Late Sunday afternoon the leadership of  both chambers of both parties  and the president all came to an arrangement of sorts to end the stalemate over lifting the debt ceiling, thus avoiding  default.   The agreement comes just in the nick of time since August 2 was the drop dead date established by the Secretary of the Treasury. 

The economy is just too fragile to hold hostage and we aren’t out of the woods yet.  Both the House and the Senate now need to agree.  Will that happen?  It remains to be seen.  This is not the time for stubbornness.Extremist factions of both parties simply cannot hold the country hostage just to get their own way. 

What will happen?  Will the debt ceiling be lifted or will the president be forced to use section 4  of the 14th amendment that says “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” 

The devil is in the details.  Meanwhile, countries around the world see national crisis as a self-inflicted wound and suggest that the United States has already done a great deal of damage to its own reputation.  According to the New York Times:

The United States government may not be so lucky with its reputation.

Even before negotiations went down to the wire on Sunday night, the bitterness, division and dysfunction that resounded around the world in recent weeks as the United States veered toward default did more than just fuel a perception that Washington is approaching Japan-like levels of political gridlock. Among foreign leaders and in global markets, the political histrionics have eroded America’s already diminishing aura as the world’s economic haven and the sole country with the power to lead the rest of the world out of financial crisis and recession.

It has chipped away at the global authority of President Obama, who was celebrated abroad when he came to office as a man who would end an era of American unilateralism. Now the topic of discussion in other capitals is whether the Age of Obama is giving way to an Age of Austerity, one that will inevitably reduce America’s influence internationally.

Thanks a lot, folks.  But that was the grand plan anyway, wasn’t it?  Anything to damage  Obama. 

37 Thoughts to “Debt Ceiling Crisis: Holding the country hostage”

  1. Starryflights

    PIMCO chief: Deal won’t prevent downgrading of US AAA credit rating
    By Gautham Nagesh – 07/31/11 03:57 PM ET

    The U.S. is headed for a downgrade in its credit rating regardless of whether a deal is reached this weekend, according to PIMCO founder and managing director Bill Gross.

    When asked by CNN host Ali Velshi on Sunday whether the U.S. deserved to maintain its AAA credit rating Gross said a downgrade from one of the major credit rating agencies is inevitable.

    “Eventually there’s a downgrade coming, it just depends on Moody’s, S&P and Fitch and they’re very slow-moving,” Gross said. “This country has $10-12 trillion worth of outstanding debt. In addition however we’ve got about $60 trillion worth of liabilities. I call this Debt Man Walking.”

    Gross said the total liabilities for Medicare, Medicaid and Social Security put the U.S. among the worst countries in the world in terms of total debt. He added that the debt crisis has had negative implications for economic growth, interest rates, financial markets and the dollar.

    http://thehill.com/blogs/blog-briefing-room/news/174591-pimco-chief-bill-gross-says-downgrade-of-us-credit-rating-is-coming

    Yeah, thanks a lot, Repugs, for behaving like a bunch of deadbeats. The Repugs don’t seem to get that changing one’s spending habits doesn’t absolve one from paying the debts that one has already racked up.

  2. Second Alamo

    Even in the presidency one is no longer held accountable for his own actions. That is the problem in America today. It’s always someone else’s fault.

  3. Starryflights

    So what, you would be okay if we defaulted on our debts? Not paying one’s debts is the height of irresponsibility. Well, where I come from, we believe that honorable men and women pay their bills.

  4. Pat.Herve

    I am told that tax cuts create jobs. How many jobs were created via the Bush Tax Cuts?

  5. Starryflights

    We’ve waitin’ for those Bush tax cut jobs to emerge for 10 years. Guess we’ll have another couple more to wait now that they’ve been extended.

  6. Starryflights

    The President Surrenders
    By PAUL KRUGMAN
    Published: July 31, 2011

    A deal to raise the federal debt ceiling is in the works. If it goes through, many commentators will declare that disaster was avoided. But they will be wrong.

