“RISE ABOVE: THE DEBT THREAT” is the banner on CNBC. Really? Do we really need another 8 weeks of intrigue, countdowns and the proliferations of discussions over another Congressional event? Before we get into the two possible outcomes of the debt ceiling debate let me clarify a few things that makes this whole drama absolutely pointless other than scaring the crap out of people:
The U.S. is a sovereign currency issuer and as such will not default on its debt obligations.
The debt ceiling will be raised as Republicans, as repeatedly demonstrated, will likely fold to political pressure.Tax revenue, on a monthly basis, far exceeds the level of interest payments on the debt – the U.S. will only default if the idiots in Washington CHOOSE to default.
From Cullen Roche: “The US government can always harness its banking system to procure funding for future spending (well, 99% of the time and in that 1% of the time when it can’t the Fed will buy the bonds on the primary market, but that’s a different matter and totally different from QE). The system is designed so the US government can always procure funds. Auctions, for instance, are literally designed not to fail. So the USA is not designed like Greece or Spain. The US government has an inflation constraint, not a solvency constraint.”
The debt ceiling, a necessary check and balance system for government spending, only functions when Congress adheres to the law and actually issues an annual budget. Since Congress has not passed a budget in the past 4 years, and the Senate has already stated they will not issue a budget in the next four, it greatly reduces the relevance of a “debt ceiling.”
The debt ceiling debate is being used to advance political agendas by threatening the public with “economic disaster.”
With that being said I see two possible outcomes from the impending debate on spending and the debt ceiling.
Debt Ceiling Raised With Few Real Cuts – Market Rallies
The first option, and the one I fear is most likely, is that the debt ceiling will be raised with few“real” spending cuts. While the touted cuts will be in the range of $200 billion annually they will be in the form of reduced future spending rather than cuts to current spending. The Republican controlled House will try to pass this off as a victory, however, the deficit will continue to balloon over the coming decade, along with Federal Debt to GDP ratios, doing little to offset the drag on economic prosperity.
The good news is that the financial markets should respond favorably to such an outcome as the worst fears of “austerity” are avoided and government spending continues to support economic growth. With the debt ceiling, and fiscal cliff issues, now resolved the removal of uncertainty, combined with $85 billion a month in liquidity from the Federal Reserve, is likely to propel the markets higher in 2013.
Debt Ceiling Raised With Real Cuts – Market Declines
The second scenario would require the Republican controlled House to stand firm on spending cuts in the face of “economic disaster.” A solid plan of spending reform that reduces actual levels of current spending, as well as dealing with welfare reform, would be a step in the right direction to actually reducing the long term budget deficit and set the stage for future economic prosperity.
However, there are two major problems with such an outcome. First, as stated above, recent history suggests that despite all of the rhetoric, the conservative right will likely fold to political pressure and raise the debt ceiling with few, if any, real cuts to spending. Secondly, this is“austerity” and such cuts will have an additional drag on economic growth in the near term. When those spending cuts are combined with the recent tax hikes as discussed previously, it will most likely push the economy into a recession. In such an environment the financial markets would likely perform poorly despite the concerted efforts of the Fed’s monetary policies.
It’s A Lose-Lose Scenario
For the conservative right there is no solution from which they will emerge victorious. If they fold, and give in to raising the debt ceiling with no substantive spending cuts, they will likely be branded as traitors and ousted by their constituents come the next election cycle. If they do stand firm and garner real spending cuts they will be blamed by the current Administration for the economic recession. Either way – the Republicans are set to take the fall.
Continuing To Bail Out Bad Behavior
Clearly, I see no outcome where the debt ceiling is not raised. It will be raised – it is only a question of how soon and by how much? However, therein lays the problem of having NO BUDGET. Without an approved budget then how much should Congress vote to raise the debt ceiling by? $1 Trillion? $2 Trillion? How much will it take just to cover current spending requirements through the end of 2013 before this debate comes up again?
Why we are having these inane discussions, and posturing on fiscal responsibility, is lost of me? I say this because while I believe that fiscal responsibility is essential for our long term economic prosperity – those responsible for action continue to bailout irresponsible, and in many cases reprehensible, behavior. Look at what just occurred this past weekend:
The reality is that our leaders will continue to engage in fiscally bad behavior until the system cracks under its own weight. Why do I say this? Simply because it has been the history of global economies over the last 800 years. As the chart below shows – increasing deficits have dragged on economic growth.
As Cullen stated this morning: “It’s sad that this is the current state of affairs in American politics. The fact that we’re fighting stupid ideas with stupider ideas would be funny if it wasn’t so sad.”
I agree. In regards to CNBC’s banner – it is indeed time to “Rise Above” such things as childish behavior, partisan politics and threatening the American public with economic disaster to achieve a political agenda. It is time for our Congressional leaders to begin acting like adults and begin to start the process of systematically reducing spending, reforming entitlements and balancing the budget in a manner that does not cripple economic growth. A balanced, thoughtfully constructed, and well communicated path to reform has always been the optimal approach.
The time to have begun such a process was immediately after the financial crisis when stimulus programs had the greatest economic impact to offset drags from reforms. Today, the support from monetary policy is not as strong but still likely sufficient enough to provide a necessary floor. However, the longer that real fiscal reforms are delayed the less supportive monetary policy will be.
The debate on the debt ceiling is likely to come, and go, with little change from the status quo. The Fed is already engaged on creating the next asset bubble while the current Administration is willfully leading us to our next economic crisis. All of this simply to avoid near term economic pain. Sadly, there is no pain-free solution to resolve the what ails growth in America. Hopefully, our leaders will indeed “Rise Above” and actually begin to“lead” and come to a rational solution that achieves long term economic stability and returns America to a path of prosperity.
Images: Flickr (licence attribution)
About The Author
Lance Roberts – Host of Streettalk Live
After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.
Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.
Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.