David Cameron has ruled out a referendum on Britain’s membership of the European Union on the grounds that the UK had their say 36 years ago. A senior aide to the Prime Minister enraged eurosceptics yesterday by claiming that the UK must remain a member of the EU because Brussels bureaucrats have done ‘useful work’ on climate change and global poverty.
And he ignored the fact that no one under the age of 53 has ever had the chance to state their views on Brussels in a public vote.
Londonistan is burning, the Euro is disintegrating, and Cameron is still on holiday in Italy. I wouldn’t have thought it to be possible, but David Cameron is beginning to make Gordon Brown look like an honest, competent politician by way of comparison. But if “useful work” on nonexistent climate change and growing global poverty is really their best argument for staying in the EU, we should be able to count on Britain leaving it by next Tuesday.
The Conservative Party promised the British people a referendum. If the Conservative Prime Minister isn’t going to deliver one, he must resign.
Daniel Indiviglio makes some relevant points in his article about the downgrade at The Atlantic and he was one of the few who correctly saw it as a real possibility, but I think he ultimately goes off-track when he calls into question S&P’s decision to downgrade the U.S. sovereign credit rating:
S&P was not happy with the $2.2 trillion minimum debt reduction plan. That’s understandable. A bigger deal would certainly have been preferable from a fiscal soundness standpoint. But does the agency really estimate that the deal is is so dangerously small that there’s a realistic chance that the U.S. could now default at some point in the future? In particular, does U.S. debt really look significantly riskier now than it did in, say, April?
The bond market certainly doesn’t think so. Treasury yields are near all-time lows, despite all that political nonsense. And remember, the interest the U.S. pays on its debt is far, far smaller than its tax revenues. If the Treasury prioritizes interest payments, then there’s no conceivable way the U.S. could default.
I defended S&P’s initial decision to put the U.S. rating on negative watch back in May when politics were becoming poisonous. But to actually downgrade the U.S. after Washington managed to avoid its self-created crisis is another story. S&P should have acted like the other agencies and affirmed the U.S. rating, but kept it on negative watch until more deficit reduction plans were put in place over the next couple of years, as I explain here.
In fact, this might not turn out well for S&P. The firm might think it’s acting boldly or proactively. Instead, the market may question S&P’s reasoning skills. The rating agency is acting here on an assumption not shared by its peers at Moody’s and Fitch: that U.S. politics are so screwed up that they could render the nation unable to live up to its debt obligations. That’s despite pretty much everyone agreeing that the nation will be financially able to pay for its debt in the short-, medium-, and long-term.
Indiviglio did a great job of demonstrating that the U.S. downgrade was be almost perfectly in line with the historical Japanese downgrade, which took place when its net government debt reached 60% of GDP. (It is presently around 225%). However, he reaches the wrong conclusion, as many have, by getting sidetracked over the way in which S&P’s analyzed the political situation in the U.S.A. And while there was never any question of short-term default, (despite the scare tactics of both Democrats and Republicans), I very much disagree that the nation will necessarily be able to pay for its debt in the medium- and long-terms.
The real reason that the downgrade was not only inevitable, but correct, and not only correct, but the first in a series of downgrades, can be seen in projections based on the historical patterns in the Z1 debt sector charts. These show the S&P’s worst case scenario to be far too optimistic to be credible.
While the debt figures don’t match up perfectly, as August “Net debt held by the public” is a little different at $9.78 trillion than Q1-2011 “federal government debt outstanding” at $9.65 trillion, they are close enough for the purposes of comparison. Utilizing the Q1 figure provides a federal debt/GDP of 64.3%, which is much lower than 74% presently estimated by the end of 2011 by S&P’s. However, we can see how they reach that number by plugging in the expected growth in the amount of debt at the post-2008 quarterly average of $365 billion. This indicates an end of year federal debt figure of 10.74 trillion and a GDP figure of $14.513 trillion.
