Tuesday, August 2, 2011



As we come to the end of the debt ceiling debacle for 2011 and 2012 it is important to highlight what our fine leaders and representatives accomplished for us hard working folk.  I only want to highlight the key points and I'll add some thoughts below the summary.  In addition, I'll talk about market direction in the TRADING UPDATE section.

  • The compromise allows the debt ceiling to increase by as much as $2.4 trillion dollars in total. Included is an immediate increase of $400 billion dollars. President Obama would be permitted to request another $500 billion increase in the coming months, which Congress could vote to disallow by a veto proof two-thirds margin. A further increase of between $1.2 trillion and $1.5 trillion would be available after a special committee identifies matching levels of additional spending cuts.
  • The agreement calls for cuts of more than $900 billion over ten years in spending from programs, agencies and day-to-day spending. It would include security-related and non-security-related cuts. According to the Congressional Budget Office, "discretionary" spending would be decreased by $21 billion in 2012 and $42 billion in 2013.
  • The agreement creates a 12-person House and Senate special committee to identify further spending cuts. The committee must complete its work by Thanksgiving - November 23 - and Congress must hold an up or down vote on the committee recommendations by December 23. The committee could overhaul the tax code or find savings in benefit programs like Medicaid, Medicare or Social Security. Congress could not modify the committee's recommendation.
  • Should the special committee deadlock or should Congress reject the committee's recommendations, then automatic across the board spending cuts of at least $1.2 trillion would go into effect.
  • The agreement requires that the House of Representatives and the Senate vote on a Balanced Budget Amendment to the Constitution, although its passage is not guaranteed.
  • The deal also includes changes to Pell Grants and student loan programs. Pell Grants will receive a $17 billion increase for low-income college students, which will be financed by the elimination of subsidized student loans for most graduate students
Ok, here's a little refresher before we get started.  The 2011 budget is slated to be a total of $3.85 Trillion and of that it includes borrowing almost half of the sum to meet those requirements.  That borrowing represents a $1.65 TRILLION deficit.  Stated another way, we are spending almost double what we are bring in.

I'm fine with bullet one where they parse out the amounts over time.  Clearly the President got what he wanted which was a deal to get him through the 2012 election cycle.  Hasn't the guy ever heard about serving the public?  Who cares about the election, fix the problem!

Cuts of $900 Billion in ten years are a complete farce.  There are so many problems with the approach that these clowns took with this deal it is simply appalling.  First 2012 and 2013 cuts amount to around $70 Billion.  These are cuts that likely will happen, but amount to about 2% of the freaking budget!  Who runs a budget like this?  In other words, this $900 Billion is a complete joke.

The Special Committee is something that I feel is dangerous.  While I like the idea of a group getting together to actually work AND having their ideas implemented, it is dangerous in terms of who will be on the committee and who won't.  Effectively we already know that to be considered for the committee you must  have voted "YES" for the debt ceiling agreement.  That means that many of the fiscal conservatives in Congress will not be allowed to participate.  Ron Paul and others that actually vote based on conviction will be excluded, and he is exactly the one person that should be on the panel.

I do like that cuts will be enacted and if not, across the board cuts will come.  This is REALLY what has the Democrats shaking in their boots.  If the Republican caucus really wants to find cuts they can simply vote the recommendations down and the hammer will come.  Of course we all know that the Republicans talk a good game but don't really have a real desire to change anything so we'll see some other compromise that will keep the status-quo going for a little while longer till the house of cards completely implodes.

The Balanced Budget piece has no teeth.  It is interesting that almost all politicians say that they want a balanced budget, but somehow it never gets put to a vote.  My guess is that we'll have about 99% absenteeism on the day that vote is held.  That issue is one where everyone likes to affirm it, but no one wants it really.  If we had a balanced budget amendment, the government ponzi scheme would face limits and that can't be good for anyone that derives power from an unlimited and insatiable government.

Finally, the Pell Grant thing is also pretty laughable.  We are going to continue down the road of getting our young folks all going to college so they can get in line with the other unemployed folks with useless liberal arts degrees.  I actually would support this measure IF and only if Congress required these students to self-fund their expenses until they actually received their degrees (yes loans, working, etc) to make the cost to taxpayers riskless.  Second, the government Pell grants would only reimburse students that earned degrees in engineering, science, and other hard-core programs that were technical in nature.  Upon earning degree AND working for 2 years in the field the Pell grant would pay off or reimburse a student for books and tuition up to a maximum amount.  This would ensure that the taxpayer only pays for success and doesn't pay for Jimmy to "find himself in college" and also makes sure that the graduates that earned the degrees are employable contributors to society.  While it sounds tough, too bad.  WE HAVE ENOUGH UNEMPLOYED LAWYERS, LIBERAL ARTS LOSERS, AND DROP OUTS in this program, enough is enough.  It is our money and it is time to demand responsible stewardship of it.

And yes, all of those scientists could work to create the next generation of these (see video below) which just happen to be some of the coolest planes ever.  I really put them here to show you what $1.5 Billion will get you.  Now contemplate this, you could buy 650 of these awesome flying wings for just under 1 trillion.  My guess is that when all is said and done, we won't have anything to show for our use of $1 trillion in deficit spending this year, so if I have to spend an extra trillion or two I'd rather have the B-2s.

My first take on this deal is that the Democrats won.  Yes the media is howling and stating that the Republicans won and the Tea Party members are terrorists, but that is foolish.  The Republicans caved just like I said they would.  Essentially they could have gotten anything they wanted if they were willing to push things to the limit, they weren't.  The President gets to push this issue out past 2012 so he can concentrate on the election and continue telling everyone that he inherited a financial mess.

While the Tea Party may have scored some points by getting the balanced budget onto the map and even getting the special subcommittee to make cuts, they have allowed themselves to be characterized as a radical fringe group of nut jobs willing to take down the USA to accomplish their goals.  They need to be more forceful and vocal stating that they love this country and that the politicians on the left and right simply are part of the political class that could care less about the nation and its people.  They must state this emphatically every time and demand recognition that the past policies of Bush and Obama are failures and don't work.  The liberals hate the Tea Party and attempt to label them and marginalize them in order to attempt to make others discount them.  It has worked so far, but they must fight on.

Unfortunately Republicans are the the guys that are attempting to play the game of politics the best.  You can see it in the old veterans.  They are loving having a "bad cop" group that they can blame for being on the fringe and then they can go to their constituents and blame the liberal left.  They proudly sit in the middle playing both sides off each other.  I can tell they believe that they will rise to power in 2012.  The problem is though that many of us recognize this game and the time for life-long politicians is waning.  We need leaders that make hard choices and choose the side of long term financial strength for our country rather than another election cycle victory. 

Here is a list of those that voted for and against the bill in Congress -
Here is a list of those that voted for and against the bill in the Senate -

I will do a trading update this evening.  Please drop by again to view this post.  http://www.goatmug.blogspot.com/


Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/