The grand compromise over the budget and debt ceiling was scuttled by the House. So, the expected Republican surrender didn’t emerge yesterday or today. And everyone was so hopeful, too. Anyway, we now move closer to at least a technical default on US Securities, and, as a result, Fitch announced today that the US rating was being put on watch for a possible downgrade.
Chicago-based Fitch, the third-largest of the major debt-rating companies behind Standard & Poor’s and Moody’s Investors Service, put U.S. Treasury bonds on Rating Watch Negative, which is sometimes but not always a first step before a downgrade. Fitch said in a statement that it still thinks the debt ceiling will be raised in time to prevent a default.
Fitch said the government would have only limited capacity to make payments on the $16.7 trillion national debt after Treasury Department’s emergency measures run out Thursday.
Speaker Boehner did come up with a plan for some sort of House bill, but he abandoned it at the end of today, apparently not having the votes to pass it.
Last-minute protests from conservatives in the House created a day of delay and confusion in Congress’s efforts to avoid a U.S. debt default, as Republican leaders failed to craft a GOP budget proposal that could muster enough votes to pass.
In an embarrassing retreat for House Speaker John Boehner (R., Ohio), House leaders had to cancel plans to bring a GOP bill to the floor for a vote Tuesday night.
At this point, under Congressional rules, I don’t see how a debt deal can be struck that can pass Congress and be signed by the president before the Treasuries emergency actions on the debt run out on the 17th.
The markets are starting to get cautious about all this. There were 3- and 6-month T-Bill auctions today. They didn’t go especially well. The rate for the 3 month jumped 10 basis points, while the 6-month yield rose 9 basis points from last week. Last month’s 4-week auction was weak, as well.
Doom approaches! Or not.
Meanwhile, the Chinese government is calling for a de-Americanized world.
“The world is still crawling its way out of an economic disaster thanks to the voracious Wall Street elites,” the commentary said. “Such alarming days when the destinies of others are in the hands of a hypocritical nation have to be terminated.”
“The congressmen are behaving irresponsibly not only for other countries but also for” the United States’ “own creditors,” said Mei Xinyu at the Chinese Academy of International Trade and Economic Cooperation, which has ties to the Commerce Ministry. “They are gambling the U.S. future on their political-struggle interests.”
I don’t know what they’re complaining about. After all, we’re funding a great portion of their defense budget with the interest payments on the US bonds they own, so I don’t see why….oh. Wait. If we default, those interest payments stop. OK. I think I’m beginning to see what they’re so upset about. I imagine our messy democratic maneuverings are also a bit foreign and frustrating to a one-party dictatorship, too.
If only we had a dictatorial, one-party, state here, we could do these things so much more efficiently. Just like Tom Friedman always says.
I like the phrase, “political-struggle interests.” You gotta hand it to those Commies, boy. You just can’t beat ‘em for catchy political sloganeering. “The running dogs of the capitalist-imperialist forces” has always been a favorite of mine.
The direction the country is taking bothers me. Increasingly, I see little hope for a bright prosperous future. Frankly, things cannot continue going in the direction they’re heading without a disastrous result.
Mark Steyn wrote earlier this week:
Generally speaking, functioning societies make good-faith efforts to raise what they spend, subject to fluctuations in economic fortune: Government spending in Australia is 33.1 percent of GDP, and tax revenues are 27.1 percent. Likewise, government spending in Norway is 46.4 percent, and revenues are 41 percent – a shortfall but in the ballpark. Government spending in the United States is 42.2 percent, but revenues are 24 percent – the widest spending/taxing gulf in any major economy.
This is unsupportable, by any measure, and should be seen to be so by anyone with common sense, irrespective of political party, but apparently is not. And it’s important to recognize that the reason revenues are at a historically high 24% of GDP—the historical average is around 18%—is that GDP growth for the last 4 years has been atrociously bad, and well below the 3% historical trend rate of growth.
In a rational world, we would make a decision to settle on a continuum somewhere between cutting government spending to 24% of GDP, and raising taxes to 42.2% of GDP, which would necessarily imply massive tax increases on the middle and, yes, even the lower class.
