Debt Limit Negotiations Are at a Standstill

Five weeks remain before Treasury Secretary Tim Geithner says the U.S. will not be able to pay its bills. First, Republican negotiator Eric Cantor simply quit negotiation sessions with the Vice President. Jon Kyl, the second Republican negotiator, followed suit. Pundits had said that Senate Majority Leader Mitch McConnell was pulling the strings; that he wanted Biden out of the way to force the direct involvement of the President, who tends to come to the table with concessions already granted.

And so, the two met ten days after the walkout. Compromise is obviously required, but McConnell refused to yield to a Democratic push for new revenues. “It’s time Washington take the hit, not the taxpayers”, said McConnell after the meeting, insisting that reduction of the nation’s debt come only from cuts in spending.

However, the tax changes on which the President seems to be insisting are elimination of corporate loopholes, and an end to subsidies to oil and gas companies, the top five of which earned $35 billion in profits in the first quarter. With the full faith and credit of the United States at stake, we the people are left to guess at where things stand.

Let’s go back to September 29, 2008. The news channels watched on one side of a split screen the failing vote in the House of Representatives for the $700 billion financial bailout, while the other half of the screen tracked the Dow Jones index plunging 777 points in reaction. Two-thirds of Democrats had voted for the bailout, but only one-third of Republicans. It missed by 13 votes. The Bush administration desperately re-submitted the bill. On the second try, it passed.

If you’ve ever wondered what might have happened had there been no bailout, you might soon have that opportunity. This time it won’t be bank credit that will seize up, but the country itself. By August 2, says Treasury Secretary Timothy

I am struck very recently by the number of leaders in American business, politics and journalism who now get a certain faraway look in their eyes…and say, “It’s worse than people think, you know’”. Peggy Noonan in the Wall Street Journal

Raising the debt limit usually passes without notice. During the George W. Bush presidency, the limit was raised seven times without incident (twice in 2008). But since 2008, Republicans have gained 63 seats in the House; 28 of them are Tea Party candidates bent on little other than shrinking government by slashing spending and enacting still more tax cuts. In return for raising the debt limit, they are pressuring the Republican leadership to demand that the Obama administration cut $2 trillion from the budget 10 years.

Moody's has already issued a warning that if the debt limit is not increased, it would consider downgrading U.S. credit. Politicians on both sides blame each other for the continuing impasse.

Government spending has already bumped up against the debt limit, but Treasury’s financial shuffling has bought time until the checks finally bounce in mid-summer. At that point the government would use its funds to the extent it can prevent the country from going into default with other nations, a catastrophe that would cause the collapse of the dollar, soaring inflation and a worldwide panic. The Treasury will instead need to shortchange domestic spending: seniors will not receive social security checks, student loans will be suspended, military pay held up, and more. The panic will be here at home.

But it’s worse. The standoff a few months ago, with a government shutdown in the offing, was resolved with a last-minute $38.5 billion cut in spending. It didn’t bother Wall Street that the government might turn off the lights for a while. But the stakes this time are far higher; this has never happened before and the consequences could be seismic. If the political parties do not show progress and instead engage in brinksmanship right to the cliff edge, then well before any last minute theatrics, the bond market is likely to be spooked. If our politicians, stuck in their intractable positions, do not show progress and flirt with United States default, markets around the world could spin out of control.