Comment: If Congress and the White House....

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If Congress and the White House....

..... fail to make a deal on the debt ceiling IT DOES NOT MEAN DEFAULT. Rand Paul said as much in that CNN interview starting at about 7 minutes into the segment. He also said that the US government would have to immediately go to a balanced budget. I think this means that the economy will probably suffer a relapse back into recession.  Here’s my analysis BY THE NUMBERS.

Nominal US GDP is growing at an annual rate of about 2.5%. US federal spending currently weighs in at roughly 23% of GDP, in contrast to the historical average of 19.6% from 1946 to 2008.

If the debt ceiling is not raised, the government will have no choice but to go COLD TURKEY to a balanced budget by cutting 18 cents out of every dollar it currently spends. Picture a game of musical chairs with 100 people playing and when the music stops playing 18 people can't find a chair to sit down on. Slashing 18% of the federal budget would bring US federal spending down to roughly 19% of GDP and by extension cut the annual GDP growth rate from a positive +2.5% to a negative -1.5% in a New York minute. Negative GDP growth is the very definition of recession.

Media pundits, financial industry analysts and politicians seem to be missing sight of the fact that the deficit fell to $642 billion in 2013 from $1.1 trillion in 2012, mostly due to rising tax revenues resulting from the economic recovery weak & tepid as it is.  

At this rate of decline the budget will be back in balance in only two years.  The deficit bogeyman will be dead without having to put the budget into balance via shock therapy!  The risk is that additional austerity at this stage causes the economy to relapse back into recession ala the 1937 recession within the depression when Roosevelt tried to balance the budget ahead of the 1938 elections.

I wish Rand Paul would discuss the solution his father promoted 2 years ago during the last debt ceiling crisis which was to cancel the debt held by the Fed from its QE asset purchases. Here is what Ron Paul had to say about this issue back then....

Ron Paul’s Surprisingly Lucid Solution to the Debt Ceiling Impasse

Ed Rombach