Now it’s D for dunces as US debt crisis grows
July 29, 2011
Tea Party members sound off on debt
RAW VISION: Freshmen Republicans in the House of Representatives sound off ahead of key vote on the debt deal.
GETTING to grips with the long term implications of the sovereign debt debacle unfolding in the United States Congress involves understanding a lot of ”d” words. Here’s a quick cheat sheet to help get you up to speed.
The US government runs a budget deficit because each year it spends more than it raises in tax revenue. To fund this deficit, it must go into debt. Congress imposes a limit on how much the government can borrow. If Congress refuses to increase this debt ceiling by midnight next Tuesday, the US government will find itself with insufficient funds to meet regular payments to social security recipients, veterans, et cetera and will most likely default on its interest payments on debt.
This would provoke a downgrade of the nation’s AAA credit rating by rating agencies, which would almost certainly lead to a loss of business confidence and a double-dip recession in the US, and perhaps the world. And that is dumb.
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Illustration: Simon Letch.
Illustration: Simon Letch.
So, has Uncle Sam finally lost his marbles? It does appear the snowy-haired symbol of stern-faced stability has descended into senility, spending more than he earns and not paying his debts. It is a far cry from America’s role over the past half century as the world’s economic superpower.
Indeed, after the dust has settled on next week’s potential default and subsequent credit downgrade, the long run legacy of this bout of Congressional insanity will likely be to accelerate the US greenback’s demise as the world’s reserve currency.
To understand why, you have to go back to fundamentals, about the role of financial markets and the role of the US in them. The financial market is, after all, just a marketplace where some people come to park money and others come to borrow it to do other stuff they want to do. Investors come in search of a safe place to put their money and in the hope of earning a return above inflation. Borrowers just want cash as cheaply as they can get it. The haggling that takes place between investors and borrowers determines the rate of interest one will charge the other.
For many decades, the safest place for investors to park their money has been US Treasury bonds. Bonds are just contracts which stipulate that, in return for an investor’s money, a borrower, such as the US government, will pay a rate of return each year – a ”yield” – and eventually give the original sum of money back at some agreed point in the future.
Investors have valued the stability offered by these US Treasury bonds – issued by the world’s most powerful democratic government – so highly that they have been, and still are, prepared to accept an annual return of just 3 per cent to park their money in them, compared to the 5 per cent investors demand from the Australian government.
But this entire system is built on trust – trust from investors that they will be paid a steady rate of return on their money, and, eventually, get it back.
Shenanigans in the US Congress threaten to throw this entire system into doubt. It is hard to overstate the potentially dire consequences that could flow from this.
Worst case scenario, the US government defaults unexpectedly next Tuesday, spooking financial market participants who largely expect Congress will cobble together a last minute deal to increase the debt ceiling. A default could see investors suddenly lose faith in financial markets, withdraw their funds altogether or refuse to lend them at anything but exorbitant rates. Businesses the world over would be starved of funds to do the things they want to do, including employing the workers they need to do it. Economies would shrink, unemployment would skyrocket.
If you think that sounds far-fetched, it’s exactly what happened the day the US investment bank Lehman Brothers collapsed in September 2008.
Most investors doubt things will get to this stage this time around, believing that if Congress fails to pass a last minute deal to increase the debt ceiling, the US President, Barack Obama, will enact powers to unilaterally increase it, or, failing that, issue orders giving priority to interest payments over other payments, such as social security cheques.
But a growing number of economists think the US government will lose its gold-plated AAA credit rating anyway, thanks to the complete lack of a credible plan to bring divergent revenue and spending growth paths back into line.
A lower credit rating would mean the US government would have to pay investors a higher rate of interest on its borrowings.
How much higher is unclear. But any increase would add to the ballooning interest bill the US has already racked up on its debts.
US Treasury bonds have traditionally served as a safe-haven for investors in times of economic uncertainty. But what happens when what investors are trying to hide from is the US itself?
The Australian dollar broke $US1.10 this week in part because investors have already begun the search for alternative safe-havens to US Treasury bonds. (Foreigners can only buy Australian bonds with Australian dollars, so when demand for Australian bonds rises, so too does the demand for Australian dollars, pushing up the price). The escape path towards another traditional safehaven, gold, is already well worn, with gold striking another record of $US1625 an ounce.
Make no mistake; investors, including private banks and central banks, are still buying and holding a lot of US government debt, about $US11 trillion all up. But the scale of the stupidity gripping US Congress is hard to ignore.
