Posts Tagged Debt
On Thursday, Mario Draghi, President of the European Central Bank, announced a Stimulus Package of monetary tools, which are intended to nudge the economy upward. The ECB is the monetary authority that regulates the Eurozone, the 19 European Union member nations that share the common currency, the Euro. There is some question, however, as to whether monetary stimulus alone may be effective at the current minimal interest rate. Additionally, growth can also be stifled may by inflation, which is at a negative 0.20%, considerably below the ECB’s goal of 2.0%.
The Gross Domestic Product for 2015 is expected to have grown by 1.8% for the E. U, while that of the Euro Area will be 1.5%. In 2016, the GDP growth rate of the E. U. and Euro Area are projected to rise to 2.1% and 1.8%, respectively. The financial markets responded in quite a haphazard manner following the ECB announcement. Initially, the EURO STOXX 50 Index, of 50 blue chip stocks from 12 Eurozone nations, rose sharply, but then it closed the day down by 1.8%.
The Stimulus Package contained a curious array of monetary tools, such as cutting the key lending rate to 0.00% and increasing the monthly bond-buying program. The ECB controls only monetary policy; while fiscal tools—which some believe to be the preferred policy under such conditions—remain in the hands of each of the Euro member nations, respectively.
So far in the recovery, monetary tools have hardly encouraged banks to lend, or consumers and businesses to spend. Government spending, such as on infrastructure projects–repairing highways, bridges, tunnels, etc–could put people to work quickly, increase consumer spending and, in turn, add to the tax revenue.
The E. U. seems to have an aversion for fiscal stimulus. For the most part, that is probably due to the inability of the ECB to coordinate such actions on the part of the various member nations. More specifically, however, once deficit spending especially were unleashed, the generally free-wheeling habits nations of the South and the more restrained ones of the North could probably never be able to reconciled again. That inability to coordinate both fiscal and monetary policy, I believer, is why the Eurozone might never be able to truly live up to its original expectations.
The National Debt is currently running around $17.263 Trillion; however, it is most important to understand that it didn’t accumulate in just the past few years. Rather, it has built-up over many years, and numerous Administrations and Congresses–and both political parties were party to it. So, what has built-up over decades can only be eliminated over the decades to come. In fact, you can track the National Debt, on this U. S. Treasury web site, over time, going all the way back to 1790, http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm.
Currently, the Opposition Party–the GOP–is accusing the Administration of President Barack Obama of running-up the Debt. But, you cannot have it both ways–turning a blind eye to one Party’s Deficits, while castigating another for them. Both Parties need to cooperate, at least on this one issue–paying-down the National Debt. But, can they?
Given the current political Environment in Washington, D. C., however, I don’t believe that we will see any progress on reducing the Debt at this time. In fact, today’s Republican Party is fighting with itself; so, how can it cooperate with the Democrats? In fact, there has been considerable backlash against both Speaker John Boehner (R-OH) and Senate Minority Leader Mitch McConnell (R-KY), from the GOP’s Conservative Elements, over their voting for a “Clean” Debt-Limit Increase last week.
Congress will need to wean itself from the practice of spending like “drunken sailors” (sorry, Swabbies) and focus on the issues behind Legislation, rather than how much “pork” (pet projects) they can add. It seems like they sit around a table and trade: “I’ll vote for that project in your District (State), if you’ll vote for this one in mine”. Several years ago, Congress claimed that “Pork Barrel Politics” was a thing of the past. Well, if you believe that one, I’ve got a bridge in Brooklyn to sell you.
In previous Blog Posts, I have noted several examples of Pork: the $200 Million to build the “Bridge to Nowhere”, connecting a sparsely-populated island with very little traffic, to the Mainland in Alaska; the John Murtha International Airport, near Johnstown, Pa., which only has a few flights In-or-Out each week; forcing NASA to continue to fund a program to test rocket engines, at the Stennis Flight Center, in Miss., when the actual rocket program was terminated in 2010; the ridiculously inefficient manner of spreading the assembly and construction of the Pentagon’s “Toys of War” over a multitude of Congressional Districts; and, of course, the role of Lobbyists throughout Washington, which might be the biggest reason for inflating the Federal Budget.
Here are some questions that I would ask:
1. Why did the Last Administration award so many No-Bid Contracts, each for millions
and millions of Dollars, in Iraq? Did we really need to out-source food service,
motor pool operations and security–in a War Zone?
2. Why is the Pentagon involved in the determination to sell Military Equipment (planes, tanks, ships, missiles, etc.) to our Allies? Shouldn’t that be handled totally in the State Department? Surely State has the necessary resources.
3. Shouldn’t Congress focus on the necessity of funding various projects requested by the various Government Departments and the Budgetary considerations; but, not on where to place them–or forcing unwanted equipment on Departments?
