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America, We Have a Problem   August 3rd, 2011
Retreat and defeat on debt ceiling issue means America loses       

 
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With the debt ceiling legislation signed into law, yet another failure of Washington can be filed in the history books. While this wasn't the first opportunity to get our fiscal house in order--and while there may be additional opportunities in the future--I think this will prove to be a historic moment when we had a chance to change our fiscal trajectory... but didn't.

The problem with the debt ceiling agreement isn't that it was raised. While refusing to raise it would've been a bold move that would immediately balance our budget overnight, it would've been a massive shock to our economy. You don't reduce federal spending by $1.5 trillion/year overnight and expect a comfortable result in the economy. The correct approach is to ease into a balanced budget over several years by reducing the deficit each year until it reaches zero.

The problem with the agreement is that there are no real spending cuts. Forget about what you may have read in the legacy media. Most of the "cuts" that are programmed over the next decade will never happen since future Congresses will not be bound by the legislation passed by this Congress. And those few "cuts" that actually happen aren't really cuts--they're reductions in the growth of government. So a given program may grow by $19 billion instead of $20 billion... but government spending will continue to grow.

The debt ceiling agreement is a semi-brilliant political maneuver. Everyone (Obama, Republicans, and Democrats) can claim to be reducing federal spending by $2.4 trillion (over a decade) with no-one actually having to make any tough political decisions between now and November 2012. Obama won't have to go through this again before his reelection and Republicans won't have to face the political consequences of having done what is right--which will be economically painful if we ever get around to doing it.

My concern is that we won't ever get around to doing it.

We had three opportunities this year to cut spending: We had the continuing resolution back in April. Republicans punted and instead of the $100 billion in spending cuts they promised in 2010, we got $38 billion in supposed cuts... which ended up being less than a billion. Republicans refused to fight. I was ok with that because I thought the real fight would be the debt ceiling.

Then we had the debt ceiling. After fighting for weeks and suffering all the bad PR that we knew would be launched against Republicans, Republicans again caved and we have essentially no real spending cuts. So Republicans went through the process of being smeared in the press for weeks for no good reason.

Now all we have left this year is the FY2012 budget which must be approved by October. But based on the failures of Republicans to reduce spending in the continuing resolution and the debt ceiling, I have no reason to believe that--even closer to the election--they're going to hold the line when it comes to the budget.

Sure, the "terms of the debate" have somewhat shifted... but that's of little consolation when the outcome of the debate remains the same: Increasing government spending over the next decade. Politicians may have talked about cutting spending, but then proceeded to not cut spending, as usual.

So now politicians in Washington have taken care of the business of kicking the can down the road and will be running for reelection for the next 15 months. If we're lucky, we'll have a Republican House, Senate, and White House after November 2012.

Then will we have real spending cuts and the austerity we so desperately need? It seems unlikely. From a political standpoint, the blame for any painful cuts that were demanded now could at least be shared with Democrats. Sure, the media would blame the Republicans but with Democrats controlling 2/3rds of government there would at least be enough spin available to make the resulting pain a bipartisan responsibility (as it should be since the spending problem is a bipartisan creation).

But if Republicans control 100% of government after 2012 will they make the necessary cuts that they know will be painful, knowing that all the blame for that pain will be assigned to Republicans since we'll control 100% of government?

Probably not. At least given what we've seen of Republicans this year there's no reason to believe that they'll suddenly grow a spine in 2013 when they know there's no way to avoid responsibility for what will be difficult decisions for our country (unless, of course, we elect a heck of a lot more hobbits to Congress and the White House in 2012). All the sudden they'll want to hedge their bets to protect their Republican majority in 2014. And so it goes.

Of course that assumes that we even make it to 2013 without a full-on debt crisis. When the debt crisis hits--whenever that is, be it in 2014, 2013, 2012, or tomorrow--it's "game over" for America as we know it. What happens then can only be a matter of speculation, but it will be a very different world.

And apparently I'm not the only one who's losing confidence that we'll ever address our spending problems. All last week politicians were rushing to pass a debt ceiling bill--any bill--to calm the markets and so we wouldn't lose our AAA credit rating.

Yet yesterday--as the debt ceiling legislation was rushed through the Senate and onto the president's desk--the stock market dropped 266 points wiping out the S&P's gains for the year while gold broke new records hitting $1660/oz in after-hours trading. And even though part of the rush was supposedly to save our credit rating, Moody's lowered its outlook on American debt to "negative." We're still waiting to see what S&P has to say.

Meanwhile, 10-year interest rates on U.S. bonds dove from a high of 3.01% last Wednesday to a low of 2.62% today--losing nearly 0.4% in just a week. Even after the debt ceiling was raised, interest rates crashed lower along with stocks. The last time interest rates were this low was right before QE2 was announced in November 2010; and before that was in December of 2008 when it hit 2.13% at the depths of the financial crisis. Our economic situation is not good.

Regardless of what the markets do in coming days, there's no indication that raising the debt ceiling gave the markets any confidence. In fact, the initial indications are the complete opposite. I believe there's a growing realization that our leaders will not lead us anywhere but to financial ruin.

America, we have a problem. There's a debt crisis coming and the political class in Washington has proven time and time again that, rather than averting it, they'll contribute to it every step of the way.

My only reason for optimism--and the reason I continue to fight--is the reality that it truly isn't too late until it's too late. Up until the day that the bond markets start rebelling, it's not too late to change our fiscal course. We can stop overspending and digging a deeper hole any time we want.

Unfortunately, our politicians in Washington want to see how deep a hole they can dig and every missed opportunity is a step closer to a future we don't want for America.

It would seem the only way to stop Washington politicians from digging a deeper hole is to take away their shovels when they're up for election.

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