In other words, S&P’s is probably assuming that either GDP will contract $490 million in the second through fourth quarters or the rate of federal borrowing will slow down. Either way, the so-called “double-dip recession” already appears to be baked in the S&P’s cake, assuming that its analysts are as capable of reading the Federal Reserve reports as Karl Denninger is. But that’s not the interesting aspect, from my perspective. What is interesting is the debt/GDP projections under the three future scenarios, Upside, Base Case, and Downside. Consider these projections of future federal debt to GDP ratios:
Where I suspect S&P’s has gone amiss, (and perhaps it had no choice in the matter due to its professional obligations), is by taking the CBO scoring figures seriously and thereby utilizing GDP estimates as the primary variable. Based on my calculations, it is also possible that S&P’s is simply plugging in the 66-year average rate of increase of federal debt, 5.92%, into their spreadsheets. But it isn’t GDP that has changed so drastically over the last three years and significantly modified the debt/GDP ratio, it is the rapid 82.89% increase in the federal debt over the last 11 quarters. If we utilize federal debt as the primary variable and plug them into S&P’s GDP estimates, we get some very different results. (I’m going to ignore the inflation and tax estimates in order to reduce the number of variables; these are estimates for the purpose of critical comparison, not predictive projections.)
The S&P’s GDP estimates are as follows:
UPSIDE: 3% GDP growth + lapsed tax cuts BASE CASE: 3% GDP growth DOWNSIDE: 2.5% GDP growth
However, net GDP growth over the 13 quarters from Q1 2008 to Q2 2011 is $729.9 billion, or 5.1%. That is an annual rate of growth of 1.57% and assumes that overall credit continues to remain flat at $52.6 trillion while federal debt continues to rise at the rate that private debt contracts. Call it the CURRENT CASE. Plugging in 1.57% annual GDP growth and 22.7% annual federal debt growth provides the following debt/GDP ratios if one begins with the firm numbers from the end of year 2010.
CURRENT CASE: 2011 77%, 2015 164%, 2021 509%
And if we substitute actual rates of federal debt growth for the S&P estimates of it that are based on the notoriously unreliable CBO scoring, it becomes very clear that the debt/GDP projections are wildly inaccurate regardless of what rate of GDP growth is assumed and shows that the problem is not one that economic growth can possibly solve. In fact, the revised UPSIDE case which takes historical debt growth into account is much worse than the Base Case that does not.
Notice that while the end of year 2011 figure (actually 76.8%) isn’t much worse than S&P’s is projecting at 74%, it is considerably worse than the DOWNSIDE in 2015 (164% vs 79%) and more than six times as bad in 2021 (509% vs 85%). But are these astronomical ratios even remotely possible? Could federal debt really rise to $26.1 trillion in 2015 from $9.6 trillion at present? After all, that would amount to 39.4% of all U.S. debt outstanding, assuming that the private sectors shrank at the same rate that the federal government sector expanded, and would indicate a Game Over default sometime in between 2016 and 2018.
This chart, which shows the historical percentage for each of the major debt sectors since 1946, demonstrates that at least the 2015 rate is clearly within the bounds of possibility. The Federal Government sector represented more than 39.4% of total U.S. debt until 1955. Furthermore, it also shows that the decline of Financial sector debt, which has contracted $3 trillion since 2008 and fallen from 32.7% of the total to 26.8%, could conceivably continue to dwindle away to less than one percent of the total, which would amount to an additional $11.2 trillion in debt-deleveraging that would need to be replaced by federal debt in order to prevent concomitant economic contraction. (It also, by the by, shows very clearly the real source of America’s current economic woes.) Government spending and borrowing is not the root cause of the problem, it is merely a failed attempt to cure the disease of massive private sector debt expansion and contraction.
