How the US government’s finances work

I have been on a crash course to try and understand the arcane details of what options are available if the current debt ceiling is reached with no action taken to raise it and the balance in the government’s account actually becomes zero. I thought I would share what I have learned so far.

We tend to think of the US government as having a checking account, just like many of us, and of the debt ceiling like a loan given to us by a bank. This is mostly true, except in one significant way that I will get to below. This informative article by John Carney says that the government does have something that looks like a checking account in which all the money it receives continuously (tax receipts, air transport security fees, the postal service, Medicare premiums, etc.) is deposited and from which all its payments (federal employee salaries, income tax refunds, NASA, interest on our debt, unemployment insurance benefits and paying defense contracts) goes out. To get an idea of the scale of transactions in that account, at the beginning of last Friday, the account had $83 billion and during the day it received $7 billion in deposits and paid out $13 billion in withdrawals, leaving it at the end of the day with $77 billion. When the debt ceiling is raised, the balance of money available for use in that account is effectively increased by that amount.

Will not raising the debt ceiling actually result in the US government not being able to meet its obligations? If the US government’s finances are really like our own checking accounts, it would seem that once the balance in the account reaches zero, we run out of money to spend and cannot write any more checks. If we do, they will bounce. That means that the government will have to make hard decisions about what obligations to meet and what to ignore, limiting its outlays only to the amount of money that comes in. And if it cannot meet all its obligations this way, it goes into bankruptcy.

But this is where the government differs from you and me, because the government has a really, really special relationship with its bank. The Federal Reserve Bank of New York is the place where the government’s checking account resides. It appears that the government is not forced to stop paying any of its obligations even if the amount in that account becomes zero because when the government (i.e., the US Treasury Department) writes a check payable to someone who then deposits it in their own bank, the check works its way through the system and ultimately goes back to the Federal Reserve (the government’s bank) for cashing and it is next to impossible that they will not honor a US government check and thus cause it to bounce. As Carney says:

It’s not clear that the Federal Reserve would be required to clear a check that exceeded the amount on deposit. It may be within its authority to reject the check.

But rejecting a check written by the government of the United States would probably violate the dual mandate of the Fed to pursue maximum employment and price stability. A U.S. government that bounced checks would just introduce so much chaos the Fed would likely be obligated by its core mandates to credit the check.

To restate it in personal finance terms, by honoring the check even if the balance in the account is zero, the Federal Reserve would be giving the US Treasury the equivalent of free overdraft privileges. This is similar to the way that some regular banks treat their best customers, confident that the money will be paid back in the future. Of course, banks can sometimes get nervous about the financial state of even the most seemingly sterling customers and shut down this overdraft privilege but it seems unlikely that the Federal Reserve would do that to the US Treasury except under the most catastrophic circumstances, such as the US government running completely amuck.

Notice that this would do something very odd. It would give the U.S. Treasury Department control of the money supply—something usually credited to the Fed. But by writing checks on an empty bank account, the Treasury would be inflating the money supply. It would be printing money to pay its bills, more or less.

So the Treasury cannot actually run out of money. It can only run out if it decides—that is, if Secretary Geithner and President Barack Obama choose—to stop writing checks sufficient to pay all of our obligations.

By a curious coincidence, the person who would write the checks (current US Treasury Secretary Timothy Geithner) was, before he took his current job, the head of the Federal Reserve Bank of New York, which is the US government’s banker and would be the body that decides whether to honor the checks or not.

So how will the Federal Reserve honor the checks of the US Treasury if there is no money in that account? Ordinary banks, faced with such a situation where a valued customer writes a check that exceeds the money on deposit, can honor the check using the money it holds of other depositors or borrow money from other banks or the Federal Reserve. The Federal Reserve system also has deposits of other banks that it can use to honor the US Treasury checks but has an additional way of producing money that ordinary banks do no have. It can order the printing of money.

