A man of joy.

Peter Terpeluk was my friend. And he died last week.

Like gay lovers in an earlier era, Peter and I kept our relationship quiet. He was a big Republican muckety-muck, fundraiser and lobbyist extraordinaire, former Republican National Committee finance chairman. I was, he liked to tell me, his favorite Liberal.

Peter was among the most unfailingly joyful people I have ever known. An odd thing to say about a D.C. insider—it not being a place where joy would jump out of a word cloud. To watch Peter pacing in his office, however, bouncing from one call to the next to the next, was to watch a person completely and profoundly in his element. How he kept the pieces sorted out was a mystery to me. But he would laugh as he reflected on the world of his choosing. The world of his making.

Peter was appointed Ambassador to Luxembourg by W. It was the culmination of his life. From borough manager in Pennsylvania, he worked his way through the Republican ranks, until the final honorific was his for life.

Ambassador Terpeluk. It was, he assured me, a great gig. “You gotta do it,” he insisted, seemingly oblivious to the realities of the world that precluded the rest of us from applying to be, for example, Ambassador to Iceland.

Peter was a giver. He was a bundler. He knew who to call and when to call them. He introduced people. He had a sense about people. As Wayne Berman—a peer and collaborator at the peak of the Republican money world—assured me years ago, Peter was the best. Along with Bill Timmons, the best lobbyist in DC.

Peter believed in the Republican Party. Though not on any particular issue I can think of. He was a party man, not an issue man. Like most Democrats. This nation is split in half by party people, more so than issues. Don’t ask me why, I don’t get it. But Peter was unfailingly friendly. While I heard him disparage Democrats to no end—Clinton was white trash. Obama was a joke—on a personal level, I never heard him utter a mean word. It was never personal, it was strictly business. Or rather, it was strictly politics.

But there was something that mystified me about Peter jumping on early with Rick Perry. George H.W. Bush and W. were both unfailingly amiable people. And Ronald Reagan as well. They each in their own way radiated an optimism and embrace of the nation beyond its political borders. These were the people who brought Peter to politics and to the seat of power. And like Peter, their politics was played hard, but not with a mean or harsh tone.

Not so with Rick Perry. If he has a weak spot, it is not intelligence—the great Democrat blind spot—but his apparent meanness. Not meanness of policy, but of attitude. Of affect.

Among Peter’s last words to me of Perry—It could be a movement. Won't know for a long while—indicated that he saw Perry to be of Reaganesque potential, but that he was not sold yet. I suspect that it was the lack of joy, the meanness of spirit in Perry’s public demeanor that had give him pause. Perry can connect with the anger of the Tea Party and may yet, as Peter predicted, run the table in the primary season, but to win the Presidency, Perry will have to show something more, something better. America does not vote mean. Or if it does, that is when it will be time to fear for our nation.

Optimism is the touchstone of leadership. It brings out a sense of hope, and from hope comes joy. Even in the face of adversity.

And joy—deep down beneath that Republican exterior, with the tie pins and those starched, French-cuff shirts—was the defining wellspring of Peter Terpeluk’s character. I will miss him.

And so it starts.

I watched Texas Governor Rick Perry over the weekend. Gotta say, great start. Perry should rip Mitt Romney apart. He delivers a great vision speech. And the primaries lay out well for him. Iowa and South Carolina should be easy, and New Hampshire will be discounted, because even if Romney wins there, he will be viewed as a favorite son.

A Republican friend, close to Perry, demurs. "We will win New Hampshire. I have never been with a political person like this in my life. He is the best guy working a room ever. Better than Reagan. That speech went right into the living rooms like RR used to do."

My son reads this, and has the perfect new age response: "I should put some Intrade money on him while it's cheap." But the Perry contract is not cheap. He just announced and he is already at 38, eight points over Romney.

I have had two reactions. I listened to Perry's stump speech. He is delivers a great speech. He has a very strong voice. Clear vision on opportunity and the future. As my friend said, it goes right through the medium—radio, TV—to the person. Visceral. He has a power and passion that elude Romney, who is the epitome of Just Words. Seemed apparent to me that Perry can run away with the nomination. 

Then I took a look at Perry's other words. Not his record—as that really matters little, ironically, despite how it will be spun and debated—but his temperament. And boy is he out there. There is a reason Karl Rove and the Bush family have fought this guy. He is the opposite of their notion of a conservative Republican. W worked hard to convey a sense of being a unifying figure, the Compassionate Conservative and all that. In that regard, Dick Cheney really was his undoing, the Sith Lord who brought him under his wing, taught him the arts of war—domestic and international. In contrast, Perry just either says what he wants with no regard for outcomes, or says what he wants with full regard for outcomes. I suspect it's the latter.

The bit about Texas and secession is notable. When Texas joined the union, it had the right to choose to divide up into six states—to have more senators. It did not have the right to exit. Yet secessionism remains such a visceral touchstone of American Nativism, something that Perry has played well. Does it matter that Texas has no such right? Does it matter that we fought a long civil war over the this issue? Of course not. This is politics, not political science.

Playing the secession card is directly linked to Perry's comments on the Fed.  "If this guy [Bernanke] prints more money between now and the election, I don't know what y'all would do to him in Iowa, but we—we would treat him pretty ugly down in Texas." His unwillingness to acknowledge those comments as grossly inappropriate—and instead to simply retort "Look, I'm just passionate about the issue"—tells you exactly why he is cut from a different bolt of cloth than the Bush clan. He also knows that they—Karl Rove and others—have no choice but to come around. Perry knows well that, in the famous words of Toby Ziegler, "They'll like us when we win."

I had my own personal, visceral reaction to Perry's attack on Ben Bernanke, rooted in my own family history in Alabama, where by grandmother taught me that the rules by day were different than the rules by night. Filtered through my own rendering of family and national history "I don't know what y'all would do to him in Iowa, but we—we would treat him pretty ugly down in Texas," translated into "I don't know about y'all —but we know how to handle Jew bankers down in Texas."

I know, I need to have my filters cleaned. But even if this reaction was unfair and unreasonable, it reflected my larger reading of Perry. As a politician who can reach out and grab his audience by the jugular, he is head and shoulders above the rest of the pack.

So, if my first reaction was that he can run away with the nomination, my second reaction is that he may well run away with it. At 38, the Perry contract on Intrade may still be cheap.

Never before could I imagine that monetary policy could generate such heat. I mean, does any politician really understand the workings of monetary policy and the mechanics of money creation in a digital age? I don't think many people do. But Perry's words, like his words on secession, had nothing to do with the facts of the matter, but rather the roots of popular distrust of federal institutions, to say nothing of Wall Street and bankers.

And never before could I imagine that a leading presidential contender could verbally threaten a high public official—much less a thoroughly decent man of his own political party. Virginia Governor Bob McDonnell—who governs a state where one must understand history and language and code, provided an understated assessment of Perry's words—"I thought the remarks probably were something that could have been said differently."

But McDonnell was speaking to a different time, before Tea Party anger swept away the Republican Establishment as it was, and before all notions of temperance and self-restraint were swept out of the public square. Today, Rick Perry is in perfect alignment with his audience. His words are pitch perfect. He will not be admonished by Bob McDonnell or Karl Rove for intemperance. Intemperance is his brand.

It is particularly odd to see Karl Rove and the Bush loyalists so far outside the mainstream of their own party, unable to channel the currents of conservative opinion in a direction of their choosing. But this is indeed a different time, and so far they have found themselves powerless to stop it.

Questions of character.

One week after the downgrade of the United States bond rating, the markets have returned a verdict of sorts. In a week of staggering volatility, stocks declined by 2% while money flooded into the downgraded U.S. Treasury market, reducing yields on the 10-year by 0.30%. While the S&P action certainly amped up the already-white hot political climate, the actual report offered little new insight. By the end of the week it was evident that the correction in the equity markets that had been underway since July was continuing, as was the global flight to quality that continues to favor U.S. Treasury bonds.

