Monday, July 25, 2011

Will the Outcome of the Budget Battle Signal the Demise of the Democratic Party?

I warned you to watch the bond market and the direction of interest rates for an indication of the possible outcome of the deficit deal. Up until the middle of last week the bond market was suggesting, based on the level of interest rates, that there would be a budget deal. As of the close on Friday I’m no longer sure there will be a deal by August 2nd.
During the American Civil War there was a “high water mark” which the Confederacy reached and then started it’s long decline to surrender. At the time the high water mark happened nobody knew that it had been reached. The Civil War “high water mark” was the bloody angle in the third day of battle at Gettysburg,
Perhaps the Democratic Party reached its high water mark with the passage of the universal health care legislation. We are at a stale mate in direction as to how to solve the debt and deficit problems in the United State. The Democratic Party says they are willing to make budget cuts but the “rich” have to pay more. They say they want the tax increases now and will make the budget cuts over the next 10 years. This idea is like the Ole Miss direction play in football. Try and convince your opponent that you are going one direction and then go in the opposite direction.
In the past when we have had one of these confrontations the Republicans have been the party to cave and they may well cave again this time. They seemed to have staked out the ground that insists on cutting expenses and not raising any new taxes.
If the Republicans hold their ground and the Democrats agree to entitlement cuts the President will lose his base and the Democratic Party will start to decline from the “high water mark.” If the Democrats lose the Senate and the White House in the next election it will be based on the Democratic failure to respond to the public need to restrain the budget. How can we tell Greece, Spain, Portugal, Ireland and Italy that they must adopt austerity programs while we continue to spend and spend and get deeper and deeper in debt ourselves? Is that a misdirection play on the part of the United States?
As much as I hate to say it, I do not think we will find a solution by August 2. I know that everybody knows the outcome, or they think they know the outcome if we fail to act. The ground that has been staked out by both parties will not allow them to give in and find a solution. The one question that lingers in my mind is do they care if we default? Would Democrats rather see the country go in default rather than give up their entitlement programs? I think so. Would Republicans rather hold the line on tax increases at the expense of the country going into default? I think so.
I think, in either case, the great social programs that started with FDR are history and it is only a short amount of time before it all unfolds right in front of us. As I said before, watch the yield on the 10-year T-Bond as we get closer to the deadline.
Dan Perkins


Dan Perkins, RIA said...

A light bulb went off for me tonight thinking of my college freshman economics and American History classes.

If you cut government spending And leave the tax rates as is will actually result in job losses. It will take money out of the economy which will take more of Americans discretionary income and will result in overall job loss.

If you think that by leaving the rates as is for higher earners it will create jobs, that was the thinking of Herbert Hoover and his "trickle down economics". We all know how that worked out.

Any reduction in government spending in this economy is a bad idea. It will only exacerbate the problem.

Amazing how Clinton left office with a $5 trillion surplus and now we have a $14 trillion deficit.

Oh, by the way,Boehner called the King of republicans, Limbaugh before his speech tonight. Who owns the party?


Dan Perkins, RIA said...

DM, thanks for your comments. I find it interesting that the Democratic leader in the Senate Mr. Reid has proposed a new bill that would cut $2.7 trillion from the budget over 10 years and wants no new taxes.

It seems to me that both proposals are bogus and do not tell the real story. The Reid's bill assumes that we would continue funding both wars for the next 10 years and by getting out we save $1 trillion. The assumption is that we would have stayed in both countries at the same level for 10 years.

On the other hand the House Leader proposal reduces the additional deficit to $7 trillion instead of $9 trillion. No wonder America is disappointed and disgusted with Washington.