Holland and Italy, two of the Eurozone’s largest economies, have gone into recession, new figures show.
The economies of both countries suffered a second successive quarter of shrinkage, each contracting by 0.7 per cent during the last three months of 2011.
Germany’s economy also contracted in the fourth quarter, down 0.2 per cent from the previous quarter. This was the country’s first shrinkage since 2009.
Together, all 17 nations making up the Eurozone witnessed a 0.3 per cent contraction in the fourth quarter, but have managed to avoid a collective recession with growth of 0.1 per cent in the third quarter.
However, Dr Howard Archer, chief UK and European Economist at IHS Global Insight, said he doubts that the Eurozone will be able to avoid further contraction in the face of tighter credit conditions, a further tightening in fiscal policy in many countries, the ongoing pressures facing consumers and limited global growth.
“We expect the Eurozone to start growing gradually again during the second half of 2012, assuming some easing in sovereign debt tensions, reduced inflation boosting consumer spending power, and a pick-up in global growth,” he said.
“Even so, we still see Eurozone GDP contracting by 0.6 per cent overall in 2012, held back significantly by extended contraction in Italy and Spain.”
Meanwhile, debt-stricken Greece suffered a seven per cent year-on-year contraction in its economy for the fourth quarter.
Public order minister Christos Papoutsis said today that the Greek people have been pushed to the limit by austerity measures.
The country had been ordered to make swingeing cuts in return for a €130 billion bailout.
But Eurozone ministers have demanded a further €325 million of cuts before the package will be considered.
Thursday, February 16, 2012
A Warning Sign For The World
A Warning Sign For The World
Any financial system that is based on debt is doomed to fail. Today, we are living in the greatest debt bubble that the world has ever seen, and if all of a sudden people could not use credit to buy things our economy would immediately ground to a halt. Unfortunately, no debt bubble can last forever. When this current debt bubble finally bursts, faith in the financial system is going to disappear, credit is going to freeze up and there is going to be a massive wave of bank failures. Right now, Greece is a warning sign for the world. Nobody wants to lend money to Greece, the Greek banking system is dying, one out of every four businesses has already shut down, unemployment is soaring and the Greek economy has now been in recession for five years in a row. Sadly, the economic implosion in Greece is rapidly accelerating. The Greek economy shrunk at a 7 percent annual rate during the 4th quarter of 2011. That wasn't supposed to happen. Things were supposed to be getting better in Greece by now. But instead the Greek depression is getting even worse, and very soon the rest of the world is going to be going through what Greece is currently experiencing.
Unfortunately, most in the mainstream media are treating what is happening in Greece as an "isolated incident" rather than as a very serious warning sign for the world.
Thankfully, there are at least a few reporters out there that are realizing the gravity of the situation. The following is how one reporter from the New York Times recently described what life is like in Greece now....
By many indicators, Greece is devolving into something unprecedented in modern Western experience. A quarter of all Greek companies have gone out of business since 2009, and half of all small businesses in the country say they are unable to meet payroll. The suicide rate increased by 40 percent in the first half of 2011. A barter economy has sprung up, as people try to work around a broken financial system. Nearly half the population under 25 is unemployed. Last September, organizers of a government-sponsored seminar on emigrating to Australia, an event that drew 42 people a year earlier, were overwhelmed when 12,000 people signed up. Greek bankers told me that people had taken about one-third of their money out of their accounts; many, it seems, were keeping what savings they had under their beds or buried in their backyards. One banker, part of whose job these days is persuading people to keep their money in the bank, said to me, “Who would trust a Greek bank?”
Can you imagine?
Greece is experiencing a full-blown economic collapse and nobody can see a light at the end of the tunnel at this point.
As I have written about previously, the overall rate of unemployment in Greece has now risen above 20 percent and the youth unemployment rate in Greece has soared to an astounding 48 percent.
Deleveraging can be an extremely painful process. Greece has been forced to try to reduce the size of its budget deficit, but every time it cuts government spending that causes economic activity (and thus government revenues) to slow down as well.
Now the EU and the IMF are demanding that even more very painful austerity measures be implemented in Greece even though Greece is already experiencing a full-blown depression.
The EU and the IMF are demanding that Greece fire 15,000 more government workers immediately and a total of 150,000 government workers by 2015.
The EU and the IMF are demanding that wages for government workers be cut by another 20 percent.
