Thursday, May 19, 2011

Heading For The Cliff

It is truly maddening to watch the folks on Capitol Hill deal with the current debt crisis.  They continue to play a dangerous political game of chicken with the nation’s financial security; seemingly oblivious to the severity of the issues.
They cannot agree on anything.  The President appoints a bi-partisan commission to develop a solution for the deficit problem.  After months of study the Simpson-Bowles Commission releases its findings.  Their recommendations are honest, thorough and politically tough to swallow. They are ignored.  Even the President pushes their recommendations off to the side. 
He appoints another fact finding group led by Vice-President Biden.  The only Republican with any clout willing to attend is Eric Cantor.  It is hard to negotiate when one side doesn’t bother to show up. 
Another group, “The Gang of Six”, an independent group of three Senators from each party, attempts to tackle the problem.  The group reaches an impasse and one of the members resigns in frustration. 
The Democrats say everything is on the table…except a major overhaul of entitlements.  The Republicans say everything is on the table…except any increase in taxes.  They celebrate agreement on cutting student loan subsidies, farm payments and support for federal worker’s pensions; cuts which amount to millions when they need to be looking at trillions.  Just a few days ago they could not even agree that it just might be a waste of taxpayer’s money to give tax breaks as incentives oil companies who are making billions in profits.  If they cannot agree on a no brainer that affects less than 1% of the deficit then what can they agree on?
They cannot even agree on the seriousness of the problem.  Some members believe resolving the debt crisis can be put off and that the repercussions from failing to raise the debt ceiling have been grossly overstated.  These people are clueless.
The country is at the mercy of the bond markets.  The bond markets control our ability to borrow and loan money and therefore control the growth of our economy.  So strong is the influence of the bond markets on how our country operates that President Clinton was said to react in anger when informed that he could not pursue his economic agenda because the bond markets would react unfavorably.  “You mean to tell me my administration is going to be held hostage by the f-----g bond markets?”  Even the most powerful man in the world must yield to the power wielded by the bond markets.
If Congress fails to address the debt problem now the negative reaction from the bond markets will cause interest rates to rise substantially.  The government currently borrows money to pay its debts at an interest rate near 0%.  That rate could rise to 2-3% which would add another $500 billion in interest to the debt…per year.  Corporate interest rates will rise accordingly and small businesses will be unable to get the loans they need to operate.  The only way to grow out of this economic downturn is to build our way out; and construction and development projects will stop due to the inability to borrow money.  Stocks will fall and the strength of the US dollar on the international market will weaken.
The other part of this equation is jobs.  Both parties promised to develop jobs upon entering office; but neither party has fulfilled its promise.  Go back and read the articles about the debt issues.  You will find reams of political rhetoric about spending cuts but very little in the way of job creating solutions.  We cannot work our way out of this recession with 14 million people out of work.  And we cannot create jobs if high interest rates prohibit businesses from borrowing.  Again, the power of the bond markets controls the growth of the economy.
Standard & Poors has already warned  that the full faith and credit of the US government is in jeopardy.  Congress has yet to heed the warning.
The US economy is like a car rushing toward the edge of a cliff.  Congress is in the drivers’ seat; but they have yet to recognize the disaster that lies ahead.  They have the ability to put on the brakes but they are too distracted by the political landscape.  The bond traders are in the passenger seat.  They see the approaching doom and have already sounded the alarm.  They will bail out long before the car actually reaches the cliff.  Once they do the end it inevitable.
Congress is broken.  They live in a bubble sheltered from reality and oblivious to the needs of the people they were elected to serve.  Their behavior is a sad testament to our way of governing; and a danger to our way of life.           

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