How will a fight over the debt ceiling affect the market?

[BTravlin]

Since the spending of gvmt has been going up faster than inflation for many many years... and faster than the growth of GDP.... more [-]'volume'[/-] growth will just make it worse...

There is no way we can grow out of the problem... even if growth was 10% a year...

Not sure I follow.

To restate what I meant, if GDP were growing at a much faster clip then tax receipts would grow dramatically and thereby make the job of the politicians much easier.

 

[Texas Proud]

Not sure I follow.

To restate what I meant, if GDP were growing at a much faster clip then tax receipts would grow dramatically and thereby make the job of the politicians much easier.

OK.. let me rephrase....


Politicians have historically increased spending at a greater clip than inflation... if the economy started growing at a nice clip and tax receipts started to grow dramatically... then spending would start to grow also... you would probably also cause inflation... and since a lot of our budget gets increase for inflation... more spending... and then you have to fund the new programs that will be passed... hence, they would spend the increased taxes...

IOW, we are currently borrowing 40 cents of every dollar spent... it will take a LOT of growth to grow our way out of our current problem... and that is if we do not increase spending...

Sure... more receipts will make it easier for the politicians... but that still does not fix the problems...

 

[Htown Harry]

Columnist Kevin Hassett, a former advisor to the McCain campaign and currently doing time at the American Enterprise Institute, likes the cards the R's have in the house. He predicts a dragged-out affair where the House holds out for $100B of cuts in return for a vote to raise the cap by June.

Boehner Will Win This Game of Default Chicken: Kevin Hassett - Bloomberg

I think his theory is plausible, but unlikely in the details.

He seems to be assuming the president and the D's will be rather passive and predictable, coasting along as the rhetoric - and the stakes for us all - escalate. Statements like "While Democrats may have an articulate president pressing all sorts of alarm bells, Republicans will enjoy something more potent: an actual mandate". This suggests he thinks the D's will be saying little more than "Mr. Boehner, bad things are right around the corner. Pretty puleeese, pass a debt cap raise" (my words, not the author's - with tongue in cheek).

The events of the lame duck session suggest Obama will have a more strategic approach. I hope so, but not because I'm rooting strongly for either side to gain political points. It's because I agree with the author that the ultimate outcome includes some yet-to-be negotiated, relatively modest "steps" toward deficit reduction passing simultaneously with a debt cap raise.

So, Mr. Boehner and Mr. Obama and Mr. Reid, please get on with it.

Which brings me to a strong criticism of Mr. Hassett and his ilk (political think tankers coming from either side). Hassett mentions in his piece that "House Republicans, whom I addressed last week at their strategy meeting in Baltimore, hold all the cards." Re-reading the piece with this in mind leads me to conclude that he is not just predicting a dangerous game of chicken. While working behind the scenes he is advocating it. Shame on him.

 

[BTravlin]

OK.. let me rephrase....


Politicians have historically increased spending at a greater clip than inflation... if the economy started growing at a nice clip and tax receipts started to grow dramatically... then spending would start to grow also... you would probably also cause inflation... and since a lot of our budget gets increase for inflation... more spending... and then you have to fund the new programs that will be passed... hence, they would spend the increased taxes...

IOW, we are currently borrowing 40 cents of every dollar spent... it will take a LOT of growth to grow our way out of our current problem... and that is if we do not increase spending...

Sure... more receipts will make it easier for the politicians... but that still does not fix the problems...

Okay, now we're on the same page. I agree with what you say. I was just saying that many politicians don't seem to have any sense of urgency regarding our debt problem and think growth will take of the problem but that just isn't in the cards, especially if they don't reduce spending.

 

[M Paquette]

Okay, now we're on the same page. I agree with what you say. I was just saying that many politicians don't seem to have any sense of urgency regarding our debt problem and think growth will take of the problem but that just isn't in the cards, especially if they don't reduce spending.

Our very own Government Accounting Office did a study on this published back in January 2008, when the economy looked all bright and shiny. Here's the PowerPoint presentation. (If it's on a PowerPoint slide it must be real!)

http://www.gao.gov/cghome/d08446cg.pdf

From Slide 27:
Current Fiscal Policy Is Unsustainable
• The “Status Quo” Is Not an Option
• We face large and growing structural deficits largely due to
known demographic trends and rising health care costs
• GAO’s simulations show that balancing the budget in 2040 could require actions as large as
• Cutting total federal spending by 60 percent or
• Raising federal taxes to two times today's level

• Faster Economic Growth Can Help, but It Cannot Solve the Problem
• Closing the current long-term fiscal gap based on reasonable assumptions would require real average annual economic growth in the double-digit range every year for the next 75 years
• During the 1990s, the economy grew at an average 3.2 percent per year
• As a result, we cannot simply grow our way out of this problem. Tough choices will be required

 

[ERD50]

It is a Ponzi scheme that everyone understands and is stable. But because Congress has separated the actions of obligating and authorizing a refusal of Congress to deal with this rationally could (would?) destabilize the scheme and cause a crisis. To the extent that the impacts Geithner outlined are accurate, it seems to me that Congress owes it to the American people, and the world for that matter, to raise the cap whether or not they can immediately forge a long term solution to the debt. To intentionally catapult the world into recession round 2 in a fit of partisan peak and frustration with their own incompetence actually would fit the term Glen Beck so lightly bandies about -- traitorous.

