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The Tea Party Fiscal Flip Flop(s)

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When the 2011 federal budget was being bludgeoned into it's final form, the Republicans/Tea Party screamed that continued borrowing would raise the cost of borrowing by increasing the perception that the U.S. government might not be able to service higher debt. At what level a punitive demand for interest increases on U.S. debt would happen is anybody's guess, but it was argued that it would happen, eventually. Standard & Poor's even threatened that the rating of U.S. Treasuries might be lowered from AAA sometime in the next dozen years if the U.S. budget deficit is not subdued. Bond vigilantes would surely punish us for our profligate spending by raising demands for interest on U.S. debt.

Attendant to that argument was that the possibility of tax increases required to cover debt payments, both growing principal and interest, created "uncertainty" in the business community. "Uncertainty" is what, Republicans say, is keeping businesses from hiring.

Now, within a few weeks of sealing the 2011 budget deal, as the argument has shifted from the budget to the raising of the debt ceiling, something strange has happened. The Tea Party Republicans are now saying that it's OK for U.S. government interest expenses to go up. It's OK to default on some obligations, and if that causes interest costs on the debt to go up, all the better. Higher interest payments will decrease the capacity of government to take on further debt and will, therefore, extort spending cuts.

Since Republicans control the House, no tax increases can be passed to cover the increased interest costs and government will have to be made smaller. The fact that default, wholly or in part, will raise interest costs no longer seems to matter. Now, in fact, to Tea Partiers it seems to be a good thing.

The threat of higher interest on U.S. securities has been serious, if not exactly imminent. If the interest paid on new borrowing goes up, that's one thing, but since about 2/3rds of the U.S. debt is short term two year notes, an increase in interest on debt would actually deepen our debt problems as two year term Treasuries get refinanced at a higher rate. It would be like deliberately opting to increase your adjustable mortgage interest with no increase in your ability to pay.

Republicans, and many Blue Dog Democrats, were/are concerned about long term debt consequences, and rightly so. If nothing is done to spur economic growth and create jobs, revenues would remain the same while costs of debt service increase. We have to default, but the means we might use to avoid default, like monetizing the debt or slashing spending, would simply redistribute the burden of increased debt service to the populations with exposure to changes in inflation or government programs. So the best thing to do, all around, is to balance the budget in the long run. The long run is not the short run.

To borrow a popular term from what's left of the housing industry, the Tea Party is now talking about a strategic default. The difference is that the purpose of this government strategic default would be political instead of financial.

Default by the U.S. government would be financial absurdity. In many states, you can walk away from an underwater mortgage, but your credit is ruined. The ruination of U.S. credit as a country means the ruination of the credit of every last citizen of the country. It would be like deliberately missing a payment on your credit card so that the interest you pay goes from 12 percent to 29 percent, and the GOP is thinking that's clever enough to impose it on every U.S. citizen. The political reasons to do it range from capping the economy short of recovery to making the Democrats look bad to the baseline misguided conservative ideology.

It is clever, Republican clever, because it will force the cost of government to go up and so force government to do less and so shrink government. A shrinking government that is more expensive will prove, once and for all, that government is a waste of money. This strategic default is a new variant on starving the government beast through amassing debt. Since they aren't in a position to run the debt up any further, even their base gets upset with that, they can still increase the cost of government. It's a last ditch attempt, short of winning elections on a platform of destroying Medicare, to break the government.

With a Tea Party strategic default, the "uncertainty" for business will become worse sooner, rather than later. Business, still not recovered from the Great Republican Recession, fears tax increases and would now face both tax increases and higher cost of credit for themselves, as credit terms for government set the expectation of credit terms across credit markets. Much worse though, current short and long term Treasury holders would see the cash value of their bonds fall. As interest rates go up, bonds that pay less in interest lose cash value. Treasuries are widely held as investments. Domestically and internationally, holders of Treasuries could be forced into insolvency by loses in their bond portfolios. A banking, stock market, pension, endowment and global government debt crisis would ensue. "Uncertainty" for business will become a certainty.

It's hard to imagine that the party of business, the GOP, would condone legislative actions that would make it worse for business than it is already, but that's the inevitable outcome of deliberate strategic default.

Businessmen, traditional GOP constituents, it's time to call your congressman and Senator and tell them to kick the Tea Party to the curb. It appears a right wing populist movement is just as dangerous to your short term interest as is any left wing populist movement. Sure, the deficit needs to come down, but the way to do it is to grow the economy and/or make economically neutral cuts. Default now will just make things worse sooner, rather than later.

The Tea Party flip is a fiscal and financial flop.