Wednesday, August 3, 2011

Debt Ceiling Debacle

Yay! We reached a debt ceiling agreement! And it cuts $2.1 trillion from the federal budget!

Let's take a closer look at what really happened.

First of all, there are guaranteed budget cuts of $2.1 trillion. Sounds great until you realize that those cuts are spread out over 10 years. What's worse is that those cuts are extremely back-end loaded, meaning that much of that money isn't cut until many years down the road. In fact, only about 20 or 25 billion dollars in cuts take effect in fiscal year 2012. As far as I'm concerned, those are the only cuts that matter because any future congress doesn't have to abide by the guidelines set out in this bill. (If you're curious, 2013 cuts amount to only $47 billion, but the new 2012 congress will likely change that.) This is why politicians love 10 year budgets. They can make seemingly huge cuts that only take place in the last 3 or 4 years, never actually follow through with those cuts 6 or 7 years later and claim victory in order to help their reelection chances.  Oh, and those cuts aren't really cuts in any literal sense of the word. In Washington, if you plan to increase spending by 10% but only increase it by 6% they say they made a 4% budget cut, even though spending increases by 6%.  These cuts are no different. They're only budget increases that are less than the larger budget increases that were already in place.  Maybe that explains why so many politicians have a weight problem. "I only ate 7,000 calories today instead of the 10,000 I planned on eating! I cut my calorie intake by 30% and only gained 5 pounds instead of 8! This diet is a huge success!"

Now to the debt ceiling. I'm not entirely certain how much it is raised by. Initially it's $400 billion with another $500 billion increase later this year. And I also saw that the total increase would somehow end up being about $2.1 trillion.  That's the largest number I've seen so I'll just assume that is true. This number is very important because it's the amount of money that the Treasury says they need in order to make it through the next election cycle and into 2013.  In fact, Vice President Biden said that the deal has one overwhelming redeeming feature: postponing the next debt limit battle until 2013 and leaving the current fight behind.  This is crucial because Obama, and anybody in congress for that matter, don't want to have to duke it out over the debt ceiling again before they have to hit the campaign trail.

But I'm not so sure that $2.1 trillion dollars is enough to get us by that long. In August of 2009 the White House predicted the 2011 GDP to increase by 3.8%. In July of 2010 the White House projected 2011 GDP to increase by 4%.  Now that we have 2 quarters of data for 2011 let's see how accurate they were. The 1st quarter GDP was originally stated to be 1.9% but was recently revised down to 0.4%. Currently the 2nd quarter GDP increase is said to be 1.3% and who knows how much that will be revised down to.* But even if we have 0.4% Q1 GDP and 1.3% Q2 GDP, that still only gives us an annualized rate of 0.8%. That is just slightly more than a long fucking way from the 4% projected just one year ago (If you're keeping score at home, the White House was off by 400% IN JUST ONE YEAR**). And with an economy that looks more and more likely to slip into the double-dip recession*** that I've been expecting for over a year now (and I'm certain it is inevitable), I wouldn't be surprised if the real revenues fall far short of the projections and the deficit ends up being much larger than expected.  If that happens, and it's very likely that it will****, the Treasury could burn through their $2.1 trillion ceiling hike much sooner than anyone believes. Reaching the debt limit again, before the 2012 election, would pretty much be the nail in Obama's coffin. Then we will elect a Republican that is just as ineffective. Yay!

*Q1 GDP was revised down by 1.5%. If Q2 is revised down that much we will officially be in negative growth territory. Just a reminder, back in August 2010 I predicted GDP to enter negative growth by Q2 2011. In a few months, when the official Q2 GDP numbers are revised, that could prove to be amazingly accurate. Either way, the fact that some dumb fuck with no formal economics education who can read and objectively take in information has made predictions much more accurate than the President from Harvard speaks volumes.

**If they can be off by so much in just one year, why does anyone expect them to make budget and revenue forecasts that go out 10 years? Am I the only one who thinks this is insanity?

***In this case the term "double dip recession" is somewhat of a misnomer. It's my belief that we're currently in a depression that's been going on since 2007. The only reason the GDP numbers are positive is because the government is manipulating CPI to make inflation seem much lower than it is. Remember, official GDP is the increase in nominal GDP minus the inflation rate. If we had an accurate inflation rate, it would be high enough to push official GDP into negative territory.

****Since we'll probably have QE3 in the next couple months, and almost certainly will by the end of the year, that could help keep the economy afloat even though the effects of QE will be less and less with each round. But remember, when The Fed does QE, they print money to purchase Treasuries, so the QE money will go towards the national debt and, obviously, the debt ceiling.