The Debt Ceiling: A Scoreless Tie after One Inning
I am sick of the debt ceiling fiasco and yet I can't let it go. Post mortems abound identifying winners and losers. Some are pleased that we dodged a bullet while others on both sides bemoan their own lack of backbone. The truth is that nothing was accomplished by either side. The debt ceiling had to be raised. Sorry Tea Party, but it was a tactical error to use it as leverage. The cuts are trivial and unenforceable. Establishing that group of 12 members of Congress sets a dangerous precedent. Anything they agree on should be rejected, no matter the built in consequences. Candor was notably missing from the debate, though Eric Cantor excelled. True, no tax increases were agreed to, but the Republican House was never going to approve them anyhow.
The "crisis" was manufactured; the creditworthiness of the US remains AAA if you look at it objectively. Would you really rather own paper from some AAA European bank being pressured to be nice to Greece and the other basket cases it serves? I'd sooner own California paper. Nice innocent sheep are being pressured to buy gold at ever more absurd prices. Authors with cute buzzwords like "aftershock" want you to believe that the US economy is about to go over a cliff. Don't get me wrong. I don't begrudge them their book profits and their television time. To a contrarian, pervasive pessimism is quite bullish. Yet the United States is knee-deep in shale, coal, and natural gas. For the first time in my memory, young people are being advised that college is worthless. Yet the unemployment rate among college graduates remains below half the national average.
S&P are idiots. How can the quant community take this lying down? Name a safer long term dollar denominated investment than a t-note. It is a good example of bad math and bad statistics spewed out by ignorant self-styled experts. The debt is not about to be paid down tomorrow with freshly minted QE (Quantitative Easing) certificates. It is unnecessary, since the net assets on the US balance sheet, public and private, dwarf the liabilities. The powerful economic engine of the United States can support a more frugal government without a sacrifice in the standard of living. What would happen to the holders of treasury AAA securities if the bond vigilantes sold them off? They can spend their dollars on current consumption or invest their dollars in a safer dollar-denominated investment if they can find one. Sometimes it seems we become so enamored of our models that we forget that the real world contains things of value like homes and factories and raw materials and rocket scientists, and nuclear weapons on submarines.
One way to look at the current political/economic situation is as a baseball game between the Tea Party team and the K- team. After all the millions of words written or shouted in the past few months, it remains a scoreless tie after only one inning. The Tea Party team did get a single and a stolen base, while the K- team had no hits. A hard hit ball by Harry Reid to Mitch McConnell at shortstop was bobbled, but old Harry's legs weren't strong enough to beat the throw to first. Obama took three strikes without the bat leaving his shoulder.
The Tea Party team is pumped, but its promising line-up of rookies has to prove it can do the job. The K- team is old and past its prime, but they can still slide with spikes flying and their sore-armed pitchers can still throw a hidden spitball whenever the other team is threatening. If you prefer football, think of it as no score early in the first quarter. The K- team lost a fumble but the Tea Party team couldn't convert and had to punt.
Sports analogies are always fun but the truth is that the debt fight accomplished nothing. The minor cuts up front are meaningless. The committee of twelve is yet another attempt to subvert the Constitution. There will be no balanced Budget Amendment ever unless the Republicans get a two thirds majority in both Houses. The administration is intellectually bankrupt. Just by holding firm, House Republicans can prevent increased spending without any deal. In 2012, Republicans should run against the EPA and the FED. If the harm those agencies are doing is exposed, the economy can rise again on the shoulders of free enterprise.
In the meantime, see if you can get anyone to explain the difference between a rating of AAA and AA+ in clear, objective terms. (Disclaimer: I cannot.) The smarter the pundit, the more foolish he or she will look trying to give a coherent answer. Do you really think that the most sophisticated financial minds in the world are looking to S&P for guidance?
What has changed since Downgrade Friday? Whatever actual wealth we (or the rest of the world) had then, is still there, as described above. None of this actual wealth is about to disappear.
The bad thing about the excessive debt, both public and private, is that it obscures the true ownership of these assets. I doubt most economists would agree, but debt crises can always be resolved by a change in ownership of various assets. You would think the left would be ecstatic. Share the wealth. The problem is the chaos that ensues while sorting out ownership. Inflation transfers wealth from creditors to debtors. That sounds progressive. If the Government hadn't interfered, the UAW might have ended up owning GM. Now that would be a sight to behold!
Money -- particularly paper money -- is not the actual wealth. It is an idea worth considering. The whole purpose of the left is to transfer ownership and control of as many assets as possible to a government of a self-serving cadre of experts, whose expertise cannot be challenged by anyone outside the inner circle. They rage at private jets and expense accounts in the private sector, while assuming those perqs for themselves. So, follow the money for sure. But also follow the control.
Meanwhile, if you care about preserving our liberty, there is no need to panic. Let the Russians and Chinese bellow about the dollar not being used to price things internationally. See how many people with real wealth will part with it for rubles or renmimbis.
The Republicans can unilaterally prevent all tax increases and spending increases, except possibly for the expiring Bush cuts. If they want actual spending cuts, they should put them on the table in gory detail and stick to them. Just worry about this year and next year. The voters can decide if that is enough every two years.
The ongoing problem remains how to spur economic growth. Reining in the EPA and the FED would be a good start. A simpler, fairer tax system would help too. Most helpful of all would to restore the perception in the business community that they have a friend in the White House.
When contemplating the future, remember that each generation must reprise some of the battles they thought were won. I have never heard it suggested that constant vigilance by free citizens is not necessary to preserve liberty.