So default seems to not be the inevitable consequence of not raising the debt ceiling, which may explain why governments around the globe are not (as yet) panicking and stock markets are not (as yet) tumbling at the prospect of a US default. Maybe they understand these things better than we do or they don’t understand but think that Congress will ultimately raise the ceiling before the deadline.

The legislation governing the US debt is called the Public Debt Act and was passed in 1941. As I understand it (and I may well be wrong), it forbids the US Treasury from going into debt higher than a limit set by Congress. i.e., the US Treasury is forbidden from selling (through the Federal Reserve) Treasury bills, notes, and bonds that would bring money into its checking account but increase its indebtedness above the debt limit, and from writing checks that would cause it to exceed the amount available to it in its account.

But what happens if the administration ignores the law and writes the checks anyway? It is not clear to me what recourse anyone would have to stop the Federal Reserve Bank of New York from granting the overdraft. Congress could go to court to try and stop it but the judiciary is generally reluctant to intervene in such disputes between the other two branches of government, seeing them as political matters to be resolved in the political arena. After all, Congress always has the power to impeach an administration that defies the laws it passes. But successive administrations have ignored Congressional laws in the past with no repercussions. Right now, the war being waged against Libya seems to be a clear violation of the War Powers Act and yet Congress is mute. It is not clear that violating the Public Debt Act law will cause Congress to do anything other than make a big noise.

Of course, what happens to the US’s credit rating, interest rates, and the value of the dollar if this happens is something else altogether.

The pathetic cosmological argument for god

It has become increasingly clear that cosmology has become the last refuge of those religious people eager to find some place where god can still have done something while remaining undetectable. But those arguments are clearly pretty desperate.

Jason Rosenhouse provides an excellent summary of the debate over cosmological arguments and concludes:

If the cosmological argument is the best theology has to offer then we atheists do not need to worry that we have overlooked a good argument for God’s existence.

As for the cosmological argument itself, I make no apology for being dismissive. Depending on what version you are considering, you can expect to find concepts like causality or probability being used in domains where they do not clearly apply, or dubious arguments for why an actual infinity cannot exist, or highly questionable premises about the beginnings of the universe or about how everything that began to exist must have had a cause, or groundless invocations of the principle of sufficient reason. You inevitably come so perilously close to assuming what you are trying to prove that you may as well just assume God exists and be done with it.

That’s my reaction to proponents of the cosmological arguments as well. They work so hard at finding implausible reasoning to support their pre-ordained conclusion that they might as well just say that believe in god because they want to or need to, even if it is unsupported by evidence.

How yogis ‘levitate’

Hindu mystics have long been claiming that they can, by sheer will and/or the intervention of god, levitate off the ground. Here is one way it is done.

A good rule of thumb is that if something violates the laws of science, it is not a miracle, it is not by ‘harnessing the energy field’ or some such Deepak Chopraesque mumbo-jumbo, and it is not due to a god. It is merely a trick. The only question to be explored is how the trick is carried out.

The logic of science-8: The power of universal claims in science

(For previous posts in this series, see here.)

In the previous post in this series, I argued that in the case of an existence claim, the burden of proof is upon the person making the assertion. In the absence of a preponderance of evidence in its favor, the claim can be dismissed. As has often been said, “What can be asserted without proof can be dismissed without proof”. The basis for this stance is the practical one that proving the non-existence of an entity (except in very limited circumstances) is impossible. Hence if we do NOT have a preponderance of evidence in favor of the existence of an entity, we conclude that it is not there.

In the case of a universal claim, however, the situation is reversed and the default position is that the claim is assumed to be true unless evidence is provided that refutes it. So in this case, the burden of proof is on the person disputing the assertion, again for eminently practical reasons.

