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Showing posts with label debtlimit. Show all posts
Showing posts with label debtlimit. Show all posts
Market value of Federal Debt doubles in a very short time

Market value of Federal Debt doubles in a very short time

These data reveal that the market value of gross Federal debt (including Fed and SS Trust fund holdings) doubled between 9/2003 and 9/2010 (going from $7,303.2 to $14,497.4), and the market value of privately held Federal debt doubled since 9/2005 (going from $3,982.9 to $7,979.3). Sooner or later, the income tax will have to be raised in order to pay off this runup in debt. At the same time, the carrying cost of that debt is barely 2% of GDP, almost half of which is paid to foreigners.
Obama says that we should be frustrated at Congress?

Obama says that we should be frustrated at Congress?

Here is a president who won't put forward his own proposals but attacks proposals when the Republicans put forward theirs, who leaks Republican proposals to the New York Times when they are offered in closed door meetings, who attacks Republicans for not compromising when compromising should be a two way street, but who now constantly blames Republicans and Congress for any problems. The S&P downgrade was from not cutting enough and for delaying any noticeable cuts for many years. Notice that he implicitly is taking a swipe a the House and not the Senate when his weekly radio address notes that members are back in their home districts right now. From Fox News:



In his weekly radio and Internet address Saturday, Obama said people are frustrated by the partisan gridlock in Washington, especially after the brutal fight over increasing the nation's borrowing limit that didn't prevent the U.S. debt from being downgraded.

Obama tried to position himself on the side of the public and against a deeply unpopular Congress. But even though Obama's approval ratings aren't so good either, he clearly sees a need to direct the public's anger toward Congress or risk being the target himself as the 2012 campaign revs up.

"You've got a right to be frustrated," the president said. "I am. Because you deserve better. I don't think it's too much for you to expect that the people you send to this town start delivering."

"Members of Congress are at home in their districts right now. And if you agree with me -- whether you're a Democrat or a Republican or not much of a fan of either -- let them know." . . .
John Stossel shows how little changed government spending will be from the Debt Ceiling agreement

John Stossel shows how little changed government spending will be from the Debt Ceiling agreement

John Stossel has a useful post on his blog available here. From his post:

Spending won't be cut at all. It's only a "cut" compared to increases the CBO "assumed". Imagine if you ran your budget that way. Dinner conversation might go like this: "Since we're so deep in debt, I've decided to cut spending next year. Instead of a new Lexus, I'll buy a Dodge." . . .
Democrats Happy with Debt Ceiling Deal, Republicans Not at All Happy

Democrats Happy with Debt Ceiling Deal, Republicans Not at All Happy

From a USA Today/Gallup Poll:

The poll showed 58 percent of Democrats approve of the deal, compared with just 26 percent of Republicans. A whopping 64 percent of Republicans disapproved.
Further, only 22 percent of Tea Party supporters reported being happy with the compromise package.
The numbers belie the claims being made on Capitol Hill that Democrats were dragged into signing off on what one lawmaker described as a "sugar-coated Satan sandwich," with the creditworthiness of the United States on the line. . . .
The Government Bond Crisis

The Government Bond Crisis

Moody's warns that there is a significant probability that US bonds will be downgraded.

Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. while warning that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens. . . .


Meanwhile Europe is a mess and people don't seem to realize that all this government guarantees only means that countries will spend more money and get in even worse off. From the UK Telegraph:

The three-month euribor/OIS spread, the fear gauge of credit markets, reached the highest level in two years today, jumping 7 basis points to 40 in wild trading. . . . The credit stress was triggered by fresh mayhem in the southern European bond markets and ominously in parts of the eurozone's soft core as well, including Belgium. Spanish yields pushed further into the danger zone to 6.42pc. Italian debt reached a post-EMU high of 6.22pc before falling back slightly on reports of Chinese buying. . . .


Another way of measuring the problem:

On financial markets, the benchmark spread between 10-year Spanish bonds and German Bunds rose to euro lifetime highs above 400 basis points before falling back to around 383 bps. . . .


The Euro Interbank Offered Rate (Euribor) is a daily reference rate based on the averaged interest rates at which banks offer to lend unsecured funds to other banks in the euro wholesale money market (or interbank market).

An overnight indexed swap (OIS) is an interest rate swap where the periodic floating rate of the swap is equal to the geometric average of an overnight index (i.e., a published interest rate) over every day of the payment period.

Newest Fox News piece: The Debt Deal's Three Biggest Winners and Losers

My newest piece starts this way:

With a debt ceiling agreement finally in place and the Senate on track to approve it today congratulations are being handed out all around. 
Armageddon and catastrophe has supposedly been averted. And politicians are rushing to put the best face on the deal. 