Now, I am not making any predictions here, other than a general one that because private sector debt will continue to fall, there will be tremendous pressure to continue to increase federal spending and borrowing at rates more similar to that of the last three years than the historical norm. This is because the alternative is an immediate and sizable contraction of GDP. As ugly as it appears, the CURRENT CASE scenario I have outlined is not a worst case scenario because it does not account for the economic contraction I expect to finally begin showing up in the GDP numbers later this year and in 2012. The determining factor will be whether the rate of increase of federal debt is closer to the 22.7% annual rate of 2008-2011 or the 5.9% rate of 1946-2011. Just out of curiosity, I looked at the latter, which in combination with the 1.57% 2008-2011 GDP growth produces the following scenario:
Which of these five scenarios appears to be playing out should be readily apparent by the time the Q4-2011 debt sector numbers are published in the Federal Reserve’s Z1 report. If the Household and Private sectors continue to decline and end-of-year federal debt/GDP is over 75%, then CURRENT CASE is probably in effect.
UPDATE – More like 3 in 3, I would say: “A Standard & Poor’s official says there is a 1 in 3 chance that the U.S. credit rating could be downgraded another notch if conditions erode over the next six to 24 months. The credit rating agency’s managing director, John Chambers, tells ABC’s “This Week” that if the fiscal position of the U.S. deteriorates further, or if political gridlock tightens even more, a further downgrade is possible.”
It is impressive how quickly the Republican Establishment – for whom you know I am said to be the Voice – managed to flip most of the Congressional class of 2010. Remember this when you’re urged to vote Republican in support of small government next fall. Remember this when the Tea Party stalwart tells you that he’s going to Washington to change how things are done there and represent the interests of those who elected him:
The House GOP freshmen were sent to Washington with a mandate from their constituents to rein in spending and put an end to the practice of the federal government borrowing far more than it takes in. But at the end of a furious spending battle that gripped Washington, most of the second coming of the Republican revolution voted for a bipartisan deal that increases the debt ceiling and cuts the deficit, raising the specter of disenchantment and possibly retribution from the activists who propelled them into office last fall.
Some of the tea-party driven supporters will undoubtedly conclude that their freshmen were bought out by the Republican establishment. All told, 59 freshmen voted for the debt bill – two-thirds of the rookie class – and 28 voted against it.
But the freshmen tell a different story of how they came to support the bill, one born out of listening sessions with leadership, an evolution in understanding the economic consequences of a default and opportunities to vote their priorities on the House floor. And, they say, their leadership was able to make them feel enough like valued members that when the time for tough votes came, they were ready to be team players in lending their support.
The Republican establishment has at least 30 years of experience in breaking the freshmen to heel. They did it en masse in 1994 and they’ve done it again now. This is why it is not merely stupid, but by Einstein’s metric, insane, to attempt to change anything by electing Republicans. The Tea Party has to break away and go third party if it is to have any chance at all at reducing government spending.
It probably won’t work that way either, given the changed demographics of the American electorate, but it should be obvious that it is mathematically impossible to effect any meaningful change over time if two-thirds of the “elected revolutionaries” can be successfully suborned within the first year of their taking office.
[W]e don’t have two competing parties in Washington. We have one-party governance, totally unresponsive to the will of the people and the rule of law. Republicans and Democrats represent two wings of the same party – both of which, at the end of the day, don’t really covet a return to constitutionally limited government.
Disaster?
Catastrophe?
Outrage?
Yes, but none of these words even comes close to adequately characterizing the betrayal perpetrated by the Republican establishment in Washington over the last few days.
The era of big government is back with a vengeance – and apparently here to stay.
There are no limits. There are no restraints. There is no accountability. There is no end to red ink as far as the eye can see.
As I have been telling you for ten years, voting Republican will NEVER be a panacea for the cornucopia of ills that have rendered America a revenant. There probably is no panacea, as it is hard to envision any workable solution that does not involve the division of the country into at least three parts. There simply aren’t the votes to “take back America” because too many nominal Americans dislike historical America, disvalue its freedoms and despise its Constitutional values.
And, thanks to the post-1965 influx of third-world immigrants, there will never be the votes. No Hispanic nation, no African nation, no Arabic nation, and very few European nations have EVER placed any value on “the rights of Englishmen” that were asserted in the Declaration of Independence. One need only read the aberrant parodies of the Declaration in the various UN and EU versions or national constitutions to see this is the case. Mere change of geographic location has not sufficed to significantly modify the core philosophies or ideologies, or in many cases, even the national identities of those immigrants.
