MMT to Ryan- Apologize NOW about the US being the next Greece

Congressman Ryan’s response to the President Obama’s State of the Union address included
something we’ve all hear a lot of ever since.

He warned along the lines that that the US could become the next Greece,
and be faced with some kind of a sudden financial crisis,
where the world would no longer lend to us,
interest rates would skyrocket,
and the US,
unable to spend,
would be down on it’s knees before the IMF begging for the needed funding.

And no one with any kind of national public forum took issue with him.
Including the President and the Democrats in Congress,
who for all appearances quietly agreed and acted accordingly.

Well, today, based on the near universal response to the S&P downgrade,
everyone now knows, or should know,
there is no such thing as the US becoming the next Greece.

The overwhelming response to the S&P downgrade by everyone from Buffet to Greenspan, and
most every financial and academic economist in the world was along the lines of:

The US is the issuer of the dollar.
It can print dollars.
So it can always make timely payments without limit.

THERE IS NO SOLVENCY ISSUE FOR THE US.
There is no such thing as the US running out of dollars to spend.
There is no such thing as the US being dependent on taxing or borrowing to get dollars to spend.

Greece is very different.
Greece, Ireland, Italy, and all the euro member nations, corporations, and households can’t print euro,
any more than the US states, corporations, and households can print dollars.
And so they are all indeed dependent on revenues from somewhere to be able to spend.

So, Congressman Ryan, please apologize NOW for being so wrong and so misleading.

There is no solvency risk for the US.
The Fed is price setter for the interest rates for the US government and the banking system, not the market,
just like the European Central Bank sets the interest rates for its banking system and its own debt.

Congressman Ryan,
your reasons for deficit reduction have vaporized.

You see,
the risk of overspending is inflation,
not solvency.

So if you want to argue for deficit reduction,
apologize NOW,
regroup,
and come back with your next round of fear mongering
about how the deficit can be inflationary,
or something like that,
and see how that flies.

Equity storm over for a bit

From Goldman:

Published August 8, 2011

* Following Friday’s downward revisions, we now expect real GDP to increase just 2%-2½% (annualized) through the end of 2012 and the unemployment rate to rise slightly to 9¼% during this period.

This is still higher than the first half, so presumably corporations will have a better second half as well, and they did just fine in the first half.

And with lower gasoline prices, consumers get a nice break there which should firm their spending on other things as well.

The tighter fiscal won’t matter for this year, and markets won’t discount what may happen in November until it’s closer to actually happening.

So still looks to me like the recent sell off in stocks was mainly technical, as the initial knee jerk sell off from the debt ceiling and downgrade uncertainties triggered further selling by those with short options positions, much like the crash of 1987.

And, like then, and unlike early 2008, the current federal deficit seems more than large to me to keep things chugging along at muddle through levels of modest growth, continued too high unemployment, and decent corporate profits and investment.

Yes, risks remain. Europe is a continuous risk, but the ECB, once again, stepped in and wrote the check. China looks to be slipping but the lower commodity prices will help US consumers maybe about as much as they hurt the earnings of some corps.

So for now, with the options related stock selling over, it looks like we’re back to calmer waters for a while.

And Congress goes back to trying to cut the deficit to put people back to work.
Someone needs to tell them they haven’t run out of dollars, they aren’t dependent on China, and they can’t become the next Greece, and so yes, the deficit is too small given the current output gap.

But until then, we keep working to become the next Japan.

S&P downgrades US on ability to pay

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said in a statement late yesterday after markets closed.

Credit ratings are based on ability to pay and willingness to pay.

David Beers of S&P knows this and has discussed this in the past.

Including direct discussion with me where he acknowledged a nation like the US always has the ability to make US dollar payments.

Therefore any downgrade would necessarily be based on willingness to pay.

In fact, I downgraded the US on willingness to pay several months ago on this website. And the debt ceiling debate more than demonstrated a willingness to default by far too many members of Congress for even consideration of a AAA rating.

So why then did David T. Beers decide to downgrade the US on ability to pay, and not explicitly on willingness to pay?

