Obama Has Saved His Presidency, but at What Price?

The opinion of many observers is that Barack Obama has saved his presidency — maybe even his re-election — in the same way that Bill Clinton did after losing the midterm elections of Congress. But how? By extending by two years the big tax cuts that favor the middle and upper classes, which were put in place by his predecessor, George W. Bush. In addition, he has kept his own supporters on his side by extending unemployment benefits for millions of out-of-work Americans and also by reducing the income tax by 2 percent.

This is a quite obvious political tactic, and like all these tactics, it is, simply put, beautiful. The lowering of the income tax, increased unemployment benefits, the prolonging of tax cuts and a compromise with the Republicans are all done at the expense of others, and the total bill will reach the trillion dollar mark. Since the U.S. already has a deficit of around $1.3 trillion, they have dug themselves into an even deeper hole. Future generations will pay.

This past week, the commission for reducing this deficit could not reach the majority required to impose a timetable on Congress, meaning that the United States will be the only Western country not to start its financial restructuring in 2011. Worse still, these tax cuts, assured until 2012, will come to an end at the time of the next presidential campaign; an extension, therefore, is virtually assured.

We have not had to wait too long for reactions from the country. Wall Street brokers are having a field day. Insightful as they are, they are anticipating that deficits, such as interest rates, will greatly increase. Already this week, buyers of U.S. debt security bonds were not breaking the doors down. Rates for debts over the last 10 years rose from 2.6 percent to 3.3 percent. One way to curtail this trend would be if the central bank, the Fed, were to increase their purchase of government security bonds, supporting this cause and lowering the interest expenses. Soon, there will be no other choice. The alternative is raising rates of bonds already purchased; doing so would diminish their value so much that the reserves would be in danger. Leading experts are now forecasting that this process may have become irreversible.

The reduction of social contributions from employees — the other element of this compromise — will increase purchasing power by 2 percent, at the expense of future taxpayers. Support for the unemployed may be misguided, however: As soon as the economy starts to make some progress and jobs are created, the urgency to accept these jobs is reduced for the unemployed. Unemployment figures may remain high.

Obama’s compromise with the Republicans is a classic. The Democrats and the Republicans, often in the minority, are banding together to deliver mutual benefits, but this only increases the bill for others, i.e., the State, the future taxpayers. They do not feel anything yet; on the contrary, everyone is happy as everyone is benefiting. But there is an authority that slyly monitors and observes these “vigilant bonds.” Bond investors around the world have understood that it would be highly risky to finance the U.S. government at this point. I feel that this week saw the limit being reached. The Chinese are concerned, investment funds are being held back, and I do not want my pension fund to be used to buy U.S. securities under any circumstances. Or, only when interest rates go up to 12 or 14 percent. We have already witnessed a similar case when in 1981, the Fed chief, Paul Volcker, had to clean up the shambles of the Ford and Carter presidencies.

The mechanism of bond markets is simple and brutal at times: An increase in rates of around 12 percent would reduce the value of bonds issued from $1,000 to less than $400. No one is buying at the current prices, and so they are playing a waiting game.