Eight Days...and Counting - Jeff Thredgold (11/15/11)

Members of the Joint Select Committee on Deficit Reduction…also known as the “super committee”…have a rapidly dwindling number of days to agree to a minimum of $1.2 trillion in deficit reduction over the next 10 years. Their agreement…or lack thereof…is due bymidnighton November 23.

Assuming the “super committee” agrees to at least the minimum level of deficit reduction, the Congress then has until December 23 to accept or reject the package. Should partisan politics rule the day…and an agreement is not reached…then $1.2 trillion in deficit reduction over the following 10 years automatically kicks in during early 2013, with half in the defense sector.

The sum of $1.2 trillion is a lot of money…although it is (unfortunately) almost pocket change in the nation’s capital. That level of deficit reduction would trim government spending over the next 10 years by less than three percent a year…

…given the widespread pain of the Great Recession…and the somewhat pathetic U.S. economic recovery of the past nine quarters…have you or anyone else you know been forced to trim your/their annual spending by three percent?…

…no further comment necessary

The Committee

As you are likely aware, the 12-member Committee is comprised of six Democrats and six Republicans, with six from the House of Representatives and six from the Senate. Each member of the Committee was presumably picked by their Party leadership for their devotion to Party principles.

A simple overview would suggest that Republicans are opposed to anything that smells of tax increases, while Democrats vow to protect current government programs, particularly Social Security, Medicare and Medicaid. Still, there is a bit of optimism that the good of the nation just might supersede the devotion to Party core values.

Republicans on the Committee, with some support from other members of the Congress, have indicated a willingness to consider some forms of “revenue enhancement”…just don’t call it a tax increase. Such willingness is conditional on the Democrats agreeing to some future reductions in the growth rate of entitlement and other programs, erroneously (in my view) referred to as spending cuts…

…as noted previously, only in Washington DC can you spend more money every year on a program and call it a spending cut!

Conversely, the Democrats are willing to consider some steps to slow the future growth rate of entitlement and other programs, if the Republicans are willing to help generate more revenue…again NOT referred to as tax increases.

Across the Pond

All of the discussions have taken place with an eye toward the fragility in Europe. I indicated in a Tea Leaf issue 21 months ago (entitled A Shot Across the Bow, dated February 17, 2010) that worst case fears then beginning to impact Greece were that excessive sovereign (national) debt issues could spread to other European nations.

I suggested that such issues could also eventually spread to the U.K. and to the U.S. We are simply NOT immune to the sovereign debt issues that have already engulfed Greece, Ireland, Portugal…and now Italy and increasingly Spain. In recent days, anxiety about French sovereign debt and related financing costs has moved closer to the media’s page one.

Note: the Germans and the International Monetary Fund DO NOT have the financial wherewithal to rescue larger and larger euro nations now threatened with sharply higher borrowing costs.

In Coming Days

The next eight days are likely to become increasingly emotional and bitter, with both sides attacking the other side for their intransigence. The stakes are very high.

The Democrats will be required to give a bit more in regard to slowing the future growth rate of entitlement programs. The Republicans will likely push for lower tax rates across the income board, with some limitations or eliminations as to current deductions. The result would be slightly higher revenue.

The best and brightest hopes are that a much larger agreement to reduce future budget deficits by $3-$4 trillion over the next 10 years could be reached. As I indicated in last week’s Tea Leaf issue entitled Jobs Mixed Bag, such a “grand plan” could be worth perhaps 300-500 points on the upside for the Dow Jones Industrial Average (DJIA). This would be particularly true if the agreement was comprised of more substance and less hot air.

Conversely, the failure of Democrats and Republicans to reach an agreement on what is really “a less than three percent” reduction annually in government deficits over the next 10 years would not be taken kindly by Wall Street. Such failure, with the typical complaining by both sides about how impossible the other side is to work with, could cost the DJIA 300-500 points.

Other Options

Some have suggested that the failure of the “super committee” to reach agreement—or of reaching a deal for the minimum $1.2 trillion of deficit reduction that is full of holes and unrealistic assumptions—could then compel the Congress to look at other deficit reduction options that have been presented during the past year or so.

In my view, the best proposal to date has been that of the President’s own deficit reduction commission, chaired by Erskine Bowles of North Carolina and former Senator Alan Simpson of Wyoming, which presented its recommendations last December 1. That proposal called for reducing future budget deficits by roughly $4 trillion, and was viewed by some as a viable down payment on financial sanity in this country.

That comprehensive proposal was hated by the far right AND by the far left. On the other hand, the political “middle” saw merit in many of the proposals. Such is many times the nature of good policy in Washington DC.

Unfortunately, the rules of that 18-member commission required 14 members to agree to support it. It received 11 affirmative votes. As a result, the President AND the Congress essentially ignored its recommendations…

…too bad

One other “proposal” came from Warren Buffet. He noted in a CNBC interview that he could solve the deficit issue in five minutes. He suggested “you just pass a law that says that anytime there is a deficit of more than three percent of GDP (note: versus roughly nine percent currently), all sitting members of the Congress are ineligible for re-election”…

…food for thought