West coast debate

Link – Sacred Cow

Fiat kills sequestration—the process requires every sector to be eligible for cuts

Fiat kills sequestration—creates sacred cows which mean no sequestration

Democratic leaders, by and large, oppose the effort to unravel the defense sequester, which was triggered by Congress' inability to find common ground on spending cuts and revenue increases. And Democratic leadership aides have said the defense cuts, when spread out over 10 years, are merely a fraction of DOD's overall budget, essentially about $55 billion a year. Senate Majority Leader Harry Reid, D-Nev., issued a statement after the super committee flop, saying, "The sequester was designed to be painful, and it is. But that is the commitment to fiscal responsibility that both parties made to the American people. In the absence of a balanced plan that would reduce the deficit by at least as much, I will oppose any efforts to change or roll back the sequester." So far, no such "balanced plan" has materialized. A similar set of mandatory cuts will hit a number of Democratic sacred cows, like education and healthcare. As yet, there appears to be no similar effort afoot to scrap those cuts. But Republicans are determined that DOD will not take the hit. Across the Capitol, House Armed Services Committee Chairman Buck McKeon, R-Calif., has also vowed that he "will not let these sequestration cuts stand" and has said he will soon introduce legislation to that effect. One thing is certain, the fight over defense funds will carry into a hotly-contested election. What happens then is anyone's guess.

Fiat turns the trigger option into a paper tiger – can’t be cut

"It's all hypothetical, but if a trigger were in effect, you would see an immediate action on the floor of both houses by those of us who are not ready to see the dismantling of our defense establishment," McCain said. If across-the-board spending cuts were triggered, they would be spread out over a decade and not even begin until January 2013. That would leave lawmakers plenty of time to undo this consequence for inaction that is now written into law, according to GOP strategist and former top Republican aide Ron Bonjean. "It sounds great at the time when you make a deal, like on the debt [ceiling]," Bonjean said. "But when it actually comes down the pike, and if Congress has something to do about it, they may be [like] Lucy trying to take the football away from Charlie Brown." And the less Congress believes such a spending cut trigger would really be carried out, the less reason the supercommittee has to reach a deal.

Link – Chopping Block

Everything has to be on the chopping block to enforce fiscal discipline

Perception link – Congress has to be perceived as truly committed – every program is key

Last month, the Pentagon ordered a halt to work on the second engine. It plans to buy engines solely from Pratt & Whitney of Hartford, Conn. Still, officials in the defense industry say proponents of the alternative engine may try to restore the money in future military budgets, long after Gates has retired as defense secretary. In the interim, the company would use its own money to try to keep the production line open. In February, Gates said his bottom line number for the defense budget was $540 billion, tens of billions more than what the White House and congressional leaders worked out. Sen. Jack Reed, D-R.I., a member of the Armed Services Committee, said resolution was critical. "The most important thing is getting a budget for the year. It lowers the level of uncertainty," Reed said. "The consequences of not having a budget are delay and maybe even deferring important projects at a cost of more money. It's very inefficient." But he added that if lawmakers are "truly committed to reducing the deficit," they have to look at every program. The bill calls for cuts in 759 defense programs. Consistent with recent defense legislation, the bill bars the transfer of terrorist suspects held at the Navy-run prison at Guantanamo Bay, Cuba, to the United State and prevents construction of facilities in the U.S. to house detainees. On foreign aid, the White House and congressional leaders agreed to significant across-the-board cuts. The U.S. contribution to the United Nations and other international organizations would be cut by $377 million. Pay for foreign service officers would be frozen. The Global Agriculture and Food Security Fund, created to fight world hunger and poverty, would get just $100 million, far less than the $408 million than Obama sought. The negotiators agreed to cuts in the millions for international banks, the U.N. Population Fund and international narcotics control and law enforcement programs.

