Debt Politics in the (Formerly) Free World

May 20, 2011 - PRLog -- COMMENTARY—www.prospectingournal.com—May 20, 2011—The US debt has skyrocketed to such a ridiculous level that it’s almost tempting to cheer it on, like when you near the rain-record in summer and actually start rooting for it, despite the misery.

Well here I am in Canada, nervously standing on top of a nation that, proudly or not (I‘m guessing not), maxed out its credit card at an impressive $14.3 trillion this past Monday. Despite all the dire warnings against US government spending and the Federal Reserve’s debt-based monetary system over the decades, the land of McDonalds has managed to pile on bill after bill. Clinton and several presidents before him faced debt-ceiling issues, all of which were “resolved,” but things are now slightly different. That is, Bush 2 managed to times the debt by (almost) three, leaving Obama up at night.

The solution? My bet is on a “sweep it under the rug” strategy. “Keep kicking the can down the road,” “We’ll get it right next time!” or, my personal favourite, “Look at the problems we are leaving for our poor children.” You don’t have to be an economics professor—or even smart—to know that ignoring an increasing pile of debt by making it bigger is taking baby-steps towards economic suicide.

But why should Americans care about how they manage their finances when their own government acts like an 8-year old with a credit card? There has been a lot of talk lately about how Americans need to learn to live within their means (no job=no means), how they need to become less materialistic, etc., but I think this is not addressing the real problem: a government that is rolling a financial bomb into a snowball, uphill, 90 degrees—it can only be pushed so far.

To make matters worse, the Treasury is staving off financial Armageddon until August 2 by dipping into two government pension funds. Obama’s current debt-reduction plan includes a series of budget cuts and an initiative to tax the higher income earners, which will reportedly shed $4 trillion of debt in 12 years. 12 years? Isn’t that also the amount of time the debt is projected to increase by $10 trillion if government spending and borrowing stays on a similar course? Judging by the cooperation between the political parties now, it’s a tough call.

And thus we have the political dance, where opposing parties form debt-ceiling strategies to woo the voting masses. With the election coming up and Americans slightly pissed that they now live in the world’s quickest un-developing nation, you can expect the debt issue to create some staggering political PR. As financial blogger Barry Ritholtz highlights at The Big Picture, “The regular debt ceiling limit dance seems to evoke a fairly standard set of behaviors in the two major US political parties: Whichever party is out of power . . . threatens not to support raising the debt ceiling. Whichever party is in power talks about how irresponsible and dangerous such a move would be.”

What’s the best solution? Austan Goolsbee, Chairman of Obama’s Council of Economic Advisers, says the US needs to focus on economic growth and the budget. Meanwhile, the US dollar is lagging and the economy is anything but healthy. The EU is on suicide watch, the former IMF Head just required a bailout, commodities are taking a hit, but at least the Sub-Saharan African nations are looking good! Stocks have also been relatively flat and bond yields up only slightly, suggesting investor attentions have gone elsewhere. Or nowhere.

So where would Canada be in all of this? Would there, in a worst-case crash scenario, be any “market” left worth talking about? I’ve read predictions that, in the face of a crash, Canada may actually experience short-term prosperity, especially in the west. Yet the manufacturing sector would soon run into US exporters playing with “damaged currency.” For investors out there, interpret this as you will—you now have the summer trading season to think about it. Gold? Silver? Bibles?

One thing is for sure: the ceiling is bursting and any political decision will likely be in the 11th hour. If the ceiling is raised, which is likely due to the total lack of any other realistic and non-deadly choices, we can expect more years of market uncertainty. If not, let’s welcome the Armageddon, though May 21 will be long gone (Perhaps their calendar was just a bit off? It happens.). The latest estimate states that the US borrows 40 cents for every dollar it spends. If this goes further, I have a great idea for the next Hollywood blockbuster:  Great Depression 2, Judgment Day.

Chris Devauld
Senior Writer
www.prospectingjournal.com

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