Is the Tea Party ruining the economy -- again?

As US debt negotiations go down to the wire, economic growth is stalling and markets are being stressed. Feels like the 2008 panic all over again.

By Anthony Mirhaydari Jul 29, 2011 11:23AM

With stocks sliding for the sixth day in a row, word that the economy nearly dipped back into recession in the first quarter and signs of stress already beginning to appear in the funding markets, I can't help but feel like the economy is headed for a repeat of the 2008 panic that deepened the housing bust and made what would have already been a painful recession even worse.

 

People wonder why, three years into the official recovery, unemployment is still above 9%, housing is stabilizing at best and job growth remains anemic. It's because of the policy errors in those fateful days three years ago. Those wounds -- caused by far-right Republican intransigence against President George Bush's bank bailout proposal and the free-market zealotry that allowed Lehman Bros. to fail -- did serious damage. Inter-bank lending dried up. Businesses couldn't fund normal operations. Purchases were withheld. Hiring was postponed.

 

We're still paying the price for those crass political acts today. And now, with the U.S. Treasury on the precipice of its first-ever credit default because of an unwillingness among freshmen Tea Party members in the House to compromise with Democrats or even their own party leadership threatens a repeat at a time of extreme economic vulnerability. In fact, forget 2008. There are parallels to the policy errors that prolonged the Great Depression. Here's why.

 

There are a lot of moving parts to this issue, to be sure. But a few big points stand out:

 

* If we breach the Aug. 2 deadline, it will have serious consequences even if the Treasury prioritizes bondholders and avoids default. The government has payment obligations of $363 billion for the month of August, compared with expected revenue of $203 billion. Cuts will be made. The Bipartisan Policy Center did an exhaustive study of the issue and found that the Treasury has no "secret bag of tricks" to finance the government past the deadline.

 

Hard choices would have to be made. If you made payments on interest, Social Security, Medicare or Medicaid, defense vendors and unemployment benefits, that's worth $172 billion. So there wouldn't be money to pay for things like active-duty military, veterans affairs, Federal salaries, the FBI, the federal courts and IRS refunds.

 

 

* From a cash-flow perspective, Societe Generale notes that a "selective default" on U.S. Treasury debt would likely happen on Aug., 4 when a $30 billion slug of T-bills mature. Another $30 billion matures on Aug. 11. And a whopping $1.173 trillion worth of repayments and interest payments are due and would likely result in outright default and rating downgrades. Aug. 15 is the day of reckoning.

 

* As I've mentioned in a number of columns over the past two years, the economic recovery has been hamstrung by structural issues caused by the nature of the recession -- defined by an asset price bust (housing), a credit bust (defaults) and banking panic (Lehman). Between August 2008 and the October 2008 low, the Dow Jones Industrial Average lost 35%. We've seen how financial turmoil has long-lasting effects on the real economy. It's not something to take lightly for the sake of scoring political points.

 

* The economy is extremely vulnerable. Because of the structural issues outlined above, growth has been anemic. To make matters worse, it's had to absorb the knocks from the European debt crisis, the Japanese earthquake-tsunami-nuclear meltdown, food and fuel price spikes, Middle East turmoil and more. And like a battered boxer with the heart of a champion, it keeps getting off the mat. Just-released data show that first-quarter GDP slowed to just 0.4%, while second-quarter growth came in a 1.4%.

 

This is below the U.S. economy's stall speed and isn't enough to pull down the unemployment rate. Unless growth re-accelerates soon, the dynamics of the economy will pull it back into recession. The debacle under way in Congress is just the latest blow.

 

* The need for long-term fiscal consolidation is clear. I'm sympathetic to the urges of the Tea Party members to control government spending and cut America's out-of-control debt load that is swelling beyond the dangerous level of 100% of GDP -- a level that is associated with slower economic growth.

 

 

But as I discussed in a column back in February, there are a right way and a wrong way to go about fiscal austerity. Doing it all at once by deeply slashing discretionary spending programs is wrong. Doing it by holding the economy hostage is wrong. Doing it by relying entirely on spending cuts without tax increases is wrong. The chart above shows how extending the Bush tax cuts or cutting corporate taxes would provide very little economic benefit compared with things like middle-class tax cuts or infrastructure spending.

 

 

Doing it wrong, by cutting things that affect the economy more (like most spending programs) will push the unemployment rate higher, as illustrated by Societe Generale in the chart above.