Link – Earmarks

Plan will get marked up with earmarks – costs billions more

Mr. Flake said he had raised the issue with Mr. Boehner, adding, “I’m confident that he heard me and will address these things, too.” Soft earmarks alone accounted for billions of dollars in spending in 2006, the last year they were examined, according the Congressional Research Service. They occur most often in spending bills for State Department, the United States Agency for International Development and other foreign aid programs. In 2010, the soft earmarks included suggestions to finance the Esperanza International, a micro-lending organization based in Washington State that was started by David Valle, a former major league baseball player, and the Real Property Foundation, a group in Chicago made up of American real estate agents that promotes private property rights around the world. Patrick M. Cronin, a senior adviser at the Center for a New American Security and a former administrator at the Agency for International Development, said soft earmarks were commonly used by members of Congress, especially appropriators. “They would tell you that they wanted money to go to a particular university or group or the next time you wouldn’t get the funding in the budget you wanted,” Dr. Cronin said. “So it’s true that you can ignore6 some soft earmarks, but others you have to take more seriously. Agency heads are not going to put their budgets in jeopardy because of a few line items.”

Pork spending kills government’s ability to reduce the deficit

Earmarks will be airdropped on to the plan

In the 20 months since U.S. House and Senate leaders promised greater transparency, Congress has repeatedly skirted its own rules and tucked into mammoth, must-pass bills nearly $2 billion in secretive earmarks. The provisions, known as airdrops, fund or authorize funding for pet projects and include $750,000 to equip a Florida children's hospital to fully operate on a generator during an emergency; $1 million for an Alabama town to shore up a flood-prone road; and $6.9 million for a North Carolina company to install wireless surveillance at airports along the U.S. border. The airdropping process works like this: After the House and Senate pass a bill, a committee of lawmakers is picked to iron out differences. Rules ban slipping new earmarks or provisions into the final version. But negotiators toss them in, knowing that the rules can be disregarded with a procedural motion when the House and Senate vote on the final bill. "We have pretty good rules," said Rep. Jeff Flake, R- Ariz. "But every rule we have can be waived, and we do." Airdropping is quick and secretive, said Steve Ellis, vice president of Taxpayers for Common Sense, a federal budget watchdog. "There is virtually no accountability if you airdrop (earmarks) in," he said. "There is not an opportunity to scrutinize them because things go like greased lightning between the conference committee and the House, and the House and the Senate."

Spending  Ratings Downgrade

Unexpected spending tanks the credit rating

Ability to reduce debt in the future is key to avoid a downgrade

The super committee finds a way to thread the needle and get enough votes to back a mix of spending cuts and some revenue increases that total $1.2 trillion over a decade. The revenue increases probably would be sold as closing tax loopholes. Ending a special break for ethanol blenders that is set to expire at the end of the year anyway is a possible example. While not total failure, this would be a disappointment to ratings agencies looking for a more ambitious product. Their rating decisions would probably depend on the chances of further deficit-reduction measures in the future and on the performance of the economy.

Extra spending forces cuts—makes compromise impossible and kills debt reduction

Debt Reduction Key To Rating

Effectively reducing the deficit is key to avoid a credit downgrade

Failure to reduce the deficit tanks the credit rating—political compromise is on the brink

Fitch rates AAA now but sequestration is key to maintaining the rating

The credit rating agency Fitch Ratings has issued another warning to Washington. If it doesn't come up with a plan to reduce the nation's budget deficit, Fitch might yank its AAA rating by the end of next year. "Without such a strategy, the sovereign rating will likely be lowered," Fitch said in a statement today, according to Bloomberg. "Agreement will also have to be reached on raising the federal debt ceiling, which is expected to become binding in the first half of 2013." Fitch had already assigned the U.S. a negative outlook in November. And as you may remember, Standard & Poor's slashed the country's credit rating to AA-plus in August. Bloomberg has a bit from an analyst about what all this means: "'The debt situation is a slow moving train wreck,' said Jason Brady, a managing director at Thornburg Investment Management Inc., which oversees about $73 billion from Santa Fe, New Mexico. 'The risks are apparent, but the benefits or strengths are also apparent. The strength of the U.S economy, the strength of the U.S financial system, is more apparent right now.'"

