On the Debt Ceiling Debate

After digesting several hours of debate and news coverage over the weekend, it occurs to me that this affair fits rather nicely into my concept of the global macro theme at work: the US economy, with adverse demographics and now so tightly integrated into a global economy which is slowly but inexorably leveling living standards, is simply having to respond in some appropriate way.

The debate is ostensibly about the near term problem of the Federal government’s operating deficit and accumulated debt, but quite a lot of the contention revolves around social security and medicare. Now, if I recall correctly, SS/MC are a separate trust fund, so they aren’t even a part of the operating budget calculations. That being the case, we have two separate debates going on here but they are being combined in a way that does make sense in seeing the long term fiscal picture, but is probably lost on a good number of US citizens.

On the operating budget side the problem we have, and I don’t see anyone framing it exactly in this way, is that the economy is fine, labor is highly productive, but we have about 15 million people too many that the economy doesn’t need to produce the output it produces. We’re simply not going to get mass production industry back from China and other offshore countries because we can’t push compensation low enough to be competitive, period. The debate resolves down to how we are going to carry the extra 15 million.

Democrats for the most part see it as a moral duty to provide some maintenance level of living standard for them, either by direct employment or by public spending run through the private sector. Republicans for the most see this (correctly I believe) as a drag on the economy. The reason we aren’t having a coherent debate is that we have a moral argument on one side and an economic argument on the other. The are each having a one sided debate so there is nothing much to agree on. If we can get to a place where we can figure out how to employ them productively through government policy, fine. If not, then the market needs to be allowed to sort it out. As an optimist, I don’t see the outcome as necessarily bad.

As for the SS/MC dimension of the problem, it looks like the classic failure of a ponzi scheme, which is literally what those programs are. So long as the working population was growing faster than the retired population, the system worked fine. Now that the demographics have shifted (we have seen data about the shrinking size of the workforce) it collapses. Plain and simple, no debate needed. We’ve known about this for a long time.

Strip out the disability part of social security, set the retirement age to 70, means test the benefits, and we are good to go. Medicare and medicaid should be shut down, period. Too much opportunity for waste and fraud, and there is no credible way to police it effectively. Health care is an area where market discipline is really the only way to go, and a Paul Ryan type plan is a sensible way to approach it. Insurance companies get a lot of criticism, much of it deserved, but they generally do a decent job of pooling risk and controlling cost.

Hmm…that sounds dangerously close to a political post, and we said we weren’t going to go there. I’m sticking with the economy category on this one.

5 thoughts on “On the Debt Ceiling Debate

  1. Hi Harry,

    Thanks for this very frank and realistic view of the economic issue. It could be construed as political by those who have something to lose. But I see it as being honest.

    Thanks for having both the insight and the courage to post this message.


  2. Hi Harry,

    Although the market has been consolidating off and on since February 2011, it seems that today’s upside may be signaling a possible upside turnaround. The market never sold off 10%, so this sideways movement qualifies for a flat base. And recently the market has been carving out a symmetrical triangle.

    Although there may be more selling in the work, it is possible that the market may be anticipating a positive outcome to the debt issue as there are signals of bullish resilience, IMO.

    I am curious to see how this plays out, especially to see if the latent bullishness is triggered.

    And I enjoy, all this time, reading your analyses of the market: stocks, bonds, and commodities. I’m not much on following currencies. Yours is a difficult job and I commend you for your work.


  3. Hi Harry,

    My apologies for being so wishy washy, but one small detail threw a monkey wrench into my analysis. I want to retract my comments and revert back to my old stance. I think the market is going to do the opposite of what I stated.

    I have been seeing great weakness in this sideways market. The buying is weak with the technicals showing divergences. Having just added an old technical tool back into my charting did the trick for me.

    So with the approach of the August 2 debt ceiling deadline, instead the market might sell the news. The possible Head & Shoulders might come into play.

    And I haven’t been able to make head nor tails with the Elliot Wave count. I don’t know what it is doing.

    It is so easy, for me, to become confused analyzing the technicals for swing trading, it is no wonder that I continue to flounder. My only excuse is that congestions are hard to trade.

    In closing, I realize that this is a consistent problem that I face as I try to coordinate the various time frames into one cohesive picture.

    Thanks for listening and, again, my apologies. Making analytical stock market decisions is a tough business. But I’ll keep trying.


  4. Aloha Shirley,

    Prolonged sideways markets are hard to trade indeed. This market has me feeling bullish one day, bearish the next. When the picture gets murky like that I try to simplify my analysis. Elliot Wave counts and the like are out of the question, it’s back to the basics. For me the basic facts are a mixed bag:

    On the bullish side, the major indexes are above their primary moving averages, earnings are coming in above expectations, and the leading stocks are acting well. On the bearish side, the major indexes have made lower highs, and the financials still look awful. Then there is that debt ceiling nonsense you mentioned, hanging over the market and creating uncertainty.

    On balance, I am neutral to mildly bullish on both stocks and corporate bonds, though we remain overweight cash in the total return portfolio. I have to admit I am second guessing this positioning constantly, as it would be better to collect coupons and dividends on stocks and bonds that are going nowhere than to hold cash and get nothing. However this is summer trading, and these goofy politicians may yet throw us a curveball, so I am keeping plenty of cash to move into opportunities that may yet come.

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