LL: Debt ceiling talks resume Monday. Are you hopeful an agreement will be made before August 2?
GV: I think there will be a deal, but this will get ugly. Lots of confusing rhetoric for the markets. If markets hate uncertainty, this will be the mother of all uncertainty.
LL: Week of July 18th a balance budget amendment will be voted on in the Senate
GV: The balanced budget amendment will need 60 votes in the Senate.
LL: Tax increases are not likely to pass in the House and Senate.
There is argument on both sides about what is a tax increase. Dems say they want to close the tax loop holes and want to take away the oil and ethanol subsidies as well as a "tax break for millionaires".
Republicans are flatly saying no to tax increases. What is a fair tax break for "all Americans"?
GV: Tax hike rhetoric is a waste of time because tax hikes are dead in the House. There could be some tightening of tax breaks—ethanol, oil incentives, etc.
LL: Many of my contacts are saying the President has been on the sidelines during these debt discussions, leading from behind having others involved in the discussions. Now the President is stepping in.
Can he get both sides together and a compromise struck?
GV: The president is strangely passive in these debates, preferring to inject himself only at the last minute. Ironically, Democrats are suspicious of him—they think he might cave on entitlements—and hawkish Republicans are suspicious of John Boehner—they think he may cave on revenue raisers. Those two are the key to a deal, which is still weeks away.
LL: The GOP want to shrink the government and spending as a share of GDP and the Democrats want to increase the size of Government. What will make both sides happy?
GV: The key is the activists in the House—87 Republican freshmen, mostly Tea Party members. They don't care about whether they get re-elected; they're on a mission from God to cut spending. Not sure I agree that Dems want to grow government, but they're clearly on the defensive. A final deal will contain deep spending cuts —deeper than the markets anticipate— and whether that's good for the economy in the short-run is debatable.
LL: Is this just political theatre on the side of the GOP?
GV: No, it's not political theater. Obviously both sides read the polls and are thinking about 2012, but the key is in the House—and these people are deadly serious that spending has to decrease.
LL: Many of my GOP contacts were not happy with the true debt savings that were agreed to in the 2011 budget after the CBO scored it once it was passed. I have had some GOP contacts tell me they were "had" and they want to make sure this round of negotiations will produce real cost savings. How will Boehner and McConnell convince their party if a deal was struck today that they should go with it.
GV: Boehner and McConnell have to bring red meat to their colleagues.
Yes, the GOP right is suspicious of a wimpy deal—which is why the final deal will be surprisingly tough.
LL: Sovereign debt is the biggest concern right now in the global markets. If this drama does go on for too long many fear this could spark a market meltdown because of the fear of default. Are you concerned of this?
GV: There are two "worst case" scenarios. The most obvious—default —is extremely unlikely. Tim Geithner is not going to preside over default; he'll simply pay interest on the national debt in August if he has two. The other "worst case" scenario cannot be ruled out—Geithner avoids default but has no money to pay for anything else—Social Security, military pay, all government programs. That would be disastrous for the economy and the stock market, but probably a positive for the bond market. A total meltdown like this in August cannot be ruled out, but default is very, very unlikely.
There's one other scenario I do not rule out—everyone will want to leave town in late July, and they may do a temporary debt ceiling extension, maybe 1 trillion dollars, accompanied by 1 trillion in spending cuts, which is do-able. Of course, that means we have to do thru this all over again by late fall . . .
A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."
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