Apart from The Deathly Hollows: Part II, all eyes are riveted on the debt limit drama—whether or not the legal limit of $14.3 trillion will be raised before the Treasury runs out of cash. A spokesman for the Chinese Foreign Ministry, well aware that his country sits on $2 trillion of Treasury, Fannie Mae and Freddie Mac debt and speaking like a true capitalist, expressed hope that “the U.S. government adopts responsible policies and measures to guarantee the interests of investors.” Moody’s and Standard & Poor both warned that they will chop the U.S. Treasury’s coveted triple AAA rating unless the debt limit is raised and concrete steps are taken to narrow the fiscal deficit.
Bringing Hamlet up to date, “To default or not to default, that is the question.” Contrary to media hype, which tells us that August 2, 2011 is the magic date when the question will be answered, this play promises to have many acts. Why? Irresistible force meets unmovable object. Republicans insist that spending growth must be stopped in its tracks, the federal government tethered to outlays no higher than 18 percent of GDP, and to ensure these promises “no new taxes.” Democrats seem willing to curb the trajectory of out-year spending, but they will be damned if federal programs (including Medicare and Social Security entitlements) are slashed below 24 percent of GDP, so they insist “new taxes on the rich.” Those conflicting positions spell a federal deficit of 6 percent of GDP, continuing escalation in the ratio of federal gross debt to GDP (already over 100 percent) and a sure downgrade in the Treasury’s AAA rating.
There is a political answer to this clash—but it will not come before January 2013. As Congressman Paul Ryan has declared, in the 2012 election America will choose between two paths: revoking future entitlement promises already written into law, or increasing the federal tax burden by at least 4 percent of GDP. This is a momentous decision, as big as any our nation has faced in recent decades. One choice spells a Republican in the White House and Republican control of the Senate and the House; the other choice spells the reelection of President Obama and Democrat control of Congress.
With the 2012 election in mind, over the next fifteen months every political decision on the debt limit, spending and taxes will be shaped foremost by calculations of its impact on voters. President Obama faces the election dragging a ball-and-chain: 9 percent unemployment now, not below 8 percent by November 2012. He has an enormous stake in avoiding financial instability that would make a bad employment picture worse and shatter whatever credit he can take for lifting America out of the Great Recession. From a White House perspective, default and downgrade must be averted at all costs.
What about the Republicans? Their fear is repeating Speaker Gingrich’s political pratfall when he shut down government twice in the winter of 1995-96. Default is not attractive either to Senate Minority Leader McConnell or Speaker Boehner because they can’t control how the political chips will fall. In the wake of such an action, President Obama and Treasury Secretary Geithner would decide the priority order of federal outlays, and their ordering would surely confer maximum discomfort on the Republican Party.
Downgrade is a different story for the Republicans. If a downgrade can be linked in the public mind not to failure to raise the debt limit but rather failure to control the deficit, then the monkey can be put on the president’s back. That’s the play we’ll see unfold act by act until the next election. Incremental increases in the debt limit—with the outlook always a few months away from default, coupled with a downgrade by Moody’s and S&P, complaints from China and other holders of Treasury debt and a weaker dollar in foreign exchange markets.
Suppose, in November 2012, faced by a clear difference between parties, the American public repeats past practice and returns divided government to Washington. Like today’s White House and Congress, their successors will be no better able to agree on the choice between cutting spending and raising taxes. But they might agree that “perils of Pauline” is not a good story line for American finances. Strange things could come out of this pact. Perhaps a balanced budget amendment of the sort advocated by Senator Hatch; perhaps enforced by automatic cuts in out-year entitlement spending; and perhaps a one-time bump in federal tax revenues from the historic norm of 18 percent of GDP to 22 percent of GDP.
Comments
The ratings agencies, "Mini-Me's" to the thieving, lying international bankers, can be bought by anyone. They're unindicted whores, not to be taken seriously. They'll threaten a "downgrade" so their pimps, the bankers, keep making 30-40 billion dollars a month on interest, compliments of the American taxpayer. The USA can pay it's debts, but Obama wants to increase them, too....by the trillions. He's nuts, and rather dumb (no wonder his grades have been hidden). I'd prefer a default, even though it's an idle threat, to financing Obama's campaign with more borrowed money. Can anyone else cry for Goldman Sachs if they don't get their way and continue the grift? If you have any qualms, look at how they destroyed Greece for profit! Let's cut the federal credit cards and cash loans in half to save our grandchildren, bring the troops home to save our children, slowly decrease "entitlements" as free lunches, and protect our economy from the financial rapists in Peking and on Wall Street, who speak to each other in fluent Mandarin. Ask Geithner!
I really have to agree with Valen! The spending is getting egregious and there's really no way out of this debt trap unless we clean up our act on the global stage. That means no more wars that aren't affiliated with an imminent threat to the safety of Americans. Also, I think it was Warren Buffet who said that congressmen and senators shouldn't be able to get re-elected if they don't come to an agreement on a budget. The Republicans are like a teenager with a credit card in a mall... Any place with a credit card machine poses a problem for judgment calls of need vs. want. We really don't need 140 million dollar war planes and 2000 nuclear warheads. They just want them to fluff their feathers at the rest of the world. Hopefully, we won't see a repeats of the arms race from WWI.