Comedic Timing: Debt Surpasses $16 Trillion as DNC Begins

During his first run for president, Barack Obama described the four trillion dollars that then President George W. Bush had amassed during his eight years in office, as "unpatriotic."

This past March, CBS News reported that the national debt had increased more under President Obama than it had during the entire Bush 43 administration.

But comedy is all about timing. That's what makes this report from Politico so funny: Debt to hit $16 trillion as DNC kicks off:

Bad timing for Democrats: The gross national debt is set to hit $16 trillion Tuesday as the party’s convention gets under way, and Republicans are pouncing.

Related articles

• Breaking: US Debt Officially Passes $16 Trillion on First Day of DNC (thegatewaypundit.com)
• The National Debt: $16 Trillion Dollars Of Moral, Cultural And Political Decay (tarpon.wordpress.com)
• Beware This Fully-Operational Debt Star (pjmedia.com)
• Debt to hit $16 trillion just as party gavel in convention... (washingtontimes.com)

Obama's Role in our Sovereign Debt Downgrade

ZeroHedge: Equities In Dallas And Sovereign Debt Ratings:

All else aside, when the President of a country states repeatedly that we could default, someone at the rating agency is bound to notice.  Even the Italian politicians take time away from their various antics to mention that Italy is in great shape and will always pay her debts.  I just don’t see S&P doing anything else in the U.S. for awhile.

That pretty much nails it. Instead of talking up the economy, the President talked it down as he demagogued his side of the issue. That, combined with the fact that S&P wanted $4 trillion or more in cuts, instead of the smaller amount agreed to, has seriously undercut confidence.

Related articles

• China's Dagong Credit Rating Agency Downgrades US Credit Rating (thegatewaypundit.com)
• Speaking Of "Credibility", Here Is The CBO's 2001 Forecast Which Predicted Negative $2.5 Trillion Net Debt In 2011 (zerohedge.com)
• Some Perspective On Italian Bonds (zerohedge.com)
• ECB As European Lender Of Last Resort = Institutional Purveryor Of A Pan-European Ponzi Scheme (zerohedge.com)

CATO Examines the Price of a Ratings Downgrade

 

CATO Institute: The Price of a U.S. Credit Rating Downgrade:

The federal government's debt may soon be downgraded by major credit rating agencies. What would that mean?

The video above is a good introduction to the ramifications of the S&P downgrade of our debt rating from AAA to AA+.

Related articles

• S&P downgrades U.S. debt (stltoday.com)
• Standard & Poor's Downgrades U.S. Credit Rating for First Time in History (theblaze.com)
• Guest Post: Equities In Dallas And Sovereign Debt Ratings (zerohedge.com)

"‪The Spending is Nuts" Wins the Power Line Prize

Power Line: The Winner of the Power Line Prize Is… Justin Folk:

"When I first heard of the contest, I found it hard to believe that anyone would put up such a great prize to offer creatives a chance to dramatize the debt crisis. Most people don’t want to think about debt or the dangers it holds. Wars and environmentalism have attracted most of the attention of creative people in our culture–and not usually for a good result. But when you consider what debt can do and has done to nations throughout history, we’d be fools to not recognize our country’s solvency as the single greatest issue we face today. In my piece, I wanted to not just show how bad the problem is- which is in itself a noble effort since 15 trillion is hard for most to comprehend–but I sought to convey how we got to this point, and our choices moving forward."

The "Squirrels" video is appropriate for liberty minded folks of all ages.

Related articles

• ANNOUNCING THE POWER LINE PRIZE: Power Line, in conjunction with the Freedom Club, is offering a gr... (pajamasmedia.com)
• The Imminent $2.5 Trillion Debt Ceiling Hike Will Unleash A Gold Price Surge To $1,950 And Higher (zerohedge.com)

‪Senator Rubio Speaks Tea Party Truth to Entrenched Establishment Power

 

Sen. Marco Rubio (R-FL) delivered a tremendous soliloquy on the floor of the Senate Saturday. He yielded to a couple of questions from Sen. John Kerry (D-MA). Simply put, Sen. Rubio spoke Tea Party truth to entrenched establishment power. And, really, watch the whole thing--it just keeps getting better.

Related articles

• Marco Rubio Tells It Like It Is (minx.cc)
• A U.S. Sovereign Credit Downgrade Is No Laughing Matter (zerohedge.com)
• Rubio Takes on Obama, Dems: 'We Don't Need New Taxes, We Need New Taxpayers' (theblaze.com)
• Rubio: I'm not going to be the Vice Presidential nominee (hotair.com)
• Sen. Kerry calls conservative House Republicans 'small group of absolutists' (thehill.com)

Speaker of the House John Boehner Goes Mano-a-Mano with the President

 

Associated Press: ‪House Speaker Says Obama Won't Get 'blank Check'‬‏:

House Speaker John Boehner says Pres. Barack Obama wants a blank check from Congress to raise the debt ceiling, but that he's not going to get one. In his response to Obama's televised address, Boehner gave no indication of compromise.

