CRISIS DE LA DEUDA DE EE.UU: Wall Street cerró con caída de más de 5% tras rebaja en calificación de deuda

Wall Street cerró con caída de más de 5% tras rebaja en calificación de deuda de EEUU

El principal indicador bursátil de Estados Unidos, el promedio industrial Dow Jones, retrocedió 5,55% a 10.809,85 puntos, mientras en Europa el FTSEurofirst 300, de las acciones líderes, cerró con una caída de 3,4% a 942,15 unidades, su mínimo desde agosto de 2009.
Bolsas de Frankfurt y París registraron las mayores pérdidas en mercados europeos Oro se disparó y cerró por primera vez sobre US$1.700 por incertidumbre mundial Petróleo cerró con caída de 6,4% en EEUU y se ubicó en su menor nivel desde fines de 2010 Cobre cerró con pérdidas arrastrado por temor de desaceleración económica global Los principales mercados internacionales se desplomaron este lunes luego que la agencia calificadora Standard & Poor's recortó la nota de crédito máxima de AAA de Estados Unidos, lo que aumentó la preocupación de los inversionistas respecto al desempeño de la mayor economía del mundo y los llevó a desprenderse de los activos más riesgosos como las acciones.

El principal indicador bursátil de Estados Unidos, el promedio industrial Dow Jones, retrocedió 5,55% a 10.809,85 puntos, mientras el Standard & Poor's 500 perdió 6,66% para cerrar en 1.119,46 unidades y Nasdaq Composite bajó 6,9% a 2.357,69 puntos.

Una ola de ventas en pánico elevó el volumen de las operaciones en la Bolsa de Nueva York y el Standard & Poor's 50 registró su peor día desde diciembre del 2008.

En Europa el FTSEurofirst 300, de las acciones líderes, cerró con una caída de 3,4% a 942,15 unidades, su mínimo desde agosto de 2009.

La decisión de la agencia se produjo tarde el viernes tras una semana inestable para las bolsas -la peor en más de dos años-, porque los temores por las débiles perspectivas económicas y el fuerte endeudamiento público que pesan sobre las economías desarrolladas afectaron la confianza de los mercados.

El movimiento de los inversionistas hacia activos seguros impulsó al oro a un nuevo récord de US$1.713,2 por onza, porque los agentes se mostraron escépticos frente a los compromisos de los líderes de las mayores economía del mundo y del Banco Central Europeo para respaldar los mercados.

El Banco Central Europeo compró bonos emitidos por Italia y España, dos países de la zona euro con graves problemas fiscales, pero la acción no logró evitar del desplome de las bolsas.

"Lo que nos preocupa y hace que no entremos al mercado ni siquiera para comprar lo que vemos como valioso es que la presión hacia una mayor caída es aún muy fuerte", dijo Paul Zemsky, jefe de administración de activos de ING en Nueva York.

La agencia Standard & Poor's bajó la calificación de Estados Unidos a 'AA+' desde 'AAA'.

"No pasará mucho tiempo antes de que otras agencias sigan ese camino, considerando el estado de las finanzas estadounidenses. Una cosa es segura, la volatilidad seguirá y se hará más difícil operar en el mercado", dijo Angus Campbell, jefe de ventas de Capital Spreads.

Moody's repitió el lunes la advertencia de que puede bajar la calificación de Estados Unidos antes del 2013 si el panorama económico se deteriora significativamente, pero ve posibilidades de un nuevo acuerdo en Washington para reducir el déficit fiscal antes de esa fecha.

El negativo escenario externo también afectó los precios de las materias primas, ante la expectativa que un menor crecimiento económico mundial pueda impactar la demanda por estos productos.

El precio del petróleo cayó 6,41% a US$81,31 el barril, en la Bolsa Mercantil de Nueva York, mientras el cobre cerró con un descenso de 1,64% a US$4,10 la libra, en la Bolsa de Metales de Londres, marcando su menor valor en cinco semanas.

Obama por rebaja de S&P: "No importa lo que ocurra siempre seremos un país AAA"

El presidente de EEUU atribuyó el recorte de su calificación crediticia al enfrentamiento político en Washington, por lo que sostuvo que ofrecerá algunas recomendaciones sobre cómo reducir el déficit fiscal del país.

Morgan Stanley advierte que impacto de rebaja en calificación a EEUU podría no ser inmediato Moody's reitera que podría bajar calificación de EEUU antes de 2013 si se deteriora panorama económico S&P asegura que hay un 33% de probabilidades de una nueva rebaja a EEUU El presidente Barack Obama afirmó hoy que "los mercados siguen percibiendo que el crédito de Estados Unidos es de primera categoría" y que los actuales problemas financieros "tienen solución".

El presidente, en una alocución desde la Casa Blanca mientras continuaba la caída de las cotizaciones en los mercados financieros en respuesta a la rebaja de la calificación del crédito del país por parte de la agencia Standard & Poor's, sostuvo que a los inversionistas les preocupa "la incapacidad política para hallar esas soluciones".

"Los mercados suben y bajan pero este es Estados Unidos, y no importa lo que ocurra siempre seremos un país AAA", añadió.

"Tenemos los trabajadores más productivos, la tecnología más avanzada, los empresarios con más iniciativa", continuó.

El presidente reiteró que la solución a mediano y largo plazo requiere un "manejo equilibrado" del déficit de Estados Unidos que incluya reducciones de los gastos y aumentos de los impuestos.

De hecho, Obama atribuyó el recorte de su calificación crediticia al enfrentamiento político en Washington, por lo que sostuvo que ofrecerá algunas recomendaciones sobre cómo reducir el déficit fiscal del país.

Agregó que espera que la rebaja de S&P dé a los legisladores un nuevo sentido de urgencia para enfrentar el déficit y sostuvo que no creía que los recortes pudiesen avanzar solo con un recorte de gastos.

Por ello mencionó nuevamente la necesidad de subir los impuestos a los estadounidenses más ricos y hacer ajustes modestos en los populares pero costosos programas de bienestar social.

Deuda de EEUU: Senado rechaza plan de Reid y nueva votación se aplazaría para el lunes

EEUU: Senado rechaza plan de Reid y nueva votación se aplazaría para el lunes

Reid no pudo sumar los 60 votos necesarios para hacer avanzar su propuesta, pero se estima que el plan será objeto de nuevas negociaciones con los republicanos que deriven en una posible votación mañana.

El Senado de Estados Unidos rechazó hoy el proyecto de reducción del déficit presentado por el jefe de la bancada demócrata en la cámara alta, Harry Reid, y se abrió así un nuevo compás de espera con negociaciones alrededor de ese mismo plan, y que pueden concluir con un acuerdo para elevar el techo del endeudamiento y evitar un default.

Reid no pudo sumar los 60 votos necesarios para hacer avanzar su propuesta, pero se estima que el plan será objeto de nuevas negociaciones con los republicanos que deriven en una posible votación mañana a las 7 (12GMT).

En una votación de 50 contra 49, el plan del líder de la mayoría del Senado, el demócrata Harry Reid, quedó a pocos votos de los 60 necesarios para avanzar en el organismo de 100 miembros.

