Busch: Why a Dem Win in NY Spells Trouble for the Debt Ceiling

Wednesday morning I tweeted this on the NY Rep. Race: Mediscare wrks as Dems take NY Rep House seat. Lesson: nvr put a plan fwd tht can b criticized. It wrked in 2008 and it works agn in 2011.

Here's the scoop on Social Security, Social Security Disability and Medicare.

In order, they run out of reserves on 2038, 2018 and 2024. Currently, they are paying out more than they take in and to cover the shortfall they drain their excess reserves. Let's say they are overspending by around 20%. This means that on those dates, the funds can only pay out what they take in from current taxes. This means they have to cut payments or services by 20%. This is Rep. Ryan's point on entitlements: you have to change the structure now or by law, the benefits will be cut anyway on those dates.

I'm not sure what the current Democratic strategy/plan for entitlements is as they have not yet put out a plan to deal with the issue. The cynical crowd says their plan is to not put out a plan before the 2012 elections, hammer the Republicans in the House for voting for the Ryan plan (Mediscare tactics) and then adapt some form of the Ryan plan after the election. This is analogous to what happened in the 2008 election when McCain provided specifics on taxing benefit plans, got hammered on it by Obama, and then Obama used it as part of his Obamacare program.

American healthcare reform
Tom Grill | Photographer's Choice RF | Getty Images
American healthcare reform

The media/press is going to slather over the election in New York and how the Democrat beat the Republican in the race in a normally Republican district.

The outcome should not only be disconcerting for Republicans, but also for investors who own US Treasury securities.

Here's why: If the Democrats are emboldened by the win in NY, it could lead to a change in strategy for the August 2nd debt ceiling hike.

Using the no-plan-Mediscare paradigm, Democrats could use a three step strategy.

  1. Do not acquiesce on spending cuts or major cuts to entitlements.
  2. Hammer the Republicans on their plans.
  3. Win in 2012 and then either implement the same plans or raise taxes to cover the deficits.

The winning strategy points to more delays on seriously addressing the major fiscal issues for the United States and the vindication of the S&P outlook downgrade to negative. Remember, S&P said specifically they were worried that the United States would not address their spending issues before 2013. Given the Democratic strategy and win in NY, this call is looking more ominous and prescient.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.