Summer fun – – – The Great Debt Debate !

by Ted Rushton

It’s August, and as for the past several thousand years the big issue in Arizona is summer rain    just as the big issue in Washington is government spending.

Should anyone be surprised?

The U.S. Debt Agreement has all the potential of the 1938 Munich Agreement, an earlier effort to solve all past, present and future problems with a few simple easy strokes of some diplomatic pens.

President Barack Obama, as with Prime Minister Neville Chamberlain, is likely to sign the historic pact.  He is not likely to wave it over his head and proclaim “Peace in our time” with Congress; the impetus for such dramatic gestures hailing all things good and wonderful faded somewhat with the ‘Mission Accomplished’ boast of 2003.

The US Debt Agreement allows the US to keep borrowing until after the 2012 election, which enables Republicans to campaign on “uncontrolled spending” and Democrats to continue “uncontrolledspending” until after the election.  It gives dreamers plenty of time to scheme up $1.5 trillion in cuts on which Obama, his opponent and all members of Congress who are up for election may campaign for or against.  It allows Teapotty members such as Michele Bachman to denounce “earmarks”  except for the projects she favours, which are “vital projects to the national interest.”  (She wants a new bridge over an old river.)

 And it allows the 2012 federal budget with its deficit of about $1 trillion, or 7.5 percent of national GDP, to be enacted and spent.

Standard and Poor has indicated it will cut the US credit rating in response to the failure to authorize $4 trillion cuts in federal spending that Standard and Poor wants;  but this is not likely to affect the interest paid on US Treasury debt which is now about 2.75 percent.

 Why so low? 

The reason is that people with a few billion dollars to invest (U.S. Corporations now have about $1.9 trillion in surplus cash) regard the U.S. as the world’s safest investment market. 

Europe is teetering on the Greek debt crisis;  the ‘Arab Spring’ is chasing money out of Arab countries;  China is plagued with its high speed rail and Three Gorges Dam problems;  and safe havens such as Canada, Switzerland and Lichtenstein can only absorb a limited amont of foreign funds.

 The degree of “risk” is not based on what happens in Washington;  it is based on the best possible alternative.  Today, the U.S. is still “the best possible alternative” in the world, and the financial markets recognize this even if others don’t.  The US government is the safest possible  alternative to almost every other society.  Members of Congress can throw as much sand about their little sandbox as they like, but the US economy remains anchored on more substantial ground.

There are two major factors involved:

 1)  the US Constitution says Congress decides on the amount of federal spending;

 2)  the US Constitution says Congress cannot do anything to undermine the credit of the federal government.

 What was not publicized in this rush to madness was that government receipts have been running above forecasts;  and thus may get through August without issuing new debt.  It’s August;  Washington was built in a swamp, and swamp dwellers are not at the best when temperatures and humidity are at their peak.  Just wait until the World Series is over, i.e. October, and everyone will be able to go back to calling each other names.

Washington is as always was, in the words of John F. Kennedy:  a city with northern charm and southern efficiency.  It’s how Washington brings America together    and unites the world in wondering, “What next!”

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