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Terry Savage Headshot

The Congress that Cried Wolf

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You remember the story of the little boy who cried wolf just to get attention. When the wolf finally arrived, no one responded to his cries - and he was devoured. It's a story told to young children. Too bad Congress forgot.

Remember the cries of wolf when the "sequester" was passed early this year. There were promises of impending doom at the very idea that the government might cut its spending by 10 percent. Instead, they made the cuts. And except for a few days of inconveniences at airports (quickly ended when the lawmakers needed to fly home), it wasn't the end of the world.

Now, they're crying wolf again.

By the time you read this column the impasse will likely be resolved. And while a short-term shut down will be damaging to the economy, the government won't completely shut down. Prisoners will be guarded, Social Security will be direct-deposited, the military will be on watch, and border guards aren't taking a break. Our government, like cancer, is too big to shut down instantaneously.

Even the word "budget" is a cry of wolf. The word "budget" implies some kind of thoughtful plan to guide future spending. Congress hasn't passed a real Federal budget in the past four years. Instead they've gotten by with "continuing resolutions" that allow Washington to keep on spending, and over-spending, so they have added at least $1 trillion to the national debt every year for the past four years.
And this time is no different. The current issue is, once again, over passing a continuing spending resolution.

The real issue is the "debt ceiling" - the official limitation on how much the government can borrow. That limit has been raised time and again to accommodate Congressional overspending. In fact, the debt ceiling was reached late last spring, but through a complex series of financial maneuvers the Treasury was able to continue to borrow money to fund spending.

There will be another confrontation this month, with the threat that if the debt ceiling isn't raised, the United States will have to default on its debt, and be unable to borrow more money to keep the government going. That too, is likely to be dealt with at the last minute the second ring in a three-ring circus.

But after this latest public standoff circus, who will believe how serious our fiscal situation truly is? The implications of not getting to serious discussion about government spending and taxation cannot be pushed much farther down the road without consequences for our country - and the global financial system. Those consequences have much greater implications than a short-term shutdown of Federal offices and museums.

The Economy: Businesses can't make spending and hiring plans in such an uncertain climate. It's estimated by economists at Morgan Stanley that every week of shutdown would cost the economy 0.15 percent in growth. Since the economy is only growing at a snail's pace now, 2.5 percent annually, a prolonged shutdown, though unlikely, would have a large impact. But it's not so easy to measure the long term costs of decisions delayed, jobs not created, and global competitors taking advantage of our indecision.

Interest Rates: You saw interest rates start to climb when the Federal Reserve implied it might cut back on its monthly addition of $85 billion to the money supply. Those higher rates on Treasury securities translated into higher mortgage rates - and slowed the housing recovery. Now just imagine how high - and how quickly -- rates would rise if it appeared the Congress not only couldn't come to a budget agreement, but planned to continue digging a deeper hole of debt.

Interest on the debt is the third largest category of spending, behind domestic programs and defense. If the global interest rate market loses confidence in the future value of the dollar, even the Fed won't be able to keep rates from rising. And if rates were just at the "normal" level, instead of being held down by the Fed, we could add another half trillion to the national debt each year just to pay the interest bill.

The Dollar: And that would bring us very quickly to the third ring of this political circus - the ring of confidence in the dollar. If the world loses confidence in the U.S. dollar, there will be no way for the politicians to bring us back from the precipice at the last minute. The world operates in dollars, oil is priced in dollars, plans are made in dollars.

When confidence in the dollar is lost, the centerpiece of the world's financial system will crumble - and it won't be pretty for America when no one wants to give us full value for our money, when no one wants to lend us money and take promises of repayment in dollars. Then spending cuts will be forced on us. Either that or we will start "printing" the money we need - further destroying the value of the dollar.

Think I'm just crying wolf? Remember, eventually the real wolf did come. And that's The Savage Truth!