IMF To Congress: Time For A Debt Deal

June 17th, 2011 at 11:33 am | 15 Comments |

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Last evening, participants in the “Biden Budget Talks” leaked that the group seeks now $4 trillion in debt reduction during the next 10-12 years.Yet, reports proliferate that Medicare, Medicaid, perhaps Tricare, and Social Security are off-limits.

The arithmetic doesn’t work if the rumors are true.

More likely outcomes will be along these lines:

  • Small changes to non-medical, non-Social Security, entitlements (pensions, farm subsidies, etc.);
  • Assumption of a freeze of some length on domestic appropriated accounts (12-14 per cent of federal expenditures);
  • “Process” changes that will create the promise of automatic spending cuts in the future in Medicare, Medicaid, defense spending and tax expenditures.

We will be very pleasantly surprised if the Biden talks produce fundamental re-structuring of the nation’s fiscal mess. Not only is time running out for a comprehensive legislative package that reforms Medicare and Medicaid (the greatest drivers of future fiscal collapse), but it is not in the self interest of Democrats in general to produce meaningful Medicare reform when so many of them in the House and Senate want to use it as an attack tool against their Republican opponents in the 2012 election cycle.

Our reaction is similar to that of Senate Budget Committee Chairman Kent Conrad earlier this week when he expressed his fear that the Biden talks would produce nothing of substantial fiscal consequence.

Conrad has been around the budget block many times and he can sniff out a bad deal when he gets near one. As for the “pledge” that spending cuts will be three times bigger than any revenue changes, history presents a lesson. Way back in antediluvian times (the mid-’80s), Congress promised then President Ronald Reagan that it would produce three dollars of spending savings for each dollar of tax increases. The actual package was more like one for one when all the gimmicks and spin were squeezed out of the package and people who knew Reagan best said that he knew after the fact that the numbers were phoney.

The recent admission of reality by the American Association of Retired Persons (AARP) that Social Security and Medicare really are on the reform block is good news. AARP wants to have a seat at the table in the post-2012 election world when Congress may get serious about such entitlement reform. Its traditional opposition to any changes in entitlements has been a huge stumbling block to progress on the fiscal front; indeed, one can make a pretty strong case that the spending indulgence for seniors that will flood the nation in coming years occurs because of the counter-productive actions of AARP.

Someday not far off, real entitlement reform will force itself onto the Congressional agenda. It won’t be this year nor next. It may well be 2013. And, given turmoil in overseas markets and economies, America may continue to be blessed by strong demand for the “safe haven” of our sovereign debt.

But the patience of credit markets is not eternal. At some point market participants will demand real changes in American debt accumulation. That demand could be in the form of very unpleasant interest rates demanded on our sovereign debt.

Market patience concerns not just serious American policymakers.  This morning, the International Monetary Fund warned both the Europeans and Washington, D.C., that “they are playing with fire” unless they take immediate steps to reduce deficits.

Jose Vinals, director of the IMF’s monetary and capital markets department, continued:  “You cannot afford to have a world economy where these important decisions are postponed because you are really playing with fire.  We have now entered very clearly into a new phase of the crisis, which is, I would say, the political phase.”

In addition, the IMF’s new economic forecast predicts slower global and American economic growth in the next 18 months than its original forecast. Slower growth, higher unemployment, increasing spending, less revenue — no wonder most Americans who live outside Washington, D.C., have so pessimistic a view of the future and so little faith in the federal government.

Our view is that if the Biden talks produce the minimal result we predict, Director Vinals’ fears will materialize more quickly and perhaps more dramatically than most Americans anticipate.


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15 Comments so far ↓

  • balconesfault

    the spending indulgence for seniors that will flood the nation in coming years occurs because of the counter-productive actions of AARP.

    You mean, the guaranteed benefits that they had money withdrawn from every paycheck they received in their adult working life to pay for?

    That “indulgence”?

  • Smargalicious

    This is why we need the Ryan plan. It will cure us.

  • andydp

    As a regular reader of the Wall Street Journal, I have been surprised at their almost complete lack of coverage on the raising of the debt ceiling. There have been occasional comments or small articles, but nothing to equal the amount of coverage when the Health Care Act was being debated.

    Apparently, the Journal editorial staff is waiting for the denoument to lambaste the Obama administration, AARP, Unions, Sun Spots, Crop Circles and the shooter on the grassy knoll for the budget default. They are conveniently avoiding mention of the GOP role in this matter. You know: the role where the GOP took a budget surplus and turned it into the largest increase of debt in US history.

  • Smargalicious

    You know: the role where the GOP took a budget surplus and turned it into the largest increase of debt in US history.

    You know, you forgot about the Global War on Terror that started on Bush’s watch due to Slick Willie’s annoying distractions, like, you know, sodomizing young interns?? Sheesh.

    • balconesfault

      the Global War on Terror that started on Bush’s watch due to Slick Willie’s annoying distractions,

      Just because Clinton didn’t come up with some fancy names, it doesn’t mean he wasn’t actively combating militant Islamic terrorists.