The dramatic rally in bonds was more notable than the stock market decline. After all, S&P's pronouncement was supposed to cast a pall over U.S. Treasuries and send investors scurrying to the sidelines. Of course, if global investors have learned nothing else, it is that there are no sidelines. The near-death experience of the world financial system in 2008 showed that in a pinch the United States Federal Reserve remains the back-stop and liquidity source of first and last resort, and since 2008 the universe of "risk-free" investment alternatives has dwindled. The very concept of a united Europe is under assault, much less the notion that the euro would emerge as the reserve currency alternative to the dollar. Even keeping holding cash in a bank has become problematic for institutional investors, as banks are beginning to charge fees for accepting large deposits rather than paying interest.

At the end of the day, the markets shrugged off the S&P downgrade because it was a non-event. Is the United States facing significant financial challenges? Certainly. Was this news? Certainly not. Does U.S. sovereign debt now rated AA+ constitute a greater default risk that any number of triple-A rated corporate bonds? That would seem to be a silly question, yet S&P seemed to be saying yes, while the markets this week said no. In the world today—a world where risks abound—the U.S. Treasury remains the benchmark for very simple reasons. In a crunch, there is nowhere else to go.

But in S&P's view, there was a material change. In the old rating agency adage, bond ratings reflect both an issuer's ability to pay and its willingness to pay. What had changed was the casual willingness of some debt ceiling combatants to embrace default as an acceptable outcome, even as others wielded the threat of default for leverage. This Friday, a senior director for S&P confirmed that the factor that led to the downgrade of the U.S. credit rating was not a material change in the financial circumstances as much as evident changes in the willingness to pay, or, more frankly, the willingness to not pay. “People in the political arena were even talking about a potential default... That a country even has such voices, albeit a minority, is something notable. This kind of rhetoric is not common amongst AAA sovereigns.”

It did not used to be this way. In fact, until recently such rhetoric was inconceivable—in old Yankee terms, credit was a point of moral character. This dramatic shift in acceptable political speech emerged earlier this year when Newt Gingrich advocated the use of bankruptcy by states as a strategic option. Gingrich's argument—which sent the municipal bond market reeling—established the principle that it is now acceptable for national political figures to disavow our moral and legal obligation to pay our debts, if it serves the interest of the pursuit of partisan political advantage.

A lingering question about our political system has been whether we are able to face up to long-term fiscal challenges and make needed changes in advance of market pressures forcing the issue. In some respects, we would seem to be making progress. After all, for the first time in the twenty years since the creation of the Concord Coalition, the issues of the long-term fiscal health of the United States and the affordability of entitlement programs are now active subjects of debate in the public square. The problem evidenced by the debt ceiling debate, however, is that for all of the debate and sense of urgency, there appears to be almost no willingness in Congress to taking the next step: Owning the problem, and doing something about it.

The debt ceiling bill that finally emerged—with the oxymoronic title The Budget Control Act of 2011—was a perfect Congressional compromise: It cut no spending and raised no revenues. For the only fiscal year over which this Congress has authority, Fiscal Year 2012, it reduced the deficit by a grand total of $21 billion. After talk of $4 trillion here and $2 trillion there, the final legislation—with apologies to Everett Dirksen—did not even add up to real money. The rest was in the out-years. Or kicked over to a debt commission which may or may not achieve its purpose—time will tell.

Congress has a well-established tradition of being long on rhetoric and short on action when it comes to dealing with budget issues. Dating back to the Gramm-Rudman-Hollings Act a quarter century ago, Congress prefers to set out-year targets but never actually specify what and how to cut. It is notable that Gramm-Rudman had the same 50-50 automatic cuts in defense and non-defense programs in the event targeted cuts were not achieved. It is also notable that none of those spending cuts ever materialized.

Now, once again, the arguments are high on rhetoric and devoid of substance. As a follow-up to the debt ceiling debate, John Boehner and Eric Cantor are pushing for a balanced budget amendment. Yet—like so many demagogues before them—neither Boehner nor Cantor have proposed how they would balance the budget—which, it is important to point out, the Paul Ryan Plan did not do. And this week, at the Republican presidential debate, Michele Bachman reasserted her stance in opposition to raising the debt ceiling, but none of the moderators saw fit to ask how Bachman would have proposed to allocate the limited federal resources if the debt ceiling bill had not passed.

At the Republican debate, only Ron Paul made a substantive point on this issue, when he advocated ending our war policy and spending. But every candidate, particularly if they choose to ride the balanced budget amendment wave, should be obligated to describe the specific choices they would make to actually balance the budget. It is not hard to do, as there is abundant data about choices and trade-offs readily available. The Congressional Budget Office provides detailed data for evaluating alternative policy choices, and weighing the long-term budget impacts. And earlier this year, this easy online tool was created that allows anyone to build their own budget solution.

We now have a window of several months before the commission created by the debt ceiling bill is obligated to put its recommendations on the table—and Congress is obligated to vote up or down—or automatic cuts are supposed to go into effect. The question is whether we ever get there, as both political parties are itching to make 2012 the showdown election, and both believe that they will be in a better negotiating position after that election. Republicans believe that Obama is beatable, and they can win the Senate with a continuation of the 2010 election trend. Democrats believe that the younger, more diverse electorate of 2008 will turn the tide away from the 2010 turnout that was uniformly older, whiter and richer. Therefore, both parties will be willing to kick the can a few more years down the road, and avoid once again making those choices that Congress has proven, time and time again, that it is loath to make.

The question remains whether this is our political system working as it should—as the more optimistic observers have concluded—or whether S&P's observation is correct, that our political rhetoric is evidence of a deeper weakness—that political imperatives now trump all other considerations—and that Congress is no longer be capable of making serious budgetary choices that are necessary for the long-term well-being of the nation.

Big time bluff.

Granted, the tea party came to Washington and changed the nature of the debate. Last December, two debt commissions reported out long-term solutions to the issue of chronic budgetary reliance on debt. Both commission reports recommended a balance of actions affecting expenditure and revenues. Both commissions projected long-term moderation in debt levels. President Obama could have embraced his debt commission, and as Senator Judd Gregg noted on one senior RNC official, had Obama endorsed his commission, Senate Republicans would have been hard-pressed not to fall in line.

But last December was eons ago in the life of Washington, and while that path not taken might have seemed immoderate at the time for the President and Democrats, it is a stark reminder of how far the tea party has moved the debate in a few short months.

But for the tea party—the House radicals and their fellow travelers—the end of Debt Ceiling Crisis of 2011 may loom as the great opportunity lost. Their goals were not to move the debate or incrementally shift the culture, but rather to make radical change, to stop the spending and impose a balanced budget on the nation. Rhetorically at least, they have been unmoved by arguments that rapidly curtailing federal spending would send an already weak economy into a tailspin. Instead, their stance has ranged from the moralistic—that the accumulation of debt must stop—to the contrarian—that based on their own economic calculus a cut-back in federal spending would have curative powers on the private sector and stimulate economic growth.

This week, pointing to the risks of credit downgrades and sovereign default, John Boehner finally brought his caucus into line behind a debt ceiling bill, and it now appears that before the August 2nd deadline, the political parties will agree on some deal that purports to reduce the trajectory of national spending by some trillions of dollars over ten years. But as the numbers are crunched, the reality will look increasingly marginal. And the House radicals find themselves complicit in a process that was closer to business as usual than to radical change.

As the denouement approaches, and a resolution to the debt crisis appears to be at hand, one has to ask how many of the participants continue to believe that a default on U.S. Treasury obligations was ever at risk. Yet that was the hammer held over the heads of the House radicals.