Sequestration Key Rating

Sequestration is key to the AAA rating

AAA now but the sequestration process is key to the rating

The U.S.'s AAA rating will probably be cut by Fitch Ratings by the end of 2013 unless lawmakers are able to formulate a plan to reduce the budget deficit after next year's congressional and presidential elections. "Without such a strategy, the sovereign rating will likely be lowered," New York-based Fitch said in a statement today. "Agreement will also have to be reached on raising the federal debt ceiling, which is expected to become binding in the first half of 2013." Fitch assigned a negative outlook on the U.S. in November after a congressional committee failed to agree on budget cuts. The rating firm forecast federal public-debt will exceed 90 percent of gross-domestic-product by the end of the decade unless the government addresses rising health and social security spending through tax increases or reductions in expenditures. "The debt situation is a slow moving train wreck," said Jason Brady, a managing director at Thornburg Investment Management Inc., which oversees about $73 billion from Santa Fe, New Mexico. "The risks are apparent, but the benefits or strengths are also apparent. The strength of the U.S economy, the strength of the U.S financial system, is more apparent right now."

Credit Downgrade Hurts Economy

A decreased credit rating causes economic collapse

A ratings decline causes economic collapse

Credit Downgrade Hurts Economy

Decreases in fiscal discipline mean S and P downgrade crushes the economy

AT: Econ Resilient

Past resilience no longer applies – housing bubble eliminated shock absorbers

Poor growth momentum undermines the resilience of the US economy

In a paper called "After the Fall" presented at the Federal Reserve Bank of Kansas City's Jackson Hole Symposium last year, my wife Carmen and I looked at the experience surrounding the fifteen worst financial crises in the second half of the twentieth century.[2] The bitter message is that economies persistently perform poorly after a wrenching crash in financial markets and shock to banks. This Outlook will review that territory to provide perspective about the current position and the likely trajectory of the US economy. Precedent predicts that economic activity will expand at a pace insufficient to make much progress in reducing the unemployment rate. This sizable resource slack should help hold inflation steady in the face of depreciation of the exchange value of the dollar. An economy not generating much momentum is less resilient to adverse shocks. And with the current backdrop of multiple European governments teetering on the brink of default, investors still backpedalling from risk, and US politicians itching for the next fight, adverse shocks loom especially ominous. That said, firms have liquid balance sheets and equity markets are providing remarkably high earnings relative to their prices. Economic expansion could be rejuvenated, but it will likely have to come from within, as US policymakers are unlikely to provide a spark from outside. Netting across the various risks and factoring in this policy inertia, the chance that the economy slips into another recession within a year is about four in ten.

Slow growth eliminates the resilience of the US economy

AT: S&P Already Downgraded US

Downgrades by two agencies force a massive sell off of US bonds

It's a conclusion available to even the most casual observer of US politics and the reckless debate about lifting the US government's debt ceiling. Indeed, conservative Tea Party forces openly advocate the US government should do just that, and default on its debts. But even so, Friday's downgrade represents the opinion of just one of three major credit rating agencies. Moody's still rates it as AAA - the highest rating available - as does Fitch. Crucially, this means investors governed by investment rules stipulating they must only hold AAA rated assets are unlikely to be forced to sell their Treasury bonds and push up the cost of US borrowing. Similarly, the biggest foreign holders of US Treasury bonds, China and Japan, are unlikely to sell out of US bonds altogether. What would they buy instead? Indeed, perversely, by heightening market jitters, S&P's downgrading of US government debt might spark an investor flight towards US Treasury bonds, increasing their price and lowering the yield payable on US borrowing, as investors seek the comfort of their old safe haven. International investors have demonstrated a certain Stockholm syndrome-like relationship with US assets, falling in love with the very currency and bonds of the country that has caused them so much trouble in the first place. Having clung to the apron strings of the US government in times of uncertainty for decades, this could prove a hard habit to break. That is why the US dollar tends to rally in times of uncertainty (US bonds must be bought in US currency). This will limit any increase in US government debt servicing costs. So in the short term, the credit downgrade potentially means next to nothing. However, from a longer term perspective, the embarrassing removal of the US government's prized AAA rating says everything. It serves as a stark reminder that the situation is bleak. The US economy is staring down the barrel of, at worst, another recession and, at best, a lost decade of sluggish growth and high unemployment. In this context, events such as Friday's downgrade can quickly become a lightning rod for justifiably negative market sentiment towards the prospects for American and world growth