 

The right way is to do it with a realization that part of the budget problem is related to the terrible state of the economy and that the "structural" deficit is tied mainly to popular entitlement programs. Mainly, I'm talking about health care costs, which I discussed in a recent blog post. If the Tea Party really wants to get tough and fix the problem, attack the free-for-all smorgasbord that is Medicare and Medicaid.

 

Getting it wrong is dangerous. As I wrote last October when covering the Tea Party's economic proposals heading into the mid-term elections:

 

"There is the dark parallel in these austerity proposals to President Herbert Hoover's tax hikes of 1932 and President Franklin D. Roosevelt's efforts to balance the budget in 1938, both of which magnified the effects of the Great Depression. And after all, it wasn't budget cutting that led the federal budget into balance during the 1990s; it was a tax hike, slower spending growth and a powerful economic boom."

 

It took a long time to get us into this mess -- and it's going to take a long time to get out. The first priority is ending the debt crisis before we have a repeat of the 2008 nightmare. The time for compromise is now. Second, we need a credible medium-term fiscal consolidation plan. Third, we need to look at ways to get the economy and the jobs market back on track. I suggested two ideas a few weeks ago.

 

And the thing is, the extreme position of the Tea Party -- massive spending cuts now with no tax reform -- is out of touch with where most Americans are, based on recent polling. This crisis isn't necessary. And the people don't want it.

 

I've been banging on the table over the past few months that the economy was showing hopeful signs of recovery. And indeed, initial weekly jobless claims dropped below 400,000 last week for the first time since April. If we don't get a quick resolution on the debt ceiling, all bets are off.

 

For investors, it's a difficult situation. Stocks are being hammered now, but no one knows when or whether a bipartisan compromise will be hammered out. And there is the issue of a possible credit downgrade from the rating agencies if a debt ceiling deal isn't accompanied by at least a $4 trillion cut to the deficit over 10 years.

 

 

The best advice is to maintain a market neutral to mild short positioning by raising cash, targeting weak sectors and holding a few long positions in areas still showing strength -- a strategy I outlined in my column this week. For my newsletter subscribers, who are up 1% for the month, compared with a 3.6% loss for the S&P 500, that involves short positions like Endeavour Silver (EXK), which is down 2.8% as precious-metals stocks come under pressure.

 

The EXK short was found with technical screens developed with the help of Fidelity's Wealth-Lab Pro backtesting toolset. I'll add the position to my Edge Letter sample portfolio, which tracks my picks for MSN Money readers in real time here. (Editor's note: Fidelity sponsors the Investor Pro section on MSN Money.

 

Disclosure: Anthony has recommended EXK short to his newsletter subscribers.

 

Check out Anthony's new investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.

 

The author can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below. 

78Comments
Jul 29, 2011 1:49PM
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Is this the same guy, who just a few days ago was telling me that this market bull has plenty of room to run and I should jump in?

Jul 29, 2011 2:19PM
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After reading some of the comments below mine, I can see why we're ****ed! Yea great let's play the left-right paradigm blame game and call each opposing side terrorists. The real Financial Terrorists are the criminal banking elite who use Weapons of Mass Destruction (Credit Default Swaps, Derivative, etc.) to rob, rape and pillage the global economy. It's funny how Obama ran on the same things the Tea Party is talking about now. Go do a google search on Obama's campagin promises. He said back then that spending was out of control and that we needed to get our fiscal house in order and he also said WE NEED TO STOP RAISING THE DEBT CEILING!!!!!!!! It's really sad how stupid my fellow Americans are. Now with that about the Dems. don't get it twisted. If McCain was Pres. we'd be bombing the **** out of Iran right now. Please don't comment about how we'll have cheap gas because we've invaded Iraq, Afghanistan, Libya, Pakistan, Yemen, etc., etc., etc. How has that worked out for gas/oil prices?

 

Secondly the little weenie who writes these pathetic articles needs to be smacked in the side of his head. Yea the Tea Party is responsible for repaeling Glass-Steagall and every other banking regulation during the Clinton years (don't forget the .com bubble), then let's just blame them for 2 illegal oil wars and a real estate bubble built on fraud (let's blame them for the $19 billion that went missing in shrink wrapped $100 bills in Iraq), now let's blame them for Obama continuing Bush's policies and injecting them with steroids and lastly let's blame them for the dog and pony show which is now Reality T.V. D.C. additon. THE REAL PEOPLE TO BLAME ARE THE AMERICAN PEOPLE. WE LET THESE KLEPTOCRATS STEAL EVERYTHING AND GET AWAY WITH IT. WE allowed "Too Big to Fail" and "moral hazard" to occur. WE allowed that bs investigation into 9/11 (how the hell didn't the Feds know beforehand?). Think about this. Traders were putting shorts (a 5000% increase) on airlines day's before 9/11 even happened. Before anyone blames a Democrat or Republican or Tea Partier, LOOK IN THE MIRROR!!!

