Wednesday, October 16, 2013 - That Was Close

That Was Close

by Sinclair Noe

DOW + 205 = 15,373
SPX + 23 = 1721
NAS + 45 = 3839
10 YR YLD - .05 = 2.67%
OIL + .87 = 102.08
GOLD + 1.70 = 1283.70
SILV + .12 = 21.52

Wait, wait. Stop the countdown. There will be no debt-pocalypse. Not tonight. The politicians have worked out a deal. Whew, that was close. Under the agreement, the government would be funded through Jan. 15, and the debt ceiling would be raised until Feb. 7. So, if you stocked up on canned goods and cigarettes, well, they'll keep a few months and we can do this again to start the new year.

The government will re-open tomorrow. The government debt will be paid as usual. Life goes on.

Even as the shutdown of the United States government and the threat of a default appear to be coming to an end, the cost of Congress’s gridlock has already run well into the billions. Retail sales that weren't made, canceled vacations to national parks and other destinations, import inspections, export financing, and oil and gas permitting stalled; and the total will continue to grow after the shutdown ends. A full accounting will take months but this will likely have some adverse effect on 4^th quarter GDP.

Plus, tack on higher interest payments on short term debt, which have tripled from just a few weeks ago.  The World Bank has estimated that a similar standoff in 2011 raised borrowing costs in poor countries by about 0.75 percentage point, and that those costs remained elevated for months.

The Senate will take up a separate motion to instruct House and Senate negotiators to reach accord by Dec. 13 on a long-term blueprint for tax and spending policies over the next decade. So, at a time when fiscal dysfunction has done significant damage to the economy, the solution is to develop fiscal policy that will further put the brakes on the economy.

So, when you hear more news on this, you'll undoubtedly hear someone talk about the winners and losers in this political battle, and while there were certainly losers, and they are easy to spot; I still can't spot the winners.

So, it's back to business; we'll have a not quite so dramatic repeat in a few months, although the big losers in the battle will not be so reckless. It would be better to just end this game of debt ceiling.

The following article explains the debt ceiling; here's the link: Congress Shouldn't Raise the 'Debt Limit' -- It Should Repeal It by Scott Lilly.

The problem, however, is that the "debt-limit" resolution purports to be something that it clearly is not -- a tool for shaping and redefining the nation's fiscal policy -- and, in reality, plays a totally nonsensical role. It can't be explained to people in simple terms because it doesn't make any sense.

Back in 1917, President Woodrow Wilson needed a way to finance America's entry into World War I. The government's budgeting process was in shambles. Individual agencies went directly to Congress to seek appropriations without direction or even coordination from the White House. The War Department would put together their request and send it up to the Hill. The Department of the Navy and other departments would do the same.

But in many instances, Congress also had limited control over what the various pieces of the bureaucracy were up to, how they spent their money, or how much they spent. Despite an 1870 law that attempted to prohibit the creation of deficiencies -- obligations to pay tax dollars to individuals or businesses that have not been appropriated -- there was little real restraint on a department secretary who wanted to expand his budget by simply signing a contract to spend that money and then telling Congress that the United States owed the money and the good faith and credit of the American people would be damaged if Congress didn't appropriate the money and pay the bill.

So when President Wilson asked Congress for the authority to issue Liberty bonds -- the forerunner of modern-day Treasury bonds that were used to finance World War I -- many in Congress rightly wondered where the issuance of such debt could lead the country given the lack of any real budget process to make budgetary decisions. The debt limit was probably a useless tool for forcing budget choices even in those primitive days of developing the nation's fiscal policy. It had only one thing going for it -- a name that was hard to vote against.

But just four years later, President Warren G. Harding signed the Budget and Accounting Act of 1921 and instituted the beginning of modern federal budgeting. The act was largely based on the recommendations of a commission established by President William H. Taft a decade earlier, and did a number of important things.

First, the act established the Bureau of the Budget, which reviewed and could revise the budget requests of all departments and agencies of the federal government. The Bureau was obliged to add all of the spending up into one total and propose changes in revenue to ensure that deficits were kept to a minimum.

Second, the act created the General Accounting Office to have professional auditors go over the agencies' books and examine whether expenditures were made in conformance with the laws under which they were authorized. Congress also reorganized itself so that all spending requests were under the jurisdiction of a single committee.