Sure looks like a case of intellectual dishonesty.
And I have no idea why.
So much for his legacy.

And, as previously discussed, markets probably won’t care, much like when Japan was even more severely downgraded.

A credit rating simply needn’t be applicable for the issuer of its own currency, as David should well know.

Consumer credit up, Friday update

It doesn’t look to me like anything particularly bad has actually yet happened to the US economy.

The federal deficit is chugging along at maybe 9% of US GDP, supporting income and adding to savings by exactly that much, so a collapse in aggregate demand, while not impossible, is highly unlikely.

After recent downward revisions, that sent shock waves through the markets, so far this year GDP has grown by .4% in Q1 and 1.2% in Q2, with Q3 now revised down to maybe 2.0%. Looks to me like it’s been increasing, albeit very slowly. And today’s employment report shows much the same- modest improvement in an economy that’s growing enough to add a few jobs, but not enough to keep up with productivity growth and labor force growth, as labor participation rates fell to a new low for the cycle.

And, as previously discussed, looks to me like H1 demonstrated that corps can make decent returns with very little GDP growth, so even modestly better Q3 GDP can mean modestly better corp profits. Not to mention the high unemployment and decent productivity gains keeping unit labor costs low.

Lower crude oil and gasoline profits will hurt some corps, but should help others more than that, as consumers have more to spend on other things, and the corps with lower profits won’t cut their actual spending and so won’t reduce aggregate demand.

This is the reverse of what happened in the recent run up of gasoline prices.

Japan should be doing better as well as they recover from the shock of the earthquake.

Yes, there are risks, like the looming US govt spending cuts to be debated in November, but that’s too far in advance for today’s markets to discount.

A China hard landing will bring commodity prices down further, hurting some stocks but, again, helping consumers.

A euro zone meltdown would be an extreme negative, but, once again, the ECB has offered to write the check which, operationally, they can do without limit as needed. So markets will likely assume they will write the check and act accordingly.

A strong dollar is more a risk to valuations than to employment and output, and falling import prices are very dollar friendly, as is continuing a fiscal balance that constrains aggregate demand to the extent evidenced by the unemployment and labor force participation rates. And Japan’s dollar buying is a sign of the times. With US demand weakening, foreign nations are swayed by politically influential exporters who do not want to let their currency appreciate and risk losing market share.

The Fed’s reaction function includes unemployment and prices, but not corporate earnings per se. It’s failing on it’s unemployment mandate, and now with commodity prices coming down it’s undoubtedly reconcerned about failing on it’s price stability mandate as well, particularly with a Fed chairman who sees the risks as asymmetrical. That is, he believes they can deal with inflation, but that deflation is more problematic.

So with equity prices a function of earnings and not a function of GDP per se, as well as function of interest rates, current PE’s look a lot more attractive than they did before the sell off, and nothing bad has happened to Q3 earnings forecasts, where real GDP remains forecast higher than Q2.

So from here, seems to me both bonds and stocks could do ok, as a consequence of weak but positive GDP that’s enough to support corporate earnings growth, but not nearly enough to threaten Fed hikes.

Consumer borrowing up in June by most in 4 years

By Martin Crutsinger

May 25 (Bloomberg) — Americans borrowed more money in June than during any other month in nearly four years, relying on credit cards and loans to help get through a difficult economic stretch.

The Federal Reserve said Friday that consumers increased their borrowing by $15.5 billion in June. That’s the largest one-month gain since August 2007. And it is three times the amount that consumers borrowed in May.

The category that measures credit card use increased by $5.2 billion — the most for a single month since March 2008 and only the third gain since the financial crisis. A category that includes auto loans rose by $10.3 billion, the most since February.

Total consumer borrowing rose to a seasonally adjusted annual level of $2.45 trillion. That was 2.1 percent higher than the nearly four-year low of $2.39 trillion hit in September.

post debt ceiling crisis update

With the debt ceiling extended, the risk of an catastrophic automatic pro cyclical Treasury response, as previously discussed, has been removed.