A second downgrade causes dollar dumping

The big three agencies outweigh others

Ratings Decrease Bad – Dollar Impact

Ratings decrease causes dollar sell-off – won’t happen now

Now is key—markets are watching US action because of previous downgrade

Second, the S&P action reminds us that a specific assumption long held by markets – that the bonds issued by governments of wealthy countries are free from default risk – may be changing. In the early 2000s, I argued that governments of wealthy democracies have a good deal of policymaking autonomy vis-à-vis capital markets. As long as governments do well in terms of macro-outcomes, such as low inflation and small fiscal deficits, markets were content to charge them relatively low interest rates. Investors paid little attention to the finer details of government policies – how they allocated spending across categories, or whether left or right-leaning governments were in office. This was in marked contrast to the broader pressures that markets placed on governments of developing countries. In such places, a concern with default risk led to a greater set of pressures from private investors. But now, as it has become clear that membership in EMU does not lead necessarily to stable fiscal policies, and as some developed countries have deficit and debt levels that rival or exceed those of economies in Latin America, southeast Asia and sub-Saharan Africa, this easy shortcut – “developed country sovereign debt is safe”—may no longer apply. So some governments may find themselves more exposed to financial market pressures than in the past. And these governments could find that political events – including wrangling over a debt ceiling – provoke a greater market response than they once did. Whether this is a short-term pattern or a longer-term change remains to be seen.

Dollar collapse causes heg collapse

The risks entailed in failing to meet these challenges are not trivial. At least one is almost existential. A dollar-based global monetary system that is long past its prime and overdue for correction cannot much longer sustain the spendthrift fiscal policies to which Americans have become accustomed.3 The inevitable adjustment to fiscal and monetary realities could include not just global financial collapse but the sudden decline of both US prosperity and the worldwide military power and political prestige that this has long underwritten. This linkage to the possibility of a dollar sovereign-debt crisis is well understood in the Pentagon,4 even if not reflected in fiscal and monetary policy or debate in the US Congress. It could bring on a sudden, radical reduction in US economic power and military prowess.

Ratings Decrease Bad – Chinese Currency Impact

Credit downgrade causes Chinese currency appreciation

Revaluation hurts government efforts to solve the rich-poor gap – sparks instability

http://economic-research.bnpparibas.com/applis/www/RechEco.nsf/0/A3C686E8B35688A4C12570490048F6AB/$FileC0506_A2.pdf?OpenElement

Chinese Revaluation Bad – Unrest

China’s prime motivation for not revaluing is concern over impacting the rich-poor gap

Naughton said that a major concern for the government in keeping the yuan's value low is that it has helped farmers, who have been able to increase prices for agricultural products. When the currency goes up, China's farmers will face more competition from imported food. "As you know, the rural income gap has been very large in recent years and has been increasing. But the administration of Wen Jiabao has really made a very strong effort to narrow this gap and support the incomes of farmers, and this is one area where they've had significant success in the last year," Naughton said.

Revaluation jacks up the cost of food imports, hurting rural farmers and sparking massive social unrest

There's a powerful reason for China's recalcitrance. The country's technocrats were convinced years ago that revaluation made economic sense. But revaluation would cut the price of food imports, depressing earnings of Chinese farmers. Faced with simmering discontent among rural Chinese who have been left behind by China's coastal boom, the dictatorship fears that currency revaluation could unleash furious protest.

Rural unrest sparks Russia-China border war – escalates to nuclear winter

Chinese propaganda has constantly been showing us skyscrapers in free trade zones in southeastern China. It should not be forgotten, however, that some 250 to 300 million people live there, i.e. at most a quarter of China’s population. A billion Chinese people are still living in misery. For them, even the living standards of a backwater Russian town remain inaccessibly high. They have absolutely nothing to lose. There is every prerequisite for “the final throw to the north.” The strength of the Chinese People’s Liberation Army (CPLA) has been growing quicker than the Chinese economy. A decade ago the CPLA was equipped with inferior copies of Russian arms from later 1950s to the early 1960s. However, through its own efforts Russia has nearly managed to liquidate its most significant technological advantage. Thanks to our zeal, from antique MiG-21 fighters of the earliest modifications and S-75 air defense missile systems the Chinese antiaircraft defense forces have adopted Su-27 fighters and S-300 air defense missile systems. China’s air defense forces have received Tor systems instead of anti-aircraft guns which could have been used during World War II. The shock air force of our “eastern brethren” will in the near future replace antique Tu-16 and Il-28 airplanes with Su-30 fighters, which are not yet available to the Russian Armed Forces! Russia may face the “wonderful” prospect of combating the Chinese army, which, if full mobilization is called, is comparable in size with Russia’s entire population, which also has nuclear weapons (even tactical weapons become strategic if states have common borders) and would be absolutely insensitive to losses (even a loss of a few million of the servicemen would be acceptable to China). Such a war would be more horrible than the World War II. It would require from our state maximal tension, universal mobilization and complete accumulation of the army military hardware, up to the last tank or a plane, in a single direction (we would have to forget such “trifles” like Talebs and Basaev, but this does not guarantee success either). Massive nuclear strikes on basic military forces and cities of China would finally be the only way out, what would exhaust Russia’s armament completely. We have not got another set of intercontinental ballistic missiles and submarine-based missiles, whereas the general forces would be extremely exhausted in the border combats. In the long run, even if the aggression would be stopped after the majority of the Chinese are killed, our country would be absolutely unprotected against the “Chechen” and the “Balkan” variants both, and even against the first frost of a possible nuclear winter.

