Why a weak dollar threatens America.
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It seems nobody in this country wants to take responsibility for the secular decline in the value of the U.S. dollar. When Fed Chairman Ben Bernanke is asked about the currency's decline, he refers the query to the Treasury Department. When the president is asked about the dollar, he often gives the tired old platitude that the U.S. has a strong dollar policy, but his vacuous words seem more like a perfunctory utterances than a bona fide dollar-boosting strategy.
Recently, in an interview with CNBC's Maria Bartiromo, Treasury Secretary Timothy Geithner had some startling comments about the world's reserve currency. When asked about its chronic weakness, and what specifically he was doing to safeguard the dollar, Mr. Geithner said, "…if you look generally, you know, I don't talk about developments in the exchange markets." He continued, "If you look at what's happened over the last year, you've seen really a lot of confidence in the U.S. economy. When the crisis was at its peak … you saw the dollar rise when people were most concerned about the future of the world."
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Now that the U.S. dollar is once again caught up in a vicious secular bear market, losing nearly 16% of its value since March alone, the Treasury Secretary is once again opting to plead the fifth. Even worse, he claims that last year was a good example of global confidence in the currency, even though it was down over 8% for the year.
Can he really be counting on another collapse in the global economy to pull the dollar out of its downtrend? To use the previous year as an example of confidence and strength in the country, or the currency, is spurious in nature. It illustrates that our Treasury Secretary either tacitly condones a falling dollar or has no idea what causes a weak currency.
The progenitor of our weak dollar is the skyrocketing monetary base, which reached an all-time record high of $1.86 trillion last week. The Fed's monetization of banks' assets has caused real interest rates to become negative and increased interest rate differentials with the currencies of more sober central bankers, like Glenn Stevens from Australia. In addition, our profligate spending habits have caused record budget deficits and even caused our healing trade deficit to reverse course and head higher. Unfortunately, all those trends seem firmly intact and are actually growing worse.
There is, however, no shortage of gurus who will tell you that a weakening dollar is great for America. They'll tell you that it boosts exports and the earnings of domestic companies that conduct business on foreign soil. Their logic is flawed. First off, a falling dollar has actually pushed our trade deficit higher--not lower. If a weak dollar bolsters our economy and our manufacturing base, then why has the trade deficit surged since 2001, even as the dollar lost nearly 40% of its value based on a basket of the six currencies of our largest trading partners?
A specific example is illuminating in disproving the theory that you can balance a trade deficit by crumbling your currency. China announced in 2005 plans to increase the value of its currency and abandon its decade-old peg to the U.S. dollar in favor of a link to a basket of world currencies. Since then the Yuan has rallied from 0.1208 to 0.1465 to the dollar.
This rise in the yuan, and fall in the dollar, has had a negligible effect on U.S. exports. For all of 2005 the U.S. deficit with China was $201 billion. In 2008, three years into the dollar's devaluation, it soared to $266 billion. Why didn't the falling dollar help boost exports? Because the price of goods produced in the U.S. went up.
That means foreign importers were immune from our made-in-America inflation, not that they could afford to buy more of our goods. There just isn't any amount of dollars the Fed can create that can serve as a substitute for manufacturing and producing more of the things that foreign countries want to purchase.
Multinational corporations are also better protected from the falling dollar than companies that strictly sell their goods inside the U.S. The foreign currency MNCs earn translates to more dollars once the cash is repatriated. But the purchasing power of those dollars becomes attenuated.
So again, there just isn't as much real return produced from owning multinationals as many investors espouse. And it certainly isn't worth the price we pay for rampant inflation at home. To claim that a falling dollar is great because it boosts the earnings of MNCs is tantamount to saying a rise in the number of car crashes would be a wonderful for Americans because they can invest in air bag makers.
It would be better if the Chinese allowed their currency to strengthen rather than to pursue a homegrown U.S. policy of dollar weakness. There is a big difference if the former occurs. If the dollar loses its value because we pursue inflationary domestic policies, it means all Americans will suffer from the loss of their currency's purchasing power right here in the U.S.A. If, however, the Chinese sell dollars accumulated from their trade surplus, the yuan will rise without the destructive inflation being generated here at home--provided that the U.S. repents from its profligate spending habits.
That doesn't mean the Chinese will necessarily buy more U.S. goods, but they might. The problem is that if the Chinese no longer need to park their savings in U.S. debt, Treasury prices will fall and yields soar. The dollar will suffer greatly in the short term as measured against the Chinese currency. But again, that is inevitable and much better in the long run for the U.S.
Finally, I'm tired of hearing there's just no substitute for the U.S. dollar, as if saying it enough will make it so. Or that the Chinese will be compelled to ruin their environment, work like dogs and squander their savings forever and remain powerless to do anything about it.
Does it make sense for them to keep buying Treasuries if their prices fall and the currency they are denominated in continues to crumble? Wouldn't it make sense to diversify their holdings into other currencies and commodities? In fact, that is exactly what they are doing. They have moved their holdings of Treasuries to the short end of the curve for an easy exit and are buying more Euros, gold and commodities.
