When Economics, finance, and history form a convergence, then it is time to look at the "trend". This blog is designed to see how the little pieces fit together to form the big picture. . The blog will also address some social and political aspects of the United States and beyond. College football season will offer weekly complimentary selections v.s. the Las Vegas Line.
Friday, July 22, 2011
A Voice of Reason: Letter from Steve LaTourette
Thank you for contacting me about the debt ceiling debate. As you can imagine, little else is being worked on by the Congress and the President as we approach August 2nd, the date the Treasury tells us the United States will run out of cash.
The ongoing discussions have both great promise and great peril: peril, due to the impact that default by the U.S. would have on the cost of money in the future; promise because this crisis has created a once-in-a-generation chance to put the country’s economic future on a stable path. I apologize for the length of this response, however, there are a number of misconceptions about this issue and I want to be as clear as I can be.
I have recently been briefed by a number of experts about what happens if we take no action on the debt ceiling. The most informative one, to my mind, was prepared by the Bipartisan Policy Center and can be found at www.bipartisanpolicy.org. That analysis reveals that the date the U.S. runs out of cash and will be required to pay bills as money comes in is August 2nd (slides 5-6). There is no precedent for what would happen next but slide 11 indicates that the government would have to prioritize among 80 million payments. Slide 13 shows that income for August would be $172B and bills $306B for a deficit of $134B.
The severity of that situation is clearly illustrated in slides 14-19, where the Bipartisan Center lays out 2 proposed scenarios of what could be paid and what wouldn’t be paid. In addition, the credit rating agencies, Standard & Poors, et al., have indicated that a failure to pay all of our bills would result in an increase in the cost of financing the debt we already owe. Many of us who bought our first house in the 1980’s can vividly recall 15% interest rates and even a modest rise in what the U.S. pays as an interest rate can wipe out trillions in any savings a deal would achieve(slide 36).
All of which brings us to what should we do about it. Obviously, a default by the U.S. cannot be permitted. That being said, the magnitude of the debt crisis demands that a transformational solution be crafted that puts the country on a path to financial health. Some have suggested that the President simply be given an additional authority to borrow another $2Trillion without any spending cuts or revenue increases. I reject that approach.
The Speaker, John Boehner, is working with the Administration to craft what is being called the ‘big deal’. That deal would only allow additional borrowing if spending is reduced in an amount greater than the new debt. Further, through eliminating loopholes, tax simplification and broadening the base of taxpayers, revenue would be increased without the class warfare demagoguery. I support the Speaker’s work to achieve this bigger agreement, as it represents our best hope to not, again, kick this problem down the road to our kids and grandkids. Obviously, my support of any proposal will depend on the details of that proposal.
I very much appreciate you contacting me regarding this matter and as events continue to develop please feel free to share your thoughts on what you see and hear. Thankfully, the new rules of the House require that any ‘deal’ be available for 72 hours online before it comes to a vote and I welcome your thoughts when that occurs.