1/7/2013 9:15 PM ET|
Forget the cliff; beware the ceiling
For all the worry, the fiscal cliff was just a preview of the debt-ceiling ruckus ahead. Here's why that could be worse for investors -- and how to get through it.
You ain't seen nothin' yet.
The cliffhanger of a fiscal cliff deal was just a dress rehearsal for the late-January/early-February battle over raising the debt ceiling. This time it's worse -- and more worrisome for investors. This one could really move global markets -- and move them fast and hard, in the not-so-distant future. Here are three reasons why, plus a strategy for getting past it.
The crises ahead
This time the damage from missing the deadline for a deal sets in on Day One. The negative effects of not reaching a fiscal cliff deal on taxes and spending on Jan. 1 or thereabouts was never going to be immediate. In the fiscal cliff crisis, tax rates indeed would have gone up immediately, but tax payments would have increased gradually and spending cuts would have been phased in over time. The damage to the U.S. economy from a fiscal cliff failure would have been major -- perhaps enough to send the economy back into recession -- but it would have been felt only gradually. That's why economists, Wall Street pundits and politicians kept saying that it was possible to go over the cliff and still fix the problem before the economy suffered major damage. (This was the so-called bungee-cord strategy.)
That's not true of the debt-ceiling crisis. This time, the damage is likely to be big and immediate, and some of it won't be easily reversed.
This crisis is really three crises in one:
- Crisis No. 1 is the raising of the debt ceiling. If Congress doesn't raise the current $16.4 trillion debt ceiling, the Treasury can't increase net borrowing to pay the country's bills. In practice, the Treasury has ways to manage the country's debt levels so that it can pay U.S. obligations until, according to estimates from the Congressional Budget Office, mid-February. After that, the Treasury would have to decide to pay some bills and not others. You can bet it would continue to pay the interest on U.S. debt, even if it had to raid other budget lines to do so. Default on U.S. debt obligations would throw the U.S. and the rest of the world into financial market chaos.
- Crisis No. 2 hits shortly after the Treasury runs out of room to finagle. The fiscal cliff deal put off $1.2 trillion in automatic spending cuts divided equally between defense spending and domestic discretionary spending -- this is what's called the sequester -- that were set to gradually take effect after Jan. 1, according to the terms of the Budget Control Act of 2011, which ended the most recent battle over the debt ceiling. (About $100 billion in automatic cuts would go into effect in the 2013 fiscal year that ends on Sept. 30.) The Jan. 1 fiscal cliff deal postponed the cuts until March 1. So, sometime in the next six to seven weeks, Congress will have to resolve the automatic budget cuts it has failed to address in a meaningful way in the past 18 months or so. Otherwise, federal spending gets whacked by $100 billion this year -- with more cuts to come. That's certainly enough to take a bite out of first-quarter growth in gross domestic product that economists already fear could dip to a rate of just 1%.
- Crisis No. 3 comes close on the heels of Crisis No. 2. The September 2012 continuing resolution that authorized spending by the federal government expires March 27. Unable to pass an actual budget or the appropriation and spending bills that go with it, our government in Washington has been operating under a continuing resolution that authorized spending for the first half of fiscal 2013. Unlike a failure to raise the debt ceiling -- which would lead to the government paying some bills and not others -- failure to extend the continuing resolution would mean that the federal government wouldn't have authority to spend any money. Here, we're looking at something that would actually shut down the federal government.
The two sides have already begun to double-down on their rhetoric. Congressional Democrats, afraid that President Barack Obama will negotiate spending cuts on entitlements including Social Security and Medicare, are urging the president to get tough. House Minority Leader Nancy Pelosi, D-Calif., has said the president should invoke the 14th Amendment to raise the debt ceiling by presidential order. Section 4 of that amendment 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." Some constitutional lawyers -- along with some Congressional Democrats and some members of the Obama administration including Treasury Secretary Timothy Geithner -- have argued that this language makes the debt ceiling itself unconstitutional and gives the president the power to simply raise or ignore the debt ceiling. (So far, the White House, aware that such an assertion of power would provoke a constitutional crisis, has said it does not intend to invoke the 14th Amendment.)
On the Republican side, Senate and House leaders facing a revolt by conservative Republicans have declared any further tax increases off the table. On Sunday, Republican Senate Minority Leader Mitch McConnell of Kentucky said, "The tax issue is finished, over, completed." That will come as a surprise to a White House that is holding to its position that any spending cuts must be balanced 1-to-1 by tax increases. Such extreme positions seem to mark the beginning of negotiations in Washington these days. And the distance between these positions, even if they are rhetorical posturing, is certainly enough to make reaching any agreement a long and drawn-out affair with big potential to worry the market.
What the market fears
That potential to worry the market is what interests investors most. Here's how I'd handicap that worry.
