The Great Debate

The route to a real budget deal

There are glimmers of light in our battle to put America’s finances in order. New hope for a long-term budget deal has come in the form of two ideas, both from outside Congress, that many of our elected officials have embraced:“No Budget, No Pay” and “No Deal, No Break.”

The critical matter now is whether these two initiatives will lead to serious negotiations, or just be rhetorical weapons in Washington’s political warfare.

Both these campaigns speak to substantive needs we have as a nation. “No Budget, No Pay” is a signature campaign of No Labels, a national coalition of Republicans, Democrats and independents advocating that Washington should focus on progress not partisanship. I am a co-founder of this group.

“No Deal, No Break” is a nonpartisan effort supported by my organization, the Comeback American Initiative, and others. It is pushing for Congress to stay in session until a deal is reached.

“No Budget, No Pay” is intended to pressure our politicians by withholding their salaries if they don’t pass a timely budget. Federal law spells out that Congress should pass a budget by April 15 each year. Yet the Senate has not passed a budget in four years, and Congress has not passed a budget and related spending bills on time in 15 years.

Time for a serious deficit plan

 President Barack Obama pledged to cut the deficit in half by the end of his first term. But because he focused on political gimmicks, rather than real reform, we’ve seen trillion-dollar deficits and nearly $6 trillion added to the debt instead. Based on what we heard from the president at a news conference Tuesday, his unserious attitude is likely to continue.

That’s worrying. Unless we can get a handle on Washington’s overspending, and quickly, it will continue to undermine our economy and jeopardize our children’s futures.

Sadly, the White House is not yet serious about doing that. Instead, it has predictably suggested politically driven tax hikes as appropriate offsets for the sequester, including a tax on corporate jets. If that sounds like a poll-tested P.R. gimmick rather than a serious solution, that’s because it is. A permanent tax increase like that would take 10 years just to raise enough money to replace one week’s worth of the sequester.

El-Erian on the S&P’s negative outlook for US debt

JEN ROGERS, REUTERS INSIDER: S&P sending a shock through the markets after the credit rating agency cut its long term outlook for the US to negative from stable saying it believes there’s a risk US policymakers may not reach an agreement on how to address the country’s long term fiscal pressures. PIMCO has also had serious concerns about the US fiscal outlook, shifting to a short position in US government-related debt in March. PIMCO’s CEO Mohamed El-Erian joins us now. So Mohamed, can you help us make sense of the bond market reaction to this news. Treasuries by and large now higher on the day; equities seem to be the one’s taking it on the chin. What do you make of this?

MOHAMED EL-ERIAN, PIMCO: So on the treasury market, you’re seeing a steepening; you’re seeing the front end doing better and the long end doing relatively worse. And the reason for this is simple: people now recognize that you’re gonna have to have some sort of fiscal tightening which means that the outlook for growth is less bright than it was before the announcement and therefore, short term treasuries are gaining. However, long term treasuries which reflect the fiscal risk premium are doing less well. As regards to other assets, it’s very simple. You cannot be a good house in a deteriorating neighborhood. So, be it equities, be it credit, they’re all being hit because people are realizing that the neighborhood itself is deteriorating.

ROGERS: You have been outspoken on the US before. A lot of people seem to be caught a little bit off guard by this news. Surprised- were you surprised?

from James Saft:

Private equity wins, U.S. creditors lose

James Saft is a Reuters columnist. The opinions expressed are his own.

The move to reform taxation of billions of dollars in so-called carried interest paid to hedge fund and private equity executives is dead and prominent among the mourners should be investors in U.S. debt.

A country that can't even get it together to ensure that some of its highest paid people pay as much proportionally in tax as their secretaries and personal trainers is a country with very little hope of effecting meaningful budgetary reform.

Suffice to say that the long bond didn't sell off on news that U.S. Senate Finance Committee Chairman Max Baucus has dropped a higher carried interest provision from his since-defeated tax bill, a sign that the Democrats have effectively given up hope of the measure. The news should, however, make holders of U.S. debt even more willing to sell to the Federal Reserve, currently buying Treasuries often and in size. The script has been written for tax and spending reform over the next two years and for lenders to the U.S. the story does not end happily.

Government debt’s Minsky-ish moment

If government debt is the new subprime, it may just turn out that Greece is a Florida condo while the United States is a single-family house in a nice mid-Western suburb, the kind of place that fell 15 rather than 50 percent.

In considering the Greek, or European, sovereign debt crisis, the common line of argument, which is true if incomplete, is that the U.S. is far more different than similar; it possesses its own currency, which just happens to be the world’s primary reserve unit, its economy is stronger and more flexible and its institutions better developed and more credible.

All true, but there is a funny feeling that investors, prompted by Greece but also having looked at better credits like the U.S., are doing a fundamental reevaluation of the risks of lending to governments. This may end at Greece, it may end at Portugal, it may end at Britain, but it is not over yet.

Global imbalances: out with a bang?

jamessaft1.jpg(James Saft is a Reuters columnist. The opinions expressed are his own)

The simplest way to end the imbalances in the world’s economy is also sadly perhaps the most likely: for the Chinese to stop buying U.S. debt.

This is not going to happen anytime soon, for one thing deleveraging in the U.S. will for a time make U.S. Treasuries look good value, but a buyer’s strike is a heck of a lot more likely than the orchestrated rebalancing the U.S. will push at this week’s G-20 meeting of leading nations.

The U.S. plans to advance a plan at the Pittsburgh summit to fundamentally change the balance of the global economy, which over the past 15 years or so has been characterized by over-borrowing and consumption in the West provided and financed by savers and workers in Asia.