The EU and the IMF are demanding that the minimum wage be slashed by more than 20 percent.
The EU and the IMF are also demanding significant reductions in unemployment benefits and pension benefits.
Of course all of those cuts are going to make the short-term economic conditions in Greece even worse.
The rioting, looting and burning of buildings that we are witnessing right now in Greece is likely to continue for quite some time as exasperated citizens attempt to express their frustrations to politicians that simply do not seem to care.
According to the National Confederation of Greek Commerce, recent rioting resulted in damage to 153 businesses in Athens. 45 of those businesses were totally destroyed.
You can view some stunning footage of the current rioting in Greece right here.
Despite all of the austerity measures that have already been implemented, the truth is that Greece is very likely to default soon anyway.
There is a very good chance that the new austerity agreement that the Greek parliament just approved will never be implemented. There are new elections scheduled for April and the current party in power is polling in the single digits.
The new Greek government is likely to look much different from the current one, and nobody knows for sure if the new government will follow through on any of the promises being made by the current government.
In addition, the German parliament must approve this new deal with Greece, and the German parliament is not scheduled to vote on it until February 27th. Considering the mood in Germany right now, approval is not guaranteed.
So there are all kinds of things that could go wrong with the "deals" that are currently being discussed. The truth is that a Greek default in the coming months seems to become more likely by the day.
Some in the financial world almost seem eager for a Greek default. The following is what Jon Moulton, the chairman of Better Capital, recently told CNBC....
"If I was Greek, I wouldn’t be going for these measures, I’d be going for default and getting it over with. Would you like two to three years of pain or 20?"
But a disorderly Greek default would not be a pleasant thing for the global economy at all. A recent article in the Guardian detailed what some of the consequences of a Greek default and exit from the eurozone might be....
But default and "re-drachmatisation" would be a costly and chaotic process. In the long term the euro might be strengthened if some of its weaker members headed for the door. But in the short term banks across the eurozone might have to be closed to prevent a run on the single currency as investors speculated about which country might be next. A new wave of bank nationalisations would be likely to follow as lenders counted their losses on now worthless Greek debt.
Capital controls would have to be imposed and borders shut to stop money flooding out of Greece. Portugal, Italy and Spain would come under intense pressure from investors wary about the risk of another victim. Banks everywhere, already reluctant to lend, would cut back hard, nervous about their exposure to the bonds of all Europe's crisis-hit states.
And the financial crisis in Europe is going to continue to spread well beyond Greece. Moody's Investors Service just downgraded the credit ratings of six European nations. The following is how Bloomberg described the downgrades....
Spain was downgraded to A3 from A1 with a negative outlook, Italy was downgraded to A3 from A2 with a negative outlook and Portugal was downgraded to Ba3 from Ba2 with a negative outlook, Moody’s said. It also reduced the ratings of Slovakia, Slovenia and Malta.
Countries such as Italy, Spain, Portugal, Ireland and Hungary are heading down the exact same road that Greece has gone. Greece was the first one to experience a full-blown depression, but soon Greece will have a lot of company.
Greece is most definitely a warning sign for the world. If you keep recklessly piling up debt, eventually a day of reckoning comes. It is inevitable.
But Barack Obama does not seem to understand this. He continues to pile another 150 million dollars on to our national debt every single hour. He knows that cutting spending significantly right now would hurt the economy and that would significantly hurt his chances for another term.
Needless to say, Barack Obama is not likely to do anything that is going to significantly hurt his chances for another four years in the White House.
So we continue to roll on toward disaster.
The U.S. financial system is like a car with no brakes that is heading straight toward a 5,000 foot drop at 100 miles an hour.
It is all going to seem like fun and games to some people until we hit the canyon floor.
Once that happens, nobody will be laughing.
http://theeconomiccollapseblog.com/archives/a-warning-sign-for-the-world
Any financial system that is based on debt is doomed to fail. Today, we are living in the greatest debt bubble that the world has ever seen, and if all of a sudden people could not use credit to buy things our economy would immediately ground to a halt. Unfortunately, no debt bubble can last forever. When this current debt bubble finally bursts, faith in the financial system is going to disappear, credit is going to freeze up and there is going to be a massive wave of bank failures. Right now, Greece is a warning sign for the world. Nobody wants to lend money to Greece, the Greek banking system is dying, one out of every four businesses has already shut down, unemployment is soaring and the Greek economy has now been in recession for five years in a row. Sadly, the economic implosion in Greece is rapidly accelerating. The Greek economy shrunk at a 7 percent annual rate during the 4th quarter of 2011. That wasn't supposed to happen. Things were supposed to be getting better in Greece by now. But instead the Greek depression is getting even worse, and very soon the rest of the world is going to be going through what Greece is currently experiencing.