What’s left is the muddling through with modest topline growth scenario we’ve had all year.

With a 9% budget deficit humming along, much like a year ago when markets began to discount a double dip recession, I see little chance of a serious collapse in aggregate demand from current levels.

It still looks to me like a Japan like lingering soft spot and L shaped ‘recovery’ with the Fed struggling to meet either of its mandates will keep this Fed ‘low for long’, and that the term structure of rates is moving towards that scenario.

With the end of QE, relative supply shifts back to the curve inside of 10 years, which should work to flatten the long end vs the 7-10 year maturities. And the reversal of positions related to hedging debt ceiling risks that drove accounts to sell or get short the long end work to that same end as well.

The first half of this year demonstrated that corporate sales and earnings can grow at reasonable rates with modest GDP growth. That is, equities can do reasonably well in a slow growth, high unemployment environment.

However, a new realization has finally dawned on investors and the mainstream media. They now seem to realize that government spending cuts reduce growth, with no clarity on how that might translate into higher future private sector growth. That puts the macroeconomic picture in a bind. The believe we need deficit reduction to ward off a looming financial crisis where we somehow turn into Greece, but at the same time now realize that austerity means a weaker economy, at least for as far into the future as markets can discount. This has cast a general malaise that’s been most recently causing stocks and interest rates to fall.

With crude oil and product prices leveling off, presumably because of not so strong world demand, the outlook for inflation (as generally defined) has moderated, as confirmed by recent indicators. As Chairman Bernanke has stated, commodity prices don’t need to actually fall for inflation to come down, they only need to level off, providing they aren’t entirely passed through to the other components of inflation. And with wages and unit labor costs, the largest component of costs, flat to falling, it looks like the the higher commodity costs have been limited to a relative value shift. Yes, standards of living and real terms of trade have been reduced, but it doesn’t look like there’s been any actual inflation, as defined by a continuous increase in the price level.

However, the market seem to have forgotten that the US has been supplying crude oil from its strategic petroleum reserves, which will soon run its course, and I’ve yet to see indications that Lybia will be back on line anytime soon to replace that lost supply. So it is possible crude prices could run back up in September and inflation resume. For the other commodities, however, the longer term supply cycle could be turning, where supply catches up to demand, and prices fall towards marginal costs of production. But that’s a hard call to make, until after it happens.

With the debt ceiling risks now behind us, the systemic risk in the euro zone is now back in the headlines. Unlike the US, where the Treasury is back to being counter cyclical (unemployment payments can rise should jobs be lost and tax revenues fall), the euro zone governments remain largely pro cyclical, as market forces demand deficits be cut in exchange for funding, even as economies weaken. This means a slowdown to that results in negative growth and rising unemployment can accelerate downward, at least until the ECB writes the check to fund counter cyclical deficit spending.

China had a relatively slow first half, and the early indicators for the second half are mixed. Manufacturing indicators looked weak, while the service sector seemed ok. But it’s both too early to tell and the numbers can’t be trusted, so the possibility of a hard landing remains.

Japan is recovering some from the earthquake, but not as quickly as expected, and there has yet to be a fiscal response large enough to move that needle. And with global excess capacity taking up some of the fall off in production, Japan will be hard pressed to get it back.

Falling crude prices and weak global demand softening other commodity prices, looks dollar friendly to me. And, technically, my guess is that first QE and then the debt ceiling threats drove portfolios out of the dollar and left the world short dollars, which is also now a positive for the dollar.

The lingering question is how US aggregate demand can be this weak with the Federal deficit running at about 9% of GDP. That is, what are the demand leakages that the deficit has only partially offset. We have the usual pension fund contributions, and corporate reserves are up with retained earnings/cash reserves up. Additionally, we aren’t getting the usual private sector borrowing to spend on housing/cars as might be expected this far into a recovery, even though the federal deficit spending has restored savings of dollar financial assets and debt to income ratio to levels that have supported vigorous private sector credit expansions in past cycles.