Finally, the legislation established strict procedures by which any employee of the government could sign a contract obligating the federal government to make any kind of payment. Any employee who did so without appropriated dollars to pay the cost of that contract was guilty of a felony and subject to criminal prosecution.

The increased control and accountability provided by the 1921 act went a long way toward addressing the concerns that had sparked the Liberty bond amendment, but Congress continued the process of passing legislation to increase the debt limit as it was needed. However, Congress finally dealt directly and comprehensively with establishing a process to determine all of the issues related to the growth of the public debt in 1974 with the adoption of the Congressional Budget and Impoundment Control Act.

This act, among other things, required each house of Congress to adopt a resolution each year setting forth a blueprint for future spending decisions as well as changes in the level of revenues collected, and expressly requiring a vote on the level of the deficit that would result from the decisions about spending and revenues. This not only gave Congress the opportunity to vote on deficits before they were created, but it also made the "debt ceiling" completely irrelevant except for one purpose: whether or not we should default on paying the bills on purchases we had previously decided to make.

But the House did not move to suspend the legislative charade of deciding whether or not to pay the bills they had already voted to ring up for several years after the congressional budget process was implemented in 1977. There were probably several reasons for that. One was that some members of Congress never seem to tire of hearing themselves drone on about the evils of rising debt. All too often, those members are only covering their tracks for supporting more spending and big tax giveaways. Another group saw the regular process of bargaining with the White House over whether or not to push the country into default as a useful opportunity to get concessions of various types. This was more popular in the House than in the Senate, because the Senate already had a wealth of executive branch appointments on which to bargain over, and what could be demanded and obtained was usually small enough that the White House and congressional leaders were willing to play the game.

But in 1979, former House Speaker Tip O'Neill (D-MA) assigned a rapidly rising young member of the House Democratic caucus -- then-Rep. Dick Gephardt (D-MO) -- to head up the effort of passing the debt limit. 

Gephardt figured out how to translate the obvious solution for dealing with the debt ceiling from the standpoint of logic into a change in the House rules. Under the Gephardt rule, as the change became known, when a budget resolution conference report was adopted, a House Joint Resolution was automatically deemed as passed by the House and sent to the Senate. Put in place in 1979, the new rule was first used in 1980 and remained in place until House Speaker Newt Gingrich (R-GA) jettisoned the procedure in 1995. While Speakers O'Neill, Jim Wright (D-TX), and Tom Foley (D-WA) were willing to let the will of the House on the annual budget resolution represent the will of the House on the debt limit with no further demands on either President Ronald Reagan or George H.W. Bush, Speaker Gingrich saw it as a potential pressure point in his dealings with President Bill Clinton.

On a number of occasions, the House had to act on legislation to prevent default despite the Gephardt rule. This was either the result of amendments added in the Senate, or because the budget resolution anticipated growth in the public debt that was slower than the demands on the Treasury turned out to be because the economy grew at a slower pace than the Congressional Budget Office had forecast. But most of the time, the budget resolution provided the basis for House action on the debt limit.

So we are again at the 11th hour with continued uncertainty as to whether the Congress will force the country into default. Consumer confidence has dropped 12 points in the past week, the most since the collapse of the Lehman Brothers investment bank five years ago. House Republican leaders insist that their disagreement over raising the debt limit is a matter of deep philosophical differences with the president over how much the federal government should be borrowing. But if you look at their position in terms of the legislation they have passed -- the so-called Ryan budget resolution, H. Con. Res. 15 -- you find in section 101 on page 6, line 6: "DEBT SUBJECT TO LIMIT.--The appropriate levels of the public debt are as follows: Fiscal year 2014: $17,776,278,000,000." That is exactly $1.077 trillion above the current debt limit that House leaders refuse to raise. It is also $184 billion above the level of debt that the Congressional Budget Office projects the country will have at the end of this fiscal year in October 2014. All but four House Republican leaders who were in the chamber at the time of passage voted for that resolution.

The reason the public debt is rising under the House-passed budget is that the $2.82 trillion in spending contained in the budget resolution passed this spring greatly exceeds the $2.27 trillion in revenues contained in that proposal. Very simply, they have voted to spend the money, but they don't want to pay the bill.