Tuesday, July 26, 2011


Last night the president spoke about the looming crisis of default. He tried to explain why we are at the precipice- and he gave what he felt was a balanced approach to the problem. Let me just hit a few high points of this debate- and try and clear up some confusion I see in the media on how they are reporting the story.

First- lots of news guys are saying ‘the Tea Party Repubs are voting for a default’. Is this true? Actually no. Now- their actions might very well lead to a default- but to say they are outright voting for one- that’s not true.

Technically a default would be if the U.S. govt. did not make good on its payments to those who hold our debt. When bonds/treasuries mature- and when the interest is due- if the govt. did not meet these obligations- on time- then that’s a default.

Are the Repubs voting for that? No. So why is the media [and the pres. last night] saying this? The tea party guys are saying ‘look- we got elected by people who wanted the out of control spending to stop, that was the main promise we made to them- and we will not vote for a debt ceiling increase- unless we cut an equal [or more] amount of spending to go along with it’.

This has left the Dems and the Repubs bargaining over these last few months. There are legitimate differences between the 2 sides- and they are at a stalemate. Now- the reason we need to raise the debt ceiling is because the govt. cannot ‘rack up debt’ [by actually paying the monthly bills] without congressional approval. In August we will bring in around 170 billion dollars- the bills are around 230 billion- and the interest payments and maturing bonds come to around 25 billion [estimates].

To not raise the debt ceiling- as a strictly financial decision- does not mean your voting for default. The govt. can pay the 25 billion first [which the constitution demands] and then would have to deal with what gets paid next.

Is it responsible to try and make up the difference in one month like this. No. It’s just too much to cut in one month. Yet technically voting against a debt ceiling increase is not the same as voting for default.

Next- was the president totally ‘honest’ in the speech last night? No. What? Are you calling the president a liar! Look- like everyone else- he fibs every now and again. In the speech he really hedged his bets. He said the reason he’s against a short term increase in the ceiling [6-9 months] is because the credit rating agencies [Moody’s, S& P] would more than likely drop our credit rating if we don’t do a long term ceiling limit lift- just long enough to get the president past the next election.

If you follow the story closely- and listen to the non biased financial gurus- they are saying that the rating agencies have already told the insiders that in 6 months the rating will drop. So Geithner and all the president’s men already know this. So when the president says ‘look you Repubs- if you don’t raise it in one shot- into 2013- then the rating drop is your fault’ ah- the games people play.

And of course both sides play the game- most of the time.

Now- the Repubs floated a few budgets over the last year- different plans- put down on paper- that hung them out to dry. Basically Harry Reid has been not doing his job as majority leader [last year he was asked ‘why don’t you raise the debt ceiling before the election- and the Repubs get in?’ He replied- ‘let them do it and get the blame- not us’. He basically has done this with every important issue- even though the majority party are the ones responsible to float budgets and raise ceilings and everything else- he blatantly admits that he wants the other side to do it- so he can blame them] and has said ‘let the Repubs go on record’ then like a bunch of novices- that’s what the Repubs did!

They took the heat- floated a very unpopular plan [Ryan] and the Dems attacked- all out- grandma over the cliff- the whole 9 yards.

Okay- what did this signal to the credit rating agencies? It told them that yes- indeed- the congress more than likely will not deal with the debt problem [not just raising the ceiling] and because of this fear- they realize now that they might have to drop the rating.

All the European nations who have lost their good ratings [Greece] and who are in trouble [Italy, Spain, Portugal, Ireland] are in trouble by the rating agencies- not because of a false debt ceiling- but because of the actual debt..

The rating agencies are not going to drop our rating simply because the ceiling won’t get raised- they have said this. They are going to drop it because they think the govt. is not really going to deal with the structural problems of the debt.

Reid’s recent plan says he will cut around 2.7 trillion of debt over 10 years. No new taxes- and the ceiling gets raised till 2013. Problem? He’s claiming that 1 trillion of it are cuts to the wars winding down over the next 10 years. Geez- are we really that simple? [these are cuts that are going to made anyway]

Gimmicks like this are why the rating agencies are going to drop our rating- not just a debt ceiling vote of no.

If the final plan- no matter whose it is- if it doesn’t deal with Medicare in a structural way- then it’s not dealing with the debt. Medicare means well- but is has the govt. on the hook to cover the expenses of a private industry- the health care industry. This industry- for whatever reason- is going up in cost at an astronomical pace- and that’s the biggest future problem of our debt.

Social Security simply takes in present money- and then gives it out on a monthly basis- overall that plan can be made whole- not like Medicare. So to overlook the real problems [like Reid's recent plan] will also contribute to a credit rating drop.

So yes- the president is also hedging his bets- saying ‘look- if you don’t extend the ceiling beyond next year- then it’s your fault if the rating falls!’ Ah- he knows the rating is going to fall- they have been told this. And he knows it’s because of all these other things [he’s a smart man]. So he is ‘counting on’ not getting a long term deal- he sees the writing on the wall- and he’s told the country- ‘see- I told you what the Repubs are going to do will hurt our rating’ and sure enough- the rating is going to go down.

Political posturing- by whoever- is not problem solving. I do not side with the hard right- or left- on this issue- and I think not raising the ceiling- right now- is not good. But both sides have to make some hard choices- when the pres did recognize that real changes do need to be made to entitlements- he took heat from his left.

And when Boehner was left standing at the altar [or walked away- depending on how you lean] after agreeing to 800 billion in new tax revenue- he took some heat. But at the end of the day we will need to put politics aside and deal with this very real problem. Make no mistake about it- not raising the ceiling by August would be a mistake- but it’s not an outright vote for default- and when the credit rating drops- it will be because of a lot of reasons- not just because they did a short term deal.


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