As an example, the universal claim that all electrons have identical masses and charges can never be proven to be true with just supporting evidence because we cannot measure the properties of every electron in the universe. But once a few of them have been shown to have the same mass and charge, the universal claim that all of them do is presumed to be true unless someone comes up with evidence that disputes it. This is why the proposition “All electrons have the same mass and charge and behave identically in interactions with other particles” is believed to be a true proposition. In this case, absence of evidence (against the universal proposition) can be taken as evidence of absence that such evidence exists at all.

In science, negative evidence can be powerful in the same way that it can be in the legal setting, as in the famous Sherlock Holmes story of the inferences that can be drawn from the dog that did not bark in the night. Since there is a belief that dogs always bark when unexpected events occur in the night, we can infer from a silent dog that nothing untoward happened. In science, we believe that natural laws are invariably followed without exception. For example, the strongly held scientific belief that there exist only two kinds of electric charge is based entirely on this argument, because there has been no evidence produced that we need a third kind of electric charge. Similarly, any universal claim about the properties of an entity whose existence has already been established are taken to be true unless evidence is provided that contradicts the claim.

The laws of science are (as far as I am aware) always phrased as universal claims. There are a number of such laws such as energy, momentum, and angular momentum conservation, baryon number conservation, and CPT conservation (where C stands for ‘charge conjugation’, P stands for ‘parity’, and T for ‘time reversal) all of which are believed to be true purely because no violations have been observed. Anyone who challenges the validity of those laws has the burden of proof to provide evidence of such violation. This approach is so routine in science that no one even bothers to state it explicitly

The contradiction of a universal claim is done by means of an existence claim. For example, it used to be considered that something called CP was also conserved in every reaction. Why did we believe this universal claim? Because no reaction violating it had ever been seen. But some scientists suspected that it might be violated under certain conditions. Postulating such a reaction constituted a new existence claim. This was not initially accepted since no one had seen a violation of CP. But then one rare reaction was detected that did violate CP and this was confirmed in subsequent experiments. It was only then that the universal claim that CP was never violated was accepted as not being true, because some researchers produced evidence in support of their existence claim of such violations. Now, without further evidence, we are justified in believing the universal claim that this same reaction will violate CP every time it happens, until someone finds evidence for the claim that on occasion it does not.

So in science this interplay of existence and universal claims, and the different ways they are established, goes on all the time and forms an integral part of the way that scientific knowledge is constructed.

‘God exists’ is an existence claim and the burden of proof lies with those who assert it. In the absence of such evidence, the scientific conclusion is that god does not exist. Similarly, ‘god does not exist’ is a universal claim and the burden of proof lies with those who deny it and they must again provide evidence that god exists. Since they have not produced any such evidence, the scientific conclusion is that ‘god does not exist’ is a true statement.

It necessarily follows from the above discussion that in science the word ‘true’ is used provisionally and not absolutely. In the case of an existence claim, ‘true’ is taken to mean that it is supported by a preponderance of evidence. In the case of universal claims, ‘true’ is used as an abbreviation for ‘not yet shown to be contradicted by evidence’. It is always within the realm of possibility that someone might come along with data that suggests that there exists a particle that seems to behave identically as the electron but has (say) a different mass. In fact, that has actually happened. The scientific community responded with further experimentation that confirmed the existence of this new particle, now called the muon, and it is now considered a true proposition that muons exist and all have the same mass and charge and behave just like electrons except that their mass differs from that of electrons.

Maybe one day there will be a preponderance of evidence for the existence of god. But until such time, a perfectly valid scientific conclusion is that god does not exist.

Next: Proofs as used in science

Collateral damage caused by government shut down

While many of us wonder what might be the long-term ramifications of a government default and shutdown if the debt ceiling is not raised by August 2, for many people this is not merely an academic exercise but a real and immediate danger.

Recall that about half of American households are ‘economically fragile’ in the sense that in an emergency they could not lay their hands on $2,000 within 30 days. They live from paycheck to paycheck. What will happen to such households if government employees get furloughed and don’t get paid or to similarly situated seniors if the social security checks don’t go out? How will they pay their rent and mortgages?

