I understand it's up to congress to pass a budget which they may or may not do, but congress must act when the treasury secretary gives congress notice there are no more funds in the treasury. Congess must then vote for the debt ceiling to be raised allowing the treasury to sell bonds there upon giving the fed the opportunity to buy them albeit with printed money, correct? But if congress does not vote to raise the debt ceiling the government shuts down which is what almost happened in the fall of 2011. In that event does the fed have any power or authority to continue printing money to fund the federal government? I'm trying to understand the scenario of what might happen if when we go over the cliff and revenue is increased and it is offset by slower growth and another budget battle occurs with no agreement. Is US bankruptcy a reality or will the Fed be able to avert it?
You are still waiting for a comment or answer, I see. Well (as mister Ronald Reagan would say), I'll give you my opinion which isn't worth much. First, you have to realize that the fed is not the only purchaser of Treasury bonds. (I assume you know that.) Second, you must realize that, contrary to what the nut conspiracy folks believe, the fed is not a private bank operation but very much part of the federal government. Nevertheless, it is set up to be independent, i.e., not susceptible to political pressure (Ha, ha, ha.) . Now what was your question? Oh! Now I remember. It had something to do with what happens if we don't approve raising the debt ceiling. Answer, and this is highly authoritative (wink, wink), Don't worry about that little detail. The only thing you have to do is to determine what will be best for the 2% that own everything. Once you figure that out , you will know what will happen. It is far more simple than it may seem. (Oh, dear Lord, I hope I haven't given away too much!)
I thank you for you comment/answer. It is a good response to a poor question and in retrospect I should have worded my question so as not to suggest that I am the some sort of doomsday evangilist proclaiming that the day of financial armageddon is near, and that the US will go bankrupt. I fully expect the debt ceiling to be raised as it always is in early 2013 and the US to meet its obligations, however the manner and the details of which I believe are very much in the air and are very much being ignored by the market. Everybody expects a resolution to the fiscal cliff however people are neglecting the details of that resolution. Most likely the resolution will include additional tax revenue and large budget cuts which I believe will be deflationary. Deflation is the very thing the Fed is trying to prevent and I was trying to determine if the Fed will have an immediate response to a huge shock to their inflationary efforts. I kinda of expect the market to wake up and realize the Fed has not as much power to drive the economy and start to price that in to the market (maybe we'll see). I also realize that another resolution may include congress kicking the can down the road. In that event I expect another downgrade and this time the bond market to respond negatively not like in 2011.
You have given some serious thought to this matter. So I will respond back with something less playful, less frivolous. I believe the Republican party mainstream is promoting a failed and utterly incorrect economic model, while at the same time I'm not sure that the economic approach of the Democrats is correct either, but it hasn't at least been proven incorrect at this point, so I think of the two approaches to rescuing the economy the latter is the only one being offered up that makes any sense. So we have two diametrically opposed economic theories, and they are in serious conflict. One is what we have called supply side, associated with what's been called "trickle down", economics, and the other is demand side, stimulus economics, much like Keynes advocated. Bernanke is very much a believer in the latter, but the Fed has to have cooperation from the Congress to make their accommodative policies work as well as intended. On top of these two base theories, the first having been proven wrong and the second not properly tested, are superimposed revenue constraints recognized by both parties. One party, the Republicans, cling tenaciously to the absurd idea of belt tightening, accompanied by low taxes, and government shrunk to its limit, with virtually every former government function being passed to the private sector, except defense, which they wish to maintain at a size greater than all other nations combined, to grow the economy and bring revenue into balance with expenditures. Never mind the high probability that if we had followed this approach to the letter going into the recent recession we would likely be in depression right now. The other party wants to increase revenue by a selective, and small tax (~4%) increase on upper incomes, while making small cuts in other areas including defense, but leaving social spending pretty much alone. They also favor continued large spending on stimulus programs, so much so, that deficits may be further increased