The resolution of the fiscal cliff did little to address the primary issue of governmental spending and increasing deficits. The end result was an easy sound bite for the President, “I promised not to raise taxes on working Americans, continued the extended unemployment program and forced the wealthy to pay their fair share.” I was surprised the republicans gave in so easily as I read the details of the resolution, primarily because the sequester and debt ceiling issues were completely sidestepped in the negotiations. I just assumed it was politics as usual and that means kicking the can down the road as long as possible.
Current estimates are that we’ll hit the debt ceiling around March 1st, give or take two weeks. Congress’ inability to hash out an agreement on the last debt ceiling increase was a primary cause for the first credit downgrade in U.S. history by ratings agency Standard & Poors. It now appears that the Republican Party conceded the fiscal cliff battle in an attempt to win the debt ceiling war. The Republican mantra throughout the fiscal cliff discussions focused on a Dollar for Dollar balance of spending cuts vs. tax hikes. Their concession to the final deal kept them from becoming the scapegoat in a game of political brinksmanship.
This round of debt ceiling talks promises to be an all out war between the President and the Republican Party. The sequester will automatically kick in if the debt ceiling is not raised and this appears to be the Republican strategy for getting the spending cuts they wanted in the fiscal cliff negotiations. It’s important to remember that President Obama signed the sequester bill into law as part of the 2011 Budget Control Act. At some point, the Democratic Party must realize that it cannot continue to buy votes through endless entitlements. The Republican Party appears to have already come to grips with this, as sequestration would immediately trim more than $54 billion dollars in defense spending for 2013.
The political gamesmanship taking place appears to have now put the pressure back on the Democrats. Odds are, the President assumed that the Republican Party would call for a replacement of the sequester to avoid the defense spending cuts associated with its implementation. The President would then use this to leverage his domestic spending desires. However, Republican silence on replacing the sequester shows that the Republican Party may have more support from its constituents than initially assumed. House Speaker, John Boehner has indicated that he has significant support, going so far as to say, “I got that in my back pocket,” referring to the support of Republican defense hawks.
The Republican Party’s ability to finally form a consensus now forces the Democrats to come to the table with their own domestic spending cuts. The reasoning is that the Democrats would rather pick and choose which programs get cut and by how much as opposed to the blanket cuts imposed by sequestration. Meanwhile, the Republicans appear to have accepted that the sequester may be the only way to cut spending. This implies that they’ll be less likely to concede the debt ceiling negotiations as easily as they did the fiscal cliff.
This brings us to Democratic wiggle room and the technical loophole of, “seigniorage.” Seigniorage is the difference between the physical cost of producing currency and the face value of the currency itself. Therefore, if it costs the government $.02 to produce a nickel, a $.03 profit is made by the Treasury through seigniorage. The President can use this to avoid the debt ceiling discussions altogether while the Federal Reserve and the Treasury Department quietly work behind the scenes in an attempt to keep our country afloat.
Finally, the argument that this would be hyper inflationary is simply ignorant. The coin would be deposited at the Federal Reserve. The Fed would instantly use it to buy U.S. Treasuries thus, sterilizing the $1 trillion Dollar coin economically. The primary point is that we are straddling the political and economic fence between hapless and malevolent. Hopefully, the fence pikes will be uncomfortable enough to force a resolution.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer