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Posts Tagged ‘Debt Ceiling

The Congressional TP is wrong…and it is killing the GOP.

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Is the New Yorker wrong or has the GOP gone GOP Elephant Closes Governmentover the top? I’m of the opinion that the GOP is hurting themselves for a generation if the most hardline members of their base continue this quixotic campaign. There are a lot of things about the ACA that could and should be fixed that would enable better growth in our economy, but the GOP has not offered any alternatives that fixes the problems of coverage, affordability with consumer protections, or bends the medical cost curve that the nation, as a whole, supports. If the nation had, Romney would be president right now.

What the Republican intransigents were willing to deprive of funds, besides the Capitol police, included the following: The Centers for Disease Control, which said that it would have to stop its seasonal flu-prevention program and would “have significantly reduced capacity to respond to outbreak investigations.” The Environmental Protection Agency, which would close down almost entirely, and the Occupational Safety and Health Administration, which would stop most of its inspections. The WIC program, which provides healthy food supplements for millions of pregnant women, new mothers, and babies, and could run on temporary federal funds only through the end of the month. The Food and Drug Administration, which said it “will be unable to support the majority of its food safety, nutrition, and cosmetics activities,” and would have to halt “the majority of the laboratory research necessary to inform public health decision-making.” The National Institutes of Health, which announced that it would not be enrolling any new patients in ongoing studies or clinical trials.

Since Tea Party conservatives dislike the federal government on principle, the derailing of what the federal government does every day doesn’t bother them all that much. What should bother them, deeply, is the anti-democratic nature of the maneuver. To hold up a budget and shut down the government in order to sabotage a law you don’t like is not just nose-thumbing at the government; it’s flouting the will of the people. Obamacare passed both Houses of Congress nearly three years ago. In June, 2012, in an opinion written by Chief Justice John Roberts, the Supreme Court upheld the constitutionality of its fundamental elements. In November, 2012, Obama, who had devoted much of his political capital to the Affordable Care Act—it will likely be his signature legislation—was handily reëlected. And, last week, on the first day that you could sign up for insurance through the new health-care exchanges, 2.8 million people went on the federal government’s enrollment site. Surely that’s evidence that, whatever else Obamacare will prove to be, it is legislation that is fulfilling a real need: that of the fifteen per cent of the American population who are uninsured, as well as of individuals who are paying exorbitant sums for insurance on the open market, all of whom live with the insecurity of being unable to afford health care. In no small part, fixing this problem was what Barack Obama was elected to do.

In the meantime, the diehard opponents of the bill in Congress remain a faction within their own party, whom fellow-Republicans seem determined to identify by more and more outlandish epithets. To Representative Devin Nunes, a Republican from California’s Central Valley, they are “lemmings with suicide vests.” To Senator John McCain, they’re “wacko birds.” (He used the term in March, when Senators Rand Paul and Ted Cruz were filibustering the nomination of John Brennan for C.I.A. director; McCain later apologized, but Cruz, according to a profile in GQ, has embraced “wacko bird.”) To Representative Peter King, of New York, Cruz is the “con man” who knew “this would never work” but somehow “suckered” House Republicans. Cruz, meanwhile, compared those Republicans who were willing to vote on the budget—and let Obamacare proceed—to appeasers of the Nazis.

It’s worth remembering that in the early nineteen-sixties, when another health-care bill was under debate, the rhetoric of the Republicans who opposed it was just as over the top. We didn’t get socialism, as those opponents warned; we got Medicare, which turned out to be a very popular, mostly high-functioning program that saves elderly people from going bankrupt when they get sick. In the end, as the President says, that is the kind of outcome that the extremist Republicans running this budget battle fear the most: that Obamacare will work, and the Democrats will get credit for it. And what the mainstream Republicans fear the most is that voters will blame them for letting the lemmings run the show. If Obama refuses to back down, this could be a moment that will define his legacy—a fight for democracy as much as for Democrats. ♦

According to reports, the Dems already accepted the House budget numbers, which, in reality, are lower than the Ryan budget for the 6 week CR. Six weeks! It’s not like we’re talking about a full year, for heaven’s sake. That, in itself, is a great win for House Republicans. But attaching a defunding or delay in the individual mandate – that only applies to individuals who don’t get health insurance through their company – to the CR was always going to be a loser for the GOP which they should have known. First, most of the ACA funding is not part of the discretionary (aka annual) budget. It’s self-funded like Social Security or Medicare. Second, the Dems would never agree to delay it start up until close to the next election, making the ACA again another election year issue.

