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Page added on October 10, 2013
Heinberg: Shutdown and default: the worst-case scenario
I’m not saying the worst is going to happen. But if it does, matters could get depressingly bad, disturbingly fast.
How bad? Start with Treasury Secretary Jack Lew’s estimate of the potential damage from a failure by Congress to increase the nation’s borrowing limit. On Sunday morning’s TV talk shows, he pointed out that credit markets could freeze, the value of the dollar could plummet, and US interest rates could skyrocket. Think 2008 all over again. [http://www.csmonitor.com/USA/DC-Decoder/2013/1006/Congress-playing-with-fire-on-debt-limit-warns-Treasury-Secretary-Jack-Lew-video]
The Lincoln Memorial closed during the United States federal government shutdown of 2013. (Source: Flickr user reivax via Wikimedia Commons)
But it’s actually much worse than that. Almost nobody in the commentariat mentions that the US economy is currently being held together by deficit spending and quantitative easing. Rapid economic growth as experienced during the mid-20th century is over and done with. [www.ted.com/talks/robert_gordon_the_death_of_innovation_the_end_of_growth.html] However, our financial system is set up to require constant growth. This is a serious problem, and the only solution anybody has come up with so far is for the Federal government and the Federal Reserve to purchase a few more years of ersatz growth with borrowed money. Financial markets would crash without a constant injection of quantitative easing (QE), and Main Street would wither without monthly deficit-funded infusions from Washington. Absent ongoing stimulus (which is admittedly not a permanent solution), we would be hurtled back to the deflationary hell of five years ago. It’s hard to see how a US government debt default could fail to get us there.
That’s just the potential economic fallout from default. The possible political consequences are almost as unfathomable. According to Jonathan Chait, writing in New York Magazine, the current Democrat-Republican impasse is actually a foreseeable, if not inevitable, outgrowth of the American political system, with its division of power between a separately elected President and Congress. [http://nymag.com/news/politics/nationalinterest/government-shutdown-2013-10/] Chait cites the opinion of the late Spanish political scientist Juan Linz that “All such systems are based on dual democratic legitimacy: No democratic principle exists to resolve disputes between the executive and the legislature about which of the two actually represents the will of the people.” The current standoff, in which both sides believe they have an enormous amount to lose by compromising, could—again, in the worst instance—come to represent the most serous constitutional crisis since the Civil War.
There are also looming geopolitical repercussions. If the United States defaults, other nations may ditch the US dollar as reserve currency. That would have serious ongoing consequences for the American economy, but it would also reduce the nation’s international political clout. Last week, President Obama had to cancel a key Asian trip to deal with the domestic shutdown crisis. Chinese leader Xi Jinping did show up as scheduled, looking confident and in charge. The US empire has been fraying for the past decade anyway; default could speed that process dramatically.
In the worst case, the United States could emerge from the current political crisis in a way that renders it, only months from now, economically and politically unrecognizable.
Again, none of this is inevitable. Cooler heads may prevail. But the worst-case scenario is hardly far-fetched. Look at the incentives.
Congressional Republicans have boxed themselves into a corner. By taking the nation’s government and economy hostage and making heavy demands, they incur high political risks. They stand to lose power and legitimacy unless they come away from the confrontation with some tangible gain they can trumpet to their base. (Indiana Republican Congressman Marlin Stutzman: “We have to get something out of this. And I don’t know what that even is.” [http://talkingpointsmemo.com/livewire/gop-congressman-says-he-doesn-t-know-what-republicans-want-in-shutdown-fight]) The higher the price the country pays for the standoff, the greater the Republicans’ need for some reason to say it was all worthwhile.
Meanwhile Mr. Obama believes that if he gives in to Congress, a precedent will have been welded into place. Every time the debt ceiling needs to be raised, there will be opportunity for Congress to make further demands. Elections will cease to matter. Obama probably regrets his negotiations with Congress in a similar standoff in 2011, which resulted in the Sequester. The current dispute is not just about Obamacare. It is about maintaining the scope of presidential power in the face of a congressional effort to dramatically reduce it. Obama’s historic legacy is at stake.
