Raising the Debt Ceiling may be Worse than Default

Posted by PITHOCRATES - July 30th, 2011

Despite U.S. Debt Crisis, U.S. still the World’s Safe Asset of Choice

As Congress debates over the debt ceiling…blah blah blah…Armageddon.  Funny thing is, the U.S. debt problem is not that bad.  When compared to the debt problem in Europe (see Err, over here by Schumpeter posted 7/29/2011 on The Economist).

AS THE August 2nd deadline for a resolution of America’s debt-ceiling row approaches, other news is being drowned out. America’s debt debacle provokes rubber-necking fascination but the euro crisis is still the bigger threat to financial stability.

The chances (admittedly diminishing with time) are that America will get its house in order and avoid default; and that a ratings downgrade will happen but not threaten the pre-eminence of Treasuries as the world’s safe asset of choice. In contrast, the euro area’s crisis is already in full swing and policymakers, as this week’s issue of The Economist makes plain, have not found a way to stop it.

Things are worse in the European Union.  Especially the Eurozone.  And though Armageddon is at hand in the U.S., we’re still the “world’s safe asset of choice.”  So the end of the world as we know it may not be at hand.  But the out of control government spending and debt is fast approaching European levels.  So if we don’t cut our spending and reduce our deficits, we will follow lockstep behind Europe into fiscal ruin.  And then, of course, Armageddon.  

Partisan Democrats decry Republican Partisanship

So this Republican partisanship needs to end.  They need to be bipartisan.  Like the Democrats.  That is, when they’re not being partisan themselves (see For Reid, Durbin, and Obama, a (very) partisan record on debt ceiling by Byron York posted 7/30/2011 on The Washington Examiner).

A look at Reid’s record, however, shows that in the last decade his own voting on the issue of the debt ceiling is not only partisan but perfectly partisan. According to “The Debt Limit: History and Recent Increases,” a January 2010 report by the Congressional Research Service, the Senate has passed ten increases to the debt limit since 2000.  Reid never voted to increase the debt ceiling when Republicans were in control of the Senate, and he always voted to increase the debt ceiling when Democrats were in control…

At look at Durbin’s record shows that he, too, has voted along absolutely partisan lines.  In the last decade, Durbin never voted to increase the debt ceiling when Republicans were in control and always voted to increase the debt ceiling when Democrats were in control.  As for Obama, there were four votes to raise the debt ceiling when he was in the Senate.  He missed two of them, voted no once when Republicans were in charge, and voted yes once when Democrats were in charge.

So the Democrats have a history of being just as partisan as the Republicans.  Even now, as they decry the Republican’s partisanship, they refuse to compromise at all on what they’ve always wanted.  More taxes.  And more borrowing.  So they can spend a lot more.

Democrats open to Compromise, as long as it’s the Republicans doing the Compromising

And they’ve drawn a line in the sand.  No meaningful cuts without new taxes (see Senate Kills Debt Bill, Bipartisan Talks on Hold by Steven T. Dennis posted 7/29/2011 on Roll Call).

“We’ve got a closet full of triggers,” he said. But, he added, “I came to the conclusion that we are negotiating with ourselves. The Republicans will not agree to any triggers that have any revenues in it.”

And Reid noted that Democrats have drawn a line in the sand against any cuts to entitlement programs without revenue.

The Republicans refuse to raise taxes because America is still wallowing in the Great Recession.  Democrats refuse to drop their request to raise taxes.  And flat out refuse to cut entitlements.  Like Social Security.  Medicare.  And the new Obamacare.  Because, though fiscally responsible, it’s not politically expedient.  Which is going to become a BIG problem soon.

Repeal Obamacare and all our Current Troubles go Away

Health care spending will take the U.S. to European levels of spending and debt (see CMS Projections Confirm Runaway Health Care Spending by Kathryn Nix posted 7/29/2011 on The Foundry).

