U.S. Debt/Deficit Reduction Congressional Negotiations

[nwsteve]

Given the recent drama and seemly increasingly entrenched positions by the Republicans and Dems, what are your feelings of what will happen by Aug 2, the so-called "deadline" for approval of increase in US Debt Limits?
Will they actually big able to pull-off the "big deal" and get a $4Trillion package including reform in entitlements or will they be stuck getting by with a $2Trillion package that gets them past 2012 Elections. Or, does the battle go past the Aug 2 deadline.
Personally, as polarized as all the positions are now, I do not expect much than what is minimially necessary. There seems to be few in Congress are able to look much beyond their own terms in office and "kicking-the-can down the road"
Nwsteve

 

[eridanus]

They'll default. Bond prices will plummet. But, hey, the debt limit wasn't increased and at least defense wasn't cut.

UPDATE 2-U.S. House approves $649 bln for defense in 2012 | Reuters

(Oops, you mean there's not enough money to pay military salaries?)

 

[chinaco]

They will not default.

If they do not lift the debt limit.... they will approve a temporary measure of some sort.

If, for some reason we could not meet our obligations... it will cause problems.

If voters are affected... for example if SS payments are not made, or businesses do not get paid (cause layoffs), etc...

Many incumbents (regardless of party) will likely be pushed out of office. Voters will take it out on whoever was in office for not stopping it! The only person they can take it out on is their reps and senators!

http://www.pollingreport.com/cong_rep.htm
http://www.pollingreport.com/cong_dem.htm

Both parties in congress are getting high disapproval ratings (60+% disapprove).

The next election could be a: "Throw the bums out" election.... with the "Bum" being the incumbent (whatever party).

 

[frayne]

Political gamesmanship nothing more, if the roles were reversed the Dems. would be doing the same crap. Neither party is stupid enough to let the US go into default.

 

[devans0]

The more politicians that I get to know, the less confident I am that political posturing and egos won't trump (pun intended) common sense. I remember another showdown that tipped over a slight about someone having to leave an airplane by the back door and miss his photo op.

 

[samclem]

According to the Speaker of the House, it looks like the President and Congress are giving up on the $4T deal and shooting for the $2T deal.

"Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt reduction agreement without tax hikes," Mr. Boehner said. "I believe the best approach may be to focus on producing a smaller measure, based on the cuts identified in the Biden-led negotiations, that still meets our call for spending reforms and cuts greater than the amount of any debt limit increase."

I'll be interested in seeing these "cuts." The last time Speaker Boehner was crowing about all the cuts he'd achieved, most turned out to be imaginary.

I'd prefer a $4T deal even if up to $1T was increased revenues, provided the increases came from a simplified tax code which thereby increased the productivity of available capital. Not all "tax increases" are the same. I guess this kind of deal just ain't gonna happen in the present environment.

 

[ERD50]

They'll default.

They will not default.

I'm solidly in this camp!

I'd prefer a $4T deal even if up to $1T was increased revenues, provided the increases came from a simplified tax code which thereby increased the productivity of available capital. Not all "tax increases" are the same. I guess this kind of deal just ain't gonna happen in the present environment.

I (seriously) agree. I'm not opposed to some tax increases if they make 'big picture' sense. Simplifying the tax code is a 'no-brainer' AFAIAC. Adding another tax bracket could make some (small amount) of sense. As has been noted, a married couple making $250,000 in a high COLA area certainly are not "rich" in the same sense as someone making $10,000,000. As I understand it, there aren't that many multi-million $ incomes to make a big difference in revenues if we raised rates on them, but it would be something, and acceptable to most people (not making over $1M ).

-ERD50

 

[donheff]

I thought they might actually pull off the "big deal" but that looks unlikely. We won't default, if we get that far Obama will cite the 14th amendment to keep paying our bills (sensibly in my opinion). But that just kicks the can down the road a few months until we run into continuing resolution time and a government shutdown situation -- there is no amendment to remedy that. What I think will be interesting is if Moody's or someone downgrades government paper if 8/2 approaches and the idiots are still fiddling.

 

[scrabbler1]

What I think will be interesting is if Moody's or someone downgrades government paper if 8/2 approaches and the idiots are still fiddling.

I see this as very likely to happen, like a big warning shot to Congress and the president that there are consequences to inaction. A credit rating downgrade is also easily reversible if and when Congress and the president make a deal later, hopefully not too much later. State and local governments often see their credit ratings get downgraded when their fiscal houses are shaky, then get upgraded later when they get their fiscal houses in order again. Even if this is the first time it happens to the federal government, they should be treated no differently.

 

[Midpack]

I'd be really surprised if they do any more than the minimum possible. While they talk big individually, spouting their respective party positions for the most part, collectively they just 'kick the can down the street.' And with an ever more polarized and [-]clueless[/-] apathetic electorate, it's sad but not surprising.

"You can always count on Americans to do the right thing - after they've tried everything else." Winston Churchill

Seems more true today than ever IMO...

 

[donheff]

In today's Post I there was an article about the debt ceiling that said we "defaulted" for two weeks in 1979 because of combination of failure to raise the ceiling in time and a breakdown of Treasury's check printing machines. The article says a 1989 academic study found that raised interest rates by .6% for years afterward. So a "temporary" downgrade might be longer lived than the disruption causing it.

 

[clifp]

In today's Post I there was an article about the debt ceiling that said we "defaulted" for two weeks in 1979 because of combination of failure to raise the ceiling in time and a breakdown of Treasury's check printing machines. The article says a 1989 academic study found that raised interest rates by .6% for years afterward. So a "temporary" downgrade might be longer lived than the disruption causing it.

The Washington Post article spurred me to doing a bit of googling. Here is a more detailed article

And a chart

It is worth noting that a .6% spike in interest rates is $85 billion a year in higher interest cost for the country, of which roughly 1/3 goes to foreign investors. If we do default I vote we take the $85 billion out of Congress, the White House, and their staffers salary .

 

[Gone4Good]

The last decade of my career I spent making institutional investment recommendations in the utility sector. Often times state politics played a meaningful role - to the point in several cases of threatening the bankruptcy of the state's utilities.

What I learned over those ten years is that logical outcomes that can easily be reached by reasonable people are not always the political path of least resistance. I found willful ignorance to obvious consequences blinded participants to those 'logical outcomes.' Often it took near disaster for the scales to drop from legislators eyes.

In almost all cases, investors were too complacent and 'surprised' by initial outcomes that appeared so obviously destructive to the best interest of everyone involved. That seems to be the situation we're in today.

 

[M Paquette]

Moody's Places US Government Bond Rating on Review for Possible Downgrade

This should be good for a few more basis points on Treasuries.

From the Moody's Investors Service note:

Moody's Investors Service has placed the Aaa bond rating of the government of the United States on review for possible downgrade given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations. On June 2, Moody's had announced that a rating review would be likely in mid July unless there was meaningful progress in negotiations to raise the debt limit.
...
The review of the US government's bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes. As such, there is a small but rising risk of a short-lived default.

Moody's considers the probability of a default on interest payments to be low but no longer to be de minimis. An actual default, regardless of duration, would fundamentally alter Moody's assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate.

Update: The full note and a bit of commentary is online here:
Moody's Puts US on Review for Possible Downgrade - MarketBeat - WSJ