The Chinese government has for some time called for a new international currency to replace the dollar, offering the renminbi in its place. As investors watch the disarray unfolding in Congress, they could be forgiven for preferring the strong-armed embrace of a single party state.
Posted at 11:42 AM ET, 07/28/2011
Debt ceiling search spike reveals country’s concern
By Hayley Tsukayama
Internet users are searching for any information about the debt ceiling. (TIM WIMBORNE – REUTERS)
Fancy polls and social science aside, if you want a quick and dirty snapshot of what the country is thinking, look no further than what Americans are typing into their search engines.
According to a report from Web analytics firm Experian Hitwise, people have been hitting the Web for information — any information — about the debt ceiling. The report shows that searches for that term and variations on that phrase have jumped 232 percent during the week ending July 16. Searchers are most interested in explanations of the debt ceiling, updates on the latest talks and the history of the debate.
Searchers are also looking at President Obama’s past and current views on the U.S. debt, as well as the views and actions on the debt ceiling under previous administrations dating to the days of President Richard Nixon.
Internet searches also show that people are worried about what will happen to the economy, Social Security and unemployment if the debate is not resolved by the Aug. 2 deadline — when Treasury Secretary Timothy F. Geithner says the nations will default on its debt obligations.
July 28, 2011, 5:00 am
Which Is in Worse Shape, U.S. or Europe?
By SIMON JOHNSON
Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”
The United States and Europe seem to be competing hard this summer for the title of “biggest economic problem.” Based on the latest news coverage, Europe might seem to be experiencing something of a resurgence, as last week the euro zone agreed on a deal involving mutual support and limiting the fallout from Greece’s debt problems.
In contrast, the United States seems to be mired in a political stalemate that becomes more complex and confused at every turn.
Perspectives from expert contributors.
But rhetoric masks reality on both sides of the Atlantic. The euro zone still faces an immediate crisis: the can was kicked down the road last week, but not far. The United States, on the other hand, is in much better shape over the next decade than you might think after listening to politicians of any stripe.
American problems loom in the decades that follow 2021, so there is still plenty of time to sort these out; the bad news is that almost no one is talking about the real issues.
In a policy paper released by the Peterson Institute for International Economics on July 21, Peter Boone and I went through the details on the euro-zone crisis, including how this common currency area got itself into such deep trouble and what the likely scenarios are now (you can also see the discussion and contrasting views at the publication event).
In our assessment, the issue is lack of effective governance within the euro zone. Governments had an incentive to run reckless policy – either in terms of budget deficits (Greece), out-of-control banks (Ireland) or refusal to create an economic structure that would support growth (Portugal).
These policies were financed by loans from other countries, particularly within the euro zone, creating and sustaining the widely shared perception that if any country were to get into trouble, it would be bailed out by deep-pocketed neighbors (a phrase that in this context always means Germany).
At the heart of this system was a great deal of “moral hazard”; investors stopped doing meaningful credit analysis, so Greek or Spanish or Italian governments could borrow at just a few basis points above the rate for the German government (one basis point is a hundredth of a percentage point, 0.01 percent).
What has shocked investors’ thinking over the last three years are the realizations that Greece and some other “peripheral” countries have so much debt they may not be able to make all the contracted payments by themselves and that Germany and other northern countries have become convinced that foolish investors should suffer some losses.
Imposing losses on banks that made bad decisions is a sensible principle – but getting from here to there is not easy, particularly when the “periphery” includes Italy, with a far larger economy than Greece or Ireland or Portugal and with gross debt of nearly two trillion euros (about 120 percent of its gross domestic product).
Either Europe really ends moral hazard and widely restructures sovereign debts, or it keeps the bailouts coming, with the deep involvement of the European Central Bank, which will ultimately be inflationary. The package announced last week is a classic case of muddling through; it doesn’t really solve anything. (See the Economix Q. & A. on Greece’s latest debt deal.)
If Europe and the world now experience a growth miracle, these debt problems will recede in importance, because solvency is all about debt burdens relative to G.D.P. But if near-term growth is not strong, as seems increasingly likely, market participants will soon resume their contemplation of European dominoes.
In contrast, the United States has a simple fiscal problem – as I discussed in my testimony to the House Ways and Means Committee this week. Government debt surged from 2008, not because of Greek-style profligacy but rather because of an Irish-style banking disaster. When credit collapses, so does revenue. As the economy recovers, revenue comes back.
