The Babies in Washington

Maybe our politicians feel squeezed, but it is American people who are getting crushed. “I want…. I want… Gonna hold my breath until I die, mommy….” Disgust is the emotion that most thinking Americans feel against all of the “deciders” they elected and sent to Washington. It’s all about slogans, and “I’m right and you are wrong.” The two most dangerous words in the English language – “always” and “never” – dominate the verbiage. Legislators who outsourced their jobs to make decisions by signing “never” pledges – guess that would include “never” even if the United States were invaded by waves of foreign troops – are stuck with the inevitable confrontation (if they “break” their pledge and do their jobs) in the next election by another stupid idiot who will challenge these incumbents with another “never” pledge.

Bottom line is folks (yup, Republicans and Democratic Congressmen and women voted for it) spent like bandits while reducing taxes, particularly in waging two very costly wars costing trillions, and many in Congress simply don’t want to pay the bill. If you or I acted that way, our creditors would send us cascading into court and then, if we really didn’t fork over the cash, into bankruptcy.

Even if we raise the debt ceiling and reach an agreement, unless we show some signs of adult responsibility, the credit rating agencies are looking at the dysfunctional economic mess that Washington has created and may downgrade America’s rating from AAA to something less. If we don’t fix this immediately and have to do a retroactive repair, the magnitude of the drop in credit rating could be even more catastrophic. Why does that remotely matter?

First, the dollar will lose some of its status as a reserve currency and many will no longer run to the dollar when the going gets tough. Many institutions, public and private, are required by their own charters to hold AAA bonds and must move into safer bonds if any of their holdings fall below that level. That will flood new dollars into the marketplace as buyers seek alternatives, and in a world based on simple supply and demand, the oversupply of dollars will fall in value because of the decline in demand. Less valuable dollars means our earnings in dollars are worth less and will hence buy less. And once a country loses AAA status, there is no guarantee that beginning to act like adults later will result in a return of that rating anytime soon.

Inevitably on default (assuming we “undefault” enough to operate later), the cost of placing our national debt in the global markets will increase as lower credit ratings are tied directly to higher interest payments. That applies to existing national debt instruments as they are rolled over in the marketplace. More interest and the federal budget has to grow by that amount, increasing our deficit to accommodate this higher cost… exactly the opposite result of those hell-bent on cost cutting. The combined reduced demand for hard dollars and the pressure on federal dollar accounts to pay more interest has the double whammy of increasing the cost of anything we import – from gasoline to manufactured goods – or anything priced by the global marketplace (any commodities… like foodstuffs) – by the amount of the fall while increasing the cost of every other consumer/business lending structure: from corporate borrowings to support their operating cash flow (and jobs) to credit cards, auto loans and mortgages. Consumer costs will rise further as corporate America passes its increased borrowing costs on to consumers as well.

How’s that for starters? Yeah, starters… Because about $135 billion (the shortfall) that was being pumped into the U.S. economy – for whatever reason – will stop almost instantly. 41% of the federal budget will be unfunded… and while we probably won’t technically default on our bond obligations, we should brace for an economic tsunami. Take that much money out of the U.S. in one moment, through mass layoffs or furloughs, stopping infrastructure projects dead in their tracks, pulling entitlement payments away from those who were about to spend that money back into the system won’t, a huge pile of aid to states from the feds will stop on a dime… and exactly what does common sense tell you will happen?

Oh sure, some money will continue to flow because it has been prefunded or comes from other sources. Current taxes do fund almost 60% of the fed’s operating budget. But removal of that money and the cost in jobs alone will send credit card and mortgage defaults ever higher, dropping real estate values again and reigniting the possibility of a very deep double dip recession. In short, everything that cost-cutting and self-proclaimed “responsible” Congressmen and women say that want – lower government spending and job growth – will unravel fast. Global markets that look to the United States for stability are already reflecting a rapidly falling confidence in our (and their) future.

What’s the biggest blocking point? Increasing taxes on the wealthiest Americans. These folks frankly know that if someone doesn’t resolve the budgetary impasse, they will bear a substantial portion of the impact of higher U.S. interest rates. Still, lower taxes might be a cause that a billionaire might support strongly. Because of the Citizens United case, we know that there is no limit to political action committees in espousing various political perspectives with their marketing dollars… marketing dollars that get Congresspeople who sign pledges not to raise taxes elected. And since nobody with money is going to hire more workers when they know there isn’t sufficient consumer demand to buy the resulting goods and services, virtually none of that money retained by not paying taxes is going to create any new jobs. It will sit in nice bank accounts, probably not in U.S. dollars, where it will invoke coos and smiles. What’s in it for most Americans? Oh, if 2012 elections were this fall….

I’m Peter Dekom, and this is absolutely the most stupid, self-inflicted massive economic damage that our elected representatives could ever foment against the American people.