CENTRAL VIEW for Monday, July 18, 2011

Political theater: Budget cuts vs. debt ceiling

What would happen if Congress does not increase the amount of money the U.S. Government (USG) can borrow? Will it mean the end of Western Civilization as we know it? No way. The bond-rating companies will simply drop the ratings of U.S. bonds, treasury bills, and savings bond from the current AAA ratings to something lower. They will compare the amount of our national debt ($14.5 trillion dollars or $129,900 per taxpayer) to our national net worth as expressed as: Gross Domestic Product or GDP.

Back in 2006, the last year the Republicans controlled Congress, the federal debt as a percent of GDP was about 63-percent. Now, after three years of Mr. Obama, the federal debt as a percent GDP is about 103-percent. In other words, in terms of GDP, the U.S. now owes slightly more than the U.S. is worth – a recipe for financial disaster.

Investors know lower ratings indicate riskier investments, meaning investors will demand higher rates of interest. The Greek government is so indebted that investors get 16-percent interest for investing in Greek bonds. Germany, which in fair financial shape, pays only three-percent to those who invest in German bonds.

If the debt ceiling is not raised, based on the previous performance of the Obama Administration, the USG will simply print more money to cover the demand by investors for higher interest rates on USG securities. Unfortunately, printing more money inevitably leads to inflation which robs the poor and the seniors who have retired on fixed incomes.

But should the Republicans have the financial guts to refuse to raise the debt ceiling, the politically “smart” play for Mr. Obama is to shut down those parts of the USG that will inflict the most pain on the public: Stop processing Social Security checks, curtail Medicare, and close the National Parks during this vacation season.

The Wall Street Journal says the current media-inflated battle between producing a reduced federal budget and raising the debt ceiling is merely political theater. The real deal is the Congressional Budget and Impoundment Control Act of 1974. The Budget Act says the president must submit a proposed budget to Congress on or before the first Monday in February. Mr. Obama did so. But the Democrat-controlled U.S. Senate rejected Mr. Obama’s budget proposal by a vote of 97-0.

In 2011, with the Republicans now back in control of the U.S. House (where all money bills must originate), the House passed a budget bill to cut spending by about $5.8 trillion over the next ten years. The House sent their budget bill to the Democrat-controlled Senate which, so far, refuses to consider it. In fact, the Democrat-controlled Senate has not acted on a budget bill since 2009.

According to the 1974 Budget Act, the House, and Senate “small” (meaning: must) convene a conference committee to resolve their differences and present a budget to the president to either sign or veto by April 15, 2011. That was long ago. Mr. Obama met his deadline. The House met its deadline. The Senate did not meet its deadline and even scoffed at Mr. Obama’s proposed budget.

If Congress will cut the federal budget by about $2 trillion dollars and hold the debt ceiling where it is, the dollar, overtime, is likely to gain in strength. Such firm financial resolve would signal the world that the USG is serious about getting its ratio of federal debt to GDP down to where it was before the Democrats got control of Congress in 2006.

We would be, once again, the “city upon a hill” that the other nations used to admire. We would be setting a positive example for the rest of the world that runaway government spending can be brought under control. But is that what Mr. Obama wants to do? You decide.

Nationally syndicated columnist, William Hamilton, was educated at the University of Oklahoma, the George Washington University, the U.S Naval War College, the University of Nebraska, and Harvard University.

©2011. William Hamilton.

Dr. Hamilton can be contacted at:

Email: william@central-view.com