The single most interesting point about today’s debt ceiling debate is that over the 10-year forecast horizon that frames for the entire discussion, by any conventional definition no fiscal problem exists. In 2021, the United States is likely to have a small primary surplus at the federal level – meaning that the budget, before interest payments, will no longer be in deficit. (James Kwak elaborates on this point on Baseline Scenario, the blog we run together.)
The really bad budget numbers for the United States come after 2021, but these are not the focus of anyone’s current proposals on Capitol Hill. Compared with other countries, the increase in health-care spending from 2010 to 2030 is most troublesome and what will ruin us (see Statistical Table 9 in the International Monetary Fund’s Spring 2011 Fiscal Monitor; or, if you prefer a single picture that cuts to the chase, look at where the United States falls in Figure 1 on page 9 of the I.M.F.’s recent report on how to handle “fiscal consolidation” in the Group of 20 developed economies.)
The debate in Washington is both heated and off course, because no one is grappling with the difficult issue of how to control health-care costs. The Tea Party enthusiasts are intent on near-term government spending cuts as a condition of supporting any increase in the debt ceiling.
If this version of a libertarian tax revolt carries the day, the resulting fiscal contraction will slow the economy and fewer jobs will be created. It does nothing directly to address the looming budget issues beyond 2021.
In the near term, the Europeans have the bigger problem – and this will only be compounded by slower growth in the United States (home to about one-quarter of the world economy). Over the longer haul, it remains to be seen when and how politicians in the United States will take up the real budget issues.
So far, the evidence is not encouraging.
Stocks Climb on Debt Optimism, Jobless Claims
By Michael P. Regan and Nikolaj Gammeltoft – Jul 28, 2011 11:15 PM GMT+0700
July 27 (Bloomberg) — Jeffrey Lindsey, a portfolio manager at BlackRock Advisors Inc., talks about the performance of the U.S. stock market, the outlook for corporate profits and his investment strategy. He speaks with Carol Massar, Matt Miller, Julie Hyman and Sheila Dharmarajan on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)
Enlarge image Yen Rises
Japanese yen and U.S. dollar notes are arranged for a photograph in Tokyo, Japan. Photographer: Tomohiro Ohsumi/Bloomberg
U.S. stocks climbed, halting a three-day slump, as optimism grew that lawmakers will reach a deal to raise the debt ceiling and jobless claims decreased to the lowest level since April. European shares erased losses, while Treasuries and the dollar rose.
The Standard & Poor’s 500 Index added 0.7 percent to 1,314.19 as of 12:13 p.m. in New York after tumbling 2 percent yesterday, while the Stoxx Europe 600 Index reversed a 1 percent slide. The Dollar Index increased 0.2 percent and the yen climbed versus 14 of 16 major peers. The yield on the 10-year Treasury note fell four basis points to 2.94 percent, while Italy’s yield rose following a debt sale.
U.S. equities extended gains as White House spokesman Jay Carney said “chances are great” for a compromise deal to increase the nation’s borrowing limit as the House of Representatives planned to vote on a proposal that confronts unified Democratic opposition in the Senate. Stocks started the session higher after initial jobless claims slid below 400,000 for the first time since April and another report showed pending home sales unexpectedly rose.
“Today’s reports moved in the right direction,” Scott Richter, who helps oversee about $16 billion at Fifth Third Asset Management in Cleveland, said in a telephone interview. “For the first time in several days we’re seeing a little bit of movement in the stalemate on the debt debate in Washington.”
Stocks and Treasuries are moving in tandem twice as often as they normally do, a sign investors are growing convinced the U.S. will lose its AAA credit rating and that an impasse among lawmakers may spur losses in both markets.
The S&P 500 has risen or fallen together with 10-year Treasury notes 80 percent of the time in the last 10 days, compared with the average since 2000 of 41 percent, according to data compiled by Bloomberg.
Treasury Secretary Timothy F. Geithner has repeatedly said the government’s authority to borrow will run out on Aug. 2 unless Congress raises the $14.3 trillion debt ceiling. A Treasury official said in an e-mail earlier today the department would provide more information on how the government would operate in the absence of borrowing authority no earlier than after financial markets close tomorrow.
Passage of the House measure to raise the ceiling, which all 51 Senate Democrats and two independents oppose, will lead to negotiations among leaders on both sides in an attempt to avert a U.S. default.