This should be a sobering reminder that politics is not a game. Ordinary people get hurt.

How the oligarchy speaks

Oligarchies are most effective when they work in the background, out of the public eye, getting their way by having political leaders carry out their bidding. The oligarchy usually prefers to use establishment academics and the media and the bond rating agencies to speak on their behalf but they seem to have become worried that those subtle, behind-the-scenes ways seem to have failed when it comes to raising the debt ceiling, forcing them to come out more in the open.

Wall Street has pretty much openly told the Republican party leadership that the kabuki theater had gone on long enough and to raise the debt ceiling. In a highly unusual move, a broad segment of the oligarchy sent an open letter to Obama and every member of Congress (though I suspect that the real targets were the debt-ceiling holdouts) that the ceiling must be raised.

Warren Buffet played his usual role of speaking for the ‘soft’ face of the oligarchy (i.e., the down-home, aw shucks, ‘good’ rich guy) when he publicly predicted that the ceiling would be raised. A ‘prediction’ of this sort is usually just a hint as to what the speaker wants others to do. Ben Bernanke has also warned of the dire danger of not raising the ceiling.

The major bond ratings agencies like Moody, Fitch, and Standard and Poor have warned that the US government’s credit rating would be lowered if it defaulted. The opinions of the ratings agencies should be highly discredited since these were the same agencies that gave the highest ratings to the worthless mortgage-backed securities that fueled the madness that led to the collapse of the housing market that has harmed so many people. But while their assessments of credit worthiness are worthless, they are a major voice by which the oligarchy makes its views known.

Although the debt-ceiling negotiation drama has continued, what made me think that there would be no default is that the ultimate voice of the oligarchy, the stock market, has remained seemingly unperturbed. If there were real fears of a default, it should have tanked. While that may still happen, so far the oligarchy seems convinced that the ceiling will be raised. Commentator karoli sees things slightly differently, suggesting that the reason for the stock market’s stability is that the oligarchy does not want a budget deal because they care more about keeping their taxes low than about higher interest rates. They would prefer no deal, even if it results in a US government default, if the alternative is a deal in which their taxes are raised.

Economist Paul Craig Roberts, former Assistant Secretary of the US Treasury and Associate Editor of the Wall Street Journal, is another formerly solid establishment economist, a conservative counterpart to Jeffrey Sachs, who like him has become shrill. In a must-read analysis, Craig says that:

The downgrade threat [by the credit ratings agencies] is not credible, and neither is the default threat. Both are make-believe crises that are being hyped in order to force cutbacks in Medicare, Medicaid, and Social Security.

Washington’s priorities and those of its presstitutes could not be clearer. President Obama, like George W. Bush before him, both parties in Congress, the print and TV media, and National Public Radio have made it clear that war is a far more important priority than health care and old age pensions for Americans.

The American people and their wants and needs are not represented in Washington. Washington serves powerful interest groups, such as the military/security complex, Wall Street and the banksters, agribusiness, the oil companies, the insurance companies, pharmaceuticals, and the mining and timber industries.

Craig argues that even if no debt-ceiling deal is reached between Obama and Congress, there will still be no default because the US is in the unique position (unlike Greece and the other European countries also struggling with debt) that it pays its debt with its own currency.

The US government will never default on its bonds, because the bonds, unlike those of Greece, Spain, and Ireland, are payable in its own currency. Regardless of whether the debt ceiling is raised, the Federal Reserve will continue to purchase the Treasury’s debt. If Goldman Sachs is too big to fail, then so is the US government.

I must admit that I don’t understand in detail how US deficits are financed. The relationship between the US Treasury and the Federal Reserve, the way that US Treasury bonds are bought and sold, the way that new dollars are printed to finance the debt, are all things that are somewhat opaque to me but Craig is the kind of person who would know.