In 2008 the 16 countries that use the Euro currency have an economy that is more than 76% the size of that in the U.S., according to Wikipedia. So is it incredulous to believe that the Chinese could, and should, diversify out of their current $800 billion-plus in Treasury holdings, or from their $1.3 trillion in U.S. reserves, or from having 65% of their reserves in the dollar?
It looks like the plan the U.S. wants to pursue is to continue to discourage foreign investment, punch our bankers (the Chinese) in the nose and punish those who are savers by crumbling our currency. But please, Mr. Geithner, let's not pretend it benefits anyone except those who are heavily in debt--chief among them our government. Even the U.S. government will be surprised to learn that the price of devaluing that debt through the process of inflation is the eventual destruction of our own economy.
Michael Pento is chief economist at Delta Global Advisors and a contributor to greenfaucet.com.
Thursday, October 22, 2009
Our Drunken Uncle
Posted 10/21/2009 07:23 PM ET
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Spending: According to two separate Government Accountability Office scenarios, America's long-term fiscal outlook is "unsustainable." No surprise, since Uncle Sam is spending like a drunken sailor.
The GAO, Congress' in-house think tank, warns that in "little over 10 years, debt held by the public as a percent of GDP" will hit a record high, exceeding the debt-to-GDP ratio seen after World War II. Then it will "grow at a steady rate thereafter," according to the government forecasters.
"Social Security cash surpluses, which have been used to help finance other government activities, are projected to turn to cash deficits by 2016," the GAO warns.
The agency's fall update of its "Long-Term Fiscal Outlook" adds that "the Social Security trust fund will be exhausted in 2037, 4 years earlier than estimated last year." The Medicare trust fund's day of reckoning, meanwhile, "was also moved forward by 2 years to 2017."
The GAO used two simulations, an optimistic one making the assumption of historically lower-than-average nonentitlement spending and higher-than-average tax revenues, and a second model assuming that spending and revenues would keep to historical averages. But "both simulations show that the federal government is on an unsustainable fiscal path."
The non-optimistic simulation "shows persistent annual budget deficits in excess of 7% of GDP — levels not seen since the aftermath of World War II." Under that scenario, "roughly 92 cents of every dollar of federal revenue will be spent on the major entitlement programs and net interest costs by 2019."
Even if revenue remains constant at 20.2% of GDP — higher than the historical average — by 2030 there will be little room for "all other spending," which includes "national defense, homeland security, investment in highways and mass transit and alternative energy sources, plus smaller entitlement programs such as Supplemental Security Income, Temporary Assistance for Needy Families, and farm price supports."
It sounds like doomsday. But the politicians who run Washington are ignoring the dire warnings.
This week, House Speaker Nancy Pelosi is convening a gaggle of ideologically friendly economists with the aim of getting cover for yet another stimulus — even though the last one of $787 billion made no discernible dent in unemployment, which threatens to reach double digits.
And Sen. Ben Cardin, D-Md., appearing on Fox News Wednesday, spoke for lots of his fellow liberals in blithely proposing a brand-new, massive entitlement in the form of a government-run health scheme, claiming that "a public option helps bring down the costs."
Also appearing on Fox Wednesday, Sen. Judd Gregg, R-N.H., after accusing Democrats on the Senate floor of a "Bernie Madoff approach to (health care) funding," warned that when disguised funding is tallied up, the true cost of Congress' proposed government health takeover — even without the public option — is $1.8 trillion.
Government spending is burning our children's futures to the ground, yet our "leaders" in Washington think it's time to spray the kerosene of still more spending on the fire.
View Enlarged Image
Spending: According to two separate Government Accountability Office scenarios, America's long-term fiscal outlook is "unsustainable." No surprise, since Uncle Sam is spending like a drunken sailor.
The GAO, Congress' in-house think tank, warns that in "little over 10 years, debt held by the public as a percent of GDP" will hit a record high, exceeding the debt-to-GDP ratio seen after World War II. Then it will "grow at a steady rate thereafter," according to the government forecasters.
"Social Security cash surpluses, which have been used to help finance other government activities, are projected to turn to cash deficits by 2016," the GAO warns.
The agency's fall update of its "Long-Term Fiscal Outlook" adds that "the Social Security trust fund will be exhausted in 2037, 4 years earlier than estimated last year." The Medicare trust fund's day of reckoning, meanwhile, "was also moved forward by 2 years to 2017."
The GAO used two simulations, an optimistic one making the assumption of historically lower-than-average nonentitlement spending and higher-than-average tax revenues, and a second model assuming that spending and revenues would keep to historical averages. But "both simulations show that the federal government is on an unsustainable fiscal path."
The non-optimistic simulation "shows persistent annual budget deficits in excess of 7% of GDP — levels not seen since the aftermath of World War II." Under that scenario, "roughly 92 cents of every dollar of federal revenue will be spent on the major entitlement programs and net interest costs by 2019."
Even if revenue remains constant at 20.2% of GDP — higher than the historical average — by 2030 there will be little room for "all other spending," which includes "national defense, homeland security, investment in highways and mass transit and alternative energy sources, plus smaller entitlement programs such as Supplemental Security Income, Temporary Assistance for Needy Families, and farm price supports."
It sounds like doomsday. But the politicians who run Washington are ignoring the dire warnings.
