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Another Budget & Debt Ceiling Fiasco Starts Now

September 25th, 2013

by Gary Halbert

of Halbert Wealth Management

IN THIS ISSUE:

1.The Battle Over the Federal Budget… Redux

2.The Debt Ceiling Battle – Another Fiasco?

3.More Americans Oppose Raising the Debt Ceiling

4. Obama Slams Republicans, Refuses to Negotiate

5. CBO Warns US Debt Path is Unsustainable

The Battle Over the Federal Budget… Redux

Last Wednesday, after the Fed surprisingly voted not to “taper,” stocks soared to new record highs, but then lost ground for the next two days. It may be that some investors decided to lock in some gains, reduce exposure and brace for the next few weeks as the budget and debt ceiling circuses play out in Washington.

That’s not surprising. The prospect of a government shutdown or, worse, a default on the federal debt, rekindles memories of 2011 when Washington’s infighting prompted the loss of the United States’ AAA credit rating and was a primary driver behind the stock market’s last major correction.

Dow Jone Industrial Average

Fiscal year 2014 begins a week from today on October 1 with no budget resolution in sight. No one voted for President Obama’s federal budget proposal submitted earlier this year – nothing new about that. Likewise, there is little hope that the Senate will pass the House Republican budget. So here we go again with a potential government shutdown just ahead.

In the latest move, the Republican-controlled House of Representatives passed a “continuing resolution” on Friday to fund federal agencies through mid-December, but also inserted a provision that eliminates funding for Obamacare. Democrats, who control the Senate, have said they will strip out that provision when the bill comes before them and then send it back to the House, most likely late this week.

Even before the budget deadline arrives, leaders from both parties are already blaming each other in advance in case there is a government shutdown, if a deal cannot be reached before October 1. Nancy Pelosi says Republicans are “legislative arsonists” who are using their opposition to Obamacare as an excuse to shutter the government’s doors.

Republicans are divided among themselves with some remembering that the GOP got most of the blame for the budget battle in 2011 and don’t want to see a repeat now. Yet Tea Party and other conservative lawmakers are urging Republicans to use any tool available to stop the Affordable Care Act from taking hold.

As usual, no one knows how this will play out. Yet the most likely scenario is that sometime around midnight on September 30, House Speaker John Boehner will relent and pass the modified Senate bill with mostly Democratic votes. But if it looks like there is any chance that the government will shut down, expect that tonegatively affect the stock markets.

The interesting sideshow to watch over the next week is the fight over whether to continue the “sequestration” spending cuts into FY2014. The Republicans want the cuts to remain in place, while the Democrats argue that they are an abomination. Whatever happens, the 2014 budget will be larger than the 2013 budget. Sadly, it gets bigger every year, no matter what.

The Debt Ceiling Battle – Another Fiasco?

The debt ceiling or debt limit is the total amount of money that the United States government is authorized to borrow to meet itsexisting legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.

The debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past. The current debt ceiling is $16.699 trillion. The current national debt is $16.949 trillion (seewww.usdebtclock.org).

We eclipsed the $16.699 debt ceiling earlier this year, and the Treasury has been funding the government using “extraordinary measures” since then. However, the Treasury Secretary has warned that those measures will be exhausted around October 15.

Failing to increase the debt limit could have catastrophic economic consequences. It could cause the government to default on its legal obligations – an unprecedented event in American history. That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans.

So, we know that the debt ceiling will be raised, just as it always has in the past. It’s just a question of when and whether the fight results in another government shutdown. The US will not default on its debt. However, that does not mean we won’t get another downgrade in the US credit rating as happened in 2011.

More Americans Oppose Raising the Debt Ceiling

It might interest you to know that more Americans areagainst raising the debt ceiling than those who are in favor of it. A new NBC/Wall Street Journal pollreleased last weekfound that 44% of respondents are against raising the debt ceiling and only 22% believe it should be raised to avoid a default. A third of those who answered are unsure.

A recent Reason-Rupe pollfound that 55% of Americans say they do not support raising the debt ceilingeven if it causes the US to default. Even if the Democrats would agree to include dollar-for-dollar spending cuts equal to the increase in the debt ceiling, only 45% say they’d support raising the debt limit and 46% would still oppose.

The point is, aLOT of Americans want Washington to balance the budget so that we don’t have to raise the debt ceiling in the future. Count me as one of them!

Obama Slams Republicans, Refuses to Negotiate

President Obama continues to hammer the Republicans at each and every speaking opportunity. He even went so far as to blast the GOP in a speech on the very day that 12 Americans were murdered in a mass shooting at the Navy Ship Yard on September 16. In retrospect, the White House admitted that the highly partisan speech on that particularly somber day was inappropriate.

Nevertheless, the president was right back at it again last week. On Saturday, he blasted House Republicans who passed a budget the night before which would shut down the government unless Obama and Senate Democrats agree to strip all funding for Obamacare. The president called on Republicans to “stop governing by crisis.”