In a better-case scenario, and a more likely one, the standoff is resolved before the nation defaults. The Tea Party’s big-business backers are already yanking its leash. [http://maddowblog.msnbc.com/_news/2013/10/09/20886987-gop-losing-powerful-allies-in-hostage-crises?lite] President Obama has offered House Republicans the possibility of a short-term debt-cap increase and funding of the government to make time for negotiations; while House Speaker Boehner initially rejected this, it is probably the best face-saving measure available.
However, if both sides hold firm and the nation defaults, we’re headed into uncharted territory. And only an understanding of ecology (as well as politics and economics) reveals the true dangers ahead.
Back in the early 1970s a famous computer-assisted study of the physical systems that support economic growth (agriculture, natural resources, and the ability of the environment to absorb pollution) concluded that world industrial output would likely peak and decline in the early 21st century. [http://en.wikipedia.org/wiki/The_Limits_to_Growth] That study, which has been validated by recent research, [www.csiro.au/files/files/plje.pdf] did not consider the roles of financial or political systems.
At first economists scoffed at the idea that economic growth might not continue forever. But today, one by one, economists are beginning to recognize that, as Stephen B. King, chief economist at HSBC wrote in a recent New York Times op-ed, “We are reaching end times for Western affluence.” [www.nytimes.com/2013/10/07/opinion/when-wealth-disappears.html?pagewanted=1&_r=0]
In 2008 it became clear that, as limits to growth are encountered, the inherent instability of financial systems can precipitate a much faster crash than would otherwise be the case. It also became clear that governments and central banks will undertake extraordinary measures to avert a fast-crash scenario. The rapid expansion of household debt, which had kept the growth balloon inflated since 1980, effectively ceased with the advent of the Great Recession. The balance sheet of the Fed stretched dramatically, and the Federal Government’s debt levels soared, as policy makers strove to keep the economy from imploding.
But government debt quickly became a political hot potato, and that helped lead us to the present impasse.
In 2013 we are learning that the US political system is rigged in such a way that backstops against a fast financial crash may fail.
Some aspects of our 21st century dilemma are inevitable: you can’t run an ever-growing economy on non-renewable resources without eventually facing symptoms of depletion and scarcity (e.g., high oil prices). Some aspects are slowly cumulative, like the buildup of greenhouse gases in Earth’s atmosphere and the consequences for ecosystems that support life on our planet. But we also face looming crises brought on by the design of our political institutions, and by the personalities and tactics of specific leaders. One would hope that these latter crises could be more easily averted than those tied to the very sinews of our industrial way of life.
We can’t prevent some unfortunate results of processes that humanity set in motion decades ago: we’re already committed to a certain amount of climate change, given past greenhouse gas emissions; we’ve already unleashed a mass extinction event and made a wasteland of the oceans. But we can avoid the worst-case scenario. Here’s what to do: Release the hostages. Pass a new debt limit and re-open the government, no conditions attached. Then get to work designing a post-growth, post-fossil fuel economy that protects people and planet. Do it in that order. Simple. Go to it. Hello, Washington, anybody listening?
18 Comments on "Heinberg: Shutdown and default: the worst-case scenario"
action on Thu, 10th Oct 2013 8:05 pm
Speaking of the political/economic component, growth can’t go on forever, obvious and true, it’s time for the fat trimming to ramp up and weed out those not strong/smart enough to make it through the coming recession. Growth is the enemy here, especially when it’s composed of complete morons, there will be casualties, deal with it.
DC on Thu, 10th Oct 2013 8:10 pm
It is good to see Mr Heinberg paying some attention to the social construct side of things. IE fiat-wealth-debt systems. But it only stands to reason if the physical systems that drive endless growth are unsustainable and must eventually crash, then it stands to reason the economic systems that prop it up are equally suspect.
Some PO’er seem to believe that physical PO is valid and decisive action is needed to avert it worst effects down the road, but seem to hold on to the idea that all for-profit capitalism needs is at best, a few minor tweaks and cosmetic makeovers around the edges.
Political and economic systems can easily collapse and go into crisis states even in cases where resources are not really in short supply. We see this many times in history.
However, no economic system can or has survived genuine resource shocks. Be it actual shortages, or rising prices, whatever the cause, fragile economies will always be shook by resource depletion. The current circus in the imperial capital is not about so-called ‘democrats’ vs alleged ‘repubs’. Rather it is visible manifestation of the simple fact the empire is bankrupt.