The S&P 500 tumbled 2 percent yesterday, its biggest loss since June 1, and has declined 2.9 percent since July 8, the day before Alcoa Inc. unofficially started the earnings season on July 11, even as four companies beat analyst estimates for every one that missed, according to data compiled by Bloomberg. In Europe’s Stoxx 600, more companies have trailed projections than surprised positively.
Equity futures gained before U.S. exchanges opened this morning after jobless claims fell by 24,000 to 398,000 in the week ended July 23, fewer than forecast, Labor Department figures showed. The median estimate of economists in a Bloomberg News survey called for a drop to 415,000.
Cisco Systems Inc. rallied 3.2 percent to lead gains in the Dow Jones Industrial Average after Goldman Sachs Group Inc. advised buying the shares. DuPont Co. climbed 2.2 percent after raising its full-year earnings forecast. Exxon Mobil Corp. fell 1.1 percent after reporting second-quarter profit trailed estimates.
Among European shares, Credit Suisse Group AG (CSGN), Switzerland’s second-biggest bank, lost 2.4 percent after second-quarter profit fell 52 percent, and BASF SE, the world’s largest chemical company, sank 4.9 percent after signaling growth will slow. Air France-KLM Group and Deutsche Lufthansa AG, Europe’s biggest airlines, fell more than 3.4 percent as earnings missed estimates.
Italy’s 10-year bond yield rose seven basis points to 5.81 percent. The nation sold almost 2.7 billion euros ($3.9 billion) of 10-year bonds at an average yield of 5.77 percent, compared with 4.94 percent at an auction June 28. The Spanish 10-year yield increased six basis points to 5.98 percent. The Greek two- year note yield jumped 33 basis points to 30.35 percent.
The MSCI Emerging Markets Index slipped 0.3 percent, led by declines in Asian exporters including Taiwan’s HTC Corp. and South Korea’s Samsung Electronics Co. Turkey’s lira strengthened 1.1 percent against the dollar and the country’s ISE National 100 Index advanced 2.2 percent, the most in two months, after central bank Governor Erdem Basci said the Turkish currency isn’t overvalued.
The New Zealand dollar rose 0.4 percent versus the greenback, approaching a record, after the central bank kept interest rates unchanged and said it would likely remove the 50 basis-point “insurance” cut made after a February earthquake. Australia’s dollar also advanced toward the highest level since it was freely floated in 1983.
AS Bakal Terjebak pada ‘Credit Crunch’
Oleh: Ahmad Munjin
Pasar Modal – Kamis, 28 Juli 2011 | 07:00 WIB
INILAH.COM, Jakarta – Kurs rupiah di pasar spot valas antar bank Jakarta, Kamis (28/7) diprediksi menguat. Besarnya peluang downgrade AS yang bakal memicu credit crunch menjadi tekanan bagi dolar AS.
Periset dan analis senior PT Monex Investindo Futures Albertus Christian mengatakan, tren penguatan rupiah masih berlanjut hari ini. Kecuali, jika ada kejutan adanya kesepakatan pemerintah Obama dengan Kongres AS. Jika mereka sepakat memangkas anggaran sebagai syarat kenaikan batas atas utang AS, risiko downgrade menjadi hilang.
Tapi, imbuhnya, selama kesepakatan kenaikan batas atas utang AS tidak terjadi, tren penguatan rupiah belum akan terpatahkan. “Jika dilihat dari indikatornya, variasi harga rupiah akan lebar dalam kisaran 8.430 untuk pekan ini jika support 8.465 ditembus ke bawah dan level atasnya 8.500,” katanya kepada INILAH.COM.
Lebih jauh Christian menjelaskan, downgrade AS akan memicu kesulitan pinjaman antar bank (credit crunch) seperti yang terjadi pada era kebangkrutan Lehman Brothers pada 2008. “Tapi, default AS akan berimbas 5 kali lebih besar dibandingkan imbas negatif dari Lehman Brothers,” timpalnya.
Meskipun, dikatakan Christian, jika AS hanya di-downgrade dari level AAA satu level saja. “Bank-bank akan enggan meminjamkan likuiditasnya satu sama lain di AS,” imbuhnya. “Jika bank saja tidak memberikan pinjaman, apalagi masyarakatnya.”
Memang, lanjutnya, semua analis optimistis AS pada akhirnya akan mencapai kata sepakat karena default akan menggerus popularitas Presiden AS Barack Obama. Obama pun tidak akan terpilih jadi presiden AS berikutnya. “Tapi, sejauh ini, pasar melihat risiko gagal bayar dan down grade AS yang semakin meningkat,” ucapnya.