At the moment, however, it is impossible to cut spending to 24% of GDP. Not just politically impossible, though that appears to be true also, but I mean impossible impossible. The reason it is impossible is that 24% of current GDP will not cover the cost of mandatory entitlement spending and service on the national debt. More than 62% of government spending is mandatory spending on essentially social security and Medicare. Another 6% is interest on the national debt, and it’s only that low because 1) the Fed has been buying massive amounts of US treasury bonds, and 2) interest rates are historically low.
In other words, 68% of the federal budget is taken up by entitlements and debt service, alone. We could eliminate the entirety of the rest of the federal government and, at current rates of taxation, would still run a deficit.
At the current rate of spending, we can expect to add over $12 trillion dollars in debt over the next decade. To combat this, the president has requested an additional 1.6 trillion in new revenue, which he expects to gain by increasing tax rates on only the upper class. Even assuming, arguendo, that such a taxation plan would actually result in that much additional revenue—which it likely would not—we would still add an additional $10 trillion in debt.
And that, of course, assumes interest rates would not rise from their current low levels. A rise to the historical rates of interest would increase debt service costs from $250 billion per year to $650 billion per year, or approximately 15% of the budget.
Neither Congress nor the President are proposing a serious plan to balance the budget, which would require a politically impossible mix of massive budget/entitlement cuts, and/or massive tax increases on the middle and lower classes.
Absent such a plan, we will inevitably default on our debt, or hyperinflate our way out of it, both of which are merely two sides of the same coin. In either case, the dollar will lose its status as the world’s reserve currency, and the life savings of every single person in the country—except, perhaps, those embodied in some classes of hard asset—will be rendered worthless. There will be massive unemployment, and a high possibility of civil strife. Imported goods will essentially be unobtainable, and I’m not just talking about BMWs and Land Rovers, but everyday things we never even think about, like fresh fruit from Chile in the winter, or clothes from Singapore and Taiwan at any time.
The least damaging course of action would be a massive reduction in government spending. A more damaging course would be a massive increase in taxation. The most damaging course would be to do nothing but nibble at the edges of spending and taxation until we default, either formally, or de facto through hyperinflation. So far, we are set on the third course.
We are set on a path to completely destroy the currency and economic life of the Republic, and we will inevitably do so without massive tax increases, massive spending cuts, or some mixture of the two.
Meanwhile, in Washington, DC, the Fiscal Cliff negotiations—by which I mean "farce"—continue. Personally, I’m a charter member of the Let It Burn club. The Democrats have set up a narrative in which, no matter what happens, Republicans will get the blame. And yet, 18 months ago, what we’re now calling the Fiscal Cliff was unilaterally hailed as a wise, bipartisan, and far-seeing compromise that would set the country on the road to financial rectitude. And quite frankly, the president is giving every indication that he wants to go over the Fiscal Cliff, and that he can weather the political and economic fallout from it.
OK. Then let’s test that theory.
This is not a risk-free strategy. As Ace of Spades points out:
The Walk Away/Let It Burn option is growing on people. One cautionary note, though: This will provoke a serious constitutional crisis and may undo the Republic. So a soft Let it Burn could turn into a genuine collapse of the Republic.
Obama is a tyrant. If Republicans do not lift the debt ceiling, it is perfectly obvious what he will do, as he’s argued for it before: Like Putin, he will begin unilaterally asserting power he doesn’t have.
And what will be the recourse? Court, I suppose. Impeachment, sure, but Democrats will block conviction. So whether or not the President can suddenly assert sweeping power over the purse — sweeping aside the last real check on his power granted to the House of Representatives — will depend on the vote of Justice Go Along to Get Along Roberts.
President Obama has already asked for it. It’s that one exception I mentioned before: He is asking for unilateral power to raise the debt ceiling and no president should ever have that power.
Our constitution is clear that the money bills must originate in the house. Equally clear is the principle of Congressional supremacy, in that Congress may pass laws even over a presidential veto. The debt ceiling is clearly a Congressional, not a presidential prerogative.
Congress, of course, has already amended the Constitution’s strictures in practice. For instance, the Senate takes House bills, say, for building a dam, and strips the original language, then loads it up with budgetary items. The House accepts them in conference. Additionally, we have operated without a federal budget—though one is required annually by law—since 2009. This is a…constitutional novelty.
