The vote on $50 billion for Hurricane Sandy relief for New Jersey and other damaged places (and "pork" projects from Alaska to Cuba), in which 49 Republican Congress members from suburban Philly and other East Coast pockets joined Democrats to beat GOP leaders who wanted to spend less, is a sign President Obama is going to win this year's budget fight -- and probably lose us all the fiscal war, warns James M. Meyer, chief investment officer of Tower Bridge Advisors, in a note to clients of Boenning & Scattergood today.
Republicans can count votes, so they are ready to "cave" on the debt ceiling and deficit, Meyer figures. "They will call it a compromise, but the end result will be a much smaller package than a fiscal conservative might hope for."
He also doesn't believe either party has the guts to cut the military budget like it needs to be cut: "One side of the aisle talks of fiscal responsibility more than the other but both sides spend like drunken sailors" to keep local contractors happy.
Obama is right, says Meyer, that "we can live" with Washington paying interest on a few hundred billion dollars of debt each year.
But Obama "is wrong, dead wrong, if he believes that the current mode of spending 50% more than our government takes in can be extended too much longer," he adds.
"Unfortunately, our government only swallows tough medicine during crisis and there isn’t a crisis with 10-year Treasuries yielding [just] 1.85% and the Dow within 5% of an all-time high."
So we're in a bit of a sugar rush, which is tempting Washington not to cut more or raise more.
"The real crime is that a solution today doesn’t have to be very painful. Social Security can be fixed relatively easily and even Medicare can be repaired without much long term pain." But it's not happening.
"I can’t tell you when the crisis will happen in calendar terms but I can tell you than when the nation’s debt service costs start to exceed 4%, the crisis will be near.
"As our interest costs rise, forcing our deficit to rise further, we will enter the same torture chamber that Spain entered in 2010," with government all but shutting down just when it's needed most: "Americans will either have to self-fund their debt as the Japanese do or we will have to accept Draconian cutbacks.
"Doing something now would be a lot easier but neither Congress nor the President has the understanding or the courage. Instead, we will get temporary solutions, aspirin instead of antibiotics. Those solutions will allow a very comfortable 2013 and perhaps 2014." But then rates will rise, pushed up by weak investor demand or foreign debt competition or an exhausted Federal Reserve.
"Unfortunately, the only practical solution is crisis. The debate ceiling debate isn’t a crisis; it is a man-made political happening. Markets create crisis. Whenever it happens, we won’t be prepared. We could be but we won’t."