The meaning of a default U.S. Treasury bonds is narrow and specific: It means that principal on maturing Treasury bonds or interest due on any outstanding bonds is not paid when due. A default on our Treasury bonds has been the hammer hanging over negotiations, yet such a default would not be caused by a failure to raise the debt ceiling.

While there appears to have been little public discussion of the process by which default would be averted, it is actually not complicated. First, all maturing Treasury bonds would be rolled over (refinanced) into new bonds, as is currently the practice with all maturing Treasury securities. Refinancing the principal amount of maturing obligations does not impact the par amount of bonds outstanding subject to the debt ceiling, it simply replaces old maturing bonds with new bonds on a dollar for dollar basis. Second, unlike current practice, interest due on such obligations would have to be paid from resources other than the issuance of new bonds. Whether through Federal Reserve credits—effectively the creation of new money—or the utilization of tax receipts flowing into the Treasury, the approximately $15 billion per month of interest payable on outstanding Treasury obligations—a relative pittance—would be prioritized over other uses of funds, as both common sense and the 14th Amendment would dictate.

Two months ago, Tim Geithner made clear that the default argument was a ruse.

I think there are some people who are pretending not to understand it, who think there's leverage for them in threatening a default. I don't understand it as a negotiating position

Ironically, notwithstanding Geithner's assertion that there would not be a circumstance leading to a default, and lack of any risk premium priced into U.S. securities in the Treasury bond or credit default swap markets, for the past two months the debate over the debt ceiling has continued under the specific pretense—the leverage suggested by the fear of default—that Geithner dismisses.

Default has not been at issue in the current debacle in Washington, DC. Rather, it is the fear of default that has been used so effectively as the hammer by the so-called "adults" in the political establishment. Why the language of default risk persists is itself an interesting question, as a bi-partisan spectrum of Congressional leaders and pundits continue to push the default crisis paradigm. More curious still is why it continues to hold sway.

This week, that leverage was brought to bear in full force on the radical members of the House Republican caucus, as those House members finally cow-towed to their elders. Just at the moment of their greatest power, the recalcitrant House members were brought to heel by the John McCains and Mitch McConnells who knew well that a rapid deceleration of federal spending would hurt Republican constituencies as well as Democrat, and who had much to fear of a failure to raise the spending cap. If the House radicals had held firm for one more week—and no default transpired—the Washington debate would have been turned on its head. Instead of raising the debt ceiling to resolve a purported crisis, in such a post-August 2nd world with no threats of default and bond market calamities, raising the debt ceiling would only be done once there was explicit agreement on what actually spending warranted incurring new debt.

In such a post-August 2nd world—where no default had occurred—the debate would return to a debate on spending—which has always been the central issue. But in that new world, the debt ceiling would remain in place, effectively forcing a balancing of revenues and outlays unless the votes could be cobbled together to specifically authorize new debt.

And what an odd world that would be—and we already began to see hints of the arguments that would be made: Soldiers in Afghanistan are worried they may not get their paychecks. The first argument for "patriotic" spending. Then it will be the Medicare recipients. Then Medicaid. And the farmers. Mortgage brokers. Defense contractors. Voting blocks. Major contributors.

What would that world look like, when every tax cut, every tax expenditure, every spending program and every military venture was on the table. Each one with a voting block, each one with a constituency, but each one having to be justified in the full light of day: Are we willing to pay for this? Or are we willing to vote to borrow money for this?

That is the world no one wants to see. And when the House radicals wake up on Wednesday, and see the rare opportunity that passed them by—and that it was their own leadership that sold them out—there should be hell to pay.

Full faith and credit.

Everyone wants in on this act. Particularly the bond rating agencies. Having been caught asleep at the switch in the run-up to crises past, Moody's and Standard & Poor's are loath to let it happen again. Going back to the Drexel Burham/Michael Milken affair, they affirmed the strong ratings on Executive Life just before the junk bond world collapsed. Same with Orange County, California, before losses in its investment pool drove it into bankruptcy. They threatened the bond insurance companies with downgrades if they did not bulk up their balance sheets with housing bonds, and we are all know how that ended up...

Now, Moody's and S&P want to play in the Treasury bond/debt ceiling game of high stakes poker in Washington. This week, both rating agencies piled on, threatening the United States with downgrades on its bonds if the debt ceiling matter is not promptly resolved. These pronouncements tend to have consequences, as the leadership of united Europe has found out. Greece has become yesterday's news, as over the past two weeks Portugal and Italy have seen their bond prices tumble and interest rates skyrocket as the markets responded to rating agency comments on their fiscal fortunes. Outraged European central bankers, struggling to find an effective solution to the crumbling of the Eurozone, attacked the bond rating firms for hidden political motivations and threatened to take action to "break the oligopoly."

And what of the Treasury market? How did U.S. Treasury bond market respond to the threatened downgrades?

Not even a whimper. Actually, a rally of sorts. Yields on the benchmark 10-year Treasury declined by four basis points this week. As buyers bid up the prices, yields fell from 2.95% to 2.91% today, down from just over 3% a week ago. Europe's pain—much to their undying chagrine—continues to be our gain. From the bond market perspective, the debt ceiling debate seems almost to be a sideshow against the backdrop of the disintegration of Europe, even with only two weeks to go until Armageddon.

It's the new reality TV. Everyone is watching, everyone is talking about it, but if the markets are a measure of the real world, this most important and urgent of matters seems to have become part of the entertainment-cable-Internet-popular culture other-world that consumes our lives, but isn't really part of our lives.

Perhaps it is because we tend to believe that an actual default on U.S. Treasury obligations is simply beyond of the realm of possibility. We see all the actors yelling and screaming in Washington, playing their assigned roles, but we know deep inside that they cannot actually let the world unravel around them. Just because they are scared of Grover Norquist?

There is another point of view, which is that this is not about our debt at all, but a tug of war for which the debt ceiling is just a dramatic point of leverage. It is not about debt, because some would argue—though few appear to be listening—that constitutionally there is no crisis. The 14th Amendment would seem to be quite clear—to a lay-person—that the full faith and credit of the United States obligations cannot be questioned—and therefore cannot be undermined even by Congress. The counter-argument that has been offered is that the Constitution gives only to Congress the power to borrow. But the simple fact is that all of the bonds on which people suggest that we might default were borrowed with the full authority of Congress. And once authorized and issued, the obligation to repay cannot be questioned—or so it would seem.

Perhaps the bondholders who are lining up at the Fed window in D.C.—even as they are running from the same in capitals across Europe—know what seems to have eluded the bond rating agencies, which is that the debt will be paid and that the market—as is its wont—has already priced in the risk of default on our bonds, and it is a small price indeed. From a practical standpoint, the principal due on maturing Treasury bonds can be "rolled over" into newly issued Treasuries, with no debt ceiling impact. It is all the other "obligations" that are at risk. All of those obligations—the ones that impact the lives and livelihoods of all but the holders of our bonds—that are only valid if each Congress chooses to make good on the commitments of some prior Congress. And those obligations are indeed at risk, for the simple reason that as a nation we have consistently determined that we are not willing to tax ourselves for the goods and services that we seem to want, and with no action on the debt ceiling we will have neither the tax revenues nor the bond proceeds to pay for all of them.

The issue is not default. The issue is spending. In the view of House Republicans and Tea Party activists, spending should come down dramatically. Sacred cows should be slaughtered. Entitlements should be reconceived. The New Deal and the Great Society have run their course. But for the Senate Republicans the motivations are more complex. The plan put forward by Senator Mitch McConnell skillfully serves a larger set of interests and would allow the status quo ante so dear to Senators to survive. His plan would essentially would take Congress out of the debt ceiling game, and give his colleagues the best of all outcomes: The spending would continue while someone else—the President—would take the blame.