Unfortunately, most in the mainstream media are treating what is happening in Greece as an "isolated incident" rather than as a very serious warning sign for the world.
Thankfully, there are at least a few reporters out there that are realizing the gravity of the situation. The following is how one reporter from the New York Times recently described what life is like in Greece now....
By many indicators, Greece is devolving into something unprecedented in modern Western experience. A quarter of all Greek companies have gone out of business since 2009, and half of all small businesses in the country say they are unable to meet payroll. The suicide rate increased by 40 percent in the first half of 2011. A barter economy has sprung up, as people try to work around a broken financial system. Nearly half the population under 25 is unemployed. Last September, organizers of a government-sponsored seminar on emigrating to Australia, an event that drew 42 people a year earlier, were overwhelmed when 12,000 people signed up. Greek bankers told me that people had taken about one-third of their money out of their accounts; many, it seems, were keeping what savings they had under their beds or buried in their backyards. One banker, part of whose job these days is persuading people to keep their money in the bank, said to me, “Who would trust a Greek bank?”
Can you imagine?
Greece is experiencing a full-blown economic collapse and nobody can see a light at the end of the tunnel at this point.
As I have written about previously, the overall rate of unemployment in Greece has now risen above 20 percent and the youth unemployment rate in Greece has soared to an astounding 48 percent.
Deleveraging can be an extremely painful process. Greece has been forced to try to reduce the size of its budget deficit, but every time it cuts government spending that causes economic activity (and thus government revenues) to slow down as well.
Now the EU and the IMF are demanding that even more very painful austerity measures be implemented in Greece even though Greece is already experiencing a full-blown depression.
The EU and the IMF are demanding that Greece fire 15,000 more government workers immediately and a total of 150,000 government workers by 2015.
The EU and the IMF are demanding that wages for government workers be cut by another 20 percent.
The EU and the IMF are demanding that the minimum wage be slashed by more than 20 percent.
The EU and the IMF are also demanding significant reductions in unemployment benefits and pension benefits.
Of course all of those cuts are going to make the short-term economic conditions in Greece even worse.
The rioting, looting and burning of buildings that we are witnessing right now in Greece is likely to continue for quite some time as exasperated citizens attempt to express their frustrations to politicians that simply do not seem to care.
According to the National Confederation of Greek Commerce, recent rioting resulted in damage to 153 businesses in Athens. 45 of those businesses were totally destroyed.
You can view some stunning footage of the current rioting in Greece right here.
Despite all of the austerity measures that have already been implemented, the truth is that Greece is very likely to default soon anyway.
There is a very good chance that the new austerity agreement that the Greek parliament just approved will never be implemented. There are new elections scheduled for April and the current party in power is polling in the single digits.
The new Greek government is likely to look much different from the current one, and nobody knows for sure if the new government will follow through on any of the promises being made by the current government.
In addition, the German parliament must approve this new deal with Greece, and the German parliament is not scheduled to vote on it until February 27th. Considering the mood in Germany right now, approval is not guaranteed.
So there are all kinds of things that could go wrong with the "deals" that are currently being discussed. The truth is that a Greek default in the coming months seems to become more likely by the day.
Some in the financial world almost seem eager for a Greek default. The following is what Jon Moulton, the chairman of Better Capital, recently told CNBC....
"If I was Greek, I wouldn’t be going for these measures, I’d be going for default and getting it over with. Would you like two to three years of pain or 20?"
But a disorderly Greek default would not be a pleasant thing for the global economy at all. A recent article in the Guardian detailed what some of the consequences of a Greek default and exit from the eurozone might be....
But default and "re-drachmatisation" would be a costly and chaotic process. In the long term the euro might be strengthened if some of its weaker members headed for the door. But in the short term banks across the eurozone might have to be closed to prevent a run on the single currency as investors speculated about which country might be next. A new wave of bank nationalisations would be likely to follow as lenders counted their losses on now worthless Greek debt.