Moreover, using the debt ceiling as a negotiating strategy, regardless of how much the deficit is hated, is not acceptable. It’s one thing to decry how on the House or Senate floor how much the country is going into debt when you know the increase will happen anyway, but it’s another to threaten the US economy with default on the nation’s promises of payment. The debt limit and promised payments to our all of our nation’s creditors, whoever they may be, should never, ever be put at risk.

Yes, there is an ongoing disagreement over the size of the federal government. Some are good arguments, such as should the US be the world’s police force or have a huge, expensive national security state that infringes upon the rights of privacy of citizens, but some are bad arguments such as throwing the least able into the trash can of history. Can government work better? Clearly the answer is yes. Our federal government continues as a model of the 19th Century. But *only* Congress can change that antiquated model…and that change will only occur when committee power and fundraising models change.

Regardless, PIMCO’s El-Erian notes, the failure to increase to increase the debt ceiling would lead to a Great Depression worldwide and cause irreparable harm to the US in prestige, authority, and, most of all, to our status as the world’s reserve currency and the special borrowing rates that status implies.

Further, China, in 2011, when Congress last threatened the debt ceiling as a serious negotiating point, entered into talks with other BRIC nations to replace the US dollar as the world’s reserve currency. China, apparently, received a lot of support among those nations. Does anyone in their right minds believe that China will let go of their ability to reduce the status of the US dollar as the world’s reserve currency when it obviously is in their own interest to reduce the influence of the US? Although the Chinese did not say as much publicly, I am quite sure they would like the Renminbi become the world’s reserve currency.

If US voters do not understand the perils on the world stage and to the US economy of the Tea Party strategy, then God help us all.


Written by Valerie Curl

October 9, 2013 at 9:23 PM

The Making of Debt Deal

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The leaders of both parties and the President have come to a deal. The full Senate and House have yet to vote on it. However, after all the fighting and the loss of $7 trillion so far to the economy, the deal may be nearly done.

Speaker John Boehner sent a powerpoint presentation to his members in the House. Here it is:


What is missing from this presentation by Boehner are the exact numbers that will be cut from each section of the budget, but at least the cuts don’t begin until 2013 which gives the economy another to recover. With 25% or more of American businesses having contracts with or working directly for the federal government, immediate cuts could cause even less demand which would slow the economy even more than the stagnation we’re already seeing. This is a big win for American businesses.

Now if we can get out this death spiral that has occurred over the last week, maybe Congress can get back to the job of actually creating positive policies that can create the jobs Americans need. Like PIMCO’s CEO El-Erian, I vote for an infrastructure bank that partners private money with public resources to rebuild America. GM’s CEO said he even approves of a gas tax to fund infrastructure repairs and rebuilding – that’s a first for an auto company but shows how far the industry has come since its near death experience two years ago.

The rest of the work will be much harder because of ideological differences in Congress, but the fact is we desperately need a tax overhaul to eliminate most of the $1.2 trillion tax expenditures in the code as well as to simplify it. If most of the spending through the tax code is eliminated, tax rates could be lowered while still producing the needed revenues to pay down the debt more quickly and maintain vital services for our families. And of course, that’s not even counting the messy debate about drawing down in Afghanistan and leaving Iraq. But let’s face it, we’re spending more than a $1 billion per solider per year on these wars while asking ordinary, hard pressed middle income families to make sacrifices in Pell Grants, health care, education and elsewhere.

Written by Valerie Curl

July 31, 2011 at 6:26 PM

Default Will Add $100 Billion/Year to Deficit

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Zerohedge.com spoke to JPM head of fixed-income Terry Belton about the consequences to the federal deficit/debt if the debt ceiling is not raised in time to prevent a default or the ratings agencies downgrade our sovereign debt, i.e. Treasury bonds.

