Overview of the U.S. Debt Crisis

Both Moody’s and Standard & Poors stated yesterday that they are prepared to downgrade the United States’ vaunted AAA credit rating if the country’s borrowing limit is not raised by Congress past its $14.29 trillion threshold.  I consider the U.S. debt crisis to be a seminal moment for the country.  Why?

Regardless of the outcome, the United States is finally having a substantive conversation about its debt/leverage culture.  Further, the two major political parties in the U.S., Republicans and Democrats, are finally having a substantive conversation about the irresponsibility of never balancing a budget, or having a budgetary surplus; and of a tax code that is insane.

Importantly, both political parties bear responsibility for this impending crisis.  In a moment of national and international importance it simply does not serve the magnitude of the issue to point fingers at who is responsible for the current state of affairs – what matters is the future!  I laud the Republicans for insisting that this discussion occur, but I also laud President Barack Obama for insisting that a discussion about how to increase U.S. revenues takes place, too.

I agree with the following details of the current negotiations:

• A balanced budget amendment would be wonderful.  What would be nice is that, if, in times of national crisis, the budget could temporarily be allowed to be out of balance.  Crisis could be defined as times of war or severe recession (3+ quarters of declining gross domestic product (GDP)).
• The budget can be balanced by operating two levers: increasing national revenue and decreasing spending.
  • Revenues can be increased in many ways, not just by increasing marginal tax rates.  How?  Eliminating tax breaks and tax loopholes.  For example, most U.S. corporations pay very little in taxes due to all of the incentives granted them by Congress.   Additionally, natural resource companies – like oil and natural gas firms – pay almost nothing in taxes.  It is irresponsible to not try and increase revenues.
  • Spending can obviously be cut.  The problem of course is that to give up the ability to direct government monies to your home district is tantamount to self-emasculation if you are a member of Congress.  Also, if you dare to cut or change one of the sacred cows of the United States – like Social Security or Medicare – you risk political suicide.  But you know what?  Each member of Congress was gainfully employed before he/she was elected to office.  Why is it such a big deal that you might not get re-elected?  Kind of an argument for term limits, isn’t it?
• Insisting on the entire tax code being revamped.  The U.S. tax code is a complex morass.  That I, a former portfolio manager of a mutual fund, cannot figure out my own taxes without aid is ridiculous.

Let’s look at the various possible outcomes of the debt ceiling negotiations:

• Scenario 1: Debt ceiling is lifted with no changes to the U.S. budget.
  • Outcome: The U.S. forestalls the critical, existential, self reflection about its debt/leverage culture.  Future generations bear the brunt of the unwinding of this lazy, irresponsible, spineless mode of living.  Importantly, this scenario could be reached by both sides agreeing to raise the debt limit with “substantive talks” to occur at some point in the future – most likely after the 2012 election season.
  • Probability: 15% likelihood of happening
• Scenario 2: Debt ceiling is lifted with typical Congressional Quasimodo-Compromise changes to the U.S. budget.
  • Outcome: The U.S. barely manages to dodge the crisis because both parties ultimately fear being blamed for the crisis when pensioners and veterans are not being paid.  So token compromises are made between both parties that result in a more complex, more retarded public finance function and a more complex, more retarded tax code.  Then the spin-doctoring begins in the run up to the 2012 U.S. election season.  Nothing ultimately changes and the U.S. forestalls into the future its existential moment.
  • Probability: 65% likelihood
• Scenario 3: Debt ceiling is lifted with actual real and important changes, like the ones I outlined above
  • Outcome: There is a lot of belly-aching and finger pointing by both parties.  The American public doesn’t understand the import of the Congressional accord, but future generations of U.S. citizens (and the world) are grateful that there is at least one place on the planet where self-responsibility is the general tenor of a people.  Economic stagnation ultimately lifts as the U.S. is no longer critically dependent on debt/leverage to “grow” its economy.  Instead, real economic growth, that is, innovation, transpires.  This creates a much stronger economic base for the future of the planet.
  • Probability: 15% likelihood
• Scenario 4: Debt ceiling is not lifted and a default on U.S. debt occurs.
  • Outcome: Hard to say with specificity because the U.S. would launch the world into wild, unchartered territory.  Likely it would be a disaster for worldwide financial markets, perhaps tossing the world back into a recessionary funk.  Or maybe nothing much would change at all. Largely, financial markets have ignored the U.S. debt crisis assuming that it will be resolved, or that it is irrelevant.  Personally, I think this outcome would carry tremendous economic pain around the world and would likely result in the other three scenarios above coming to fruition in quick order.
  • Probability: 5% likelihood

In each of the above scenarios, a substantive, real discussion will have occurred regardless of actual outcome.  I am putting all of my extra fulfillment powers on Scenario 3, above.  Its time for the U.S. to exit its political and economic fetal position and reenter the world of an adult body politic.

Jason

P.S. – Hello to all of the new visitors to the blog.  I strongly encourage you to explore the “Best of the Blog” section to get oriented on the What My Intuition Tells Me Now blog.