Capital controls would have to be imposed and borders shut to stop money flooding out of Greece. Portugal, Italy and Spain would come under intense pressure from investors wary about the risk of another victim. Banks everywhere, already reluctant to lend, would cut back hard, nervous about their exposure to the bonds of all Europe's crisis-hit states.
And the financial crisis in Europe is going to continue to spread well beyond Greece. Moody's Investors Service just downgraded the credit ratings of six European nations. The following is how Bloomberg described the downgrades....
Spain was downgraded to A3 from A1 with a negative outlook, Italy was downgraded to A3 from A2 with a negative outlook and Portugal was downgraded to Ba3 from Ba2 with a negative outlook, Moody’s said. It also reduced the ratings of Slovakia, Slovenia and Malta.
Countries such as Italy, Spain, Portugal, Ireland and Hungary are heading down the exact same road that Greece has gone. Greece was the first one to experience a full-blown depression, but soon Greece will have a lot of company.
Greece is most definitely a warning sign for the world. If you keep recklessly piling up debt, eventually a day of reckoning comes. It is inevitable.
But Barack Obama does not seem to understand this. He continues to pile another 150 million dollars on to our national debt every single hour. He knows that cutting spending significantly right now would hurt the economy and that would significantly hurt his chances for another term.
Needless to say, Barack Obama is not likely to do anything that is going to significantly hurt his chances for another four years in the White House.
So we continue to roll on toward disaster.
The U.S. financial system is like a car with no brakes that is heading straight toward a 5,000 foot drop at 100 miles an hour.
It is all going to seem like fun and games to some people until we hit the canyon floor.
Once that happens, nobody will be laughing.
http://theeconomiccollapseblog.com/archives/a-warning-sign-for-the-world
Tuesday, February 14, 2012
Conference Board Economists: U.S. Economy Transitioning To A New Normal
"The economy that we had before the recession is gone," said Kenneth Goldstein, economist at the Conference Board. "It's not coming back."
The U.S. economy is transitioning to a new normal in which businesses invest less and consumers spend less than before the recession, Goldstein told The Huffington Post in an interview last week. As a result, he said, economic growth and job growth will be slower than before.
He said that businesses, consumers and the government would need to spend at least $1 trillion more than they are likely to spend in order for the economy to return to its pre-recession growth rate. But he added that no one is willing to spend the money necessary to jumpstart the economy, since the government is cutting spending, consumers are saving more, and businesses expect a lower return on their investments.
"Where's the money?" Goldstein asked.
The Conference Board, which counts half of all Fortune 500 companies among its members, provides economic and business advice and research to its member companies.
The main problem is that consumers' expectations for the future have plunged, Goldstein said. They suffered from such a large economic shock in 2008 and 2009 that many older people now do not expect to return to work, and many younger people no longer expect to make that much money, he continued. As a result, Americans have cut back on spending.
Consumers are indeed saving more than they did before the recession. They saved 3.7 percent of their incomes at the end of 2011, in contrast to less than 2 percent of their incomes during all of 2005, according to government statistics. Their wages, when accounting for inflation, actually fell in 2011.
Consumer confidence has been at recessionary levels for the past four years, according to the Conference Board's Consumer Confidence Index.
Like consumers, businesses are spending less because they have lowered their expectations of future income, Goldstein said. While businesses could expect returns of 8 to 12 percent on their investments before the recession, they are now expecting returns of about half that amount. If they raise prices too much, consumers will choose cheaper alternatives, he said.
Exports are one of the only bright spots sustaining U.S. economic growth at this slower pace, he added.
Now that people's homes are often worth less and credit is expensive, people are relying on their wages to be able to spend money -- and their wages have barely been growing, said Lynn Franco, director of the Conference Board's Consumer Research Center. She said this means that economic growth will be slower than it was before the recession for the foreseeable future, since consumer spending comprises two-thirds of the U.S. economy.
"If you just take a look at the fundamentals alone," she said, "you cannot get back to the levels of consumer spending that we had prior to the crisis."
The U.S. economy is transitioning to a new normal in which businesses invest less and consumers spend less than before the recession, Goldstein told The Huffington Post in an interview last week. As a result, he said, economic growth and job growth will be slower than before.
He said that businesses, consumers and the government would need to spend at least $1 trillion more than they are likely to spend in order for the economy to return to its pre-recession growth rate. But he added that no one is willing to spend the money necessary to jumpstart the economy, since the government is cutting spending, consumers are saving more, and businesses expect a lower return on their investments.
