Debt Ceiling Debate is Masking the Horrific Economic News

Posted by PITHOCRATES - July 29th, 2011

The Meaning of Bipartisan Depends on your Point of View; on the Right it means Compromise whereas on the Left it means Unconditional Surrender.

In the budget debate to raise the debt ceiling, both sides have dug in.  The Left says the Right is being intransigent.  Saying they are unwilling to compromise.  Even though they have done far less in the compromise department themselves.  They want to raise taxes.  They want to borrow more.  And they will not compromise on these positions.  They refuse to pass any Republican bill in the Senate (and President Obama says he will veto any bill that makes it through the Senate) unless it completely gives way to the Democrat position. 

All the while this theatre is playing out credit rating agencies are lining up to downgrade U.S. sovereign debt due to excessive deficits, debt and out of control government spending.  Unless they see at least $4 trillion in real spending cuts (not promised cuts that never happen or baseline ‘spending cuts’ that still increase spending), the downgrades are a fait accompli.  At least according to an S&P report.

If they’re that Bad at Analyzing Data do we really want them Tweaking the Economy?

As cheerful as all that is at least we can look forward to some upbeat economic news.  Just like Obama, Biden, Bernanke, Geithner, et al have been promising with all their economic tweaks to win the future.  And the result of all that vey extensive and very expensive tweaking?  Hmm.  What would be a good choice of words?  How about abject failure (see Economy in U.S. Grows Less Than Forecast After Almost Stalling by Shobhana Chandra posted 7/29/2011 on Bloomberg)? 

Revisions to GDP figures going back to 2003 showed that the 2007-2009 recession took a bigger bite out of the economy than previously estimated and the recovery lost momentum throughout 2010. The world’s largest economy shrank 5.1 percent from the fourth quarter of 2007 to the second quarter of 2009, compared with the previously reported 4.1 percent drop. The second-worst contraction in the post-World War II era was a 3.7 percent decline in 1957-58.

The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, climbed at a 2.1 percent pace, the most since the last three months of 2009, compared with 1.6 percent in the first quarter, as higher oil and food costs pushed up the prices of other goods and services. The central bank’s longer-term projection is a range of 1.7 percent to 2 percent.

“This is the worst of all worlds for investors, certainly the worst of all worlds for the Fed,” John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said in an interview on Bloomberg Television. “A little too much inflation, not enough growth, that is a tough scenario in the U.S.”

Of course, they’ll say it was even worse than they thought.  Again.  Blame George W. Bush.  Again.  Which doesn’t fill one with a lot of confidence.  For if they’re that bad at analyzing data, do we really want them tweaking the economy?

Still, they keep telling us how bad things would have been if they didn’t act?  Why, there’d be dingoes running in the streets eating our babies.  To be honest, we’re tired of hearing about how many jobs they created and saved.  We’d probably be further ahead today if we’d taken the chance with the dingoes and they left the economy alone.

The Obama Social Engineering is giving us Carter Stagflation

Inflation.  And low GDP growth.  That is a horrible combination.  But it’s what you get when you try to use monetary policy to fix fiscal problems (see Forget About The Debt Ceiling Debate, Where’s The Economic Growth? by Kevin Mahin posted 7/29/2011 on Forbes). 

I recognize that the debt ceiling debate may make for interesting political theatre for some.  I also recognize that the spending and revenue issues underlying the debate need to be addressed sooner than later.  However,  the heightened threat of stagflation*, now present in the system, is of paramount concern to me.

*Stagflation is a financial term often used to describe an environment where inflation (i.e. prices) is high and economic growth is low.  Periods of stagflation have historically been accompanied by high unemployment as well.

We are fast approaching the malaise of the Carter stagflation.  We need fiscal policy that is conducive to creating jobs.  Instead, this administration is more concerned about social engineering at the expense of job creation.

Killing the American Automotive Industry and Killing Americans

For all the talk about the auto bailouts to save American jobs, the latest policy appears to want to kill American jobs.  When the auto industry is suffering anemic growth, the Obama administration just made it harder to be in the auto industry by raising fuel efficiency standards to 54.5 miles per gallon by 2025 (see Obama to unveil auto fuel rule deal by David Shepardson posted 7/29/2011 on The Detroit News). 

The deal would extend a May 2009 agreement that boosted fuel efficiency standards to 34.1 mpg by 2016, costing the auto industry $51.5 billion over five years.

In the current budget debates, Obama keeps saying that because of the slow economic recovery we shouldn’t go on a cost cutting spree.  That would only pull consumer spending out of the economy.  Of course he has no such empathy for the struggling auto industry.  He’s more than willing to raise their cost of doing business.  Killing jobs in the process.

Incidentally, there are only two ways to squeeze this kind of mileage out of a car.  Making it so light that it (and its passengers) would probably not survive most accidents.  Or being unable to build a car to meet this standard.

Gas Prices must Rise to between $4.50-$5.50 for the Electric Car to Succeed

But what on earth would be the reason to enact standards that automakers can’t meet?  Well, how about this (see Gas must hit $4.50 to make electric cars cost-effective by Joel Gehrke posted 7/29/2011 on the Washington Examiner)? 

Gas prices must rise to between $4.50-$5.50, the study authors suggest, for electric vehicles to become less expensive to own than gas-powered vehicles…

Of course, this omits the other method of making electric cars competitive — enact fuel efficiency standards that make gas-powered vehicles illegal to make or impossibly expensive. Given President Obama’s announcement today that fuel economy standards are set to rise to 54.5 mpg between 2017 and 2025, it seems that the electric vehicle industry is getting the government props necessary to make consumers buy the cars.

