As reported in Huffington Post Business

Written by William Alden

NEW YORK — As politicians fight over the federal debt ceiling, Americans could start feeling the consequences of Congressional gridlock even before that limit is hit.

Moody’s Investors Service warned on Thursday that if lawmakers have not made progress in negotiations to raise the debt limit by mid-July, the ratings agency plans to reassess the nation’s sterling credit rating for a possible downgrade. The warning, coming after Standard & Poor’s lowered its outlook on U.S. debt to “negative” in April, underscores that the current political stalemate in Washington has already begun to dampen the nation’s economic prospects.

A downgrade from Moody’s on U.S. debt, or even the imminent threat of one, could itself begin to choke the economic processes that still have not fully recovered from the Great Recession. It would imply that a credit default is possible, likely causing yields on Treasury debt to rise and pushing up interest rates across the board.

“It would be an earth-shattering event,” said Scott Anderson, senior economist at Wells Fargo. “It’s taken as a given that U.S. Treasuries are a safe asset. Once you question that assumption, it shakes the foundations of global finance, and the way it’s been established over the last 50 years.”

Federal lawmakers have been locked in a debate over raising the nation’s legal borrowing limit, as the vote to allow the government to fund its existing obligations has been tied to a more controversial legislative agenda. Congressional Republicans insist they will not vote to raise the limit without also achieving measures to reduce the federal deficit, while economic officials in the Obama administration warn that procrastination on the debt ceiling vote could have disastrous consequences.

The country could be forced to default if the limit is not raised by August 2, Treasury Secretary Tim Geithner said in a letter to Congress last month.

But the economic pain could begin before that date. The risk of a default by the U.S. government has risen, Moody’s Investors Service said in a note posted to its website. Moody’s incorporates these considerations into its credit ratings, which are treated by many investors as authoritative assessments of credit quality. Investors use these ratings in their decisions to buy or sell a security.

The country will keep its top rating if the government does not default, Moody’s said. But if the agency determines there isn’t significant progress on a deal by mid-July, it will initiate the process that could lead to a downgrade, the agency said in the release.

“Although Moody’s fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations,” the note reads. “The heightened polarization over the debt limit has increased the odds of a short-lived default.”

Moody’s added that its long-term assessment would also depend on lawmakers’ hammering out a plan to reduce the federal deficit. S&P sounded a similar note in April, saying it could downgrade U.S. credit if lawmakers don’t settle on a plan to reduce the deficit and debt by 2013.

Investor confidence in Treasury debt began to show cracks on Thursday. Yields on U.S. debt have been low for the past several months even as politicians fight over the debt limit, suggesting that investors believe the government will not ultimately default. But yields edged up on Thursday as the value of the debt fell.

The 10-year Treasury note was yielding nearly 3.03 percent on Thursday, after closing on Wednesday at 2.95 percent. Rising interest rates suggest investors perceive the debt as risky, demanding higher payment in compensation for this lack of safety.

As congressional negotiations drag on, this trend in bond markets could continue, said Anderson, the Wells Fargo economist. Higher Treasury rates would make borrowing more expensive for businesses and individual Americans. Especially in light of Friday’s dismal jobs report, any further economic strain should be avoided, Anderson said.

“The markets would start pricing in the possibility of default even before the drop-dead deadline,” he said. “We can’t deal with another shock.”

James
Pethokoukis

Politics and policy from inside Washington

 

So I took a crack at the budget
simulator
cooked up over at the NYTimes Web site. It starts out with a
projected 2015 deficit of $418 billion and a projected 2030 deficit of $1.355
trillion. My goal was to do it through 100 percent spending cuts.

nytimes

Here is what I did:

1.  Eliminated earmarks  ($14 billion)

2. Cut the pay of civilian workers by 5 percent ($17 billion)

3. Reduced the federal workforce by 10 percent ($15 billion)

4. Reduced nuclear arsenal and space spending  ($38 billion)

5. Reduce military to pre-Iraq War size and further reduce troops in Asia and
Europe ($49 billion)

6. Reduce Navy and Air Force fleets ($24 billion)

7.  Cancel or delay some weapons programs ($18 billion)

8. Reduce the number of troops in Iraq and Afghanistan to 60,000 by 2015
($149 billion)

9. Enact medical malpractice reform ($13 billion)

10. Increase the Medicare eligibility age to 68  ($56 billion)

11. Reduce the tax break for employer-provided health insurance ($157
billion)

12. Cap Medicare growth starting in 2013 ($562 billion)

13. Raise the Social Security retirement age to 70 ($247 billion)

14. Reduce Social Security benefits for those with high incomes ($54
billion)

15. Tighten eligibility for disability ($17 billion)

16. Use an alternate measure for inflation ($82 billion)

In the end, my budget would have a minuscule 2015 deficit of $80 billion and
a 2030 surplus of $187 billion. Now I would have preferred an option for deeper
domestic spending cuts. The Heritage
Foundation has ideas
for over $300 billion worth. And I think eliminating
hundreds of billions of tax breaks and lowering tax rates across the board would
boost growth and revenue. The simulator only lets me use the Bowles-Simpson plan
which would lower rates by cutting tax expenditures —  but uses some of the
dough for deficit reduction. Plus, the simulator assumes no impact on growth
from higher taxes or lower taxes. Also, there is no doubt the Medicare cuts
would be rightly labeled as “rationing.”  But Americans really have only two
choices, I think: severe government healthcare rationing (since right now
healthcare costs are rising much faster than GDP growth) or voucherization.

The simulator also shows how tough it is to balance the budget through tax
increases alone. If you went for every tax increased offered, you would still
have a slight deficit in 2030. And again, that assumes zero impact on economic
growth from a) letting all the Bush tax cuts expire; b) eliminating tax breaks;
c) adding a national sales tax, carbon tax and bank tax. That is a fantasy.
Letting all the Bush tax cuts expire, for instance, would probably knock 2-3
percentage points from GDP next year.

For Our Own Deficit

May 13, 2011

Well……. we did avoid a government shutdown.

Thanks to some last minute wrangling down and DC,

the US economy lives on…..

limping until the end of September 2011.

All eyes now have turned to the vote on raising the debt ceiling.

Officially, the government states we should pass the debt limit sometime in early to mid-May.

What would happen if the Congress votes not to raise the debt ceiling?

Steps can be taken at that time to start shuffling who and what to pay…..

That should buy us another month.

Reports are that if the debt ceiling is not raised by the beginning of July,

The US will go into default.

What would happen should the US go into default?

  • The United States would default on its bond payments and would see its credit rating fall dramatically
  • Bondholders’ would be unable to receive interest payments
  • Investors would have a difficult time trusting the United States to honor its obligations and demand for long term United States debt would fall.
  • Senior citizen would not receive their Social Security checks
    • loss of these dollars would likely further hurt domestic consumption in the United States and place an undue strain on the budgets of senior citizens
  • A default will lead to increased risks for owning U.S. bonds.
    • Increased risks equal higher rates
    • Business loan borrowers and individuals looking for personal loans would see their borrowing costs rise astronomically
    • home or auto loan rates will be drastically higher, since access to credit would be at a premium

           

That’s just a snap shot of what to expect.

We made it thru the Great Recession.

Many experts feel this would throw the US into another Great Depression.

.

Not much time to dawdle!!!

Several weeks ago….

Standard and Poors, for the first time lowered its long term outlook for the federal government’s fiscal health……

From stable

To negative……..

They warned of serious consequences

If the lawmakers fail to reach a deal to control the massive federal deficit

So when is Congress expected to start tackling this issue?

It is reported they will start meeting on this issue sometime in June.

Congress just passed the 2011 budget!!!!

Heck, we still have 5 months left until the 2011 fiscal year is over.

Yet they will resolve the debt issue in 30 days?

America is a great country

No matter what is said

There is no place better to live

Everyone would love to enjoy

The freedoms we take for granted.

The debt ceiling and the deficit…….

Should not be a political issue

It is not going to go away

What are we doing to provide a secure future for the next generation?

We must carefully look at all the programs

Analyze what works

And put a true dollar value on sustainability

We are at a fork in the road

And the decisions we make

Will determine what path we go down

WASHINGTON — Congressional negotiators held what were described as “productive” talks Tuesday afternoon in an effort to pass a spending measure that would cut tens of billions of dollars from the federal budget. But with just days remaining before the federal government runs out of money, there was only muted optimism that lawmakers would be able to avert a government shutdown.

