08/08/2011 04:52 pm ET Updated Oct 08, 2011

Did Obama Bell the Cat?

After months of failed talks with Republicans and Democrats, President Obama was allowed to turn 50-years-old this week. A provision to postpone the birth date failed and he was allowed to have a party for friends and relatives.

But the jokes, like this one and about having nothing to celebrate, may be on the jokesters. Mister President Cool may have belled the cat by insisting on an automatic trigger to slash spending in two sacred cows -- Medicare and defense equally -- if $1.5 billion worth of deficit cuts aren't made by Congress in November. (Both sides agreed to leave untouched Social Security, veterans payments, Medicaid for the poor and children.)

Obama originally wanted tax increases to be one trigger with Medicare, but defense was substituted because the Republicans knew the Tea Party refused any tax increases.

Pounced at the last minute

The "cat" that's been belled is the unaffordable cost of the military, which will be pruned because Congress won't agree voluntarily on cuts by Christmas. The US military budget is US$700 billion which is equal to the next 20 biggest spending nations combined and equivalent in size to the total economic output of The Netherlands.

But also "belled" will be Congress which must compromise on cuts, or be killed by 41 million seniors when Medicare gets cut and by the military-industrial complex and millions of veterans when defense is chopped.

This debt deal hands Democrats a weapon to prod Republicans to accept tax increases instead and, if they don't, casting themselves as choosing protection of the rich over the military.
"It's smart because it pushes the sides together; that's what its designed to do," said Republican strategist John Ullyot, a former spokesman for the Senate Armed Services Committee. "That's really going to make at least the Republicans" on the special committee "come to the middle as much as they can."

It's also politically smart. If the two compromise on spending cuts, the process and President will be vindicated.

If they don't, the process and Congress will be vilified. Polls show that support for Congress in general is 14%, about equal to the support for more nuclear reactors.

Another way of looking at it was as an elegant compromise, said independent Senator Joe Lieberman. "It was an agreement by each party to yield to the other party's most politically and ideologically sensitive priority. In the case of Democrats, it's to protect entitlement spending ... In the case of Republicans, it's to not raise taxes."

Its the Euro stupid

By the way, this brinkmanship was not the market news this week, it was another Red Alert concerning the Euro.

"This [week's stock market slaughter] is Europe's 2008, not America's," said market guru Jim Cramer.

The Euro's flaw is that the King has no Clothes. There is a Eurozone, a European Central Bank and a giant bureaucracy. But none has the power over the central banks of the 17 countries that are members or over their Parliaments which have never had debt ceilings, and never will.
This represents a governance deficit. Bad behavior by spendthrift nations cannot be controlled or curbed. And the behavior of the well-managed nations cannot be controlled either to help out when needed which is why markets have become concerned again that their latest bailout is another case of too little, too late and too ineffective.

Unfortunately, the entire Euro experiment was badly designed and should never have happened without a single central bank with teeth enough to impose discipline on all. But the Germans and French will pony up inevitably, and can afford to, because they and the others simply cannot put Humpty Dumpty together again.

So it was a week like any other, except more dramatic. For eight days, markets have been discounting and correcting for the dysfunction in Washington and then, most recently, the dire straits in Europe's capitals.

From the Financial Post