THE CHICKEN DANCE

There is a lot going on that could have a major impact on the world economy. One of them is the possible economic collapse of Evergrande, a Chinese property company.

Remember when a couple of really stupid kids would play a game of chicken with their cars. There were even movies about this. Both cars would head straight toward each other. Obviously, if there was a head on collision, both drivers would likely die. The loser was the person who was the first to swerve away. In other words, the first person to act responsibly was considered the loser. Wow!

Right now, Democrats and Republicans are playing chicken with our entire economy at stake. This is regarding extending the debt limit.

While most of us believe the government spends money without any regard to the consequences, there actually is a debt limit. This is the amount of money that Congress will allow the Treasury to borrow to keep the government running. Think of it like a limit to your VISA or Master Card. Once you exceed that limit, you can’t buy anything, even things you need desperately. When this happens to a family, they may go bankrupt. Many companies have gone bankrupt when they couldn’t pay their bills. This is exactly why some predict that Evergrande may go bankrupt with economic consequences felt around the world. The attached article from CNBC does a good job of explaining this:

Evergrande debt: Collapse could have domino effect on China properties (cnbc.com)

Currently the debt limit appears to be set at $28.4 trillion, which is already pretty staggering. In 2019 the GDP was about $21.4 trillion, so we already owe more than the entire economy produces in a single year. Everyone agrees that we owe a lot more than we should and that at some point this is going to be a problem.

Now we are very close to exceeding the debt limit and if that happens the Treasury will have to take drastic action, including failing to make payments due on our debt, which may be owed to foreign countries. Everyone agrees that this is beyond bad.

But even though both Democrats and Republican agree this is a huge problem, they do not agree on how to fix it. Democrats are demanding Republicans agree to add trillions of dollars to our current spending for this infrastructure bill and a lot of additional entitlement spending. Republicans are standing firm and saying that they will not vote to increase the debt limit if these bills are part of the agreement. Neither side appears willing to budge.

Democrats WANT that spending bill. Republicans are deeply opposed to that spending bill. Somebody is either going to swerve or there will be an economic head-on collision.

Historically there has always been a last minute, bi-partisan bill, to extend the debt limit without addressing other issues. That is what happened when Trump was President. So far, this time, neither party appears to be willing to budge.

The following article from MSN typically blames everything on Republicans.

GOP plan to block House measure could trigger an unprecedented $28tn default (msn.com)

This will happen on October 1, 2021, so time is rapidly running out. My best guess is that they will do what they have always done before, which is just pass a stand-alone bill to increase the debt limit and kick the ugly can down the road one more time.

One thing is certain, there is little or no potential for Democrats and Republicans to work together in a responsible manner for the good of the country. You can blame that on either party, but that is the sad reality. When you combine that with an obviously inept President totally incapable of even pretending to provide leadership, the problem is compounded. Throw in a Senate that is deadlocked and the recipe for disaster is obvious. If is often said that nothing serious ever changes until things reach rock bottom. American was an isolationist nation, even after Hitler invaded France, until Japan attacked us on December 7, 1941. Then and only then did the nation become unified in a mission to defeat both Germany and Japan.

The consequences of failing to extend the debt limit are impossible to fully predict, but everyone agrees it would be beyond horrific. But so would be the failure to recognize that we simply cannot keep spending money we do not have. Venezuela is a classic example of that. It went from being one of the richest nations on earth to an economic disaster. That will not happen here, the United States is not Venezuela. But at some point, the chickens will come home to roost and delaying that just increases the size of the ultimate disaster and the cost to put things in order.

In the meantime, watch the chicken dance going on in Washington.  We do not know what will happen, but we do know it will really matter. If only we could find a way to limit the casualties to the chickens.

TDM

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