While resources stolen from the world at below market rates continue to flow more or less un-impeded into the ‘heartland’, the rest of the world is slowly demanding a greater share-and bidding up the costs.This non-military form of competition does not sit well with the US. An empire used to securing resources on its own terms via coups and military invasions and coercive ‘free-trade agreements’ is having a hard time coping. Why do you think in all this yapping in washington, the US military has not once been brought up? Well because that military is ‘needed’ to deny other nations their share of the worlds resources at market rates of course. Cant do that if there starved of funding.
But people starved of basic health care and even food, well that’s all fine and dandy to the Bohners and Mitch McConnell slugs in the farcical US political system.
As this trend moves forward, expect more and more instability in the corrupt amerikan capital.
Dave Thompson on Thu, 10th Oct 2013 8:47 pm
The international corporate bankers military industrial media complex owns you and me and the entire planet for that matter. Global noncompliance will only be to late.
J-Gav on Thu, 10th Oct 2013 10:39 pm
Dave – “Global non-compliance” would be welcome whenever it appeared but I wouldn’t hold my breath.
DMyers on Fri, 11th Oct 2013 12:07 am
Heinberg is all wrong on this one. He should be siding with the Republicans. I’m not disputing that it may be all rhetorical, but it should be a sincere movement. Someone needs to stand up and say, “enough! we’re bankrupt, there ain’t no free lunch!”
This government debt is all about perpetuating the system that Heinberg detests. It’s all about consuming more than there is.
Rather than advocating opening the debt spigot, Heinberg should be advocating a reduction in expenditures. It has to start somewhere. You can’t have it both ways.
BillT on Fri, 11th Oct 2013 3:44 am
The US Military takes 57% of the disposable US budget. It is often posed as only 18% by putting SS and the Meds in the pie, making tHEM look like the guilty parties, but they are funded by separate tax revenues and are NOT part of the budget.
You disagree? Do some research and find out for yourself, like I did.
As for the theater in DC … that is all it is. It may delay your next S.S. or Meds payment, but that is all. Eventually, the system is going to crash and burn, but not recover like the fictitious Phoenix. I hope you are preparing for that day, no matter what country you live in. Especially if it is a Western one. I am.
GregT on Fri, 11th Oct 2013 5:30 am
Some excellent comments above, much to consider.
The sooner people figure out that the entire ‘republicans vs democrats’ theatre won’t solve anything, the better. Both parties have contributed their fare share to the debt.
We are all living beyond our means, and it is only a matter of time before our debts will need to ‘repaid’. The longer we drag this out, the worse the consequences will be.
Stilgar on Fri, 11th Oct 2013 7:01 am
“This is a serious problem, and the only solution anybody has come up with so far is for the Federal government and the Federal Reserve to purchase a few more years of ersatz growth with borrowed money. Financial markets would crash without a constant injection of quantitative easing (QE), and Main Street would wither without monthly deficit-funded infusions from Washington.”
DC politicians need to admit they committed too much outlay over the years when oil was cheaper and growth higher. Start reducing every outlay across the board, but also reduce defense. Somehow defense went from around 300b during Clinton to something now like 750b?
Also taper QE 5b a month until it is gone.
Let’s stand on our own two feet and see where the chips fall. People with their household budgets do it all the time. This is what we have, so this is what we spend. No gimmicks, special compensation, extra hoopla, pork barrel gifts or any other dumb ass giveaways that get us into fiscal trouble.
The problem is in spite of tightening our belts, the problem of resource depletion with it’s higher prices, is this oil age game can only go on so long. But all those people aren’t going anywhere, so what gives when shtf? Like BillT puts it, start preparing.