En el campo de los republicanos, el presidente de la Cámara de Representantes, John Boehner, envió un correo electrónico sobre la deuda a sus colegas el domingo, indicando que las "conversaciones avanzan en la dirección adecuada, pero quedan asuntos mayores" pendientes.

Por su parte, La Casa Blanca permanece abierta a elevar el límite de deuda de Estados Unidos por unos días adicionales si los legisladores alcanzan un acuerdo y requieren de más tiempo para conseguir su aprobación en el Congreso, afirmó el domingo un funcionario.

Los republicanos y los aliados demócratas del presidente Barack Obama están negociando un pacto para elevar el techo de deuda de 14,3 billones de dólares antes del martes y evitar un moratoria de pagos, pero el tiempo se está agotando.

Incluso con un acuerdo a la mano, tomaría días superar los procedimientos legislativos y llevar el proyecto de ley hasta el despacho de Obama para que lo promulgue.

Republicans blocked a Democratic effort to end debate on Sen. Harry Reid's proposal and move to a vote.

Washington .- Democrats and Republicans are "very close" to reaching a $3 trillion deal that would avoid a possible government default in coming days, Senate Minority Leader Mitch McConnell told CNN's "State of the Union" Sunday.


"We had a very good day yesterday," the Kentucky Republican said, adding that the two sides "made dramatic progress" in negotiations on a deal that would cut government spending and raise the federal debt ceiling.

Another Republican senator, Johnny Isakson of Georgia, later told reporters he expected a Monday vote on a compromise.

"It feels like they're going to finish the deal today and then we'll have the vote tomorrow," Isakson said, adding he supports the plan under discussion.

Sen. Schumer: Still no deal

Reid, McConnell spar over debt progress

Debt ceiling crisis continues

Pelosi: GOP bill 'perfectly absurd' House Speaker John Boehner, meanwhile, advised his Republican caucus that serious issues remain under discussion, but to be ready for a possible conference call on Sunday to discuss a proposed deal.

Democrats in Congress and the Obama administration agreed that progress has been made, but noted negotiations continue on difficult issues.

Senate Majority Leader Harry Reid, D-Nevada, opened the Senate session Sunday by saying there was no agreement yet on raising the federal debt ceiling, but "we are cautiously optimistic."

"If there's a word right here that would sum up the mood, it would be relief -- relief that we won't default," Sen. Chuck Schumer, D-New York, said on the CNN program. "That's not a certainty, but default is far less of a possibility now than it was even a day ago."

With the deadline to reach a debt ceiling agreement just two days away, congressional leaders and the White House are trying to complete the possible deal that would extend the debt limit through 2012 -- a presidential election year.

If Congress fails to raise the current $14.3 trillion debt ceiling by Tuesday, Americans could face rising interest rates and a declining dollar, among other problems.

Some financial experts have warned of a downgrade of America's triple-A credit rating and a potential stock market plunge. The Dow Jones Industrial Average dropped for a sixth straight day on Friday.

Without an increase in the debt limit, the federal government will not be able to pay all its bills next month. President Barack Obama recently indicated he can't guarantee Social Security checks will be mailed out on time.

In Afghanistan on Sunday, Joint Chiefs of Staff Chairman Adm. Mike Mullen was unable to assure U.S. troops they would get their paychecks following the August 2 deadline without a deal. Mullen said August 15 would be the first payday jeopardized if the United States defaults.

Last week, a Department of Defense official told on condition of not being identified that "it's not a question of whether, but when" military pay gets withheld if no agreement is reached.

Vice President Joe Biden arrived at the White House on Sunday morning, though no additional formal talks involving the administration and congressional leaders have been announced. A Democratic source told on condition of not being identified that Biden was engaged in behind-the-scenes negotiations with both congressional legislators and the administration.

Initial news of a possible deal came shortly after the Senate delayed consideration of a debt ceiling proposal by Reid late Saturday night, pushing back a key procedural vote by 12 hours. When that vote occurred on Sunday afternoon, Republicans blocked a Democratic effort to end debate on the Reid proposal and move to a vote, extending consideration of the plan while negotiations continue.

The vote was 50-49, short of the super-majority of 60 required to pass.

Reid plans to insert a negotiated final agreement into the proposal once a deal has been reached. When it became clear that Democrats would lose Sunday's vote, Reid voted against his own plan in a procedural move to preserve the ability to bring it up again.

According to McConnell and other congressional and administration officials interviewed Sunday, as well as various sources who spoke on condition of not being identified, the deal under discussion would be a two-step process intended to bring as much as $3 trillion in deficit reduction over 10 years.

Some sources provided differing targets for the total, ranging from $2.4 trillion up to $3 trillion.

A first step would include about $1 trillion in spending cuts while raising the debt ceiling about the same amount. The proposal also would set up a special committee of Democratic and Republican legislators from both chambers of Congress to recommend additional deficit reduction steps -- including tax reform as well as reforms to popular entitlement programs such as Medicare and Social Security.

The committee's recommendations would be put to a vote by Congress, without any amendments, by the end of the year. If Congress fails to pass the package, a so-called "trigger" mechanism would enact automatic spending cuts. Either way -- with the package passed by Congress or the trigger of automatic cuts -- a second increase in the debt ceiling would occur, but with an accompanying congressional vote of disapproval.

In addition, the agreement would require both chambers of Congress to vote on a balanced budget amendment to the U.S. Constitution. Such an amendment would require two-thirds majorities in both chambers to pass, followed by ratification by 38 states -- a process likely to take years.

Schumer told that a main sticking point still under discussion was the trigger mechanism of automatic spending cuts in case Congress fails to enact the special committee's recommendations.

According to sources, cuts in the trigger mechanism would be across-the-board, including Medicare and defense spending, to present an unpalatable alternative for both parties in the event Congress fails to pass the special committee's proposal.

"You want to make it hard for them just to walk away and wash their hands," Gene Sperling, the director of Obama's National Economic Council, told. "You want them to say, if nothing happens, there will be a very tough degree of pain that will take place."

Preliminary reaction showed sensitivity to that pain. Sen. Carl Levin, D-Michigan, said the automatic spending cuts under a trigger mechanism should not affect Medicare benefits for senior citizens.

GOP leader 'confident' debt deal on horizon

Worried about debt ceiling

Sen. Hutchison speaks about debt crisis

Tea Party view of debt ceiling fight

National Debt

U.S. House of Representatives

U.S. Senate

Harry Reid

John Boehner

"The way we understand it's going to be worded is it does not affect beneficiaries. It would affect providers and insurance companies," Levin said. "That should be the case, because if it hits beneficiaries, you're going to lose lots of Democratic votes."

Meanwhile, former U.S. ambassador to the United Nations John Bolton, an aide to former Republican President George W. Bush, warned that automatic spending cuts for the military under the trigger would put national security at risk.

"By exposing critical defense programs to disproportionate cuts as part of the 'trigger mechanism,' there is a clear risk that key defense programs will be hollowed out," Bolton said in a statement.

Overall, the agreement under discussion would increase the debt limit in two stages, both of which would occur automatically -- a key Democratic demand that would prevent a repeat of the current crisis before the next election.