4. Why did the bi-partisan Senate Bill for Immigration Reform have to add Billions of Dollars to double the Boarder Patrol when most Illegals nowadays do not come across a boarder; rather, they just arrive legally on VISAs and, then, stay past the expiration date?
5. How about the Government budget practice of “Use it or Lose it”, which causes many Departments to go on “Shopping Sprees” toward the end of the Fiscal Year, which is every September 30? Wouldn’t it make more sense to actually reward a Department that can spend within its means?
I’m sure that I could go on and on about such unnecessary spending, and I believe that readers could each add a few more. Instead, Congress seems to focus on which Programs they can cut, and which they can protect, all in the sense of making a deal. But, cutting Programs for political or ideological reasons–or to appease Special Interest Groups, is not the best way to provide Fiscal Sanity.
Whew!!! The National Debt Ceiling was extended today by the House and Senate, through March 15, 2015, and the President will undoubtedly sign it very quickly. It is important to remember, however, that the overwhelming majority of Republicans, in both Houses, voted against it. In the House, Speaker John Boehner (R-OH) and Majority Leader Eric Cantor (R-VA) signed it, along with 25 others from the GOP. 199 Republicans and two Democrats, however, voted against it. In the Senate, only Minority Leader Mitch McConnell (R-KY), Minority Whip John Cornyn (R-TX) and three other Republicans signed it, while the rest did not. What were they possibly thinking?
As I have written before, the Financial Markets don’t know how to handle uncertainty. If the U. S. were to default on its Debt, I believe that World Trade would almost stop, and Investments in Business and World Economies could stop functioning as everyone hoarded Cash. Even then, they wouldn’t know what any currencies would be worth in the future. Oil, which propels many economies, would probably stay in the ground as Oil Contracts, which are generally denominated in U. S. Dollars, would be highly questionable.
The purpose of this Blog Post is not to predict Doom and Gloom, and I am not suggesting that “The Sky is Falling”. Rather, I would like to point-out the Lunacy of many in Congress–even Paul D. Ryan (R-WI), Chairman of the House Finance Committee–in acting without forethought, but merely by keeping Politics and Ideology foremost in mind.
If we Default on our National Debt, America would not be able to pay its Bills for goods and services that it has already spent, and had been already appropriated by Congress. Now, I realize that we still have The size of the $17 Trillion National Debt to contend with. Unfortunately, Congress and Administrations always seem to deal in ten-year terms, figuring that no one will remember then what any of them said today, how they voted and, perhaps they might not even be in Office when the Chickens Come Home to Roost.
President Barack Obama and the Congress have already significantly reduced the current Budget Deficit and, HOPEFULLY (CAPs, huh?) future Presidents and Congresses will continue to do so. For instance, in order to spite the President when he first took Office in 2009, Conservatives in Congress would not authorize the full package of desperately-needed Infrastructure Projects, which most economists said needed to be much larger. The potholes are still there, highways are still sliding further into disrepair and bridges continue falling down.
Republicans have always despised the Legacy of President Franklin D. Roosevelt who raised this Country out of the Great Depression by creating Infrastructure Jobs. Such jobs put money into the Economy and created even more jobs and higher Tax Rolls. Corporations and the Financial Markets have surely come back from the Financial Abyss of the Great Recession (4Q07-1Q09), but the Working Class and Consumer Spending have not. And, the One Percent continues to complain that they are unfairly labeled. Hey, if the shoe fits…?
In my next Blog Post, I will discuss the National Debt. Remember that this was not a big concern when President George W. Bush took the Country into two Unnecessary Wars in the Middle East. And, Congress wrote him a blank check and let his Administration do so without appropriating the necessary Hundreds of Billions of Dollars to do so. Perhaps we were all too busy wondering what color Emergency Flags were flying that week. Remember them?
Yesterday, the House of Representatives approved extending the Federal Debt Limit for one year. The Senate is expected to vote this week; however, with the pending Snowstorm in the Northeast and the scheduled Recess for Presidents’ Day (all of) next week, perhaps it will take-up that vote today, reducing the chances of further delays.
Raising the Debt Ceiling for a whole year–rather than what has recently become
several-month-long “band-aids”, at least to me, is a strategic change by Speaker John Boehner (R-OH). In doing so, he broke the so-called (Former Speaker Dennis) “Hastert Rule” of never taking a Bill to the Floor unless it is assured to have a majority of the Speaker’s own Party vote in favor of it. Some D. C. Pundits have suggested that this is a signal that Boehner’s job has just gotten a lot easier.
The Debt Ceiling Extension is vitally important; because, not doing so would mean that the Government would not be able to pay its bills–those that had already been appropriated by Congress–and cause a Default on our National Debt. As I had suggested previously, a U.S. Default would send shock waves throughout the entire World Economy–worse than the recent Great Recession (4Q07-1Q09).
