Debt Ceiling Deal Drama

After a lengthy blogging hiatus, I have returned to my regular schedule.

Today we will consider the implications of the recently announced debt deal between the Republican and Democratic leaders.

From Reuters:

Obama announces debt deal to end U.S. debt crisis


President Barack Obama said on Sunday that Democrat and Republican leaders have reached an agreement to reduce the U.S. deficit and avoid default, but it was not clear if the spending cuts were deep enough to stave off a credit rating downgrade.

Obama said the agreement will cut about $1 trillion over 10 years and cuts would not happen so quickly that they would drag on the fragile U.S. economy. Another $1.2 trillion would be cut if a joint committee fails to find at least that much in budget savings.

The deal would still have to be passed in the House and the Senate.

Well surprise, surprise, a deal has been reached.

My suspicion of a deal in principle several weeks ago now being announced for dramatic effect and political gain has come to fruition.
While we do not know all of the deal details, and it has not yet been approved by Congress, we can quickly do a back of the envelope calculation on the impact this will have on future federal budgets.

The current deal shaves only $100 billion per year off the deficit. With the additional budget savings proposed, the deficit is reduced a total of $220 billion per year.

But, the current revenue is estimated at $2.6 Trillion, while expenditures are $3.7 Trillion, leaving a deficit of $1,100 Billion.

So after all the drama and posturing, the deficit has potentially been cut between 10% and 20%.

Hardly an earth-shattering result.

With this type of lame deal, the debt continues to grow at $900 Billion annually, which increases the total debt by 50% over the next seven years.

When we consider that the current debt to GDP level is about 100% according to the IMF, we see that this "deal" will result in a Greek level of debt (142% of GDP) in less than six years.

The chart below shows the situation in Europe courtesy of france24.com:




The United States continues to head on its Greek trajectory. Its debt to GDP ratio is equivalent to that of Belgium today and on the way toward Italy and Greece with the new deal.

Considering the debt problems Greece has raising capital at extreme interest rates, we can expect that the market will wake up to the US debt problem within 1 to 2 years.

This is the problem of a style of democracy that allows special interest groups, bureaucrats, and corporations to pick taxpayers pockets; eventually the money runs out.

Even the "elastic" fiat currency is no match for the demand for entitlements of rich and poor alike. Weak kneed politicians continue to offer goodies that we can't afford, and the military industrial complex and corrupt banking system continue to consume more than 50% of tax receipts.

While the debt drama is likely to settle down for a few months, the problem remains unchanged and unaddressed in a sustainable way. Stock markets will march higher for a time, bond markets will give a sigh of relief, gold may backtrack a little, but the debt can has been kicked down the road and will return with vengeance, probably after the European debt crisis heats up further.

Comments

  1. PW hope all is well.

    http://www.youtube.com/watch?v=J7XA2UUpXRk&feature=player_embedded#at=126

    Note: Sit down before viewing.

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  2. Thanks for the link Bill.

    This is the sort of thing that makes me see red. A couple of young people who have received so much in handouts already, that they think they don't even need to pay their rent!

    A sad, but accurate snapshot of society in general.

    ReplyDelete

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