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Debt Deal, Our ‘Walking Pneumonia’ Economy, QE3 and More ‘Sense on Cents’

Posted by Larry Doyle on August 1, 2011 7:40 AM |

What now? What lies ahead on the challenging and winding road filled with clouds and great unknowns that defines our American economic landscape?

The political circus in Washington has clearly taken center stage over the last few weeks. Watching this show has been anything but entertaining and don’t think the theatrics do not harm our economy. They do.

Uncertainty breeds risk aversion and our economy needs people and businesses willing to take risks.

Can we assume that the passage of a bipartisan debt package means we can get back to business as usual and that the economy will rebound? Not so fast.

Business as we know it has been anything but usual over the last few years and will be anything but usual in the years ahead. In fact, in the near term I am fairly certain that this debt package will actually negatively impact our ‘walking pneumonia’ economy.

Our economy has not been overly robust in 2011 to this point. 1st quarter GDP was recently revised to a barely positive .4% while 2nd quarter GDP registered a less than robust 1.3%. Revisions to prior quarters received little to no attention but were also revised lower, in some cases substantially.

I read those revisions as an indication that our economy has not been recovering nearly as much as the circus performers and their sidekicks might have had us believe. Cooking the books? Playing with the numbers? No doubt but those are tales for another day.

I have long described our economy as suffering from ‘walking pneumonia’ and I believe that shortness of breath will only worsen over the next 6-18 months. In fact, Barclays just this morning revised their 2011 and 2012 GDP forecasts lower by approximately 25-30%.  That reality is a reflection that our ‘walking pneumonia’ economy will not only be with us for a protracted period but our condition will not soon improve.

I believe that Barack Obama and incumbents in both parties should be seriously concerned about their prospects in the 2012 election.

The debt deal certainly has many chapters yet to be written but as currently laid out it will cut approximately $2.4-2.5 trillion dollars in spending over the next ten years. That is not an insignificant number but do not forget that the increase in the debt ceiling is the precursor to a net increase of approximately $2.1 trillion in the short term. We are poised to continue digging deeper in an attempt to get ourselves out of this hole.

Net net, our overall debt will be lowered by approximately $400 billion. Any decrease in debt and spending is a HUGE step for our circus showmen who typically have only known how to hand out favors and pile up pork while screwing our children and children’s children.

The flow of that money, whether wisely or unwisely spent, has been akin to a flow of oxygen into our economy. Given the fact that the funds are all borrowed, the oxygen flow has effectively been laced with a silent but ultimately deadly killer in the form of excessive debt which has ballooned our nation’s balance sheet. You certainly would not and could not run your own business in such a fashion. Despite the fact that the oxygen is laced with a ‘poison’, that is the excessive debt, the simple fact is lessened oxygen flow means a greater likelihood of a slowing economy.

How might the ratings agencies react to this debt deal? Recall that these agencies have previously stated that they needed to see credible reductions in spending of upwards of $4 trillion in order for us to maintain our AAA rating. With spending cuts in this debt deal projected to run only up to $2.5 trillion, how do the ratings agencies maintain credibility if they do not downgrade our debt to a AA level?

If that were to happen, Terry Belton, an interest rate and derivatives strategist at JP Morgan (an individual with whom I worked and for whom I have untold respect) projects that our longer term interest rates will increase by 50-70 basis points (.5-.7%). Those increased costs of funding our debt will go a LONG way in eliminating the savings as currently projected in this debt deal. Do you get the sense we are merely treading water as we go down a sinkhole?

What does this all mean? What do I foresee on our near term economic landscape and how can we truly change the game to salvage our economic future?

In the short term, do not be surprised that Ben Bernanke undertakes a third round of quantitative easing in an attempt to support the economy but also monetize the debt. This QE3 may further prop asset valuations but would further pressure the value of the dollar and once again spur inflation. You’ll be getting screwed once again when you go to the pump or your local market.

Over the longer haul, truly meaningful debt reduction relative to GDP needs to be addressed from both ends. Serious reform in entitlement spending needs to happen. I only see that happening via a means testing. In terms of generating real growth (not the phoney government induced growth which we have seen over the last few years), we need meaningful reform in our tax code so we can compete globally.

Can these reforms happen in a Washington which is in bed with so many partners and involved in so many different incestuous relationships? I do not believe so.