The above paragraph was ripped from the headlines on Wednesday April 6th

What do you make of all this talk?

You can turn on any cable channel and the coverage is 24/7. The American press seems to be obsessed with the moment.

Japan??? ………That happened over a month ago

Libya…….That sound bite may last 30 seconds

Now we are faced with a Government shutdown!!!!….

Is it possible?

Will it happen?

I found myself being drawn to this topic. Numbers are constantly being discussed.

What are we really dealing with?

Can we just focus on making cuts to 12% of the budget and tackle the deficit issues?

What about the sacred cows!!!!!!

Defense….Social Security….Medicare…..Medicaid

Let’s look at some numbers:

On February 14, 2011, President Obama released his 2012 Federal Budget.

The report updated the projected 2011 deficit to be $1.645 trillion.

This is based on estimated revenues of $2.173 trillion and outlays of $3.818 trillion.

Observations

The federal deficit of $1.645 trillion is for 1 year (2011)

The federal deficit of $1.645 trillion is 75.7% of the $2.173 trillion total revenue the Government brought in last year.

The US Government is currently funding only 56.9% of their current expenses ($3.818 trillion) with the total revenue they received ($2.173 trillion).

The federal deficit of $1.645 trillion helps fund 43.1% of the $3.818 trillion in expenses.

You hear Congress arguing over whether to cut $30 billion or $40 billion in expenses.

That number may seems like a large amount, but what is it in the scheme of things?

Let’s take a quick look at where we are spending this money.

The federal budget in 2011 was projected at $3.83 trillion in total spending.

Below is a breakdown of the budgeted expenses for 2011. (This budget has never been passed, yet!!!)  

Obama’s new 2012 budget calls for reducing these cost by $12 billion dollars to $3.818 trillion from the proposed 2011 figure of $3.83 trillion.

You can now……. all play along….

Where do you want to take the $12 billion from?

$787.6 billion in pensions, $898 billion in health care expenditures, $140.9 billion for education, $928.5 billion in defense spending, $464.6 billion in welfare spending, $57.3 billion in protective services such as police, fire, law courts, $104.2 billion for transportation, $29 billion in general government expenses, $151.4 billion in other spending including basic research, and          $250.7 billion on interest payments.

Let’s not get too aggressive…..

What are our options?

 

How do we reduce cost and lower the deficit?

There is some talk of cutting all the expenses, 5%  across the board.

They’ll be no discrimination, everyone will take a hit.

That would reduce overall cost by $190.9 billion.

Guess what…..

the deficit would still be $1,454.1 trillion for this year.

Now what?

…………..I’m thinking…….I’m thinking

More factors to think about

 

The overall deficit is just under $15 trillion,

Our existing $1.645 trillion deficit makes up just under 11% of the overall deficit.

Recently, Robert Gates said the Pentagon has identified $178 billion in cuts for the five years from fiscal year 2012 to 2016. The Pentagon plans to reinvest about $100 billion of that into its own services, leaving the remainder for deficit reduction.

Hmmmmm!

Gates can identify $178 billion in cuts but wants to keep 57% of it?

This week, Portugal was looking to raise money by selling 6 month T -Bills for 5.117%.

Just 60 days ago the same T Bill was selling for 2.984%.

The US is currently selling T Bills for under 0.5%.

What do you think will happen if there is a Government shutdown?

There is the looming question of raising the debt ceiling.

How long before the world loses confidence in our ability to control cost?

Somehow I think we really took our eye off the ball.

Just this morning, experts were discussing the fact that the Government is expected to run with a deficit,

But……. $4 to $5 trillion is a more acceptable number.

How do we get from $15 trillion to $5 trillion?

Let’s try cutting the deficit by $1 trillion a year.

That means ………

In 10 years we can be within the acceptable numbers.

If we have already budgeted for a deficit of $1.645 trillion; to save $1 trillion this year, we would have to cut expenses $2.645 trillion dollars.

That means, we cut expenses from $3.818 trillion to $1.173 trillion.

We would only have to cut expenses by 70%!!!!

That doesn’t sound too promising!

How about we take 20 years to get the deficit from $15 trillion to $5 trillion?