Or have they? Looking back at past cycles it seems the support from private sector credit expansions that ‘shouldn’t have happened’ has been overlooked, raising the question of whether what we have now is the norm in the absence of an ‘unsustainable bubble.’ For example, would output and employment have recovered in the last cycle without the expansion phase of sub prime fiasco? What would the late 1990’s have looked like without the funding of the impossible business plans of the .com and y2k credit expansion? And I credit much of the magic of the Reagan years to the expansion phase of what became the S and L debacle, and it was the emerging market lending boom that drove the prior decade. And note that Japan has not repeated the mistake of allowing the type of credit boom they had in the 1980’s, accounting for the last two decades of no growth, and, conversely, China’s boom has been almost entirely driven by loans from state owned banks with no concern about repayment.

So my point is, maybe, at least over the last few decades, we’ve always needed larger budget deficits than imagined to sustain full employment via something other than an unsustainable private sector credit boom? And with today’s politics, the odds of pursuing a higher deficit are about as remote as a meaningful private sector credit boom.

So muddling through seems here to stay for a while.

Kelton responds to the Progressive Caucus Co-chair

Maddening! The Clinton surpluses were driven by the dot.com bubble and unsustainable private sector deficits. When the bubble burts, stocks crashed, the economy went into recession, and the surplus quickly reversed itself. It was only AFTER the government’s budget moved sharply into deficit that the private sector was able to get out of the red. All of this would happened even without 9/11, the wars in Iraq and Afghanistan, the subprime crisis, etc. We cannot keep relying on asset bubbles (stocks, housing, whatever) to drive economic growth.

The simple fact is this: A GOVERNMENT SURPLUS IMPLIES A DEFICIT IN THE PRIVATE SECTOR. And the private sector, unlike the public sector, cannot survive when it’s running a deficit. Anyone who does not recognize this simple fact (intuitively or empirically) should not offer commentary on matters of such significance.

Government Deficits allow the private sector to net save financial assets. Balance the budget, and the private sector loses financial assets. Run a government surplus, and you drive the private sector into deficit.

Someone in Washington better figure this out pretty damn quick, or our children and grandchildren are going to be burdened like never before.

The Ph.D. Economists who blog here understand:

This Is Our Moment

By Rep. Keith Ellison

July 28 — America has an historic opportunity. We have the chance to address our budget deficit in a manner not seen since President Bill Clinton created a budget surplus in 1999. And if we do it right, we could pave the way for a vibrant American economy based not on gimmicks like giveaways for special interests, but on job creation for working Americans. As co-chair of the Congressional Progressive Caucus, I urge us to avoid a default on the faith and credit of the United States while protecting Medicare, Medicaid and Social Security.

At every step of the way, Republicans in Washington have blocked a fair plan. The American people are demanding that our government resolves deficits while maintaining our promises to the middle class. Yet, an uncompromising political faction is stonewalling and ignoring the clarion call of this historic moment.

The Congressional Progressive Caucus stands with the American people. Long before Republicans took our economy hostage, we introduced the People’s Budget, the most fiscally responsible deficit plan introduced this year. The People’s Budget would eliminate the deficit in 10 years. Economists across the political spectrum have called it courageous and responsible. Introducing this budget was one of my proudest moments as a Member of Congress, because it shows the power of Progressive policies and values. Creating an economy that reduces deficits and creates jobs is a progressive value, not just a slogan as it is for the Tea Party.

As the People’s Budget has proposed, and the president has affirmed, our solution must reflect the same values that have motivated us historically. We believe in a fiscally healthy America because it leads to an economically healthy America. A balanced budget is critical precisely because it allows us to maintain the services that the middle class depends on. Any deficit deal that takes money away from seniors and American workers who rely on Social Security, Medicare, or Medicaid undermines the original goal of deficit reduction. Any deficit deal that cuts food stamps but pampers the wealthy is not only bad for the most vulnerable Americans, but damages our fiscal health.