"Where's the money?" Goldstein asked.
The Conference Board, which counts half of all Fortune 500 companies among its members, provides economic and business advice and research to its member companies.
The main problem is that consumers' expectations for the future have plunged, Goldstein said. They suffered from such a large economic shock in 2008 and 2009 that many older people now do not expect to return to work, and many younger people no longer expect to make that much money, he continued. As a result, Americans have cut back on spending.
Consumers are indeed saving more than they did before the recession. They saved 3.7 percent of their incomes at the end of 2011, in contrast to less than 2 percent of their incomes during all of 2005, according to government statistics. Their wages, when accounting for inflation, actually fell in 2011.
Consumer confidence has been at recessionary levels for the past four years, according to the Conference Board's Consumer Confidence Index.
Like consumers, businesses are spending less because they have lowered their expectations of future income, Goldstein said. While businesses could expect returns of 8 to 12 percent on their investments before the recession, they are now expecting returns of about half that amount. If they raise prices too much, consumers will choose cheaper alternatives, he said.
Exports are one of the only bright spots sustaining U.S. economic growth at this slower pace, he added.
Now that people's homes are often worth less and credit is expensive, people are relying on their wages to be able to spend money -- and their wages have barely been growing, said Lynn Franco, director of the Conference Board's Consumer Research Center. She said this means that economic growth will be slower than it was before the recession for the foreseeable future, since consumer spending comprises two-thirds of the U.S. economy.
"If you just take a look at the fundamentals alone," she said, "you cannot get back to the levels of consumer spending that we had prior to the crisis."
Greece Takes to Twitter and YouTube as Riots Consume Athens
Greek parliament approved a controversial austerity deal Sunday so the indebted country can get a bailout from the European Union. After the vote, angry Greeks began rioting and hurling fire bombs and stones at police and storefronts.By Monday morning, the violence had subsided. The EU told Greece that the vote was welcome, but more action was still needed to avoid default and “disastrous consequences.”
Greeks used Twitter and YouTube to share scenes of the turmoil with the rest of the world. Mashable has collected tweets, photos and videos that best represent the riots and the day-after reckoning of the damage.
Goldman Sachs Shorted Greek Debt After It Arranged Those Shady Swaps
Goldman Sachs arranged swaps that effectively allowed Greece to borrow 1 billion Euros without adding to its official public debt. While it arranged the swaps, Goldman also sought to buy insurance on Greek debt and engage in other trades to protect itself against the risk of a default on those swaps. Eventually, Goldman sold the swaps to the national bank of Greece.
Despite its role in creating swaps that may have allowed the Greek government to mask its growing debts, Goldman has no net exposure to a default on Greek debt, a person familiar with the matter says.
Despite its role in creating swaps that may have allowed the Greek government to mask its growing debts, Goldman has no net exposure to a default on Greek debt, a person familiar with the matter says.
Congress Debt Ceiling Debacle May Repeat Before Presidential Election
WASHINGTON -- Last year's torturous congressional debate over raising the federal debt ceiling eventually resulted in a deal that President Barack Obama and congressional leaders believed would keep the federal government funded through the 2012 elections. Not so fast.
In what one top congressional aide calls a "nightmare scenario," the federal government could wind up hitting the debt ceiling at the height of the presidential campaign. The Treasury Department is now contemplating the prospect of invoking "extraordinary measures" to keep the government funded through November.
Barring a major economic shock -- a financial meltdown in Europe, for instance -- the emergency measures should be enough to get the federal government past the election. But even under a rosy scenario, the next Congress will be forced to raise the debt ceiling as one of its first orders of business in 2013, if the lame duck outgoing body doesn't do it. And if the Treasury does have to invoke "extraordinary measures" before the election, it's easy to imagine a re-run of last year's political circus, magnified many times over.
Deficit projections have changed repeatedly over the past six months and are likely to change again. Treasury is uncertain whether it would actually need to invoke "extraordinary measures" before the election. The Treasury only deploys them after the government has actually hit the debt limit. Using financial maneuvers, the Treasury can give itself head room under the debt ceiling -- but only for a few months. That's what happened last summer, when the government continued functioning without a deal to increase the debt ceiling until August, even though the country hit the debt limit in May.
The premature return of the debt ceiling is being driven by three major factors: increased spending, slow economic growth and the failure of the congressional Super Committee.
