Is our 1937 moment in the not too distant future? It’s beginning to look that way. House Republicans are using the debt ceiling debate as their bargaining chip to “cut, cap and balance”. According to The Hill this means:
Cut — Substantial cuts in spending that will reduce the deficit next year and thereafter.
Cap — Enforceable spending caps that will put federal spending on a path to a balanced budget.
Balance — Passage of a balanced-budget amendment to the U.S. Constitution — but only if it includes both a spending limitation and a supermajority for raising taxes, in addition to balancing revenues and expenses.
Of course, this is all being done in the name of avoiding our inevitable insolvency (there’s no such thing as the USA running out of the currency it has a monopoly supply of, but that’s for another discussion). As I’ve previously mentioned, when the private sector is desirous of paying down debt and acquiring increased savings that savings must come from somewhere. The result of the balance sheet recession is that spenders have been forced to to turn into savers. As the MMT work on sectoral balances proves, this savings must come from the foreign sector or the government sector. With the US now running a current account deficit of 4% it is imperative that the government sector run a deficit in excess of 4% in order for the private sector to be able to save. If this were not the case, the private sector would be forced into deficit and the economy would contract. This occurred repeatedly in Japan in the 90′s and is currently occurring in the periphery nations of Europe. Austerity is not helping as so many said it would in 2008. Instead, it is causing near depression throughout the region. Were it not for 10% budget deficits in the USA you can be certain that we would be suffering a similar economic decline. Fortunately, we have not allowed ourselves to be scared by the persistent fear mongering with regards to our imminent (mythical) insolvency.
Cut, cap and balance is genius politics if you’re trying to send President Obama out in 2012 as the worst President of all-time, but it’s awful economics (yes, it was awful economics under Clinton as well) and the equivalent of walking the US economy out on the plank. The details here are still early in the making, but if we do indeed pass harsh cuts and enforce a balanced budget amendment in the coming years I would get extraordinarily bearish on the outlook for the US economy. 1937 here we come?
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.