Washington Stalls on Debt Limit Deal
The movie, "Groundhog Day," rushes to mind as we watch the tragicomedy of the recent debates on the national debt and the country's fiscal future. In "Groundhog Day," Bill Murray found himself reliving the same day over and over. In our political debates, the participants are using the same talking points over and over, talking points that are also decades ago.
Here are just four examples of our repetitive "Groundhog Day" debates:
#1. Renown investor Stanley Druckenmiller, in an interview in the Wall Street Journal, defended the notion that Congress should refuse to pass an increase in the debt ceiling. Druckenmiller asserted that markets would react more harshly to a debt ceiling increase without significant cuts in federal spending than they would to a default. He predicted that any short term disruption in markets would eventually calm down if a real deficit reduction plan emerged from Congress.
This is the same argument Druckenmiller made in the winter of 1995-96, when he called upon the Republican House to reject an increase in the debt ceiling. He later recanted as it became obvious that markets were somewhat less forgiving of stupidity than he had believed.
Such claims normally would be ignored, except that some Republican Senators and Congressmen who have no idea of what derivatives are or how they connect to global markets, are encouraged to say similarly silly things.
#2.The release of the report on the Social Security and Medicare trust funds. The Trustees' report confirmed two facts obvious to most analysts: the date for bankruptcy for Social Security had advanced by one year and the main Medicare trust fund will be completely out of money by 2024, five years earlier than projected just last year. This report repeats most of the trustee reports of the past two decades.
Every few years, someone writes about the dangers, the same old voices deny that any dangers exist, and nothing happens.
#3. At the end of this past week, Treasury Secretary Tim Geithner warned that a failure to pass an increase in the debt ceiling promptly could lead to a "double-dip" recession. Few media outlets paid much attention to Geithner's remarks, in large part because he has been issuing the same warning for months now.
Worse for those making such warnings, Treasury Secretaries for the past 25 years have made similar arguments. It seems that some in Congress simply believe that Treasury Secretaries have been crying "wolf" and now it's time to test if they are right or not.
#4. Both political parties are charging each other with threatening to destroy Medicare and Social Security. This is an old debate. Democrats have attacked Republicans since 1965 with hostility toward Medicare.
Once in a while, Republicans respond by charging Democrats with similar instincts--e.g., the cuts in Medicare Advantage that are part of the PPACA (“Patient Protection and Affordable Care Act”, known to most as "Obamacare"). Republicans claim that these cuts proves that it is the Democrats who want to cut Medicare.
On Social Security, repetition has reached the point where one can simply take a videotape from debates on the subject from decades ago, substitute different speakers, and hear precisely the same charges and counter-charges. Nothing new has emerged from the Social Security debate since the 1970s.
Every debate has become rote, almost Kabuki-like, where charge and counter-charge are well-rehearsed, well-known, and fully disregarded. No one is really thinking any more, merely reacting.
Ask yourself these questions:
-Do current markets have the same size, complexity, and global inter-relatedness as they did in 1995?
-Are the demographics driving Social Security and Medicare the same as in 1995?
-Are the fiscal realities of American government policy the same as in 1980, 1990, or even 2000?
-Is the American dollar still the best store of value in the world, as it once was?
The answer to all four questions is, "No, Of course not. Things are different now."
I have often written of my hypothetical 31-year-old bond market trader in Tokyo, watching this entire fiscal and debt debate. He doesn't know, nor care, about how things were 25 years ago. He wasn't even in grade school then. He cares about now. How obviously ignorant of modern market structure are American politicians? Even if these folks manage to ensure that no payment of principle or interest is missed, what kind of damage will they do to their own economy with their machinations?
In short, is this 31-year-old bond trader really confident that America knows what it is doing? Right now, he isn’t. Our hypothetical bond trader may soon decide he needs to change how he values US sovereign debt.