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US Debt Flies High – But NASA Keeps Mission Control Going

Interest-Rates / US Debt Oct 02, 2013 - 07:12 PM GMT

By: Andrew_McKillop

Interest-Rates

ALWAYS A TEMPORARY SHUTDOWN
Analysts cited by ZeroHedge, 29 September, said that some 50% of US defence force workers will continue to be paid, and NASA will continue paying workers at Mission Control in Houston to support the International Space station, where two Americans and four other people live. Aside from that, only 3% of NASA's 18 000 other employees will keep on working. About 91% of the tax-gathering IRS' staff will also be furloughed – who needs to collect taxes at a moment like this?


Whenever Obama tries an initiative its a flop. His current goal is to increase US Federal borrowing but his strident claim that not resolving the USA's now permanent debt crisis – for example by defaulting – would be a “banana republic failure” inevitably creating an international crisis in the financial markets, also turned out to be a flop. After a ritual trim of equity market indexes, September 30, the markets bounced back October 1st. Apart from a savage hit on already underpriced gold, and a ritual downward tweak for highly overpriced oil, the markets were unmoved by Obama's brinkmanship.

Many European markets racked up gains far above 1%, on October 1st.

By October 2 they were back in panic mode, of course, but everybody knows market traders do best when prices are volatile. This helps them wrongfoot each other, and especially small investors who don't understand how trader myths and rituals decide, each day or week, whether these great arbiters of the economy will be in panic mode, or euphoria mode!

THE SPECIAL FACTOR - OBAMA
Unlike the two-biggest recent debt limit crises of 1995-96, and more briefly 2011, when brinkmanship led to a shutdown in US Federal government operations – except vital sectors such as pay for US Army soldiers on active service – political analysts say the 2013 debt ceiling standoff has plenty of special features, starting with Obama who, they say, has treated the whole thing as a partisan political issue. Cynics say that Samson-style he could try tearing down the walls and repeat the Aug 5, 2011 event, when the credit-rating agency Standard & Poor's downgraded the USA's rating for government bonds for the first time in US history. The problem is, it has already been done. The walls are gone.

In 2011, markets around the world, and the three major indexes in the US experienced their most volatile week since the 2008 financial crisis with the DJIA plunging 635 points or 5.6% in one day. In the 1995-96 shutdown, according to the Bancroft Library at Berkeley University, president Clinton got the better of the government shutdown. Whereas then-House Speaker Gingrich expected the public to side with the Republican Party during the dispute, opinion polls showed a majority of Americans felt that the impasse was the result of Republican Party egoism and obstinacy. This is Obama's pitch today.

Obama could be a lot less lucky than the “rebound kid” Clinton, who according to political folklore was shifted to the right by the standoff. In his State of the Union Address of January 27, 1996, Clinton declared that "the era of big government is over." This in no way solved the growing debt problem, but at the time it was a smaller acorn compared with Obama's huge oak tree.

Obama is running against history – he seems to want bigger government and smaller results, except more debt. To be sure, he is not alone. Prime minister Abe of Japan is playing the same happy-lucky tune with public finances, the national debt, consumption taxes – and the public's patience. Japan as we know, has impressively more public debt relative to GDP than the USA. Japan as we also know, is heading for a wall of its own making, but “Abenomics” sails on, like a QE-fuelled Titanic. One advantage for Abe is that unlike the US dollar and its world reserve money role, Japan's yen can be shredded more easily, which is what Abe firmly wants to do.

US Democrats claim they want to, know how to, and can “tax and spend”, but they don't tax – they only talk about it. This in part is why the debt racks upward. Obama's track record explicitly shows he often cuts taxes – even as he increases spending. His record includes him agreeing in 2010 to extend the Bush tax cuts for two years as they were about to expire. Then in 2012, he made the Bush cuts permanent except for the wealthiest taxpayers, and in 2011 he agreed to spending cuts in exchange for an increase in the debt limit as it was so close to being breached. One thing is almost certain, neither Obama nor leading Democrats see the national debt as a huge tax – on the future.

THE DOWNGRADE – OF THE ECONOMY
Congressional committees like the Office of the Comptroller of the Currency, and the Bipartisan Policy Center have estimated that Federal spending will have to be cut by one-third to one-half or 33%-50% if there is no breakthrough – but unless that austerity cure is carried out for years, not months, it  will have little or nothing to do with the real problem of accumulated debt. What it will however surely and rapidly do, is to further slow the US economy.

