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July 21, 2011

S&P Warns: Just Raising The Debt Ceiling Without Serious Reduction of Actual Debt Will Result In A Downgrade of Creditworthiness
Boehner Denies Story

Update: Boehner has tweeted that this NYT story is false:

False. Senate should pass #CutCapBalance. RT NYT NEWS ALERT: Obama and Boehner Close to Major Budget Deal, Congressional Leaders Are Told

The NYT had previously claimed -- probably relying on Obama's people as sources -- of an imminent deal between Bammy and Boehner.

The Obama administration has informed Democratic Congressional leaders that President Obama and Speaker John A. Boehner were starting to close in on a major budget deal that would enact substantial spending cuts and seek future revenues through a tax overhaul, Congressional officials said Thursday.

With the government staring at a potential default in less than two weeks, the officials said the administration on Wednesday night notified top members of Congress that an agreement between the president and Mr. Boehner could be imminent. The Congressional leaders, whose help Mr. Obama would need to bring a compromise forward, were told that the new revenue tied to the looming agreement to increase the debt limit by Aug. 2 would be produced in 2012 through a tax code rewrite that would lower individual and corporate rates, close loopholes, end tax breaks and make other adjustments to produce revenue gains.

Officials knowledgeable about the conversations between the administration and Congressional leaders said the details of the potential package remained unknown but they presumed it would include cuts and adjustments in most federal programs, including Medicare.

Obama's people did this once before, claiming a deal was about to be struck when that wasn't true at all. Is this some kind of tactic on their part?

As for the deal suggested: This is interesting. A commenter -- forget who -- suggested that rather than the typical screw-over of tax hikes upfront and supposed cuts later (which tend not to happen), why shouldn't we insist on the opposite timing? Cuts first, and then promises of tax hikes? And then decide later if we feel like doing that.

Now that doesn't mean this is a good deal. I doubt it is. Assuming it's based on the Gang of Six plan, Dick Morris and others are calling it a fraud. Not only does the plan likely call for the elimination of big-ticket deductions (mortgage interest, charitable contributions, state and local taxes)...

But the most dangerous part of the proposal is that to establish a commission to monitor the deficit reduction measures to assure that they unfold as planned. Senator Kent Conrad (D-ND), Chairman of the Senate Budget Committee, has been pushing this idea for more than a year now hoping to equip the commission with automatic authority to cut spending and to raise taxes without legislative authorization. It would allow a tax increase without requiring any member of Congress to vote for it.

Not sure that this is what's been agreed to, though.

Dick Morris made an interesting prediction last night about the steps that would likely occur here. Since he nailed step one, maybe he's right about the later steps two.

1. Boehner and Obama announce a deal based on the Gang of Six proposal.

2. House Republicans refuse to vote for it. Now Democrats, plus some of the moderate Republican House members, could probably pass it with their own votes (they'd have Boehner, for one), but they will refuse to do so, because they don't want to take ownership of an unpopular deal.

3. So Obama is now forced to begin negotiating with Tea Party-ish House Republicans who will insist on the deal coming much closer to their line of thinking.

4. Who knows what happens here. The gap between the Establishment and Insurgency is too wide to easily paper over.

External Pressure: Frankly, I can't think of anything more helpful to our position than this.

We have two feuding political parties. Guess who acts as the "neutral, independent referee" deciding which party has the better argument?

The media, of course. That's why we can never actually win.

However, here comes a bona-fide objective third party with undeniable expertise on debt and its consequences to refute the media's narrative and say Debt must be reduced.

If an agreement is reached to raise the debt ceiling but nothing meaningful is done in terms of deficit reduction, the U.S. would likely have its rating cut to the AA category, S&P said.

“While banks and broker-dealers wouldn’t likely suffer any immediate ratings downgrades, we would downgrade the debt of Fannie Mae, Freddie Mac, the ‘AAA’ rated Federal Home Loan Banks, and the ‘AAA’ rated Federal Farm Credit System Banks to correspond with the U.S. sovereign rating,” S&P said in its report.

“We would also lower the ratings on ‘AAA’ rated U.S. insurance groups, as per our criteria that correlates insurers’ and sovereigns’ ratings,” the firm said.

Gang of Six Is Rubbish: A lot of serious people -- former Bush economic advisors -- say the deal is a giant step backwards.

Keith Hennessee has a lot of reasons for panning this non-plan -- seventeen of them, in fact. I was going to quote some, as Captain Ed did, but as I read them I realized they're all deadly.

The Gang of Six is an absolutely horrible plan that capitulates to the Democrats on every single agenda item and of course then dooms the nation to ever-increasing spending and ultimate bankruptcy.

Update: A smaller credit-rating agency, Egan Jones, which is not one of the big three, has already reduced America's credit rating.

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