McConnell, who appears to have become the lead Republican negotiator, said he is "very, very close to being able ... to recommend to my members that this is something that they ought to support."

The deal will not include tax increases, McConnell added, expressing a key demand of Republicans. Obama has pushed for a comprehensive approach that would include additional tax revenue as well as spending cuts and entitlement reforms to reduce budget deficits.

Reid, D-Nevada, said Saturday night that the delay in considering his proposal was additional time for negotiations at the White House.

His announcement capped a day of sharp partisan voting in the House and extended talks behind closed doors between congressional and administration officials. Concern continued to grow that Congress will fail to raise the nation's debt ceiling in time to avoid a potentially devastating national default this week.

Earlier Saturday, the Republican-controlled House rejected Reid's plan -- partisan payback for the Democratic-controlled Senate's rejection of Boehner's plan Friday night.

House members rejected Reid's plan in a 246-173 vote. Most Democrats supported the measure; every Republican voted against it.

For their part, Republicans continued to trumpet Boehner's proposal. The measure won House approval Friday, but only by a narrow margin after a one-day delay during which the speaker was forced to round up support from wary tea party conservatives.

Boehner's deal with conservatives -- which added a provision requiring congressional approval of a balanced budget amendment in order to raise the debt limit next year -- was sharply criticized by Democrats, who called it a political nonstarter.

Democratic leaders vehemently object not only to the balanced budget amendment, but also the GOP's insistence that a second debt ceiling vote be held before the next election. They argue that reaching bipartisan agreement on another debt ceiling hike during an election year could be nearly impossible, and that short-term extensions of the limit could further destabilize the economy.

Leaders of both parties now agree that any deal to raise the debt ceiling should include long-term spending reductions to help control spiraling deficits. But they have differed on both the timetable and requirements tied to certain cuts.

Boehner's plan proposed generating a total of $917 billion in savings while initially raising the debt ceiling by $900 billion. The speaker has pledged to match any debt ceiling hike with dollar-for-dollar spending cuts.

His plan would require a second vote by Congress to raise the debt ceiling by a combined $2.5 trillion -- enough to last through the end of 2012. It would create a special congressional committee to recommend additional savings of $1.6 trillion or more.

Any failure on the part of Congress to enact mandated spending reductions or abide by new spending caps would trigger automatic across-the-board budget cuts.

The plan also calls for congressional passage of a balanced budget amendment before the second vote to raise the debt ceiling.

Reid's plan, meanwhile, would reduce deficits over the next decade by $2.4 trillion and raise the debt ceiling by a similar amount. It includes $1 trillion in savings based on the planned U.S. withdrawals from military engagements in Afghanistan and Iraq.

Reid's plan also would establish a congressional committee made up of 12 House and Senate members to consider additional options for debt reduction. The committee's proposals would be guaranteed by a Senate vote with no amendments by the end of the year.

In addition, it incorporates a process based on a proposal by McConnell that would give Obama the authority to raise the debt ceiling in two steps while providing Congress the opportunity to vote its disapproval.

Among other things, Reid has stressed that his plan meets the key GOP demand for no additional taxes. Boehner, however, argued last week that Reid's plan fails to tackle popular entitlement programs such as Medicare, which are among the biggest drivers of the debt.

A recent CNN/ORC International Poll reveals a growing public exasperation and demand for compromise. Sixty-four percent of respondents to a July 18-20 survey preferred a deal with a mix of spending cuts and tax increases. Only 34% preferred a debt reduction plan based solely on spending reductions.

According to the poll, the public is sharply divided along partisan lines; Democrats and independents are open to a number of different approaches because they think a failure to raise the debt ceiling would cause a major crisis for the country. Republicans, however, draw the line at tax increases, and a narrow majority of them oppose raising the debt ceiling under any circumstances.

 

U.S. DEBT TALKS DEADLINE: The debt ceiling - Where you stand in battle?

House Speaker John Boehner's debt plan was put on hold Thursday night after lacking the needed votes to pass, but he may try again Friday. The frustration about the inability of Congress and President Barack Obama to reach a deal to raise the debt ceiling and prevent a possible government default has sparked a firestorm of anger directed toward Washington.

But there's no shortage of people who believe they have the answer to solving the crisis or who is to blame for it.

As Washington struggles to reach a deal, we are listening to what you have to say about the debt fiasco as well thoughts from influential voices, politicians and analysts.

What is the solution for fixing the debt crisis?

With the both chambers of Congress seemingly unable to come up with a debt-ceiling solution, constitutional law professor Jack Balkin wrote about three ways Obama could bypass Congress and try to solve the crisis on his own.

"We are having a debt-ceiling crisis because Congress has given the president contradictory commands," Balkin said in a CNN.com opinion piece. "Congress has ordered the president to spend money, and it has forbidden him to borrow enough money to obey its orders." But Obama may be able to save the United States from defaulting, he suggests, perhaps by issuing two $1 trillion coins or selling the Federal Reserve an option on $2 trillion in property.

One commenter named svscnn said: "I don't know if I'm relieved or concerned about some of the revelations in this article. While they all seem a bit shady, I suppose it's good to know that there are still some executive options on the table to keep us from going over the brink that Congress has brought us to."

Marc J. Yacht said he thinks that Obama is being “held hostage” and that he should stand his ground in the debt-ceiling debate.

“Use your power of the executive order to break the impasse, if you can,” Yacht told CNN's iReport. “Not raisng the debt ceiling undermines this country's stability. Equity and balance has to be the driving force in this debate.”

Skip Wininge, another iReporter, got so fed up with Congress’ inability to reform the tax structure that he has devised a plan of his own. He uploaded his thoughts to iReport, explaining, “Don’t pay for wars and tax cuts on the backs of senior citizens who barely get by on Social Security and Medicare. They have already paid their dues."

Another solution? "If far-right conservatives can't listen to reason, maybe they will listen to Ronald Reagan," CNN contributor John Avlon argues.

"Because Reagan had stern words for Congress when it tried to play political games with the debt ceiling in 1987. They still ring true today...," he wrote before quoting the late president's exact words. "Congressional Republicans should read that paragraph (from Reagan's speech) out loud twice before going to vote on the debt ceiling in the next few days. It is essentially the same argument Obama has been making. But in our current hyper-partisan environment reason doesn't resonate across party lines. Instead, there is too often an overheated impulse to oppose Obama at any cost. Hearing the same argument from the Gipper might inspire a needed sense of perspective."

Candy Grossi has someone else in mind that Congress should call for help. She said she is weary of the “Washington political game playing” because she doesn’t think that politicians really care what average Americans have to say.

Her advice to Washington? Enlist the help of people who are used to balancing their household budgets.

“Advice for Washington: Bring some normal housewives who have to really work a budget, putting food on the table ... ," she told iReport. "Maybe then our budget will get in line. We need people who don't have any special interest. We need people who really care for the good of our nation, which means our people (all of us).”

CNN also asked former officeholders for their views on how to resolve the debt crisis. What do they think should happen?

Former Sen. Arlen Specter of Pennsylvania said he thinks Obama should hold in reserve the prospect of using the 14th Amendment to get around the debt ceiling.

