StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Is August 2 Or July 22 The Day The Government Turns Into A Budget Pumpkin?

02 Jul 2011
Posted by Stan Collender

There was some speculation last week that Treasury was about to announce that, because of higher revenue collections than had been expected, the day the federal government's cash needs would go critical would be changed from from the previously announced August 2 to August 22.

That speculation was shown to be idle -- at best -- when Treasury released a statement yesterday saying that nothing had changed and August 2 was still the date.  Here's the full text of the two-paragraph release:

FOR IMMEDIATE RELEASE:  July 1, 2011                                   
WASHINGTON – Today, Mary Miller, Assistant Secretary for Financial Markets at the U.S. Department of the Treasury, issued the following statement reaffirming the projected date on which the United States will exhaust borrowing authority under the statutory debt limit.
“The Treasury Department continues to project that the United States will exhaust its borrowing authority under the debt limit on August 2, 2011.  Secretary Geithner urges Congress to avoid the catastrophic economic and market consequences of a default crisis by raising the statutory debt limit in a timely manner.”

A second date -- July 22 -- popped up in some news reports last last week and was immediately assumed by many to be the new drop dead date.  Not true: July 22 is the date the White House says a big budget deal has to be completed so that there's time to get the agreement drafted into legislative language and passed by both house before the government turns into a fiscal pumpkin on August 2.

The July 22 pre-pumpkin day deadline is a bit misleading, however.  If there's a deal after July 22, Congress and the White House will be able to buy themselves time by enacting a short-term increase in the debt ceiling.  That would provide the breathing room needed to do the legislative drafting and allow representatives and senators to review the bill.

Of course, a short-term increase in the debt ceiling would require members of Congress to take an additional vote on increasing the amount the government is allowed to borrow...and that won't be easy given that most representatives and senators would vastly prefer not to vote on it even once.




Why isn't Obama speaking out about the debt ceiling?

Stan, I don't know if you saw the comment I left on Pete Davis's post about the debt ceiling. Here's how I edited it for my own blog.

President Obama should make it clear to the American people that if we don't raise the debt limit, we are risking severe repercussions. If he doesn't do that he isn't doing his job. Obama is the one person in the nation who is in a position to explain the meaning (and non-meaning) of the debt ceiling. The most important thing he can do is to explain to the American people why the debt ceiling must be raised. All other budget issues, while important, are not connected to the debt ceiling. He must take seriously his role as educator-in-chief and explain that to the American people.
Once he's done that he must then make it clear that it's up to Congress to act. As president he can't raise the debt ceiling. Congress must do it. He must get the American electorate to tell their representatives that the debt ceiling should be raised. Once he does that, it will happen.
So the real question is why isn't he doing this? I'm beginning to agree with the Republicans who keep saying that he isn't doing his job.

He doesn't have to

At this point, I am convinced that if a deal cannot be reached, President Obama will exercise his rights (as he interprets them) under:

Section 4 of the 14 Amendment (which states "The validity of the public debt of the United States, authorized by law...shall not be questioned"),

Perry v. United States (which states that Congress cannot cancel the payments of government bonds), and

Train v. City of New York (which states that the President must "spend every penny" of money allocated by Congress).

He will declare the debt ceiling illegal and unconstitutional, and direct Sec. Geithner to keep issuing debt. Bernanke announces that the Fed will honor the issued bonds, and the financial markets breathe a sigh of relief.

Some may try to sue, but their suits will be summarily tossed for lack of standing.

The Tea Partiers will scream, of course, and might even succeed in getting an impeachment trial for whatever charges they can dream up. However, with dozens less than the 67 necessary to convict (even assuming every single Republican goes along with this insanity), the impeachment will not be remotely taken seriously by the media (except for Fox News and the WSJ), and may even enhance Obama's re-election chances.

And we all roll along, at least as long as the world bond market wishes to buy our debt. When they stop, it'll get interesting.

Not just the Tea Partiers will scream...

...but so will any adult who isn't "yet" relying on government retirement funds.

I'm 37. I'm saving for my retirement and have been since I was 25. In that time, all I've seen are "leaders" like Bush and Obama, Geithner and Henry Paulson, Bernanke and Greenspan both destroy the value of my savings. Thank goodness I also had the foresight to buy bullion or I'd be like every other American: trying to spend every dollar I had before it was devalued further.