In August, lawmakers agreed to raise the debt ceiling by $2.4 trillion. In the context of a $3.6 trillion budget with a $1 trillion budget deficit, the number seemed adequate, even with weak economic growth. But a full $300 billion of the August hike depended on the Super Committee reaching a deal on long-term spending cuts. The Super Committee reached no agreement, so the debt ceiling was only raised by $2.1 trillion.
Obama's plan to boost the economy with a payroll tax cut has also expanded the deficit in the short term. In December, lawmakers agreed to a package extending the tax cut for two months, along with unemployment benefits and Medicare payments to doctors, at a cost of $33 billion. The deal was entirely funded under government accounting rules. But budgeting rules allow for 10 years worth of revenue or spending cuts to be counted against the cost of an up-front expense -- paying you Tuesday, so to speak, for a hamburger today. Doing it any other way would undermine the stimulative value of the spending or tax cuts, but it puts Treasury in a bind. The two-month extension was paid for with 10 years of modestly increased fees on mortgages guaranteed by Fannie Mae and Freddie Mac. Only 10 months of those fees will actually hit the books by election time -- about $3 billion, leaving an extra $30 billion in borrowing not anticipated by the August debt deal.
But that's only for the two-month deal.
The budgeting dynamics are likely to be similar for a pending package to extend the terms throughout 2012. The cost is expected to be $166 billion. A similar funding plan for the full-year package would require roughly $145 billion in borrowing before November. As a result, the pre-election deficit would be about $175 billion more than lawmakers anticipated in August, bumping up the timing of the debt-ceiling collision by at least a month.
But a more pressing concern for Treasury is the economic underperformance since August. Treasury emphasizes that the terms of the August deal were negotiated by members of Congress, but acknowledges that it provided the information. Among the key facts -- the U.S. could expect to run an average monthly budget deficit of about $125 billion for the next couple of years. That estimate was based on economic assumptions from the White House Office of Management and Budget. The assumptions have proved off the mark.
At the time Congress cut the debt ceiling deal, OMB expected real gross domestic product growth of 2.7 percent and an average interest rate on 10-year Treasury bills of 3 percent for 2011. For 2012, the office expected GDP growth of 3.6 percent and interest rates of 3.6 percent. That resulted in expected tax revenue of $2.2 trillion for 2011 and $2.6 trillion for 2012.
Growth missed the 2011 target, with OMB now expecting final 2011 growth of just 1.6 percent, more than 40 percent below the predictions, according to new data published on Tuesday. OMB has now downgraded its 2012 growth projections from 3.6 percent to just 2 percent, a 44 percent decrease.
Lower growth translates to less tax revenue from income and corporate profit. Lower tax revenue means a bigger deficit, which calls into question whether the debt deal from August will prevent the government from hitting the debt limit before November.
Interest rates, however, have proved significantly more favorable than the administration projected, meaning that the government will pay less to borrow money to fill that hole than it expected. For 2011, the average rate on 10-year Treasury notes was 2.8 percent. OMB now expects average interest rates of 2.3 percent for 2012. Those rates only apply to new debt issued by the government. Prior debt issued under higher interest rates still must be paid back at those previous, higher rates.
Hitting the debt limit before the election could result in political chaos. Both the National Republican Senatorial Committee and the National Republican Campaign Committee -- fundraising entities for congressional Republicans -- rolled out attack ads and a barrage of press releases targeting swing state Democrats during last summer's debacle. And while both groups declined to comment for this article, the Senate team has plenty of ammunition to use against vulnerable Democrats.
In May, the senatorial committee rolled out a web ad hitting Sens. Claire McCaskill (D-Mo.), Sherrod Brown (D-Ohio), Bob Casey (D-Pa.), Jon Tester (D-Mont.) and Bill Nelson (D-Fla.), all of whom are up for reelection this fall.
WATCH the Republican attack ad:
That bond market quieted some of the airwave chatter from Republicans, who had held the debt ceiling increase hostage in exchange for deep spending cuts, raising the prospect of a U.S. default, which would have sent global financial markets into a tailspin (President Obama then followed suit by insisting on a "grand bargain" to cut Social Security and Medicare, a demand that was ultimately rejected.)
The National Republican Campaign Committee bombarded the districts of more than 30 House Democrats with press releases, claiming each member had "helped champion a spending spree that resulted in record deficits and debt levels," and were now seeking "another blank check for more spending by supporting a higher borrowing limit without any spending cuts."