Arthur on Fri, 11th Oct 2013 11:23 am
Political correct lefty Richard Heinberg is (probably deliberately) missing the point about the true nature of the current stand-off in Washington. The Republicans are not held hostage by the non-existing ‘big-business backers of the Tea Party’, but by their own angry white voters for a change, they no longer can ignore, like they did for decades. True grass roots democracy finally arrives in lobby-ridden Washington. The real issue is the vast transfer of Obama-care wealth from the republican voting white middle class (Tea Party) to the democrat voting ‘under class’, many of whom are immigrants. Euro-America chose to ignore mass immigration that started in 1965, but now can no longer be ignored, because the bills are coming in, big time. It still is portrayed as a Dems/Reps issue, and at first sight it is, but in reality it is an underlying racial split. The Republican party is the white party, that does not want to be called as such, but in reality it is. No wonder Heinberg does not want to touch that tricky subject and prefers to risk-free blame ‘big business’ instead. Not even the great Pat Buchanan wants to touch the racial issue when he hints today that the US better fall apart like the USSR:
http://www.lewrockwell.com/2013/10/patrick-j-buchanan/secede-3/
…because, you see, “The five counties of Western Maryland — Garrett, Allegheny, Washington, Frederick and Carroll, which have more in common with West Virginia and wish to be rid of Baltimore and free of Annapolis”.
I have no idea how the current conflict is going to be resolved in the short term, probably raising the debt limit against postponing or a watered-down Obama-care, but that is by no means certain. But everybody knows that the current situation is financially not sustainable, even without resource issues.
US history can be divided in three sharply distinct periods:
– 1492-1776: European colonialism. Competing New Netherlands (Nieuw Amsterdam) and New England (Boston) projects, French presence (New Orleans, Detroit, Baton Rouge), Spain owning western America. Peter Stuyvesant, Pilgrim Fathers.
– 1776-1913: American Independence. Tea Party 1.0. Jefferson, Washington, Philadelphia, Declaration of Independence, Constitution, Statue of Liberty, isolationism, mass immigration from Eastern Europe, including Jews. Rise of the oil age on American soil first.
– 1913-present: Zionist colonialism. Federal Reserve. Zionist organized US WW1 entry. Zionist takeover of media and Wallstreet. The warnings of Henry Ford. Diplomatic recognition of the USSR in 1933, preparing the coming globalist US-USSR alliance. Roosevelt-Churchill conspiracy, pushing Britain into war guarantee to get WW2 kicked off. Globalist US-USSR victory over nationalism. Zionist organized Nuremberg trial –> holo-story as the intended religion of the NWO. Stalin’s post-war refusal to cooperate with a Zionist-run NWO, leading to cold war between the two globalist powers. After the death of Roosevelt a last surge of Euro-America (McCarthy and Kennedy clan). Zionist organized killing of JFK, cementing Zionist power. Zionist inspired 1965 immigration act to recreate Euro-America into a blueprint of the intended One World NWO, a communist world without nations and borders, run from Washington, New York, London and Jerusalem.
Now America is entering a fourth period. The rise of China, post-Soviet Russia and a united Europe ensure that the NWO is dead in the water. There are two competing models on offer for the future of the US:
1) neo-Bolshevik. Consolidation of Zionist power on US soil. Abolishing of the Constitution and gun-ownership. Forced integration between races. Massive shift of wealth from whites to others. End of free speech, criminalization of holocaust-denial.
2) neo-Constitutional. Republican party morphs into the White Party. Tea Party 2.0 wins. The 2nd period of American Independence and isolationism. Jesse Ventura, Ron Paul, Alex Jones, PCR, Buchanan, Richard Gage provisional government. Reopening of official 9/11 investigation. Smashing of Zionist power. Secession and re-confederation of Euro-American majority states. Abolishing of the Fed, NSA, CIA. “Brussels DC” –> merely 1% US GDP via Washington, 30,000 federal employees. Alliance with Europe and Russia (Northern Treaty Organization NTO), loosely/vaguely defined as ‘white Christian’. Abolishing of the concept of ‘the West’ in favor of ‘the North’, in clear opposition and defense against the oncoming hordes of the rising South. Dismantling of the MIC. Far-reaching disarmament agreements with China, the only serious Other Entity.US retreat behind pre-1836 borders. Return of Mexican majority states to Mexico. Ruthless opening of Washington and Moscow WW2 archives.
BillT on Fri, 11th Oct 2013 11:42 am
Arthur, you keep insisting that Europe is not in any problems. Truth is, they are joined at the hip with Washington DC. The Entire European system is underpinned by the same printing by the US Fed as the US and the rest of the West is. When the US goes down, Europe will be right behind. Europe is bankrupt, just like the US.