      The Republicans DID have a name for it when Clinton did it, though. They called it “Wagging the Dog”.

    • medinnus

      Hush, closet homosexual. Adults are talking now.

      I do seem to recall Bush the War Criminal ignoring pre-9/11 AQ national security meetings as “unimportant”. He was too busy trying to find a lie to justify an invasion of Iraq.

      So that he could plunge the nation into debt so that he could have a “gun as phallic symbol” compensatory aid to measure against his father’s war record. He didn’t have the balls to serve in Vietnam, he needed something. Fortunately, he had a big Dick as Vice President.

      As for the sodomy – at least Clinton slept with women, and women who weren’t paid professionals, as opposed to the GOP sex scandals. And your own preferences.

      • Smargalicious

        Hush, closet homosexual. Adults are talking now.

        LOL!! :D Good one.

        I do seem to recall Bush the War Criminal ignoring pre-9/11 AQ national security meetings as “unimportant”. He was too busy trying to find a lie to justify an invasion of Iraq.

        LOL AGAIN!! You’re forgetting about the precursors to 9-11: The USS Cole bombing and the WTC bombings, which were met with limp-wristed responses. And, if Bush had not been a “war criminal”, Odumbo the African would never have had the intelligence to give the order to kill UBL. And, Saddam needed killin’. Injected a democracy in the middle of Arab dictatorships. Brilliant.

        As for the sodomy – at least Clinton slept with women, and women who weren’t paid professionals, as opposed to the GOP sex scandals. And your own preferences.

        Har! Tell that to the Chief Rear Admiral DemonRat Barney Frank! Hee!

        • PracticalGirl

          “DemonRat”…Smarg, your SavageNation flag is flying. No wonder you lapse in and out of both English and coherency.

        • sweatyb

          please, for the good of all of us, do not feed the troll.

  • think4yourself

    It’s good to hear the AARP say that. Seems like they are thinking not only of seniors receiving benefits now, but those who will begin to receive benefits in 10 years (which the Ryan plan does not). In my view, one of the trouble with unions (public and private sector), is that they negotiated big pension benefits for their members and doing so killed the golden goose. AARP may have recognized that lesson. Throw in the recent action by Kay Bailey Hutchinson and perhaps you’ll get real movement on the spending side.

    Now if only the GOP would recognize that this gives them the upper hand and decide to negotiate, which means being willing to put tax increases on the table as well. Or they can walk away, blame the other guy and nothing gets done. Should be interesting what they decide.

    • sweatyb

      the problem with the whole “blame unions” meme, is that it ignores that American businesses are by-and-large, doing pretty well right now. And they’ve done amazingly well over the last decade.

      But workers have seen their real wages stagnate or decline over the same period. The only place where compensation has kept pace with corporate profits are places where the workforce is unionized.

      In other words, it’s not that unions are getting cushy deals. It’s that non-union workers have been getting shafted and don’t know it.

  • sweatyb

    The IMF? Seriously? Those jokers don’t know how to run an economy anywhere but into the ground. Americans pride ourselves on making our own rules and ignoring the bleating of the international community. But now that the IMF, one of the least credible international bodies I can think of, says something the right-wing nuts agree with, we better do what they say?

    At some point market participants will demand real changes in American debt accumulation. That demand could be in the form of very unpleasant interest rates demanded on our sovereign debt.

    What other bogeymen are you afraid of? Are you worried about the monsters under your bed? Because they’re just as real and immediate as your hypothetical “market participants”.

    Meanwhile, right now we have a real crisis in this country of unemployment which is undermining domestic demand and sabotaging the recovery.

    Is America poor or broke? No. We have trillions in un-capitalized wealth. We are the richest nation in the world by miles and miles. And, despite the hurdles placed in its way, our economy is growing.

    Is it just that there’s no work that needs doing? No. Opportunities exist for major returns on capital investments in infrastructure, energy creation, and future technologies that would keep America on top for the next century.

    So where’s all the money? It’s in the banks and investment firms, using intense leveraging and market tricks to making more money for the supremely wealthy without actually investing in anything. (Investing in things is risky. It takes time to pay off. Front-running the market with micro-second transactions is easy and quick.)

    How can we get that capital out of the banks and into the economy so that it can be used for projects that will create jobs, spur growth, and create demand? Tax rich people and corporations. Tax capital gains as income (which it is).

    The “confidence crisis” of the future is a myth, a nightmare story to scare the villagers. But we have a real problem right now and the tools to fix it. The Republicans are mendacious, after Bush, I’ve grown to expect that. But why are the Democrats such complete flippin’ cowards?

  • indy

    In my view, one of the trouble with unions (public and private sector), is that they negotiated big pension benefits for their members and doing so killed the golden goose.

    Well, there is plenty of blame to go around. Companies were basically happy to trade away future liabilities in order to gain current improvements to the bottom line.

  • Rewena

    “In other words, it’s not that unions are getting cushy deals. It’s that non-union workers have been getting shafted and don’t know it.”

    Amen, and one can’t help but wonder just how long it will be before people get this.

  • D Furlano

    IMF better watch out our the US will cut their funding.