Capital Markets Update

By Louis S. Barnes Friday, january 11th, 2013 Markets barely moved this week, and there was no new data of note except the NFIB survey of small business. Its economist, Bill Dunkelberg: “The current Index value of 88 is a recession level reading.” The index has had some better days recently, but is in the same basic place it has been since early 2008. The NFIB work is so sound, so long-running (same format since 1973), that those claiming a stronger national recovery underway have some explaining to do. The Consumer Financial Protection Bureau created by the Dodd-Frank spasm released its long-awaited Thou Shalt Not to the mortgage industry. After more than a year of probing, at who knows what taxpayer cost, the CFPB report and new rules found not one single mortgage practice underway today which should be stopped. A witch hunt worthy of Massachusetts in 1692 could not find a solitary agent of Satan. Then, back to the Fiscal Cliffs. In the serial encounter ahead, one Cliff stands out for misunderstanding: the vote on the federal debt limit. In the near-hit preplay in 2011 (and in others clear back to the ’80s) many people have shouted that a failure to pass a higher limit would result in US “default.” Not so. Absolutely not so. Money definitions and precision matter a great deal. Direct, “full faith and credit obligations of the US Treasury” are senior claims on US revenue. Default means to fail to pay interest or principal on time. We have plenty of revenue to pay interest when due, and even under a debt-limit freeze could roll-over existing debt, issuing a new bond every time one came due. “Bond” is another important word. “My word is my bond” means my promise is as good as a bond, the highest and most senior financial obligation. In a bankruptcy, senior bondholders are paid before any other claimant. If the debt limit froze and the Treasury ran out of cash after interest payments, some other federal spending would have to stop for a day or a while. We have tax revenue for about 70% of spending and intend to borrow the rest this year. Hit the debt ceiling, then pay interest, pay Social Security, Medicare/Medicaid, put Defense on a starvation diet… the rest of the government would go on furlough. Not “default.” Mr. Obama: “Congress should pay the tab for a bill they’ve already racked up.” Now we’re getting somewhere. Future spending is an “appropriation,” not a debt. All governments constantly revise future appropriations: they are not “bonded” obligations in any way. Mr. Obama’s use of the third person, “they,” is a charming way to describe those who have appropriated spending that we cannot now afford. Most of that work was done by his own party. Republicans have resisted adequate tax revenue and insisted on bloated “defense” spending. However, the Democrats in Congress ever since the 1960s have appropriated more and more social spending, never with adequate revenue support, and expecting economic growth to cover the bet. For a long time it did cover; not now, not soon. How can this be? They all voted on it, now they refuse to borrow? Incredibly, no they did not vote on “it.” As our fiscal difficulty has deepened, Congress votes on “continuing resolutions” for spending, and rarely simultaneous tax revenue. Only in the Bush I and Clinton “paygo” deals did we actually demand of ourselves income before we agreed to spend. And the result was a budget surplus. Dubya fought two wars without tax revenue, and Obama has yet to submit an actual budget. Congress just voted $60 billion for Sandy damage, but no revenue. The most important principle in democracy: Minorities should not be abused by majorities, nor should minorities abuse majorities. The Republicans are close to the line in using the debt limit to hold Democrats hostage, but the Democrats entirely deserve the treatment. Like a drunk facing intervention, they say, “Okay, okay, I’ll stop, but don’t take my booze. I can quit any time I want, but times are tough and I need a snort once in a while. Besides it’s my booze, not yours. Hey! No! Don’t break those bottles!”