    For the deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status.

    Start with the economics. We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.

    The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.

    http://www.nytimes.com/2011/08/01/opinion/the-president-surrenders-on-debt-ceiling.html?_r=1

    Great. This deal is not to make the recession even worse.

  7. Cargosquid

    @Starryflights
    Again, here’s the lie. Not raising the debt ceiling is NOT defaulting. Not raising the debt ceiling means that you can’t charge more money to pay of your credit card.

    So, its fiscal responsibility to you to borrow 1.5 trillion to pay off 1.4 trillion? That makes sense to you? We haven’t paid any debts. We’re using a credit card to pay of another credit card, but, if that makes everyone happy…..

    As for the jobs under the Bush tax cuts…you do remember the 5.2% unemployment, right?

    Jim Hoeft says it best:…..can’t hide the fact that the Bush tax cuts were a tremendous success. During the Bush years, despite the 2000 Recession, the 9-11 attacks, the stock market scandals, Hurricane Katrina, and wars in Iraq and Afghanistan, the Bush Administration was able to reduce the budget deficit from 412 billion dollars in 2004 to 162 billion dollars in 2007, a sixty percent drop.

    In 2004 the federal budget deficit was 412 billion dollars. In 2005 it dropped to 318 billion dollars. In 2006 the deficit dipped to 248 billion dollars. And, in 2007 it fell below 200 billion to 162 billion dollars. During the Bush years the average unemployment rate was 5.2 percent, the economy saw the strongest productivity growth in four decades and there was robust GDP growth. Bush did this with tax cuts.

    Sooooo….. there’s your answer. The tax cuts did help. Its the OTHER policies being enacted since Bush left that’s holding down job creation. Heck, we’ve lost tens of thousands of jobs just in the oil industry alone because of the moratorium. Thousands lost or not created because of Obama’s policies on coal. Thousands of jobs haven’t been created because small businesses have no idea how Obamacare is going to affect them.

    Lets see if simplifying the tax code and regulatory schemes might bring back jobs. Can’t hurt.

  8. That is the biggest crock I have ever heard in my life. 9-11 was a jobs creator on so many fronts. Wars are also huge job creators. Soooooo….let’s not give credit where it is not due.

    Recessions create unemployment. Had it not been for TARP unemployment would be far worse.

    I am just sick of hearing blather about “jobs creators. ” Like most things in life, there needs to be balance. Fewer jobs held means less revenue coming in. There needs to be some tax adjustment with the very wealthy returning to where they were before the ‘Bush tax cuts’ which simply cannot be sustained.

    Its time for middle class conservatives to stop being sycophants to the wealthy. Its obvious why Congress is saying no new taxes on the wealthy…VERY obvious. They are the wealthy. Its time for the middle class to stop drinking their kool aid.

  9. Cato the Elder

    List of politicians that more than doubled their net worth in less than 4 years in office: http://governmentgonewild.org/thelist

    1. It sounds like we ought to be trusting the D’s more than the Rs. The D’s sure know how to grow wealth.

      When I see someone like Sen. Ensign’s name on that list I get suspicious. His family had a great deal of money before he went to public office. Its sort of like saying a Kennedy has more money.

  10. marinm

    Teflon(R) President. Nothing ever sticks.

    WashPo gives President a thumbs up on the deal.

    http://www.washingtonpost.com/politics/the-debt-ceiling-deal-winners-and-losers/2011/07/31/gIQAHl7FmI_story.html

    Starry, I saw (and heard) about PKs article and his talking head comments about how to make a few million dollars in this down economy (play poker with Obama because he’ll always fold). Liberals are very unhappy with the deal struck.

  11. Starryflights

    Cargo, reducing the annual budget deficit under Bush is not the same as reducing the cumulative debt. You need annual surpluses to bring down the cumulative debt. The last time that we had surpluses was when Clinton was President. Those surpluses have long since been squandered. Bush added to the cumulative debt.

    And yeah, nobody appears happy with this deal. I don’t know what the repugs are whining about. There will be no tax increases at least until 2012.