“This extraordinary assertion of executive authority could be justified because the Congress has, in effect, abdicated its constitutional responsibility to agree on legislation through the bicameral conference before the drop-dead date leaving a vacuum which must be filled if the government is to function,” he said.

Ex-Reagan budget director David Stockman said, “The crisis lies in the debt, not the ceiling. Kicking the can with a six months' ceiling increase is the worst possible alternative because it allows the politicians of both parties to continue making the big fiscal lie.”

Former Sen. John Danforth said the real issue is the size of government. He urges Congress and the president to agree on raising the debt ceiling and to make the 2012 election a vote on the size of government – between Obama’s plan for a government that spends nearly 24% of the gross domestic product and Rep. Paul Ryan’s plan for a smaller government, amounting to about 20% of GDP.

“The appropriate size of federal spending as a percent of GDP will not be resolved by politicians without input from the American people. In other words, it will not be decided before the 2012 presidential election,” Danforth said.

Meanwhile, iReporter Valerie Bass, a Middleburg, Florida, teacher and the wife of an Afghanistan veteran, offers this advice to Congress: “This is not a game. Cut the benefits the politicians have as we can't afford them.”

Bass has a lot more to say in her impassioned iReport: "My husband lost his health and his ability to have a normal life due to his deployment to Afghanistan. We also have two children in college and are counting every penny. We have given our future and our health for this country. We are the military families!"

Who's to blame for the debt-ceiling crisis?

Fareed Zakaria calls the government impasse a self-created crisis, saying the damage is already done.

"My basic point is that this is a crisis that we have manufactured out of whole cloth. We have created a circumstance in which the world doubts our credibility, rating agencies are thinking of downgrading our debt and the dollar's role as the world's reserve currency could be jeopardized," Zakaria writes. "Please understand that none of these things are happening because the United States is running deficits. There was no indication – by any metric – that the United States was having difficulty borrowing money one month ago. In fact, the world has been lending money to the United States more cheaply than ever before.

"We face downgrades and investor panic not because of our deficits but because we are behaving like deadbeats, refusing to pay our bills, pouting while the bill collector waits at the door."

Many iReporters said they are sick of the politics behind the crisis and want lawmakers to put aside their differences and just solve the economic problems.

Steve Rokowski said he is tired of elected officials “hiding behind statements” about how the American system of government works. Those elected officials are the most to blame, according to Rokowski.

“Compromise is essential to get things done," Rokowski told iReport. "We all have to do it daily in our lives; it’s more important for Congress as their decisions are supposed to be for the greater good of the country. Stalemate is not an option. I am tired of our government officials always hiding behind the statements that, 'This is the system our forefathers have put in place.' They didn’t set up a government that was this dysfunctional.”

Who's winning this fight?

Lawrence R. Jacobs, a professor and director of the Center for the Study of Politics and Governance at the University of Minnesota's Humphrey School of Public Affairs, takes a look at the implications across the board and who could walk away a winner or a loser in this war over the debt.

He said that Americans are turning against the GOP in the debt debate because of the party's insistence on cutting government programs only without any tax hikes. And Democrats are winning the argument on Medicare and Social Security. Obama also has a lot at stake here. His talk about the inability of government to get anything done implicates him, too, Jacobs argues. Any talk of a dysfunctional government is hurting his cause, he writes.

"The president's flagging of Washington's 'dysfunction' reinforces the distrust of government that many Americans harbor, oddly making it harder for him to rally support behind government programs such as Medicare and Social Security," he writes. "This may help to explain why the GOP is losing the debt-ceiling debate and yet three-quarters of Americans favor a constitutional amendment to balance the budget."

He adds, "The lessons moving forward are clear. Republican leaders intent on winning the White House and strengthening their position in Congress need to steer their party back to the views of mainstream America or squander what may be setting up as a propitious opportunity in 2012 to run against the 'in' party in a time of deep discontent. As for Democrats, they need to focus like a laser beam on the concrete programs that many Americans rely upon and steer away from the sweeping conclusions about government waste and dysfunction that undergird a genuine philosophical conservatism in America."

But Jeffrey Miron, author of "Libertarianism, from A to Z," writes this public spectacle is a blemish on both parties in part because neither side will concede on their big issues. Democrats won't accept that Medicare is the primary driver of the fiscal nightmare, he argues, and Republicans won't distinguish between two kinds of tax revenue – that from higher tax rates and that from fixing tax loopholes.

"Will the Democrats and Republicans be able to set aside their prejudices?" asks Miron, a senior lecturer and director of undergraduate studies in Harvard University's Economics Department and a senior fellow at the Cato Institute. "Alas, both parties are doing what their respective constituents seem to want, so compromise will not come easily.

"But something must change, and soon. Otherwise, nothing will stop the U.S. fiscal train wreck."

The federal government has four days left to raise the nation's current $14.3 trillion debt ceiling, the Treasury Department said. A failure to do so will risk an unprecedented national default.


If the debt ceiling is not raised by Tuesday, Americans could face rising interest rates and a declining dollar, among other problems.

As the cost of borrowing rises, individual mortgages, car loans and student loans could become significantly more expensive. Some financial experts have warned of a downgrade of America's triple-A credit rating and a potential stock market crash.

Without an increase in the debt limit, the federal government will not be able to pay all of its bills next month. President Barack Obama recently indicated he can't guarantee Social Security checks will be mailed out on time. Other critical government programs could be endangered as well.

U.S. DEBT TALKS: The debt ceiling battle: Where things stand

The federal government has five days left to raise the nation's current $14.3 trillion debt ceiling, the Treasury Department said. A failure to do so will risk an unprecedented national default.

If the debt ceiling is not raised by August 2, Americans could face rising interest rates and a declining dollar, among other problems.

As the cost of borrowing rises, individual mortgages, car loans and student loans could become significantly more expensive. Some financial experts have warned of a downgrade of America's triple-A credit rating and a potential stock market crash.

Without an increase in the debt limit, the federal government will not be able to pay all of its bills next month. President Barack Obama recently indicated he can't guarantee Social Security checks will be mailed out on time. Other critical government programs could be endangered as well.

Where do things stand in the fight to raise the debt ceiling?

House

The GOP-controlled House is scheduled to vote at roughly 6 p.m. ET Thursday on a proposal put forward by House Speaker John Boehner, R-Ohio. Assuming House Democrats remain united against the plan, Boehner will need the support of at least 217 of the House's 240 Republicans to pass it.

All 53 Senate Democrats have promised to oppose the plan if it is passes the House.

Boehner's plan calls for $917 billion in savings over the next decade, while creating a special congressional committee to recommend additional savings of $1.6 trillion or more. It would allow the debt ceiling to be increased by a total of roughly $2.5 trillion through two separate votes. The $2.5 trillion total would be enough to fund the federal government through the end of 2012.

The plan also calls for a congressional vote on a balanced budget amendment to the Constitution by the end of the year.

Senate

Senate Majority Leader Harry Reid's plan would reduce federal deficits over the next decade by at least $2.2 trillion while raising the debt ceiling by $2.7 trillion. Reid has promised additional cuts will be included in the final version of his legislation - enough to meet the GOP's demand that total savings should at least equal any total debt ceiling hike.