Then we would only have to cut expenses 35%.

Do I hear 30 years?

Where am I going with all this fuzzy math?

I wish I knew!!!

No one seems to want to stand up and address any of these questions?

Ask anyone, we already feel we pay our fair share of taxes.

Can the American public be asked to pay more?

If you want to get reelected,

you better not be talking about raising taxes!

Cut our taxes but don’t dare cut our programs….

Is the US Government up for the challenge?

Will they be able to make the tough choices?

Or will the push the ball forward.

At HBS we pride ourselves on providing Smart Solutions for Smart Business

I am not sure where we would place this budget category?

I am just trying to make some sense of it.

Your comments are welcomed.

You may email george@hbsadvantage.com

Visit us on the web www.hutchinsonbusinesssolutions.com

Written by Jon Ward as reported in Huffington Post

WASHINGTON — The big numbers from Paul Ryan’s budget: It will reduce spending by $6.2 trillion over the next decade and reduce the deficit by $4.4 trillion.

It also cuts the top income tax rate by nearly a third, from 35 percent to 25 percent.

A big part of the House Budget Chairman’s plan rests on the assumption that President Barack Obama’s health care law will be repealed. Over the next decade, that would cut $1.4 trillion in spending alone, according to Ryan’s budget. Those savings, however, wouldn’t go directly to deficit reduction, because Ryan would also repeal the elements of health care reform that are aimed at raising revenue or reducing costs.

The Wisconsin Republican’s budget spends less on nearly every major category of the budget. Over the next decade, Ryan (R-Wis.) wants to cut $389 billion from Medicare, the public health insurance program for seniors. Over the same period, Ryan’s budget puts $735 billion less toward Medicaid, which benefits Americans too poor to afford private insurance. Discretionary spending on domestic programs is also reduced by $923 billion.

Two exceptions are security and defense spending and spending on Social Security, the public pension program for the elderly. Both are kept steady and relatively unchanged from Obama’s proposed budget.

A draft proposal from Ryan’s House Budget Committee says that under his plan, the national debt would be $1.1 trillion less than it would be over the next five years under Obama’s budget, and would add $3 trillion less to the debt than Obama’s budget proposal over the next decade. Ryan’s budget proposal would bring the debt held by the public to $13.9 trillion by 2016 and $16 trillion by 2021, compared to $15 trillion in 2016 and $19 trillion in 2021 under the president’s proposal. (The full national debt of just over $14 trillion also includes money owed to the Social Security and Medicare trust funds, but the public figure is the one normally used for budget forecasts.)

Though Ryan’s plan would reduce the size of the national debt as a portion of the economy – which is the key factor when considering the country’s obligations to creditors – the addition of new debt in the short term shows the gap between talk of not raising the debt ceiling by many Republicans and fiscal reality.

Ryan’s plan has $40 trillion in spending over the next 10 years compared to $34.9 trillion in revenues. Obama would spend $46 trillion in the coming decade while bringing in $38.8 trillion in revenues. So Ryan’s plan would still result in the government spending $5.1 trillion more over the next decade than it brings in, but that’s less than the $7.2 trillion in deficit spending that Obama has proposed.

The most fundamental difference between the competing budget proposals is seen in the way they envision the size of government’s imprint in the economy, as measured by spending and revenues as a percentage of gross domestic product.

Obama’s budget plan would take spending as a percentage of gross domestic product (GDP), the total economic output of the American economy, from 25.3 percent this year to the 22 percent range for much of the next decade. But by the end of the 10 year horizon, his plan has spending back at 23 percent. Revenues, meanwhile, which are currently at an anemic 14.4 percent, would creep up to 19 percent by 2015 and then hit 20 percent in 2021.

It would be the highest amount of government spending since World War II. During the 12-year presidency of Franklin Delano Roosevelt, spending went from 8 percent of GDP to 41 percent, driven by FDR’s New Deal but even more so by war spending.

During Harry Truman’s administration, spending was cut in half, from 41 percent of GDP down to 20 percent, and went down further to 18 percent under Dwight Eisenhower. It stayed at 18 percent of GDP through the John F. Kennedy presidency, crept up to 19 percent under Lyndon Johnson, and then went up to 20 percent while Richard Nixon was in the White House. Gerald Ford brought spending back down to 19 percent of GDP, it then went up to 22 percent during Jimmy Carter’s term, down to 21 percent under Ronald Reagan’s two terms and George H.W. Bush’s four years as commander in chief. Bill Clinton brought spending back down to 18 percent of the U.S. economy.