This is not how you increase domestic auto output.  Or create jobs.  This is how you change human behavior.  By forcing people to act against their will.  And in the process making us all poorer by increasing the cost of food.  How?  Gasoline and diesel are a big component of food costs.  For it takes fuel to grow food.  And to bring it to market.

The One Thing the Obama Administration is Good At

It makes you think.  Is all of this debt ceiling debate pure theatre to distract us from the destruction of the economy?  Because this destruction is pretty good as far as destruction goes.  You probably couldn’t have done a better job if you tried.  Which begs the question was this all planned?  A social reengineering of the United States brought about by the destruction of the U.S. economy? 

If so, at least you can say there was one thing the Obama administration was good at.

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Geithner Shuffles Money, Keeps U.S. under Debt Limit

Posted by PITHOCRATES - May 16th, 2011

The Debt Ceiling Holds, Government Pension Funds Raided instead

Timothy Geithner warned the US Congress that it would be the end of the world if they did not raise the debt ceiling yesterday.  It was that urgent.  Here it is today and the world is still here.  Apparently they were fudging a little with the doom and gloom (see US reaches $14tn debt limit and cuts investments by the BBC posted 5/16/2011 on the BBC News Business).

Treasury Secretary Timothy Geithner has said that he will suspend investing into two large government pension funds.

This delays any breaching of the limit to 2 August…

The full amount of the suspended payments into the two pension funds will be restored if Congress raises the debt ceiling.

Before the Federal Reserve there was J. P. Morgan.  During the Panic of 1907, Morgan bailed out the U.S. banking system.  Because he could.  Because he was that rich.  And because he would.  He cared that much for his country.  People hated him, though, for his wealth.  Can you imagine anyone rich enough to bail out the United States?  Apart from a couple of government pension funds, that is.

Mr Geithner had previously set a deadline for a deal on increasing the debt ceiling to 8 July, but said that better tax receipts meant the deadline could be extended to 2 August.

An extension?  Guess things aren’t as bad as they’ve been saying.  Then again, this administration has not been very good with their forecasts.  The stimulus bill would, they promised, keep the unemployment rate under 8%.  Since that promise and the passing of the stimulus the unemployment rate passed 8 %.  9%.  And even 10%.  Briefly.  In fact, the more they seem to do the worse things seem to get.

In April, ratings agency Standard & Poor’s downgraded its US credit rating outlook from stable to negative, increasing the likelihood that the rating could be cut within the next two years.

Standard & Poor’s didn’t do this because they’re worried that Congress wouldn’t raise the debt ceiling.  They did it because they’re worried about the debt level of the United States.  For two reasons.  First of all, it has to be paid back.  Second, until it is, interest has to be paid.  And the larger the debt gets the harder it makes it to do these things.  In fact, it can get so bad that the treasury secretary could ask Congress to raise the debt ceiling because they have to borrow more to pay their bills.  And when you start borrowing money to pay the interest on your debt it makes creditors nervous.

An Economy still in Recession

And it’s not only Standard & Poor’s worried about the size of the debt (see Economists cut U. S. growth estimates because of fuel prices by Christina Rexrode, Associated Press, posted 5/16/2011 on USA Today).

A survey by the National Association for Business Economics predicts GDP will grow 2.8% this year — down from the group’s February prediction that it would grow 3.3%. Their outlook for consumer spending and the housing market also weakened, in part because they expect oil prices to remain above $100 a barrel through 2012.

In a survey the NABE released Monday, 41 economists also said they “remain highly concerned” about the growing federal deficit, and said growth the first three months of the year had been weaker than expected.

So GDP growth is weaker than first predicted.  Consumer spending is weak.  The housing market is weak.  And oil is still above $100 a barrel.  This is not how recession ends.  This is an economy in recession.  So the U.S. isn’t going to grow itself out of its deficit anytime soon by a surge of tax receipts from a booming economy.  And continued deficits will only add to the debt.  Further spooking the credit markets.

China Spooked by U.S. Growing Debt

So is anybody else nervous out there?  Any of our creditors?  How about the largest holder of U.S. Debt?  China.  If they aren’t worried then there’s probably nothing to worry about (see China cuts holdings of US Treasurys for 5th month by Martin Crutsinger, AP Economics Writer posted 5/16/2011 on Yahoo! Finance).

China, the biggest buyer of U.S. securities, trimmed its holdings for a fifth straight month.

The Treasury Department said Monday that China cut its holdings by $9.2 billion to $1.14 trillion.

And, of course, they’re worried.  At one time, China alone was financing the annual deficit.  Not anymore.  Something must have spooked them.  And it’s not that Congress may not raise the debt ceiling.  Few would doubt the world’s largest economy will be able to service its debt.  They have the money.  They may just have to transfer it from other spending.  Like from some government pension funds.  Clearly, though, the Chinese are not amused.  And that’s some pretty harsh criticism.  Especially considering that they’re a bunch of communists.

It’s not the Debt Limit.  It’s the Debt.

Have you ever missed a credit card payment?  And use your card only to see it declined?  What happens after you catch up on your payments?  You can use it again.  Maybe get a late payment fee.  No big deal.

Have you ever had a financial problem that you turned to your credit cards?  Run up a lot of debt fast?  And one day try your card and see it declined?  Getting that card turned back on isn’t as easy.  Why?  Because your creditors have lost faith in you.  Because your debt is so high that they have doubts that you’ll be able to service your debt.  Let alone pay it down.

This is kind of where the United States is now.  Creditors look at the spending and scratch their head.  They know the spending is growing out of control and needs to stop.  And yet the government spends more.  Telling them that the U.S government is not serious about getting their finances in order.  At this point it’s not raising the debt ceiling that concerns them.  It’s the debt.  In fact, they’d probably welcome a partial shutdown of the government and a missed interest payment or two.  Just to knock some sense into someone somewhere in Washington.

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