Wednesday, July 27, 2011

All Just A Little Bit of History Repeating

It's all just a little bit of history repeating...........

We tend to have short historical memory. Ronald Reagan signed bills to raise the debt ceiling 18 times. George W. Bush did it at least 7 times. Typically, doing so is so routine -- and such an obvious need for the economy -- that the bill to do so is one page. And now we have this manufactured crisis.

Let's review: If the United States of America defaults on its loans or can't pay for all the things Congress has already approved for spending, then the world's investors will no longer see the U.S.A. as safe an investment as it has always been. Remember the 10-Year Treasury Bond is the gold standard of safe investments (see prior posts).

If that happens, then investors will require a higher interest rate for the 10-Year Treasury. If that happens, because the 10-Year Treasury sets the floor for almost all other interest rates, we will see a rise in interest rates that businesses use (big and small) to finance their businesses and therefore will incur a manufactured "tax" on their loan interests. Consumers will see a rise in interest rates in credit card rates, car loan rates, and most devastating of all, mortgage rates. If you don't like tax hikes, you will abhor this.

Still, there is this manufactured crisis that is threatening to become all too real right now, forced by our politicians over something that should be routine. Should there be a debate and resolution about sustainable financing of the government? Of course. Should it be at the threat of the nation honoring it's debt obligations? Oh hell no.

The time for the honest debate has now passed. We can continue it, but we can't let the United States of America default on its debt obligations. The market plunged 200 points today in the Dow. It may be occurring to "serious smart" money that the adults in Washington DC are actually, possibly, not in charge.

Still, though... this too shall pass. We won WWII and our economy rebounded. We fought the USSR and won. We dealt with 911 and $2+ Trillion in historical tax cuts while fighting 2 simultaneous, rather ill-advised wars. We took a budget surplus in 2000 and turned it into a stupendous debt even before the economic crisis happened. Reagan gave us our first trillion dollar debt. The debt when George W. Bush took office was "only" $5.6 Trillion. Can this nation have been through so much, and done so much in the past 10 years, that we can't set the course straight again? I doubt it. And so do the world's investors who are help fueling our frustratingly slow recovery, but still a recovery. Mortgages and the 10-Year are still historically low today, even with the Dow 400 points down this week.

How patient will the world's investors be, however, if our politicians continue not to be responsible with our nation's economy? Will this become another historical inflection point? I hope not. I hope the adults really are in charge. We'll find out what the world's financiers, who have our economic future in their hands by the decisions they make based on risk factors only, believe as they continue to watch the absurdities taking place in Washington DC. Let's hope the adults take the wheel soon. I predict they will.

Tuesday, July 26, 2011

To Veto or Not to Veto

Okay so here's what we got:

It took until today for a 2nd degree "veto threat" of the Boehner plan, which Wall Street and CBO has also warned would not avoid a downgrade in our AAA national credit rating by S&P.

Key to understanding the current political theatre is bearing in mind how presidential elections are won in the end: within 2%. So winning the presidency, after the primaries, is thus: scare the base + motivate the base + independents = 51%.

So all of the fight for the incumbent presidency is about a fight for the middle 2% of the electorate. I think that's why the President kept a mostly moderate tone and didn't throw any serious jabs; at one point even paid credit to Speaker Boehner. Most watchers, including me, wondered if he was going to issue a 1st term Clintonesque unequivocal veto threat. That would have pushed away the middle 2%.

Instead, today, only under the light of us wonks following every move, the White House issued the 2nd degree veto threat of the Boehner plan by saying that the Presidents "advisers" would recomend he veto it (namely a short term bill instead of one that Wall Street prefers and we need which would extend the debt ceiling through 2012). The 1st degree threat is an outright declaration from the President himself. I doubt that's forthcoming. It would be like rubbing your feet on the carpet in a room full of gas.

The markets still aren't reacting to the made-up crisis. That's encouraging. But Wall Street and Bloomberg News and the head of the IMF made clear today that the time for resolution is immediate. We'll see how seriously the "serious" people in Washington take that message.

Monday, July 25, 2011

And Here We Are: More Debt Debate

I'm amused now, July 25th, reading my most recent post foretelling the path of the debt ceiling debate from two months ago. Up until today, I have stood by my last post. But tonight, the President has called a national address on all news and network channels. Why?

Today, the markets (to be clear, by "markets" I mean the stock and generally traded markets; I once was deposed as a witness by a dim-witted attorney who didn't understand the context of how I use the word when he cited a blog post of mine), anyway today the markets didn't react much at all to the unresolved debt ceiling debate. I think that's because the "serious, smart" money thinks as I do and many others, "Well of course Congress will raise the debt ceiling to avoid financial Armageddon in a sputtering economic recovery." But tonight that becomes less clear. There is no "forming consensus" in Washington. No plan at all - and I can count at least 5 plans - none can pass Congress as things stand.

To be clear, the Democrats and this Democratic President have put, contrary to past ideology of the party, a) entitlement cuts on the table, b) a $2.7 Trillion spending cut plan with no new revenues plan on the table (Senate Majority Leader Reid's plan), and c) last week, the President was pushing what most financiers are wanting, the "Grand Deal" of $4 Trillion over 10 years deficit reduction with a mix of spending cuts and new revenues (which doesn't necessarily mean tax raises) at a ratio of 3/4 spending cuts (is that a party of "spending?") and 1/4 new revenues without raising marginal tax rates. If the Republicans think the President was bluffing, my god why didn't they call his bluff?

Right now the Republicans are losing, despite what the very able and smart Ezra Klein says at The Washington Post, and they could be losing for a generation. If the President and Democrats win big with the message that Democrats are the economically sensible party, they will be able to show that they have been willing to stand up to their base and bend over backward (as usual) to accommodate Republicans, particularly on an issue that middle-road voters perceive Republicans always win. No more. No more? We'll find out.

What's clear is that the new (2008 and especially 2010) Republicans in Congress are the most radical of this generation. It's clear that the intersection of "gut politics" (think Southern Strategy of Nixon) and the very serious nature of... reality... are coming to an uncomfortable and potentially explosive junction within the Republican party. Now what?

Well for now we just have to wait 3 minutes and see what move the President makes next...