The Fraudulent Budget Debate

This is the fun stuff about politics. Basically our politicians are being forced to do something they don’t want to do, and our job is to cut through the obfuscation to uncover the fact that they are doing exactly the opposite of what they say they're doing.

It is fairly obvious that despite what they are saying publicly, they aren’t making significant cuts to the budget. And S&P and Moody’s know this. Which means that we’ll see our gilt-edged credit rating (a curious term since there is nothing really golden about our national debt) be cut anyway. Please see the comment below on CDS rates on Treasurys.

What do we have so far?

$917 billion in cuts over 10 years. 2012 spending is capped at $1.043 trillion, $44 billion, or 4.2%, below the CBO March baseline of $1.087 trillion. 2013 spending is capped at $1.047 trillion, $62 billion, or 5.6% below the CBO March baseline of $1.109 trillion.

Then there is this bipartisan committee of politicians who will wrangle over how to cut another $1.5 trillion. If they can’t agree by January 1, 2013, cuts will be automatic across the board, one-half from defense and one-half from discretionary spending. Social Security, Medicare, and Medicaid won’t be cut. The debt limit would be increased dollar-for-dollar by the amount of the cuts.

They promise to have a vote on a balanced budget amendment by year-end.

Will the Bush tax cuts be allowed to expire? Yes, at least that is what Obama says will happen. I believe him.

This morning, David Stockman saw it this way:

… [H]ow do you like the “compromise” $917 billion Stage I spending cut? Let’s see, that’s about one-half of one-percent of the CBO baseline of $200 trillion in GDP for the same 10-years–but the problem seems to be a deficit that is 10% of GDP or 20X the cut! Also, the only thing it really does is cut $20 billion in FY 2012—the only year that is enforceable or about 1.5% of the $1.3 trillion minimum deficit for the coming year.

The usual players are stepping up to the microphones. The Republican presidential candidates are trashing it, saying they aren’t real cuts and that we can’t cut defense. The House Progressive Caucus (75 members) rejected it as well. They want more taxes and wish to cut defense. Will Boehner survive this budget legislation? Probably, but he’s going to run into a brick wall with many Republicans, especially the Tea Party Caucus.

I think this bill will pass. There are no real cuts here; it just cuts back future spending increases. It accomplishes very little other than to get the debt limit raised and stave off the inevitable for another day. But that day isn’t going away.

By the way, according to this note in the Wall Street Journal, we already have a de facto rating cut:

One-year CDS were quoted Monday at 0.45 percentage point, down from 0.75 percentage point Friday and a move equivalent to a drop of €30,000 in the cost of protecting €10 million ($14.4 million) of U.S. government debt, according to Markit. … Monday’s CDS levels now imply a credit rating of double-A on U.S. Treasurys, lower than their current triple-A rating and consistent with what some ratings companies believe is more appropriate for U.S. sovereign debt. Standard & Poor’s, for example, has threatened to cut the U.S. credit rating if Congress doesn’t produce viable austerity measures that will fix the U.S. deficit over the long term.

As I have been saying, the rating cut will come anyway, yet what have we accomplished?

Editor's Note: This article was originally published at The Daily Capitalist.

Twitter: @DailyCapitalist