U.S. Continued Debt Ceiling Debate

By: Ian Campbell | Tue, Jul 26, 2011
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Rather than reference and comment on any one or more of the multiple articles and ongoing media streaming of the 'toing and froing' of the U.S. Debt Ceiling debate, this morning I am simply going to summarize what I think are the likely outcomes and consequences, and what I think about reported major stumbling blocks to agreement.

  1. I continue to believe there will be agreement before the August 2 deadline. If I am wrong, I say 'batten down the hatches';

  2. Irrespective of the ultimate terms of said agreement, in public (that is, what one can see when one can't see 'behind closed doors') all the U.S. politicians with the exception of President Obama and perhaps House Speaker John Boehner, will not have come out of this 'smelling like roses', and the U.S. political system will have lost broad credibility with both U.S. citizens irrespective of party, and with the world at large. If I am right in this, in many respects I think the latter is a potentially bigger problem for America than is the former;

  3. I think that irrespective of outcome, assuming political compromise and with expected ongoing significant U.S. Federal deficits for the foreseeable future, I think it likely U.S. Debt will face a debt ratings downgrade, albeit likely a limited one. If this doesn't happen immediately, I anticipate it will happen in subsequent months, not years;

  4. The very manner in which the debates have evolved and been publicized is but further strong evidence that if the United States is not as a practical matter already a plutocracy, it is most of the way to becoming one - a plutocracy being a society where 'rule or control' is 'by the wealthy';

  5. If what President Obama is saying publicly is what he is saying behind closed doors (and I will be surprised if that isn't the case) the Democrats have been and are prepared to negotiate on the social entitlements they dearly want to preserve. The Republicans to date have been reported as completely unwilling to negotiate tax increases for the wealthy in America. If nothing else, you have to give them an 'A' for consistency. However, this is a case where as I see things, an 'A' for consistency gets you to the bottom of the class, not the top, and further ought to get you in the corner of the classroom with your face to wall and a dunce-cap firmly upright on your head, or - in the good old days - the 'strap';

  6. As for the dunce-cap, the Republican's theory behind not increasing taxes presumably is rooted in a belief that the private sector is far better at employing capital, and hence increasing the number of available jobs, than is the public sector. That's the theory, the practice likely has a good deal to do with keeping the Republican's coffers full. The theory makes sense to me, but I think the Republicans application of it goes somewhat overboard. To cite only one example of how the U.S. income tax system mis-functions from my perspective, it is my understanding that U.S. Hedge Funds, depending upon their investment success, are taxed federally on a portion of their income at long-term capital gains rates, which are lower than rates of tax levied on income. Assuming that to be the case, that makes no sense to me. If the business of a Hedge Fund is to make money as its principal objective - a thesis hard to argue with - it seems logical to me that all of its income both in theory and practice ought to be taxed as income earned, and no portion of its income ought to be taxed as a capital gain - including their carried percentage interest in long-term capital gains enjoyed by their clients. As for loss of job creation if that Hedge Fund tax treatment was changed, I can't imagine U.S. Hedge Fund managers being demotivated as a result, and I would be surprised if they didn't create more jobs if that was in their best interest. And that is but one example of raising the taxes of the U.S. wealthy that only makes sense to me. I am sure there are many others I could cite if I better understood the details of the U.S. income tax system;

  7. The Republicans unwillingness to compromise on income tax increases for the wealthy, if that unwillingness survives any final successful negotiation, will do two things. First, I think it will reflect in the minds of Main Street Americans on President Obama as a 'lame duck President' in circumstances where the average Main Street American simply won't understand the importance of the Debt Ceiling increase, and think that President Obama 'sold them out'. Second, will reinforce for Republicans the political contributions from the wealthy they will need to have any chance of electing a Republican President in 2012; and,

  8. Any way you cut it, this well publicized 'negotiation charade' will have done America no good on the world stage, or prospectively.

 


 

Ian Campbell

Author: Ian Campbell

Ian R. Campbell, FCA, FCBV
Economic Straight Talk

Through the Economic Straight Talk Newsletter Ian R. Campbell shares his perspective on the world economy, the financial markets, and natural resources. A recognized business valuation authority, he founded Toronto based Campbell Valuation Partners (1976), Stock Research Portal (2007) a source of resource companies market data and analytic tools, and Economic Straight Talk (2012). The CICBV* annually funds business valuation research in his name**. Contact him at icampbell@srddi.com.
* Canadian Institute of Chartered Business Valuators
** through The Ian R. Campbell Research Initiative

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