But giving unilateral budgetary power to the president goes far beyond novelty. In my view, granting this power to any president will mark the end of the Republic, just as surely as the creation of the First Triumvirate marked the death knell of the Roman Republic.
The American people elected President Obama. It is only right that they should reap the full measure of the consequences of that decision. Ace is right. Going over the Fiscal Cliff may undo the Republic. But if that is true, then I’m entirely unconvinced that the Republic should be saved.
I tend to be more optimistic than Dale about the near-to-intermediate future for the economy and for the culture. This may be unusual for a libertarian, but I’m heartened by many of the ways in which our opponents’ system is unsustainable.
Let me start by saying that, given a certain size of central government, libertarians could do worse than spending almost two-thirds of the budget on a few wealth transfer programs (Social Security and Medicare, both mostly funded by flat taxes, plus Medicaid, which gets much of its funding from the states) and a military like ours. Imagine if that money was spent employing domestic police and busybodies.
But even that government is fiscally unsustainable, so we expect our government to eventually be forced to give up some of its “responsibilities.” Assuming the country avoids a sovereign debt crisis, that adjustment might not be so bad for libertarians. Continue reading
If you wonder why there is this focus on the left on taxing the ‘rich’, part of it can be found here:
President Barack Obama asked Congress for another $1.2 trillion in government borrowing authority, the third and final request under an August deal with lawmakers that averted a U.S. default.
The president’s notification to congressional leaders yesterday starts a 15-day countdown for lawmakers to consider and vote on a joint resolution disapproving of the increase.
An “August” deal and we’re already on the “third and final request”? August for heaven sake. 5 months. Does that at all demonstrate how absolutely unconcerned this administration is with out-of-control spending? Does it help explain the class-warfare, anti-Wall Street, shift-the-blame campaign in which the President has been engaged?
We’ve already exceeded the national yearly GDP with our debt under Obama and now he’s going for more.
Well, except at DoD. There’s he’s slashing muscle and bone on the one hand while proposing a pay-hike for other federal employees on the other.
The debt ceiling increase is to meet commitments already made by the government. The Treasury Department has been relying on accounting maneuvers, similar to the ones employed during the year’s earlier dispute, to ensure that the previous $15.194 trillion limit wasn’t breached.
Since the budget law was approved, the debt limit has been raised twice, by a total of $900 billion. In the latest request, the limit would rise to $16.394 trillion, which the Treasury Department estimates will fund the government until late 2012.
We are so ill served by our current crop of politicians that it almost defies description. We’re past the generational theft of our grandchildren’s money and are working on that of our great-grandchildren.
This is simply inexcusable, yet like an alcoholic or drug addict it seems our politicians can’t help but do whatever is necessary to obtain their next fix of borrowed money. Meanwhile the credit rating for the country has been downgraded and is at risk for further downgrade. And the economic drag on the economy in general this sort of a debt load carries continues to increase.
You want a national tragedy … here it is. You want a national nightmare … its playing out right in front of you and there doesn’t seem like anyone is able to stop it.
But most rational people understand that at some point it has to stop … it has to come to an end. And when it does, this recession will look like child’s play, all thanks to the selfish short-sightedness of our political class. Oh, and yes, the gutless votes who keep rewarding this sort of behavior because it benefits them.
At the risk of sounding like some sort of extremist fanatic, the end is near. And it isn’t going to be a pretty end either.
Following yesterday’s announcement that Greek debt was downgraded to junk status, today Spain’s debt was downgraded as well. Spain is, in many ways the bellwether for Europe’s debt crisis. Spain has a much larger economy than Greece. So large, in fact, that it may be too big to bail out.
Fortunately, Spain’s debt is still less than 60% of GDP; however, the country is on a reckless fiscal path and the government shows no signs of doing anything about it.
As a result of the growing crisis, the Euro is getting hammered in the FOREX market, while the dollar is soaring. This is, in effect, an interest rate hike for US businesses that export to the Euro zone.
Naturally, this places downward pressure on US export sales at a time where the overall business climate is still weak. So, none of this is good news for the American economy, either.