It is time to pull out of the Republican Party altogether. This may mean that Obama will win a second term if he is not put out to pasture by the Democratic Party elders during the nomination process. This will almost surely mean that there will be no meaningful opposition in Washington to the bi-factional ruling party in 2012 and possibly 2014.
But the complete inability of the Republican Party to do anything of substance, to cut so much as a single dollar from the current amount of spending, means that the “realistic” forty-year strategy of “elect more conservative Republicans” has completely failed. It failed when Reagan was elected. It failed in 1994. It failed when Republicans held the White House and both houses of Congress. It has failed after the 2010 success of the Tea Party. Because it is clear that it is no longer even possible to prevent the bi-factional swan dive from the economic Tarpeian Rock, it is time to shift focus and to begin preparing for the post-mortem rebuilding.
“At the White House and in talks in congressional offices and corridors, most of the attention was focused on finding a way to define the precise conditions under which the president could get a second increase in the debt limit that would be needed early in 2012 under both Republican and Democratic proposals.” – “Amid New Talks, Some Optimism on Debt Crisis,” The New York Times, July 30, 2011
It’s not hard to understand why the leaders of both political parties are vehemently opposed to the possibility of U.S. default. But as many commentators, including myself, have pointed out for weeks, a failure to raise the debt ceiling has absolutely nothing to do with the possibility of a sovereign U.S. default! In fact, raising the debt ceiling will make a default much more likely in the future. So why are the politicians, particularly Barack Obama, so desperate to see some sort of deal struck that will permit the raising of the $14.3 trillion federal debt ceiling?
NB – This column was written prior to the announcement of the “compromise” plan, which Karl Denninger summarized as below. Nothing in it changes anything substantive regarding the column.
1. Lie once again about “cutting spending.” It does no such thing. It increases spending – every year. Bogus and outright-fraudulent “baseline budgeting” means that if they intended to boost spending $300 billion but only increase it $200, that’s a $100 billion “cut.” If you ran your household like this you’d be broke in a week. For the US, it will take a bit longer.
2. No tax increases. That’s nice, but let’s not forget that while the Democrats scream about the “Bush Tax Cuts” the FICA tax cut was theirs. Obama signed it. You cannot keep reducing income and increasing spending forever.
3. The cuts, fraudulent though they are, aren’t even real anyway – and not binding either. There’s nothing before 2013, which means a downgrade is almost certain. Further, raising the debt ceiling now for the whole among but allegedly finding the “cuts” over 10 years is an outright fraud by a ratio of 10:1.
4. A 2013 timeline for actual changes means nothing, since the next Congress is not bound by what this one does. Period.
5. Sequesterization didn’t work in 1997. It won’t work in 2011 either.
6. We failed to get to $4 trillion. That’s what S&P said they needed, and they said they needed to see that within the next three years. Now we find out if S&P has any balls.
NRO reports: “According to sources, Boehner said the deal was “the best that we could get.”” And that is perhaps the most shameful thing about this whole bipartisan charade. The scriptwriters couldn’t even bother to write new dialogue for Republicans Cave on the Budget XXXI.
Unsurprisingly, it has all turned out to be fake. The choice being presented for public consumption is one between fake spending cuts (Republican) versus non-existent spending cuts (Democrat). Of course, the real issue is the need to keep spending in order to continue the appearance of economic stagnation. Ask yourself this question. What is the magic in the $2.4 trillion addition to the $14.3 trillion debt ceiling?
Answer: $365 billion. That is the average increase in federal debt per quarter since the middle of 2008. $2.4 trillion is six quarters worth of that… which is sufficient to see the current set of politicians safely past the 2012 elections. Assuming that the private sector continues its debt-deleveraging, this means that by the end of 2012, government will account for 27.8% of all debt, the federal government will account for 23.2% of it (up from 10.3% in Q2-2008), households will be at 22.4% (down from 28%) and the financial sector at 24.4% (down from 31.5%).
Speaking of the debt limit, if you happen to be Canadian, I’ve been asked to appear on their 24-hour news channel, CTV, to discuss it. If you are not Canadian, but happen to be so inclined, you can watch the clip here.
