Tea Leaf: Debt commission could provide political 'cover,' may be best road to follow

Published: Tuesday, July 26 2011 12:00 p.m. MDT

How does one write a timely piece about an ever-changing topic … about one which may or may not get resolved in coming days … about one that may or may not lead to a downgrade of this nation's $14 trillion plus outstanding debt … about one that may or may not lead to a financial crisis … about one that could result in an historic effort to begin the process of limiting future growth rates of U.S. government spending, or merely kicks the can further down the road for politicians to deal with later.

Given all of these uncertainties, certain factors seem clear:

An actual default on U.S. interest payments or maturing debt payoffs is highly unlikely to happen. The enormous egos found in Washington, D.C., have an eye to the future.

I guarantee you that President Barack Obama, U.S. Treasury Secretary Tim Geithner and other key political players in the debt ceiling increase showdown DO NOT want to be identified in future history books as those who were "minding the store" when this great nation defaulted on its debt. (I could be wrong — wouldn't be the first time, nor the last.)

You can bet that the Treasury secretary and the president will do everything in their power to keep interest payments made and bond maturities paid. In fact, financial data suggests that tax inflows in recent weeks to the U.S. government have been decidedly stronger than expected.

The Aug. 2 date of potential default has been unofficially extended in some circles to Aug. 10-15, with numerous observers noting that the U.S. Treasury Department could juggle funds so as to keep most payments made well into September. Social Security payments and military pay will also continue, with the possible need to then prioritize other payments as necessary.

Barring a much stronger plan to boost the debt ceiling and reduce future budget deficits than currently seems likely, at least one of the three major debt rating agencies — Moody's, S&P and Fitch — will likely reduce the Aaa/AAA/AAA bond ratings of the United States of America within six months. This remains true even if the debt ceiling is passed and is combined with what is viewed as a weak plan to get this nation's financial house in order.

Granted, the credibility of these rating agencies in recent years has been reduced to somewhere "between zero and none" after they totally missed the sub-prime mortgage lending crisis of three to five years ago.

However, a lowered rating regarding the quality of U.S. debt will lead to modestly higher U.S. borrowing (interest) costs for years to come. In turn, borrowing costs of corporations for debt and of consumers for credit cards, auto loans and mortgage loans will be modestly higher than would have been the case with an adult-like response of national politicians in recent days, weeks and months. How sad. How pathetic.

For the umpteenth time, please note that the term "spending cuts" should be taken off the negotiating table. In regard to entitlement programs of Social Security, Medicare and Medicaid, as well as with most government programs, we are talking about slowing down future growth rates of spending. Any reference to "spending cuts" is only when compared to long-term baseline projections of spending. We will spend more money each year on all of the entitlement programs, as well as most other programs.

For example, politicians like to infer that reducing a future program's growth rate from 9 percent annually to 8 percent annually is a spending cut. Only in the fantasy land of Washington, D.C., can you spend more money each year on a program and call it a spending cut. Rather than provide clarity to taxpayers, politicians prefer to demonize the other side with talk of spending cuts. How sad. How pathetic.

Assuming the high likelihood of an increase in the debt ceiling in coming days (the debt ceiling has already been increased 100 times since 1940), the focus will then be on creating a viable plan to reduce unprecedented and destructive budget deficits in years to come.

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