Wednesday, July 13, 2011

More On Budget Battles

I have had a surprising number of phone calls and discussions with clients on the current budget impasse in Washington.

I say "surprising" because, to me, it is inconceivable that any politician or political party would ultimately sacrifice our country's pristine credit rating to score a few political points. However, based on my recent conversations, perhaps I am being too sanguine.

In my optimistic view, I think that we have been through this before. I view the current situation as analogous to the showdown in the mid-1990's between the House Republicans lead by Newt Gingrich and President Clinton.

As you probably recall, the Republicans had swamped the Democrats in the mid-term elections in 1994, and the political winds all seemed to be behind Speaker Gingrich and his "Contract with America". After failing to come to any agreement on reducing the size of the budget deficit, the federal government essentially shut down for all but "essential" services. However, in the end, after several weeks of talks, the Republicans blinked, and the President went on to a resounding reelection in 1996.

And, oh by the way, the S&P 500 was up +36% in 1995, and +20% in 1996.

However, many of my savvy clients disagree with my characterization of today's situation with 15 years ago, and think that things are much more dire than I do.

And so too does the London Telegraph, as columnist Tim Stanley wrote yesterday:’s {Obama's} problem: this isn’t 1995 and he ain’t Bill Clinton. In 1995, thanks to Clinton’s wholesale theft of Republican fiscal and trade policy, the country was out of recession and unemployment was low. The underlying issue that year was how to share the proceeds of growth...

Today, the deficit is a very real, very big problem that goes beyond party politics. How America deals with its mounting debt will affect business confidence, external investment, Chinese foreign policy, the solvency of Social Security, and the price of basic goods. America’s entire future as a world power is at stake. Government shutdown in 1995 meant that services were suspended and a few driving test examiners didn’t get their daily fix of failing people. Shutdown or default today could extend the recession for another 12 months. With unemployment already at 9.2 per cent (it was averaged just 5.6 per cent in 1995), that’s a risk that isn’t worth playing chicken over. Even Bill Clinton understands that, which is why he’s called for corporation taxes to be cut.

When it comes to the debt talks, Obama is no Bill Clinton – Telegraph Blogs