As the economy recovers and the major provisions of Obamacare kick in, national health spending is projected to grow at quite a clip—increasing, on average, 5.8 percent each year. By 2020, the nation will spend $4.54 trillion on health care, or close to 20 percent of GDP. (For the sake of comparison: In 2010, federal tax revenue totaled 14.9 percent of GDP, and all federal spending combined amounted to 23.8 percent of GDP.)

Of course, every cloud has a silver lining.  An S&P report calls for real spending cuts of $4 trillion or more over 10 years to avoid the credit downgrade.  And look at this.  Obamacare will cost $4.54 trillion over some 10 years.  Imagine that.  Save the AAA bond rating.  Leave Social Security and Medicare intact.  And all you have to do is cut one program that no one is receiving any benefits from yet.  Repeal Obamacare.  And all our current troubles go away.

Or you can Devalue the Currency

Of course, that’s one way of solving the current crisis.  There appears to be another.  One that is a bit more destructive (see Answers to the 7 big “what-ifs” of debt default by Lauren Young posted 7/30/2011 on Reuters).

Traders say Asian central banks, among the world’s biggest dollar holders, have been steady buyers of alternatives to the dollar such as the Singapore dollar and other Asian currencies as well as the Canadian, Australian and New Zealand dollars. “Foreigners are at the vanguard of the drop in the dollar,” says Dan Dorrow, head of research at Faros Trading, a currency broker/dealer in Stamford, Connecticut. “I don’t think anyone expects a catastrophic U.S. default. But a downgrade will make them more aggressive in moving away from the dollar…”

The bottom line? It will be more expensive to travel overseas, drink French wine or buy Japanese cars.

A little trade war anyone?  A weak currency is like a tariff.  It makes imports so expensive that we stop buying them.  And buy American instead.  Thus increasing U.S. GDP.  And there is a corollary to this.  Can you guess what that is?  Here’s a hint.  It does something to our exports.  And our vacation market.

Fixing our Economy by Destroying other Economies

A weak currency not only makes your imports more expensive, it also makes your exports less expensive.  Which helps your export market.  And encourages people to vacation in your country because those stronger, foreign currencies can buy so much more (see U.S. Economy: Growth Trails Forecasts as Consumers Retrench by Shobhana Chandra posted 7/29/2011 on Bloomberg).

The improvement in the difference between imports and exports added another 0.6 point [of U.S. GDP].

Overseas sales will remain a backstop for factories. Dow Chemical Co. (DOW), the largest U.S. chemical maker, said demand is “strong” in markets abroad.

“We captured strong growth in Latin America, and the emerging geographies more broadly, while North America experienced moderate growth,” Andrew Liveris, chief executive officer, said on a July 27 conference call with analysts.

So perhaps this is the grand plan.  Increase spending to unsustainable levels.  Incur record debt.  This spending and debt triggers a downgrade of U.S. sovereign debt.  Which devalues the U.S. dollar.  Which places a de facto tariff on imports.  And provides a subsidy for our exports.  And it makes the U.S. a vacation destination.  Until our trading partners retaliate for fixing our economy by destroying their economies.  Like everyone is saying the Chinese are doing by keeping their own currency weak.

Repealing Obamacare would Please the Credit Rating Agencies

So the only bright spot in the U.S. economy is other economies.  Where they’re experiencing growth.  And can easily afford U.S. goods.  Which is about the only market buying them these days.  But for the world’s largest economy (for now) to rely solely on exports can be a bit risky.  Especially if it triggers a trade war.  Which, incidentally, helped trigger the Great Depression.

No, it would probably be more prudent to keep that AAA rating by cutting spending.  Before we spend ourselves to European ruin.  That’s the key to everything.  In particular cutting the fastest growing government expenditure.  Health care.  Which makes repealing Obamacare made to order.  No one is benefitting from it yet.  So no one will even notice this cut.  Other than the credit rating agencies.  Who will stand up and applaud this action. 

For just raising the debt ceiling doesn’t solve the real problem.  In fact, raising the debt ceiling without the $4 trillion in spending cuts will just push us closer to European ruin.

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