Reid's plan would cut spending by $1.8 trillion. Roughly $1 trillion in the savings are based on the planned U.S. withdrawals from military engagements in Afghanistan and Iraq.

Reid's plan also would establish a congressional committee made up of 12 House and Senate members to consider additional options for debt reduction. The committee's proposals would be guaranteed a Senate vote with no amendments by the end of this year.

Obama

Obama has endorsed Reid's plan and threatened a veto of Boehner's plan. The president strongly opposes any bill that doesn't raise the debt ceiling through the 2012 election. Obama has promised to veto any short-term debt ceiling extension unless it paves the way for a "grand bargain" of more sweeping reforms and revenue increases.

The president made a nationally televised plea for compromise Monday night, though he also criticized Republicans for opposing any tax hikes on the wealthy.

"This is no way to run the greatest country on Earth," the president said. "The American people may have voted for divided government, but they didn't vote for a dysfunctional government."

OBAMA COULD BYPASS CONGRESS

Very soon, Congress will raise the debt ceiling. If it does not, it would be the greatest unforced error in American history, a self-inflicted wound that is as disastrous as it was avoidable.


Suppose, however, that the tea party gets its way, and the debt ceiling is not increased. What are President Barack Obama's options?

We are having a debt-ceiling crisis because Congress has given the president contradictory commands; it has ordered the president to spend money, and it has forbidden him to borrow enough money to obey its orders.

Are there other ways for the president to raise money besides borrowing?

Sovereign governments such as the United States can print new money. However, there's a statutory limit to the amount of paper currency that can be in circulation at any one time.

Ironically, there's no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds.

Opinion: Both parties are wrong on debt talks

The government can also raise money through sales: For example, it could sell the Federal Reserve an option to purchase government property for $2 trillion. The Fed would then credit the proceeds to the government's checking account. Once Congress lifts the debt ceiling, the president could buy back the option for a dollar, or the option could simply expire in 90 days. And there are probably other ways that the Fed could achieve a similar result, by analogy to its actions during the 2008 financial crisis, when it made huge loans and purchases to bail out the financial sector.

The "jumbo coin" and "exploding option" strategies work because modern central banks don't have to print bills or float debt to create new money; they just add money to their customers' checking accounts.

The government has not discussed either option publicly. There are three reasons for this. First, there may be other legal obstacles to using these options that we don't know about. Second, because these devices could be used over and over again, they might scare investors and be politically unacceptable. Third, the president's political strategy has been to obtain a congressional deal lowering the deficit, and these solutions would take all the pressure off Congress.

However, that calculation could change if the president believes that Congress is simply unable to pass anything, a conclusion he has not yet reached.

Assume that the platinum coin and exploding option strategies are not available. What else can the president do?

Like Congress, the president is bound by Section 4 of the 14th Amendment, which states that "(t)he validity of the public debt of the United States, authorized by law . . . shall not be questioned." Section 4 was passed after the Civil War because the framers worried that former Southern rebels returning to Congress would hold the federal debt hostage to extract political concessions on Reconstruction. Section 5 gives Congress the power to enforce the 14th Amendment's provisions. This does not mean, however, that these provisions do not apply to the president; otherwise, he could violate the 14th Amendment at will.

Section 4 requires the president not to put the validity of the public debt into question. If the debt ceiling is not raised in time, there will not be enough incoming revenues to pay for all of the government's bills as they come due. Therefore he has a constitutional obligation to prioritize incoming revenues to pay the public debt: interest on government bonds and any other "vested" obligations.

What falls into the latter category is not entirely clear, but a large number of other government obligations -- and certainly payments for future services -- would not count and would have to be sacrificed. This might include, for example, Social Security payments.

To be sure, the president could keep paying Social Security if he could keep the total amount of debt constant by redeeming bonds in the Social Security trust fund for cash and immediately selling new bonds to replace them. But the money coming in may not be able to keep pace with the money going out. Even if he tries his best, the president may not be able to pay every Social Security check in full on time.

If the president stopped paying parts of Social Security or other government programs that the public relies on, we would have a partial government shutdown. This would quickly put enormous pressure on Congress to raise the debt ceiling to make it possible to resume normal government operations.

Thus, even if Social Security and other social safety net programs are not part of "the public debt," under Section 4, failure to pay them promptly and in full will probably lead to a political solution to the debt crisis within a week or so. The closest precedent is the 1995 government shutdown precipitated by the Republican-controlled Congress' battle with President Bill Clinton.

Assume, however, that even a prolonged government shutdown does not move Congress to act. Eventually paying only interest and vested obligations will prove unsustainable -- first because tax revenues will decrease as the economy sours, and second, because holders of government debt will conclude that a government that cannot act in a crisis is not trustworthy.

If the president reasonably believes that the public debt will be put in question for either reason, Section 4 comes into play once again. His predicament is caused by the combination of statutes that authorize and limit what he can do: He must pay appropriated monies, but he may not print new currency and he may not float new debt. If this combination of contradictory commands would cause him to violate Section 4, then he has a constitutional duty to treat at least one of the laws as unconstitutional as applied to the current circumstances.

This would be like a statute that ordered the president to hire 50 new employees provided that none of them is a woman. The second requirement violates the Constitution, so the president can hire the 50 employees and ignore the discriminatory provision.

Here the president would argue that existing appropriations plus the debt ceiling create an unconstitutional combination of commands. Therefore he chooses to obey the appropriations bill -- which was passed later in time anyway -- and ignores the debt ceiling. He orders the secretary of the Treasury to issue new debt sufficient to pay the government's bills as they come due.

The big test would be whether the markets treat these new bonds just like older bonds. If they do, or if they demand only a slightly higher interest rate, the president will have avoided economic Armageddon and saved the country's economy -- and the world's. The president and Congress can then move on to the real issue: fighting about future appropriations and revenues.

At this point, the president should ask Congress to ratify his actions by raising the debt ceiling. If they do not, he can continue the process until they do. His actions might set a precedent: Knowing that the president will invoke Section 4, congressional threats of using the debt ceiling to extract political concessions will become a defunct strategy in the future.

In fact, this was one reason why Section 4 was put into the Constitution in the first place.

An angry Congress may respond by impeaching the president. However, if the president's actions end the government shutdown, stabilize the markets and prevent an economic catastrophe, this reduces the chances that he will be impeached by the House. (After all, he saved the country.) Perhaps more important, the chances that he will be convicted by a two-thirds vote of the Senate, which has a Democratic majority, are virtually zero.

The public may regard an impeachment trial as a waste of time, since the ultimate result is clear. In addition, the president will point to the shutdown and the impeachment when he runs against his political opponents in the 2012 election, arguing that they did nothing to save the country from calamity while he has risked impeachment to protect the republic.

The final possibility is that members of Congress will sue the president for ignoring the debt ceiling. Under existing Supreme Court precedents, groups of individual congressmen would not probably have standing to sue. It is possible that a contrived suit could be created by bond holders, but courts will probably see through it. Moreover, even if the bond holders have standing, the courts will likely treat the constitutional issues as nonjusticiable under the "political question" doctrine, as they do in the case of war powers.

