pm

      Thanks C, JKH wrote something about the lack of analysis on what the Trillion Dollar coin would actually do, and it pushed me to finish this article.

      I’ve been thinking a ton about your idea on the credibility of countries – it almost seems to me like part of the reason countries cannot spend their way to wealth is a lack of credibility of the government, so running a mercantilist strategy takes credibility (in the form of money) from credible countries.

  • Clonal Antibody January 5, 2013 at 11:58 pm

    Mike,

    I think you are underestimating the impact as you go longer than 2 months. This is because you have not looped in the effects of declining tax revenues – which is what will happen as the economy spirals downward. See what is happening to Greece.

    • Michael Sankowski January 6, 2013 at 8:29 am

      Clonal,

      You are totally correct. I should have known this too, because I have read this post by Kash Mansori many times in the last two years.

      http://streetlightblog.blogspot.com/2011/05/some-simple-deficit-reduction.html

      I’ll figure out the algebra and put in an update at some point today.

      • Clonal Antibody January 7, 2013 at 10:36 am

        Mike did you work out the additional impact? Assume that gross tax collection is a fixed percentage of monthly GDP with a one month lag.

  • PeterP January 6, 2013 at 9:13 am

    You guys are so wrong. Just ask Scott Sumner, set the NGDP target 4% up and presto! He always says that austerity is irrelevant and can always be offset by the CB announcing the NGDP target. Remember, they have a bazooka! Nobody has seen it, but Nick Rowe says it is a really big bazooka, gotta trust professionals.

    • Cullen Roche January 6, 2013 at 10:56 am

      +1

  • Matt Franko January 7, 2013 at 5:42 am

    Mike,

    We already hit the debt ceiling on Dec 31. $16.394T and holding.

    Looks like assuredly based on the politics we will be in this status until the end of February.

    And we ran a 20B surplus in December.

    So that 1.1T annual deficit number represents the whole year ok but on a month to month basis, there have been some wild swings.

    It will be interesting to see if that Okuns Law thing is apparent in the data for the next 2 months as the $100B/mo by definition will not be available.

    rsp,

    • Michael Sankowski January 8, 2013 at 9:45 am

      Matt,

      We are living on borrowed time – the treasury is using emergency measures to finance government. The drop dead date is somewhere between Feb 15 and March 1

  • Cowpoke January 7, 2013 at 10:47 am

    Isn’t this end of world a bit over blown?
    I could get it if the US govt was printing the 100 billion a month and adding it to the system. However, they are just realocating money already in play.
    So the money will be at work doing somthing regardless if Uncle Sam grabs it for political pork projects.
    Won’t It?