From the fiscal cliff deal, we know that investors are inclined to assume that, against all evidence, politicians will find a compromise rather than wreck the economy or destroy the U.S. credit rating. I think in this case that means that the markets are likely to stay relatively optimistic until at least the fourth week in January.
How do I arrive at that? The next meeting of the Bank of Japan is set for Jan. 21 and 22, and the next meeting of the U.S. Federal Reserve's Federal Open Market Committee is Jan. 29 and 30. The Bank of Japan is widely expected to cave in to pressure from the newly elected Liberal Democratic government and announce a big program of bond buying that would push inflation toward a goal of 2% and weaken the yen. Investors will be looking to the Fed meeting for signs that, after the fiscal cliff deal and with the looming uncertainty of the three February crises, the bank intends to keep its $85 billion-a-month program of economic stimulus (via quantitative easing) running at full throttle.
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As a former small contractor which did some work for the DOD, I found the actual waste was horendous. I literally witnessed a contract that would remodel a building and within a couple of years the building would be demolished. This goes on all the time. What I've also witnessed as observations at all levels of government the only way to limit waste is firm cuts to budgets. This leads me to conclude that a 25% cut is possible without touching any benefit, it would merely make those responsible "more responsible" limiting waste and corruption. Niether Republicrats nor Demlowcrats will have the will to "slash and burn" but instead will tell everyone they are cutting, but instead afterwards we will find out that in fact spending will continue unabated. Kinda like the "tax cliff" arrangement, now everyone is realizing the Obamlacrats and Repubicrats kept the details secret. Our nation cannot be saved, the "trough feeders" have a voracious monetary appetite for greed and plenty.
The 47% that you are referring to includes people who are collecting social security and government pensions. What kind of person would refer to people who worked their whole lives and paid into a retirement program as moochers?
I have decided that coming to this forum for constructive dialog is simply a waste of time. I enjoy Jim Jubak and the others, but the quality and tone exhibited in the Comments' Posting makes constructive discussion IMPOSSIBLE. It seems as if it is some type of coordinated effort to make it so unpleasant that people just stop coming here.
To the authors....keep writing articles, I don't care one way or the other about the discussion.
And by the way Mr. Jubak, your article about the Debt Ceiling was interesting and informative.
Oldchum, With all due respect, we are under a debt system where all money is created through borrowing from banks. When we make repayment payments to the banks, that amount of money is erased from the books, or (uncreated), and doesn't exist in circulation any more. This lowers the amount of money available to spur commerce, hence recession or depression, which feeds upon itself.
Under this system, if we don't spend, we start going into a financial collapse. In order to spend under this system, we must continue to borrow! This system is to blame for our nations economic troubles, and congress is to blame for allowing it to continue. We are to blame for not holding the feet of congress to the fire.
There is no "Next Crisis", it is the same crisis it has been, OVERSPENDING. Without overspending we wouldn't have the problems we are continuously faced with. If Obama won't implement changes that would bring jobs back at 300 to 400K jobs a month, then spending needs to be cut, and the pretend things are getting better policies need to stop.
Perhaps shutting down the govt would be a great thing. It just might let some people know we have spent too much and change some voting patterns, particularly those who vote in blocks for big govt and big spending.
Naw. Too many people are just plain stupid and stubborn. Those people will not learn, even when they suffer, they will blame the same people they have been blaming all along.
People keep talking about balancing the budget and paying off the debt. Please tell me how this can be accomplished when we are in a debt monetary system. Under this system, if we don't borrow, we begin an immediate collapse. If there is no debt, there can be no dollars.
Some of my friends wrote to the treasury and asked the following questions:
How is money created?
Russell Munk, assistant general counsel for the U.S. treasury wrote back and said: " The actual creation of money, always involves the extension of credit from private commercial banks".
If all money is created through loans, where does the money to pay the interest on the borrowed money come from?
Russell Munk wrote back: "The money to pay interest on all other money, comes from the same source as all other money".
In other words, all money is created as debt to the people with no money created to pay the interest unless that money is borrowed also. At interest!
How can we pay debt with more debt? People confuse wealth with money. A person may have wealth in stocks or bonds, or in the equity of their property. That wealth cannot be spent until it is converted into money. There are only two ways to convert wealth into money. Sell some of the stock, bonds or property to someone, or use it as collateral for a loan from a bank. Either way a bank usually gets involved.
I don't see any possibility of paying down our debt, or balancing the budget under this system. Even when the budget was claimed to have been balanced under Clinton, it was really Robbing from Peter to pay Paul. Just number shifting and manipulation. This system only increases the cost of living and governing expenses. It is not possible to pay down our debt. What's even more ironic, is that we continue to give foreign aid to other nations when we have to borrow the money to do it.
Obama will just raise it again and then blow money past the limit and ask for a higher limit at the end of the year.
Government's rule is to get a credit limit then overspend and blame it on others. A balanced budget or not spending more than you have is alien to all politicians because there are no repercussions from the sheeople.
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