Obama Team Pumps up Fears of Debt Default

Obama Team Pumps up Fears of Default; Newt Said What?; Rape Case Against Frenchman Has Global Implications; Israel Under Siege

Bond Sales Show Investors Not Worried About Debt Default

“The basic point is that the world will inevitably view this as a default – something that has never happened before.”

-- Deputy Treasury Secretary Neal Wolin talking to London’s Financial Times about a potential failure by Congress to raise the federal borrowing limit.

Investors fleeing a European government debt meltdown, crashing commodity prices and unstable stocks helped make the last offering of federal debt under the current debt ceiling a big success.

The final raft of Treasury bonds offered under the $14.3 trillion debt ceiling sold quickly and cheaply as investors around the globe gobbled up the U.S. debt, driving down the interest rates the government will have to pay.

The bad news: out government’s credit card is maxed out as of today. The good news: There are lots of people who still want to lend Uncle Sam money.

Even with the U.S. out of credit, re-sales of already issued bonds continued to fetch lower rates today as traders gladly took puny returns of 3 percent on 10-year bonds just to have somewhere safe to park their money.

Part of the reason for the cheap interest payments is temporary. Fiscal trouble in Europe and Asia leaves American debt, while still less desirable than once upon a time, as the least bad option in the bond world. As other, riskier investments lose their appeal amid fears of another economic slowdown, T-Bonds look good. The underpinning for the strong performance, though, is U.S. creditworthiness.

So who, other than those in the Obama administration, believes that there is any chance that the American government will default on its existing debt?

Certainly bond buyers don’t seem to think the risk is real in the short term. Many have soured on American long-term debt on fears that inflation will mean getting paid back in tattered greenbacks, but if there was any real concern that the U.S. would really stiff its creditors it seems highly unlikely that investors would still be clamoring for a cup of our red ink.

The administration has held that if the debt ceiling is not lifted in the next 11 weeks it will be tantamount to default. The U.S. has defaulted before. During the Depression, Franklin Roosevelt invalidated gold certificates in a bid to save the dollar. The certificates had been issued to stretch federal spending power and came to far outstrip the value of gold held by the government. Rather than have a run on federal gold, Roosevelt opted to default on the government’s obligation.

But there is little talk of default beyond the Obama administration. The rest of the world and Washington are preparing for a scenario more like the ones that happened when the debt limit was exhausted during the Clinton era – partial government shutdowns until a deal can be reached.

In an apparent effort to increase the pressure on Democratic senators who are resisting the administration’s calls for an immediate increase in borrowing power, though, Secretary Tim Geithner and his lieutenants are doing their best to create the impression that default is the only way to go.

The administration is still discussing small-bore trade-offs for more borrowing, like requiring federal employees to contribute to their own retirement funds. One supposes that if there were such massive concern over a default and double-dip recession, the president would be moving faster to cut a deal rather than greeting the UConn basketball team this afternoon and heading to another fundraiser tonight.

Plus, Geithner’s credibility took a hit on the issue when he suddenly added another month to his projected Armageddon date after improved tax receipts and discovering larger cash reserves than he had projected. Republicans now argue that Geithner could delay even a partial shutdown by liquidating more holdings, like the gold still held by the federal government and the shares in bailed out companies, like General Motors.

Having extended the day of destruction, Geithner is now trying to get the members of his party to quit quibbling and take he and Obama’s demands seriously. The success of his own bond sales will further undercut his clout.

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Newt Gingrich Baffles Boosters

"I don't think right-wing social engineering is any more desirable than left-wing social engineering.”

-- Former House Speaker Newt Gingrich on “Meet the Press” slamming Rep. Paul Ryan’s Medicare plan.

Maybe Newt Gingrich really doesn’t want the Republican presidential nomination. After a months of hemming and hawing about a candidacy before he eventually tweeted himself into the race, Gingrich has succeeded mostly in confusing potential supporters.

His Sunday appearance on “Meet the Press” could have been a great moment for Gingrich, the only southerner other than businessman Herman Cain in the race, to capitalize on the decision by Mike Huckabee not to run. But instead, Gingrich seemed intent on alienating conservatives instead of embracing them.

Gingrich espoused the virtues of mandatory health insurance and called an aggressive Republican debt plan “right-wing social engineering.”

The former House speaker made complicated defenses of his plans for a health-insurance mandate like the ones enacted by President Obama and former Massachusetts Gov. Mitt Romney despite widespread Republican outrage over such an expansion of government power.