In fact, the struggle between the president and Congress is similar to recent disputes over the president's power to use military force to protect national interests or in emergency situations. If the courts won't intervene in the Libya affair, they probably won't intervene here.

It is still unlikely that things will get this far. Our Constitution, however, was designed to deal with extreme situations when ordinary politics fails. Let us hope that our institutions do not fail us now.

U.S. DEBT TALKS focus on a new bipartisan $3.7 trillion debt reduction plan Wednesday -- the latest effort to avoid a potentially catastrophic default next month

Washington – Top administration and congressional officials are expected to focus on a new bipartisan $3.7 trillion debt reduction plan Wednesday -- the latest effort to avoid a potentially catastrophic default next month on the federal government's financial obligations.


President Barack Obama offered strong praise for the initiative on Tuesday, calling it "broadly consistent" with his own approach to the current debt ceiling crisis because it mixes tax changes, entitlement reforms and spending reductions.

Senate Democratic leaders, however, expressed skepticism that they will be able to increase the debt limit and pass the plan -- drafted by members of the chamber's so-called "Gang of Six" -- by the August 2 deadline.

If Congress fails to raise the current $14.3 trillion debt ceiling by that date, Americans could face rising interest rates, a declining dollar and increasingly jittery financial markets, among other problems.

The seriousness of the overall situation was reinforced last week when a major credit rating agency, Standard and Poor's, said it was placing the United States' sovereign rating on "CreditWatch with negative implications." Another major agency -- Moody's Investors Services -- said it would put America's bond rating on review for a possible downgrade.

House Republicans approved a "cut, cap and balance" plan Tuesday night that would raise the debt ceiling while imposing strict caps on all future federal spending and making it significantly tougher to raise taxes -- the solution favored by hard-line conservatives. The GOP plan -- which also requires Congress to pass a balanced budget amendment to the Constitution before raising the debt ceiling -- has little chance of clearing the Democratic-controlled Senate or surviving a certain presidential veto.


The vote did, however, allow rank-and-file Republicans to clearly demonstrate their preference for steps favored by many in the tea party movement even as their leadership seeks a middle ground with Democrats.

"While President Obama simply talks tough about cutting spending, House Republicans are taking action," House Speaker John Boehner, R-Ohio, said in a statement after the sharply polarized 234-190 vote.

Obama said before the vote that legislators "don't have any more time to engage in symbolic gestures."

"We have a Democratic president and administration that is prepared to sign a tough package that includes both spending cuts (and) modifications to Social Security, Medicaid and Medicare that would strengthen those systems and allow them to move forward, and would include a revenue component," Obama added. "We now have a bipartisan group of senators who agree with that balanced approach. And we've got the American people who agree with that balanced approach."

Obama also refused to rule out a fallback plan proposed by Senate Minority Leader Mitch McConnell, R-Kentucky, that would raise the debt ceiling up to $2.5 trillion through the 2012 election.

Under the Gang of Six plan -- put together by three Democrats and three Republicans -- $500 billion in budget savings would be immediately imposed, with marginal income tax rates reduced and the controversial alternative minimum tax ultimately abolished.

The plan would create three tax brackets with rates from 8% to 12%, 14% to 22%, and 23% to 29% -- part of a new structure designed to generate an additional $1 trillion in revenue. It would require cost changes to Medicare's growth rate formula, as well as $80 billion in Pentagon cuts.

"We've gone from a Gang of Six to a Mob of 50," an upbeat Sen. Joe Manchin, D-West Virginia, told reporters as he left a Tuesday meeting on Capitol Hill where other senators were briefed on the blueprint.

Sen. Tom Coburn, R-Oklahoma, announced that he had decided to rejoin the group. Coburn had recently withdrawn from the Gang of Six due to a dispute over entitlement cuts, but declared Tuesday that the plan, which now includes $116 billion in entitlement health care cost savings, has "moved significantly, and (is) where we need to be."

A Democratic congressional source said on condition of not being identified that the private meeting with senators to unveil the plan erupted in applause when Coburn, a conservative deficit hawk, announced he had rejoined the Gang of Six.

Other legislators supporting the plan included two conservative Republicans -- Sen. Lamar Alexander of Tennessee and Rep. Roger Wicker of Mississippi -- while another GOP conservative, Sen. Jeff Sessions of Alabama, raised questions about whether it achieves necessary spending cuts and raises taxes.

A spokesman for Boehner said it was similar in concept to what Boehner and Obama had discussed in their negotiations so far, "but also appears to fall short in some important areas." Other House Republican leaders, including Majority Leader Eric Cantor of Virginia and Budget Committee Chairman Rep. Paul Ryan of Wisconsin, also questioned the Gang of Six plan's call for increased tax revenue and commitment to reducing future costs.

Senate Majority Leader Harry Reid, D-Nevada, meanwhile, noted that the Constitution requires revenue bills to originate in the House, while his assistant majority leader, Sen. Dick Durbin of Illinois, pointed out that the plan still must be drafted into legislative language and analyzed by the Congressional Budget Office before it can be considered.

"It's not ready for prime time," said Durbin, one of the Gang of Six negotiators.

Reid said he's open to incorporating some elements of the proposal into a separate bill that he and McConnell are drafting as a fallback option to prevent the U.S. government from defaulting on its debt.

Several new public opinion polls, meanwhile, show that a majority of Americans want legislators to compromise on a deficit reduction deal instead of refusing to yield from their starting positions.

A CBS News poll released Monday indicates that two-thirds of Americans say any agreement should include spending reductions and tax hikes, with 28% saying a deal should only include spending cuts and 3% saying it should only include tax increases.

According to the survey, there is little partisan divide on the question. More than seven out of 10 Democrats and more than two-thirds of independent voters support a balanced approach, as do 55% of Republicans and 53% of self-described tea party movement supporters.


A Quinnipiac University poll released last week had similar findings. The survey indicated that two-thirds of the public supported a deal that included spending cuts as well as tax increases for wealthy Americans and corporations. Nearly nine out of 10 Democrats and two-thirds of independents in the survey supported the inclusion of tax increases, with Republicans divided on the issue.

The GOP initiative -- which would require any new tax increases to be approved by two-thirds of the members of the House and Senate -- stands in sharp contrast to Obama's stated preference for a package of roughly $4 trillion in savings over the next decade, composed of tax increases on the wealthy and spending reforms in Medicare, Social Security and elsewhere.

Hopes for such a so-called "grand bargain" appeared to have faded in recent days, partly because Republicans have continued to insist that any tax increases could derail an already shaky economic recovery. It was not immediately clear whether the Gang of Six proposal would be able to revive those hopes.

At the heart of the tax dispute has been Obama's call for more revenue by allowing tax cuts from the Bush presidency to expire at the end of 2012 for families making more than $250,000. The president's ideal plan would keep the lower tax rates for Americans who earn less.

Obama noted last week he is not looking to raise any taxes until 2013 or later. In exchange, the president said, he wants to ensure that the current progressive nature of the tax code is maintained, with higher-income Americans assessed higher tax rates.

