The budget crisis, which up to this point has been merely a debate, is about to become full blown crisis. By March 4th the federal government needs to pass a Continuing Resolution (CR) in order to fund continuing federal government operations for the rest of the 2011 fiscal year, while making the largest single discretionary spending cut in the history of the nation. If the CR is not enacted before the current funding measure’s deadline of March 4th, Congress must pass another short-term funding resolution or else risk a government-wide shutdown.
The current CR is making its way through congress and about to end up on the President's desk for signature contains some $100 billion in cuts and the President has already promised to veto it because it has cuts the President doesn't support. But those cuts don't even begin to touch entitlements and the Pentagon budget! There is simply NO WAY we can seriously deal with our national deficit and debt without doing so! And, since the Federal government still lacks the will or wear-with-all to tackle the 1.5 trillion deficit, the stage is set for the next big standoff - the vote to raise the Debt Ceiling.
Federal debt could exceed the current limit by as early as April 2011. If Republicans don't raise the limit, they risk defaulting on the country's debt obligations, which would be disastrous for the economy. By the same token, the Tea Party is digging in its heels and will use the threat of a filibuster to stop a bill to raise the Debt Ceiling as a means to get what it considers serious spending cuts. It's going to get ugly.
Because States must balance their budgets and because they lack a mechanism for buying their own debt, like Washington has through the Federal Reserve, the budget shortfalls have become a critical problem that have to be addressed. What's begun to happen at the State level in Wisconsin is the beginning of what will be going on across the country. In order to address their State budget shortfalls one State house after another is squaring off against those trying to protect their entitlements (pensions, medicare, social security, union contracts, collective bargaining, etc.). It's going to get ugly.
It's going to get ugly as unions, pensioners, teachers, police, transportation workers, government employees, and other large groups of citizens have their livelihoods threatened. It's going to get ugly as municipal bond holders discover that their believed to be secure investments are being devalued. It's going to get ugly as property owners face the threat of large tax increases. It's going to get ugly when higher property taxes combined with accelerated property tax sales and foreclosures combined with fewer buyers force another leg down in housing prices.
As all these citizen groups protests mount in cities, towns, and state capitals across the nation it will seem like there is unrest everywhere which will create a very uneasy feeling. Some protesters are bound to take extreme actions and one crazy action will inspire another. Events could easily spiral and protests could put an unmanageable strain on safety officers to control crowds and the disruption they cause to traffic and the regular function of government, transportation, and other services. It's going to get ugly when workers protesting their cuts decide to walk out on their jobs. It's going to get ugly when the protesters are the same people responsible for handling the protests. It's going to get ugly when teacher walkouts close schools and parents who need to go to work have to deal with children who should be in school.
As the daily news coverage of the protests and government gridlock and other consequences brought on by the budget battles takes over the media there will be a growing feeling of uneasiness in our country and this will take a severe toll on consumer confidence. It's going to get ugly as the budget crisis begins to take its toll on consumer spending and in turn threatens the economic recovery. It's going to get ugly when the stock market prices in this change in reality. It's going to get ugly when a previously rising stock prices change their direction and declining prices start taking back the wealth effect that Bernanke and the Federal Reserve has tried so hard to bring about. It's going to get very ugly when markets and economies around the world recognize that what is going on in America is a threat to world's economy! It's going to get very ugly when sovereign debt problems, yet unresolved, become critical and unsustainable, and now the they have to factor in the USA's problems!
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