US debt talks
Dancing into the abyss

Added on July 30, 2011 at 23:24 Riga time
On Saturday, July 30, the GOP dominated House has rejected Harry Reid's (Democrat) plan with 246 to 173 votes. Unlike the GOP plan, the Reid plan would have allowed to govern without rising the debt ceiling again until 2013, after the next presidential and congressional elections.

Added on July 30, 2011 at 19:26 Riga time
In the evening of July 29, the Republicans pushed their plan through the 435-seat House of Representatives with a narrow 218 to 210 vote. Two hours later, the GOP proposal was rejected by the Democratic majority in the 100-seat Senate with a clear 59 to 41 vote. Note that, in the House, not a single Democrat voted for the GOP plan. In the Senate, all 51 Democrats, 2 independents and 6 Republicans formed the victorious opposition. Time to compromise is running out...

US debt talks: Dancing into the abyss
Article added on July 29, 2011  
Let's dance into the abyss, that seems to be the current motto in Washington, D.C. With the 2011-deficit projected to be around 9% of GDP and the overall federal and state debt reaching 100% of GDP if no austerity measures will be taken, that's quite a gamble.

Europe is in a crisis too, despite the recent Euro summit, which has not resolved anything, and despite the Italian austerity budget. However, a comparison of mid-July showed that the public deficit in the entire Eurozone was estimated to reach some 4.3% of GDP in 2011 compared with the 9% in the US mentioned above. That should make you think.

The US is still in a deep financial crisis. Fannie Mae and Freddie Mac are still there. The banks are fewer and bigger than ever. They are still intertwined and too-big-to-fail.

The US debt talks between Democrats and Republicans and between the President and the GOP opposition should lead the United States back to a sustainable path.

Fiscal discipline is requested. At the same time, two-thirds of the US economy is driven by consumption. The American problem is that both the government (on all levels) and consumers have been living above their means for decades; check the US-China trade deficit for some of the details. I referred to this uncomfortable situation in February 2009 as catch-22: you should both spend and save at the same time.

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The situation is worse than you may think. After a long period of underinvestment in the American infrastructure, the United States should massively invest public money in the future and at the same time save public money. Not an easy task to accomplish. How about getting rid of all subsidies, starting with the ones for agriculture and oil companies?

From April to June 2011, the US economy only grew 1.3%, with analysts expecting GDP growth to be around 1.8%. Worse, the first quarter growth has been revised down: GDP did not grow 1.9% as officially announced earlier in the year, but only 0.4%. That's a substantial difference.

What is the reaction in Washington? The House Republicans may overplay their hand again as they did in the Clinton years. In the 1990s, they pushed the Democratic president to the center but, in the end, their demands became to extreme and they gave Clinton a second life.

Boehner, Cantor and the Tea Party parliamentarians have to be careful. It is true that Obama gave you a “stimulus”, a bailout of car-companies, to pay back the unions for their electoral help, as well as ObamaCare. When the Fairytale President tries to sell himself as a fiscal conservative, he is not credible. At the same time, the GOP forgot all about fiscal discipline during the years of Bush the Torturer: lowering taxes while enlarging entitlements and fighting ill-conceived and ill-managed wars.

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The years of Bush the Torturer were disastrous, but it did not get better under Obama. The US are farther away from a zero deficit than before. Paying down the debt is a long-term goal of a pretty distant future.

Grandstanding at the abyss does not help anyone. The United States have a dynamic economy which can bounce back quickly, but courageous decisions are needed now. There is no more room for delaying decisions, additional earmarks and subsidies (e.g. for farmers and oil companies). Tax loopholes have to be closed now.

In addition to cutting entitlements, the military sector has to be analyzed. President Eisenhower said in his 1961 farewell address: “... we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. ... we - you and I, and our government - must avoid the impulse to live only for today, plundering, for our own ease and convenience, the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage.”

The most powerful US lobby is the military-industrial complex. Monopolies and oligopolies reign. Purchasing military equipment has become a black hole. In addition, there is a total lack of financial accountability. Just think of the billions “lost” in Afghanistan. Nobody knows where the billions of dollars to build up the country have ended up. Also in the US, billions of military spending money are squandered to maintain unnecessary military basis' and projects.

The left has to abandon the idea of a social-democratic state. The right has to come to its senses regarding military spending and closing tax loopholes. As for the debt ceiling, it has to be raised anyway because that is for money Congress has already spent.

It may be the time for new political parties to emerge. There is not enough competition for ideas. If you think the state is the solution, you vote for the Democrats. If you think the state is the problem, you vote for the Republicans. More choice is needed. The current politicians have to find a sustainable compromise in their debt talks now, otherwise voters may soon look elsewhere.

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