Wednesday, August 10, 2011

The debt ceiling fears (Watt Thoughts)

Just over a week ago congress passed and President Obama signed a bill to raise the debt ceiling of the USA. In the debate leading up to Tuesday we heard many stories on what was going to happen if the debt ceiling was not passed. It has been 8 days now, so lets look at some of them and what has happened.

The biggest one spread all over was if the debt ceiling was not raised the stock market and economy was going to tank. Lets look what happened in 6 days of trading since. Five of those six days the stock market has not just closed down but 100s of point a day. Wonder what it would have been if this was the good?

We heard from commentators and politicians that if we did not raise the debt limit that the AAA rating the USA had would fall. Notice I used the word had. It fell on Friday when S&P cut it. If you had listened to the rating organizations they were not threatening to cut because debt ceiling was being hit, but that we have possibly out borrowed our ability to pay our bills. So one agency did cut and the others put out stronger language that a cut is possibly imminent.
We heard the economy would fall apart. Now we have heard all week that the risks of another recession (called a double dip) is now rated as about 25% possible by economists, much higher than before.

We heard that interest rates would go thru the roof if we did not raise the ceiling because we would lose the AAA rating. Well we lost the AAA rating and we find people and institutions are doing like always when stock market goes bonkers and buying gold and US Treasuries which has run the rate down

What do we need to do now? Get the federal spending in control. First that means actually doing a budget. (ask anyone who counsels individuals with debt problems and this is step 1). Second we need to pass real spending cuts but spending cuts that will take place in 5 or 10 years. Cuts now will take effect. Cuts in 5 or 10 years will be ignored by Congress and the President then. Look at cuts that were put in some medical programs on payments to medical providers but were to start a year or two down the road. Each year congress votes to kick the can down the road and to delay implementation. It does no good for me to say that I am going to reduce my budget in 2012 or lose 40 pounds in 2012 now. When 2012 gets here I will say lets just wait to 2013. Congress is the same.

The choices are cutting spending and raising taxes. We need to look at what the government needs to do and start cutting wants to do or would be nice to do. It needs to be real cuts now. We need to look at our tax structure and simplify it. We can probably get more revenue from it by cutting the different deductions (called loopholes when someone else uses it) and cut rates at the same time. Make it more fair. We hear Social Security is headed fro going broke and what did our leaders do. This year they cut payroll taxes, which are individuals contributions to Social Security and now I hear they want to keep the cut. If you are not collecting enough to make it solvent how does cutting amount you collect help, This is not part of the normal cut tax rates and we will get more. That argument is if we reduce the tax rate people will produce more to earn more. This was simply a case of cut the payroll taxes to give people more money. The group that most vocally passed the payroll tax cut are anti tax cutters.

Now the good news. Since we raised the debt ceiling oil prices (September futures) and wholesale gas prices (September futures have fallen about 15% to around $80 a barrel.

The deficit and debt crisis is real and we must get them under control.