Well, if you want to describe it as 'traitorous', maybe you would be interested in this:

Boehner Should Win This Round of Default Chicken: Kevin Hassett - Bloomberg

Obama is no stranger to this game, having played his part dutifully when President George W. Bush sought a debt ceiling increase in 2006. In a close and largely partisan vote, Obama and 43 of his Democratic colleagues in the U.S. Senate opposed the measure.

-ERD50

 

[eridanus]

The fed can continue making payments on interest and debt and can even issue new debt when the old debt matures. Texas Proud wrote this on page 1 -- the revenue greatly exceeds the debt payments.

Geithner's letter is about a choice. We can default OR cut spending elsewhere. A default would make 2008 look like a pebble in the road. It simply won't happen.

Unless instructed otherwise, Geithner has some discretion in what gets paid. I'd guess that delaying the tax refunds will be the first thing we'll see. We'll eventually see federal employee furloughs, followed by Medicare, federal pension (their debt will be called), and Social Security cuts, if nothing gets done by September.

In effect, this isn't really a game of chicken because the debt is manageable. It's the disctionary spending cuts that will kill a career or 50.

 

[BTravlin]

Well this should shake things up and start some interesting conversations.

House GOP Lists $2.5 Trillion in Spending Cuts - US News and World Report

 

[Texas Proud]

Well this should shake things up and start some interesting conversations.

House GOP Lists $2.5 Trillion in Spending Cuts - US News and World Report

This is an important change if it every got passed. Automatic inflation increases means you spend more money, but it does not count...

"Discretionary Spending Limit, FY 2012-2021: Eliminate automatic increases for inflation from CBO baseline projections for future discretionary appropriations. Further, impose discretionary spending limits through 2021 at 2006 levels on the non-defense portion of the discretionary budget. $2.29 trillion savings over ten years."


One thing that I noticed in all that cutting... very very little cut in the farm subsidy... and ethanol.... cutting these should save a few billion...

 

[eridanus]

Well this should shake things up and start some interesting conversations.

House GOP Lists $2.5 Trillion in Spending Cuts - US News and World Report

I see some sacred cows weren't touched.


"Exchange Programs for Alaska, Natives Native Hawaiians, and Their Historical Trading Partners in Massachusetts." Boondoggle alert!

 

[M Paquette]

Well this should shake things up and start some interesting conversations.

House GOP Lists $2.5 Trillion in Spending Cuts - US News and World Report

That's the total, spread over 10 years. A bunch of that is in one-time savings:

80 billion - defunding the recent healthcare legislation and banning Justice from defending against legal challenges
45 billion - recapture remaining 'stimulus' funds
16 billion - repeal Medicaid FMAP increase to states (reinstates the cut in doctor reimbursements, etc)

The article also lists a bunch of annual cuts. It's a start, but not quite enough in sustained annual cuts to have balanced the FY 2008 budget, which they are basing this off of. Nothing that a couple years of double-digit GDP growth wouldn't fix, of course.

Some of the cuts in that list are pretty funny. Not the mohair subsidy! Oh noes! And the usual suspects; Repeal the Davis-Bacon Act (good luck), defund public broadcasting, nibble at federal employee unions, etc.

Even more interesting are the things not cut: DoD spending (Still almost as much as the rest of the world combined), almost all farm subsidies other than sugar (take that, Hawaii and California!), and of course The Third Rail of Entitlements.

 

[Htown Harry]

Well this should shake things up and start some interesting conversations.

House GOP Lists $2.5 Trillion in Spending Cuts - US News and World Report

Going back to the OP's question: If this bill is passed by the House and stays in play for some extended political wrangling over the next few months, what does the forum think would be the short term effect on markets? Why?

 

[ERD50]

That's the total, spread over 10 years. A bunch of that is in one-time savings: ...

Some of the cuts in that list are pretty funny. Not the mohair subsidy! Oh noes! And the usual suspects; Repeal the Davis-Bacon Act (good luck), defund public broadcasting, nibble at federal employee unions, etc.

Even more interesting are the things not cut: DoD spending (Still almost as much as the rest of the world combined), almost all farm subsidies other than sugar (take that, Hawaii and California!), and of course The Third Rail of Entitlements.

Yes, pretty disappointing, but better than nothing. Not even an ethanol cut in there (unless it was in code). Not the kind of substantive 'meet the problem head on' that we need, but I don't think either party is ready for that.

I hope to make it to the 'meet & greet' my rep will have again tomorrow. Maybe I can get some feedback on this.