Progressive economic policies lead to a sustainable economy. Americans understand this and history confirms it. Progressive policies implemented since the early 1900s launched America into the modern age and created a vibrant, middle class. Yet, for 10 years, Republicans have given more money to special interests, while the middle class has footed the bill. They passed the biggest tax cut ever for millionaires and billionaires, without paying for a dime of it. They passed a giveaway to the pharmaceutical lobbyists that will cost $1 trillion over 10 years. And it was George W. Bush, not President Obama, who ran roughshod into two unfunded wars, which alone are estimated to have cost us $4 trillion, more than 20% of the deficit.

The stakes are too high now. Republicans have taken us to the brink of default, and it is already hurting our economy. If we do default, the pain our middle class feels would be even worse. Retirement investments would be threatened by plummeting stock prices; higher interest rates would make it more expensive for Americans to pay off credit bills; and the unemployment rate would skyrocket in the face of decreased consumer spending. House Speaker John Boehner’s proposal is less a good-faith effort to avoid a default than an appeal to a narrow sliver of his political base. As Robert Greenstein, president of the Center on Budget and Policy Priorities wrote yesterday, “[Boehner’s plan] could well produce the greatest increase in poverty and hardship produced by any law in modern US history.” Most worrisome of all, it wastes our opportunity for a long-term solution and stalls progress for another six months. Credit agencies have already hinted Boehner’s plan would not convince them that America is able to pay its bills.

Progressives know this is America’s moment to lead. The deadline is upon us – but so is the opportunity.

“Sometimes nothing is a real cool hand”

Perhaps the chilling reason no bill is even beginning to emerge from Congress is raising its ugly head. Could it be that members of Congress and the President, deep down, want to see the US government go cold turkey to a balanced budget? Like taking away the drugs from an addict, might they all believe it’s for our own good and our children’s future to take away the government’s credit card now, before it’s too late?

We know they all believe that because of the deficit we are on the verge of a Greek like financial crisis. We know they all believe we need deficit reduction to prevent catastrophe. We know they all believe the government has been borrowing from China to spend like a drunken sailor, leaving the debt to our grandchildren. We know they all believe we either make the tough choices now, or soon face the undeniable consequences. And we know they all believe that even the most aggressive packages under consideration won’t be sufficient to solve the problem.

So what’s a patriotic politician to do? What solves the problem and, while there will be near term pain, minimizes the total long term pain? Yes, running out the clock and doing nothing, which is exactly what’s happening. And all the while trying to make sure your opposition gets the blame for the initial pain, while positioning yourself to take credit for the good that will surely follow. Is that not what’s happening?

They are dead wrong, of course, and, consequently, we’re all dead ducks, as the price of nothing is far higher than anything I’ve seen discussed anywhere. With the automatic fiscal stabilizers disabled (Treasury spending can’t increase in a slowdown, and in fact is forced to decrease as revenues fall) the downward acceleration of the economy from the sudden cut in government spending will be far more severe than anyone has begun to imagine. The lack of general concern for what might happen is directly evidenced by the current market complacency, allowing those properly alarmed to get their hedges in place at very attractive prices.

What happens in the do nothing scenario?
Stocks go down globally, the US dollar goes up, commodities go down, US Treasury rates fall, credit sensitive interest rates rise, sales and GDP fall, unemployment rises, all in the context of a general global deflationary spiral.

So continue to hope for the best while being prepared for the worst.

WSJ- Boehner pulls out of debt talks….

As previously discussed, the President is no longer involved, and if Congress does get a bill to his desk he’ll sign it.

Grand Bargain Talks Collapse

By Carol E Lee and Janet Hook

July 22 (WSJ) — A high-stakes effort by President Barack Obama and House Speaker John Boehner to hatch a landmark deficit reduction deal collapsed in anger Friday, sending Washington into a weekend of negotiations over how the world’s top financial power can make good on its debt obligations.

In a letter to his colleagues, Mr. Boehner said he called off talks with the president. He informed Mr. Obama Friday night he planned to start negotiations with the Senate to seek what would likely be a smaller deal.

“In the end we couldn’t connect. Not because of different personalities, but because of different visions for our country,” Mr. Boehner wrote in the letter. Later, at a press conference, Mr. Boehner accused the president of “moving the goal post.”