The “limited magnitude” of both debt plans put forward by congressional leaders would not put the nation’s AAA credit rating back on solid footing, Moody’s Investors Service announced Friday. “Reductions of the magnitude now being proposed, if adopted, would likely lead Moody’s to adopt a negative outlook on the AAA rating,” the credit rating agency said in a new report. “The chances of a significant improvement in the long-term credit profile of the government coming from deficit reductions of the magnitude proposed in either plan are not high.”
It added that “prolonged debt ceiling deliberations” have increased the odds of a downgrade, but that the firm is still confident policymakers will avoid a default.
“It remains our expectation that the government will continue with timely debt service,” the firm said. It also clarified that as far as it is concerned, the nation will only default if it misses an interest or principal payment on U.S. debt, not if it misses payments on other obligations like federal employee salaries or Social Security benefits.
Translation: The Republicans that sold out and put their careers at severe risk of Tea Party challenges in the primaries not only accomplished nothing, but never could have accomplished anything meaningful. If Boehner and Cantor were competent, they would have run their multiplicity of plans past the ratings agency, not just the optimistic and reliably inaccurate Congressional Budget Office.
And as I and many other financially literate economics observers have pointed out, a failure to raise the debt ceiling has ABSOLUTELY NOTHING to do with default, despite the ignorant bleatings of “economists” like Megan McCardle. The mainstream commentators have it backwards again, as it is raising the debt ceiling that makes the prospect of sovereign default more likely, not leaving it in place.
Freshman Rep. Allen West (R., Fla.), a tea-party star, is under pressure:
“Several Tea Party organizations are working to punish conservative Republicans who plan to vote yes on Speaker John Boehner’s (R-Ohio) debt-ceiling proposal. Tea Party leaders announced Thursday that they are targeting Republican Reps. James Lankford (Okla.), Allen West (Fla.), Mike Kelly (Pa.) and Bill Flores (Texas), all four freshmen and declared yes votes for Boehner. . . . West has been particularly vocal in his support of Boehner’s plan, which many consider a surprise endorsement by the Tea Party firebrand not known for falling into line behind his party’s leadership.”
In an interview with National Review Online this morning, West was defiant. When asked about whether he is worried about the heat, he looked me straight in the eye, stayed silent, lifted his right hand and brushed off both of his shoulders, Jay-Z style.
“The Taliban targeted me, al-Qaeda targeted me and I’m still alive,” West smiled. He praised Boehner for adjusting the debt-limit bill, calling it a “good move.” The proposal, he said, “does not have tax hikes and is not a clean raise of the debt ceiling. For the first time in the history of the nation, we are having a debt-limit increase with real spending cuts. What more could you want?”
My first thought is that all I wanted was no debt-limit increase period. Increasing the debt ceiling with fake spending cuts – and as we learned from the last go-round, they are fake – serves no purpose whatsoever. My second thought is that it is eminently stupid to place any trust in anyone who runs for office. A politician will always come up with some excuse to rationalize doing what he promised he would not do.
And my third thought is: what an asshole! He’s going to strike the tough guy pose contra those who put him in office to stop more government spending? I know nothing else about the guy, don’t really care who is in Congress, don’t believe the Tea Party will be able to do anything about government spending, and I’d still like to see the Tea Party leave a smoking crater where this guy’s career used to be in 2012.
It gets even better. Apparently the real Tea Party hasn’t said boo about being betrayed.
““A press release has been issued claiming Tea Party Nation supports a primary challenge against Allen West. TPN’s name was used without permission. I will be giving a more detailed statement shortly but neither I nor Tea Party Nation supports a primary challenge against Allen West.”
In other words, the Tea Party would appear to be as worthless as the Republican Party.
UPDATE – Boehner’s White Flag passed 218-210. It would appear there are only 22 Republicans who aren’t economically illiterate. I’m sure “it was the best deal we could get” is going to sell every bit as well as George Bush’s “Read My Lips” cave in. It’s not like the U.S. is going to be less in debt this time next year.