Going back to the OP's question: If this bill is passed by the House and stays in play for some extended political wrangling over the next few months, what does the forum think would be the short term effect on markets? Why?

Wish I had gone short on mohair futures.

-ERD50

 

[BTravlin]

That's the total, spread over 10 years. A bunch of that is in one-time savings:

80 billion - defunding the recent healthcare legislation and banning Justice from defending against legal challenges
45 billion - recapture remaining 'stimulus' funds
16 billion - repeal Medicaid FMAP increase to states (reinstates the cut in doctor reimbursements, etc)

The article also lists a bunch of annual cuts. It's a start, but not quite enough in sustained annual cuts to have balanced the FY 2008 budget, which they are basing this off of. Nothing that a couple years of double-digit GDP growth wouldn't fix, of course.

Some of the cuts in that list are pretty funny. Not the mohair subsidy! Oh noes! And the usual suspects; Repeal the Davis-Bacon Act (good luck), defund public broadcasting, nibble at federal employee unions, etc.

Even more interesting are the things not cut: DoD spending (Still almost as much as the rest of the world combined), almost all farm subsidies other than sugar (take that, Hawaii and California!), and of course The Third Rail of Entitlements.

Yes, they need to add more cuts in many more areas if they want to be taken seriously. We have hundreds of military installations around the world and surely we can do without a couple dozen of those at least. Neither side wants to touch agricultural subsides though. I guess nobody wants to piss Iowa off.

 

[M Paquette]

CBO Analysis of Congressman Paul Ryan's Roadmap proposal

http://www.cbo.gov/ftpdocs/108xx/doc10851/01-27-Ryan-Roadmap-Letter.pdf

The good news is that The Roadmap does eventually reduce the deficit to zero.

The bad news is that the deficit reaches zero around 2060, and the preceding half century of deficits runs the national debt to about 77 trillion dollars. It looks like we'll still have to raise the debt ceiling.

On Medicare, the proposed voucher system does cap Medicare spending as a portion of GDP, keeping it under 4% past 2050. That's compared to the current situation, projected to be 9% in 2050, rising to 15% in 2083. Both the level of expected federal spending on Medicare and the uncertainty surrounding that spending would decline, but enrollees’ spending for health care and the uncertainty surrounding that spending would increase.

 

[Gone4Good]

I just read a Reuter's poll that says 71% of Americans don't want Congress to raise the debt ceiling.

. . . 80% don't want their taxes raised, and 82% don't want their benefits cut.

99% are morons.

 

[Gone4Good]

http://www.cbo.gov/ftpdocs/108xx/doc10851/01-27-Ryan-Roadmap-Letter.pdf

The good news is that The Roadmap does eventually reduce the deficit to zero.

The bad news is that it doesn't when the tax proposals are included. The CBO analysis linked above doesn't factor in Ryan's plan to significantly cut taxes. From page 4 of the above linked CBO analysis . . .

Other Tax Provisions. The proposal would make significant changes to the tax system. However, as specified by your [Paul Ryan's] staff, for this analysis total federal tax revenues are assumed to equal those under CBO’s alternative fiscal scenario (which is one interpretation of what it would mean to continue current fiscal policy)

So much for seriousness.

 

[M Paquette]

. . . 80% don't want their taxes raised, and 82% don't want their benefits cut.

99% are morons.

Noticed that, didja?

The thing about polls is that rather than representing some sort of collective wisdom of the people, they are more of a reflection of the lowest common denominator. If you can get some yahoo with a megaphone to repeat anything often enough, it starts to sound familiar, and will likely be regurgitated in response to inquiries.

We have a Congress, rather than direct governance through polls, for a reason. Congresscritters are supposed to be a deliberative body with our best interests in mind, with polling information merely one more source of information for them. Of course, they do have to survive the poll that counts, the elections, but in theory if they've acted with our best interests in mind, and clearly communicated that, then they have a fair crack at being re-elected.

Of course, for them to act with our best interests in mind, and communicate that back to us, they have to be heard over the noise from all the yahoos with megaphones.

 

[M Paquette]

The bad news is that it doesn't when the tax proposals are included. The CBO analysis linked above doesn't factor in Ryan's plan to significantly cut taxes. From page 4 of the above linked CBO analysis . . .

So much for seriousness.

Well, a fella's gotta have his bread and circuses. Under the alternative scenario, with a 28% of GDP annual deficit and 433% of GDP debt in 2060, almost doubling by 2080, I'm sure that the good Congressman and his colleagues will find the golden showers of trickle-down economics adequately stimulating to the nation.

Or not.

The CBO document compared the Roadmap proposal, assuming that Congress can stick to it for half a century (not a great assumption) with what the CBO calls the alternative scenario, which rather than adhering to current law, follows what is more likely to happen based on past history, with Congress patching Medicare payments, the AMT tax thresholds, and similar tweaks every year or two.