A Recovery Menaced By Dysfunctional Politics

In a time of fundamental uncertainty, what do we know for certain?

No, that’s not a Yogi Berra kind of question.

Timing of passage of an increase of some size in the national debt ceiling remains uncertain.

Which side will blink first remains uncertain.

Final form of the legislation remains uncertain.

Market reaction remains uncertain.

But we do know some things for certain.

We know that both extremes of both parties are willing to risk America’s trustworthiness in financial matters.

We know that any real progress on the fiscal crisis the United States faces has evaporated.

We know that a downgrade of American sovereign debt by at least one major rating agency seems certain.

We know that on August 3, the borrowing ability of the Treasury ends.

From that point on, uncertainty reigns: will Treasury prioritize payments to its debtors; who will get paid first; more to the point, who will get paid after debt service payments are made and social security payments go out; who won’t get paid at all, or at least not on time and not in full?

This insanity occurs just as the Commerce Department released truly pessimistic economic news. Not only was gross domestic product in the quarter just ended at an anemic 1.3 percent, but GDP in the first quarter of this year was revised down from the earlier 1.8 percent to a truly weak 0.4 percent. Worst of all, the news was this: personal consumption, the driver of almost 70 percent of our economy, grew by only 0.1 per cent last quarter.

We asked this question four months ago: Would Democrats in Congress bail out Republicans on the debt ceiling increase? That question remains relevant. As the President pointed out in his brief remarks this morning, it is the House that has floundered. While his speech was another in the “I am the adult, you kids have to act” theme, he made the telling and scathing remark that while America has a AAA bond rating, it doesn’t “have a AAA political system.” It may be that the Speaker can get the final 6-7 votes he needs for his plan. It still faces death in the Senate.

Now that time has almost run out, due to Senate parliamentary rules and the threatened filibuster by some Republicans, what will Congress do? We expect some sort of Reid-McConnell agreement. We expect it to be filibustered through the weekend. We expect it to pass Monday or Tuesday. Then, will enough Democrats join with Speaker Boehner to pass the Senate bill? Or more crudely, will the Speaker risk his political future by discarding the 50-60 Tea Party-based members in his own caucus?

That final uncertainty will be resolved within the next week, probably with some short term extension that gains time, until the Congressional August recess really begins on August 8.

But one certainty, sadly, endures. America’s political dysfunction has now begun to threaten the nation’s economy and the underlying strength of the dollar. Neither party wants to give up what it thinks will be a winning political message next year. The Democrats, led by Sen. Chuck Schumer, want to be able to pound Republicans as granny-killers. The Republicans want to be able to hit Democrats as virtual socialists who want more spending, more taxes, and more centralized control. As usual it will be a battle of caricatures, pushed with literally hundreds of millions of dollars in advertising.

We wrote several times earlier this month that the debt ceiling increase would pass. We noted that it would be done by Congress in the most painful, economic harmful, and distressing manner. That forecast has now been validated.

We wish we had been wrong.