Failing to raise the debt ceiling would have forced the government to default on its previous financial commitments.
The campaign committee also ran ads targeting Reps. Brad Miller (D-N.C.) and Kate Marshall (D-Nev.), engaging in a bit of China-baiting by warning of the debt owed to "The Peoples' Republic of China" and flashing the image of a red credit card. China is America's largest foreign creditor, but owns just 8 percent of all U.S. government debt. Most American debt is owned by American investors.
Watch the Republican attack ad against Kate Marshall:
In his 2006 Senate run, Pennsylvania's Bob Casey criticized then-Sen. Rick Santorum (R-Pa.) for voting to raise the debt limit, during an appearance on "Meet the Press." That same year, the Democratic Senatorial Campaign Committee ran an ad slamming then-Sen. Mike DeWine (R-Ohio) for doing the same thing, aiding now-Sen. Brown of Ohio, as Politico has reported. In 2007, Missouri's McCaskill voted against raising the debt limit, and Republicans have plenty of quotes about the debt ceiling from Florida's Nelson from this 2004 speech.
Treasury will have a better idea about its 2012 finances after April, when tax returns are due. Most workers pay taxes out of regular paychecks, providing a steady stream of revenue to the government. But others who are not traditional employees of a company pay once a year in April, and the total revenue from that one-time haul can be difficult for the government to predict.
But even if all goes as congressional Democrats believed it would last summer, the new congressional class of 2013 can look forward to a debt ceiling battle as one of their first orders of business. And the stakes in January of next year will be just as high as those from last summer.
In what one top congressional aide calls a "nightmare scenario," the federal government could wind up hitting the debt ceiling at the height of the presidential campaign. The Treasury Department is now contemplating the prospect of invoking "extraordinary measures" to keep the government funded through November.
Barring a major economic shock -- a financial meltdown in Europe, for instance -- the emergency measures should be enough to get the federal government past the election. But even under a rosy scenario, the next Congress will be forced to raise the debt ceiling as one of its first orders of business in 2013, if the lame duck outgoing body doesn't do it. And if the Treasury does have to invoke "extraordinary measures" before the election, it's easy to imagine a re-run of last year's political circus, magnified many times over.
Deficit projections have changed repeatedly over the past six months and are likely to change again. Treasury is uncertain whether it would actually need to invoke "extraordinary measures" before the election. The Treasury only deploys them after the government has actually hit the debt limit. Using financial maneuvers, the Treasury can give itself head room under the debt ceiling -- but only for a few months. That's what happened last summer, when the government continued functioning without a deal to increase the debt ceiling until August, even though the country hit the debt limit in May.
The premature return of the debt ceiling is being driven by three major factors: increased spending, slow economic growth and the failure of the congressional Super Committee.
In August, lawmakers agreed to raise the debt ceiling by $2.4 trillion. In the context of a $3.6 trillion budget with a $1 trillion budget deficit, the number seemed adequate, even with weak economic growth. But a full $300 billion of the August hike depended on the Super Committee reaching a deal on long-term spending cuts. The Super Committee reached no agreement, so the debt ceiling was only raised by $2.1 trillion.
Obama's plan to boost the economy with a payroll tax cut has also expanded the deficit in the short term. In December, lawmakers agreed to a package extending the tax cut for two months, along with unemployment benefits and Medicare payments to doctors, at a cost of $33 billion. The deal was entirely funded under government accounting rules. But budgeting rules allow for 10 years worth of revenue or spending cuts to be counted against the cost of an up-front expense -- paying you Tuesday, so to speak, for a hamburger today. Doing it any other way would undermine the stimulative value of the spending or tax cuts, but it puts Treasury in a bind. The two-month extension was paid for with 10 years of modestly increased fees on mortgages guaranteed by Fannie Mae and Freddie Mac. Only 10 months of those fees will actually hit the books by election time -- about $3 billion, leaving an extra $30 billion in borrowing not anticipated by the August debt deal.
But that's only for the two-month deal.
The budgeting dynamics are likely to be similar for a pending package to extend the terms throughout 2012. The cost is expected to be $166 billion. A similar funding plan for the full-year package would require roughly $145 billion in borrowing before November. As a result, the pre-election deficit would be about $175 billion more than lawmakers anticipated in August, bumping up the timing of the debt-ceiling collision by at least a month.