Potensi penguatan rupiah, juga dipicu mata uang RI ini yang tidak terkait dengan krisis utang Eropa dan dari sisi perbedaan tingkat suku bunga semakin melebar antara BI rate 6,75% dengan The Fed Fund Rate 0-0,25%. AS terlilit utang dan dari sisi ekonomi moneter, The Fed mengambil kebijakan zero rate policy. “Arus modal asing akan terus mengalir ke aset-aset rupiah sehingga memperkuat nilai tukranya,” imbuh Christian.
Asal tahu saja, kurs rupiahdi pasar spot valas antar bank Jakarta, Rabu (27/7) ditutup menguat 18 poin (0,21%) ke level 8.482/8.492 per dolar AS.
After the debt-ceiling standoff is resolved
By Mohamed A. El-Erian, Thursday, July 28, 5:22 AM
Some have suggested that all the drama over the debt ceiling will be justified by the long-term benefit of forcing America to embark on medium-term plan for deficit reduction. Yet at this point, the benefits of a deal will be offset by how it was achieved.
I am confident that Washington will find a way, albeit very awkwardly, to compromise on a mini-deal, rather than a grand bargain, that raises the debt ceiling and avoids a debt default. They may even manage to evade a downgrade of the nation’s vaunted AAA credit rating, though this is much more uncertain.
But fiscal solvency is not merely a function of deficits and debt, interest rates and the profile of maturities. It is also highly sensitive to economic growth: The lower an economy’s growth rate, the higher a budget deficit is likely to be, the larger the debt accumulation, and the greater the need for yet another round of fiscal austerity to safeguard solvency. All are components of the much-feared debt trap.
The very vocal and visible recent bickering is causing more than transitory damage to U.S. growth and employment prospects. Remember, this debt crisis is not the result of an inability to pay; nor is it being forced on the United States by hesitant creditors. Rather, political posturing on what had been a relatively obscure and non-threatening legislative requirement — Congress gets to control the nation’s spending and taxes through other means each year — the debate on the debt ceiling has managed to bring forward in a very dramatic and disorderly manner fiscal challenges that lie down the road.
In this political mess, already-weak business and consumer confidence is being dealt a further blow. Companies with massive cash holdings now have yet another excuse to stay on the sidelines. Foreigners have been stunned by the political dysfunctionality of the country in which they have placed factories, whose financial instruments they buy with their savings and whose money serves as the global reserve currency.
It is a matter of days before analysts engage in yet another round of unfavorable revisions to their outlook for the U.S. economy. Already muted growth projections will be cut further. On the back of a weak second quarter, the much-hoped-for robust recovery will again be postponed. As the already subdued job-creation rate is undermined and the average duration of joblessness is lengthened, the unemployment crisis will deepen.
It is far from certain that, in forcing spending cuts, a resolution to the debt-ceiling debacle will materially improve the U.S. economic outlook. Indeed, because of the standoff’s detrimental impact on growth and employment, it could tip the United States closer to the very debt trap that reformers are seeking to prevent.
Yet all is not necessarily lost.
Washington’s squabbles have touched a national nerve. Americans are shocked by politicians’ inability to compromise and the absence of a common analysis. An increasing number of citizens are expressing deep frustration with our political process. Their main message is simple: The country deserves better, and it desperately needs more responsible economic governance.
When the debt ceiling is finally increased, our political leaders should lose no time in trying to channel this surge of popular activism into a force to improve prospects for the economy. This should be done through a more informed national dialogue about the structural impediments to growth and jobs. The president should chair a committee representing the two major political parties with members from labor, business and academia — a new “Gang of Six.” This panel should have a broader mandate than the president’s fiscal commission and the Senate Gang of Six, and it should be better hard-wired into the decision-making process.
Given how close we are to a self-inflicted financial meltdown, I suspect that there would be broad support for such an approach. In addition to a more coherent fiscal discussion, the explicit goal would be to produce coordinated steps toward improved functioning of the housing and labor markets, enhanced job retraining and retooling, strengthening education, overcoming uneven bank lending, and rebuilding critical infrastructure through thoughtful public-private partnerships. By working for a productive national dialogue, America would finally develop and communicate a clear medium-term framework to reverse the weakening of the U.S. economy and the erosion in its global standing.