Paul Krugman is an establishment economist who has so far has remained within the approved range of ‘respectable opinion’, viewing the Democrats as liberal and the Republicans as conservative and the failure of Democrats to exploit their winning hands and snatch defeat from the jaws of victory as being largely due to their poor negotiating skills. But the debt ceiling debate has exasperated even him and he has started saying some shrill things. I don’t know how far he can go before he too gets booted out of the Village.

How many more establishment economist types need to become shrill before the message gets through to the general public that it is the domination of the US economy by the oligarchy that is the real problem here, not the debt ceiling or the budget or Social Security or Medicare or Medicaid? These people and their enablers in government and the media are driving the US into a very deep ditch.

Palin film continues to bomb

The second weekend of the Sarah Palin fan biopic The Undefeated saw the film being expanded to 14 cities from the original 10 but reporting gross box office receipts of just $24,000, a decline of 63% from the first weekend.

To the calculators! With apologies to Tbogg, who has been mocking chronicling the film’s performance so far (see here and here and here), but the above results mean a weekend average of $1,714 per city or $571 per day or $143 per show (assuming four shows per day) or 18 people per showing (at $8 per ticket).

I think it is safe to say that if you want to see the film, you need not bother about buying tickets in advance, unless they are showing it in people’s living rooms.

This must really hurt, you betcha. After all, the distributors carefully chose cities that are supposed to be friendly to her, such as Grapevine, Texas.

Which raises the question: Where are all the real Merkins who see Palin as the nation’s savior? Surely she has more fans than this? Why aren’t they showing her some love in return for the joy she brings to their lives?

The Internet: Where religions come to die

Even evangelical Christians agree with this assessment that the internet poses a real threat to religion’s survival. Listen to Josh McDowell of Cru, the organization formerly known as Campus Crusade for Christ.

Atheists and skeptics now have equal access to our children as we have, which is why the number of Christian youth who believe in the fundamentals of Christianity is decreasing and sexual immorality is growing, apologist Josh McDowell said.

“The Internet has given atheists, agnostics, skeptics, the people who like to destroy everything that you and I believe, the almost equal access to your kids as your youth pastor and you have… whether you like it or not,” said McDowell, who is author of two books on Christian apologetics, More than a Carpenter and New Evidence that Demands Verdict.

“Now here is the problem,” said McDowell, “going all the way back, when Al Gore invented the Internet [he said jokingly], I made the statement off and on for 10-11 years that the abundance of knowledge, the abundance of information, will not lead to certainty; it will lead to pervasive skepticism. And, folks, that’s exactly what has happened. It’s like this. How do you really know, there is so much out there… This abundance [of information] has led to skepticism. And then the Internet has leveled the playing field [giving equal access to skeptics].”

McDowell, who lives in southern California with his wife Dottie and four children, said atheists, agnostics and skeptics didn’t have access to kids earlier. “If they wrote books, not many people read it. If they gave a talk, not many people went. They would normally get to kids maybe in the last couple of years of the university.” But that has changed now.

Jesus and Mo pick up on McDowell’s comments.

J&M-level field.png

Daniel Dennett once said that arguing with religious people is like playing tennis with someone who raises the net when you make your shot and lowers it for theirs. The internet is like a more impartial person who has taken over umpiring duties.

The oligarchy forced into the open

I do not tend to follow micro-politics (who’s up, whose down, what the latest rumor is about this or that, how the polls vary from day to day) carefully because doing so not only consumes all your time but it prevents you from seeing the more important big picture. I prefer to focus on macro-politics, politics on the large scale and longer time frames. However, there are times when macro-political theories impact micro-political events and the debt-ceiling debate is one such case.

