Congress Gets Ready for the Next Budget Battle

The 24-hour-a-day, seven-days-a-week coverage of the fiscally trivial work of the past 3 months is over.  The Continuing Resolution for Appropriations for FY11, passed at 11:55 p.m. Friday, five minutes before a government shutdown would have occurred.  Passage of the CR represents an important symbol for a small section of the American electorate at best and evidence of Congress’ lack of seriousness at worst.  But as far as the American federal debt goes, and as far as day-to-day economics proceeds, nothing happened.

The projected deficit for this fiscal year will be about $1.6 trillion.  After the CR battle that dominated headlines and cyberspace ad naseum, the projected deficit will be $1.567 trillion.  Given the inherent inaccuracies of such projections, even this late in the fiscal year, that is a difference that makes no difference.

In my last blogpost, I considered how a hypothetical 31-year old bond trader in Tokyo might respond to the budget follies in Washington.  They would be sufficiently alarmed by the chaos and inexplicable behavior of our political leadership and would have good reason to worry about how this same Congress would handle the looming debt ceiling increase drama.

Despite the deal, bond markets will be confused and rightly so.  Why did politicians create such noise over almost nothing?  Was it all symbolic?  With such an enormous debt burden bearing down on the country, why did they waste so much time?

The conclusion of the FY11 budget battle leaves bond traders just as apprehensive about how Congress will act on the debt ceiling increase as before.  They have in the back of their minds questions: "Are these folks serious?  Do they know what lies ahead?"

No one won in the FY11 confrontation.  Each of the three major actors suffered injury:

• the Republican House reinforced an image of ideological rigidity that caused its approval rating to plunge from approximately 53% to the mid-30s in just 90 days
• the Senate played a relatively minor role, both sides sticking to talking points reinforcing the behavior of their partisans.
• President Obama, having failed to try to educate the public or lead public opinion in his State of the Union, once again seemed aloof and somehow disconnected to the problems confronting the nation.

But each of these three elements think they’ve won something important:

• House Republican conservatives believe they have shown their strength and leadership, mistaking stubbornness for wisdom
• Senators played around with balanced budget amendments and saving National Public Radio while America's debt increased by about half a trillion dollars during the course of the debate
• President Obama avoided any real commitment to the outcome, leaving him political room in the presidential race to condemn or endorse more comprehensive fiscal plans later.

It has been fashionable from the first days of Congress more than 200 years ago to criticize the institution and its denizens.  It may well be that most members of Congress believe that this most recent spectacle will soon flee from public memory and that any damage to members will soon dissipate. After all, folks always complain about politicians, but most of them get re-elected on a regular basis.  The same thing, many members may think, will happen this time.

Congress focuses so intently on the audience back home, and prays so fervently that memories remain short, that it fails to notice another audience--our 31-year-old bond trader in Tokyo.  He buys and sells billions of dollars a day in U.S. sovereign debt.  If and when the global bond market begins to lose confidence in American fiscal seriousness, our bond trader wants to be the first to sell, not the last.

Our 31-year-old bond trader is neither mythical nor imaginary.  He really exists. Even in the middle of the tragedies his own country suffers, he concentrates on his task: to make money.   And, he watches closely how this incomprehensible American government will handle the necessity of raising the public debt ceiling, now $14.29 trillion, later this year.

So far, he is far from impressed or re-assured.

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