First Battle of a Protracted War

As the clock ticks with little more than a week to go before the August 2 deadline, Democrats and Republicans say they are no closer to a deal to raise the debt limit and cut spending. The latest out is that Obama and House Speaker John Boehner may be close to a deal. Even though details are sketchy, Democrats are critical of it because spending would be immediate and tax increases would come only later, if at all. 

While many opinions and criticisms float the airways, yields on US Treasuries have remained remarkably stable. The 10-year now stands at 2.97% well below its July 1st level of 3.18% and significantly below its average of 5.48% in the period 1998-2001 when the government was running a budget surplus.

Treasury buyers, stock buyers, and Washington high-ups all believe a deal will be reached to avert a crisis. This time may well be different than previous budget showdowns in that the public may play a bigger role in policy than any time since Reagan. The stakes, pressures, and immediacy of the debt debate have burned away all the usual chaff.

The fundamental and essential differences between Democrats and Republicans are lying bare on the table of public discourse. D: Give me higher taxes if you want to cut spending, so that everyone shares the pain. R: Cut spending and taxes if you want the economy to grow. There is ample historical proof that both strategies work.

Voters no longer have to rely on idealistic speeches to guide their choice. With every week’s unemployment report they better understand that temporary stimulus measures do not create jobs of get an economy going. They understand that the debt which funded the stimulus measures is permanent and that it will be passed on to their children and beyond in the form of lower standards of living. And if there was any doubt before “change you can believe in” as to the consequences of unbridled entitlement spending, they can look to Greece’s current crisis for a glimpse into what their children and grandchildren will face.

Our two-party system has its attributes, but for the last couple of decades it has been mostly counterproductive. Somewhere along the way, vote-buying, power concentration, career preservation, and raw ideology usurped the American political scene. The objective of both parties has been to get a majority, ram down as much legislation as possible in the limited time allowed and keep the paying constituents as happy as possible with promises in the lean years.

A deal will almost certainly be made before August 2, but it will likely be scarred by both parties. While credit should be given to the Tea Party for causing this a national referendum on debt, spending, and taxes it was too much to expect fundamental change to take place at gunpoint. The ends do not justify the means at this late hour. They have accomplished much by making clear the threat of unrestrained government spending, and indeed higher taxes in this soft economy, but unfortunately for their cause, they will have to compromise on smaller cuts and the possibility of increased taxes (closed loopholes).

The debt ceiling debate is but the opening salvo of what promises to be a protracted and bitterly fought political battle in this country. The lines are clearly drawn with a few negotiators under white flags between them. Regrettably, our president has not publically placed himself under the white flag with his rhetoric of class warfare and other demagoguery. But there is hope that his behind-closed-door talks are more conciliatory and productive.

The week’s economic data was mostly focused on housing.  Home builders reported modest improvement in July with the housing market index rising two points to 15 from an unusually depressed June. Housing starts jumped 14.6% in June, following no change in May (originally up 3.5%). Sales of existing homes failed to pick up in June, slipping 0.8%. However the houses that did sell came in at substantially higher prices, at a median $184,300 for an 8.9% monthly gain with the annual rate moving into positive ground for the first time this year at plus 0.8%.

The index of leading economic indicators rose 0.3% in June following May’s outsized gain of 0.8%.Money supply was the primary driver with the yield spread between long rates and short rates being the second most important contributor. Unemployment remains stubbornly high with jobless claims rising 10,000 in the July 16th week to a 418,000.

The bright news for the week comes from the stock market and corporate earnings. As of yesterday 125 of S&P 500 companies have reported with 106 of them reporting higher earnings. Excluding banks, 76% of companies reporting so far have exceeded analysts’ estimates for their earnings. Earnings for S&P 500 companies are estimated to grow 16.1% for the second quarter.

One week to go and the clock is ticking.

Have a nice weekend writing your Congressmen.