But resistance to higher taxes is now a bedrock principle for most Republicans, enforced by conservative crusaders such as political activist Grover Norquist. His group, Americans for Tax Reform, has sponsored a high-profile pledge to oppose any tax increase.

The pledge has been signed by more than 230 House members and 40 senators, almost all of them Republicans.

Despite their differences, leaders from both parties insist they are committed to reaching an agreement that will allow them to raise the debt ceiling before August 2. McConnell's fallback proposal would give Obama the power to raise the borrowing limit by a total of $2.5 trillion, but also require three congressional votes on the issue before the 2012 general election.

Specifically, Obama would be required to submit three requests for debt ceiling hikes -- a $700 billion increase and two $900 billion increases. Along with each request, the president would have to submit a list of recommended spending cuts exceeding the debt ceiling increase. The cuts would not need to be enacted in order for the ceiling to rise.

Congress would vote on -- and presumably pass -- "resolutions of disapproval" for each request. Obama would likely veto each resolution. Unless Congress manages to override the president's vetoes -- considered highly unlikely -- the debt ceiling would increase.

The unusual scheme would allow most Republicans and some more conservative Democrats to vote against any debt ceiling hike while still allowing it to clear.

McConnell and Reid are also working on two critical additions to the plan, according to congressional aides in both parties. One would add up to roughly $1.5 trillion in spending cuts agreed to in earlier talks led by Vice President Joe Biden; the other would create a commission meant to find more major spending cuts, tax increases and entitlement reforms.

Changes agreed to by the commission -- composed of an equal number of House and Senate Democrats and Republicans -- would be subject to a strict up-or-down vote by Congress. No amendments would be allowed.

Sources say the panel would be modeled after the Base Closing and Realignment Commission, which managed to close hundreds of military bases that Congress could not otherwise bring itself to shut down.

STATE OF UNION: Debt talks would cut spending, cap and balance, and eventually will avoid economic chaos

Washington.-  "Cut, cap and balance" is all the rage in some Republican quarters.


Cut a substantial amount of spending to bring down the roughly $1.5 trillion deficit expected this year.

Cap federal spending at 18 percent of the gross domestic product. It's at 24 percent of the GDP now.

Pass a balanced-budget amendment to the Constitution that includes spending caps and makes it difficult to raise federal taxes.

"The answer for the country is for the president to agree to cut federal spending, to cap federal spending and to put in place a balanced-budget amendment," Republican presidential candidate Mitt Romney says.

GOP's 'duck, dodge, dismantle' approach

This week, the Republican-controlled House of Representatives likely will pass a "cut, cap and balance" bill as a prerequisite to raising the debt ceiling. There are mighty objections from Democrats and the White House.

"What these amendments do is not just say you have to balance the budget, but it puts in place spending limitations that would force us to cut Social Security and Medicare more deeply than even the House budget resolution did," Jacob Lew, the White House's budget director, said Sunday on CNN's "State of the Union."

What the House will almost surely approve, the Senate almost surely will not, leaving the debt ceiling issue precisely where it has been for months: unresolved.

Asked if he would allow the United States to go into default or go to a Plan B if the Senate won't pass the bill, Sen. Lindsey Graham, R-South Carolina, said he's not considering an alternative.

"I am going to focus on Plan A. That to me is the only plan that will work. It's the real deal. Not a big deal," Graham said on "State of the Union."

The most probable deal -- still in the works -- would cut spending by $1.5 trillion over 10 years and let the president raise the debt ceiling through the 2012 election. Congress could stop him, but only in the unlikely event of a veto-proof majority vote in both houses.

Everybody gets off the hook. And it avoids economic chaos.

At the end of the day, Republican leaders have made it clear that they will not be the ones to put the government into default, Sen. Jon Kyl, R-Arizona, said on ABC's "This Week."

It is uncertain whether Republican rank and file will follow. The idea came from Senate Minority Leader Mitch McConnell, R-Kentucky, whom conservatives have trashed ever since.

"We're in big trouble, so let's have that national debate, not some cop-out like the McConnell plan," Rep. Jim Jordan, R-Ohio, said on "Fox News Sunday."

Democratic sources said the McConnell plan will be on the Senate floor this week. A top Republican source said that first the Senate will vote on CCB -- cut, cap and balance. Even it if fails, it has endless potential as a CBS -- a campaign bumper sticker.

Debt fallback plan gains momentum as GOP plans symbolic votes

Top administration and congressional officials are expected to continue working this week on a measure to raise the federal debt ceiling by up to $2.5 trillion, embracing a version of a fallback plan designed by Senate Minority Leader Mitch McConnell to avoid a potentially catastrophic default.


At the same time, GOP leaders are planning a series of votes on a proposed balanced budget amendment to the Constitution and sharp caps on future spending. The bills have no chance of clearing Congress or winning the approval of President Barack Obama, but would allow Republicans to demonstrate their preference for steps favored by their party's conservative base.

The maneuvering will take place against a backdrop of heightened anxiety as fears rise that Washington will not be able to pay its bills starting next month. If Congress fails to raise the current $14.3 trillion debt ceiling by August 2, Americans could be hit with rising interest rates, a plummeting dollar, and increasingly jittery financial markets, among other things.

The seriousness of the overall situation was reinforced Thursday when a major credit rating agency, Standard and Poor's, said it was placing the United States' sovereign rating on "CreditWatch with negative implications."

Moody's Investors Services -- another major rating agency -- said Wednesday that it would put the sterling bond rating of the United States on review for possible downgrade.

Obama warned last week that he could not guarantee older Americans will receive their Social Security checks next month if a deal is not reached in time. Republicans accused the president of resorting to scare tactics.

Explain it to me: Debt ceiling Nevertheless, the two sides continued their talks over the weekend. Obama met at the White House Sunday with House Speaker John Boehner, R-Ohio, and House Majority Leader Eric Cantor, R-Virginia, according to a spokesman for Boehner.

"We're making progress," the president said Monday. "We can't let politics stand in the way of doing the right thing."

It "was never going to be easy (and) it certainly doesn't look easy today," added White House spokesman Jay Carney. However, Carney added that all the congressional leaders in the talks were committed to reaching a deal, whether a comprehensive deficit reduction agreement sought by Obama, a smaller version or the fallback option that focuses on raising the debt ceiling.

"We have to ensure that there is a fallback provision; that there is a measure through which Congress will act and we can ensure that the United States will not default," Carney said. "And the leaders in that room are unanimously in support of doing that."

McConnell's plan appears to have gained momentum over the past few days as hopes have faded for a grand bargain including tax hikes on the wealthy and reforms to popular entitlement programs such as Medicare and Social Security. The Republican leader's proposal would give Obama the power to raise the borrowing limit by a total of $2.5 trillion, but also require three congressional votes on the issue before the 2012 general election.

Specifically, Obama would be required to submit three requests for debt ceiling hikes -- a $700 billion increase and two $900 billion increases. Along with each request, the president would have to submit a list of recommended spending cuts exceeding the debt ceiling increase. The cuts would not need to be enacted in order for the ceiling to rise.

