Debt Ceiling Kabuki; Wall Street is "Out on a Limb" Again

Barack Obama stormed out of a meeting with Republican leaders on Wednesday when negotiations broke down over raising the $14.3 trillion debt ceiling. According to one report, the usually-unflappable Obama unloaded on House Majority Leader Eric Cantor (R-Va.) dressing him down in front of his colleagues.

Here's a blurb from an article by Time's Joe Klein, "He lit up Eric Cantor like he's never been lit up," said one Democrat who described Obama as telling the Republican leader that he would veto any short term bill that Cantor sends him."
Then the president barked at Cantor, "Don't call my bluff."

Klein again:

"The President of the United States monstered down on Representative Eric Cantor in Wednesday's deficit ceiling squabble. This is so refreshing on so many levels. Cantor has been using this crisis to undermine his leader John Boehner, by playing the Tea Party/Grover Norquist recalcitrance card. The boy badly needed someone to get up in his face and Barack Obama, of all people, apparently did, telling Cantor, in no uncertain terms, that he'd veto any short term deficit ceiling fix or, indeed, any plan that did not include revenue increases." ("Cantor to the Woodshed," Joe Klein, Time)

So, what's this all about?

"Despite the tension, Obama and the Republicans did seem to find common ground on about $1.7 trillion in cuts over 10 years, cuts that were identified during talks led by Vice President Biden.

"And we're willing to go further than that," the Democratic official said. "It's a pretty clear indication of how far the president has come in terms of his willingness to come off his maximalist position....

"We had a pretty fulsome discussion on the specifics that the White House was prepared to agree to, or at least that they thought were options that were viable," Hoyer said in an interview shortly after the meeting at the White House." ("Obama warns Cantor: 'Don't call my bluff' in debt-ceiling talks," The Hill)

See? Obama has already given away the farm and wants to give away even more, right? That's why he's mad, because the Republicans won't play ball and provide him with the cover he needs to screw working people once again.

By the way, notice how the Bush tax cuts -- which Obama approved and which add another $3.3 trillion to the deficits in the next 10 years -- haven't been a part of the current negotiations. Nor has the military budget. It's all cuts to popular social programs and public spending.

So, yes, Obama does get ruffled when he can't do his job the way he would like to; when nit-picky Tea Partiers don't understand the way that Washington's corporate welfare system really works. Then he has to throw a hissy-fit and stomp his feet like a petulant 5-year old. But it's all just empty posturing; it doesn't really mean anything. Klein's article is pure malarkey.

There is a serious side to the debt ceiling negotiations though, but it's usually glossed-over by the media. If the ceiling isn't raised by August 2, then the United States will technically default on its debt. Now, granted, the political establishment will move heaven and earth to make sure that doesn't happen, but still, the Tea Party contingent -- that are adamantly opposed to raising the limit without major concessions -- could throw a spanner in the works and derail efforts for a resolution.

And, if there is no budget agreement by August 2, then this is what we can expect:

"...Federal spending would instantly have to be reduced by about $100bn per month. By the end of 2011 federal spending would be about $500 bn lower for the year than it would have been otherwise. ....spending cuts of that size would reduce the US's 2011 GDP by multiple percentage points. The Q3 and Q4 GDP growth rates would probably be on the order of between -5% and -10%. Recall that during the recession of 2008-09, GDP only fell by about 4% in total. The unemployment rate would be likely to rise by several percentage points from its current level of 9.2%, to perhaps 15% or more of the US population. Recall that at its worst, the unemployment rate during the Great Recession only reached 10%. ...Federal spending would instantly have to be reduced by about $100bn per month. By the end of 2011 federal spending would be about $500 bn lower for the year than it would have been otherwise.

"So when you read someone blithely writing that the federal government will not default in the absence of a debt ceiling deal, and instead will merely have to trim excess spending, remember that what they're really advocating is a new and deliberately caused Great Depression. And not just in economists like me." ("Great Depressions", Streetlight Blog)

"A US technical default would convulse markets. Nothing else is certain...If a deal cannot be reached before August 2nd the Treasury says it will be forced to default.....

"Domestic banks would not have to classify their sizeable holdings of Treasuries as non-performing if they thought the default short-lived. But they would suffer nonetheless. Currently Treasuries represent roughly 30% of the collateral that financial institutions such as investment banks use to borrow in the $4 trillion repurchase ("repo") market. They represent another 4-5% of the $1 trillion in collateral used in the derivatives market. A default could trigger demands by lenders like money-market funds for more or different collateral.

"Matthew Zames of JPMorgan Chase, writing on behalf of the securities industry in April, gave warning that this could 'lead to deleveraging and a sharp drop in lending.' Money-market funds themselves hold another $338 billion of Treasuries. In the event of a default at least one would probably "break the buck" (ie, fail to give the principal back to investors), threatening "a broader run on money funds", Mr Zames said....." ("The Mother of all Tail Risks," The Economist)