  12. Dan Cooper

    @Starryflights
    What are the Demon-craps whining about then? This bill doesn’t prevent tax increases plus most of the ‘cuts’ don’t happen for years out which translates into NO cuts. I think that this is a big win for the Demon-craps.

  13. Cargosquid

    @Starryflights

    If you actually read anything, you might realize that no one said that Bush reduced the DEBT. The point was that under Bush, the deficit did shrink. Just like Obama said that he would do….still waiting on that one.

    And Bush lowered that deficit even though he had his own problems.

    @Moon-howler

    9/11 was a jobs creator? Really? First time I’ve EVER heard that especially since that crisis helped aggravate the slow down.

    @Dan Cooper
    My problem is that the GOP promised cuts. And spun it. We expect the Dems to lie. Its the GOP that lies about cuts now because they know that we’re watching them.

    However, the big winner is the Tea Party. We may still have raised the debt limit. We may still have increased taxes. We have non-existent cuts.

    But now the narrative is, unlike in the past,…..cuts are necessary. We must have cuts in spending.

    From http://www.commentarymagazine.com/2011/07/15/blaming-it-all-on-the-tea-party/

    Without the Tea Party, there would be no debt limit negotiations going on, just as there would have been no budget reduction deal last December. Without the Tea Party, President Obama would not be posing as the judicious statesman, but would be pushing –as in truth he still is–for more stimulus and further investments in high-speed rail. Whatever pressure now exists to treat the debt problem derives directly or indirectly from the explosion of energy that has been generated by the Tea Party.

    Sooo…without the Tea Party, we would still be dealing with the GOP as Democrat lite.

    1. @Cargo, all sorts of construction jobs were available after 9-11. Security related jobs also were available. I am not saying it was a good thing, just a statement of fact. Let’s also not forget all the young men and women who joined the military shortly after 9-11. I am not sure that counts as job creation but it should.

    2. WE expect the Dems to lie. Who is this WE? Do you mean the tea party? If yes, would they be offended if WE said screw you?

      So what if YOU are watching. BFD. I expect there is going to be a major ass kicking come 2012 and this time 3 groups will have great resolve-The Dems, the GOP normals, and the Independents. Without the tea party I wouldn’t have lost 20 grand last week. I tend to get real testy about stuff like that. The tea party has nothing to brag about. The naivete was startling.

  14. Starryflights

    Dan Cooper :@Starryflights What are the Demon-craps whining about then? This bill doesn’t prevent tax increases plus most of the ‘cuts’ don’t happen for years out which translates into NO cuts. I think that this is a big win for the Demon-craps.

    There will be very signifcant cuts, for example:

    Debt deal expected to hit Washington area economy, defense firms

    By Marjorie Censer and Peter Whoriskey, Published: August 1
    The hundreds of billions of dollars in cuts to military spending proposed in the federal debt-reduction deal would hit the Washington region’s defense industry hard, forcing layoffs and undermining the local economy for several years, analysts said.

    Defense firms around Washington have already been shrinking, but the proposed cuts would slice even further into an industry that is a pillar of the region’s economy, according to economists.

    The proposed budget deal would cut $350 billion from defense budgets over 10 years, in the first defense reductions since the 1990s, according to the White House. But the contraction could go much further because the deal calls for the possibility of more deficit-reduction measures by the end of the year.

    Under the plan, proposed by President Obama and congressional leaders, if a bipartisan committee does not reach agreement on a second round of cuts after negotiating for about four months, a “trigger” mechanism would kick in, forcing automatic cuts of $600 billion in defense programs.

    Michael S. Lewis, an industry analyst with Lazard Capital Markets, suggested that the cuts in the defense budget could rise to $650 billion. He estimated that that would reduce discretionary defense spending by 7 percent annually within five years. Other estimates go even higher.