This week, House Speaker Nancy Pelosi is convening a gaggle of ideologically friendly economists with the aim of getting cover for yet another stimulus — even though the last one of $787 billion made no discernible dent in unemployment, which threatens to reach double digits.
And Sen. Ben Cardin, D-Md., appearing on Fox News Wednesday, spoke for lots of his fellow liberals in blithely proposing a brand-new, massive entitlement in the form of a government-run health scheme, claiming that "a public option helps bring down the costs."
Also appearing on Fox Wednesday, Sen. Judd Gregg, R-N.H., after accusing Democrats on the Senate floor of a "Bernie Madoff approach to (health care) funding," warned that when disguised funding is tallied up, the true cost of Congress' proposed government health takeover — even without the public option — is $1.8 trillion.
Government spending is burning our children's futures to the ground, yet our "leaders" in Washington think it's time to spray the kerosene of still more spending on the fire.
Paul Krugman, and the Middle-Class Champion Myth
By John Tamny
In a world full of paradoxes, Princeton economics professor and New York Times columnist Paul Krugman has become rich decrying what he deems "income inequality." Only in America could an individual denounce the wealth gap while becoming the very person he denounces.
In that sense, it may be that polar opposites Karl Marx and Joseph Schumpeter were right: capitalism is seemingly its own worst enemy. In rich societies, commentators can become wealthy while trashing wealth creation.
The irony with Krugman is that when it comes to policy prescriptions meant to elevate the living standards of the lower and middle classes, much of what he proposes is inimical to their economic health. This has revealed itself most recently amid the dollar's renewed decline.
As Krugman put it in the New York Times, "The truth is that the falling dollar is good news." Krugman's reasoning here is that a weak dollar makes it easier for U.S. companies to export. A nice thought at first glance, but what Krugman ignores is that we can't export unless we're importing, and a weak dollar makes imports more expensive. Trade always balances.
Taking Krugman's illogic further, tall men could presumably become jockeys and short women models if the former expanded the length of an inch while the latter reduced it. The obvious problem in both instances is that no change in the definition of an inch or foot will blot out the visible reality that some people are tall, and some short.
The same applies to the veil that is money. The Obama Treasury can do as the Bush Treasury did and talk down the dollar, but eventually all prices must adjust. So while a weak dollar might in the near-term make U.S. goods attractive, the globalization of production means that the costs of the myriad imported inputs that go into the creation of U.S. goods will eventually have to rise. Inflation steals the benefits of devaluation, and ultimately renders the notion of "money illusion" moot.
Sadly, the harm wrought by a weak dollar extends well beyond false notions of enhanced exporting capabilities, and it in particular weakens the economic chances of the non-rich.
For one, those not wealthy frequently don't possess the ability to protect the value of the money they earn. Lacking access to esoteric currency trading techniques, or perhaps knowledge of gold's essential nature as a hedge against devaluation, the non-rich suffer inflation's ravages most acutely through lower purchasing power. This showed up most notably this decade in the rising price of gasoline.
Some of course did protect their wealth in a rising housing market aided by the dollar's decline, but economic reality eventually caught up to the money illusion there too. Depending on when the non-rich waded into housing, this historical middle class hedge against monetary debasement may not have worked so well.
Worse for those with middle and lower incomes, home ownership is presently for many a proverbial "ball-and-chain" which keeps them landlocked, and unable to seek the best job opportunities irrespective of locale. So while the weak dollar stimulated nominal home price gains and put a lot of average families into houses, the longer-term result has been that those who would benefit most from mobility during a period of limited job opportunities have found themselves unable to relocate.
Krugman of course makes the thin and easy to discredit argument that a weak dollar helps U.S. exporters, but what he ignores is the broader truth that without capital, there are no jobs and wages. He also ignores Schumpeter's tautology that entrepreneurs can't be entrepreneurs without capital.
Considering capital's role when it comes to jobs, a weak dollar does not cause inflation so much as it is inflation. When money is losing value, those with capital must factor in extra risk in committing it to job-creating concepts. Specifically, inflation erodes real investment returns, which means the average worker suffers lower wages for capital migrating toward the hard, commoditized assets least vulnerable to currency debasement over investment in the productive, wage economy.
Looking at entrepreneurs, most start up small with designs on growing large. But if money is losing value, their ability to access the funds necessary for growth is similarly compromised.
It is said that small businesses create the vast majority of jobs in the United States, but as the Wall Street Journal recently reported, "Banks are reluctant to lend, especially to companies with weak or no credit history." The same article in the Journal also found that "Venture-capital investment in U.S. companies fell 44% in the first half of 2009 from a year earlier." President Obama is now talking up a small-business "stimulus" plan that Krugman will no doubt cheer, but what neither understand is the greater truth that the weak dollar looms large in the struggle for capital among small businesses.
When money is treated badly, as in when it's devalued, capital hides. As evidenced by the difficulty small business and entrepreneurial concepts are having in accessing funds, this will negatively impact the job chances of those who can least afford low, or non-existent wages.
But perhaps the biggest reason Krugman's dollar opinions are inimical to the health of the lower and middle classes has to do with equity returns. Indeed, it is through saving, investing and compound interest that the phenomenon of the "Millionaire Next Door" has become a reality.
