“Solving” the Debt Problem Behind Closed Doors Is the Problem
By Mark MelinIt is difficult to watch a great society in decline, particularly when that society is your own.
As the cradles of democracy, Greece and Italy, fight a debt crisis and potential societal meltdown that will test the very concept of democracy, the world might have been looking to the U.S. for leadership on the debt topic. Â It’s likely not to happen.
The set up for debt super committee members was reasonably easy, a starter task:
Over a ten year period of time, close a $1.2 trillion deficit. Politicians don’t have to tackle the big problems – and the big problems are really significant. It’s not like they had to deal with the nearly $2 trillion in yearly deficit spending. That would really cause pain, but it’s not the largest problem. No, that big problem might be the $200+ Trillion hit to the budget when baby booming seniors start to retire in three to five years.
Politicians were given the easy task, and couldn’t even get close. Not a good sign for the future. In fact, perhaps it is time for history to note exactly what transpired. Perhaps such consideration should begin with the shroud of secrecy engulfing difficult debt negotiations. Was this a plan designed to keep the truth from voters, who typically don’t want to hear bad news or mention of that third rail word: sacrifice?  It is this voter anguish issue, not substantive issues, to which many politicians show most sensitivity?
Remember, politicians don’t often think from the same perspective as business people or investors. Politicians are masters at one thing: getting elected.  Results matter only to the extent of getting elected. The best take the political temperature and craft a marketing message that voters want to hear. Right now politicians are deadly afraid to telling voters the truth. The dichotomy is that without the truth, and the related political pressure that impacts a politician’s re-election calculus, the debt problem likely won’t get solved.
With their varied political motivations to keep the issue under wraps, asking all participants not to discuss matters in public, release of the final report was scheduled the day before Thanksgiving – an apparent failed move to “bury the news,” which is pretty much symptomatic of how the issue was handled from the start.  But this didn’t stop information from moving into the public realm. In fact, it is interesting to note that those who broke the code were punished. Consider the battered down ratings agency S&P who was really the first modern day Paul Revere, making the difficult call on U.S. debt already being discussed in professional investing circles.  S&P was also the first to receive punishment, as well. After it released its debt downgrade truth, it was widely ridiculed, almost tarred and feathered as an unpatriotic rogue.
As S&P delivered a second accurate warning on France, that historic message was delivered  in a fashion that indicates they learned from their last lesson. Instead of publically discussing the situation, the firm had a “mistake” with a “fat finger” that released an e-mail discussing the downgrade of French debt. It’s hard to entirely comprehend a Rick Perry “oops” regarding an issue so sensitive that likely was discussed only at the highest levels.
Learning from the political punishment, there was Germany. While being chided by the U.S. to shore up the “European debt problem,” reasonably fiscally responsible Germany likely drew the conclusion that providing bailouts might be an endless task in futility unless difficult austerity was in place. To announce their decision to let the weaker governments fight for survival, the foreign ministry is said to have “leaked” their position via e-mail.  Not only is the leak method interesting, but so, too, is the fact that it originated from foreign ministry rather than an economic branch, indicating the importance of the global meltdown issues.
These releases are no different from the whispers that took place near the end of the cloaked debate. Democrats might have leaked significant budget cuts that hurt their political special interests. At one point, a little noticed change took place in the “voice” of Occupy Wall Street when protesters started showing up in coordinated colors, coats and T shirts with political messages speaking out against budget cuts.  Were they warned of the eventual likely conclusion of the debt debate?
Democrats note inside their political opposition was really using brinkmanship as a negotiating tactic, calculating that a debt crisis would likely bring down a presidency. Republicans, for their part, are said to have put on the table required revenue enhancements. However, a bridge between the two parties could not be built, and part of the reason for this impasse could be due to the lack of voter knowledge and related political pressure.
What is likely interesting to watch in the near future are the automated budget cuts. Will they even occur or will politicians continue to avoid making the difficult budget decisions?  This is a key for investors to watch, because escaping the difficult choices are one political reality that might be most likely.
Have we missed a major opportunity with Democrats? They were willing to put on the table significant entitlement cuts they wouldn’t have otherwise offered? Did Republicans make a significant move on revenue? Or has a perfect set up for opportunities to solve a problem been missed?
We won’t immediately know the answer.  But it should be considered that without open discussion of the issues and risks the solution and accompanied sacrifice will likely prove elusive, creating a volatile stock market environment for years – and potentially decades – to come.
About the Author: Mark Melin is a leading expert at uncorrelated investing. He has taught managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008) and is editor of Opalesque’s OFI managed futures newsletter, where he writes uncorrelated investment development. He is currently writing his fourth book on the burgeoning debt crisis and building a defensive investment portfolio.
All contents copyright 2011 © Mark H. Melin all rights reserved.
Risk Disclosure: This article is intended for educational and informational purposes. Past performance is not always indicative of future results. There is risk of loss when investing in futures and options. Managed futures investing can involve volatility and may not be appropriate for all investors. The opinions expressed are solely those of the author, they are not appropriate for all investors and may not have considered all risk factors.
