It's Not the Debt Limit - It's the Debt

As expected, Congress and the President reached an agreement to raise the debt limit. The full details are not yet available, but the only figure we need to know is that the agreement supposedly agrees to cut spending $2.4 trillion over the next ten years, back loaded into future years.

That’s $240 billion a year when the deficit is between $1 – 1.5 trillion. In short, Congress and the President are still spending about $1 trillion more a year than the IRS takes in.

Let’s look at it another way. Federal government spending is on auto pilot to rise 8% annually. Now it will be slightly less than 8%, perhaps 7%. The magic, or tragedy, of compound interest is that 7% annually doubles in a little less than a decade.

Assuming interest rates remain at the same low level, we will add $7.5 trillion to the existing $14 trillion national debt. If interest rates rise over the next decade, as basic economics teaches us they will, then the result will be an economic disaster for the United States. High interest rates, high inflation, and even higher unemployment will ensue. The only question is when.

That doesn’t include the damage still to be incurred by Obamacare and the rising prices in fuel and energy today, and the declining dollar.

$240 billion annually is only chump change in our current budget. Even a $4 trillion cut would only have reduced the annual deficit by $400 billion.

So who won?

The Republicans and the Tea Party – they changed the terms of debate in Washington, except that the passage of the final bill will be heavily dependent on Democratic votes.

The American taxpayer - at least for now - maybe. Wait till the new commission makes its report on Thanksgiving.

Who lost?

President Obama – he did not get his “balanced approach,” continues to sound like a broken record, and never showed leadership. He admonished House Majority Leader Eric Cantor not to call his bluff. The Republicans called the President’s bluff, and he folded. Once again the President showed he can talk the talk, but not walk the walk.

Senator Harry Reid and the Do Nothing Senate.

National security, since substantial defense cuts are on the way.

Credibility. President Reagan once agreed to tax increases for subsequent budget
cuts. Subsequent Congresses never delivered on the cuts, and President Reagan realized his mistake.

The big losers though are the American people since Congress did not succeed in substantially slowing the road to Greece.

The devil is in the details. If, apparently the new Committee does not come up with the specified reductions in spending or Congress does not approve them, then automatic spending cuts will take place in 2013 – after the election. The proposal initially seems to be a poison pill, designed to force the committee and Congress to act. Half of triggered cuts will come from the defense budget. Another chunk will come from Medicare providers.

The can, the ever expanding can, was kicked down the road, the ever shrinking road. Economic growth is essentially dead in the water.

This whole debate was politically unnecessary. The Democrats refused to raise the limit when they had total control of Congress last year. Senator Reid wanted the Republicans to have to share in the blame. In the meantime, both parties played to their base.

The $2.4 trillion is either a down payment on a larger cut or simply a lost cause.
The answer will come in November 2012.

Republicans need to win even bigger in 2012 than they did in 2010.