On Wednesday of last week, he accused the GOP of engaging in “terrifying financial brinksmanship fueled by ideological arguments.” On Friday, he said the GOP was motivated primarily by a political desire to “mess with me,” rather than by concern for voters’ wellbeing.

While you may agree or disagree with Obama’s unending bashing of Republicans and his claims that they want to shut down the government, there isanother side to this story. The president has repeatedly refused to negotiate over the threat of a government shutdown on the budget and the debt ceiling. This is, in effect, yet another “red line” for Mr. Obama.

Obama’s refusal to negotiate over the budget or the debt ceiling, either of which could shut down the government, seems very strange. After all, the president was willing to negotiate with Russia’s Vladimir Putin and Syria’s Bashar al Assad over chemical weapons. In fact, those negotiations –with dictators no less – are still ongoing. Yet he won’t negotiate with Republican leaders in the House on these critical domestic issues.

As the president and chief executive, it’s his job to negotiate. What does this say about the president's strategy for the economic health and wealth of his own country, the United States of America? It says that he doesn't want to dirty his hands by talking to Republican congressional leaders.

It also says that if President Obama continues to refuse to negotiate, he will be equally responsible if a government shutdown occurs just ahead. Obama is playing chicken because he can. Larry Kudlow, one of my favorite writers, has penned anexcellent article on this very topic that you should read. You’ll find it in the first link in SPECIAL ARTICLES below.

CBO Warns US Debt Path is Unsustainable – Duh!

On Tuesday of last week, the non-partisan Congressional Budget Office released a scary new report which shows that our national debt trajectory is “unsustainable” even though the federal budget deficit for FY2013 has fallen sharply below the trillion-dollar deficits of the last four years.

But before I share the details of last week’s CBO report, I have to point out one of my pet-peeves about the way the government and the CBO report on our national debt. The CBO, the Treasury and other government agencies like to measure our national debt only as the “debt held by the public,” and they ignore that portion of the debt that is owned by “intra-governmental agencies.”

For discussion purposes, let’s say the national debt is $17 trillion. Of that, apprx. $12 trillion is debt held by the public, and apprx. $5 trillion is owed to various intra-governmental agencies such as the Social Security Trust Fund. It’s as if they want us to believe that this $5 trillion is money that never has to be repaid, so itshouldn’t count as part of the national debt.

That’s hogwash! Think of the Social Security Trust Fund. We know that every dime of the trillions that the government has robbed from the Trust Fund will be repaid, plus interest, over time. The same is true of other intra-governmental agencies as well.

So when we’re talking about the national debt, it should includeALL the debt, period.

The Commerce Department recently reported that US Gross Domestic Product, the sum of all goods and services, was $16.67 trillion at the end of the 2Q. So our national debt of $17 trillion is already more than 100% of GDP! Keep this fact in mind whenever you see reports based only on the debt held by the public.

OK, back to the new CBO report last week that warned that our debt path is “unsustainable.” This is not the first time the CBO has used this term, so I must assume they think we’ve forgotten. In any event, here is the gist of the new report.

The CBO reported that US debt held by the public is now 73% of gross domestic product, the highest in history except for a period around World War II. The figure is twice the percentage it was at the end of 2007.

Modestly lower spending, a slowly improving economy and increased collection of income, payroll and corporate taxes have helped narrow the government’s deficit this fiscal year. If current laws remain in place, CBO said, the debt will decline “slightly” relative to GDP over the next several years – totaling 68% of the economy by 2018.

But the CBO cautioned that long-term challenges remain. It warned that under current law, growing future deficits will push the debt held by the public to 100% of GDP 25 years from now. And under another scenario that envisions changes being made to some laws – including removing the so-called automatic budget cuts known as the sequester – the debt would be even higher, at nearly 190% (not shown in the chart below) 25 years from now.

Debt to DDP Ratio

“Because federal debt is already unusually high relative to GDP, further increases in debt could be especially harmful,” the CBO report said. It added that lawmakers would have to make “significant changes” to tax and spending policies to put the US budget on a sustainable path for the long term.

Budget deficits will start to rise again under current law, the CBO said, mainly because of rising interest costs and growing spending for Social Security, Medicare and Medicaid. The report said spending for those entitlement programs will cost 14% of GDP by 2038, or twice the average of the past 40 years.

“CBO’s latest report serves as yet another warning that Washington must act now to rein in our massive deficits and debt, which are hurting our economy, costing jobs and jeopardizing the American Dream for our kids and grandkids,” House Speaker John Boehner said in a statement following the report.

Above all, remember that the latest warning from the CBO does not include the $5 trillion in US debt owed to intra-governmental agencies, which also has to be repaid at some point. When you include this $5 trillion, our national debt to GDP ratio is now over 100% and rising.

Best regards,

Gary D. Halbert

© Halbert Wealth Management

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