Related articles

• Did Obama refuse a bipartisan deal on the debt ceiling? (hotair.com)
• Obama Scrambles to Look Relevant in Debt Talks (biggovernment.com)
• IRA STOLL: Boehner Was Better: President Obama, in his televised talk tonight, trotted out the s... (pajamasmedia.com)
• Speaker Boehner: GOP Will Deny President Obama a $2.4 Trillion Blank Check (thegatewaypundit.com)
• Boehner Challenges Obama with New Debt Bill While President Still Calls for Tax Increases (theblaze.com)

Debt Deal Brinkmanship

CNN.com: U.S. leaders struggle to reach debt deal as deadline clock ticks:

The aide said that party members are "struggling to see how they reach an agreement with significant debt reduction without buying time to work out the details."
Boehner aide Steel had earlier told reporters that "it would be terribly unfortunate if the president was willing to veto a debt-limit increase simply because its timing would not be ideal for his re-election campaign. We want the most significant deficit reduction possible, but linking the full faith and credit of the United States to presidential campaign politics is not a defensible position."

I expect that there will be a plan sometime Sunday for a "clean"--no changes to taxes or spending--bump in the debt ceiling in the short term and an agreement in principal for changes later this year. If that's not enough to goose the markets, expect QE3 before the year's out. 

Related articles

• Preparing the Battlespace for Debtmageddon (rebootcongress.blogspot.com)
• Boehner Issues Interim Statement As Debt Ceiling Talks Continue (zerohedge.com)
• Boehner wants solution by Sunday (money.cnn.com)

The US's Implied Credit Rating is a Two Step Downgrade

zero hedge: The Bond Vigilantes Are Here: US Net Notional CDS Outstanding Surpasses Greece For The First Time:

 

The current implied credit rating for the U.S. is 2.7, compared to 2.2 back in March, equivalent to approximate ly ‘AA’ on S&P’s scale. That is two levels below the U.S.’s current rating. March was the last time Bloomberg Brief looked at these implied credit ratings. At that time, the three most likely candidates to be downgraded were Portugal, Belgium and Spain.

Regardless of what happens in DC, the US is now flirting with a credit downgrade. The negative effects of that will filter down to state and local government debt.

Related articles

• The price of debt: Higher borrowing costs (theglobeandmail.com)
• Missouri likely to face credit review by Moody's (missouri-news.org)
• Moody's Blues: Major Agency Threatens to Downgrade U.S. Credit Rating (theblaze.com)

Preparing the Battlespace for Debtmageddon

The Washington Post: Boehner abandons efforts to reach comprehensive debt-reduction deal:

House Speaker John A. Boehner abandoned efforts Saturday night to cut a far-reaching debt-reduction deal, telling President Obama that a more modest package offers the only politically realistic path to avoiding a default on the mounting national debt.

GOP Senators and Representatives appear to be holding the line on their "no new taxes" pledge. They are also fighting for spending cuts. The Democrats are demanding more taxes and more spending. The two sides appear to be too far apart to reach a compromise on the debt ceiling. Then I saw this tweet from Zerohedge:

Two weeks from now: no tax hike, no spending cut, and debt ceiling rises by $2.5 trillion. PR spin - the "Great Compromise"

It feels depressingly likely.

We'll get to go through this all again next summer just a few short months before the November election.

Related articles

• Speaker Boehner Pulls Out of Talks for 'Big Deal' Debt Plan (theblaze.com)
• John Boehner Just Gave Up Hope For A "Big" Debt Deal (businessinsider.com)

Democrats Consider Smaller Debt Limit Increase

CNBC: Politics and Deficit: Democrats Weigh Short-Term Debt Limit Increase:

President Obama and Senate Democrats are weighing a scaled-back U.S. budget deal that would avert a looming default but force Congress to tackle the politically toxic issue again before the 2012 elections, a Senate Democratic aide told Reuters on Thursday.

If this goes through, then there will be another debt limit vote next year before the election. This effectively kicks the can down the road, but I also think it would make the 2012 election about the debt. That should get the Tea Partiers to the polls.

