Thoughts on the Proposed Debt Limit Deal

We now have a proposed “bipartisan” debt deal hammered out by the people who have put us in the position of having unsustainable spending levels and unsustainable debt in the first place, and foisted upon the American people and Congressional rank-and-file sight unseen:
Spending levels are economically unsustainable now, and will be unsustainable after this debt deal.

The debt level is economically unsustainable now, and will be worse after this deal.

While raising the debt limit will allow the treasury to borrow money to continue the present unsustainable level of spending, it will not preserve the US’ AAA bond rating.

The US will not default on its debt obligations whether or not the debt deal passes.

The debt deal permits immediate access to the first tranche of borrowing, and will permit the entire amount to be borrowed in less than a year, yet the spending “cuts” are spread out over ten years. This gives Barak Obama a blank check for two years, and handcuffs the replacement President for the next eight.

The spending “cuts” are reductions in the baseline growth over government spending over the ten years, not actual cuts to the existing budget.  This deal actually cuts nothing, it only slows the growth of spending, and not even at a rate below inflation.

The deal exempts cuts to the greatest sources of budget busting in the future: Social Security, Medicare, and Obamacare.

The debt deal will permit the balance of the fiscal year to be spent as set forth in the continuing budget resolution (remember, the Democrats have not passed a actual federal budget in more than 800 days).

If a budget deal is not passed, the US will not be able to borrow additional sums of money. It would be, therefore, a “poor man’s” balanced budget amendment, or better yet, a spending cannot exceed revenues cap. It is a back-door way to forced fiscal responsibility in spending.

If the US is not in the market for loanable funds, the demand for investment funds is therefore decreased, which has the effect of lowering interest rates on such investments.

Given all this, what is the benefit of this debt deal?

If a budget deal is not passed, the US’ bond rating will certainly be downgraded.

If the US’ bond rating is downgraded, interest rates might rise from 0.1 to 0.5 points, and they are already at near historical lows, however, this will be offset by the decrease in interest rates on investment funds. Given the Fed’s qualitative easing over the last several months, an small interest rate increase is likely in any event.

If a budget deal is not passed, the Obama administration would pick and choose which programs get paid and which programs will become prorated or impounded, that is, which are short-paid and which are not paid at all. In any event, there is adequate revenues coming into the Treasury to service all US debt and continue Defense, FAA, Social Security, and Medicare payments if Obama so chose. Senator Pat Toomey has proposed legislation directing the priority of payments, and Congress can certainly direct the Administration by law if it so chose.

If a budget deal is not passed, non-essential government workers would likely be furloughed. Thus, we will get to see how many people are on the government payroll that are not doing anything essential for taxpayers. One wonders why we have non-essential government workers in the first place. In years past, when this happens, the government workers get paid for the furloughed days anyway, which just provides these government workers yet another paid holiday at taxpayer expense.

Politically, Obama will blame Republicans and the Tea Party for a government shutdown. But, as all elements of government are held in extremely low regard by the people, what difference would it make? Since none of the GOP’s leading candidates for president in 2012 are involved in this budget and debt limit mess, but Obama is, a shutdown will hurt Obama’s reelection chances as much as anyone’s.

Lastly, it bears mentioning that every budgetary and economic government action has unforeseen economic consequences. These can be good or bad, and they are certainly hard to predict. So, the budget deal at least alleviates uncertainty, even as it simply postpones a real date of reckoning.

So, is it worth it to the taxpayers and for the rank-and-file of each party in Congress to accept this budget deal to possibly avoid a bond rating downgrade, in fact avoid forced government belt-tightening, and the political ramifications of a partial government shutdown?