Chinese Revaluation Bad – Oil Prices Impact

Revaluation spurs more oil consumption, raising prices – empirically proven

High prices destroy the Mexican economy – shocks and US dependence

The economy's growth in the second quarter, which exceeded the expectations of experts, is a sign of the strengthening of a "virtuous circle" for the country in the second half of the year, according to the Private Sector Centre for Economic Studies (CEESP). It warns, however, that given that the rebound in the Mexican economy is the result of the strengthening of the US economy, we must pay attention to the effect that high international oil prices could have on that nation. The constant rise in crude oil prices in recent weeks has already led to greater caution among consumers in the powerful neighbouring nation, who have reduced their spending as they await signs of recovery without higher prices because of the cost of energy. On this matter, the CEESP mentions the advisability of accelerating the internal strengthening of the Mexican economy in order to prevent negative effects from an external shock. And in this respect the conclusions of the National Finance Convention (CNH) were a good sign. Although the CNH does not include greater progress in the fiscal area, it implied that there is concern about some key aspects of the stability of the budget.

Mexican collapse goes global

This time, the world is keeping a close eye on Mexico's unfolding financial crisis for one simple reason: Mexico is a major international player. If its economy were to collapse, it would drag down a few other countries and thousands of foreign investors. If recovery is prolonged, the world economy will feel the slowdown. "It took a peso devaluation so that other countries could notice the key role that Mexico plays in today's global economy," said economist Victor Lpez Villafane of the Monterrey Institute of Technology. "I hate to say it, but if Mexico were to default on its debts, that would trigger an international financial collapse" not seen since the Great Depression, said Dr. Lpez, who has conducted comparative studies of the Mexican economy and the economies of some Asian and Latin American countries. "That's why it's in the best interests of the United States and the industrialized world to help Mexico weather its economic crisis," he said. The crisis began last December when the Mexican government devalued the currency. Last March, after weeks of debate, President Clinton, the International Monetary Fund and a handful of other countries and international agencies put together a $ 53 billion rescue package for Mexico. But despite the help - $ 20 billion in guarantee loans from the United States - Mexico's financial markets have been volatile for most of the year. The peso is now trading at about 7.70 to the dollar, after falling to an all-time low of 8.30 to the dollar Nov. 9. The road has been bumpy, and that has made many - particularly U.S. investors - nervous. No country understands better the importance of Mexico to the global economy than the United States, said Jorge Gonzlez Dvila, an economist at Trinity University in San Antonio. "Despite the rhetoric that you hear in Washington, I think that most people agree - even those who oppose any aid to Mexico - that when Mexico sneezes, everybody catches a cold," Mr. Gonzlez said.

High Oil Prices Bad – Poverty Impact

High prices hurt energy access for the poor

Lack of energy access exacerbates poverty

Around the world, more than one and a half billion people — roughly one-quarter of the world — lack access to electricity or fossil fuels and thus have virtually no chance to move from a brutally poor, preindustrial exis¬tence to the kind of modern, energy-intensive life many of us in the West take for granted. Energy poverty is in fact emerging as the new killer in de¬veloping nations, the root cause of a vast number of other problems, and perhaps the deepest divide between the haves and have-nots.

Poverty is on-par with an ongoing nuclear war – it kills millions a year