Put simply, investing is what has in modern times allowed the non-rich to join the rich. But as the last four decades have shown, periods when the dollar's been weak have coincided with low equity returns.
In the ‘70s, Presidents Nixon, Ford and Carter pursued weak dollar policies, and the result was a 17% percent S&P 500 return made negative in real terms based on the dollar's decline. Much the same has occurred this decade amid weak dollar policies sought by the Bush and Obama administrations.
Looking at the ‘80s and ‘90s, something different occurred altogether. Presidents Reagan and Clinton both felt a strong dollar was in the nation's interest, and the market result was a 121 percent S&P return under Reagan, and a 208 percent return under Clinton. Periods of currency strength correlate with powerful equity returns that lift the fortunes of what is a broad investor class largely populated by those not technically wealthy. Krugman seeks the opposite.
To some, Paul Krugman is a champion of the middle and lower classes given his desire to shrink the gap between those with and without money. But for his views on the dollar alone, it's apparent that his reputation lacks merit.
Krugman's support of weak currency policies erode the earnings of those who can afford it least, reduce the investment necessary to create jobs and wages, and drive down the very investment returns necessary to lift the fortunes of those seeking to increase their wealth. Far from a champion of the middle and lower classes, Krugman's views correlate with wealth destruction, and if implemented, his ideas will only shrink the wealth gap insofar as all of us will become worse off.
In that sense, it may be that polar opposites Karl Marx and Joseph Schumpeter were right: capitalism is seemingly its own worst enemy. In rich societies, commentators can become wealthy while trashing wealth creation.
The irony with Krugman is that when it comes to policy prescriptions meant to elevate the living standards of the lower and middle classes, much of what he proposes is inimical to their economic health. This has revealed itself most recently amid the dollar's renewed decline.
Taking Krugman's illogic further, tall men could presumably become jockeys and short women models if the former expanded the length of an inch while the latter reduced it. The obvious problem in both instances is that no change in the definition of an inch or foot will blot out the visible reality that some people are tall, and some short.
The same applies to the veil that is money. The Obama Treasury can do as the Bush Treasury did and talk down the dollar, but eventually all prices must adjust. So while a weak dollar might in the near-term make U.S. goods attractive, the globalization of production means that the costs of the myriad imported inputs that go into the creation of U.S. goods will eventually have to rise. Inflation steals the benefits of devaluation, and ultimately renders the notion of "money illusion" moot.
Sadly, the harm wrought by a weak dollar extends well beyond false notions of enhanced exporting capabilities, and it in particular weakens the economic chances of the non-rich.
For one, those not wealthy frequently don't possess the ability to protect the value of the money they earn. Lacking access to esoteric currency trading techniques, or perhaps knowledge of gold's essential nature as a hedge against devaluation, the non-rich suffer inflation's ravages most acutely through lower purchasing power. This showed up most notably this decade in the rising price of gasoline.
Some of course did protect their wealth in a rising housing market aided by the dollar's decline, but economic reality eventually caught up to the money illusion there too. Depending on when the non-rich waded into housing, this historical middle class hedge against monetary debasement may not have worked so well.
Worse for those with middle and lower incomes, home ownership is presently for many a proverbial "ball-and-chain" which keeps them landlocked, and unable to seek the best job opportunities irrespective of locale. So while the weak dollar stimulated nominal home price gains and put a lot of average families into houses, the longer-term result has been that those who would benefit most from mobility during a period of limited job opportunities have found themselves unable to relocate.
Krugman of course makes the thin and easy to discredit argument that a weak dollar helps U.S. exporters, but what he ignores is the broader truth that without capital, there are no jobs and wages. He also ignores Schumpeter's tautology that entrepreneurs can't be entrepreneurs without capital.
Considering capital's role when it comes to jobs, a weak dollar does not cause inflation so much as it is inflation. When money is losing value, those with capital must factor in extra risk in committing it to job-creating concepts. Specifically, inflation erodes real investment returns, which means the average worker suffers lower wages for capital migrating toward the hard, commoditized assets least vulnerable to currency debasement over investment in the productive, wage economy.
Looking at entrepreneurs, most start up small with designs on growing large. But if money is losing value, their ability to access the funds necessary for growth is similarly compromised.
It is said that small businesses create the vast majority of jobs in the United States, but as the Wall Street Journal recently reported, "Banks are reluctant to lend, especially to companies with weak or no credit history." The same article in the Journal also found that "Venture-capital investment in U.S. companies fell 44% in the first half of 2009 from a year earlier." President Obama is now talking up a small-business "stimulus" plan that Krugman will no doubt cheer, but what neither understand is the greater truth that the weak dollar looms large in the struggle for capital among small businesses.
When money is treated badly, as in when it's devalued, capital hides. As evidenced by the difficulty small business and entrepreneurial concepts are having in accessing funds, this will negatively impact the job chances of those who can least afford low, or non-existent wages.
But perhaps the biggest reason Krugman's dollar opinions are inimical to the health of the lower and middle classes has to do with equity returns. Indeed, it is through saving, investing and compound interest that the phenomenon of the "Millionaire Next Door" has become a reality.