    “That would have dire consequences,” Lewis said. “Jobs would be stopped, and there would be long-term implications for the industrial base. All that expertise and production in making jet fighters and tanks will go elsewhere.”

    http://www.washingtonpost.com/business/economy/debt-deal-expected-to-hit-washington-area-economy-defense-firms/2011/08/01/gIQALLownI_story.html

    Nice job there, teahadis. You got everything you wanted.

  15. Starryflights

    BTW: isn’t the owner of that dark blog a defense contract employee? Well, that’s one good thing to come of this – that fool may have just tea-partied his way right out of a job, bwaha!

  16. Wolverine

    Rejoicing because another person may lose his job is about as low as you can get.

  17. Kelly3406

    @Starryflights

    This article (or the White House) is clearly wrong. These are NOT the first defense reductions since the 1990s. In fact, very large reductions have already been absorbed by the DoD this year. After fighting two long wars, the force is in dire need of modernization and re-equipping. I think we could be in danger of moving back toward the hollow force of the 70s following the Vietnam War.

  18. Big Dog

    http://www.denverpost.com/littwin/ci_18596626

    “If you’re not upset, you haven’t been paying attention.”

    Doubt if there will be a photo-op signing ceremony with
    everyone all smiles and the Prez passing out pens.

  19. Cargosquid

    @Moon-howler
    You didn’t lose 20 grand because of the Tea Party. You lost 20 grand because its in the stock market while ratings agencies and lenders are demanding that the US CUT SPENDING and the President was doing his level best to panic the markets in order to create a crisis. You just happen to believe the lies that the President and the Democrats are telling you.

    As for the bill that got past, the press is calling it a Tea Party victory. The Tea Party is calling it a loss. “Nice job there, teahadis. You got everything you wanted.” is not a factual statement.

    The Tea Party wanted real cuts, not this super committee that can be relied upon to absolve Congress of its responsibilities. Increasing the debt by trillions is not a Tea Party victory. The press is calling it a TP victory so they can then blame us when it goes wrong.

    1. That is because the tea party has no inkling of how compromise works. I don’t think it is a victory for anyone other than the debt ceiling is raised so the govt. can do business.

      I know exactly why I lost the money I have lost. You apparently have limited knowledge of how such things work or you wouldn’t have said what you just said. I wish it was that simple. No, the president didn’t spook the markets. In fact, they were defying the politicians until the gang of thugs holding America hostage refused to vote to raise the debt ceiling until they got their own way. Quit blaming Obama. Investors aren’t stupid.

  20. Cargosquid

    I have limited knowledge yet you are the one blaming the Tea Party even after the Tea Party failed and the markets have continued the slide? You blame the fight over the debt limit even after other ratings agencies state that its the DEBT not the DEBT LIMIT. You blame the Tea Party even though it was always the administration telling the public that failure to raise the debt limit would equal default, even though that was a lie. They were telling banks that failure to raise WOULD NOT be a default. http://www.realnewsreporter.com/?p=6761
    This is the only play in their playbook, use or create a crisis so that their bills get forced through.
    We’ve seen it with Stimulus, HCR, etc.

    Since you have done nothing except blame the Tea Party, apparently you are the one with limited knowledge as the markets themselves have reported that its the continuing spending and the weak job markets that are hurting the markets. The markets expect things to improve and yet, everything is still heading downward. And the artificial stimulus of printing money is coming to an end.

    And again, it was the Republicans and the Tea Party that actually wrote the bills that raised the debt limit AND VOTED ON THEM. Reid did not even hold a vote, tabling the bills in committee. Reid didn’t produce one until forced. And Obama never put forth a plan AND demanded that he would only raise the debt limit if it went his way.

    There’s blame to go around. But you go ahead. Blame only one side. It lends so much credence to your statement of being an independent moderate.

    During the past few weeks I’ve seen more and more leftward support and blind allegiance to the Democrats. No criticism has been produced about their policies or even lack of policies. Its always the Tea Party that’s at fault. If the TP doesn’t produce a plan, they’re in the wrong. If they do produce a plan, they’re in the wrong. Everything they do, if they don’t “compromise” and do it the way Obama desires, they are in the wrong. Where is your demand that the Democrats compromise?