The time is now to cut, cut, cut. Not just entitlement funding, but non-domestic defense funding as well. As a country who strives to balance liberty, charity and safety, it makes sense to never get into debt as a nation again.

It's insanity that people think that Federal budget cuts in ANY category will mean spending cuts in the long run: what the Federal government won't touch, the States or local governments can (and will). The Federal budget for education should be zero. There's no reason to spend $60 billion on something that has no place for the central state to regulate. The same is true for many other areas the Federal government has introduced its foot or nose into -- especially areas where lobbyists are strongest.

Send the lobbyists to the state and local level, where they'll need hundreds of thousands to lobby local officials, rather than the mere thousands they have now.

Cut, cut, cut, chop, chop, chop. A year or two of pain and we'll be back again at the top of the pack: liberty, charity, safety.

You are absolutely wrong.

Like you, I'm 37. Like you, I have been saving for my retirement and have been since I was 25. I fully agree with you that entitlement funding and defense spending must be cut. Let me repeat that so that you hear me before you read the next paragraph. Entitlement funding and defense spending must be cut and must be cut severely.

But where you have jumped off the deep end is where you write: "The Federal budget for education should be zero. There's no reason to spend $60 billion on something that has no place for the central state to regulate. The same is true for many other areas the Federal government has introduced its foot or nose into -- especially areas where lobbyists are strongest."

Tell that to China, India, Germany, South Korea and Brazil. Those words are magic to their ears. As we have an asinine debate in this country whether government should be involved (or not) in the economy, the Chinese government is vigorously promoting industry after industry. The German government is vigorously promoting its manufacturing sector, the South Korean government is vigorously promoting its manufacturing sector - and by the time we've resolved our debate, there won't be any industries left to compete in. In point of fact, it is absolutely clear that government plays a key role in - as a catalyst, more than as a producer of any kind - but as a catalyst in promoting long-run growth.

And it does this in two ways. The first is by funding basic science and technology, research and, you know, you do that in a variety of ways. And the second is by providing some industries with some early help while their products are, as economists would say, going down the cost curve. That is to say when you start stuff off - you look at solar energy today, it's very expensive to make. And then somebody needs to buy the product or subsidize it while the cost comes down. Now the odd thing is, of course, this is the history of America's technological ingenuity and advancement.

If you look at when we had dominated the world it was the '50s, '60s, '70s, '80s. What were we doing in that period? Well, the U.S. government was massively subsidizing research and technology. We were building this huge state university system. We were setting up the NIH, the NSF, all these institutes that spent billions and billions of dollars on scientific research and technology. The second thing that was happening is that the U.S. government was buying massive quantities of new industrial and electronic products.

The computer chip for example. The U.S. government was the only buyer of computer chips for 10 years while the cost declined. NASA was the only buyer of large computers. Then you have, of course, the case of something like the Internet, which was developed by the Defense Department at a time when the commercial industries looked at the project and said it was commercially not viable. So if we were to look at our own history we would recognize the powerful role that government has played.

Now look, when the government gets involved there's danger. Some money, a lot of money maybe gets wasted, some of the decisions are badly made, but this is true in the private sector as well. But the key is that in the long run you find very few countries that have had sustained GDP growth, technological progress and advancement that have dominated the advanced industrial world, without some crucial role being played by government.

One of the facts of life is

One of the facts of life is that, unless you die before then, Mr. 37-year-old, you will become 65 eventually. You will find that the stock market may not have behaved in the way your financial advisor said that it would, you may discover that real property values did not head upward at the nice pace you had hoped, and you will find that private health insurers do not want to sell you insurance at any but a shockingly high rate. At that point, you will be hoping that the federal government did, indeed, continue to provide a social safety net for people whose economic lives have turned bad for no fault of their own. And, by the way, your employer sent you off because it didn't want old people around any more. Remember, you will not be 37 forever -- unless you die at that point.

From a techincal legal point

From a techincal legal point of view, perhaps the executive branch can continue to issue debt beyond the legislated debt ceiling. But Perry v. United States can't be guaranteed to be the result of the litigation over this issue before the current federal judiciary. And even if it is the result, who is going to force the Bachmann administration's Treasury Sec. to redeem such debt if he/she just doesn't want to? And the idea that Bernanke is going to step between Congress and the Administration to buy such debt is bizarre beyond belief.

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