Put simply, investing is what has in modern times allowed the non-rich to join the rich. But as the last four decades have shown, periods when the dollar's been weak have coincided with low equity returns.
In the ‘70s, Presidents Nixon, Ford and Carter pursued weak dollar policies, and the result was a 17% percent S&P 500 return made negative in real terms based on the dollar's decline. Much the same has occurred this decade amid weak dollar policies sought by the Bush and Obama administrations.
Looking at the ‘80s and ‘90s, something different occurred altogether. Presidents Reagan and Clinton both felt a strong dollar was in the nation's interest, and the market result was a 121 percent S&P return under Reagan, and a 208 percent return under Clinton. Periods of currency strength correlate with powerful equity returns that lift the fortunes of what is a broad investor class largely populated by those not technically wealthy. Krugman seeks the opposite.
To some, Paul Krugman is a champion of the middle and lower classes given his desire to shrink the gap between those with and without money. But for his views on the dollar alone, it's apparent that his reputation lacks merit.
Krugman's support of weak currency policies erode the earnings of those who can afford it least, reduce the investment necessary to create jobs and wages, and drive down the very investment returns necessary to lift the fortunes of those seeking to increase their wealth. Far from a champion of the middle and lower classes, Krugman's views correlate with wealth destruction, and if implemented, his ideas will only shrink the wealth gap insofar as all of us will become worse off.
Reducing Deficit Key to US Rating: Moody's
By: Reuters
The United States, which posted a record deficit in the last fiscal year, may lose its Aaa-rating if it does not reduce the gap to manageable levels in the next 3-4 years, Moody's Investors Service said on Thursday.
The U.S. government posted a deficit of $1.417 trillion in the year ended Sept. 30 as the deep recession and a series of bank rescues cut a gaping hole in its public finances.
The White House has forecast deficits of more than $1 trillion through fiscal 2011.
"The Aaa rating of the U.S. is not guaranteed," said Steven Hess, Moody's lead analyst for the United States said in an interview with Reuters Television. "So if they don't get the deficit down in the next 3-4 years to a sustainable level, then the rating will be in jeopardy."
 |
Source: usdebtclock.org |
Moody's [MCO 25.31 
0.20 (+0.8%) 
] has a stable outlook on the U.S. rating, which indicates a change is not expected over the next 18 months.
0.20 (+0.8%) ] has a stable outlook on the U.S. rating, which indicates a change is not expected over the next 18 months.Earlier this year, financial markets were spooked by concerns about the risk of the United States losing its top rating after Standard & Poor's revised its outlook on Britain to negative from stable, indicating the risk of a downgrade.
Hess said that reducing the budget deficit would be a challenge.
"Raising taxes is never popular and difficult politically so we have to see if the government can do that or cut expenditure," he said while adding it would be tough to reduce expenditure.
Dems seek cover to boost debt limit
The Senate must soon increase the national debt limit to above $13 trillion — and Democrats are looking for political cover.
Knowing they will face unyielding GOP attacks for voting to increase the eye-popping debt, Democrats are considering attaching a debt increase provision to a must-pass bill, possibly the Defense Department spending bill, according to Democratic and Republican sources.
Adding it to the defense bill would allow Democrats to argue that they voted for the measure to help troops in harm’s way — and downplay that their vote also expanded the limit for how much money the country can borrow.
The strategy has not yet been finalized, aides and senators said. The House already approved a debt limit increase of $925 billion — above the $12.1 trillion ceiling Congress approved as part of the economic stimulus package last February — but Democrats may seek to increase the limit further so they don’t have to revisit the politically treacherous issue until after the 2010 midterm elections.
As of Tuesday, the debt stood at $11.95 trillion, staring at senators amid a roiling health care debate in which critics have seized on the potential costs of the overhaul. Unlike those of the House, the Senate’s rules do not allow it to automatically increase the debt with its adoption of the annual budget resolution. That puts senators in a tough position politically. And if the Senate balks at the increase, Treasury Secretary Timothy Geithner has warned that the slow economic recovery could collapse, as investors around the world would sharply lose confidence in America’s abilities to meet its credit obligations.
“This president inherited, in some ways, an economic fiasco,” said conservative Democratic Sen. Mary Landrieu of Louisiana. “It’s not going to be a pleasant vote, but it may be necessary until we can get back on track.”
Indeed, Democrats are quick to point out that President George W. Bush left President Barack Obama with a $10.6 trillion debt — and that the debt limit was increased seven times in the Republican’s eight years in the White House. But now Democrats are in charge of Congress and the White House; and the Treasury Department reported last week that the annual deficit for the fiscal year that ended Sept. 30 stood at a record $1.4 trillion, with that number likely to balloon under Obama’s policies.
Knowing they will face unyielding GOP attacks for voting to increase the eye-popping debt, Democrats are considering attaching a debt increase provision to a must-pass bill, possibly the Defense Department spending bill, according to Democratic and Republican sources.
Adding it to the defense bill would allow Democrats to argue that they voted for the measure to help troops in harm’s way — and downplay that their vote also expanded the limit for how much money the country can borrow.
The strategy has not yet been finalized, aides and senators said. The House already approved a debt limit increase of $925 billion — above the $12.1 trillion ceiling Congress approved as part of the economic stimulus package last February — but Democrats may seek to increase the limit further so they don’t have to revisit the politically treacherous issue until after the 2010 midterm elections.
