Monday, July 25, 2011

So Far, So Good

Three cheers for the debt negotiations stalemate. What this shows, thus far, is that some are serious about achieving substantial cuts in government spending and that some are not serious. That is truly revolutionary. For generations, Republicans and Democrats have joined hands to "make government work" by increasing the government spending trajectory without providing the funding to support that trajectory.

It is easy to promise benefits. It is much harder to figure out how to pay for them. This is the lesson the Western world is learning from California to the European underbelly.

That is why the current stalemate is such good news. For the first time, it looks like some politicians are serious about facing up to our coming fiscal disaster. Unfortunately, President Obama is not among those politicians. But, we already knew that. Obama is mired in the rhetoric of class warfare and is unconcerned about unemployment, the stagnant economy, and the exploding national debt. Fortunately, other politicians are concerned and are standing firm.

This won't last, of course. Eventually, the House Republicans will cave because they are scared to death that the media's one-sided portrayal of the current stalemate will create a public perception that Republicans are the problem. The reality is that, by the time, you get to November of 2012, the real issues will be the stagnant economy and the high rate of unemployment.

Even the financial markets are unconcerned about the current sideshow. There was virtually no reaction in Asian markets last night to the debt impasse, even though Tim Geithner and Barrack Obama were hoping against hope that the markets would crash and bolster their side of the debate.

The markets know the President is not a serious budget cutter. The markets aren't stupid. The markets also know the Republicans will eventually cave -- they always do. Finally, not extending the debt ceiling does not imply a default, nor does it affect social security payments ($ 2.5 Trillion of which can be paid without any increase at all in the debt ceiling). So, why should markets worry. They aren't worrying.