Related articles

• Alan Greenspan: Scared of Debt Problem (rebootcongress.blogspot.com)
• Awful. Failed Leader Obama Blames Congress For the Record Debt He Created (Video) (thegatewaypundit.com)
• Obama Resurrects Tax-Increase Argument During Debt Speech (theblaze.com)
• Can Obama cut debt deal? (capitolhillblue.com)

CATO Institute on the Need for a Credible Commitment on Debt

From the YouTube description:

Will raising the debt limit signal to markets what we want? Or will it signal an unwillingness to deal with tough decisions on spending and debt in the near term? Cato Institute Senior Fellow Jagadeesh Gokhale suggests that refusing to raise the debt limit (until programs like Medicare, Medicaid and Social Security are reformed) could signal to markets a greater willingness to deal with long-term fiscal issues sooner rather than later.

More at CATO:

The U.S. is now facing daunting fiscal challenges. The poor prospects of crucial fiscal reforms provoked Standard and Poor's Monday to revise its long-term outlook on the U.S. economy from "stable" to "negative."

Many knowledgeable federal officials, like Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, as well as left-leaning lawmakers, insist that the answer lies in lifting the debt limit. They warn Congress about the dire consequences if it fails to do so. President Barack Obama has chimed in — though he voted against raising it when he was a senator.

They all assert that failing to increase the debt limit could sharply undermine the economic recovery.

But that view could be wrong. A temporarily frozen debt limit could instead signal U.S. lawmakers' resolve to get our fiscal house in order. It may even reassure investors about long-term U.S. economic prospects.

Read the whole thing.

Related articles

• Another Economist Jumps On The Remarkable Pro-Default Bandwagon (businessinsider.com)
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Paul Ryan's Path to Prosperity

Paul Ryan (R-WI) explains why we have to confront the growing debt burden in the video above. He provides some more details about how he would like to do that in a Wall Street Journal op-ed: The GOP Path to Prosperity:

Congress is currently embroiled in a funding fight over how much to spend on less than one-fifth of the federal budget for the next six months. Whether we cut $33 billion or $61 billion—that is, whether we shave 2% or 4% off of this year's deficit—is important. It's a sign that the election did in fact change the debate in Washington from how much we should spend to how much spending we should cut.

But this morning the new House Republican majority will introduce a budget that moves the debate from billions in spending cuts to trillions. America is facing a defining moment. The threat posed by our monumental debt will damage our country in profound ways, unless we act.

Related articles

• GOP Star Paul Ryan Releases Path to Prosperity Adult Budget Plan (Video) (gatewaypundit.rightnetwork.com)
• New at WSJ: Paul Ryan announces that GOP's 2012 budget would cut $6.2 trillion in spending over 10 years (hotair.com)
• Why You Should Care About The National Debt Ceiling (biggovernment.com)
• Democrats Warn That Paul Ryan's Medicare Plan Would Reduce Federal Health Care Spending (reason.com)

Public Strongly Opposes Raising the Debt Ceiling

A Reuters/Ipsos poll found little public support for a debt ceiling increase:

The U.S. public overwhelmingly opposes raising the country's debt limit even though failure to do so could hurt America's international standing and push up borrowing costs, according to a Reuters/Ipsos poll released on Wednesday.

Some 71 percent of those surveyed oppose increasing the borrowing authority, the focus of a brewing political battle over federal spending.

It looks like Speaker John Boehner (R) will have the support he needs to hold the line on the debt ceiling.

Related articles

• Poll: 71% of Americans oppose raising the debt ceiling (hotair.com)
• Obama Was Against Increasing the Debt Ceiling Before He Was for It (biggovernment.com)
• Ten Years, Ten Increases to the Debt Limit (rebootcongress.blogspot.com)
• Speaker Boehner: GOP Will Not Increase Debt Limit Without Spending Cuts (gatewaypundit.rightnetwork.com)

Ten Years, Ten Increases to the Debt Limit

I'm noticing a pattern here:

In the last decade, Congress raised the debt limit ten times. This data provides evidence that the debt limit, far from providing its intended fiscal discipline, has recently served as a symbolic cap which Congress will push higher and higher as spending increases dictate.

So, other than political cover, does the debt limit serve any purpose?

When States Default: Then and Now

The Wall Street Journal has an interesting article titled: When States Default: 2011, Meet 1841:

Land values soared. States splurged on new programs. Then it all went bust, bringing down banks and state governments with them. This wasn't America in 2011, it was America in 1841, when a now-forgotten depression pushed eight states and a desolate territory called Florida into the unthinkable: They defaulted on debts.

History repeats itself, but things are always a little different. One difference between then and now is that back then bonds were sacrosanct. When GM's bondholders took a hair cut during the GM bailout, an example was set. That example is that bondholders need not be paid back in full. This will wreak havoc on the bond markets once sovereigns begin partially defaulting on their bond obligations. And, of course, they'll try to avoid doing this as is the case in Portugal where debt worries have driven up bond yields:

Investors are worried the government won't be able to meet its debt obligations and may need a bailout like those provided to Greece and Ireland last year.

