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Commentary and Opinion

The Debt Ceiling: From Too Little Too Late to Too Much Too Soon

BIA Commentary and Opinion

As another debt ceiling showdown looms, I can’t help but look back at the successful Tea Party Revolt and election of 2010 and recall asking myself:  This is great, but is it too little too late?

While the current public debt to GDP ratio (about 92%) certainly is high, it is manageable.  The real issue is the looming social security and Medicare promises.   With current liabilities estimated (conservatively) to be $395,000 per U.S Household, there is no way to meet those obligations without enacting self defeating tax hikes which would kill the economy’s ability to produce enough tax revenue to pay the bill.  And this is before the true costs of Obama Care start taking effect.

Worse yet is the realization that despite what you might read or see on television, the financial crisis of 2008 has not been fully resolved.   TARP may [at this point] have been profitable [on paper] to the government, but never forget: profitable to the government and profitable to the taxpayer are two different animals.  Remember that the next time at the pump, when you are paying in excess of $4 a gallon for gas.

The total (public and private) debt in the U.S. is still in the neighborhood of 300% of GDP.

With all this in mind I can’t help but think of the 1987 big screen thriller, where an increasingly frantic Kevin Costner at the Pentagon comes to the realization that there is No Way Out.

If we are truly at, or close to the point of no return shouldn’t the GOP refuse, under any circumstances to raise the debt limit ceiling?

As an admitted Tea Party sympathizer, why do I fear that the GOP is about to sacrifice the war in order to win the battle?

The reality is that with control of only the House, the GOP lacks the political leverage necessary to enact necessary reform.   The optimal strategy at this point is to take what spending cuts you can get in exchange for a raise on the debt ceiling,  keep the Democrats (Republicans, Tea Partiers and Libertarians may  not want to associate with each , but they do face a common enemy) on the defensive in terms of spending and focus  on  November 6, 2012.

Make no mistake, no matter how vocal (and  correct) Tea Party and entitlement reform advocates may be, in terms of the general electorate there is at this point no stomach, to either enact necessary reforms or more importantly, suffer  the pain of said reform once  it has been enacted.

No sooner has QE 2 ended, followed by a dismal June Jobs report ,  has Federal Reserve Chairman Helicopter Ben Bernanke  has started whispering that  “policy support” may be necessary in the face of continued economic weakness.

The infamous Greenspan Put has transmogrified into the Bernanke Call, a riskless bet made with house money.  Ben is making the suggestion of potential QE III in light of the fact that the S&P 500 index is up some 54% since the QE I ship set sail.

Budget cutting efforts at the state level have resulted in recall efforts of newly elected governors in Wisconsin and Michigan.   Grandmas across the country are reportedly hiding under the bed, in fear of an evil Republican showing up at the door looking to drag them off to the nearest cliff.

Many will argue that there is no time left and/or that we have already passed the point of no return and that the time for action is now.

Indeed, the better half of the Soros/Druckenmiller hedge fund duo  Stan Druckenmiller  has weighed in with the idea that there is no reason to think that a “technical “ default on U.S.  Treasuries would be that catastrophic so long as the US shows the markets that they are serious about reform and comes with serious spending cuts.

While Mr. Druckenmiller makes many valid points, there are a couple of issues with this approach.  For starters if Mr. Druckenmiller is correct, and a technical default isn’t really that big of deal, ( assuming  the resolution comes with spending cuts) then we are by definition, not past the point of no return and there is time to make the necessary political gains (i.e. Senate and/or Presidency) to enact “change.”

Secondly, if we are past the point of no return, the relevant question becomes:  what is on the other side of the rainbow?

Druckenmiller   argues that the worst outcome would be a technical default that doesn’t muster enough pressure to force the Beltway to change its spending habits. This possibility “scares the hell out of [him] because [he doesn’t] know whether Obama would cave.  I’ll [Druckenmiller] tell you one thing, if [Obama officials] believe what they are saying, they’ll cave.  If they believe this Armageddon and this is worse than Lehman and this is the greatest catastrophe ever, they’ll cave.”

I beg to differ.

If the Obama administration really does think this is a catastrophe in the making and they can pin it on Republicans…there is no way they will cave.

That scenario would all but guarantee Obama’s re-election and provide the mother of all “never let a crisis go to waste” opportunities.

If the end result of a debt ceiling showdown is systemic crisis “solved” with massive wealth confiscation and re-distribution, then the cure is worse than the disease.

There is no way that a systemic crisis/collapse which is successfully pinned on the GOP, results in a public embracement of free market ideas and policies.

Which is why the GOP has to be careful of the “Too Much Too Soon” approach.   Even if the current system is already doomed to failure, time is needed to continue laying the political/philosophical groundwork to influence the aftermath. We all clamor for political leadership that is willing to sacrifice its re-election by doing the right thing, but if you sacrifice yourself before you have made a real difference, what is the point?

In his book Econoclast, author Brian Domitrovic describes how the Supply Side Revolution of 1980 was over two decades in the making.  Political change of the magnitude necessary to address our current fiscal concerns does not occur overnight.

The bad news is that the GOP doesn’t have another twenty years to ferment another revolution.   The good news is that it doesn’t need twenty years. What it has is seventeen months until November 2012.

Enough time to continue building the political capital necessary to enact reform and more importantly, sustain the pain that will surely follow.

The current debt ceiling showdown is a battle, the 2012 election is the war.  It would behoove the GOP to hold fire until further reinforcements arrive.

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DISCLAIMER: Nothing in this article should  be construed as a personal recommendation or investment advice.  Nor should anything in this article be construed as an offer, or a solicitation of an offer, to sell or buy any particular investment security.   Investors should conduct their own due diligence and seek the advice of a financial and/or investment  professional before making any investment decisions.

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