Right now, both the President and Senate leaders believe that the fear of default should provide enough motivation to get something done—along with the cover each side needs to take steps that might otherwise be unthinkable: Cutting entitlements, raising taxes, trimming the military. But so far, the House leadership is not biting. For the Democrats, the McConnell proposal may well emerge as a middle ground of sorts. But for the House Republicans and the Tea Party—those who truly want to reduce the size of government—McConnell's success would constitute a stinging defeat, an historic moment lost, and a movement scorned.

The ultimate question is what the President plans to do on August 2nd if there is no agreement. One must presume that there is a plan in place: The 14th Amendment will be upheld, the bonds will be paid, the full faith and credit of the nation will be reaffirmed—and massive cuts and sequesters will be put into effect.

As great as the fear of default might be, both the President and Mitch McConnell must fear even more what would happen next. If the markets are right, and no default ensues, the motivation to reach a middle ground or face-saving solution will dissipate, and each side will once again be captive to their base. Caught in a lie—that he knew there would be no default—the President would lose the high ground. Vindicated for their obstinance, the House leadership will have even less reason to negotiate.

That may well be the endgame that true believers among the new breed of House Republicans have in mind. And it does not make them crazy, just strategic. If they believe that default will not be allowed to occur—as a matter of Constitutional obligation and proven bi-partisan deference to the bond markets—then reaching August 3rd with no agreement might reasonably be their goal. In three weeks, they can achieve their objective of an America forced to live within her means. And ironically, from that perspective the only thing the President could do to stop them would be to allow a default to occur even when it is within his power and authority to prevent it.

Jerry Brown's challenge.

On the streets of Greece and in the legislative chambers of Sacramento, people are grappling with the same issues: Are we willing to pay for those things that we want. And what are the consequences if we don’t.

This week, Governor Jerry Brown vetoed the budget sent to him by the Democrat majority of the California legislature. In his incoming State of the State speech five months ago, Brown suggested that it was time to address the State’s long-standing fiscal problems and produce a balanced budget. Brown proposed a Solomonic solution of sorts to close the $25 billion gap in the State’s budget: Half the budget gap would be closed by budget cuts, the other half through revenue actions which would be submitted to the public for a vote. Specifically, he proposed to ask voters to approve the extension of existing taxes that are set to expire.

The Golden State has now endured literally decades of budgetary trials and gimmickry, and seen its credit rating decline along with its fiscal resources. But for all the rhetoric about decline and bankruptcy, California’s problems are political, not economic. Yes, its economy has suffered as high costs have pushed industry inland and off-shore, but it remains a vibrant economy that is home to several of the nation’s strongest economic drivers and export industries: entertainment, technology, aerospace and agriculture.

The chart below illustrates the budget situation in California. Interestingly, the data suggest that California’s history is not a story of government spending run amok. The General Fund budget, which funds core services—including public safety, transportation, support for public and higher education, transfers to local governments and bond debt service—has declined relative to State personal income and GDP growth. As this graph shows, the steady growth of the State economy has not been matched by growth in the budget, and General Fund spending has dropped significantly in recent years. The dotted lines across the top indicate the impact on taxpayers, as General Fund expenditures per $100 of personal income declined 32% over the past three decades, from $7.43 per $100 of personal income in 1980 to approximately $5.05 this coming year.


Jerry Brown is providing a test case to see if our political establishment is—just this once—capable of setting aside party interest in favor of a broader and essential urgency. While the Democrat majority agreed to significant budget cuts, thus far, Republicans in Sacramento have declined to meet him halfway. Brown’s effort to find partners willing to seize the opportunity to chart a course toward real fiscal solvency and responsibility have been stymied by Grover Norquist, the anti-tax Jeremiah of the Republic establishment, who flew to California early on to pronounce that even a vote to put the revenue measures on the ballot would constitute a violation of the Republican anti-tax shibboleth.

Our political challenge, in California and nationally, is that too many people see more opportunity in exacerbating our problems than in solving them. It is too easy to rail against the debt and decry raising the debt ceiling, all the while conveniently ignoring one’s own complicity in the problem.

Over the past 30 years, Americans have become used to not having to pay for the government services we expect and desire—like the Greeks whose profligacy we so easily disdain. And this is a universal affliction, indifferent to political party. As illustrated below, federal personal income taxes paid—the purple line—have not kept pace with the growth of national income and GDP since 1980, while federal outlays have grown steadily. Like Californians, Americans have seen personal income taxes decline modestly as a share of national income. From 2009-2011, personal income taxes have ranged from 9-10% of personal income, slightly below the average level since 1980.

Of course, the difference between California and the nation is that national spending is not constrained by actual tax collections, but only by the political will to borrow and investors’ willingness to lend. Accordingly, as this graph illustrates by the divergence and convergence of the green and purple lines, instead of constraining spending, declines in tax receipts (the purple line) have simply led to increasing levels of public debt (the green line) and conversely, increases in tax receipts have led to moderating debt levels. Over the past twenty-five years, we have not had to weigh priorities, but instead have chosen as a matter of course to borrow rather than pay out of pocket for those things that we want. Year after year, we choose not to raise taxes to fund growing military, healthcare and other program costs, or to reduce spending to offset the impact of tax cuts.


It is in the proclivity to borrow rather face up to the limited nature of financial resources that America is more like Greece than California. And it is the ready availability of capital from foreign investors that makes our national problem differ from both.

Imported capital—that funds the "current account" deficit that comprises our budget and trade deficits—has supported economic activity in much the same way borrowing on credit cards allows households to live beyond their means. And like households that allowed increasing debt to mask the reality of their economic condition, U.S. economic growth has become dependent upon borrowed funds. As illustrated in the graph below, U.S. GDP growth has been 4% or greater for much of the past three decades, however, the share of that growth that has been supported by borrowed resources has grown.


While our economic growth has become more tenuous and entitlement costs have accelerated, Americans have abdicated their personal responsibility for our predicament. We will willingly vote for those who promise to cut our taxes or to expand our entitlements, but have shown no serious interest in addressing the the imbalances that have built up in our name. And lest one be fooled by the rhetoric, the Tea Party caucus of House Republicans have proven themselves no different, as they imposed pay-go rules on spending increases but not on tax cuts.

In California, Jerry Brown has proposed putting the question of the funding and size of state government to the voters. Voting for pain is simply not part of the democratic bargain. Yet that is what Jerry Brown is demanding. Let the voters choose. Treat us like grownups, and insist that we bear the consequences.

On the other side of the pond, as they seek to resolve the Greece situation, European leaders have come to believe that the Greek polity will never willingly take the steps to reduce spending and increase taxes that European bankers are demanding. What remains to be seen is what the consequences of that unwillingness will be, for Greece and for the concept of European union.

And for us. Because in our unwillingness to accept collective responsibility for the economic situation of our own making, we may have more in common with Greece than the grownups of Jerry Brown's imagination.

Housing market blues.

Last week was but one more setback in hopes for a robust economic recovery. For two years now, economists, pundits and politicians have been looking for evidence that we have put the economic collapse behind us. Yet just last week, the sharp decline in the Case-Shiller Home Price Index and poor jobs report pointed to a stalling in any meaningful economic recovery.

The Case-Shiller index history, shown below in a graphic from the New York Times, illustrates the extent of the asset bubble in residential real estate that we experienced over the past decade, and how far prices still have to fall to be within historical ranges.

Even with the sharp contraction in prices that we have realized since the unraveling of the mortgage bond market almost three years ago, housing prices remain high by historical standards, and thus it is curious that this week Standard & Poor's would express puzzlement at the lack of a sustainable recovery. Its report "Global Housing Still Faces a Puzzling Future," begins: "Since the first-time homebuyer tax credit ended last year, the recovery of the U.S. housing market has been something of a tease." Unfortunately, that S&P should be puzzled is itself more of a puzzle than the housing market.