Papering over your debt with other people's money, or, as in the case of Portugal, the money of other countries, is always the preferred option. But western countries have shown themselves unable to rein in the root cause of all of this debt: spending; therefore, I believe that they are merely deferring the day of reckoning.

Related articles

• Five Lessons from Ireland (biggovernment.com)
• European Default Fears to Spread to U.S. and Japan, Buiter Says (businessweek.com)
• Is a Bond Crisis Inevitable? (lewrockwell.com)
• Portuguese borrowing costs hit record (guardian.co.uk)
• Debt markets take fright at EU plans for bondholders and renewed Belgian crisis (guardian.co.uk)

Ending Spending

James Pethokoukis of Reuters identifies one priority for conservatives next year:

The failure to pass a 2011 budget is also tremendously positive [for conservatives]. It shows the impact of the Tea Party movement has not waned since the November midterms. This creates a situation next year where the flood of new Tea Party Republicans can combine a threat of government shutdown with a refusal to raise the national debt ceiling so as to squeeze spending cuts out of Obama and congressional Democrats.

It will be a closely fought battle. Tea Partiers have to prepare to provide support to conservatives on Capitol Hill.

Related articles

• Will Republicans Play Chicken With The Debt Ceiling Vote? (outsidethebeltway.com)
• Get Good Candidates. Start Now. (hennessysview.com)

Virginia Judge Upholds Healthcare Legislation

The Hill is reporting that a Virginia judge has upheld the new healthcare reform law:

A federal judge in Virginia on Tuesday rejected a legal challenge to the healthcare reform law, the second time the law's mandate that people buy insurance has been ruled constitutional.

...

"Far from ‘inactivity,’ by choosing to forgo insurance, Plaintiffs are making an economic decision to try to pay for health care services later, out of pocket, rather than now, through the purchase of insurance. As Congress found, the total incidence of these economic decisions has a substantial impact on the national market for health care by collectively shifting billions of dollars on to other market participants and driving up the prices of insurance policies."

I appreciate the fact that there's now a judicial precedent that collective cost shifting is wrong. I'm sure my children will also once they realize the national debt is almost $14 trillion. Perhaps we should all take a page from the auto bailout to forestall the moral hazard of cost shifting. In particular, instead of passing that debt along to our (or someone else's) children, why don't we give the bond holders a "haircut".

Higher Taxes and More Spending

Stephen Moore and Richard Vedder in The Wall Street Journal: Higher Taxes Won't Reduce the Deficit:

Using standard statistical analyses that introduce variables to control for business-cycle fluctuations, wars and inflation, we found that over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending. Politicians spend the money as fast as it comes in—and a little bit more.

 Nothing short of a balanced budget amendment will fix this problem.

At a Certain Point You've Made Enough Money

The day after the midterm elections, the Federal Reserve announced that it would begin a second round of quantitative easing: "the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month." Quantitative easing is a term that was recently created to replace the more familiar term printing money. Because the historical record of printing money is so grim, that term developed a negative connotation. Of course, printing money was coined specifically to replace the older jargon debasing the currency for largely the same reason. All three mean the same thing: the government is going to create money to pay its obligations and, in so doing, your money is going to become less valuable.

China doesn't like this. Germany doesn't like it which is important because they're the ones responsible for making the term printing money so unfashionable. Brazil, Thailand, and South Korea are also opposed.

In a different context, President Obama has said: "at a certain point, you've made enough money." In the context of this second round of quantitative easing, I want to know have we reached that point?

The Debt Cap and Spending Cuts

The Wall Street Journal reports that Republicans plan to use the debt cap as leverage to push spending cuts:

Republicans are planning to demand major spending cuts next year before they would agree to raise the amount of federal debt that can be issued, setting up a clash between the Obama administration and a Congress stocked with lawmakers who campaigned as deficit hawks.

The U.S. can't accrue debt above a certain ceiling set by lawmakers. In the most extreme scenario, the government would default on certain debts if the cap doesn't move.

This might precipitate a replay of the mid-90s government shutdown. The Republicans were punished for that shutdown. One important difference today is that the unemployment rate inside the beltway is about 6%. With  higher unemployment everywhere else and simmering anger directed at Washington, I think a shutdown might play well this time around. After all, do we really need all of these agencies overseeing our financial system if we just print the money we need anyway?

1. US Treasury
2. Federal Deposit Insurance Corporation (FDIC)
3. Federal Reserve ("The Fed")
4. Office of the Comptroller of the Currency (OCC)
5. Security and Exchange Commission (SEC)
6. Bureau of the Public Debt
7. Community Development Financial Institution Fund (CDFI)
8. Financial Crimes Enforcement Network (FinCEN)
9. Federal Inspectors General
10. Office of Thrift Supervision (OTS)
11. National Credit Union Administration (NCUA)