US debt: President and Republicans go on television to promote rival plans

26th July 2011

The New York Times quotes the President here: "The only reason this balanced approach isn't on its way to becoming law right now is because a significant number of Republicans in Congress are insisting on a different approach, a cuts-only approach – an approach that doesn't ask the wealthiest Americans or biggest corporations to contribute anything at all. And because nothing is asked of those at the top of the income scales, such an approach would close the deficit only with more severe cuts to programs we all care about – cuts that place a greater burden on working families. We would risk sparking a deep economic crisis – this one caused almost entirely by Washington. Defaulting on our obligations is a reckless and irresponsible outcome to this debate." 

Boehner however made a strong defence.

"The sad truth is that the president wanted a blank check six months ago, and he wants a blank check today.  That is just not going to happen." Speaking of the President's plan, he said: "If the president signs it," he said, "the ‘crisis' atmosphere he has created will simply disappear.  The debt limit will be raised."

In the US, the founder of the Huffington Post, Arianna Huffington argues, angrily, that the issue is nothing to do with future spending and everything to do with not honouring past promises including the outlay for two wars.

She writes: "It is a pungent reminder that part of this spectacle going on in Washington involves Republican legislators refusing to pay for the very obligations — including two wars — they voted for in the past. Remember that the next time they lecture the country about "responsibility."

"Indeed, the total Bush added to the deficit was almost $4 trillion and, according to the Center on Budget and Policy Priorities, Bush's two tax cuts and two wars will account for nearly half of public debt projected by 2019."

But she also wants a focus on growth and jobs something she thinks has been forgotten.

Yet FT Alphaville seems to believe default remains a remoter possibility than we think with this post while also sticking the boot into the ratings agencies.

"Markets haven't been worried – and still aren't worried – about the deficit in the near-term at all. Rather, the debt ceiling has revealed a political process the rating agencies have interpreted as too paralytic to get anything done about problems that are not yet urgent.

"Look, it's really difficult to know what the political system will look like by 2013, or any way to know how even forseeable issues will turn out.

"Even more important, we've no idea how the economy will be performing then.Our point here isn't even that the rating agencies would be wrong to downgrade the US. Minding politics, and including forecasts in their ratings, is part of their job.

"What we question is why people would think the rating agencies are better at doing this than anybody else, at least given how transparent the government's books are when it comes to its debt profile. So we won't shed any tears if the outsize role of the ratings agencies continues to be trimmed, or if more generally they lose relevance in global debt markets – the sooner the better."

Fund managers still believe the impasse will be settled.

Schroders senior portfolio manager US fixed income David Harris says: "We expect the debt ceiling to be raised by August 2nd target date and for the US to avoid a technical default. This is a particularly contrived limit on US Government borrowing. However, the risk of a policy mistake leading to a missed interest or principal payment would have a very negative and lasting impact on US credibility even if the experience is brief and investors are made whole."

"We expect a solution that removes tax loopholes – that is increases revenues without formally raising taxes, combined with spending cuts across a wide variety of programmes. Unfortunately, at this late hour the chance of real progress on cutting the cost of big, expensive entitlement programmes is highly unlikely."

Perhaps understandably the price of gold moved even higher as the Express reports here, as the dollar fell against the Swiss franc and the Japanese yen.

See also:

Why the U.S. won’t default on its debt – Ken Eisold, Mindful Money's psychoanalyst

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