UPDATE II – Harry Reid and the Senate refused to accept the House Republican surrender:
At the other end of the Capitol, Senate Democrats rejected the measure without so much as a debate. The vote was 59-41, with all Democrats, two independents and six Republicans joining in opposition. Moments later, Senate Majority Leader Harry Reid, D-Nev., unveiled an alternative that would cut spending by $2.4 trillion and raise the debt limit by the same amount, enough to meet Obama’s terms that it tide the Treasury over until 2013.
It should be interesting to see what the Boehner-led Republicans will try next or if they’re seriously going to go with the “unconditional surrender is the best deal we could get” theme.
Rick Perry may not be The Third Bush. He may be The Second Thompson. As in Fred Thompson. Joseph Farah is only the first Perry enthusiast to rethink his support for the potential candidate:
I was just dead wrong in all of my conclusions about the governor of Texas. I no longer want him to run and no longer believe he is a viable candidate. In fact, I will do all I can to warn the American people away from him. My view of Perry changed from favorable but skeptical to highly unfavorable overnight this week after I read his comments to GOP donors in Aspen, Colo.
Essentially, Perry said he is just fine with New York state’s decision to approve same-sex marriage.
“Our friends in New York six weeks ago passed a statute that said marriage can be between two people of the same sex,” explained Perry. “And you know what? That’s New York, and that’s their business, and that’s fine with me. That is their call. If you believe in the 10th Amendment, stay out of their business.”
Of course, GOProud, the homosexual Republican group, was quick to praise Perry for his stand. I’m sure Perry is very proud of that endorsement. What’s wrong with his answer? So much it would take me more than one 750-word column to explain. But I will attempt to address his cowardly surrender of the national culture succinctly.
If America is to rediscover its greatness, citizens of all 50 states will need to rediscover the common values that brought us together as a nation in the first place – not just all go out and do our own thing, with every man doing what is right in his own eyes. The only viable alternative is, quite literally, a break-up of the nation. What Rick Perry is advocating here is cultural surrender.
Translation: Rick Perry can forget about riding a wave of popular support from the social conservatives who brought Bush 43 to power. It’s not as if he’s got much appeal to the economic conservatives who are increasingly looking favorably upon Paul, Bachman, and potentially, Chris Christie. As for the Fred Thompson comparison, consider the results of the recent polls here and at Instapundit. Due to Instapundit’s larger readership, there were naturally more votes in his poll, with 13,599 votes compared to the 1,873 here at VP.
36% 07% Perry 20% 04% Palin 14% 72% Paul 07% 08% Bachman 06% 01% Romney
Obviously, this is a libertarian stronghold. But what is remarkable is the complete lack of enthusiasm among either readership for the candidate the media imagines to be the “frontrunner”, Captain Underoos. The strong amount of support for Perry and Palin at Instapundit reminds me very much of the enthusiasm for Fred Thompson in 2008, right up until the moment that Thompson actually threw his hat in the ring. I suspect Farah will be far from the only supporter of a hypothetical Perry campaign who will abandon ship as it becomes a reality.
However, I think that Paul’s numbers in the Instapundit poll are misleading, despite the recent poll that showed him tied with Obama among the general electorate. Until I posted a link to the Instapundit poll, Ron Paul was around 4% there; there is probably strong link between the 1,923 votes he received at Instapundit and the 1,353 he received here. Paul will win the general election if he is nominated, it’s winning the Republican nomination that presents the much greater challenge.
Even the mainstream media is beginning to bang the drum for Obama’s retirement from the 2012 campaign:
New polls confirm Obama’s Democratic base crumbles
With all of the spotlights on the high-stakes debt maneuverings by President Obama and Speaker John Boehner the last few days, few people noticed what Vermont’s Sen. Bernie Sanders said: “I think it would be a good idea if President Obama faced some primary opposition.”
At this point, I expect the main question isn’t whether Obama will step aside, but rather, if a health issue or the ever-popular need to spend more time with his family will be the excuse provided. The publicity given Sanders’s comments is yet another shot across Team Obama’s bow.
