Government Open till May 16
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by John Dalt

4/11/11

Congress and the White House agreed on a budget for the balance of this fiscal year late Friday night.  Major news outlets sighed at the ‘disaster averted.’ We wonder.  The U.S. national debt ceiling is authorized at $14.29 trillion dollars.  That is all the money the government can borrow.  Treasury Secretary Tim Geithner estimates the U.S. will have borrowed that amount by May 16th.

In a letter to Senate Majority Leader, Geithner wrote that Treasury could take ‘extraordinary measures’ to extend the timeline, perhaps up to eight weeks.  After that, all government payments would cease until money came in.  This is where the name “Pay as You Go” comes from, not unlike what everyone else on a budget does!

The government spends about $125 billion more than it receives EVERY MONTH.  Geithner wrote Reid that, “In order to avoid an increase in the debt limit, Congress would need to eliminate annual deficits immediately.”  Sen. Charles Schumer (D-N.Y.) told Meet the Press yesterday that Republicans should take the debt-limit threat off the table.  He said, “It could be a formula for recession or worse, so this is playing with fire.”

The problem the Republicans have is they didn’t shut the government down this weekend.  Everyone at the table has seen their ‘hole card.’  It is a joker.  House Majority Leader Boehner probably did his best, fearing the backlash from the mainstream media if the house would ignore negotiations and planted their feet in concrete.  The funding cut for Planned Parenthood was a misstep; it gave the democrats a storyline.  There was weeping on TV, women’s healthcare was on the line, according to Harry Reid.  One Senator said the Republicans were willing to let women die.

What happens if Congress does not raise the debt ceiling? Fox News reports, the U.S. Treasury would not be able to legally borrow money for the government to pay bills. Payments on bond redemptions and interest would be stopped; the government would discontinue issuing Social Security Checks, Medicare benefits, and Veteran benefits. The government would only have money that came in through taxes and fees available to spend.

The U.S. would not like the ramifications of not raising the debt ceiling.  The dollar enjoys status at the “world’s reserve currency.”  This would be severely challenged by the uncertainty created by the “Mother of all Budget Battles.”  Foreign owners of our debt might start to question U.S. Treasuries as a ‘safe haven’ investment.  At that point our debt markets would be exposed to the bond vigilantes, just as Greece, Ireland and Portugal have been.

The International Monetary Fund (IMF) warns that the U.S. needs to raise all taxes and make immediate and permanent cuts of 35% in all transfer payments (Social Security and Medicare).  David Walker, former Controller of the Currency, now with the Stanford Institute for Economic Policy Research warns that, “America’s fiscal condition is now actually worse than that of two PIIGS countries already known to be extremely vulnerable to crisis---Spain and Italy.”

According to Weiss Ratings, the U.S. debt and deficit ratios are the same or worse than Spain, Portugal and Greece.  America is the world’s largest debtor nation.  The U.S. government books are a mess.  Government books have not passed the official audit by the Government Accountability Office (GAO) for 13 years in a row.

The market ‘officially’ starts earnings season today.  We have five weeks until the debt ceiling will reach a crisis.  We expect generally good earnings, but fear forecasts may be weak if they take into account inflation fears.  The next five weeks could be a race to the edge of a cliff.  Be cautious.  Be agile.

The Mailbag:
I must disagree with you that there will few supporters of the effort to control spending.---paid up subscriber R.A.

John’s reply:  I did not make it clear, that reference was to the mainstream mass media.  They will bash the GOP (and Tea Party) for any shutdown.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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