As we have seen over the last few weeks, Washington is clearly more the problem than the solution. Public service was never meant to be a career in which the showmen fill their personal coffers and trade their favors.

Washington and America need meaningful change that will only come from imposing term limits. Then perhaps we may be able to truly enact the reforms highlighted above because our public servants will not be beholden to their incestuous partners but rather the American public.

We owe nothing less to our children so that they too may have a chance to pursue the American dream.

On that note, navigate accordingly.

Questions, comments, constructive criticisms encouraged and appreciated.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.


  • This debt deal is yet another fine example of what Sheila Bair called ‘short terming’. Apparently Washington was not listening.

    The upshot hopefully will be that more of the old paradigm politicians, Dems and GOP alike, will hit the road in 2012 as We The People vote in more of those who truly have the interests of the American people, not their bed partners, at heart.

    • Bob Burnitt

      Yeah, Cate, it is just “kicking the can down the road”. No surprise there, did anybody really think they were going to do anything different???

      They are going to maintain the status quo until something BIGGER than they are KNOCKS them out of the drivers seat. They are not going to voluntarily do ANYTHING to end this Ponzi Scheme. Somebody WILL though, something or sombody OUTSIDE ourselves is going to “fix” this mess. At some point it will hit the fan. There will be NO recovery until things find their natural and TRUE bottom. Rigged Capitalism is all it is. The world will get tired of it.

      The thing that frustrates me the most is I KNOW when the Big Bang comes, they will STILL try the same old gimmicks to fix the problem. You know, “Lets try the same old thing and hope for results!!!” Sombody told me that IS the definition of mental illness, BB

  • This latest Congressional ‘promise’ to do some potential tinkering in the rate of government growth over the next 10 years is another great triumph for Wall Street Banksters, Fruadsters, Gangsters and Oligarchs.

    Mainstreet Business sees this for what it is: The latest SELLOUT of America by Republicians and many Tea Partiers that will only delay our wild ride to the bottom of the world economic heap.

    Following a few weeks of partying on Wall Street, reality will once again rear its ugly head.

  • There is more at work than spending concerns, “debt ceilings,” and other euphemisms to throw a cloud of doubt and confusion into an already messy situation concocted to further allow tax policy dysfunction to become a convenient tool designed to shrink the economy and enlarge the fortunes of the super wealthy. In our tragic failure to close loopholes and another other “incentives” designed to secure ever growing armies of cheap labor, we have invited the most exploitative elements of American industry to continue draining the American labor pool in favor of the lowest common labor denominators to be found in so-called “emerging markets.” Warping of the tax code, the quiet central force at work under the table may appear far afield, I admit. But I invite further examination of this focus on tax gaming; please examine how tax dysfunction will work entirely in favor on those who are holding the nation hostage to their own shameful advantage.

    • fred

      The markets, when left to their own device, will tell us when we get it right.

      Strong Dollar
      Lower Oil
      Higher Int Rates
      Higher Stocks
      Lower Gold

  • Matt Cornell

    Larry –

    I think you hit the nail on the head when you question above how on earth the ratings agencies maintain credibility if they do not downgrade our credit rating based on this debt deal. The President of S&P is already backpedalling today on their previous $4 trillion statement. Here is a Reuters article discussing this and (like you) questioning the overall credibility of S&P now. Unbelievable:

    Did S&P Flip-Flop on US debt Target?


  • BM

    Term limits.

    The result would be an engaged electorate and representatives that want to serve not professional politicians.

    What ails us is an uninformed electorate, a political class devoid of leadership skills and policy making provided by special interest groups more concerned with 2 year election cycles and/or the next quarter profits.

    • Bob Burnitt

      Yep BM, Term limits, we need them DESPERATELY!!! These guys build up a “machine” and you cannot get rid of them. I would go for TWO four year terms to Congress and after that, it is over. I USED to be one of those people that said, “We have term limits, they are called elections” but NO MORE. My Congressdope, Joe “Poindexter” Barton, was elected to his thirteenth term last time. He is as hard to get rid of as Fidel Castro. Stagger the elections so they would not “turn over” all at the same time, two 4 year terms is enough for me. You know, Dr. Ron Paul tried VERY hard to get us term limits BUT his fellow Congressmorons would not go for it. That “senority system” they have is a root of a lot of their evil, BB

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