In fact, with the expiration of the first-time homebuyer tax credit and looming end to the quantitative easing efforts by the Federal Reserve to hold down long-term interest rates, the housing market is only now being left to face the brunt of post-crisis market forces without those two forms of federal support. As that support falls away, it is hard to be optimistic about the direction of the housing market, and if a rebound in housing is a prerequisite for a sustained economic recovery, we could have a hard road ahead.

In their write-up, S&P projects that when all is said and done, home prices will fall 35% from their pre-crisis peak, meaning that we have another 15% downside to go. Yet by historical standards, this will not produce "cheap" prices as S&P suggests, but rather return prices to within historical norms. But whatever bottom is ultimately reached in housing prices, a resurgent housing market will also require an environment that provides reasonable expectations for asset price stability, if not appreciation. And this appears unlikely to happen any time soon.

Over the past 30 years, the housing sector benefitted from declining interest rates and liberalizing standards for residential real estate lending. Just 30 years ago, my wife and I purchased our first house in Philadelphia. A 2,400 square foot twin, we purchased it for $37,000. 30-year mortgage rates at the time were 19% the day our offer was accepted. We were required to put down 20% and the result was a monthly payment just under $500.

Real estate is a peculiar market. While people talk mostly about the sale price, what matters most to the buyer is the monthly carrying cost of the mortgage, as well as the down payment. That is to say that affordability is only partially related to the sale price.

This was evident in the growth in property values in that Philadelphia neighborhood over the ensuing three decades. Since that day when we purchased our first home, long-term mortgage rates have declined fairly steadily. There were bumps and plateaus along the way, but the decline in mortgage rates led to a long-term, explosive uptick in home prices.

Five years after we purchased our home, with mortgage rates down to 10%, we sold it for $86,000. While the price was well over twice what we paid for it, the new owner's monthly payment of $600 was only slightly more than our $500 in real terms (adjusted for inflation). And the value of the homes on our block continued to increase as long-term rates continued downward. Over the ensuing years, as mortgage rates fell to 8%, the selling price of twins on that street increased to over three times their value in 1982. And by the time we reached the pre-crash years, and mortgage rates fell to the 6% range, the price of those homes topped out over $220,000, or six times what we paid, yet the monthly carrying cost of required to by a home at that price was only $1,200 per month, still almost the same as our $500 per month payment in 1982, adjusted for inflation over the ensuing quarter century.

As mortgage interest rates continued to decline from their 1982 peak, the market grew a fevered pitch. As a real estate broker said to my wife and I when we moved to California in 1990, "You just have to get on the escalator." Prices would go up, they would never go down. Americans borrowed more as rates declined, and, believing that prices could only go up, they committed more of their income to buying bigger homes: From 1982 to 2007, the median size of a new American home grew by approximately 50% and the percentage of household disposable income Americans spent on mortgages increased by 30%.

This was the phenomenon we lived through. As interest rates fell, lower cost mortgages allowed home values to skyrocket, even as homes remained affordable at the higher prices. The graphic below illustrates the trends that conspired to support the price escalation captured in the Case-Shiller Home Price Index (shown here as the green solid line). As mortgage rates fell (blue dashed line plotted against the right axis), the mortgage value that could be supported for a constant payment grew (solid red line, left axis), while at the same time the percent of household income families used to pay their mortgages increased (purple dotted line, right axis).

The financial crisis was built on the conclusions people drew from this decades long trend in price appreciation. Many--Standard & Poor's famously among them according Michael Lewis in The Big Short--concluded that home values would never decline across the board. The mortgage lending markets bought into this notion, as down payments--the traditional protection for lenders agains declining values--all but disappeared.

But if declining rates were the driver of price appreciation, what does this portend for the housing market if we have reached the floor in long-term interest rates? The factors that could drive interest rates and mortgage carrying costs upward--economic growth, a domestic debt crisis, waning international buyer interest in our securities, sunsetting of QE2--seem more likely to transpire than those that would push rates lower--reduced U.S. borrowing, depression, deflation, renewed global economic collapse. As such, if a driver of the housing market has been steadily declining long-term interest rates, perhaps it is no longer reasonable to expect the housing market to be a driver of our economy for the simple reason that it is no longer reasonable to expect interest rates to continue to fall.

Standard & Poor's should not be puzzled. We are on the downside of the bubble now, and that should have a fundamental impact on the prospects for recovery of the housing market. If prices can fall, the psychology of home buying is very different, and for all the reasons that prices rose over the past decades, they could well continue to fall going forward if interest rates trend upward. Today, a $200,000 mortgage at 4.5% costs just over $800 per month. An increase in mortgage rates by just 1.5% to 6% increases that monthly payment by 33%, while a return of mortgage rates to the 8% level of the mid-1990s increases the monthly payment by 45%. Accordingly, rising rates would reduce home affordability and assert downward pressure on prices--just as falling rates pushed home values upward over the past several decades--and even just the risk of future price uncertainty should affect buyer confidence.

And there are other reasons home ownership may have lost its patina, further suppressing demand. Babyboomers, downsizing now that the kids are gone, may rationally choose to rent rather than own, if price appreciation will no longer be a given. And for them and their children in today's workforce, mobility may be of greater value than the rootedness of owning one's home. You only have to ask the residents of Michigan, who found themselves unable to move to pursue opportunity, tied down by the equity they hope still remained in their homes.

Home ownership is part of our identity. For some it is a rite of passage to adulthood, while for others it is what binds a family and neighborhood together. Those are attributes without financial measure. As such each spring, homes will be spruced up for sale, and buyers at a Sunday open house will find the place of their hopes and dreams. That is not going to change. But the interest rate driven growth in values of the past quarter century is behind us, and those looking for a sustained rebirth of the housing sector--waiting for the escalator to start once again--may have a while to wait.

Dominican Daydream

Rashi, our Australian Shepherd, followed me dutifully in to the kitchen, looking up expectantly as I opened my laptop to check the scores before we went out. The Red Sox had clobbered Cleveland. The Phillies, after Halladay gave up a 3-1 lead, were in extra innings with Cincinnati. Each team had just scored in the 10th to leave the scored tied at 4-4.

That is when Rashi's long night started. That is when Wilson Valdez earned himself a permanent place in Phillies, and baseball, lore. Perhaps it is too soon to speak the name Dave Roberts--the journeyman outfielder whose stolen base in the bottom of the ninth inning of an elimination game launched the Red Sox to the championship in 2004--but Wednesday night's game was the stuff kid's dreams are made of.

The game wore on. Inning after inning, the late relievers for each side handled their opponents with little threat of a resolution to the contest. By the end of the 18th inning, the Phillies last pitcher, Dennys Baez was spent, and there was no one left in the bullpen.

Enter Wilson Valdez. A 33-year old utility infielder from the Dominican Republic, Valdez had never pitched an inning as a professional baseball player. Not in the major leagues. Not in the minor leagues. But he was game to give it a shot, and Phillies manager Charlie Manuel had nowhere else to go.

Valdez proceeded to live a dream. The game was six hours hold, but the Philly faithful were hanging in. Fans--including many who clearly were going to be tired in school the next day--chanted his name as he faced the heart of the Reds line up.

And he looked the part. He looked like an infielder who had been handed the ball. One of his first pitches went wide to the backstop--he was not crisp. But he settled in, and one could slowly see the kid emerge, as the fantasy that happened to be real unfolded. He became the Dominican youth channelling Pedro Martinez, the Dominican legend who himself spent a few fading months in a Phillies uniform. Wilson and Pedro. Similar slight build. Right handers.

OK. Maybe that is the end of the comparison. One a slam dunk Hall-of-Famer. One, not so much. But on Wednesday night--or make that Thursday morning--Wilson Valdez channelled Pedro in his imagination. He was dealing.

He had clearly practiced the moves. Standing on the mound, right foot on the rubber, peering in for the sign. Like he had done it a thousand times before--just not for real.