No president since FDR has increased spending as a percentage of GDP by more than George W. Bush, taking it from 18.4 percent of GDP to 22.8 percent.

Obama’s budget does not show what happens beyond the 10-year window. So, compared to George W. Bush’s spending, he seems to be about on par. However, projections from the Congressional Budget Office (CBO) show spending growing at its current pace will grow to more than 26 percent of GDP in 2022, over 32 percent of GDP in 2030, 38 percent of GDP in 2040, and 45 percent of GDP by 2050, with the bulk of that spending driven by ever-rising health care costs.

Revenues under CBO projections would not move above 19 percent of GDP, leading to a gap between spending and revenues that would be difficult to sustain.

Ryan said a computer simulation program of what would happen in the future “crashes in 2037, because it can’t conceive of any way in which the U.S. economy can continue because of this massive burden of debt.”

Ryan’s plan would move spending back to historic levels, keeping it at 20 percent of GDP through 2030, and actually reducing it to under 19 percent by 2040. Ryan’s plan predicts revenues growing to 19 percent of GDP by 2040, allowing the national debt to be reduced over time.

The proposal landed in the middle of a busy news cycle where Washington is consumed with a spending fight over the current fiscal year budget, a much smaller portion of government spending that nonetheless will shut down the federal government if it is not resolved by Friday.

“Right now we’ve got some business in front of us that needs to be done,” Obama told reporters Tuesday afternoon, declining to respond to Ryan’s budget.

The reaction to Ryan’s plan was predictably split along ideological lines, though even those who supported the broad contours of Ryan’s plan did not embrace it in all its detail.

Robert Borosage, co-director of the liberal Campaign for America’s Future, delivered the harshest rebuke of the day to Ryan’s plan.

“This is being hailed as courageous. It isn’t courageous; it is corrupt,” Borosage said in a statement.

“Rep. Paul Ryan’s budget plan will push rising health care costs onto those least able to afford them – the elderly, the disabled and the poor,” Borosage said. “It will do nothing to curb the rising costs imposed by the powerful complexes – insurance and drug companies, private hospitals – that now force Americans to pay twice per capita of any other industrial nation for worst results.”

Rep. Chris Van Hollen, the Maryland Democrat who is Ryan’s foil as the Budget Committee’s ranking member, said the plan was a “lopsided approach” to deficit reduction that took too much from the disadvantaged and elderly in order to benefit wealthy Americans and big business.

“Behind the sunny rhetoric of reform, the Republican Budget represents the rigid ideological agenda that extends tax cuts to the rich and powerful at the expense of the rest of America – except this time on steroids,” Van Hollen said in a statement.

However, David Walker, the former U.S. comptroller general and founder of the Comeback America Initiative who is generally a fiscal hawk, said Ryan “should be commended for having the courage to lead in connection with our nation’s huge deficit and debt challenges.”

“His budget proposal recognizes that restoring fiscal sustainability will require tough transformational changes in many areas, including spending programs and tax policies,” Walker said.

Among the 2012 Republican presidential hopefuls, only former Minnesota Gov. Tim Pawlenty was quick to comment on Ryan’s plan.

“Thanks to Paul Ryan in Congress, the American people finally have someone offering real leadership in Washington,” Pawlenty said, but he otherwise steered clear of the details and focused on the coming fight over the debt ceiling.

“President Obama has failed to lead and make tough choices his entire time in the White House. While the budget is going to be debated for several months to come, the more immediate issue we face is President Obama’s plans to raise the debt ceiling next month. That’s a really bad idea,” Pawlenty said in a statement.

“With over $14 trillion debt already, we should not allow Washington’s big spenders to put us further in the hole. We must get our fiscal house in order with real spending cuts and with real structural reforms that stop the spending spree before it bankrupts our country,” he said.

Even the conservative Heritage Foundation, which heralded Ryan’s plan as “a monumental budget proposal for monumental times,” dinged it for insufficient levels of defense spending and for not addressing Social Security.