But a more pressing concern for Treasury is the economic underperformance since August. Treasury emphasizes that the terms of the August deal were negotiated by members of Congress, but acknowledges that it provided the information. Among the key facts -- the U.S. could expect to run an average monthly budget deficit of about $125 billion for the next couple of years. That estimate was based on economic assumptions from the White House Office of Management and Budget. The assumptions have proved off the mark.
At the time Congress cut the debt ceiling deal, OMB expected real gross domestic product growth of 2.7 percent and an average interest rate on 10-year Treasury bills of 3 percent for 2011. For 2012, the office expected GDP growth of 3.6 percent and interest rates of 3.6 percent. That resulted in expected tax revenue of $2.2 trillion for 2011 and $2.6 trillion for 2012.
Growth missed the 2011 target, with OMB now expecting final 2011 growth of just 1.6 percent, more than 40 percent below the predictions, according to new data published on Tuesday. OMB has now downgraded its 2012 growth projections from 3.6 percent to just 2 percent, a 44 percent decrease.
Lower growth translates to less tax revenue from income and corporate profit. Lower tax revenue means a bigger deficit, which calls into question whether the debt deal from August will prevent the government from hitting the debt limit before November.
Interest rates, however, have proved significantly more favorable than the administration projected, meaning that the government will pay less to borrow money to fill that hole than it expected. For 2011, the average rate on 10-year Treasury notes was 2.8 percent. OMB now expects average interest rates of 2.3 percent for 2012. Those rates only apply to new debt issued by the government. Prior debt issued under higher interest rates still must be paid back at those previous, higher rates.
Hitting the debt limit before the election could result in political chaos. Both the National Republican Senatorial Committee and the National Republican Campaign Committee -- fundraising entities for congressional Republicans -- rolled out attack ads and a barrage of press releases targeting swing state Democrats during last summer's debacle. And while both groups declined to comment for this article, the Senate team has plenty of ammunition to use against vulnerable Democrats.
In May, the senatorial committee rolled out a web ad hitting Sens. Claire McCaskill (D-Mo.), Sherrod Brown (D-Ohio), Bob Casey (D-Pa.), Jon Tester (D-Mont.) and Bill Nelson (D-Fla.), all of whom are up for reelection this fall.
WATCH the Republican attack ad:
That bond market quieted some of the airwave chatter from Republicans, who had held the debt ceiling increase hostage in exchange for deep spending cuts, raising the prospect of a U.S. default, which would have sent global financial markets into a tailspin (President Obama then followed suit by insisting on a "grand bargain" to cut Social Security and Medicare, a demand that was ultimately rejected.)
The National Republican Campaign Committee bombarded the districts of more than 30 House Democrats with press releases, claiming each member had "helped champion a spending spree that resulted in record deficits and debt levels," and were now seeking "another blank check for more spending by supporting a higher borrowing limit without any spending cuts."
Failing to raise the debt ceiling would have forced the government to default on its previous financial commitments.
The campaign committee also ran ads targeting Reps. Brad Miller (D-N.C.) and Kate Marshall (D-Nev.), engaging in a bit of China-baiting by warning of the debt owed to "The Peoples' Republic of China" and flashing the image of a red credit card. China is America's largest foreign creditor, but owns just 8 percent of all U.S. government debt. Most American debt is owned by American investors.
Watch the Republican attack ad against Kate Marshall:
In his 2006 Senate run, Pennsylvania's Bob Casey criticized then-Sen. Rick Santorum (R-Pa.) for voting to raise the debt limit, during an appearance on "Meet the Press." That same year, the Democratic Senatorial Campaign Committee ran an ad slamming then-Sen. Mike DeWine (R-Ohio) for doing the same thing, aiding now-Sen. Brown of Ohio, as Politico has reported. In 2007, Missouri's McCaskill voted against raising the debt limit, and Republicans have plenty of quotes about the debt ceiling from Florida's Nelson from this 2004 speech.
Treasury will have a better idea about its 2012 finances after April, when tax returns are due. Most workers pay taxes out of regular paychecks, providing a steady stream of revenue to the government. But others who are not traditional employees of a company pay once a year in April, and the total revenue from that one-time haul can be difficult for the government to predict.
But even if all goes as congressional Democrats believed it would last summer, the new congressional class of 2013 can look forward to a debt ceiling battle as one of their first orders of business. And the stakes in January of next year will be just as high as those from last summer.
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