Mr. Obama, visibly frustrated in his own news conference before Mr. Boehner’s, was critical of the GOP. He summoned Congressional leaders back to the White House Saturday morning where “they have to explain to me how it is we are going to avoid default.”

The president also sounded less optimistic than he has in recent weeks that congressional leaders could strike a deal that would avoid a government default. He said he has consulted with Treasury Secretary Tim Geithner about the consequences of default.

Mr. Boehner said talks broke down because Mr. Obama came back at the last minute and asked for $400 billion in additional revenues on top of the $800 billion he thought they had agreed to. “Dealing with this White House is like dealing with a bowl of Jell-O,” Mr. Boehner said.

Senior White House officials said Mr. Obama called Mr. Boehner Thursday and sought more revenues, saying they were needed to win Democratic votes. They said the president was willing to negotiate the matter. Mr. Obama followed up with two more phone calls to the speaker, the White House said, and they weren’t returned until Friday evening when Mr. Boehner called to say the talks were off.

The demise of the grand bargain, the latest twist in Washington’s months-long search for an agreement to raise the debt ceiling, left the next steps uncertain. Congressional aides say the outlines of a deal must be clear by Monday if Congress is to approve a deal that would prevent the U.S. government from defaulting Aug. 2.

Treasury Department officials say that without more borrowing authority by that date, the government will run out of cash to pay all its bills, including Social Security benefits, military pensions and payments to contractors.

Several smaller options have been discussed that would cut the deficit between $1 trillion and $2.5 trillion. Changes to big government programs and the tax code won’t likely be tackled. That could solve the debt-ceiling problem, but create a new one if credit-rating firms think the agreement doesn’t justify their triple-A ratings on U.S. debt.

A debt downgrade, while not as serious as a default, could send interests rates higher and cause investors to panic. Mr. Obama raised that prospect Friday night in making the case for a larger deal.

“If we can’t come up with a serious plan for actual deficit and debt reduction, and all we’re doing is extending the debt ceiling for another six, seven, eight months, then the probabilities of downgrading U.S. credit are increased, and that will be an additional cloud over the economy and make it more difficult for us and more difficult for businesses to create jobs that the American people so desperately need,” Mr. Obama said.

Mr. Obama also said as leaders work through the weekend, they should keep in mind that the stock markets will be opening Monday.

The debt ceiling whiplash, with lawmakers lurching from one proposal to the next, has put financial markets on edge. Bond investors still appear to believe a deal will be inked, but others are bracing for volatile markets if the weekend’s negotiations don’t produce results.

“If I were, particularly, a foreign holder of U.S. debt, I’d be asking myself, ‘Who is running that country,'” said John Fath, managing partner for BTG Pactual, a Brazil-based investment bank. “This is like riding on a motorcycle and going right in front of an 18-wheeler. Are they out of their minds?”

Messrs. Obama and Boehner had incentives to push for more. They were thinking in part about their legacies, while many of their followers were focused on sticking to what they saw as their parties’ basic principles. Mr. Obama may have been willing to accept changes to programs such as Medicare, and Mr. Boehner may have countenanced tax-revenue increases.

Liberal groups Friday called Mr. Obama’s re-election campaign and Democratic congressional offices attacking the grand bargain. Justin Ruben, executive director of MoveOn.org, said it would “betray the core Democratic commitment to the middle class.”

Senior Republican aides said disagreements over taxes and changes to entitlement programs became too large to overcome.

Rep. Steve LaTourette (R., Ohio), a close friend of Mr. Boehner’s, said after an afternoon meeting of the GOP caucus: “The speaker was the most melancholy I’ve ever seen him. He’s always been a tremendous optimist. He feels he’s getting nowhere fast.”

Messrs. Obama and Boehner were discussing a deal that would set the stage for $2.7 trillion in spending cuts over 10 years and $800 billion in revenues generated through the tax code—a figure Mr. Obama suggested increasing to $1.2 billion, both sides agree. The plan would have included some of the spending cuts up front, while deferring other cuts and a tax overhaul until later.