Calculations by Nomura Securities and other financial analysts suggest that the above level of needed cuts in spending by government could trim US GDP by about 0.1% annual within a few weeks.  Goldman Sachs estimates that a three-week Federal government shutdown would slow annual growth in the October-December quarter by up to 0.9%.

Although this must sound like rocket science to Obama, if the economy slows even further (he says it is accelerating), the debt ceiling as a percentage of annual GDP growth will be reduced. This will be due to the IRS, whenever it gets back to work, not getting the expected-and-hoped for new and additional taxes from the GDP growth that wasn't there and didn't happen. Elementary my dear Watson!

Under US law, an administration can spend only what it gets from tax receipts – or from borrowing. Congress sets the debt ceiling beyond which the US Treasury cannot borrow, and restricts Treasury’s authority to borrow to finance decisions already made by Congress and the President. This however is already theoretical, due to political partisan treatment of previous accumulated debt, made even more so by the “loaded gun” threat of a Federal government shutdown, with the sole real objective of raising the debt ceiling.

The Obama administration's stance, the same as in 2011, is that any “banana republic” failure to pay interest and/or principal on US Treasury securities in full and on time will create the international crisis in the financial markets, that Obama seems to think he can make a rare success of achieving. He is persisting, and he may be able to do it, Samson-style.

What counts is that even since 2011 the debt overhang has seriously grown – and is vastly greater than the debt load back in 1995. The supposed option of the government promptly reducing all other spending, outside of debt servicing, would need a sustained long-term cut of Federal spending.

THE MEN WHO BROKE THE USA
The International Monetary Fund estimated in August that the USA's debt ceiling and budget disputes, like the 2011 and 1995 showdowns, can slow world economic growth by up to 0.5%. This is notably due to the negative impacts of these disputes on bond investor sentiment, with an inevitable shorter- or longer-term rise in borrowing costs – and an immediate impact on US Federal borrowing costs.

The US Government Accountability Office has said that just the threat of default escalates the costs of government borrowing – by a total of $1.3 billion, or about 0.5% in costs from the 2011 standoff.

The Fed's Bernanke and the White House's Obama have a lot to do with this. Other than the political dogfight using the Obamacare affordable medical care program as the bone, US federal and state debt growth is the real issue. Obama's American Recovery and Reinvestment Act of 2009, following the Bush administration's  Emergency Economic Stabilization Act of 2008 probably added a combined $1.8 trillion of debt on a 10-year forward basis, according to lower-end estimates of their impacts.

President Obama could or might be given the excuse of only being the president “who was there when it happened”. This might be too generous, but again is not the main issue. What the Federal Reserve under Bernanke has done with QE and the injection of $85 billion every month into the economy was to give unmerited aid and support to the banks, and to push markets into artificial euphoria. Its incidence on the “real economy” was and is low. Few persons contest this, but one is Obama. Another of course is Bernanke, but at least he is retiring very soon.

The US is just a hair’s breath away from defaulting on sovereign debt this time. If the US defaults on repayments of its debts, then it will be further downgraded and Obama will get his prediction right - the financial markets will collapse. The wasted time he took to root for Obamacare and for military strikes in Syria, of course co-financed by Saudi Arabia, Qatar, UAE and Kuwait, were just two shocking examples of what politics does to a self-styled “good guy”.

For the month of October, according to US analysts, The Federal government owes $307 billion, but will only take receipt of $172 billion, based on the pre-shutdown situation. Servicing of the USA's present total $16.7 trillion (May-June data) of national debt is the main reason. Obama needs to make his Republican opponents blink, unlike his standoffs with Putin and Syria's Bashr al-Assad. There is no guarantee that they will, but they may. In the past, it was always Obama who blinked, knowing that even if the accumulated debt was mostly due to Republicans, despite all his efforts to increase it since 2009, he would likely get the blowback in the next election.

Now that he is in his second and last mandate, Obama could be inclined to take more risks, which spells more danger, not less. What happens next could be interesting – is Obama going to tear down the walls of the USA's financial temple, like Samson, to avenge himself against his bad luck and even worse judgement?

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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