Unfortunately, the new agreement does not accomplish as much as many had hoped, or as much as it should have, in terms of curbing spending and continued deficits. This explains why stock markets continued to fall despite the supposedly "good" news. The reason is because, once again, politicians are continuing to push the problem to the future. 

Here's a look at the winners and losers in the aftermath of the "catastrophe" that's just been averted: 

The Winners:

1. Stimulus Recipients and Big Government: President Obama’s “Stimulus” was supposed to just be temporary. Alas, the debt agreement locks in big government and the extra spending President Obama initiated will continue. 

After government spending soared by 28 percent from 2008 to 2011, the debt deal only starts cutting a meager $22 billion next year. That is an incredibly trivial cut -- just 0.6% of expenditures planned for next year. The cuts agreed on are heavily back-loaded towards the end of the 10 year budgeting cycle, when President Obama and many members of Congress will be out of office. 

Short of a constitutional amendment mandating balanced budgets, . . .


UPDATE: So what happened to the market today? They fell in Asia, Europe, and the US:

The Dow Jones Industrial Average plunged 265.87 points, or 2.19 percent, to end below the psychologically-important 12,000 mark at 11,866.62. The last time the blue-chip index declined for eight-consecutive days was in October 2008.

The S&P 500 plummeted 32.89 points, or 2.56 percent, to close at 1,254.05, slipping into negative territory for the year.

The tech-heavy Nasdaq tumbled 75.37 points, or 2.75 percent, to finish at 2,669.24. The S&P 500 and Nasdaq are both below their 200-day moving averages. . . .



Copy of Debt Agreement Bill

Copy of Debt Agreement Bill

A copy of the bill is available here. Apparently, there will be only $22 billion in spending cuts compared to the baseline for 2012. That is equivalent to a 0.6% cut in spending. These cuts in the growth of spending are backloaded, which means that there is no guarantee that any president and congress six, seven, eight or more years from now will follow through when they actually have to make the cuts. Might this agreement mean that taxes will be increased? It sure looks that way. In exchange for agreeing to make this level of cuts in spending, Democrats have gotten the chance to pick where most of the cuts will occur. If no agreement is reached for the second stage cuts, almost half the cuts will come out of defense.
"Moody's: Neither debt plan protects the nation's AAA rating"

"Moody's: Neither debt plan protects the nation's AAA rating"

Trillion dollar cuts or even a few trillion dollar cuts in the deficits sound big until you realize that those cuts are out of $46 trillion in spending over the next decade and that Obama's budget released in February scheduled deficits of $10.3 trillion over that period of time. Moody's points out the real problem with the current debate isn't this coming Tuesday, the real problem is that not enough money is being cut.

The "limited magnitude" of both debt plans put forward by congressional leaders would not put the nation's AAA credit rating back on solid footing, Moody's Investors Service announced Friday.

"Reductions of the magnitude now being proposed, if adopted, would likely lead Moody's to adopt a negative outlook on the AAA rating," the credit rating agency said in a new report. "The chances of a significant improvement in the long-term credit profile of the government coming from deficit reductions of the magnitude proposed in either plan are not high."

It added that "prolonged debt ceiling deliberations" have increased the odds of a downgrade, but that the firm is still confident policymakers will avoid a default.

"It remains our expectation that the government will continue with timely debt service," the firm said.
It also clarified that as far as it is concerned, the nation will only default if it misses an interest or principal payment on U.S. debt, not if it misses payments on other obligations like federal employee salaries or Social Security benefits. . . .
"Washington Is Annoyed at Wall Street's Failure to Panic"

"Washington Is Annoyed at Wall Street's Failure to Panic"

Politicians in Washington are upset that financial markets aren't panicking. Possibly the politicians might realize that the markets aren't upset because they don't believe all the scare stories politicians use to worry many voters. From CNBC:

I just got off the phone with a source on Capitol Hill who has spent the past few days trying to convince Republicans to vote for a debt ceiling hike.

He told me that the biggest obstacle he faces has been "market complacency."

"Frankly, a bit of panic would be very helpful right now," he said.

As he explained it, lots of people in Washington, D.C. expected that this would be a week marked by panic in the markets. Stocks would tank. Bonds would get clobbered. The dollar would do something dramatic. And all of this would help convince reluctant lawmakers that they had to reach a compromise on the debt ceiling. . . .

Instead, the market has just been on a quiet, non-panicked slide.

Stocks have sold off by a couple of percentage points, but nothing that indicates a real fear trade in the works.

Everyone in D.C. has a theory about this. Some believe the market is sending a message that a deal will get done. Others think the market doesn't understand politics. . . .


