About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Wednesday, July 27, 2011

Debt Limit: It's Showtime (Part 2)

The latest numbing fiasco involving the raising of the debt limit for the Treasury merely extends
the damage done to the US economy and society since the beginning of the new century. The US is
on a course of eventual economic destabilization and social dissolution and it is up to Obama to
try to stem the descent even at the cost of his presidency. Issues ahead:

A US Default
The president needs to veto any and all riders to a bill authorizing an increase in the debt limit
which does not run for a minimum of 18 months and / or mandates large cuts in federal spending
and / or tax increases which would commence prior to 2013, earliest. If necessary, the president
should be prepared to unilaterally authorize the Treasury to issue additional debt to finance already
appropriated spending levels so the Treasury is not in violation of its responsibility to provide
such financing. Impeachable offense? Could be, but that's what might be needed in the worse

Credit Rating Downgrade
Official Washington should wave off this issue even if the rating agencies are prepared to
downgrade US debt. It is far from clear that the US economic recovery can sustain itself without
fiscal / monetary support. Fundamental improvement toward growth sustainability is underway
but the process is so slow that large cuts in federal spending or major tax increases which come
too quickly will significantly undermine potential for further recovery.

Fiscal Restraint 
Reliance on accomodative monetary policy, including even a new round of QE, is likely no
substitute for maintaining a high level of fiscal support at this delicate point in the recovery

Spend More & Tax More
Not a chance of this in the current environment, but I would look contructively at raising
taxes on high income earners and using the proceeds to fund direct job creation if the private
sector is unwilling to step up hiring. If job creation can be accelerated by tax reform or tax
credit programs, I would add that to the mix.

At this juncture, it is absolutely imperative for the US government to begin the long and hard
process of reclaiming the trust of its citizens. Further fracturing of this compact will speed up
the burn time on a fuse of discontent already lit. Never forget the law of unintended consequences.

No comments: