Fed Warns Politicians to Raise U.S. Debt Ceiling; Republicans Unveil Cuts as Democrats Eye Tax Hike to Reduce Debt

Republicans Unveil Cuts as Democrats Eye Tax Hike to Reduce Debt

Roughly speaking, the mess we are in is the worst since 17th century financial collapse. Comparisons with the 1930’s are ludicrous. We’ve gone far beyond that. And, alas, the courage and political will to recognize the mess and act wisely to reverse gears, is absent in U.S. leadership, where the problems were hatched and where the rot is by far the deepest. - Harry Schultz, The 87 Year Old Dean of Investment Newsletters Retires with a Warning, Economic Policy Journal, January 10, 2011

May 11, 2011

Reuters - Republicans planned sharp cuts to foreign aid and education on Wednesday, while Democrats weighed a tax hike on millionaires, highlighting the yawning divide between the two parties in the budget debate.

With a struggle over raising the debt limit expected to last through the summer, Republicans in the House of Representatives forged ahead with a spending plan for the coming fiscal year that points to another bruising struggle in the fall.

Republicans have pressed for deep spending cuts to get the country's rapidly rising debt under control. They won the largest domestic spending cut in history last month in a battle that took the government to the brink of a shutdown.

An outline released by the House Appropriations Committee indicated they will press for further cuts in the coming fiscal year, which starts on Oct 1.

Domestic programs would see their budgets shrink by 22 percent from the 2010 fiscal year, when Democrats controlled both the House and the Senate. The Defense Department's budget would see a 3 percent increase from last year.

Democrats who control the Senate are considering a budget plan of their own that would impose a surtax of 3 percent on millionaires, according to a congressional source. They aim to keep domestic spending roughly at current levels -- $47 billion higher than the Republican plan.

Democrats say tax increases are needed to help keep the U.S. debt at a sustainable level, and more than half of Americans agree with them, according to a Reuters survey.

Republicans say tax hikes are off the table in negotiations on cutting stubborn budget deficits, which have hovered around 10 percent of gross domestic product in recent years.

Even as the United States struggles to emerge from the deepest recession since the 1930s, the discussion in Washington has shifted from stimulus to austerity. The country is due on Monday to hit the congressionally set $14.3 trillion limit on how much it can borrow.

The Treasury Department says Congress must act by August 2 to avoid a default that would cause turmoil in markets and economies across the globe.

Republicans and many Democrats say they will not back an increase in the country's borrowing authority unless it is paired with steps to ensure the debt does not rise to an unsustainable level relative to the economy.

WHITE HOUSE LAUNCHES CHARM OFFENSIVE

The White House's top economist, Austan Goolsbee, called that approach "insane" in a speech in Chicago. Nevertheless, the White House has launched a charm offensive aimed at reaching common ground. President Barack Obama met with Senate Democrats on Wednesday, and further meetings with other lawmakers are on the agenda.

"The president was very clear in saying we can work something out," Senate Democratic Leader Harry Reid said after the meeting.

Vice President Joe Biden has separately been meeting with a smaller group of top lawmakers to see if a deal is possible.

Meanwhile, lawmakers must begin work on the 12 spending bills that keep the government running -- the subject of last month's bruising budget battle. The House Appropriations Committee's outline sets overall spending caps for those bills but does not indicate how individual programs would fare. Nevertheless it shows sharp differences with Obama, who released his budget proposal back in February.

The Education Department, Labor Department and Health and Human Services Department would get 23 percent less than Obama requested. Those agencies handle Democratic priorities like birth-control funding and college-tuition grants, which Republicans have previously targeted for reduction or elimination.

Foreign aid, the State Department and other foreign operations would get 22 percent less than Obama requested, though the blow would be eased by war-related funding in a separate account.

These funding levels are not final, but they indicate Washington could see a replay of last year's ugly budget battle, which kept government agencies in limbo for six months before a deal was reached in April.

Fed Warns Politicians to Raise U.S. Debt Ceiling

A dollar collapse could be in the cards within a few months as new technical analysis shows the the reserve currency support eroding and within the parameters of uncharted territory. Since the Fed also began implementing Quantitative Easing (QE) I and II, the dollar has been under a continuous assault as the the total amount of dollars has increased, and inflation has moved at a very fast rate in the last six months. Technical analysis shows that before we reach the end of QE2 in June, the dollar could fall below the index level of 72, which is the lowest we have seen in the modern era of the dollar after President Nixon took us off the gold standard, and simply floated the currency as a pure fiat entity. - Kenneth Schortgen Jr., Dollar collapse possible within a few months on new technical analysis, Examiner.com, March 28, 2011

May 13, 2011

AFP- Federal Reserve chairman Ben Bernanke warned politicians Thursday to raise the country's official debt limit soon or risk destabilizing the financial system.

With the cap expected to be hit Monday and the government still needing to borrow to finance its huge fiscal deficit, Bernanke told a Senate panel that "using the debt limit as a bargaining chip is quite risky."

