Debt, Ceiling, and The Issue

So many people are reacting to the recent bill to raise the debt ceiling as if it meant anything. It did mean something, but not what people are whining about and not what the Dems or the Republicans are suggesting.

You should have expected that the debt ceiling would be raised, and probably by the arbitrary date that had been set. If anyone in Congress had suggested that the US go into even partial default, they weren’t being taken seriously. When the government has been shut down before, the Republicans have taken the blame and felt the pain on election-day. They weren’t going to do that again. No, they were going to raise the debt ceiling.

I am a little surprised that they raised it as much as they did, although the actual number was rarely mentioned in the press. No wonder, since the increase was about the same amount as the announced reduction in spending – that is suppose to occur over ten years.

Add in the fact that actually less than a trillion dollars of spending reduction was identified in the bill that was passed and the remainder is suppose to be selected in a special legislative committee, we have a bill that doesn’t mean much. Nor are the effects to begin for the next two years, except to raise the debt ceiling by over $2T.

The “reasoning” behind not having any cuts in the next two years is strictly Keynesian economics. It is accepted by both sides that government spending is a good thing for an economy that is not growing sufficiently (if at all). No one questioned this claim. The Republicans went right along with it. If you think about it, it makes even less sense in this case. I mean they are accepting the idea that not reducing the spending that BO wants in 2012 means that the economy then will do better than if his budget was reduced. This is just amazing. It this thinking is correct, the correct thing for Republicans to do would be to push for more spending, regardless of the deficit, to have even better economic performance. Well, of course, we are now talking Ben Bernanke’s language.

Many people are claiming that the loser was BO. They say that he didn’t get the increased taxes on the wealthy that he insisted upon. Maybe. There is always tomorrow, of course, or after the next election. The way the Republicans are going, BO will look great. I am sure that he hasn’t given up on raising taxes on the most productive members of our nation, he will find another time to push this through.

The bill hasn’t made our immediate situation any worse. If you understand that the debt limit was going to be increased and the whole thing was a game (a game that was taken very seriously by all participants), then you just hoped they didn’t do anything more stupid than normal. There are no new immediate taxes, no new spending, no explicit attacks on our freedom.

There is one bright spot, I think. It is that the very issue of the debt was brought forward and made a big deal. It gained the attention of the media and many people in the country for a couple weeks. It also seems that the Republicans did latch on to this issue and maybe they will try to keep it in the forefront of their public comments. That is a good thing.

Yet, as I say that I also remind myself that they did not make clear to the American public that Social Security and Medicare are doomed, no matter what the Dems do about it. Those programs have a cost that no nation could pay, and certainly not one as encumbered and regulated as this one.

The Republicans also undercut their case when they fought for such small potatoes. Cuts of $2.7T (or whatever the final advertised number was) spread over ten years do very little to impact annual deficits of over $1T a year. It was such a big fight over so little.

But actually, it is even worse because what they were fighting over weren’t cuts at all. The Congress uses terms differently than us common folk, and the “Tea Partiers” fell right into it. The budget projection process assumes that most programs will continue to expand over the years. What Congress fought over was the rate of increase of those programs. They weren’t cutting anything at all.

The expectation that reducing the increase will make a difference assumes that the income side of the budget would grow at a certain rate, meaning that if income continues to climb, and we reduce the increase in spending, we will see a reduction in the deficit and we will borrow less. But, where is this increase of revenue coming from? Well, two options: price inflation or actual growth. Along with price inflation often means increases in income as well and thus increases in tax revenue. Historically, however, income lags, meaning that our standard of living lags, and tax revenue lags. So, price inflation would only partially support a decrease in the growth of the debt.

Really, Congress is assuming that the economy will grow. I do not know what growth rate was used to figure out that their numbers would work and the deficit would not grow as fast as it has. I expect that it had some relation to our history since WW2. The growth rate over the last ten years has been much lower, however. We may not expect our growth rate to achieve the historical average any time soon, since we really haven’t recovered from the last recession. There are lots of reasons to think that the last recession is continuing and tending downward. You can be certain that the framework of this “Deal” didn’t assume a recession in the ten-year timeframe. The entire underpinning of the “Deal” is flawed.

The bottom line is that the “Deal” that was suppose to cut spending will have little effect on what will happen in the economy over the next ten years. It is a nothing. It has many fraudulent characteristics. Worse, it may make some people relax and think that things are in better shape.

That is one reason why I don’t understand the people who were so disappointed that the “Deal” was done. The bottom line was that the Republicans were fighting for show, not for real results, and not passing the debt ceiling was just too real for them (as a group, anyway).

And now (have to write more cuz stuff is happin’), S&P has actually shown up. I think that their explanation is pretty good, except that they should have mentioned that the politicians got us into this fix in the first place. I have seen two different kinds of responses, well, three, but the third, “It’s about time!”, is a very small minority.

One response is surprise that the downgrade is occurring now since the US government can meet its obligations of paying interest and paying back bonds. This is as short-sighted a view as we see from the Congress. The issue isn’t about today’s payments, but the payments during the life of the bond, which is in doubt, really.

The other response is from the Administration and the Democratic members of Congress. They apparently believe that anyone who disagrees with their view, their very subjective view that whatever they want to do is good, is at best mistaken and probably evil. Don’t be surprised to see the FBI visit S&P headquarters. If Obama actually realizes what the meaning of the downgrade means, he will look for ways to use the power of the government to change the rating of his debt.

Many of the supposed financial experts interviewed that I have seen have been unwilling to predict what we will see tomorrow when trading restarts around the world. I certainly don’t know. We may see some pause as people try to come to grips with the revised situation. Many of the organizations that currently hold Treasuries as assets that must be AAA rated may be calling their attorneys to find out what they must do. Prudence would require that they change their assets in an orderly manner and not wildly sell. But then, we could see some panic selling. Either way, a lowering of the rating of US government bonds should see an increase in the interest rate being demanded in the market. How much is very much open to question. The Treasuries will still be a major holding by many different international and domestic organizations.

But think what the downgrade does for the “Deal”. The whole plan did assume a certain cost of borrowing. That is, paying the interest on the debt is a large portion of the federal budget. That portion has just gotten larger. I bet that the projection of future spending used in shaping the “Deal” assumed pretty much the same interest rate on bonds for the entire 10 years. It certainly assumed a continued AAA rating. Now that rating is gone at the very beginning of the 10 year timeframe, and it is unlikely that the Administration or the Democratic members of Congress will do anything that will provide reasons to change the downgrade. The supposed cuts will be off set by the higher cost of paying the interest on the debt. So much for the entire hoopla and the “Deal”.

We need to focus on the primary thing, which is the education of the American people. If a sufficient number (say 20%) understand the situation, their voice concern will cause Congress to move in the correct direction. As long as the American people believe that, for example, Social Security and Medicare can be viable over the long term, nothing will be done.

As we move into the forth year since the bust of 2008 and there is no real recovery, we do have an opportunity to point out the reality of the Keynesian policies of the government. The American people do not want to live this way. I think that even the ones receiving government payouts may be willing to listen more than their counterparts in other countries because they are still Americans. In any event, we have our opportunity. Let’s make the most of it.