How the Debt Ceiling Crisis was Avoided

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Podcast Summary

Ryan opens the show by discussing the recent budget deal in which the Congress agreed to extend the debt ceiling until next year. Louis notes that this is what they had predicted would happen. Louis notes that cutting spending or defaulting was never going to happen. Louis notes that the politicians used the threat of default as political posturing. Louis predicts they will use this tactic again come next year.

Louis notes that many visitors to Smaulgld.com are from overseas searches about what the U.S. debt ceiling means. What foreign creditors saw during the debt debate was a Congress saying they can’t pay their debt unless they borrow more money and that they debated up until the last minute the interest was due to decide to borrow more money. Louis notes that the Chinese made a call to de-Americanize the financial system.

Louis notes that the US creditors see that the U.S. borrows money to spend on military adventures and to provide entitlements to its population. Louis notes that creditors to the U.S. don’t have any collateral to call upon if the U.S. defaults. Louis notes that foreign countries are diversifying their reserves away from dollars. Ryan and Louis discuss the political tactics notes employed by both sides during the debt debate. Ryan notes that there are some, including Warren Buffet, that believe there should not be a debt limit and there should be a law that the debt will always be paid.

Louis notes that the Fed and Congress pretend that they are not profligate to send a message to the markets that they are serious about tapering QE and reducing spending. Louis notes that eventually credibility will be lost if spending is not cut and QE is not tapered. Louis notes, however, that the economy would collapse if QE or spending were cut.

Ryan and Louis discuss J.P.Morgan Chase’s recent announcement of capital controls on their business accounts. Louis notes that capital controls are the sign of a poor economy and do not help.

Louis and Ryan discuss the implications if the Unites States defaulted. Louis notes that the much of the world would make alternative arrangements with other currencies to conduct international trade. Louis notes that if entitlement programs are not paid out there could be civil unrest. Louis notes that not paying entitlements is not a default.

Louis and Ryan discuss the politics of the debt ceiling debate. Louis discusses the issues that Republicans have in making their argument that too much spending will cause inflation and a financial crisis in that it has not happened. Louis notes that the Republicans would have been better served focusing on Obama care as during the debt ceiling debate the Obama care web site did not work and they could have scored political points. Louis notes that Republicans in general running for reelection in 2014 will suffer but that tea party republicans will be less vulnerable to lose their seats because they stood their ground and will have support from their core constituencies.

Louis notes that not funding Obama care would have been within Congress’ right not to. Louis notes that the Republicans could have a sent a bill to Obama funding everything but Obama care to see if he would veto it.

Ryan predicts that post debt ceiling debate interest rates will probably stay the same or fall. Louis notes that any momentum gained in the housing market before the budget debate will be hard to regain during the slow fall/winter season. Louis notes the more the Congress spends and the more the Fed prints confidence in the dollar is lost.
Ryan notes that the markets are all dependent upon the Federal Reserve policy.

Louis notes that Democrats favor government and Fed intervention into markets but that these policies harm middle and lower class Americans. Louis notes that the top bankers support Democrats. Louis notes that Democrats favor having government not as a referee in markets but as a participant. Louis discusses Herbert Hoover and Roosevelt and the Great Depression and blames officious inter meddling by government for extending it. Louis discusses how the regulatory environment helps the largest banks.