Basic details of the debt deal (simplified)


  • Guarantees a debt limit hike of $2.4 trillion.
  • Treasury is granted $400 billion of immediate new borrowing authority. This means they intend to spend it.
  • Gives Obama the green light to extend the debt limit by $500 billion this fall, subject to a vote of disapproval by Congress (would need 2/3 of both houses to block).  Again, extending the debt limit means they intend to spend it!
  • This new opportunity for more spending with the $900 billion increase in the debt ceiling is supposedly offset with $900 billion of discretionary spending cuts to be spread out over 10 years. The federal government gets to spend more now in exchange for cuts over ten years!
  • The deal gives Obama authority to raise the debt limit by $1.5 trillion, again subject to a vote ofdisapproval by Congress.  This additional access to the US Credit Card is available if matching cuts are made, or if Congress adopts and sends to the states for ratification a balanced budget amendment to the Constitution. (Senate Majority Leader Harry Reid has already called the vote “dead on arrival” in the Senate. The Balanced Budget amendment requires a 2/3 majority in both houses to pass.)


 

  • Forms “Super Congress” of 12 members of Congress (6 from each party) tasked with a plan by November 23rd to reduce deficits by a minimum of $1.2 trillion. Remember that deficits or shortfalls can be reduced with spending cuts, tax increases, or a combination of both.  If a majority of the Super Congress Committee agrees on a plan, the plan goes to a vote in the House and the Senate.
    • The “poison pill” trigger: if the Committee fails to reach $1.2 trillion in deficit reduction, it triggers an automatic “across the board” spending cut of $1.5 trillion – half to come from domestic spending (including cuts to Medicare providers) and half from defense spending.The White House Budget Office would impose these cuts. Medicaid, Social Security, veterans’ and federal employee retirement benefits are exempted from what the White House will consider eligible for cuts.

Cuts from the 2012 and 2013 budgets are insultingly small.  The Deal caps “discretionary spending” for 2012 at $1.043 trillion, just $7 billion below 2011 levels and only $44 billion below inflation-adjusted “baseline” increases.  Remember, baseline increases are set by law for a 9.5% automatic increase in spending over each previous year.  2013 discretionary spending would be only $3 billion below current levels.

Warning! Here’s where your head explodes:  The Deal avoids a pre-election year showdown over the 2012 budget because the deal “deems and passes” the 2012 budget!  What’s “deem and pass,” you say?   It is a particularly dirty legislative maneuver that allows Congress to consider the budget passedwithout ever actually having to vote on it.  This scraps the Ryan 2012 proposed budget plan. Representative Paul Ryan voted for The Deal.

My Cynical Observations:

Congress has a history of failure when it comes to motivating itself to reduce the size and scope of government – even with threats of penalties.  To get itself out of a tight spot, Congress could declare an “emergency” or an extenuating circumstance to change the November 23rd deadline or remove the penalties in this deal altogether.  Sanctions only matter if Congress cares about political embarrassment for reversing course, and since when has flip-flopping ever been unusual in Congress?

The Deal is designed to get tax increases back on the table before the 2012 election. The opportunity to beat the class warfare drum and “soak the rich” will be a strong message to a population faced with rising unemployment and under-employment.  In addition, the “poison pill trigger” sets the stage to pit defense spending against tax increases.  I spoke with a Congressman yesterday who voted against The Deal.  He posed, “What if things continue to heat up around the world with North Korea, with the threats to Israel, or with another attack on our homeland?  Because of this deal, we may be faced with choosing between deep cuts in our military or tax increases at a time when we can least afford neither.” Ah…I think the Congressman has spied one of the landmines purposefully embedded in The Deal!

One Congress cannot bind its successors. Since this deal makes access to more borrowing and spending immediate and pushes cuts down the road, serious downsizing of the federal government will depend on what the voters do in 2012.

Obama will find a way to burn through $2 trillion plus in the next sixteen months. There’s already talk of a new “jobs plan,” which during election time is just another name for “walking around money.” Perhaps more labor union pay-offs are in the works?

The Deal’s linguistic trickery is pretty evident. Saying we won’t be in Afghanistan in ten years is not a “cut.”  Using that reasoning, I could say that I cut spending this year in my household budget by not buying a new H3 Hummer.

Even a small spike in interest rates on our exploding federal debt will dramatically increase the cost of government.

 

Where will this $2 trillion plus come from? Will another country lend it to us?  More than likely it will come from the Federal Reserve Monopoly Money Stash.  This means further debasement of our currency, setting the stage for hyperinflation.  At some point, this crazy spending and printing of Monopoly money has to stop, and it may possibly end by the house of cards simply crashing down around us.

Finally, this week’s Emergency Debt Ceiling Deal does nothing to provide certainty in our economyfor investors, small businesses, or folks like us who are paying attention.  Uncertainty is a job-killer.  Uncertainty stunts and eventually kills off economic growth because we have no idea what lies ahead in taxes and regulation.  With current tax rates expiring soon, we know the cost of “paying our fair share” is already scheduled to go up…

Dec. 31, 2011: many tax breaks expire, including the Congressional “fix” that prevents some 20 million middle-class families from having to pay the AMT – the alternative minimum tax.  Congress may well forget this year’s patch and avoid having to figure out “how to pay for it.”  This is typical Big Government – they look at what we earn as theirs first, and they just allow us to keep some of it.

Jan. 1, 2012: workers see reduced paychecks as a temporary 2% cut in the Social Security tax expires.

Dec. 31, 2012: current tax rates expire (Bush tax cut extensions); cut in estate tax expires.

Jan. 1, 2013: “Medicare surtaxes” on income above $250,000 per couple kick in to help fund ObamaCare with a 0.9% surtax on salaries and a 3.8% tax on capital gains, interest, and dividends.

Where do we go from here?

“If you will not fight for right when you can easily win without bloodshed;

if you will not fight when your victory is sure and not too costly;

you may come to the moment when you will have to fight with all the odds against you

and only a precarious chance of survival. There may even be a worse case.

You may have to fight when there is no hope of victory,

because it is better to perish than to live as slaves.” Sir Winston Churchill

For the sake of our children and our children’s children, for the sake of this Shining City on a Hill, and in tribute to our Veterans…friends, we must quite simply…soldier on…

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