He was a bit shaky at first, facing reigning National League MVP Joey Votto. His first batter as a major league pitcher. But Valdez was inhaling the wonder of the moment. A few pitches in, he shakes off the sign from Dane Sardinha. Hard to imagine what he was shaking off, actually. The 86 mile an hour fastball or the 88 mile an hour fastball. Perhaps he was clearing his head, checking to see if he was really there.

No. He was shaking off Sardinha because that is what a kid does, living out that moment. Top of the 19th. Facing the heart of the order. It is a mind game, me vs. the batter... Votto, perhaps not quite believing the situation, flied out lazily to center.

Then Valdez faced Scott Rolen, stirring the fans into a greater pique of frenzy. Go Wilson Go!

Scott Rolen! The scriptwriter made a great choice. Rolen came up in the Phillies organization. A powerful third basemen, heir to the hot corner legacy of Michael Jack Schmidt. Heir now as well to the boos that rained down on Rolen, the player who abandoned the city and the team, back in the days before the parade.

Valdez, still fighting for control of his pitches, located a fastball on Rolen's shin, and located him on first base.

But then, Valdez settled in. The outcome was never in doubt. It never is in those situations. Who misses that shot at the buzzer when you are a kid?

Valdez showed no fear. He was facing the heart of the order. He gave in to his inner Pedro, ceded his Dominican soul to his childhood hero. He peered in to Jay Bruce. Bruce, the powerful slugger, leading the National League in home runs.

Really, could it get any better this? First, the league MVP goes down. Next, he hits Rolen. Now he is facing down Bruce?

So he drops down, wheels in from the side. Pure Pedro. His teammates are in awe.

He is feeling it. He is dealing. Bruce takes him deep, but not deep enough. Flies out the the warning track in deep center.

Then with two outs, it comes down to Carlos Fisher. Relief pitcher. An easy out for any pitcher in the majors.

If he was facing a just any major league pitcher.

But he was facing Pedro Martinez.

It was over. As Fisher skied a pop up behind second base, Valdez was already trotting off the field as the ball landed in Placido Polanco's glove. It doesn't get any better than this.

If you weren't watching, it all ended in the bottom of the 19th. Phillies scored, and won 5-4.

The long night ended. Finally, Rashi got her walk. And Wilson Valdez became the first player since Babe Ruth to start a game in the field and win it on the mound.

Coming to grips with the price of oil.

The announcer on the radio gave the news: Oil prices fell back below $100, as the dollar strengthened….

That the price of oil would be a newsworthy event was not new. Since the OPEC oil embargo and gas lines of the 1970s, periodic high oil prices have made news, as they crimped the American pocketbook, and caused cascading political consequences.

Last week, faced with the economic and political consequences of high gas prices, President Obama sidled up to the Drill, Baby, Drill camp and offered his support to measures to support domestic oil production. Increased domestic oil exploration and production is probably a good idea. After all, the U.S. is the largest consumer of oil, and both our national security and economic security would be enhanced by reduced dependency on oil imports.

This, of course, has been the bi-partisan stance of presidential administrations dating back at least to the Nixon administration. And in terms of environmental impact, opposing oil production in the United States is not necessarily a laudable stance—if one's concern is about global environmental impact—as production in Nigeria, for example, is certainly subject to lower environmental standards than would apply in South Dakota or Alaska.

But the President's call for increased domestic production and exploration did not reflect new insights on U.S. energy policy or how oil dependency affects our foreign policy and military engagement. The President, of course, was responding to the price of gasoline at the pump.

This is a cyclical political script dating back forty years, which is pulled out of the can when gas prices rise. We need more production. We need more conservation. We need alternative sources of supply. Wind. Solar. Tar sands. Horizontal drilling. Hydraulic fracturing. The stuff we learn in those moments of pump price political pandering.

The issue reached an extreme during the 2007-08 presidential primary season when oil prices surged upward. The candidates and political parties fulminated in high lather about cause and effect, supply and demand, and ultimately who was to blame for our pain. As Goldman Sachs predicted $200 oil, candidates vacillated between calls to eliminate the gas tax, to tax the speculators driving up the price or to drill, baby, drill.

Then the price collapsed.

Months before the economy came unglued in the fall of 2008, crude oil prices came back to earth. After peaking over $145 around July 4th, the price was back below $100 by Labor Day, and continued down. All the talk of drilling and T. Boone Pickens wind farms died away. This time, the storm abated before any legislation could be passed, so there was no new ethanol fiasco. No new oil shale tax credits. No new market distorting initiatives put in place by lobbyists for one industry or another seeking an opportunity to benefit from the public’s fleeting attention.

Months later, the Commodity Futures Trading Commission settled the question of whether the price spike was driven by real or speculative demand. Outside of the public view, and far from the political limelight, the CFTC concluded that speculation was indeed the major factor in the price spike, as distinct from "natural" forces of supply and demand driven by economic growth and declining reserves.

That is to say, demand for the consumption of oil was not the driver, but instead it was demand for oil contracts as a financial instrument.

This conclusion is a salient one for our nation's energy policy, and our monetary policy as well. It may seem to be a peculiar feature of the modern economy that commodity price speculation drives the welfare of families and individuals. But whether it is the American family planning a summer vacation or a fruit vendor far away in Tunisia, the prices of commodities traded in Chicago and other financial capitals do indeed touch daily life in the real world.

This is not news. And it is not a modern day phenomenon, as commodity price speculation and hoarding have afflicted daily life throughout history, and Tunisia’s was not the first government to fall due to high food prices. Just ask Marie Antoinette. What is notably today is the direct linkage between currency trading and commodity markets.

Oil prices fell back below $100, as the dollar strengthened….

As illustrated in the graph below, oil today has become the new asset class for hedging against dollar risk in global trading. Today, the U.S. dollar stands alone as the reserve currency of the world economy—the currency that nations use for investing their own reserves and for denominating commodity and other transactions. Despite efforts—such as the creation of the euro—to supplant the dominance of the dollar, no alternative has emerged. The structural flaws of the euro were exposed in the 2008 collapse, as the U.S. Federal Reserve emerged as the sole backstop for the global financial system. Japan’s economy remains weak and threatened by an aging population. The renminbi will not be a real currency for global trading purposes until China is willing to relinquish its managed peg and expose its economy to real market forces.


As shown here, oil has become a nearly perfect hedge against fluctuations in the dollar. The peak price of oil—the red dashed line—in the summer of 2008 came just after the low point of the dollar that same year. The ensuing collapse in oil prices mirrored the rise in the dollar through the early months of the financial collapse. Then the price of oil moved upward—mirroring the rally in gold—as the dollar value declined once again in the wake of Federal Reserve policy driving liquidity into the banking system and the dollar downward through early this year.

Then finally, as announced on the radio, the dollar is now rallying in anticipation of the end of QE2, and the oil price rise has abated.

The linkage between monetary policy and oil prices raises questions for how a consistent domestic energy policy can be implemented if critical energy market price signals are distorted by linkages with monetary policy. Federal energy policies are presumably designed to spur investment into energy development—oil, gas and alternatives—but the such investments rely on the reliability of market pricing as an indicator of supply and demand equilibrium. If oil pricing increasingly reflects non-supply and demand factors, and is in part influenced by Federal Reserve policies and actions, there are significant ramifications for our energy policies.

In simple terms, if the role of oil as an asset class can be expected to significantly affect the price of oil and add to price volatility over time, investors in energy industries will have to consider that volatility and those characteristics as much as actual supply and demand for energy as they consider investment decisions.

The impact of the evolution of oil from a physical to a financial commodity is far reaching, as the decline in the value of the dollar and the correlated rise in oil pricing has most adversely impacted those nations whose currency is tied to the dollar.

