Politicians have been busy this weekend negotiating a deal that would lift the debt ceiling and avoid the government having to prioritize its immediate payments and thus risk a debt default. This comes after a week in which macro policy uncertainties stood in stark contrast to solid corporate earnings, leading to losses of some 4 percent in all the major stock market averages.
As I write this on Sunday morning, indications out of Washington point to a "framework" that, once reflected in legislation passed by Congress and signed by the president, would allow the debt ceiling to be raised. It appears to include four key elements: enough of an increase ($2.4 trillion) in the debt ceiling to get the country beyond the 2012 elections; a first round of spending cuts ($1 trillion), though details are lacking; a second round of deficit reduction based on the work of a special congressional commission; and, failing this, a mechanism that would enforce additional spending cuts of over $1 trillion.
This compromise framework is likely to evolve into a political deal -- not because it is perfect (it is far from that) nor because critics will be silenced (they won't, as some Democrats lament the absence of tax measures and some Republicans regret the lack of entitlement reform). Rather, it is a compromise that enables everyone in this debt debacle to declare partial victory.
It is high time to remove the specter of a debt default by the most powerful economy in the world. But for the positive impact to be both significant and durable, the compromise must be assessed not as an end in itself but as a sustainable means to the more genuine end.
This end is defined in terms of robust economic growth, lower unemployment, less income and wealth inequality, and the restoration of household, corporate and international confidence in America's economic governance process. Three issues stand in the way:
First, it is not clear whether the evolving compromise is enough to satisfy the rating agencies, and S&P in particular. Indeed, if S&P were to stick to what it said on July 14 when it placed America's AAA rating on a negative watch, and it is far from certain that it will do so given recent developments, the possibility of a downgrade cannot be eliminated as yet.
Second, the compromise is not enough to offset the considerable economic damage already inflicted by the debt debacle, let alone restore confidence that the political system is able to respond to the serious structural challenges undermining growth and jobs (including malfunctioning labor, housing and banking markets). This is an acute concern given Friday's horrible GDP data.
Third, the open-ended component of the compromise does little to counter worries outside America. Foreigners have been watching Washington's dysfunctionality with a mix of bewilderment and concern. After all, they depend on America as the major provider of the global public goods that they use and pay for -- from the dollar as the reserve currency to this country's financial markets as the best place to outsource the intermediation of their hard-earned savings.
Politicians are taking an important step this weekend to remove the threat of a debt default and to focus more credibly on problems facing the economy. We should thank them for that. But we should also remind them that their work is far from done.
Rather than declare victory, Washington should waste no time in redoubling efforts to remove the multiple policy uncertainties and structural impediments that stand in the way of restoring America on the path of high growth and plentiful job creation. Anything short of that will imply further economic and social deterioration, and a greater erosion of America's global standing.
This article contains the current opinions of the author but not necessarily those of PIMCO. Such opinions are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission.
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This should only be the beginning. We need total tax r3eform. What to you think of the Gang of Six proposal when it comes to tax reform?
Thanks again!
Now you are going to ask me, how does that affect us ? Many Asian & Russian investors take Dagong rating into consideration when investing in manufacturing. Do not have the space here to explain why. But a downgrade from Dagong has for consequence, less investment in manufacturing (we have seen a steady decline in manufacturing investment in the US from foreign companies), I guess that with this downgrade, many automobile manufacturers that have planned to open new factories in the US will put their project on hold (this is just an example that everybody can easily verify).
Check out the ratings for 50 countries -> http://www.dagongcredit.com/dagongweb/uf/20110711%20Review%20summary%20-En_f.pdf
However we need to take it a step further, if a family is making more than it is spending then it will at some point go bankrupt. So that family needs to do some spending cuts, like maybe get rid of cable TV, not going out to eat as often or skip taking a vacation that year. The family needs to do what it can to bring itself back into the black. That is what our country needs to do, we need to make cuts in spending and bring ourselves back into the black. We can’t keep spending more than we make and importing more than we are exporting. It’s simple economics, if the government had to run its affairs like an American family does, then we would all be better off.
I'd just like to point out to el-Erian that neither he nor PIMCO has the authority to order such a restriction. This is one of the first problems that we need to address, this myth that corporations have the right to impose their will on real citizens.
In fact, I suggest that ending the corporate model completely would do a lot to improve America's economic and moral climate. Let's put personal responsibility back into business. And let's end once and for all this insane notion that having a magic org chart makes your business a citizen.
In the meantime, I'm gonna violate el-Erian's orders by reproducing parts of this article and referring to it in other publications, just to mock his delusions of authority.
Reid put off the vote saying he wanted the republicans to play a role.
Be careful what you wish for - it may come true.
So, even though I find the Republican behavior contemptable, I also also think Obama needs to take a major portion of the blame for his lack of guts and poor choices of action. It's pretty clear that America cannot consistently import more than it exports (as it has for four decades), and export our best jobs and most critical industries. (Software is the 'brains' of 21st century goods & services. Lose the software industry, and we'll be buying these goods & services from everyone else.)
So IMHO, everyone involved deserves a failing mark. Obama, the Tea Party, Republicans, and Democrats. It's time to begin retiring these folks by force, and seriously looking at new parties andnew political systems.Of course, as long as the same media supplies the 'nerws,' Americans are likely to remain the most ignorant people in the world.
The largest single expenditure was the stimulus (about $800B) of which nearly half was tax cuts which reduce revenue but do not stimulate the economy.
If we repeal the Bush tax cuts, get out of Iraq and Afghanistan, roll back the defense budget to what it was when Bush came into office then the budget is nearly balanced.
If I were potus, I would tell those agencies that if they don't want to be issuing their pronouncements from the Cook County Prison for perpetrating massive finanacial fraud, they better keep their pie holes shut on this one.
That makes no sense!
It's time to balance things. It's time for the rich to pay.
Tax the rich, jail the bankster, take their trillion and the FED's and invest in our citizens. Cut the MIC by 90%. Bring back the banker and business regulation cut since Reagan.
I'm so sick of misinformation based on emotional claims that get in the way of constructive dialog.
Why do they make so much more than all the rest of the people combined? Because of automation and tech, and deregulation.
The bottom 50% are now so poor, poorer than they have been in 90 years, that they pay only 2.7% of the taxes, because they make so little money.
The top 400 famlies now have as much wealth as the btoom 50% of aemricans.
Just what the founder faiugth and died to prevent.
"When economic power became concentrated in a few hands, then political power flowed to those possessors and away from the citizens, ultimately resulting in an oligarchy or tyranny." John Adams
"As riches increase and accumulate in few hands . . . the tendency of things will be to depart from the republican standard." Alexander Hamilton
"I hope we shall . . . crush in [its] birth the aristocracy of our monied corporations." Thomas Jefferson
You just got robbed by the basnkters and the super rich, and you defend them.
Leave if you don;t like it, but our money stays here. See how you do in Somalia.
It's called taxes. Not theft, it's the dues you pay for civilization.
You pay because YOU want the services you have grown to expect, roads, schools, librarires and fire depts and PD and if YOU get hurt and have no insurance You pay so YOU can get medical attention or your family can..so the next time YOU need a cop, don't be surprised if he asks You 1st, :sir and how are you going to take care of this bill, then I will listen to you. We all pay. Property taxes, library fees, Health insurance..there is more and MORE...
What exactly are the "global public goods" that we are a major provider of? Is that a euphemism for all those toxic derivatives? ;-)