    Investors AREN’T stupid. That’s why the markets are continuing to drop even though Obama “saved” us from the non-existent possibility of default. And I predict that they will continue to, at best, go sideways, until Obama is out of office.

    1. Failure to raise the debt ceiling either meant default on loans or default on the public. Its really a basic math problem. No the president didn’t lie. No Geithner did not lie either.

      The uncertainty of default slowed down economic recovery and the stock market. The stock market hates uncertainty and rising interest rates. Those are like kryptonite to the stock market.

      The stock markets don’t talk. Therefore they obviously didn’t report anything: “[T]he markets themselves have reported that its the continuing spending and the weak job markets that are hurting the markets.” (as per your statement) Obviously that isn’t what was happening before the debt ceiling crisis. Remember Cato warning all of us? I wonder why he did that?

      I am not great guru on the subject of the stock market but it didn’t take a nose dive becaue of continued spending. A weak job market report might slow things down for a day or two but spending? Check out the last quarters earnings on some of the stocks. I would start with Apple, Coca Cola, Verizon, some of those.

      And yes, I still blame the tea party sayers of NO in the house for the free fall. They created uncertainy.

      Just out of curiosity, what do you think would have happened if we either defaulted on our debts or on the American people? Pick any group due to get a pay check?

  21. Cargosquid

    “Among foreign leaders and in global markets, the political histrionics have eroded America’s already diminishing aura as the world’s economic haven and the sole country with the power to lead the rest of the world out of financial crisis and recession.

    It has chipped away at the global authority of President Obama, who was celebrated abroad when he came to office as a man who would end an era of American unilateralism. Now the topic of discussion in other capitals is whether the Age of Obama is giving way to an Age of Austerity, one that will inevitably reduce America’s influence internationally.”

    Hmmm, is it just me or do the first to bits contradict the third bit?

    1) the sole country with the power to lead the rest of the world out of financial crisis and recession.
    2) it has chipped away at the global authority of President Obama

    3)who was celebrated abroad when he came to office as a man who would end an era of American unilateralism

    If you want a President that will end the era of American leadership, don’t expect him to lead you anywhere.

    So, yes…what has happened is part of Obama’s grand plan. HE is the one that campaigned upon the US becoming just another nation among nations. So, yes, his plan is one that will inevitably reduce America’s influence internationally. He’s admitted it.

    And if you like that sort of thing, you should applaud it.

    Also…I’m curious. How would America “lead the rest of the world out of financial crisis and recession.” if a) the other countries refuse to follow our advice b) are, in some cases, doing much better than us already c) think that our present course is flawed

    What makes America the one that supposed to lead the world out of anything? Last time we tried that, we were called cowboys and vilified.

    1. I think it all depends on whether you want to be seen as the kick ass bully on the block or a team player in a changing world that can no longer be controlled by who owns the most weapons.

      We obviously are still a super power. We probably need be smarter rather than more muscular in an every changing world. Let’s take a place like Afghanistan. We could go run thousands of daisy cutter most of the country and those scrappy, resourceful people will survive. They have probably the worst economy in the world, and yet they survive on rocky mountains, poppies, unfarmable land and lapis. It makes no sense. Muscle doesn’t work there. They have thousands of miles of mountains to protect them.

      The tea party folks need to learn how to take it. Every day the president is critized, vilified, mimicked, and verbally spat upon. ONe of the fair hair children, Michele Bachmann let lose with a new torrent of crap again today. But let one person speak of the tea party or any of its members in any terms but glowing and a victimhood flag goes up and there is great weeping, wailing and gnashing of teeth over it.

      Our position in the world changes as the world changes. Let’s blame Obama is getting real old. I now want to play lets blame the tea party. They wanted off the porch, now lets let them lead. I know what I see from this view.

