Wednesday, July 27, 2011

Hey Congress! Stop Messing Around!

As I watch the Dow drop another 200 points today, I've gone from amused to very concerned. In the last few days that's 400 points. Every day, there's more back and forth - Boehner this, Cantor that, Obama Grand Bargain, etc. It's one thing to discuss a long term solution to a financial deficit issues, but it's quite another to renege on America's financial obligations.

For a while it was sport watching the House get up into a lather over a crisis they created. Most House Republicans voted on extending the debt ceiling every year as they cut taxes while spending more on wars, the prescription drug benefit and general discretionary spending on their districts. Democrats have been spending as well, but they are not creating a crisis over the debt ceiling. They are willing to approve the increase straight up.

People seem to think that not increasing the debt ceiling will stop "excess" spending. They have been misinformed. The President cannot unilaterally impose cuts in spending. Nor can Congress. That "excess" is our defense and our grandparents Social Security check. It all stops when the government loses the ability to finances its obligations.

This is an artificial crisis that is impacting people perceptions of US creditworthiness and ability of politicians to solve problems. The budget has already been voted on by both sides. In fact, they committed to a payroll tax cut, Bush tax extensions, and unemployment extensions that increased the deficit by over $600 billion/year. Where were those deficit complaints at that time? If the US cannot pay what it has committed to pay, why would you put your money here? It's like taking a loan out on your car, then saying that you are not going to pay for it afterwards and expecting to get a new loan on your house in the future. You will have to pay next time - just a lot more because you've increased risk of default to the creditor.

Already, this is having an impact as long term bond rates are going up and the insurance on American debt has risen. This is a tax on all of us as mortgages, credit card rates and car loan rates have the Treasury bond rate as it's basis. All business decisions use have risk hurdle rates based on the risk free rate - US Treasury bonds. If rates rise or changes from AAA to AA+, that's a huge issue.

Do we want another day where the Dow drops 700 points like we had in 2008? This would hurt all of our portfolios and pensions. It takes money out of our pockets. It increases the tendency to put money into cash or gold rather than invest in stocks or start-ups. I'm wondering whether I should just go to cash because the acrimony is disconcerting.

Businesses thrive when there's certainty and consistency. When the rules of the game are not clear, people are more reluctant to invest. The budget crisis, backsliding on financial and environment rules, and the artificial debt crisis doing their damage. The risk premium is increasing. While that may reduce Obama's chances of winning re-election, it helps no one. It may boomerang.

Everyone who looks at spending and tax revenue knows that spending increases and entitlement growth will have to slow and taxes will have to go up for everyone. There's no free ride here. I'd love to see both sides release their versions of a balanced budget by 2020. It's doable if our legislators have courage (go Coburn!). Work on it for the next budget cycle. But don't screw up the economy today.

1 comment:

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