Senior White House officials said the first part of the package, which would have immediately become law, also included an extension of unemployment insurance and the payroll tax break for employees.

A hurdle that emerged Thursday was the mechanism that would ensure Congress made good on its promise. Republicans wanted the so-called trigger to be elimination of the individual mandate in Mr. Obama’s health-care law, people familiar with the matter said. The White House refused to include that as a trigger, but said Mr. Obama would consider other options.

A smaller deal cut between congressional leaders would be a poor political outcome for both parties. The cuts likely wouldn’t be deep enough to satisfy conservatives, but would be big enough to irk liberals, and neither could claim credit for putting the U.S. on a path to long-term fiscal stability.

Senior Republican aides said they don’t know what shape a deal will ultimately take, but they said they need to present House members with an agreement by Monday to have time to pass legislation in both chambers by Aug. 2.

House Republicans will not back down from their demand for dollar–for–dollar spending cuts accompanying the debt limit increase. They have increasingly discussed a short-term debt increase, accompanied by the $1.5 trillion in spending cuts identified by budget negotiators. House Majority Leader Eric Cantor (R.,Va.) said the GOP would offer such a plan for avoiding default “in the coming days.”

“America will pay its bills and meet its obligations, and in coming days we will offer a path forward that meets the president’s request for a debt-limit increase, manages down the debt and achieves serious spending cuts,” Mr. Cantor said.

Getting a substantial deal matters as much for financial markets as the political fate of the nation’s leaders. Standard & Poor’s has said it could lower its AAA rating on U.S. government debt if it believes any deficit-reduction agreement is inadequate or the triggers put in place aren’t credible. A lower rating would boost borrowing costs for the government, businesses and households, possibly harming the recovery and roiling financial markets.

“What we mean by credible is something that we think people are actually going to do,” David T. Beers, managing director of sovereign and public finance ratings, said in a recent interview.

Debt ceiling dynamics: President Obama now irrelevant

It now seems to me the President will sign anything Congress sends to him for final approval.

So the question is whether the Senate and House can agree to anything they can both pass and send to the President.

And there is no point in further discussion with the President.

It’s all up to the Congress and it’s not looking promising.

Especially when deep down most probably think:

“It’s a good thing for the govt, like a drug addict, to get it’s credit card taken away and go cold turkey and be forced to limit spending to current tax revenue.

Yes, bad things might happen- stocks might go down, interest rates and unemployment might go up, and tens of thousands of businesses fail as GDP falls.

But with govt out of the way, the pain will pass and the private sector then flourish as never before.
Best to take that medicine now, suffer that pain now, and get by it to the promised land.

Not getting the debt under control will mean far worse consequences for all of us and especially for our posterity.”

So it’s the entire mindset that’s working against getting any bill to the President’s desk.

The last time I felt this was was during the Cuban Missile crisis.
Fortunately, back then, Russia blinked.

Obama

July 22 (Bloomberg) — House of Representatives Speaker John Boehner broke off talks with President Barack Obama on Friday and said he will begin negotiations with Senate leaders aimed at meeting an Aug. 2 deadline to avert an unprecedented U.S. debt default.

In a dramatic turn of events with the deadline to raise the U.S. debt ceiling just 11 days away, a stern-faced Obama expressed frustration at the Republican leader’s move, saying it was “hard to understand why Speaker Boehner would walk away from this kind of deal.”

In a letter to congressional colleagues, Boehner, the top U.S. Republican, said talks with the Democratic president had become futile, citing Obama’s demand to raise taxes.

Putting the onus on Obama, Boehner said: “The president is emphatic that taxes have to be raised. As a former small businessman, I know tax increases destroy jobs.

In a press conference, Boehner said the White House “moved the goal posts” at the last minute. He said, “Dealing with the White House is like dealing with a bowl of Jell-O.”

“We put plan after plan on the table,” Boehner said, adding that the president never brought a plan to the table.

Still, he said he’ll attend the Saturday morning meeting President Obama called of all the congressional leaders, adding that he doesn’t believe the relationship with the White House is permanently damaged.