 

In closing. Anthony, please don't write any more of this garbage. You look like a complete dip**** everytime you do. It's a shame that I have to watch Russia Today to get actual factual news and not an American Media Outlet. Shame on you and the rest of you scumbags like Rupert Murdoch, etc. I mean when you watch the Republican Presidential Candidates debate...they get asked some real "hardball" questions. What do you prefer coke or pepsi, deep dish pizza or thin crust pizza, Iphone or Blackberry, etc.. etc. If I was on that stage I would have apologized to the American people for the sham they are witnessing and then I would of smacked that little weenie asking those questions. We have 45 million on food stamps, X millions in foreclosure, million un or underemployed, etc., etc. And those are the questions we get? Wow. I have never seen such nonsense in my life and I'm only 27 years old. This country has been turned into the laughing stock of the world. It's time for people to demand more from their country and it's supposed representatives.

Jul 29, 2011 12:45PM
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LOL....economy.com?  Why not just ask the party of TAX, SPEND, DEBASE and BORROW what the best way to SPEND on?

 

They wasted over 4 Trillion in borrowed money on such growth...  What was it?   .4% the 1st quarter and an estimated 1.3% this last quarter, this almost 3 years into Recovery?   How is that annual "Recovery Summer" working for you...

 

Democrats are the TRUE economic Terrorists...  

Jul 29, 2011 1:34PM
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Seems to me that Obama and his Chicago style politics along with his henchman/woman(Reid/Pelosi) have done more to hurt the economy than any other group of people. The far right tea party conservatives are also not helping the situation but Obama has yet to have a budget and never got off the campaign trail. I cannot figure out what he does all day long other than plan another trip or party that we are all paying for, he certainly has not led this country anywhere but off the cliff. The unemployment situation is not on the democrats radar.....all they want to do is spend with no bridle whatsoever. Just wait for Obamacare which is already proving to be a nightmare.

Jul 29, 2011 3:29PM
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We cannot continue giving away our money. We support every down on their luck cause both domestically and internationally. No one forced people to sign up for stupid mortgages on houses they couldn't afford. Why should they get bailed out? What happened to personal responsibility? If you can't afford it, you can't have it. 99 weeks of unemployment? Why can't they do the jobs that no one else wants to do. You know, the jobs that we NEED all the illegal immigrants to do. Solves 2 problems at once. Sorry if you don't like cleaning hotel rooms but at least you are earning that check. We give our employees, public service workers, better wages and benefits than we have. Public sector workers from the President on down contribute nothing. Yes, they pay taxes but that money comes out of a pot they never put into. The private sector is who fills the pot. Nobody pays our healthcare, retirement etc. Tea Party, you bet! Why do the people in charge ride the gravy train. Full retirement after one term. Healthcare for life, (better than ours because they aren't part of Obamacare). If you can't balance the budget why are we paying you! Until people are held accountable for their actions we will continue to have one crisis after another in this country.
Jul 29, 2011 9:24PM
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Southern Home Builder, and myself, having served 20 years in the military respect your opinion in this forum-that's why we served-we may disagree but we have the right to express opinions.

The tide as I see it is turning against the Tea Party because the public is now realizing how dangerous they really are to rational governance and compromise (which is an art form).  There is no art with them:  it's more sledgehammer tactics-and yes, I do agree that spending must be curbed-and I do agree that many things should be changed yet one cannot accomplish these things in one year.  Change is a gradual process over time.

Back to treason-there are many definitions but one I found applicable is this one: "an attempt to overthrow the government or impair the well-being of a state to which one owes allegiance." (from dictionary.com).  This one fits what the Tea Party is doing.  One cannot deny that placing the United States financial health and security at risk is an act detrimental to the well-being of this country.

The saving grace is that Tea Party members in the last 24 hours are starting to fracture.  Hopefully the United States won't be dragged into an adverse financial situation and that a compromise will be struck this weekend to raise the debt limit.  Do I agree with raising the debt limit?  No.  But unfortunately, we are between a rock and a hard place.  The Government has borrowed money from Social Security and without raising the debt limit those repayment obligations cannot be met as my link below illustrates.  That's just one of many consequences the failure to raise the debt limit might do. So raise the debt ceiling and work towards sane solutions to decrease spending-over a phased period of time like any sane plan would dictate.

