Saturday, July 30, 2011

When the Worst Outcome Is Better Than the Status Quo, What Do We Have To Lose?

The August 2nd date on the ransom note that Tim Geithner sent to Congress is quickly approaching.  We'll see if he shoots the hostage or is just willing to settle for another pizza being delivered by a SWAT guy in a Domino's uniform.  The House passed their plan and the Senate passed their plan, and neither is willing to allow the other plan to darken their doorway.  I'd say the odds of no debt ceiling increase are pretty good.  But what happens if Congress refuses to raise the limit on the national Visa card?

I'm guessing, not so much.  The talking heads are worried about skyrocketing bond yields if the U.S. can't borrow more money for Uncle Han over in Beijing.  Personally, that seems completely backwards to me.  The risk of default only gets higher if Barry gets to borrow another trillion or so every year for the foreseeable future.  Our landlord agrees.

Default is the risk that either the interest or the principal on a debt does not get paid on schedule.  Only in Bizarro-D.C. will lowering the amount of debt increase the risk of default.  Some will say that the U.S. cannot make the scheduled payments on the borrowed money without borrowing the money to make the payments.  We in the financial industry have a word for that:  insolvency.  And it doesn't get better by increasing the debt load.

We've been ignoring this problem since the Johnson administration.  All subsequent presidents and Congresses made the proper noises of concern while actively working to make the problem worse for the next politico to sit in the chair.  Commissions have been appointed, campaign speeches have been made, but NOBODY tried to fix it.  Until now.

If the debt ceiling is not raised, the Treasury will immediately begin prioritizing federal payments.  The interest and principal on the federal debt will remain in first place; to do otherwise really will bring about the doom that is filling the media.  Social Security payments will also be made on time.  Federal law specifies that reductions in the amount owed by the Trust Fund will reduce the amount owed against the debt ceiling on a dollar-for-dollar basis.  Translation:  for every dollar Uncle Sam pays to Grandma, Uncle can borrow another dollar.

Federal payrolls will also go out on time, although we may see some widespread furloughs.  This will be an instructional period for us; if Joe Bureaucrat in the Bureau of Redundancy Department doesn't come into work for six months and nobody notices, perhaps that should tell us something.  In the private sector, pressure from payroll expense is the driving force behind process and efficiency improvements.  Think about it.

So, what doesn't get paid on time?  That's easy, the pork.  All those hundreds of billions of dollars that Congress "brings home" every year will be the first thing to get cut.  Those orange barricades stretching for miles along our interstates, dotted with the signs bragging about the American Recovery and Reinvestment Act of 2009, will be with us for a few years more.  At least until the Davis-Bacon Act get repealed and the projects can be finished on a budget that reflects reality.  The cowboy poetry festivals will have to fund themselves.

Because a group of freshmen legislators are unwilling to accept "the way things are" in D.C., this country can finally make our leaders acknowledge the same basic economic truths that every American household has to live by every day.  Recklessly borrowing against the house to pay for all of the things that Junior and Buffy are whining about isn't compassion, it's folly.

The Tea Party representatives in the House have already sent a "cut, cap, and balance" bill to the Senate, which ignored it while accusing the House of being obstructionist.  If the federal debt ceiling is not raised, the Tea Party automatically gets the first two parts of the bill.  All they have to do is...nothing. 

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