"It is a risky approach not to raise the debt limit in a reasonable time," the top central banker said.

"At minimum the cost will be an increase in interest rates that will actually worsen our deficit," he said.

"The worst outcome would be one in which the financial system was again destabilized... which of course would have extremely dire consequences for the US economy."

Republicans in Congress have refused to raise the debt limit, which now stands at $14.29 trillion, unless they can get the White House and its Democratic supporters to agree to sweeping long-term spending cuts.

The administration of President Barack Obama has said they could agree cuts but they are also demanding some tax hikes to increase revenues.

On Friday the powerful Republican leader of the House of Representatives, John Boehner, drew a line in the sand over the issue, saying that "without significant spending cuts and reforms to reduce our debt, there will be no debt limit increase."

"And with the exception of tax hikes -- which will destroy jobs -- everything is on the table," he said.

"And the cuts should be greater than the accompanying increase in the debt limit authority the president is given. We're not just talking about billions here. We should be talking about trillions," said Boehner.

The limit will be hit next Monday, after this week's Treasury Department auction of $56 billion in new debt is settled, according to a Dow Jones Newswires report.

But earlier this month Treasury Secretary Timothy Geithner said that because government receipts were running higher than projected, and by cutting certain debt issues, the government could buy several weeks, to about August 2, before it would absolutely have to raise money over the current cap or risk defaulting on its debt.

U.S. to Sell $72 Billion in Debt as Limit Nears

Bill Gross, the founder of PIMCO, one of the world’s largest bond funds, said: “We have a deficit in the $1 trillion plus arena, which means we must borrow at least a trillion dollars additional a year in order to fund the deficit. And, so, the debt ceiling currently at $14.3 trillion, which is 95% of GDP, has to go up by another trillion or so every 12 months.” “Another trillion or so every 12 months!” Apparently, the debt ceiling needs to be raised every year for at least the foreseeable future. To put it another way, the debt ceiling, according to Mr. Gross, needs to be raised by more than $1,000 billion each and every year! Seems to me, not many people in the mainstream media are alarmed by this amount of debt accumulation or by the fact that if it is not raised, the U.S will default. - Greg Hunter, Will Raising the Debt Ceiling Bail Out the Banks, Again?, USAWatchdog.com, January 12, 2011

February 2, 2011

Bloomberg - The U.S. Treasury Department today said it would keep its long-term borrowing at steady levels and warned that the federal debt limit could be reached as soon as April 5.

Mary Miller, the Treasury’s assistant secretary for financial markets, said the department so far is borrowing as usual while Congress debates when and how to raise the $14.29 trillion debt limit. Secretary Timothy F. Geithner has warned that the U.S. faces “catastrophic damage” if lawmakers do not act in time.

“We expect that Congress will do the right thing and raise the debt ceiling in a timely manner,” Miller said at a press conference.

The Treasury today said it plans to sell $72 billion in long-term debt next week, in line with the median forecast in a Bloomberg News survey of bond dealers. The department’s quarterly auctions will consist of $32 billion in three-year notes on Feb. 8, $24 billion in 10-year notes Feb. 9 and $16 billion in 30-year bonds Feb. 10.

The Treasury now expects the debt ceiling to be reached between April 5 and May 31, compared to the range of March 31 to May 16 it predicted early last month. The department will update its forecast again in the first week of March.

Tax Legislation

The tax legislation passed in December has created an additional financing need that the Treasury will address by increasing the size of its bill auctions, Miller said. The department also sells Treasury Inflation-Protected Securities, known as TIPS.

The U.S. government has racked up more than $1 trillion in debt for the past two years. Bond dealers predicted deficits of $1.363 trillion in fiscal 2011, $1.107 trillion in 2012 and $932 billion in 2013, according to a survey provided to the Treasury before this week’s announcements.

Taking Action

The Federal Reserve is in the midst of an effort to buy $600 billion in Treasury securities through June. The program represents the Fed’s second round of unconventional monetary easing aimed at spurring economic growth and preventing inflation from falling too low.

So far, the bond dealers are not reporting any harm to Treasury liquidity because of the Fed’s actions, said Matthew Rutherford, Treasury’s deputy assistant secretary for federal finance.

“At this point there were no alarm bells raised,” he said.

Next week’s auctions of bonds and notes will raise $50.2 billion in new cash, with the rest going to pay maturing debt, the Treasury said. To help manage short-term borrowing needs, the Treasury said it may issue cash-management bills in the current quarter.

Projected Borrowing

Borrowing will total a net $237 billion in the current quarter, compared with an estimate three months ago of $431 billion, the department said in a statement. The Treasury also projected borrowing of $299 billion in the three months to June 30. In the quarter that ended Dec. 31, the Treasury borrowed $363 billion, compared with a previous estimate of $362 billion.

The estimates include $5 billion for a special program for helping the Federal Reserve finance its operations, which the department is shrinking while Congress debates how to raise the debt ceiling. The Supplementary Financing Program, which the Fed has said is “helpful” to its monetary policy goals, had been kept at a level of $200 billion outstanding.