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This isn't something that just started yesterday. This is the culmination of voter stupidity. Many uneducated Americans fell for the false promises of the Radical Liberal Socialist Agenda. They kept electing these idiot lawyers over and over and over again. Now I'm not just talking about the 535 + 2 in DC. I'm talking about the countless State & Local thieves (lawyers & politicians) who have destroyed our American Dream by constantly & drastically raising taxes  for the last 25 years at an alarming rate - well above the inflation rate. Add to this: the Feds caving in to the tree huggers with no domestic oil exploration (allowing Morgan Stanley to become the biggest oil hoarder on the planet in order to push prices up with a contrived short supply), Barney Franks Fanny Mae & Freddie Mac (which allowed banks the opportunity to lend money to uneducated stupid people who couldn't afford to buy - thus creating a false demand that pushed housing prices through the roof), College Loans to everyone (which allowed Universities to jack up tuition at an alarming rate - forcing students in debt before they even get started), free healthcare for illegal immigrants, free Cell phones for the unemployed, and Govt bailouts (rewards for failure) - just to name a few of the massive blunders. What are we left with: A bankrupt Country. Don't even think about blaming the Tea Party for doing what they were elected to do. The ponzi scheme isn't working. Wake up, it's time to pay the piper.
Jul 30, 2011 12:54PM
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There is a special hatred that the Tea Party has for President Obama.  I cannot help but believe that it is racist.  There is an attempt to mask that so-called (and self proclaimed) "Christian" conservative agenda, but that agenda culminates a period of hate for the federal government, the source of desegregation.  It is desegregation that prompted the flight to home schooling, desegregation that converted the former Confederacy to Republicanism.  By destroying the federal government, one can get back states' rights, whatever those are.  To Tea Party volk, that means no immigrants, no foreigners, no minority power, no protection from corporations, and no compromise.  Yes, the Tea Party is destroying America, the government we so fought for and love, for whom hundreds and thousands died, not for Alabama, not for Idaho, not for New York, but soldiers under our fifty-state, federal flag.  Our nation should protect us from the unmitigated greed of corporations, should make sure all are treated fairly, and have a fair chance.  Ironically, the Tea Party is a corporate creation, about as independent as a dog on a leash.  These people hate America, love their state, and hate dialogue and compromise, the essence of not only our democracy, but our families, our churches and temples, and our own personal selves.  Shame upon them.
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I write as someone who was disenchanted with the Democratic and Republican parties during last Fall's election and during the presidential one before that.  However, the events of the last few days has ired me like never before and I have no choice but to engage.  Unlike the majority of folks who have posted here, I have not been asleep for the past 11 years.  G.W. Bush and a Republican Congress inherited a budget surplus and proceeded to run this country with a credit card.  What did they buy with that credit card?  A huge prescription drug benefit for Medicare, TWO wars, and tax cuts for the wealthy.  They then dismantled government oversight of the financial system and allowed the banking system to bring our economy to its knees.  When G.W. Bush then came calling with his credit card to bail the country out Democrats balked initially but made the tough choice to do the right thing and bail Mr. Bush out.  Now radical members of the party of deficits, the Republicans, is holding our nation hostage in order to move their agenda forward.  Shame on them.  Shame on you, all of you who have so readily forgotten where this debt began.  I'm disgusted and outraged by the dishonesty and selfishness of it all.  How un-American. 

Jul 29, 2011 2:06PM
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Only the bought and paid for mainstream media could portray the Tea Party stalwarts as "ruining the economy..again?" First and, I don't know where the "again" comes from. The Tea arty didn't even exist when Wall Street crashed the economy with fraudulent vehicles. Most importantly, these people are willing to forego any prospect of re-election by voting their conscience and placing the Country's best interest before their own.

It's hard to fathom just how vile Wall Street is!

Jul 29, 2011 2:33PM
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even obama can't hire you if all the jobs are overseas
Jul 29, 2011 4:54PM
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"Is the Tea Party ruining the economy-again"

Anthony.......WTF?    The "Tea Party" movement wasn't even around until 2008.  I Guess we were doing just great until then.  Who's been incharge of our economy since the ?  Both parties get re-elected by spending more,more,more !  Always have and always will, yet you want to blame the "Tea Party".  The TP may not have it 100% right, but atleast they are getting us to recognize our real problem.....Spending more than we have!