  22. Cato the Elder

    Debt ceiling debate had a little to do with it, but not a whole lot. We got some horrible manufacturing data domestically, China is slowing more than expected, and Europe is on the brink again. Bond vultures have moved on from the carcass of Greece and are now hitting Italy and Spain. The market was intact from a technical standpoint until it got all that news to absorb.

    The truth of the matter is that the market is manipulated (duh). Every quarter or so “they” create some series of events to stampede people out of their stocks so “they” can reload their book at lower prices and lather, rinse and repeat. This sell off actually overshot my target to the downside (S&P 1270) but nevertheless I started buying there and continued buying today even as people were having their “oh sh*t” moment around 10:30 this morning. 75% of making money trading stocks is watching and waiting to get in the zone, and the other 25% is sweating it out when you’re in that zone. Well folks, we’re in the zone. Remember what Uncle Warren said: be greedy when others are fearful (and there sure was a lot of fear going around this morning). While I don’t expect things to go up in a straight line from here (although I’d be happy to sell my positions if they do!) I do think that S&P 1240-1250 is a reasonable zone to use as a stop for the near to intermediate term as a reasonable bottom. You see a lot of chatter on CNBC about chart patterns which project us down into 1150 to which I say that chart patterns that are obvious to everyone and being talked about on-air usually fail.

    Yes you need to be concerned about a slowing economy, we will probably have more bad data points but remember the market is not the economy and vice-versa. This market can rally on absolutely terrible data. Bad data (Euro worries, debt ceiling, China slowing, manufacturing sucks, etc.) doesn’t matter until it does (See my diatribe about market manipulation above).

    1. Cato, I want to blame the tea party. We should have never gone up to the breaking point.

      However, I think this is the fire sale.

      On the subject of a 401k, I still have some money in some thing similar. Why? I like what it is doing and if I gave it to my investor, he would put it in very similar, if not identical stocks. He wants to get his hands on it but right now I am not paying fees. It seems money ahead to keep things as they are.

  23. Cato the Elder

    P.S. the only reason, and I do mean only reason, to be in a 401K is if you have a situation where you’re getting an employer match. If you’re not in this situation and you still have your money sitting in a 401K then shame on you.

  24. Cato the Elder

    Hey, be my guest :). Blame Xenu the Sky Wizard if it makes you feel better. All I’m saying is that if the machines want to sell the market down they’re going to do it regardless of what some clowns in Washington are doing or what the unemployment number is or whatever other bearish excuse is out there floating around.

    Small investors have two advantages over the big boys, which if you learn to exploit them correctly you can bank a lot of coin. They are a.) a shorter time horizon and b.) liquidity. Big mutuals can’t turn on a dime, they’re like Carnival Cruise ships steaming in one direction and it takes them a very long time to make course corrections. In the meantime they take all kinds of hits that the smaller more nimble players don’t take. That in a nutshell is why I don’t like those investment vehicles. Think on this – how much money would you have made today if you had that pile of cash around 10:30 this morning (hint: a lot more than your fund manager made for you today, I assure you).

    1. @Cato,

      That is why I keep things in different piles. I made more for me today than my retirement investor did. He knows he will never get my stock market stuff. He hopes to get my small 403b but he probably won’t. He has gotten his fair share, trust me. I made twice as much for myself today as he did for me. but I have very conservative investments.

    2. ETFs can’t maneuver at all can they?

  25. Cato the Elder

    Actually ETFs trade very frequently, most re-balance at the end of the day.

    1. I don’t think that is what I mean….what do you mean when you say they rebalance at the end of the day?

  26. Cato the Elder

    ETFs are products of financial engineering that (in theory) promise some rate of return based upon a basket of securities. Think of it like a very liquid mutual fund. Take an ETF like SSO for example, it’s engineered to provide 2x the gains of the S&P 500. To achieve this, they buy shares of companies that outperform the gains of the index by a factor of 2. Now, suppose some number of companies in that basket start to lag the index. The ETF needs to sell those laggards and buy the outperformers, which in effect re-balances the basket at the end of day to deliver the promised return (x2).

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