I have been writing about how the US is run by an oligarchy that is fronted by the Democratic and Republican parties. The issues that the oligarchy is united on (ones that financially benefit themselves) are agreed upon by the two parties and usually take place so quietly and behind the scenes that we are not even aware of it (much of the legislation passed by Congress and the regulations implementing them by the committees is of this form) or when it cannot be avoided becoming public (as was the case of the massive bailouts of the financial sector in 2008) is done with a grand show of bipartisanship and rushed through as matters of supposedly extreme urgency that gives the rest of us no time to participate in the process at all, let alone mount a protest.

The debt ceiling debate is another case where the oligarchy has been forced to emerge from the shadows and try to more overtly influence events.

So who makes up the oligarchy and how does it make its wishes known? The oligarchy is not a hierarchy or secretive cabal that issues orders. Such a crude system cannot be effective for long. It is a loose alliance of the top people in the business, financial, and media sectors, all of whom all share the same goal of enriching themselves at the expense of the general public. This tends to create a uniformity in general thinking, though it can differ in details. These people tend to move around in the same circles as top government officials so a lot of the oligarchy’s wishes are communicated informally. The rapidly revolving door by which top government and business officials switch roles is another mechanism to ensure uniformity in thinking. The oligarchy’s lobbyists, who pretty much have taken up residence in the halls of government and contribute heavily to congressional and presidential campaigns, also exert constant pressure to ensure that politicians know what they should do.

The major media (which is also owned by the oligarchy) also contributes when it interviews business leaders and selected intellectuals and reports their opinions which can then reach a wider audience. A lot of so-called ‘think tanks’ (The Heritage Foundation, The American Enterprise Institute, etc.) are also created and funded by the oligarchy, along with prominent university academics who are sympathetic to oligarchic interests (see the great documentary Inside Job for examples of the latter). The chair of the Federal Reserve and the Treasury Secretary can always be relied upon to be reliable spokespersons for the oligarchy since they almost always have close ties with them and often emerge from their ranks and go back to them when their terms of office are over.

This is how an informal consensus becomes created about what the ‘best’ course of action (i.e., what benefits the oligarchy) is for any given situation and those who are outside this consensus can then be dismissed as radicals and extremists and ‘shrill‘.

When it comes to the debt ceiling, I wrote the following back in November of last year:

Despite Republican rhetoric about opposing the rising national debt, the oligarchy needs the government spigots to be kept open and so I predict the Republican Party will agree to raise the debt ceiling, all the while hypocritically wailing and gnashing their teeth at what a bad thing it is. It will be interesting to see how well their supporters respond to such a blatant betrayal of what they were promised.

It has indeed been interesting to see how this is being played out in the current debt ceiling debate. I did not pay too much attention to the day-to-day drama of the talks between Obama and the Republicans or worry about the US defaulting on its debt because I felt that the oligarchy was united in wanting the debt ceiling raised and thus it would happen. This is because a default would trigger a lowering of the US’s debt rating which would require it to pay higher interest rates on the money the government borrows which in turn would raise interest rates all round. Since it is a fairly good rule of thumb that interest rates are inversely correlated with stock prices, and the oligarchy is devoted to keeping stock prices high, I felt it was a no brainer that they would push for passage of a debt ceiling increase to prevent a steep stock market decline.

It looks like that is what is mostly happening. The stock market has not panicked yet (in fact, it rose somewhat the last week) and the yield on US Treasury bonds (a key predictor of interest rates) has remained pretty much stable for the month of July.

However, it has also become clear that some vocal elements of the Republican party (such as the Tea Party caucus) are not as yet quite adept at picking up the subtle cues that tell them what they must do and who the real bosses of the country are, and are balking even when those cues are translated for them by their party leaders in more direct terms. They seem to be true believers of the idea that raising the debt ceiling is a horrendous evil and not merely a fairly routine procedure that was made into a marquee issue simply to win votes in the 2010 elections.

Given this high level of obtuseness on the part of the Tea Party, the oligarchy has to be more direct in conveying its message and it is interesting to observe it coming out in the open and start cracking the whip.

Next: How the oligarchy speaks