China is grappling with that challenge now. By adhering to a dollar peg and declining to float the renminbi, China has been forced to accept the inflationary consequences of growing energy costs. As illustrated here, cost escalation in the price of oil has been most significant for those whose currency is tied closest to the dollar. Accordingly, India and China saw major spikes in oil prices in their respective local currencies, both in 2008 and this year, as compared the modest impacts in the Euro, and negligible impacts in the Australian dollar.


It may be that with the end of QE2, the dollar will stabilize, and with it the rhetorical drumbeat for new energy policies will subside. But the lesson should be internalized into our national debate over debt and deficits, as this same oil price shock that emerged from deliberate Fed policy to depress the value of the dollar will be visited upon us with greater ferocity should global bond markets finally give up on our ability to put our fiscal house in order, and leave us with a decline in the value of the currency—and accelerating energy costs— that is out of our control.

Thoughts on NYT and Goldman.

The New York Times today continued the glorification of Goldman Sachs. The article trumpeted the careers of the best and the brightest luminaries that have led Goldman in its transition from a partnership to public firm.

What is lost in this presentation of Goldman as the successful center of the world of finance is how that success has morphed. The financial meltdown caused aggregate losses to financial institutions that have yet to be tallied, though the numbers $2 to $4 trillion are bandied about. Goldman, much as their PR efforts have denied it, would itself have collapsed in the absence of the bailout of AIG counterparties and conversion to a Fed-eligible bank holding company. Why on earth Goldman fit the profile of "systemically important"—warranting extreme public actions to assure its continued life—is one thing, but to continue on with the hubris and arrogance, and ignore the fact that financial institution losses not only took down the world as we knew it, but also wiped out a century of earnings.

In the old days of Wall Street partnerships, these losses would have wiped out the Street, and the partners would have lost much—if not all—of their personal wealth. That is why it would have been unlikely to happen. Back in the day, each of those partners had the others looking over their shoulders, scrutinizing their business, their trades and their risk. It was a real market system, and the feedback was exacting. Partnership risks were assessed by those best able to understand them—unlike the well-documented, feeble efforts of under-staffed, and intellectually less capable regulators—and unreasonable risks and trades were taken off the table by those who had their own wealth at risk.

So tell me again how this works today? Heads we win, tails you lose? We are the best and the brightest when the bets turn our way, and you hold us harmless when we are wrong. Good deal for them. Bad deal for us.

Ah, what happened to the capitalism of my youth.

Same old, same old.

So John Boehner wants trillions of dollars in cuts. Trillions. And everything is on the table. Except tax increases. And except for allowing expiring tax cuts to expire.

But everything is not on the table if everything isn't on the table.

This, of course, is why the President should have embraced the recommendations of his debt commission that was released last December. Because Washington is unable to even pretend to have a real discussion about the fiscal direction of the country.

And the consequences of continuing down this path will be disastrous.

Just because U.S. treasuries are trading at their lowest levels in history should not be taken as much comfort. It just means that the end is not near. Yet.

If we get past May 21st—the beginning of the end of days according to some Biblical prophesiers—the next apocalypse on the horizon will be the one when the world finally decides that currency stability and fiscal self-discipline are necessary attributes of a nation hosting the global reserve currency. Somehow, a currency that offers a yield of below 1% in interest while declining in purchasing power by 20% does not serve the long-term interests of the global community.

For Boehner to even posture as part of the solution—and not even give a nod to the irony of the moment—is in itself frightening. It is one thing to appeal to your newest voting block by embracing anti-deficit rhetoric as part of the ongoing spectacle that has become our politics. And as long as that voting block is willing to buy the absurd notion that spending causes deficits but tax cuts don't, Boehner can keep riding that wave.

But if the issue is deficits and debt, then the measure of one's words must be in the outcome one produces. Yet Boehner stands before a crowd of bankers and traders and says with a straight face that he wants trillions in deficit reduction as the price of not accelerating the pace of the nation's march down the road toward judgement day.

Accelerating because he is not serious for one minute about tacking the problem. His goal, as the leader of his party in Congress, is the pursuit of power and majority status. That means winning middle class votes and upper class political contributions. And standing before that room of bankers and traders, he postured effectively to get the latter at the expense of the future dreams of the former.

He will get the political contributions not because anyone in that room buys the notion that this is about cutting deficits, but rather because everyone in that room stands to reap great benefit from keeping the Bush-era tax cuts in place, and putting off the day when we actually pay for what we budget at the federal level.

No. Boehner is not serious about achieving trillions of dollars in cuts. His is just a rhetorical flourish. And the proof is in the budget that the House has just embraced. Paul Ryan's budget plan, as economist Bruce Bartlett has pointed out, does nothing to tackle deficits, but instead produces deficits far larger than current Congressional Budget Office projections. Current budget policy produces $3.2 trillion of deficits through 2019, while the Ryan budget projects $4.3 trillion of deficits during that same timeframe.

Of course, one of the major differences is that the Ryan budget cuts taxes, but those tax cuts are not paid for even with the significant cuts in spending that are in that budget. Therefore, the debt ceiling argument that Boehner made this week—his appeal to step back from our bi-partisan march toward the next fiscal train wreck—is contradicted by his own budget: If Congress were to pass the Boehner-Ryan budget, the debt issuance through 2019 would project to be $1,000,000,000,000 higher than the path we are on now.

My only question is whether, as Speaker Boehner stood before that Wall Street crowd, he believed his own words. Does he believe that the House budget proposal fixed the problem—if the problem is debt and deficits? Does he believe that putting half of the budget on the table makes his words ring true? And which is worse, if he does believe or if he doesn't?

This is just the same old game. Listen to my words, write your check, give me your vote, but God forbid I should be held accountable for the results I produce. This is the rhetoric that has destroyed the Republican Party brand of my youth. Fiscal responsibility and intellectual integrity. Prudence at home and tempered humility abroad.

Those were the days.

Default is not in our future.

The notion of a default by the U.S. Government on outstanding Treasury securities is nonsense. This is not to say that Congress will act to raise the debt ceiling. Who knows what Congress, in its infinite wisdom, will do; but the notion that a failure to raise the debt ceiling will lead to a default by the U.S. Government on outstanding Treasury securities is nonsense.

Debt and deficits and default are thrown around loosely these days. Deficits are what we have when our budgeted revenues are less than our budgeted expenditures. Debt is what we issue from time to time to fund those deficits that result from our wanting more things from the government—services, wars, transfer payments—than we are willing to pay for in taxes.

And we also print currency.

Actually, printing currency is a concept that has largely been rendered quaint, but the concept of printing currency continues to hold a place in the public imagination for those times when the Federal Reserve funds some purchase or expenditure with money that it creates for that purpose, and is provided to the recipient through electronic transfer. There is no printing involved, and no currency either, at least in the Wikipedia definition of “physical objects generally accepted as a medium of exchange.”

In the case of the current battles over the federal budget and the raising of the debt ceiling, increasing the debt ceiling may be necessary for the issuance of new Treasury securities—which once legally issued carry the full faith and credit of the United States of America—as presumably such bonds cannot be legally issued if the debt ceiling has been reached. Therefore, failure to raise the debt ceiling would presumably constrain the ability of the Federal government to “spend beyond its means,” meaning spending in excess of current revenues within a budget year. In the absence of debt capacity under the debt ceiling, federal spending would have to be held in check, and constrained to the amount of available revenues within a budget year.

But a failure to lift the debt ceiling should have no impact on the ability—and obligation—of the Fed to pay the interest and maturing principal owed on Treasury securities. Such payments will be paid by the Fed through an electronic transfer of funds that for all intents and purposes are created at the moment of transfer, without regard to any budgetary action by the Congress or the availability of revenues in the Treasury. No budgetary action or further appropriation is required for the simple reason that any Treasury debt currently outstanding was legally issued under the debt ceiling at the time it was issued, and the full faith and credit pledge of the Government is pledged to its repayment.