Politicians might not want to believe it, but there is a third option. Politicians don't know what they are doing.

More on this belief that financial markets think that it is so crucial that a deal be made.

Republicans are losing support from some of their strongest backers and concede there must be some answers before financial markets open Monday, one day before threatened default. . . .
Democrats in Senate Filibuster their own Debt bill

Democrats in Senate Filibuster their own Debt bill

After quickly moving to kill the House Republican debt ceiling bill, Senate Democrats are refusing to have a vote on their own bill. Twice now the Senate Democrats have rejected House Republican proposals, but have yet to vote on their own plan. This is the first time that Democrats have put up a plan of their own, but they want to wait to vote because they know that the Senate will also vote down the Democrat plan. From Stephen Dinan at the Washington Times' Inside Politics page:

Senate Republicans want a 60-vote threshold for a debt-limit bill to pass the chamber, but it's actually Democrats who are enforcing the filibuster on their own legislation, insisting on delaying a vote until 1 a.m. Sunday morning.

Republicans offered to let the vote happen Friday night, just minutes after the chamber voted to halt a House Republican bill. All sides expect Democrats' bill will fail too, and the GOP said senators might as well kill both at the same time so that negotiations could move on to a compromise.

"We would be happy to have that vote tonight," Sen. Mitch McConnell, Republicans' leader, offered.

But Senate Majority Leader Harry Reid objected, even though the vote would occur on his own bill. He instead said the chamber would have to run out the full procedural clock, which means a vote in the early hours Sunday morning. . . .
Jokes on the Debt Ceiling Limit Debate

Jokes on the Debt Ceiling Limit Debate

Here were a couple of jokes in a Politico story that I found most amusing. The Leno joke though is probably pretty old.

"Democrats warned that if the debt ceiling isn't raised, the government would cease to function. How would you be able to tell?" said Jay Leno on NBC's "The Tonight Show." . . .

Conan O'Brien of the "Conan" show on TBS said, "The government is one week away from running out of money to pay its bills. So basically, our nation has become Nicolas Cage." . . .
Why the US Bond Ratings may fall

Why the US Bond Ratings may fall

This could be much clearer. Unfortunately, I agree with what he said on Fox News.

Charles Krauthammer: "The reason the ratings will drop -- and I think it will within a year, if not less -- is because one of the two major parties in every argument, every negotiation, every plan it's offered, has been looking for loopholes as a way to appear to cut spending when it doesn't. And the worst example is the Reid plan, which has a trillion dollars of cuts for a 10 year extension of the surge in Iraq and Afghanistan -- a phony cut from a phony spending idea. And that's I think the reason why nobody has confidence. It can't happen if one of the two parties is clearly unserious about debt reduction."
New Piece in the Philadelphia Inquirer: Risk of a U.S. default has been exaggerated: History and the bond markets contradict the hype

New Piece in the Philadelphia Inquirer: Risk of a U.S. default has been exaggerated: History and the bond markets contradict the hype

My piece in the Philadelphia Inquirer starts this way:

A failure to raise the federal debt ceiling could "roil the financial markets and cause severe economic problems," "cause profound damage to our country," and have "dire consequences." So wrote the Los Angeles Times, the Washington Post, and the New York Times - in 1995.

Other ills predicted at the time were rising unemployment, reduced economic growth, and soaring interest rates. This was as President Bill Clinton and other Democrats were fighting off Republican attempts to link increasing the debt limit to cutting the budget deficit.

Then, as now, there was a widespread misperception that failing to raise the debt ceiling would lead to a default. The Washington Times reported that "congressional Republicans are threatening to provoke the nation's first-ever default." The Los Angeles Times warned of "the first real risk of a government default." Even Federal Reserve Chairman Alan Greenspan said Republicans should back down because, "To default for the first time in the history of this nation is not something anyone should take in any tranquil manner." . . .
Proof that not raising the debt ceiling will be a disaster?

Proof that not raising the debt ceiling will be a disaster?

The Washington Post and other publications are all excited that they have found proof that not raising the debt ceiling immediately will be a disaster. There is a big problem though, everyone is assuming that there will be default.

The Sunday airwaves brimmed once again with talk of what would – or would not – happen if lawmakers fail to meet the Aug. 2 deadline to raise the nation’s legal limit on borrowing. Unmentioned by either side was an obscure bit of budgetary history in which the country did default on some of its bills, and wound up paying the consequences.

Treasury Secretary Timothy F. Geithner said on CBS’s “Face the Nation” that inaction “would be catastrophic for the economy” and added that “no responsible leader would say the United States of America, for the first time in its history, should not pay its bills, meet its obligations.” . . .

