Joined Nov 11, 2007
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Pile Up: See How Calamity Converges to Create a Looming Fiscal Crisis

“Nobody wants much to think about it yet, but it’s well understood by everyone in Washington and on Wall Street, that a potentially massive fiscal problem is looming for the economy next year.

The issue is divided into three parts:

  • Sometime in late 2012 or early 2013, Congress will have to approve another debt ceiling hike.
  • At the same time, all of the Bush tax cuts are set to expire — not just the tax cuts for the rich.
  • Thanks to the last debt ceiling deal, some big time spending cuts are due to go into effect starting in 2013. In theory, these could be reversed by Congress, but in the context of everything else it will be challenging.

Trying to figure out how it will shake down is especially difficult since it’s an election year.

But in the worst case scenario we could have bracing austerity (tax hikes and spending cuts) coupled with another heart-stopping debt ceiling fight. Or we could have some kind of reversal of the spending cuts and a debt ceiling fight, and perhaps another downgrade from ratings agencies, another potential confidence blast.

Just in terms of the drag on growth, recent analysis by Barclays (according to BW) puts the hit at around 3% of GDP.

Furthermore, whereas in the last debt ceiling fight, Obama was eager to ensure that there would be no cuts in 2012 (an election year), it’s not clear that he’d make the same bet this time, as a lame duck (if he wins, or even just in the lame duck session), as he’s apparently open to the idea of seeing all the Bush tax cuts expire on everyone.

All this was already known.

You’ll probably feel even worse about things after you read the latest cover story by Matt Bai in The New York Times Magazine on the failure of Obama and Boehner to strike a “Grand Bargain” in the summer of 2010.

It’s a very long, and detailed story, but one key point is that yes, Obama and Boehner, for whatever reason, did think they could work with each other, and were tantalizingly close at times to a real deal. Obama was willing to concede on spending and entitlements, and Boehner was actually willing to concede on raising revenue, a decision that could prompt a revolt within a GOP that had just been swept to power with the exact opposite mandate.

What’s also clear is that all the cliches about Boehner not really being in command of his ship, and Eric Cantor wanting to undermine him seem to be true….”

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  1. just kidding

    The plan is to eventually have negative GDP growth debt high number/ GDP negative number is a negative debt to GDP ratio…. a GDP of less than zero!! it’s perfect!!!

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