AMERICA’S DARKEST HOUR

I do not mean this to be hyperbole. There is no greater danger than the one that comes from within. And it is in play.

No Give and take- Democrats and Republicans can have their spats; it is part of the game. But the ballet in Washington now puts the nation and its finances squarely at risk –and over what? It seems that a number of Republicans ran for office on the pledge of no new taxes, but when push comes to shove and deal making requires taxes they are more concerned about their own necks than about the fate of the country. Such is the stuff that patriotism is not made of.

The obscure prize- And what of taxes, that powerful elixir that drives this insanity? Let’s look at a seven year moving average of the top margin tax rate Vs real GDP growth:

OOPs the chart does not want to print, you'll have to request that from me

Surely THIS can’t be what they are fighting over? The correlation between high tax and high growth is 0.46. That’s right. In the post-war period the higher the top margin tax rate the stronger was growth.

Now I know blood is going to start to boil over this. We know it’s the taxes you pay that matter but the tax rate you avoid is pretty important too. And the simple point here is that the simple tax rate is not a powerful predictor, is it? So what is this tax debate really about? It’s about re-election. Period.

That is not to say that I think high taxes are ‘good.’

It’s all about MEEee - It is simply clear that taxes are not the end of life for growth like drinking poison. It may be the end of the line for those who overpromised to get into office, however. And we should not mortgage our future for their sake. They are now putting the country under extraordinary stress because they have set up huge spending cut targets and want to give nothing in return. Has politics ever worked like that? No. Only if you have really big leverage can you do such a thing. And they are holding hostage the United States of America.

Cartoon Economics: Ron Paul is the real character is this whole charade that I would most like to eject from the discussion. He may not be so influential but he is spewing the most incredible lies about our country. He gets paid his deference as he is a senator and he chairs the all-important Senate banking committee. How did a guy with such warped views of the US economy get to hold such an important position? His economic statements and knowledge are severely wanting. In a recent interview (click link below)

Ron Paul tells it like it ain’t:

http://www.bloomberg.com/video/72444680/

Mr. Paul was asked about the importance of the US AAA rating. His response was evasive and then he made outrageously false statements. He first says that ratings lag and the US has not been worth that rating for some time. Then he says the US is bankrupt. Then he says that the rating could be kept in the short run but that it would eventually be lost.

None of this is true.

Still numero uno- The US is still the wealthiest most productive nation on the plant. When its leaders tell lies like this it depresses the American people and makes them feel helpless. Some may even believe it. And if they do it’s not surprising that they go for Mr. Paul’s idea which is to not defend our rating; he has even said that the US should repudiate its debt! And he is a financial leader of this country. Why has his own party not locked him away in a closet somewhere?

Uncle Scrooge? - Why should the richest county in the world not pay its bills? What is to be gained in doing (not doing) that? What would happen to the rest of the world if we did that? And what would happen to our own most conservative institutions if treasury debt were to go into a true default, not a technical one, which is Mr. Paul’s idea?

It’s hard to go down that road but the Great Depression might seem like a picnic in comparison. The great recession would be known as the minor precursor.

Hard deadlines/soft thinking- The game being played about the August 2 date not being hard deadline is a real fool’s game. And as such only real fools should play it. As the Fed Chairman points out, that is a dangerous thing to do. Just think about it: here is what is being proposed- To prioritize debt payments for tax revenue and then pay other bills as the treasury ‘can.’ It does not take much of a financial expert to see that this would lead to cascading lay-offs first in government and then spreading elsewhere. Other kinds of payments ‘defaults’ and would weaken the economy and future tax revenues to the point that the government cuts would have to get even deeper. This is not a plan it’s a guarantee of a severe recession and worse. I don’t think Aug 2 is a drop dead data in the sense that if we do not lift the limit on that date the US will default and the world will come to an end. But it’s an important date and the legislators/politicians should respect instead of trying to ‘fool’ with it.

Whose deficits are theses? - Republicans blaming the Democrats for the weak economy is just not reasonable since both parties were responsible for the financial excesses that led to the financial crisis and the economic recession. Both parties are failing in getting the economy in gear. I do fault the Obama administration for a poorly constructed stimulus plan but that is only one part of it.

Desperation demands grow- On balance we have little balance. As the impasse has dragged on the Republicans seem to up their demands. The recent one: Boehner’s call for a balanced budget amendment. The Fed Chairman has come out against such a thing because it would be too inflexible. As upset as you are with current policy imagine if such a rule were in place today and the recession was causing not just state and local governments to pare down activities and fire people but the Federal government as well.

The debt ceiling BELONGS to Republicans too- Republicans keep getting heated up about cutting as much spending as we hike the debt ceiling. But that is a huge target. Democrats clearly want something in return after all Republicans act as though the debt ceiling is a Democrat objective and should compromise all sorts of stuff to hike that ceiling. The Republicans have vastly misjudged their leverage and position and are struggling to find a way forward.

Debt is a legacy- The nation’s debt simply reflects all the spending that has occurred that Congress, both Republicans and Democrats, has authorized in excess of revenues. What now is this opposition to hiking the debt ceiling? Is it bait and switch on the part of those who oppose the hike? Is this some cruel trick by Congressmen and women who voted vote for all these spending programs now want to vote to not fund them and blame Democrats? Apparently tax hikes and closing tax loopholes are not on the table either. With what are the Democrats supposed to bargain? Obama seems to have been quite flexible in trying to get some revenue raisers in compromise but not calling them tax hikes.

In my view this is the Republican’s gambit.

Their risk- They are the ones talking about shutting down government and about not hiking the debt ceiling. If anything bad happens they will be blamed. Their tactics already may have cost them dearly among moderate voters. One thing these newbie Republicans do not seem to understand is that the voters want spending cut but none of their benefits cut. So Republicans may yet see a backlash from their single-minded interpretation of their election mandate which, on close inspection, is much more complicated then they admit.

In all of this I fear for the nation. We have some real kooks in positions of power and I fear that the Republican leadership is not in control of its own forces as the newbies are driving the leadership to a hardened position that could prove fatal.