As of Tuesday, the debt stood at $11.95 trillion, staring at senators amid a roiling health care debate in which critics have seized on the potential costs of the overhaul. Unlike those of the House, the Senate’s rules do not allow it to automatically increase the debt with its adoption of the annual budget resolution. That puts senators in a tough position politically. And if the Senate balks at the increase, Treasury Secretary Timothy Geithner has warned that the slow economic recovery could collapse, as investors around the world would sharply lose confidence in America’s abilities to meet its credit obligations.
“This president inherited, in some ways, an economic fiasco,” said conservative Democratic Sen. Mary Landrieu of Louisiana. “It’s not going to be a pleasant vote, but it may be necessary until we can get back on track.”
Indeed, Democrats are quick to point out that President George W. Bush left President Barack Obama with a $10.6 trillion debt — and that the debt limit was increased seven times in the Republican’s eight years in the White House. But now Democrats are in charge of Congress and the White House; and the Treasury Department reported last week that the annual deficit for the fiscal year that ended Sept. 30 stood at a record $1.4 trillion, with that number likely to balloon under Obama’s policies.
With the debt limit about to be eclipsed, Republicans are eager to force Democrats to find the votes to increase it among themselves, putting the majority party in a lose-lose situation and searching for a way to minimize public backlash.
“Regardless of the political treachery, I’m more worried about the economic treachery and the monetary aspects of it with devaluing the dollar,” said Sen. Ben Nelson (D-Neb.).
Senate Budget Committee Chairman Kent Conrad (D-N.D.) and the committee’s ranking member, Sen. Judd Gregg (R-N.H.), whose panel is in charge of the debt limit increase, both told POLITICO that appropriators may add the language to must-pass spending legislation.
And Conrad said he wants any debt increase to be coupled with language that would create a “comprehensive” process to force Congress to begin making tough choices to cut the debt — something akin to legislation he and Gregg proposed that would establish a commission to study ways to cut the deficit, whose recommendations would be fast-tracked through Congress.
Sen. Evan Bayh of Indiana, a centrist Democrat, said he wouldn’t support an increase in the debt limit “unless there’s some mechanism to start getting the deficit under control.”
Bayh and nine other Democrats sent a letter to Senate Majority Leader Harry Reid (D-Nev.) last week that called on Congress to approve a “special process” to control the deficit — warning that adding trillions more dollars to the country’s credit card could force a sharp rise in interest rates and cause the price of goods and services to decline while limiting the country’s ability to act on a range of pressing issues.
But if that language is attached to a stand-alone bill to increase the debt limit, the House would be forced to vote on the amended version — a vote that House Democratic leaders are eager to avoid. Folding a method to control the deficit — with an increase in the debt limit — into a much larger bill seems to be a more politically palatable solution, several aides said.
“Sen. Reid agrees about the importance of dealing with our long-term fiscal challenges and has been talking with Sen. Conrad, the administration and others in the Democratic leadership about the best way to proceed,” said Jim Manley, senior communications adviser to Reid. “Those discussions are ongoing, and the administration is evaluating what they may want to recommend.”
Republicans are keenly aware that Democrats may try legislative maneuvering to avoid political fallout, with one senior GOP aide saying the defense appropriations route was under “active consideration.”
Three Republicans — Reps. Jerry Lewis and Buck McKeon of California and Rep. Bill Young of Florida — sent a letter to House Appropriations Committee Chairman Dave Obey (D-Wis.) and Speaker Nancy Pelosi (D-Calif.) Wednesday asking Democrats to keep the defense bill clean of extraneous items, including the D.C. Voting Rights Act and an increase in the national debt limit.
A spokesman for Obey, Ellis Brachman, said he “couldn’t speculate on what will be in the final defense appropriations package,” which is awaiting action by a House-Senate conference committee.
Rob Blumenthal, a spokesman for Senate Appropriations Committee Chairman Daniel Inouye (D-Hawaii), declined to comment.
Since conference reports cannot be amended, the GOP wouldn’t be able to offer amendments to a debt ceiling increase if it’s added to the defense bill.
And GOP Senate leaders — who expect their 40 members to unite against the debt limit increase and force Democrats to find the necessary 60 votes on their own — are eager to have a protracted amendment process on the floor.
“My guess is that we will try to offer some amendments to [the increase] because I think it’ll be a good opportunity for us to have a debate on spending and borrowing, and that’s obviously a debate that we want to engage in,” said Sen. John Thune (R-S.D.), No. 4 in the GOP leadership.
Sen. Olympia Snowe (R-Maine), the Senate’s biggest swing vote, said she was uncertain how she’d vote on a debt limit increase.
“You absolutely have to make government run,” she said, “but I have to look at it.”
“Regardless of the political treachery, I’m more worried about the economic treachery and the monetary aspects of it with devaluing the dollar,” said Sen. Ben Nelson (D-Neb.).
Senate Budget Committee Chairman Kent Conrad (D-N.D.) and the committee’s ranking member, Sen. Judd Gregg (R-N.H.), whose panel is in charge of the debt limit increase, both told POLITICO that appropriators may add the language to must-pass spending legislation.
