If That’s a Supercommittee, What Does One with Normal Powers Look Like?

November 14th, 2011 at 10:57 am

The WaPo had a good update on the issue but I wanted to clarify one point that I think has been muddied in much analysis.

The deficit-reduction supercommittee could always pull a rabbit out of a hat, I guess, but the likelihood of anything but gridlock has been low from the beginning.  I give the R’s some credit for breaking the no-tax-increase-ever pledge, but their offer is so fundamentally unbalanced–$300 billion in revenue increases from closing expenditures in exchange for rate cuts that will amount to almost $4 trillion in tax cuts—that it can’t taken seriously.

But my point here is about something else.  There’s a meme developing that if the committee were to gridlock, markets would react badly, interest rates would rise, and the message that “US=Greece” would be clear to all.  To which I say: nonsense.

In fact, I’d encourage you to generally respond to the statement: “if X happens, markets will react badly” with a healthy dose of skepticism.  Half the time, this formulation is scaremongering, used to garner support for your side.  And the other half, even experienced analysis don’t know how the market will react (remember the S&P downgrade–interest rates on US Treasuries fell after the announcement…go figure).

Most recently, the landscape is littered with Chicken Little warnings about the impact of current US levels of indebtedness on interest rates.   At the end of the day, these alarmists do a lot more harm than good, because someday Chicken Little will be right, and no one will listen to him.

In this case, market players have of course priced in the possibility of the Supercommittee failing to agree on a plan.  I’m not saying these players are all-knowing or even particularly rational, but if they haven’t figured out that gridlock is the likely outcome, they’ve got no business betting on markets.

And, of course, the trigger mechanism is there to ensure $1.2 trillion in savings over ten years.  But here’s the thing—and my readers know I’m as far from Chicken Little as you can get.  I take this warning more seriously than the “gridlock=doom” meme:

“…analysts are deeply concerned that lawmakers could “de-trigger” the automatic cuts, undoing even the modest steps Congress has so far taken to tame the soaring debt.”

If the Supercommittee fails and Congress takes apart the trigger, that could send a worrisome message to markets that our politics are even more dysfunctional than people thought.  I’m not saying that I’m sure markets will react badly—my knee continues to jerk with skepticism re the “it will tank the markets!” fear-mongering.

I’ve also been outspoken about the undemocratic nature of the whole process and the ineptitude of the Congress to do their job as a full legislative body and craft a balanced, sustainable budget.

But if they gridlock and de-trigger, I’ll be nervously watching the interest rates on T-bills.

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11 comments in reply to "If That’s a Supercommittee, What Does One with Normal Powers Look Like?"

  1. foosion says:

    >>I give the R’s some credit for breaking the no-tax-increase-ever pledge, but their offer is so fundamentally unbalanced–$300 billion in revenue increases from closing expenditures in exchange for rate cuts that will amount to almost $4 trillion in tax cuts—that it can’t taken seriously.>>

    How does a $3.7 trillion net tax cut break the no-tax-increase-ever pledge such that the Rs deserve any credit?


    • Evan says:

      Indeed. They haven’t broken their pledge. The Iron Law of Norquist forbids any net tax increase; it’s perfectly okay to raise taxes on some people as long as you cut them more on other, preferably richer, people.


  2. cat says:

    “If the Supercommittee fails and Congress takes apart the trigger, that could send a worrisome message to markets that our politics are even more dysfunctional than people thought. I’m not saying that I’m sure markets will react badly—my knee continues to jerk with skepticism re the “it will tank the markets!” fear-mongering.”

    Where exactly would the Confidence Fairy tell Mr Market and the Invisible Bond Vigilantes to take their money instead of the US? Canada? Sweden?

    The other major industrial nations are in worse shape then us and making worse decisions then the US even if we move from the shallow end of the austerity pool to the deepend.

    Its a shamer really, but we squandering the chance to stop running our economy for the benifit of a few hundress thousand people with the least amount of economic fallout as we could print several trillion dollars by issueing bonds at extremely low rates.


    • MNP says:

      I don’t see how you can say Canada is in worse shape than the US. That said, it simply can’t absorb that kind of money due to the size of its economy, so you’re right in the end.


      • cat says:

        Sorry, I didn’t mean to say Canada or Sweden were in worse economic shape then the US.

        I meant to say there is no economony thats in good shape that could absorb US investor flight without its economy catching fire and not in a good way.


    • Evan says:

      I rather agree. There is simply nowhere to run. When investors get spooked, they flee to the safety of T-bills. Where can they flee from T-bills? Where can you park your money that would be safe in the event of U.S. default? Gold? Please.

      Moreover, interest rates aside, the scenario where the supercommittee deadlocks and Congress then dismantles the “trigger” looks like a damn fine deal to me. We know austerity is the exact wrong medicine in the current situation. The trigger is a hefty dose of austerity. Any deal that comes out of the supercommittee will also be a hefty dose of austerity. So I can’t bring myself to be too upset about the possibility that all that austerity won’t happen.


  3. Mogden says:

    The sad part is that the goal of the supercommittee is so far less than what needs to be done that it is absolutely preposterous. We need an immediate 50% whack in all federal spending of any type.


  4. Dan Furlano says:

    The stock market will tank and treasuries will drop due to excessive demand.

    Basic MMT proven yet again.


  5. Michael says:

    Anyone who “knows” what the markets will do is too busy making fistfuls of money to tell you about it.


  6. Stephen Edie says:

    Treasury bond rates will stay put even if Congress kills the triggers. What would bond-holders choose to hold instead? Fed could always exchange unwanted bonds for more cash. Anyway, the only real way our government could default is by willfully refusing to pay its bills. Oh yeah, that almost happened a few months ago (how much more dysfunctional can you get?), and the T-bond market didn’t even flinch.


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