Jul 29, 2011 1:53PM
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Freshman Congressmen are doing exactly what their constituents demanded of them (the change is stunning and refreshing).  We are all tired of hearing from political hacks and financial hacks who make their living and derive their power from the continuation of the status quo.  If we have to go through more hard times to get our country and our freedoms and quite frankly our work ethic and culture back, then so be it.  Those of us living our lives making cautious and well-thought decisions are tired of bailing everyone who takes the shortcuts in life out of their self-inflicted messes.  Stealing from us and giving to almost anyone has become a big government business and it needs to stop.  Helping the helpless is fine, but lining the pockets of everybody else has to stop.
Jul 29, 2011 5:40PM
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Who's to blame for...

Budget deficits through the roof? Tea Party.

Entitlement programs that are unsustainable? Tea Party.

 

$14 trillion in debt and counting? Tea Party.

 

Debt rating downgrades? Tea Party.

Government default? Tea Party.

When was that Tea Party first started, by the way? Oh, that's right...Spring of 2009. And when did the first group of Tea Party politicians (not even a majority in ONE house of Congress) take office after the 2010 elections? Oh, that's right...the start of 2011. So, naturally, you can blame them for a debt problem that was first brought to eveyone's attention in...March 2011.

 

Yep, in two months the Tea Party ruined our economy. It had nothing to do with the 230+ years of government before them. Makes perfect sense to me.

Jul 29, 2011 4:33PM
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Yeah, Tony...it's the fault of the people who want the government to spend less, reduce its debts, and stop restricting individuals and businesses. THEY'RE the ones ruining the economy...

Moron.
Jul 29, 2011 7:04PM
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"Outraged taxpaying American voter", where have you lived? You say you haven't been asleep but man if not asleep you are just a mindless media robot. Let's look at the FACTS.

There was NEVER a surplus. To say Clinton had a surplus was his best lie ever and the liberal media ate it up. Don't believe me? Try to put your party hat down for a second and look at the real NATIONAL DEBT as reported by the US Treasury not a biased Republican:

1993 $4.411 TRILLION
1994 $4.692 TRILLION
1995 $4.973 TRILLION
1996 $5.224 TRILLION
1997 $5.413 TRILLION
1998 $5.526 TRILLION
1999 $5.656 TRILLION
2000 $5.674 TRILLION

Do you see any year where the debt went down? No, not one year. It was purely an accounting trick and fancy wording but the FACT is there was NEVER a surplus and thus every single year for decades the debt has risen. So how does this lie continue. It is a FACT that Clinton reduced the PUBLIC DEBT in 1998 through 2001. However, you can't ignore Intra-government debt which rose much more than public debt fell. Clinton simply robbed Peter to pay Paul. You can't ignore intra-government debt though and thus CLINTON never ran a surplus. Even intra-government debt has to be paid eventually. It is real debt. Clinton just ignored it and the idiot media and people like you bought it. The US Treasury though clearly reports no surplus ever existed.

Bush also inherited a dot com bubble in the midst of popping, a defense department that was scaled back so much by Clinton our own national security was ignored (9/11), an Enron and World Com scandal, and, if you follow housing prices, the start of the housing bubble was under Clinton with his horrible policies that Bush unfortunately continued. The recession in 2000 started under Clinton. That is simple fact and world events after Bush took office made it worse.

You can paint a rosy picture of what Bush inherited but it is all lies. He inherited a country in the start of a minor recession, with poor national defense, corporate scandals, a dot com bubble popping, a housing bubble started, and NO SURPLUS. What is so good about that? Facts are facts.
Jul 29, 2011 8:15PM
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Wow, some really STUPID people post here. I quit.
Jul 29, 2011 1:33PM
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If you have a spending problem, you don`t add fuel to the fire by providing more money in the form of increased taxes. The problem has exploded in the last 21/2 years by the anointed one. BO the incompetent.
Jul 29, 2011 11:30PM
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The tragic thing about all this nonsense is that President Obama will get the blame.  Everything can be summed up in one statement:  ignorance, stupidity, arrogance, and MOST OF ALL HYPOCRISY = Republicans
Jul 29, 2011 4:25PM
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Yah... you're such a genius Anthony.  It hasn't been a week since you were telling us all to jump back  into the market.

 

I think mostly you're just trying to sell your newsletter by writing articles based on what's already happened and trying to take credit for saying it "in your article two weeks ago:.

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