President Obama was right when he said in January that America faces a “Sputnik moment.” But the scope of what is needed today goes well beyond what the president envisaged at the time of his State of the Union speech.
Our national leaders must find the courage and wisdom to overcome a highly damaging standoff on the debt ceiling. And the next step is equally important: to use the current political shambles as a catalyst for a renewed sense of common purpose and a better economic future. If this moment is not seized skillfully, the bickering of recent weeks will pale in comparison to what lies ahead as economic growth stalls further, unemployment increases, the burdens of debt and deficit worsen, income and wealth inequalities intensify, and foreigners reassess their confidence in the U.S. economy.
The writer is chief executive and co-chief investment officer of the investment management firm Pimco.
July 27, 2011
Restive G.O.P. Yielding to Boehner Plan on Budget
By JENNIFER STEINHAUER and CARL HULSE
WASHINGTON — An increasing number of House members yielded to Speaker John Boehner’s blunt command to line up Wednesday behind his budget bill even as his staff moved frantically to alter it in an attempt to resolve the looming fiscal crisis. Congressional leaders alternately voiced optimism, determination and a haggard frustration as they struggled to make both the dollars and the votes add up.
The Congressional Budget Office, which on Monday night forced the Republican leaders back to the drawing board by ruling that their plan fell short of their promises, came back Tuesday with a verdict on Mr. Boehner’s latest revisions, declaring that they would cut spending by $917 billion over ten years. His plan would now raise the debt ceiling by $900 billion, requiring another set of decisions in just a few months.
“CBO’s analysis confirms that the spending cuts are greater than the debt hike – affirming that the House GOP bill meets the critical test House Republicans have said they will insist upon for any bill to raise the nation’s debt ceiling,” said Kevin Smith, the communications director for Mr. Boehner.
But the Senate’s majority Democrats unanimously lined up in opposition, sending Mr. Boehner a letter declaring that they all intended to vote against his plan if the House passed it.
Earlier in the day, the budget office told the Democratic side in the Senate that its approach, including savings claimed from winding down the wars in Iraq and Afghanistan, would produce $2.2 trillion in savings over 10 years — enough, if the Republicans would accept the assumptions, to raise the debt ceiling for long enough to avoid replaying the standoff next year in the middle of the 2012 election campaign.
Senator Harry Reid of Nevada, the majority leader, said that with modest “tweaking” his proposal could now form the basis of a “true compromise,” but House Republicans seemed to be solidifying their own position, and the partisan momentum seemed to be pushing the two chambers ever further apart from an ultimate deal.
Although credit rating agencies continued to maintain a fairly sanguine stance considering the high stakes, the markets turned nervous. The Standard and Poor’s 500 Index declined more than 2 percent while the technology heavy Nasdaq composite fell 2.65 percent.
Members of the House Republican caucus said after a morning meeting that Mr. Boehner opened by urging the rank and file to “get your ass in line,” but then listened as many of them voiced lingering concerns.
Insisting to members that their bill, rather than the one offered by Senate Democrats, was the path to an agreement, Mr. Boehner added: “This is the bill. I can’t do this job unless you’re behind me,” recalled people who attended the meeting.
Mr. Boehner was able to solidify support for the proposal as some who opposed his proposal suggested they would change their minds.
“We’ve got this back and forth between have we cut enough, how much have we cut, how do we get a long-term solution on this.” said Representative James Lankford, Republican of Oklahoma. “I like tea sweet enough to stand the spoon up in it,” he said. “This is not super sweet tea. But it is not unsweetened, either.”
Representative Jeff Flake, Republican of Arizona, though, who remains opposed, said he would like to see more of the savings in the early years.
“This may be the last train leaving the station,” he said. “That certainly weighs on people’s minds.” But he added, “A lot of us recognize the most meaningful part of an agreement is what you’re willing to do immediately.”
Amid the bickering and tinkering, it was hard to see how a compromise might be reached in a matter of days. But despite the delays, it seemed that the Congressional machinery would ultimately grind its way past the stage of feinting and maneuvering, and toward actual voting on the House and Senate floors. Once the yeas and, just as important, the nays have been counted, the real bargain-making might resume.
“I think we’re going to solve this,” Senator Richard J. Durbin of Illinois, the assistant Democratic leader, said on NBC’s “Today” show. But he called the latest delay “a bitter lesson” and accused the Republican leadership, which had offered a plan that fell short in dollars and in the House whip count, of bluffing “with other people’s chips.”