…Belton said that a 70 bps increase in interest would result in an incremental $100 billion in interest expense each year. As a reminder, this is roughly the amount that the NPV of a realistic deficit reduction plan over 10 years would chop off from the US deficit on a yearly basis. Simply said: the US downgrade alone, now virtually taken for granted by everyone, will offset any beneficial impact from any deficit reduction that will have to happen for the debt ceiling to be increased. And that, ladies and gentlemen, is why cash flows matters.

The next time you hear someone say a default won’t be a problem or will help tame the deficit, remind them that the financial experts on Wall St and around the world disagree completely.

As a side note, according to a source inside rating agency S&P, the Boehner Plan currently approved by the GOP House will not prevent a downgrade of the nation’s Triple A rating. The source added that S&P probably would be satisfied with Reid’s plan.

Written by Valerie Curl

July 26, 2011 at 2:42 PM

The US Deserves Better…

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US Constitution SigningBecause I live on the West Coast, I get the news from Asian markets before most Americans do. The Asians markets opened much lower today as a result of the failure of Congress of reached a debt ceiling deal. The slide has begun just as Steve Bell [Republican] of the Bipartisan Policy Center predicted a few weeks ago. By the end of the week, I predict an approximate 1000 point loss in the DJIA if a debt deal is not reached.

I admit I’m really pissed off. I cashed out last Thursday at the height of the market, but my children did not. Their retirement and educational funds will be hit big time. Worse still, their employment is in jeopardy. A default will mean double digit unemployment, somewhere in the official range of 20%. Interest rates will skyrocket for debt holders. And even worse, the BRICS will have the evidence they need that the US cannot be trusted fiscally to be the world’s reserve currency. As a result of potential or actual default, the arguments from the BRICS to change the default reserve currency from the US dollar will gain steam which will automatically increase interest rates in the US as borrowing costs will increase.

Political ideology has reached epic proportions to the degree that the entire US economy is at stake. But the partisan divide, as a result of gerrymandering which produces hardened ideology rather than a willingness to seek compromise, a media dominated by hardened ideologues, and focus group approved political rhetoric, is so great as Norm Ornstein notes in his latest editorial in Foreign Policy Magazine that there’s little chance of reaching a compromise.

It may well take a major decline in the US economy to depression levels…as well as the loss of the US dollar as the world’s reserve currency…to bring the US electorate to its senses. But I’m not betting on it. Too many decades have elapsed with too many political gamers in charge to bring the US back into alignment.

Yes, I’m really pissed off that this great country is being brought down so low as to seriously contemplate a self induced major depression – and loss of US prestige worldwide – to satisfy the ideology of a minority of the electorate. The US should be better…at least that’s what my early 17th Century ancestors believed when they left their farm in England to build a new life in the wilderness of Massachusetts and Connecticut.

This nation deserves better than the political gamesmanship being played out in Congress by extreme partisans. It deserves the concern for unity and stability that Geo. Washington exemplified over 200 hundred years ago. Anything less is not just of repudiation of our past but a failure for our nation’s future.

Written by Valerie Curl

July 25, 2011 at 9:21 AM

Defaulting on the Debt

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Dollar representing downturn in economy after debt defaultIn a new Gallup poll, 42% of Americans do not want the debt ceiling raised under any circumstances while 22% do want the ceiling raised. But of the 22% who want the debt ceiling raised, less than a third say that “economic catastrophe” would result from not doing so.

I understand most people are busy with work and family so they don’t have time to explore the implications of a default, but they need to do so because their lives will be greatly affected. It’s not just that social security or medicare payments or military and contractor salaries will be delayed, there far more significant repercussions for the economic health and future growth of the U.S.

1- Sudden, massive drop in the stock market causing huge losses in retirement and savings funds. Most people lost up 1/2 of their IRA or 401k worth – or a combined total of over a trillion dollars – in the ’08 crash. A default will be much worse, wiping out whatever remains in those accounts.

2- Interest rates will soar. Analysts predict interest rates will climb by as much as 50 basis points. That could amount to a doubling of interest rates paid on credit cards, purchases of home and cars, variable rate mortgages, credit lines for businesses, etc.

3- Credit will not just tighten but contract to worse than after the ’08 crash, causing more small to mid sized businesses either to shut their doors or layoff most of their staff.