Debt ceiling: What does it mean? Protecting your finances if US defaults

Congress would vote on -- and presumably pass -- "resolutions of disapproval" for each request. Obama would likely veto each resolution. Unless Congress manages to override the president's vetoes -- considered highly unlikely -- the debt ceiling would increase.

The unusual scheme would allow most Republicans and some more conservative Democrats to vote against any debt ceiling hike while still allowing it to clear.

McConnell, R-Kentucky, and Senate Majority Leader Harry Reid, D-Nevada, are also working on two critical additions to the plan, according to congressional aides in both parties. One would add up to roughly $1.5 trillion in spending cuts agreed to in earlier talks led by Vice President Joe Biden; the other would create a commission meant to find more major spending cuts, tax increases and entitlement reforms.

Changes agreed to by the commission -- composed of an equal number of House and Senate Democrats and Republicans -- would be subject to a strict up-or-down vote by Congress. No amendments would be allowed.

Sources say the panel would be modeled after the Base Closing and Realignment Commission, which managed to close hundreds of military bases that Congress could not otherwise bring itself to shut down.

As congressional leaders continue laying the groundwork for the plan, Republicans are moving ahead with a more partisan measure to "cut, cap and balance" future budgets. The plan includes major spending cuts, caps on future spending as a percentage of economic production, and a balanced budget amendment to the Constitution.

The White House released a statement Monday promising a veto if the GOP plan reaches Obama's desk.

"Instead of pursuing an empty political statement and unrealistic policy goals, it is necessary to move beyond politics as usual and find bipartisan common ground," the statement read.

Boehner called it "disappointing" that "the White House would reject this common-sense plan."

"If we are going to raise the debt limit and avoid default, the White House must be willing to demonstrate more courage than we have seen to date," the speaker said in a written statement.

The GOP initiative stands in sharp contrast to Obama's stated preference for a package of roughly $4 trillion in savings over the next decade composed of spending reforms and tax increases on the rich.

"I'm a little frustrated that (administration officials are) never willing to be specific about the reductions in spending that they would be willing to do," conservative Sen. Jon Kyl, R-Arizona, said Sunday.

"The president always just holds out this idea that, well, if you'll raise taxes, and he is very specific about the taxes he wants to raise, then (he) might be willing to look at cuts elsewhere," Kyl said.

"Well, of course, that's just not good enough. So, the point I'm trying to make is when the president says he's willing to compromise, understand why Republican leaders have been pretty reluctant to go along with this deal because we frankly don't know where the spending reductions come, but we do know where the taxes are."

Republicans have repeatedly insisted that they are the only side offering concrete proposals to address mounting deficits and the federal debt.

Democrats in turn have belittled the GOP's push for a balanced budget amendment, a perennial favorite of conservatives.

"This notion that we somehow have to change the Constitution to do what we were elected to do is just plain wrong," Sen. Dick Durbin, D-Illinois, said Sunday on NBC's "Meet the Press."

"Bottom line is, those who want to push a balanced budget amendment are saying, 'I can't promise you that I won't steal again, but I will vote for the Ten Commandments.' "

At the heart of the current debate is Obama's call for more tax revenue by allowing tax cuts from the Bush presidency to expire at the end of 2012 for families making more than $250,000. His plan would keep the lower tax rates for Americans who earn less.

Republicans insist they will not agree to any tax increases, arguing that such a move would derail an already weak economic recovery. Obama noted last week he is not looking to raise any taxes until 2013 or later. In exchange, the president said, he wants to ensure that the current progressive nature of the tax code is maintained, with higher-income Americans assessed higher tax rates.

But resistance to higher taxes is now a bedrock principle for most Republicans, enforced by conservative crusaders such as political activist Grover Norquist. Norquist's group, Americans for Tax Reform, has sponsored a high-profile pledge to oppose any tax increase.

The pledge has been signed by more than 230 House members and 40 senators, almost all of them Republicans.

U.S. DEBT TALKS: Why The Debt Limit Ought to Worry Canadians Too

If you have been following the U.S. debt-limit negotiations, you will undoubtedly have heard U.S. Treasury Secretary Timothy Geithner’s repeated warnings that failure to raise the debt limit would have catastrophic consequences for the U.S. economy: The credit rating of the United States would be downgraded, interest rates would rise, the safety and security of the dollar would be questioned, and the American economy would plunge back into a deep recession.


Yet, readers might be interested to learn that the effect of not raising the debt limit could have a nasty impact on the Canadian economy as well – perhaps worse than what followed the recent financial crisis. After all, the Canadian economy is inextricably linked to that of its southern neighbour, and bad economic news for the United States can spell bad news for Canada.

In light of this, Canadian Finance Minister Jim Flaherty says: “As the largest economy in the world and Canada’s largest trading partner, we are closely following the current political impasse in the U.S. … Clearly, we believe the situation needs to be addressed in the very near future to ensure continued confidence in the American and global economy.The debt limit is a cap that Congress imposes on the amount the federal government can borrow. To be clear, raising the debt limit wouldn’t actually increase the level of debt. Rather, debt grows because of taxing and spending decisions that Congress makes separately in the budget process. Raising the debt limit simply allows the government to finance spending that Congress has already approved. Failure to raise the debt limit would make it impossible for the federal government to pay for everything it has already authorized. Furthermore, if the limit is not raised, the government will eventually be forced to default on some obligation, whether that means missed payments to government contractors, or late Social Security checks to old-age retirees.

Economists tend to agree that failing to raise the debt limit will cause U.S. interest rates to spike, as investors will demand higher yields to lend to the United States. But, if recent history is any guide, a sharp increase in U.S. interest rates would mean a commensurate increase in Canadian interest rates, as well. That could have a rather pernicious effect on the debt burdens of Canadian households that have accumulated high levels of debt over the past several years. Small business loans, mortgages, and other forms of credit would become costlier, weakening consumers’ spending power and businesses’ ability to expand and hire new employees.

Combine the effect of a sharp interest-rate hike with a slowdown in Canada’s largest trading partner, and the negative economic effect of failing to raise the debt limit grows significantly. Canadian exporters would inevitably see decreased demand from sluggish American businesses and strapped consumers, and the loss in value of the U.S. dollar would make Canadian goods more expensive.

To complicate matters even further, if the failure to raise the debt limit caused a sell-off of U.S. Treasuries, a global financial crisis could ensue. For many, Treasuries appear to be a safe-harbour asset; investors hold them because they believe such investments are secure and sellable. Thus, a large sell-off of Treasury bonds could leave institutions flat-footed. Consider what might happen to insurance companies, as well as mutual and pension funds, that together hold over a trillion dollars’ worth of Treasury bonds. If they are unable to sell their rapidly depreciating Treasury holdings, they may be unable to raise enough money to pay for insurance payouts or redemptions. It is hard to see how Canada’s financial institutions and economy could be spared in such a scenario.

To be fair, it is possible that the Canadian economy could sail through such a downturn. But, given the economic decline that Canada felt during the recent financial crisis that originated in the U.S., it doesn’t seem likely.

The unprecedented nature of this issue makes it difficult to know exactly what might happen if Congress fails to raise the debt limit, but it seems likely that the results would not be in the best interests of the American people, and that Canadians, as their neighbours, would be similarly ill-affected.