“What we’re facing here is a Republican caucus that is basically showing its political bravery by giving up Medicare benefits for elderly people, by increasing the cost of student loans for working families, by cutting money for medical research,” he said.
Mr. Boehner’s troubles piled up late Tuesday afternoon when the Congressional Budget Office said his plan would cut spending by $850 billion during the next decade — about $150 billion less than the $1 trillion increase proposed for the debt ceiling.
On Tuesday morning, the budget office published its verdict on the competing plan offered, but not yet scheduled for a vote, by Senator Reid.
It would save $2.2 trillion over 10 years, less than the $2.7 trillion that the Democrats had claimed. Even discounting the savings allowed from the costs of the wars (about $1.04 trillion) and savings on interest as borrowing declines (about $250 billion), that would mean $900 billion in savings in a side-by-side comparison with the Republicans’ $850 billion as tallied by the budget office.
The scoring was better news for Mr. Reid than for Mr. Boehner, who quickly retreated from his bill once the budget office scored it on Tuesday night and was preparing to huddle with his caucus on Wednesday morning instead of moving to a vote on the floor.
House Republican leaders were forced on Tuesday night to delay a vote scheduled on their plan to raise the nation’s debt ceiling, as conservative lawmakers expressed skepticism and Mr. Boehner said he would come up with more cuts to satisfy the scorekeepers at the nonpartisan budget office.
The scramble to come up with a plan that could be put to a vote, now moved from Wednesday to Thursday, represents a test of Mr. Boehner’s ability to lead his restive caucus. The expected showdown over the legislation is the culmination of months of efforts by Tea Party-allied freshmen and fellow conservatives to demand a fundamentally smaller government in exchange for raising the federal borrowing limit.
Mr. Boehner, of Ohio, rolled out a two-stage plan on Monday that would allow the $14.3 trillion federal debt limit to rise immediately by about $1 trillion in exchange for $1.2 trillion in spending cuts. The plan tied a second increase early next year to the ability of a new bipartisan Congressional committee to produce more reductions.
The plan was met with skepticism — and in many cases outright rejection — by several conservative House members who said its savings did not go far enough. President Obama and most Congressional Democrats also have rejected the proposal, saying that it is only a short-term solution and that it could lead to market uncertainty and instability.
Republican leaders said they would probably rework it to in a way that would reflect the decreased savings by raising the debt limit by less than $850 billion. Such a change would mean that the Obama administration would need to make another request for an increase in a matter of months, making the deal even less palatable to Democrats.
“As we speak, Congressional staff are looking at options to adjust the legislation to meet our pledge,” Mr. Boehner said late Tuesday night in a prepared statement. “This is what can happen when you have an actual plan and submit it for independent review — which the Democrats who run Washington have refused to do.”
His spokesman, Mr. Buck, said on Wednesday that Mr. Reid, too, should rewrite his plan to account for the budget office’s critique.
“Speaker Boehner’s plan is not a compromise,” Mr. Reid said, after meeting with Senate Democrats, referring to the earlier version of the bill. “It was written for the Tea Party and not the American people. Democrats will not vote for it. Democrats will not vote for it. It’s dead on arrival in the Senate, if they get it out of the House.”
Before Mr. Boehner postponed the vote on his measure, the White House had sent a two-sentence message to Congress, saying that if the Boehner bill landed on Mr. Obama’s desk, “the president’s senior advisers would recommend that he veto this bill.”
Although Wall Street analysts and some Republicans expressed doubt that time would really run out on Aug. 2, leading to a possible default, the White House said that the Treasury’s estimate of the deadline was not a charade.
Treasury Secretary Timothy F. Geithner “has exercised all the wiggle room available to him,” said Jay Carney, the White House spokesman.
Moody’s Investors Service warned mutual fund clients that the impasse was threatening money-market mutual funds. “Direct risks include the potential for a missed interest or principal payment on government bonds for a short period of time, as well as incremental weakening of the overall credit quality of money-market fund portfolios that have U.S. government exposure,” the ratings company, based in New York, said in a statement.
The president of another rating agency, Standard & Poor’s, also said that deficit-reduction plans currently being considered in Congress could be sufficient to allow the United States to keep its triple-A credit rating.
But the official, Deven Sharma, disavowed recent news reports that quoted an S.&P. analyst as saying that Congress would need to achieve at least $4 trillion in deficit cuts over 10 years to maintain the country’s triple-A rating.