Remember that the U.S. is currently the only Reserve Currency–in which other Nations feel comfortable in placing their excess financial reserves–and believing that their Investment would be repaid. Also, the U.S. Economy is the only (assumably stable) one that is large enough to absorb such large Financial Inflows and Outflows.
Republicans had been hurt significantly when many Americans blamed the Party of “No” for last year’s two-week Government Shutdown, and felt that the GOP caused such shortages in Government Service as: extended delays at Airport TSA Security Points; the Closing of Many National Parks and Monuments and, more recently, putting the IRS behind schedule in preparing for the Annual Tax Filing Period, which ends on April 15th.
NOTE: My next Blog Post will address, once again, what I see as the potential Dark Side of a Default on our U. S. Government Debt.
As I had previously Posted, the whole idea of a Fiscal Cliff and the urgency of Balancing the National Debt had only occurred just after President Barack Obama took office. The so-called Fiscal Hawks certainly had no trouble authorizing the “Bush Tax Cuts” in the early 2000s. To borrow a term from My Dad, Congress had that “Bass Ackwards”. Generally, you raise Taxes when the Economy is strong–as President Bill Clinton did–and over-spend (stimulate) when the Economy is weak.
The Financial Markets certainly don’t seem concerned with the Fiscal Cliff; because stocks have rebounded nicely from their recent swoon. Interest rates on US Treasury obligations have stayed quite low. Even when S & P lowered Treasury Debt, from AAA to AA+, the rate that the Treasury pays on its Debt dropped by quite a bit.
I believe that Paul Krugman, Professor of Economics and International Affairs at Princeton University, is also a columnist for the New York Times, described the situation quite well in last Friday’s newspaper. Professor Krugman won the Nobel Prize, in Economics, in 2008. “for his analysis of trade patterns and location of economic activity”.
The “Right” has been calling for a Balanced Federal Budget–but, only since President Barack Obama took Office. George W. Bush didn’t face such a Roadblock. HMMM…
Initially, Republicans tried to convince people that lower taxes on the Wealthy will help create jobs. Oddly enough, however, when the second President Bush signed substantial Federal Income Tax Cuts into Law, mostly for the Uber-Wealthy, the Economy tanked. Very few Economists, except very conservative ones, fell for it. The Surplus that Bush inherited from President Clinton quickly evolved into a huge Deficit.
I recently wrote a Blog Post, before the Presidential Election, that noted several Billionaires who said that we needed a Politician who would do more for “Small Businesses”. Just two percent of these so-called Small Business owners would have to pay the Higher Tax Rates that kick-in for Taxpayers earning $250,000 per year, or more. Using the IRS classification of Sub-S, Billion Dollar Businesses, however, such as Koch Industries would be considered “Small”. HA!
Recently, President Obama appeared before The Business Roundtable (of very large corporations) and his Administration has been meeting with key business leaders, both on Wall Street and in the Corporate Community, in general. So far, many of them appear to be On-Board.
But, the overall agreement of the Very Wealthy in general is uncertain, at this time. And, if they call-off their lobbyists in fighting Higher Taxes for the Wealthy, perhaps the message will get through to the both sides of the Aisle in. Congress.
For the past several months, we have heard more and more about “Going Off the Fiscal Cliff”. Most recently, it has been somewhat threatening, especially among Republicans in Congress who appear the be playing a Game of Chicken with President Barack Obama. The Senate has already passed the necessary Legislation. As it stands, if Congress doesn’t take specific steps to begin the process of Balancing the National Debt, the so-called “Bush Tax Cuts” would expire and across-the-board spending cuts would be implemented including to the (generally Sacred Cow) Department of Defense.
Most recently, Republicans have brought the “Debt Ceiling” into the discussion, perhaps trying to use that as a delaying tactic. You might recall that earlier this year, Republicans had threatened not to raise the Debt Ceiling, which would enable the US Government to Pay the Bills that have already been Appropriated and Spent. In effect, they had threatened to Close the Government–on several occasions. President Obama has already said that he’s not going to play that Negotiating Game in 2013.
Let’s take a moment to go over the ABCs of the US Debt. Generally, an individual, corporation or institution attempts to spread the maturities of various debts of a period of time, so as not to have a large amount of it’s debt coming due at any one time. Also, if you have a considerable amount of debt due at a time that interest rates have spiked, you wouldn’t be too happy.
The US Treasury divides its debt over three different vehicles: Treasury bills (T-bills) are issued for periods of one-year or less; T-notes are issued for periods from two-years to less than ten-years; and T-bonds are issued for ten years or more. Unlike T-bills and Notes, there is a limit (the Debt Ceiling) as to how much T-bond Debt can be outstanding. Don’t Ask!
To many people, the National Debt and the Debt Ceiling might sound like the same thing; but, they are not. For the most part, you can probably forget about this Post. However, if you wish to impress your fellow customers at the barber shop or hair salon, go ahead and WOM THEM!