And Conrad said he wants any debt increase to be coupled with language that would create a “comprehensive” process to force Congress to begin making tough choices to cut the debt — something akin to legislation he and Gregg proposed that would establish a commission to study ways to cut the deficit, whose recommendations would be fast-tracked through Congress.
Sen. Evan Bayh of Indiana, a centrist Democrat, said he wouldn’t support an increase in the debt limit “unless there’s some mechanism to start getting the deficit under control.”
Bayh and nine other Democrats sent a letter to Senate Majority Leader Harry Reid (D-Nev.) last week that called on Congress to approve a “special process” to control the deficit — warning that adding trillions more dollars to the country’s credit card could force a sharp rise in interest rates and cause the price of goods and services to decline while limiting the country’s ability to act on a range of pressing issues.
But if that language is attached to a stand-alone bill to increase the debt limit, the House would be forced to vote on the amended version — a vote that House Democratic leaders are eager to avoid. Folding a method to control the deficit — with an increase in the debt limit — into a much larger bill seems to be a more politically palatable solution, several aides said.
“Sen. Reid agrees about the importance of dealing with our long-term fiscal challenges and has been talking with Sen. Conrad, the administration and others in the Democratic leadership about the best way to proceed,” said Jim Manley, senior communications adviser to Reid. “Those discussions are ongoing, and the administration is evaluating what they may want to recommend.”
Republicans are keenly aware that Democrats may try legislative maneuvering to avoid political fallout, with one senior GOP aide saying the defense appropriations route was under “active consideration.”
Three Republicans — Reps. Jerry Lewis and Buck McKeon of California and Rep. Bill Young of Florida — sent a letter to House Appropriations Committee Chairman Dave Obey (D-Wis.) and Speaker Nancy Pelosi (D-Calif.) Wednesday asking Democrats to keep the defense bill clean of extraneous items, including the D.C. Voting Rights Act and an increase in the national debt limit.
A spokesman for Obey, Ellis Brachman, said he “couldn’t speculate on what will be in the final defense appropriations package,” which is awaiting action by a House-Senate conference committee.
Rob Blumenthal, a spokesman for Senate Appropriations Committee Chairman Daniel Inouye (D-Hawaii), declined to comment.
Since conference reports cannot be amended, the GOP wouldn’t be able to offer amendments to a debt ceiling increase if it’s added to the defense bill.
And GOP Senate leaders — who expect their 40 members to unite against the debt limit increase and force Democrats to find the necessary 60 votes on their own — are eager to have a protracted amendment process on the floor.
“My guess is that we will try to offer some amendments to [the increase] because I think it’ll be a good opportunity for us to have a debate on spending and borrowing, and that’s obviously a debate that we want to engage in,” said Sen. John Thune (R-S.D.), No. 4 in the GOP leadership.
Sen. Olympia Snowe (R-Maine), the Senate’s biggest swing vote, said she was uncertain how she’d vote on a debt limit increase.
“You absolutely have to make government run,” she said, “but I have to look at it.”
Oil price slips after spiking to $82
World oil prices slid on Thursday on profit-taking after soaring overnight to 82 dollars per barrel, striking a one-year peak on the back of sliding US energy reserves and the weak greenback, traders said. New York's main contract, light sweet crude for December delivery, fell 1.28 dollars to 80.09 dollars a barrel. The contract had touched 82.00 dollars exactly on Wednesday -- a level last seen on October 14, 2008.
Elsewhere on Thursday, Brent North Sea crude for December delivery dipped 1.21 to 78.48 dollars, after reaching a high of 80.26 the previous day.
Both contracts had risen in value on Wednesday, lifted by a drop in US energy stocks, which was seen as a sign of improved demand in the world's biggest energy user.
Data released Wednesday by the Department of Energy showed US gasoline reserves sank by 2.3 million barrels in the week to October 16. That was more than the 800,000 barrel drop expected by most analysts.
Oil has been rising steadily in recent days, fuelled by a weak US currency, which makes dollar-priced crude cheaper for holders of stronger foreign units.
But there are doubts on whether oil prices can be sustained at levels above 80 dollars given the fragile state of the global economy, despite some signs of a recovery.
"We remain cautious about the sustainability of the oil price in the near term," analysts from the Commonwealth Bank of Australia said in a report.
Oil prices tumbled from historic highs of more than 147 dollars in July 2008 to about 32 dollars in December because of the global recession but have since risen on hopes of recovery.
Meanwhile in London on Thursday, OPEC secretary-general Abdalla Salem El-Badri said that the cartel will consider ramping up crude oil production at its next meeting in December if key conditions are met.
The cartel "will not hesitate to increase its production in December", he told reporters, adding the decision was dependent on higher oil prices, improving economic growth and no floating storage of crude.
The 12-nation Organization of Petroleum Exporting Countries (OPEC), whose members pump 40 percent of the world's crude oil supplies, will hold their next meeting in Luanda, Angola, on December 22.
"If these (rising) prices will continue, if we see the stocks go back to the normal level... if we see there is a real world economy growth, then I am sure our member countries will take the decision to increase the production in December in Luanda," he told a press briefing.