The Elite are out to destroy the middle class, of which you are one. The whole system is being primed for a crash. Then they plan yo jump in with their one world system and take over. Mother Nature may have something to say about that. Even sooner than they plan.
TIKIMAN on Fri, 11th Oct 2013 12:10 pm
OBAMA IS A NAZI
Arthur on Fri, 11th Oct 2013 6:45 pm
Bill, nowhere do I say that Europe is without problems. If the financial system in the US collapses, so it probably will in Europe as well, just like Europe was very connected to the Lehman crash in 2008. But a financial collapse does not automatically mean a collapse of the society as a whole, see Argentina, Russia and Iceland as recent examples. Life will go on, both in Europe and the US.
And I do not expect an intervention of Mother Nature any time soon:
Europe, October 11, 2013:
http://www.planetski.eu/news/5394
DC on Fri, 11th Oct 2013 9:01 pm
And the EU would likely avoid a lot of the worst effects of the US collapse IF it would only declare its independence from the US of Terror and eject it military and banks. It would not prevent or stop all problems-but its a vital first step.
BillT on Sat, 12th Oct 2013 2:53 am
I suspect that Europe is going to have more problems than you expect, Artur. Can it feed itself? Does it have gold to buy gas from Russia to keep from freezing? What about the millions of refugees from the ME and Africa that are going to flood north when their food stops?
The collapse will not only affect banking and cash flow, but the ability to exist without imports or exports.
mike on Sat, 12th Oct 2013 7:39 am
I can say with some confidence that the US will never declare itself bankrupt. Another country may declare the US bankrupt but as long as the US dollar is the reserve currency they will just keep on printing. This government shut down will end just at the final hour and there will be a huge sigh of relief by everyone, world markets will climb and we’ll have to put up with a few more months of hopium in the markets. I was right on Syria and I’ll be right again.
Arthur on Sat, 12th Oct 2013 11:00 am
“Artur. Can it feed itself?”
Easily, including wine and brie. Export surplus.
“Does it have gold to buy gas from Russia to keep from freezing?”
Europe does not need to pay in gold. Russian gas can be exchanged for high quality European products Russia cannot produce itself (basically almost everything). Oil and gas revenues are about the only source of income Russia has and Europe happens to be the best paying customer.
Besides, recently the European Wind Energy Association came with the remarkable news that in Spain wind is now the largest source of electricity, before fossil:
http://tinyurl.com/mlw4e7k
By 2020 a large chunk of electricity in Europe will be generated in a distributed fashion, reducing the need for foreign fossil fuel.
“What about the millions of refugees from the ME and Africa that are going to flood north when their food stops?”
The Mediterranean is not the Rio Grande . It is impossible for ‘millions of refugees’ to ‘flood north’. Currently only ca. 30,000/year survive the hazardous trip to Lampedusa and these are those with money. There are not boats enough to start with for these millions. Standard procedure is to sink the boats or put them on fire in sight of the Italian island, so they cannot be send back. New measures will locate these invaders in an early stage so they can be intercepted by EU navies.
The Dutch prime-minister announced recently that the welfare state will be a thing of the past, which is good news. The future will be family/clan based and no funds available for colonists, who will be encouraged to stay away from cold wet hostile lands.
DMyers on Sat, 12th Oct 2013 3:20 pm
Arthur
Good response. “The Mediterranean is not the Rio Grande.” At first, I thought that was a knock out punch.
But let’s look at it from BillT’s perspective, apocalyptic flames leaping in the background. Crossing the Rio Grande, south to north, has been by people seeking greater affluence and employment opportunities. BillT’s stated motivation is starvation.
Survival motivation might greatly change the length to which people will go, and we might be surprised at what that motivation could inspire, in terms of unprecedented accomplishments.
Arthur on Sat, 12th Oct 2013 4:49 pm
The will for survival will be present at both sides. Just look at the attitude of the average ‘neo-nazi’ in Greece, that is ordinary Golden Dawn voter towards (muslim) foreigners: outright hostility. And that is in 2013, where Greece is still kept on life support by the rest of Europe. If circumstances will deteriorate, the currently prevalent humanitarian attitude will complete disappear.