As Oct. 1 approaches, all eyes are on the debt ceiling. President Obama has said, “We are not some ‘banana republic,’ America pays their bills…we are not a deadbeat.” I would ask which is worse, a debtor who doesn’t pay their bills because they can’t or a debtor that continually borrows more to continue a lifestyle and more to pay their bills? Treasury secretary Jack Lew wrote a letter to the House saying that the final day that “extraordinary measures” will run out will be Oct.17. And we are told that the debt ceiling MUST be raised to “preserve the full faith and credit of the United States.” Are you kidding me? If someone owed you money and then told you that they needed to borrow more money to enable them to keep paying you…how much “full faith” would you have in their “credit?”
Will this “can” get kicked down the road? I would guess of course it will but the day of reckoning is coming. The way things stand now, because Congress has already created so many “give away” programs there is no way out. Benefits must be cut, even entire programs must be cut…but they won’t be until the markets force it to happen. Entitlement programs alone take up total tax receipts. These programs as they stand now will only grow…you must ask the question “will tax receipts continually grow?” Forget about discretionary spending, I am talking about the payments that are carved in stone…they alone take up everything available without borrowing further.
None of the above matters (or has mattered) because the stock market is up, interest rates though are rising but still low and real estate has come off bottom…so “everything must be OK?” I want to point out the obvious here, how much will a $20 trillion debt matter in a $15 trillion economy if that economy is shrinking while the stock market is dropping, interest rates rising and real estate weak and defaulting? The time (though long past) to get our financial house in order was during the “good times.” Biting the bullet and making the good times a little less “good” is (was) the way to do it, that option is long past and now living standards will need to be cut 35%-50%. No matter how you, or from what angle you look at this it will not “end well.”
For those who don’t know, the debt ceiling originated to create “credibility” (a term that seems to come up every time I write something these days). A “ceiling” was put in place to create confidence that our debt would remain finite, so that our debt would remain “payable.” The ceiling added to our credibility and was a reason that U.S. Treasury securities were AAA rated bedrock investments, now the debt ceiling has morphed something else. It used to be that the debt ceiling needed to be revisited every 5-10 years…now it is almost an annual exercise. It has now become a “spotlight.” I say this because each time we revisit the debt ceiling, investors get to contemplate just how “unlimited” our debt has become. The danger of this “contemplation process” is that investors figure out just how big even $1 trillion is and then make the leap to $17 trillion of on books debt with another $180++ trillion of promises on top.
Cuts in spending absolutely must be done…and they will be painful to those not receiving or receiving less “benefits.” From a macro standpoint as I have pointed out before, a $1 trillion cut in spending also carries forward to at least $1 trillion less GDP which means that the so called 2% growth turns into NEGATIVE 5% growth (before the numbers are massaged even further). 5% less growth means what…higher or lower tax receipts? My point is this, making cuts and living within our means is impossible, it cannot be done. The system has been set up for and has become accustomed to the “deficit spending,” a balanced budget would literally mean an immediate depression in economic activity. THIS is just for the Main Street economy… As for the financial markets, “forgetaboutit.” And of course when it comes to the derivatives markets you can’t even go there because then you’ll see a $100 trillion smoking hole in the ground and that assumes that less than 10% default which is a very big assumption.
So back to my title, maybe this is exactly what is needed? A complete shutdown and overhaul of everything from soup to nuts. Heck, while they’re at it maybe they should revalue gold to $50,000 per ounce or higher and actually back the currency! One can dream can’t they? Unfortunately “dreams” are not the future as we mathematically have a fiscal/financial nightmare directly ahead that no one wants to admit to. We did this to ourselves and enjoyed the ride of life along the way. No matter whom you are or how you’ve prepared, life is going to change as our past “tab” catches up with us.