Blog Posts by Peter Gorenstein

Follow The Daily Ticker on Facebook here!

The debt ceiling debate has revived the idea of a Constitutional balanced budget amendment. Members of the Republican party in both the House and Senate say the legislation would help reduce the nation's debt problem.

So what is a balanced budget amendment? A balanced budget amendment is a Constitutional rule requiring that spending cannot exceed income. It requires a balance between the projected receipts and expenditures of the government.

While it may make sense on the surface (revenue must exceed costs), a balanced budget amendment does not guarantee the fiscal discipline it implies, says Daily Ticker guest Adam Lerrick, economics professor at Carnegie Mellon University.

"Every state in the United States except Vermont has a balanced budget amendment," says Lerrick. "And yet we've seen that has not stopped many states, including three of our largest states -- Illinois, New Jersey and California -- from basically going bankrupt."

Lerrick

Follow The Daily Ticker on Facebook here!

The stock market has about doubled since the crash of 2008-09. But this rally won't last, and the crisis will continue to unfold. At least, that's the premise of "Debt, Deficits, and the Demise of the American Economy," written by Peter Tanous and CNBC journalist Jeff Cox.

In the book the two detail how debt will continue to weigh on the economy (regardless of the debt ceiling debate) and lead to another stock market crash in 2012 or sooner. The plunge in equities will be met with rising interest rates and inflation, according to their prediction.

Though it may not have happened yet, Tanous believes the Federal Reserve's strategy of buying Treasuries, "printing money" and "keeping interest rates at unreasonably low levels" will eventually manifest itself in a nasty case of inflation that will decimate the economy. "The outlook for inflation is dire," co-author Tanous tells Henry Blodget in the accompanying clip. "We are going to get much more

Washington appears to have averted its own manufactured crisis by agreeing to raise the debt ceiling by more than $2 trillion, which is projected to take the U.S. through the beginning of 2013, while cutting $2.4 trillion over the next 10 years.

"I'm happy we got any deal," says Peter Tanous, author of Debt, Deficits and the Demise of the American Economy. "We absolutely needed a deal because we were at the precipice, and we were about to fall off as an economy."

However, the compromise does little to change the economic fundamentals of the country, and it does even less to tackle our biggest problem -- debt. "This deal doesn't come anywhere close to solving our deficit problem," Tanous tells The Daily Ticker's Henry Blodget in the accompanying clip.

He's right, as Henry contends in a previous post:

"The deal calls for a reduction in projected spending by as much as $2.4 trillion over the next decade. This is made up of about $900 billion in caps on discretionary spending (including

Follow The Daily Ticker on Facebook here!

Guess what? The U.S. economy stinks! That may not come as a surprise but it's actually worse than the government first thought. While politicians in Washington bungle this debt ceiling debate the economy is mired in slow growth.

The economy grew at a 1.3% annual rate in the second quarter, but what's worse and more shocking is the Commerce Department revised first quarter growth to just 0.4% from its previous estimate of 1.9%. The combined growth for the first 6 months is the weakest since the recession ended.

Jeff Macke and Aaron Task discuss the state of the economy in the accompanying clip. Both say while the U.S. is not technically in recession (usually defined as two consecutive quarters of negative growth), the slow growth and above 9% unemployment sure make it feel like a recession.

Just look at consumer sentiment. Those numbers fell to their lowest levels in more than two years in July according to the Thomson Reuters/University of

Follow The Daily Ticker on Facebook here!

Even the best investors don't always win. Billionaire hedge fund manager John Paulson has learned that lesson this year. After an unprecedented run of riches when he banked about $20 billion - first betting against the housing market and then flipping the trade and turning bullish on the economy and the banks - one of Paulson's largest funds is down nearly 20% this year, according to Gregory Zuckerman, senior writer with the Wall Street Journal and author of The Greatest Trade Ever.

Zuckerman joined The Daily Ticker's Aaron Task on set this week to discuss Paulson's recent troubles.

Size Matters

Zuckerman says Paulson's success may also be contributing to his poor performance. Thanks to his phenomenal gains Paulson's firm now manages $38 billion in assets. That's a great fee making machine but it does make investing more difficult. "He went wrong by managing so much money," Zuckerman explains. "Historically the best investors - Julian

The political posturing in Washington over a the debt-ceiling debate is reaching new levels of brinkmanship. President Obama last night again pleaded for compromise on a debt deal. Meanwhile, House Speaker John Boehner said the time to compromise has come and gone.

The AP reports if a deal is no reached by August 2nd it will result in catastrophe.

"If an agreement is not reached by Aug. 2, the U.S. won't have enough cash to pay all its bills. That could have a devastating effect on financial markets. The U.S. would likely lose its triple-A credit rating, causing interest rates to soar. Stocks could plunge as investors look for relatively safe places to put their money."

That simply isn't true says today's guest, John Tamny editor of realclearmarkets.com. "There is no drop dead date, so really, what's the rush?"

Tamny is confident the Treasury has enough money to pay interest on debt and make Social Security payments even if a deal isn't reached in the next week. Furthermore, "there is

With time ticking on the debt ceiling deadline and the negotiations in Washington at an impasse, former President Bill Clinton suggested last week President Obama should put an end to default talks by unilaterally invoking the 14th Amendment.

Clinton was referring to Section 4 of the amendment - which was ratified more than 140 years ago to ensure the payment of Union debts after the Civil War.

"The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

President Obama has since said that's not an option he wants to pursue.

Douglas Holtz-Eakin, a former Director of the Congressional Budget Office, says that's probably a wise idea; invoking the 14th Amendment may work to thwart a default but it also ignores the problem of our long-term structural deficit. If the President tries that course of action it will prove "the politics are

America's finances are a mess. The federal government spends too much, and the debt burden is too high.

These are givens, and they are the reasons for public outrage. However, it doesn't mean the government shouldn't raise the debt ceiling. Standard & Poor's warns there is a 50% chance it will lower the U.S. government's AAA credit rating by one or more levels within three months. S&P said yesterday that even if Congress raises the debt limit in time to avert a default, it might lower the U.S. sovereign rating. Meanwhile, only 55% of respondents in the latest Wall Street Journal poll "say that failing to raise the debt ceiling would be a real and serious problem."

Today's Daily Ticker guest David Walker -- the former Comptroller General of the United States and head of the Government Accountability Office -- says it's imperative both sides of the aisle find a compromise that also sets conditions to lower our long-term debt and get us back on track. If they don't, the rest of us will