He added that an increase in output was conditional upon "signs of economic growth improving and no floating storage" of crude oil.
The OPEC chief was in London this week to attend Oil & Money 2009, a London conference for the world's energy industry. The two-day event drew to a close on Wednesday.
Both contracts had risen in value on Wednesday, lifted by a drop in US energy stocks, which was seen as a sign of improved demand in the world's biggest energy user.
Data released Wednesday by the Department of Energy showed US gasoline reserves sank by 2.3 million barrels in the week to October 16. That was more than the 800,000 barrel drop expected by most analysts.
Oil has been rising steadily in recent days, fuelled by a weak US currency, which makes dollar-priced crude cheaper for holders of stronger foreign units.
But there are doubts on whether oil prices can be sustained at levels above 80 dollars given the fragile state of the global economy, despite some signs of a recovery.
"We remain cautious about the sustainability of the oil price in the near term," analysts from the Commonwealth Bank of Australia said in a report.
Oil prices tumbled from historic highs of more than 147 dollars in July 2008 to about 32 dollars in December because of the global recession but have since risen on hopes of recovery.
Meanwhile in London on Thursday, OPEC secretary-general Abdalla Salem El-Badri said that the cartel will consider ramping up crude oil production at its next meeting in December if key conditions are met.
The cartel "will not hesitate to increase its production in December", he told reporters, adding the decision was dependent on higher oil prices, improving economic growth and no floating storage of crude.
The 12-nation Organization of Petroleum Exporting Countries (OPEC), whose members pump 40 percent of the world's crude oil supplies, will hold their next meeting in Luanda, Angola, on December 22.
"If these (rising) prices will continue, if we see the stocks go back to the normal level... if we see there is a real world economy growth, then I am sure our member countries will take the decision to increase the production in December in Luanda," he told a press briefing.
He added that an increase in output was conditional upon "signs of economic growth improving and no floating storage" of crude oil.
The OPEC chief was in London this week to attend Oil & Money 2009, a London conference for the world's energy industry. The two-day event drew to a close on Wednesday.
New jobless claims rise more than expected to 531K
First-time jobless claims rise more than expected to 531,000, continuing claims fall
WASHINGTON (AP) -- The number of newly laid-off workers filing claims for jobless benefits rose more than expected last week, as employers remain reluctant to hire even with the economy showing signs of recovery.
AP - In this Oct. 13, 2009 photo, job seekers fill in employment application forms at a career fair in ...The report is "slightly disappointing," Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a note to clients, "but it does not change the core story, which is that ... a clear downward trend in claims has emerged" over the past two months.
The Labor Department said Thursday that new jobless claims rose to a seasonally adjusted 531,000 last week, from an upwardly revised 520,000 the previous week. Wall Street economists had expected only a slight increase, according to Thomson Reuters.
Economists closely watch initial claims, which are considered a gauge of layoffs and an indication of companies' willingness to hire new workers.
The four-week average of claims, which smooths out fluctuations, fell slightly to 532,250, the lowest since mid-January and about 125,000 below the peak for the recession, reached this spring. But claims remain well above the 325,000 that economists say is consistent with a healthy economy.
The claims figures indicate the economy is shedding fewer jobs, economists said. The drop in initial claims since last month signals that employment losses likely will be below 200,000 in October, the lowest since August 2008, several economists said.
Employers cut 263,000 positions in September, the Labor Department said earlier this month, as the unemployment rate rose to 9.8 percent from 9.7 percent in August. The October report will be released Nov. 6.
The stock markets dipped in morning trading. The Dow Jones industrial average slipped about 11 points, while broader indexes also fell slightly.
The number of people continuing to claim benefits did drop for the fifth straight week to 5.9 million, from just over 6 million. The figures on continuing claims lag initial claims by a week.
Many recipients are moving onto extended benefit programs approved by Congress in response to the recession, which began in December 2007 and is the worst since the 1930s. Those extensions add up to 53 weeks of benefits on top of the 26 typically provided by the states.
When those programs are included, the total number of recipients dropped to 8.8 million in the week ending Oct. 3, the latest data available, down about 50,000 from the previous week. That decline is likely due to recipients running out of benefits, rather than finding jobs, economists say.
The National Employment Law Project, an advocacy group, estimates that about 1.3 million people will exhaust their benefits by the end of this year. Congress is considering adding another 14 to 20 weeks of support, but that bill has been delayed in the Senate.
Many analysts expect the economy grew as much as 3 percent in the July-September quarter, but employers are reluctant to hire as they wait to see if such growth can be maintained.
More job cuts were announced this week. Sun Microsystems Inc. said it plans to eliminate up to 3,000 jobs, or 10 percent of its worldwide work force, as it awaits a takeover by Oracle Corp., a deal being held up by antitrust regulators in Europe.
Among the states, Florida had the largest increase in claims, with 9,976, which it attributed to layoffs in the construction, service, manufacturing and agriculture industries. New York, Wisconsin, Indiana, and Arkansas had the next largest increases. The state data lag initial claims by one week.
California reported the largest drop in claims, down 7,062, which it attributed to fewer layoffs in the construction, service, and manufacturing industries.Tennessee, Maine and Nebraska also reported decreases.
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