Mr. Sharma told a House subcommittee that the $4 trillion figure was “within the threshold” of what the agency thinks is necessary. But he declined to draw a bright line, saying only that “some of the plans” being considered on Capitol Hill could reduce the U.S. debt burden to a level that was “in the range of the threshold of a triple-A rating.”
An earlier version of this article misidentified Representative Jeff Flake of Arizona as Floyd Flake.
Sarah Wheaton, Jada F. Smith and Jackie Calmes contributed reporting.
Can’t We Do This Right?
By THOMAS L. FRIEDMAN
There is only one thing worse than Republicans and Democrats failing to agree to lift the debt ceiling, and that is lifting the debt ceiling without a well-thought-out plan and with hasty cuts totaling trillions of dollars over a decade. What business do you know — that is still in business — that would operate this way: making massive long-term cuts, negotiated by exhausted executives, without any strategic plan? It certainly wouldn’t be a business you’d expect to thrive. Maybe you can grow without a plan. But if you cut without a plan, you will almost surely hit an artery or a bone that could really debilitate you. That, I fear, is where we are heading.
Stop for a minute and ask: What would it look like if we were approaching this problem properly?
For starters, two years ago Congress and the Obama administration would have collaborated on a series of hearings under the heading: “What world are we living in?” They would have included a broad range of business, education and technology leaders testifying about what are the major trends and opportunities that are expected to shape the job market for the next decade. Surely, the hyperconnecting of the world, the intensification of globalization and outsourcing, the challenges of energy and climate and the growing automation of the work space that is rapidly increasing productivity with fewer workers all would have figured prominently.
Then we would have put together “The National Commission for 21st Century America,” with this assignment: Given these big trends, what will America need to thrive in this world and how should we adapt our unique formula for success?
Yes, we have developed such a formula over the course of American history, and it is built on five basic pillars: educating the work force up to and beyond whatever technology demands; building the world’s best infrastructure of ports, roads and telecommunications; attracting the world’s most dynamic and high-I.Q. immigrants to enrich our universities and start new businesses; putting together the best regulations to incentivize risk-taking while curbing recklessness (not always perfectly); and funding research to push out the boundaries of science and then let American innovators and venture capitalists pluck off the most promising new ideas for new business.
Only after we had done all that would we then sit down with a blank sheet of paper and say, “O.K., given our current fiscal predicament, where should we cut spending and where must we raise new tax revenues so that we can bring our government back to solvency and, at the same time, reinvigorate our formula for growth and success.”
After all, “we don’t just need a plan for regaining American solvency. We need a plan for maintaining American greatness and sustaining the American dream for another generation,” argues Michael Mandelbaum, the Johns Hopkins University foreign policy expert (and co-author with me of a forthcoming book). “Such a plan requires cutting, taxing and spending. It requires cutting because we have made promises to ourselves on Social Security, Medicare and Medicaid that we cannot keep without reforming each of them.”
But we cannot possibly generate the savings — or the new investments we need in our formula for success — by just taking funds from these social programs and shredding the social safety nets, adds Mandelbaum. “That would trigger a backlash against free-market capitalism. And free-market capitalism is the engine of our growth, and growth is the best way to reduce the deficit.”
That is why we need to raise new tax revenues as well — so we can simultaneously shrink the entitlements programs, but still keep them viable, and generate the funds needed to strengthen all five parts of our growth formula. Anyone who says that either entitlement reform or tax increases are off the table does not have a plan for sustaining American greatness and passing on the American dream to the next generation.
Alas, that is the Tea Party. It is so lacking in any aspiration for American greatness, so dominated by the narrowest visions for our country and so ignorant of the fact that it was not tax cuts that made America great but our unique public-private partnerships across the generations. If sane Republicans do not stand up to this Hezbollah faction in their midst, the Tea Party will take the G.O.P. on a suicide mission. No American politician was more allergic to debt or taxes than Thomas Jefferson, but he also appreciated the need to have the resources to make the Louisiana Purchase and insisted that on his tombstone it be written that he founded the University of Virginia.
Personally, I’ll support anyone with a real plan to cut spending, raise revenues and boost investment in the five pillars of our success — be they Democrats or Republicans. But if neither Republicans nor Democrats can see that we need a hybrid politics today — one that requires cutting, taxing and investing as part of a single nation-building strategy (phased in over time) — then I’ll hope for a third party that does get it and can take us where we need to go.