Van Eck Hotline on Money and the Economy
For: Monday, October 14, 2013
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The drumbeats of doom and rhetoric continue to come out of Washington and other centers of political and financial power. The Federal government is now in the 14th day of the partial shutdown. The debt ceiling will be reached by Thursday of this week – although it is mere fantasy talk to claim that the government would default on even one bill, note or bond on that day. The Treasury has plenty of revenue coming in and that means the government would be able to make payments on the debt and most other obligations for an additional week or two. The politicians have come close to reaching a short-term fix to the budget problems during the past week, but the leaders on each side have balked every time a deal got close. The Republicans went too far with their demands about Obamacare and now the Democrats are pushing their advantage by demanding that some of the sequester spending cuts (which became law more than two years ago) be reduced or stopped altogether. Such is the dance of politics as each side tries to please their base and the army of special interest groups that unceasingly try to steer government policy via threats and rewards (usually related to money).
Next up it will be the Democrats that are forced to cut back on their demands. Trying to increase spending as part of a deal on the budget and the debt ceiling is certainly a curveball and puts the debate in a new light. It is hard to see how House Republicans could be convinced to accept such a deal. The bullish estimates about annual declines in the size of the budget deficit moving forward are partly based on the sequester cuts. Standard & Poor’s and other rating agencies would do doubt be disappointed if the House, Senate and White House reduced or eliminated the sequester cuts as part of a new deal. The truth is that the two parties MUST set up a system where they will force real and substantive reforms on such touchy areas as Medicare and Social Security. Whether the politicians deal with those changes soon or wait until the ultimate deadline some years down the road, the reforms will take place. That is the power of money – or in this case – the lack of money. The qualification ages for such entitlement programs – as well as means testing – will both become part of the system at some point. Mathematics and demographics assure such an outcome. A lot has changed in this nation since those programs were created and that must be reflected via new laws.
Do the two major parties have the political will to make such tough decisions during 2013 and early 2014? The behavior that has been on display in recent weeks suggests that the answer is no. During the next week or two, the pressure will eventually become too great and some kind of compromise will be struck. At a minimum, it would reopen the government, extend the debt ceiling for at least three to six months and set up a plan to discuss broad reforms down the line. The stock market is refusing to budge on the downside. That is a sign that most investors agree with my take on the near-term outlook for a deal. However, if things are allowed to go on until Thursday or later, stocks would certainly decline and that in turn would spur on action in Washington. At this point, it is impossible to say exactly how all of this is going to develop and what timetable the compromise will follow. We do know one thing for sure. The government shutdown and the ongoing debates about the issues have been hurting the U.S. and global economies. Even if a compromise is struck today, it would take a while – at least a few months – before some parts of the economy return to normal. At a minimum, it is a question of confidence. There has been ample evidence of late to show that consumer and business confidence have both been suffering. Despite various heads being buried in sand these days, both the economic data and corporate results are going to suffer from the latest delays and disruptions caused by Washington. More on Thursday.
Next hotline will be updated no later than 8:00 P.M. Eastern on Thursday, October 17, 2013