4- Many more small and community banks will go out of business as the money supply contracts.

5- Businesses large and small will layoff vast numbers of employees again, raising the unemployment figures to double digits.

6 – The deficit could increase by well over $500 billion, even for a short default, as interest rates on Treasury Bonds rise to protect investors’ interests. This increase will wipe out any any savings made thus far in reducing the deficit…and add more to it.

7 – Economists and analysts predict a 10% loss of GDP. In a $14 trillion dollar economy, that’s a loss of over $1 trillion in economic activity.

8- The US dollar is the world’s reserve currency because it’s always been the premier safe currency. As a result of being the reserve currency, the US has been able to borrow at low costs and has never had problems at currency auctions obtaining buyers. Over the last few years, the Treasury has had more buyers than bonds to sell. A default could change all of that. The BRIC countries, especially China, and the IMF have discussed changing the reserve currency to some other currency. A default will give China the argument it needs to push for another currency: the US can no longer be trusted as the keeper of the world’s reverse currency. The result of losing that status will reduce the value of the dollar worldwide and make selling Treasury bonds harder and more expensive.

9 – As the world’s largest economy, the combination of the above would push not just the US but the entire world back into recession – and possible depression. The loss of prestige worldwide by such a self-induced injury will be astronomic. The world may no longer look at the US as a superpower but somewhat like the USSR just prior to its end: without power and influence.

As Citigroup remarked to their investors regarding the consequences of a default, “what can you do after you’ve committed suicide?”

Written by Valerie Curl

July 16, 2011 at 3:56 PM

JP Morgan Sends Warning Letter to Congress & Investors

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On April 19, JP Morgan’s Fixed Income Strategy Group issued a letter of warning (pdf) regarding the negative consequences of Congress’ failure to immediately lift the debt ceiling. Here’s the important part:

Our analysis suggests that any delay in making a coupon or principal payment by the Treasury—even for a very short period of time—would almost certainly have large systemic effects with long-term adverse consequences for Treasury finances and the US economy. These effects would be transmitted through three primary channels: US money funds, the Treasury repo market, and the foreign investor community, which holds nearly half of all Treasury securities. Our main conclusions are as follows:
• A technical default raises the risk of a flight to liquidity out of government money funds, potentially triggering an increase in redemptions similar to that seen in 2008
• Repo markets will be severely disrupted as haircuts are raised and could result in a significant deleveraging event
• Even if the technical default is cured immediately, foreign demand for Treasuries could be permanently impaired. As a case in point, we note that even without any kind of default, Fannie Mae and Freddie Mac’s move into conservatorship has led to permanently lower foreign sponsorship of GSE debt.

We explore these channels in detail in the discussion below. Finally, we emphasize that even if the debt ceiling is ultimately raised before a technical default occurs, the delay in raising the debt ceiling is likely to negatively impact markets, as investors undertake risk-management actions in preparation for a potential Treasury default. Delay could also reaffirm the notion that the political compromise necessary to forge longer-term fiscal solutions is lacking, something that S&P noted in its decision to move its US ratings outlook to negative on Monday.

Further on in the letter, JP Morgan states:

In addition, the equity market would likely sell off sharply in response to a technical default, as it did on the day that Congress initially failed to pass TARP in September 2008. On that day, the S&P 500 fell 9%; using this as a rough guide, we estimate that a decline of a similar magnitude on a sustained basis in the aftermath of a default would take an additional 0.5% off of GDP growth due to lower consumption. Thus, the quantifiable effects of a default alone would likely take about 1% off of GDP growth, and the ultimate damage could be far greater.

Is it worth the risk of throwing the country into another deeper recession when the economy is already fragile, just to keep the debt ceiling – not spending – from increasing? Remember raising the debt ceiling does not automatically equate to increased spending. Just because your credit card company raises your credit limit doesn’t mean you run out and buy a whole bunch of stuff.

But not raising the debt ceiling will have an immediate and harsh impact on jobs and the economy as a whole as well as providing further impetus for the BRICS nations to push for removal of the dollar as the world’s reserve currency.

Written by Valerie Curl

April 23, 2011 at 9:05 AM

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