In fact, there was one short-lived incident in the spring of 1979 that offers a glimpse of some of the problems and costs that might arise if the stalemate on Capitol Hill continues. Then, as now, Congress had been playing a game of chicken with the debt limit, raising it to $830 billion – compared with today’s $14.3 trillion – only after Treasury Secretary W. Michael Blumenthal warned that the country was hours away from the first default in its history. . . .

Zivney said that the 1979 incident, which pales in comparison to the size and scope of payments the Treasury could have to forego if it can no longer borrow money come Aug. 2, offers a useful case study in the real-world consequences that result when the U.S. government doesn’t seem like the sure bet it has always been.

“It creates doubt, and I think that’s the real lesson,” he said. “The market has a much longer memory than individuals.” . . .


Another problem is that the problem with the 1979 payments had nothing to do with the debt ceiling. It came about from an error in word-processing. From an NPR interview:

SIEGEL: And take us back to the spring of 1979. How was it that the Treasury did not redeem some Treasury bills that came due in April and May?

Prof. ZIVNEY: Well, that's a little bit of a mystery even to me. I believe it was similar to the situation we have now, where Congress was debating raising the debt ceiling. And in the process of all these - the wrangling going on, some of the little paperwork details, like writing checks, got lost in the process. And so they didn't get written.

SIEGEL: The Treasury actually pleaded that they had bookkeeping problems, computer problems in paying off people.

Prof. ZIVNEY: Oh, they said, yes. They said there were technical errors, word-processing errors. But I'm sure the thousands of people that did not receive their $120 million were not, you know, mollified by hearing it was just a technical difficulty. . . .
Two recent Fox News pieces

Two recent Fox News pieces

"Pelosi Is Right -- The Gang of Six Plan Is Not Ready for Prime Time"

Democratic House Minority Leader Nancy Pelosi (D-Calif.) has it right. The so-called "Gang of Six" proposal to increase the debt ceiling is "not ready for prime time."
The extremely short document is vague, and if six Senators can't agree on what the individual income and corporate tax rates are going to be or how much some of the cuts will be or where they will really be made, how does anyone expect the Democrat Senate, the Republican House, and President Obama to agree on anything.
For a proposal whose text is just over two pages long, one wonders why they need to have a slightly longer than one page executive summary. Take some of the central proposals:
-- Reform of individual income tax must generate $1 trillion in additional revenue through the elimination of tax deductions. The elimination of deductions is to be partially offset by "establishing three tax brackets with rates of 8 [to] 12 percent, 14 [to] 22 percent, and 23 [to] 29 percent."
-- There is a similar reform of corporate income taxes with the new rates to be "between 23 percent and 29 percent, rais[ing] as much revenue as the current corporate tax system." . . . .


Congress Can Learn From 1995-96 Debt-Ceiling Debate

Failure to raise the Federal debt ceiling limit could "roil the financial markets and cause severe economic problems," "cause profound damage to our country," and have “dire consequences.” So wrote the Los Angeles Times, Washington Post, and New York Times. But the year was 1995, not 2011.
Other ills predicted during that contentious debate were rising unemployment, reduced GDP growth, and soaring interest rates. That was at a time when President Clinton and Democrats were fighting off attempts by Republicans to link cutting the deficit to the increase in the debt ceiling and a continuing resolution on spending.
Then as now, there was a widespread misperception that failure to increase the debt ceiling would produce a default: "congressional Republicans are threatening to provoke the nation's first-ever default" (Washington Times). The Los Angeles Times reported: "the first real risk of a government default could occur November 15 [1995]." Even the then Chairman of the Federal Reserve, Alan Greenspan, warned that congressional Republicans should drop their efforts, declaring: "To default for the first time in the history of this nation is not something anyone should take in any tranquil manner." . . .
Will voters hold Obama's scare tactics against him?

Will voters hold Obama's scare tactics against him?

I almost hope that the August 2nd deadline is passed without an agreement. Obama's claims about default, higher interest rates, disaster befalling unemployment and the economy general couldn't have been stronger. From Bloomberg:

The U.S. government can avoid a default for at least a month after the Aug. 2 deadline to lift the debt ceiling set by the Treasury Department, said John Silvia, chief economist at Wells Fargo Securities LLC.
“The Federal Reserve and the Treasury can work together to generate enough cash probably for the next two or three months to avoid any kind of automatic default on the Treasury debt,” Silvia, who is based in Charlotte, North Carolina, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “There’s a way of getting around this issue for at least another month or two.” . . .


In his speech last night Obama used the term default 6 times, higher interest rates from default 3 times, unemployment, and a "deep economic crisis."
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