“I’m confident that Congress can act next week,” he told reporters.

Lawmakers will need to have a deal in place by early next week in order to make sure it can be passed by both houses by the Aug. 2 deadline.

President Obama held a press conference to announce the news. He said Boehner’s decision came after the president offered to cut discretionary spending by $1 trillion. He said he thought he was offering an “extraordinarily fair” deal.

The president said the talks broke down over tax revenue but that both sides had been only about $10 billion apart on spending cuts.

Obama told reporters “there does not seem to be a capacity” for Republicans to agree to a debt limit deal.

Obama said he has summoned Boehner and other congressional leaders—Senate Majority Leader Harry Reid, Senate Minority Leader Mitch McConnell and House Minority Leader Nancy Pelosi—to the White House for a meeting at 11 a.m. ET Saturday.

“We have run out of time and they are going to have to explain to me how it is that we are going to avoid default and ask them to do the tough thing but the right thing,” the president said.

Both the president and Rep. Boehner said they were confident that the U.S. wouldn’t default on its obligations.

“We have never defaulted on our debt and we’re not about to do it now,” Obama said.

Obama said he was confident the $14.3 trillion limit on U.S. borrowing would be raised by the Aug. 2 deadline.

Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co., which oversees $1.2 trillion in assets, told Reuters: “If not reversed within the next few days through crisis negotiations, this breakdown will be highly detrimental to the already-fragile health of both the US and global economies.”

Obama has faced increasingly vocal complaints from his own Democrats on a deal-in-the-making that could mean painful curbs in popular health and retirement programs but no immediate increase in taxes.

“I’ve never seen frustration higher,” Democratic Senator Dianne Feinstein said after a week of sometimes chaotic efforts to sort through conflicting options and stave off a potentially devastating default on the nation’s financial obligations.

Republicans and many Democrats are refusing to raise the debt limit unless it is accompanied by steep spending cuts to tackle rising budget deficits.

Attention now turns to the Senate, where negotiations are likely to resume on a convoluted plan put forth by Republican Senate leader Mitch McConnell that intended as a fallback option if all else failed.

An unprecedented national default could push the United States back into recession and trigger global financial chaos.

Treasury Secretary Timothy Geithner met Friday with Federal Reserve Chairman Ben Bernanke and New York Fed President William Dudley to talk about the implications for the U.S. economy if Congress failed to raise the debt.

They remained confident Congress would act in time, they said in a joint statement.

The hope in Washington is that a wide-ranging, 10-year package of deficit cuts being worked out will be enough to save America’s triple-A credit rating.

Rating agencies have threatened a U.S. bond downgrade without a comprehensive deficit-cutting deal.

Seeking to ratchet up pressure on lawmakers, Obama said the consequences if they failed to act on the debt limit would include higher interest rates and greater reluctance by businesses to hire and invest.

“If we don’t solve it, every American will suffer,” he said.

Casting himself as a centrist in the bitter debate, Obama is trying to appeal to moderate independent voters he needs to win re-election in 2012.

Still the two sides remain far apart on the main issues.

Obama and Boehner took discussions on a so-called “grand bargain” behind closed doors this week.

Talks have whipsawed and stalled over raising tax revenue, which Democrats insist must be a part of any spending cut deal while Republicans reject tax increases.

Debt ceiling comments update

I see three ‘dug in’ groups:

There are those pledged never to cut Social Security benefits or eligibility. I personally heard Senator Blumethal pledge this while running for office. And Barney Frank was on saying much he same thing.

There are those pledged to never increase taxes.

There are those who believe it’s in the best interest of out economy to ‘cut off it’s credit card’ and, like a drug addict, go ‘cold turkey’ to a balanced budget. They believe that govt is the problem, and that getting govt ‘out of the way’ it will make room for the private sector to flourish. In other words this third group believes they are doing right by America by voting against any increase in the debt ceiling.

This makes getting any bill to the President to sign highly problematic.

And in this case, doing nothing is the worst case scenario.