rather than being brought down, though they pay lip service to the idea of deficit reduction. The result of the squabbling between these two factions has produced a result that is better then a deep depression would have been but less good than might have been achieved without the constant drag of those still adhering to the disproved economics of the Greenspan era, when many economists still believed that real markets were efficient just like the academic model, that markets would spontaneously tend toward equilibrium if left alone, that low taxes would result in higher revenues, and that the way to a happy and prosperous populace was to make those already happy and prosperous, through lower taxes and a less burdensome government, even happier and still more prosperous, so that their, presumably natural, largesse would "trickle down" toward the dispossessed, creating jobs and happiness for those formerly less well off. So what will happen is this, I think. We will more or less continue on the slow path to recovery that we are on. Clearly the Fed is achieving stabilization and recovery of real estate prices --nicely demonstrating the disturbing reality that a bubble once burst can be re-inflated-- and also achieving very slow job recovery. Real inflation is bad, but manageable. We may, or may not, go over the cliff, but if we do go over it, we won't land on either a trampoline or a concrete parking lot. The landing will be more like a parachutist that lands in a tree top -- scratched up but surviving. It is going to be a matter of how much brinksmanship is practiced among the factions in Congress -- I'm not expecting the President to be quite so accommodating this time around. But that has nothing much to do with the fact that he's not running again. (The pundits are wrong about this.) The election confirmed for Obama and the democrats that medicare and social security are hugely popular and, if you want to keep your job, you don't campaign promising to cut those programs! The election also confirmed what common sense should have told the Republicans, i.e., the average citizen doesn't care two figs about the top 2%. The Republicans are now going through a learning process. If they want to cut, and still be politically viable, they are learning that they had better find somewhere else to cut other than social security or medicare. And on tax hikes we are witnessing the first signs of cracks in their dike. Mr. Norquist has thrust his finger into the crack, attempting to hold back the deluge, but it will be to no avail! The first defectors from the Norquist pledge are coming forth. There will be a lot more as they discover how politically unpopular being a champion of the 2% can be. All Obama has to do is tell the mainstream voter that the Republicans are pushing us over the cliff because they insist on protecting their friends among the 2 % at the expense of Grandma's social security check or medical bills, and the Republicans are through, finished! They can't risk that, and Obama knows it. He knows that in the final analysis they have no choice but to drop their demands of major changes in social security and medicare, and protection of the upper 2%. Whether favors for the 2% and social spending cuts are connected is immaterial. The democrats will see to it that they are connected. That, and not that he is a short timer, is why Mr. Obama can afford to be firm. He has the Republicans over the proverbial barrel, and the election results show that. So bottom line is, if we do go over the cliff, we'll be rescued before there is a calamity. We will continue on the same course we are on. There may be a few changes in both Social Security and Medicare, but they will be minor. The defense department will see phased-in cuts, but significant. The Dream act, or something much like it, will pass both houses. The upper 2 % will see the equivalent of a 4% increase in their tax rate, but perhaps partially in the form of lost deductions. Or possibly the Bush cuts we'll be allowed to expire, and enough Republicans will join the Democrats to pass a middle-class-only tax cut. One way or another, the Democrats' agenda is going to prevail, with the more politically astute Republicans doing a flip-flop-aroo. In Europe the CB is going to follow the model of the U.S. Fed to the extent their charter permits it. Austerity in Europe will be paid lip service, but not get far. The Euro will weaken in 2013 and consequently the dollar will strengthen some, and the result will be a less robust U.S. equities market in 2013 than might have been. Federal tax revenues for 2013 will be greater than for 2012, and slow recovery will continue, as will inflation. There will be no overall deflation, none! The debt ceiling will be raised, and deficits will continue, but at a much slowed rate of increase, possibly even a decrease. Eventually, perhaps 20 or more years from now, Bernanke will be hailed as the greatest Fed Chairman ever.
The recurring theme of the book (i.e. "the name of the game is bailout") has proven to be rock solid time and time again. Even the die hard Fed apologists have a hard time tossing that one aside.