U.S. Debt Ceiling - What Now?

By: Axel_Merk

William Poole writes: As I write it appears that the federal government is at the brink of default. The Republicans and Democrats have laid out irreconcilable positions on taxes. President Obama has said that he will not sign a bill that does not have some increases in tax rates on upper-income taxpayers. Republicans have said that they will not accept legislation that provides for such increases. In the negotiations, there has apparently been some progress in identifying spending cuts both sides can accept, but there no compromise is possible on the conflict over taxes.

In the past, when there have been fundamental conflicts, our leaders have found a way to compromise some way or other. Ordinarily, there are ways to broker a deal. If you give me more of this, and one more sweetener, I’ll hold my nose and vote for the compromise. Not this time.

Republicans have a vivid memory of what happened to the first President Bush when he backed away from his 1988 campaign pledge, “Read my lips—no new taxes.” Voters did not give him credit for compromise and for addressing the budget deficit. Instead, he got “credit” for being an unreliable negotiator and one who did not keep campaign promises. That was part of the reason he lost to Bill Clinton in the 1992 presidential campaign.

President Obama, by insisting that the Republicans accept some tax increases in exchange for spending cuts, is asking Speaker Boehner to commit political suicide. Moreover, given the adamant positions of many new Republican members of the House of Representatives it is not clear that Boehner could deliver a majority to pass legislation containing tax increases.

Similarly, it is not clear that Obama and Majority Leader Reed in the Senate could deliver a majority of Democrats to pass legislation that began the inevitable and painful process of reining in entitlement spending. Boehner, by insisting that a deal contain no tax increases and significant spending cuts, is asking the President to commit political suicide.

Politicians do not commit political suicide. At least, not knowingly.

What to do now?

Politicians understand that most harsh political rhetoric is part of the game and not personal. Most also understand that, in extremis, they must find a way to work together enough to avoid catastrophic outcomes. A default would most certainly be such an outcome.

The political calculus currently under way of trying to figure out which party would suffer the most from default should end. There is no way to make this calculation; polling data are not at all reliable in guessing the outcome. Once someone or some firm does not receive timely payment from the federal government, her view on that outcome will swamp anything she said to a pollster.

Logically, the Treasury should be preparing to pay certain bills and not others. The Treasury should pay interest on the federal debt and on all other such obligations. I would also argue for making payments to individuals who may not have access to bank loans or the capital markets, such a Social Security recipients. Bills from defense contractors and other firms with such access might be put into a pile for future payment. However logical this approach might be, it may not be operationally feasible. It is not an easy matter to reprogram Treasury computers to pick out payments that must be made from those that can be delayed. In any event, getting to this sad state would be a major black mark on the governance process in the United States.

President Obama and Speaker Boehner should appear at a joint press conference and announce the following agreement:

• We cannot bridge the gap between our parties and the fundamental differences our parties have on the budget of the United States. This issue will have to be decided by the voters at the election in November of next year. The Administration, as is required by law, will present its budget early next year. Republicans have agreed to present their proposed budget in enough detail that it can be scored by the Congressional Budget Office. The two budgets may permit us to make some progress next year, and where possible we will do so.
• But our irreconcilable views will have to be addressed by the voters in an election campaign that will be of historic importance to the United States. That is the way great issues are decided in a great democracy and that is what we will do. For now, we will both support an increase in the debt ceiling, with agreed budget cuts where possible.
• The rest of the job will be in the hands of American voters next year.
  

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By Axel Merk

Manager of the Merk Hard, Asian and Absolute Return Currency Funds, www.merkfunds.com

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies. Axel Merk wrote the book on Sustainable Wealth; order your copy today.

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