And this is true of the general obligation indebtedness of any state government as well. Or Greece, for that matter.

The difference of course is the printing press. California can default on its general obligation bonds—if its politicians continue to play the games that are becoming all too easy and routine—because it must have money in the bank to pay its bonds when they come due. There does not need to be an appropriation in the budget—though there always is—but there does need to be money in the bank. Because unlike the U.S. Government, California does not have the ability to create currency to pay the debts that it has legally incurred and to which it has pledged its full faith and credit.

But the U.S. Government does have that ability. And it does have that obligation. And the Fed would act on that obligation regardless of what games Congress and the President might continue to play—whatever posturing they might find to be in their partisan interests as this charade plays out.

The fact is that U.S. Government will not default on its duly and legally authorized Treasury securities. And anyone who is paying attention understands this. Like the bondholders. Today, the yield on three-month Treasury bonds was one basis point. That is one one-hundredth of one percent. Or 0.01%. This rate has not changed in the past month. The three year rate is still below 1.00%, and the benchmark 10-year rate is 3.15%, or more than forty basis points less than one month ago.

So Democrats and Republicans can yell about debt and deficits, and manipulate as much as they like the simple fact that for decades now none of them have cared one whit about it, except for those moments that come along when it serves some partisan interest, and they can whip voters—who should be ashamed of themselves for going along with all of this—into a frenzy. But the markets have not blinked.

Because for all the debt, and for all the deficits, a default is not in our future. Because we own the printing press.

Whatever that means.

Who will tell the people.

For all the yelling and screaming about the national debt, you would think that Democrats and Republicans disagree about everything, when in fact they are in almost total agreement when it comes to fiscal matters. Or at least that is what the historical data seems to suggest.

The fundamental source of agreement is that Americans should get what they want, and they should not have to pay for it. Republicans think Americans want tax cuts and a strong national defense—and they should not have to pay for it. Democrats think Americans want healthcare and roads and schools, and should not have to pay for them. And most of all, Republicans and Democrats alike think that Americans should have unlimited access to drugs and medical care the closer to death they get—and certainly no one should be asked to pay for it.

At least that is what the historical record shows.

As illustrated below, federal personal income taxes paid—the purple line—have not kept pace with the growth of national income and GDP since 1980, much less with the growth in federal spending. That is to say that with all the growth in the Federal Government since Ronald Reagan came to town to shut it down, Americans have seen personal income taxes decline modestly as a share of national income. Stated simply, for every $100 of income earned by Americans in 1980, they paid $11 in personal income taxes, and over thirty years later that number was $10. And, as illustrated here as well, since 1980, total taxes—including personal and corporate income taxes, excise taxes, social security taxes and the rest—have rarely paid for all that we want, and we have made up for it by issuing debt.

Oddly enough, however, what we seem to want—what has been funded by Democrat and Republican Congresses and Presidents—has remained more constant than one might think. Since 1980, even as how much we pay has not changed materially, what we buy has not changed much either. After decades of partisan warfare, no area of federal spending has grown as a share of national income or GDP other than healthcare. In 1980, we spent 5% of GDP on defense vs. 4% today. In 1980, we spent 5% of GDP on non-defense discretionary spending vs. 4% today. In 1980, we spent 8% of GDP on non-Medicare/Medicaid entitlement spending—stuff like veterans benefits and student loans and farm subsidies—vs. 6% today. All of the growth—and therefore arguably all of the debt incurred since the bygone era of balanced budgets—has come for Medicare and Medicaid spending, which collectively grew by almost 200%, from 2% of GDP to 5%.

As the graph above illustrates by the divergence and convergence of the green and purple lines, instead of constraining spending—one of the original theories behind the tax cuts of the 1980s—declines in tax receipts have simply led to increasing levels of public debt, and conversely increases in tax receipts have led to moderating debt levels. That is to say, for all the arguments and blame about debt levels, the simple fact is that year over year we have been making a simple choice: Do we borrow or do we pony up our own dollars to pay for the budget that our elected officials approve.

The current debate over deficits and debt has been more about political theatre and gamesmanship than about constructive solutions. As one looks at the historical data, it is hard to avoid the conclusion that for past 30 years, all rhetoric aside, the national political establishment has come to accept that we do not have to pay for that which we want to receive. And this is a universal affliction, indifferent to political party. Everyone has been willing to cut what they don’t like on the margin; but no one has been willing to either tackle—or pay for—those things that everyone seems to want.

As suggested above and illustrated below, the primary source of spending growth has been healthcare. Perhaps this is not news to anyone, but it is surprising to note that since 1980, no other area of the federal budget has grown as fast as GDP and national income.

This trend has been uniform through Republican and Democrat administrations. As illustrated below, during the Reagan-Bush years, when military spending grew faster than GDP growth, its growth, in the end, was far surpassed by Medicare and Medicaid.

During the Clinton years as well, when both military and overall discretionary spending lagged behind GDP growth—and for the only time since early in the Nixon presidency that the federal actually had a balanced budget—healthcare cost growth continued unabated.

Finally, in the George W. years, when all manner of spending surged ahead, Medicare spending once again led all areas in spending growth.

For all the outcry about debt and deficits, the story is simpler that we want to imagine. First and foremost, we lost our way thirty years ago when in both the political and personal worlds we allowed ourselves to believe that it is ok to borrow instead of pay for those things that we want. And second, it is all about healthcare.

To his credit, Congressman Paul Ryan has put the issue of Medicare spending on the table, and suggested for the first time in memory that sustaining costs will require that people pay more. For his part, President Obama did the nation and his own legacy a great disservice when he chose to walk away from, rather than embrace, the admirable work of his commission on debt and deficits. That commission produced a politically balanced and thoughtful set of recommendations. While the commission lacked the super-majority vote of support that would have mandated an up or down vote by Congress—in part due to the aforementioned Congressman Ryan—it deserved that vote.

The nation has limited time to grasp this problem. To date, we have not felt the pain of the debt that we have accumulated over the past thirty years, as the interest costs we pay have been declining steadily. The irony is that the status of the dollar as the global reserve currency has been of particular benefit to us in the wake of the financial crisis. Just as our debt has been accelerating, our interest costs have reached historic lows as each global investors and central banks have continued to pour money into the dollar as the only freely convertible safe haven.

But when the global recovery comes, our costs are likely to accelerate. As the graph below illustrates, federal interest costs will accelerate rapidly with any return to normal interest rates. The average maturity of federal debt—data on which is not readily available—has been in the four to five year range over recent years, but may well have declined with the duration impact of QE2. Accordingly, this graph suggests that if our interest costs average in a return to historical interest rate yields—our net interest costs will quickly skyrocket, and within five or six years will exceed the current costs paid for either defense or Medicare spending.

This is not a radical scenario, but just based on a normal interest rate cycle. The disaster scenario happens if the bond market turns against the dollar and the reserve currency status of the dollar comes to an end.

The challenge that we face is to address our fiscal problems while we still enjoy our privileged access to capital. It is not a crisis yet—right now it is just political theatre. Somehow, for all the talk, most politicians just do not really believe that we are at risk. If they did, would they still be content to play the same games and use our fiscal challenges as one more prop for gaining partisan advantage?

As Americans, it is time to grow up and either pay for what we want, or to formally disavow wanting it. And we must all recognize that the debt that we have built up is our debt: It is the consequence of our political choices spanning a generation.

The President should reconsider his rejection of his own commission, and embrace it now, if it is not too late. Jerry Brown has already written the words for him:

If you are a Democrat who doesn’t want to make budget reductions in programs you fought for and deeply believe in, I understand that. If you are a Republican who has taken a stand against taxes, I understand where you are coming from.

But things are different this time...

We have seen the enemy, and it is us.