Debt Ceiling
The House passed a Budget deal on October 28, 2015 that, among other things, will extends the government’s borrowing authority through mid-March 2017. In 2013, the Republican-controlled House and the Democrat-controlled Senate negotiated with the White House on three fiscal matters with looming deadlines: raising the debt ceiling now approaching the limit $16.5T, massive federal spending cuts known as sequester and a budget resolution. On February 4th, the President signed a bill into law extending the debt limit debate until 5/18/13. This date may also get extended as far as August due to financial manipulations similar to those used in 2011. The "No Budget, No Pay Act of 2013" also mandates that pay for lawmakers be held in escrow starting April 16 until their chamber has passed a 2014 budget resolution. Congress must pass a spending bill, called a continuing resolution or “CR,” which would continue spending after Sept. 30, 2013, the end of the 2013 fiscal year. As it stands now, the government’s legal authority to borrow more money runs out in mid-October, 2013. According to the Bipartisan Policy Center, if that date arrived on October 18, the Treasury “would be about $106 billion short of paying all bills owed between October 18 and November 15. The congressionally mandated limit on federal borrowing is currently set at $16.7 trillion. The debt limit has been raised 13 times since 2001 and has grown from about 55 percent of Gross Domestic Product in 2001 to 102 percent of GDP last year. The hoped for legislation will raise the debt ceiling through Dec. 31, 2014.

Ubiquity, Complexity, and Sandpiles

from Maudlin Economics,

“How did you go bankrupt?” “Two ways. Gradually, then suddenly.” ―Ernest Hemingway, The Sun Also Rises Change happens quickly and, often, unpredictably. And as we will see, the unpredictable part is actually a mathematical principle. As in the Hemingway quote above, not just bankruptcy but change also happens slowly and then, seemingly, all at once.

I have updated an letter I wrote in 2006 a little bit, but the principles are timeless. I’ll be quoting from a very important book by Mark Buchanan called Ubiquity, Why Catastrophes Happen. I HIGHLY recommend it if you, like me, are trying to understand the complexity of the markets. The book isn’t directly about investing—although he touches on it—it’s about chaos theory, complexity theory, and critical states. It is written so any layman can understand—no equations, just easy-to-grasp, well-written stories and analogies.

As kids, we all had the fun of going to the beach and playing in the sand. Remember taking your plastic bucket and making sandpiles? Slowly pouring the sand into ever bigger piles until one side of the pile starts to collapse? Imagine, Buchanan says, dropping one grain of sand after another onto a table. A pile soon develops. Eventually, just one grain starts an avalanche. Most of the time, it’s a small one. But sometimes, it builds up, and it seems like one whole side of the pile slides down to the bottom.

First, economist Dr. Hyman Minsky showed how stability leads to instability. The more comfortable we get with a given condition or trend, the longer it will persist, and then the more dramatic the correction when the trend fails.

A second related concept is from game theory, the Nash equilibrium.

When I originally wrote that letter, it was 2006, and the fingers of instability hadn’t yet created the Great Recession. You could certainly see red dots in the sandpile, most notably subprime debt, but there were literally hundreds of dots scattered throughout the world economy, most of them innocuous until they weren’t.

There is a surprising but critically powerful thought in that computer model from 35 years ago: We cannot accurately predict when the avalanche will happen. You can miss out on all sorts of opportunities because you see lots of fingers of instability and ignore the base of stability. And then you can lose it all at once because you ignored the fingers of instability.

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