He also added major firepower to Democratic efforts to beat up Republicans for trying to overhaul Medicare. House Republicans who hear Gingrich’s line about “right-wing social engineering” played back to them in attack ads next year won’t look back fondly at the former speaker’s campaign.

Gingrich has been unrepentant about his appearance in ads with Nancy Pelosi for Al Gore’s global warming group and blamed his past marital infidelities on excessive love of the country that drove him to work too hard and neglect his marriage.

While there are many who may benefit from Huckabee’s departure, Gingrich seems almost determined not to be the one.

Huckabee’s clout will grow every day between now and the crucial straw poll in Ames, Iowa in August. Those looking for a claim on Huckabee’s social conservatism and strong Iowa grass roots will be auditioning for his endorsement between now and then.

His blessing of a candidate, particularly those primarily identified as fiscal conservatives like Tim Pawlenty and Mitch Daniels, could be the deciding moment of the GOP primary.

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IMF Boss Grosses Out U.S., Endangers E.U.

"These are the kind of people that are running the IMF and we want to turn the world finances and the control of the money supply to them? That should awaken everybody to the fact that they ought to look into the IMF and find out why we shouldn't be sacrificing more sovereignty to an organization like that and an individual like he was."

-- Rep. Ron Paul, R-Texas, on “FOX News Sunday.”

Dominique Strauss-Kahn, the Frenchman who is managing director of the International Monetary Fund, is fighting the attempted rape charge against him by a chambermaid at a New York hotel, but his criminal problems may have aftershocks for the whole world.

The IMF, which aspires to be the Federal Reserve for the earth, was poised to make one of its most daring bailout plays yet. Greece is going to default without a massive infusion of cash and Strauss-Kahn was preparing to provide it.

Without another major bailout, Greece will have little choice but to drop out of the Euro in order to engage in the kind of fiscal fire sale necessary. It’s either more free money for the Greeks, or Helots taking wheelbarrows of drachmas down to the baker to buy their pitas. That kind of fiscal self-immolation would blow holes in bank balance sheets around the world and add volatility to an already unsettled nation and region.

Since the IMF doesn’t have any money of its own, a move of the magnitude needed to prevent Greece slipping into chaos would rely on the support of nations that have (or can borrow and print) money. While Strauss-Kahn is on suspension and fighting the claim that he forced a maid to perform oral sex on him, other Eurocrats will run the fund, but the whole scene doesn’t exactly inspire confidence, especially since Strauss-Kahn beat a sexual harassment claim just three years ago.

Europe’s economy and currency are already a disaster, this will not make the rest of the world better disposed toward underwriting the misadventure of lashing the economies of strong nations like Germany and Britain to those of week sisters, like Greece and Spain.

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Arab Spring Rains Down on Israel

“The leaders of these violent demonstrations, their struggle is not over the 1967 borders but over the very existence of Israel, which they describe as a catastrophe that must be resolved. It is important that we look with open eyes at the reality and be aware of whom we are dealing with and what we are dealing with.”

-- Israeli Prime Minister Benjamin Netanyahu in a televised address after organized masses of Palestinians tried to surge across Israel’s borders.

The annual Palestinian day of rage that commemorates the founding of Israel and the displacement of the Arabs took on extra intensity this year as protesters, inspired by the revolutions that have gripped the region, tried to overwhelm border crossings into Israel.

Israeli forces opened fire after mobs armed with rocks tried to surge past border defenses and while Palestinians describe it as Facebook-style flash mob, the Israelis are claiming it was orchestrated attack. The Syrian regime is mopping up after its brutal crackdown and Iran looking to strengthen the hand of terrorist group Hamas, now a part of the Palestinian government thanks to a deal brokered by Islamists in the new Egyptian government. Riots in Israel would help on both of those fronts, taking the focus off of Syrian dictator Bashar Assad and further radicalizing the Palestinians.

The repercussions from the revolts still sweeping the region continue to look worse for the U.S. It leaves our allies, like the Saudis and the Israelis, embattled and estranged and has empowered Iran. President Obama is planning an address in which he will seek to tie the killing of Usama bin Laden to the movement for democracy in the region. The spate of negative news from the region, may cause Obama to reconsider, or at least minimize his plan.

At the very least, Obama will have to wait to see if the White House P.R. push on behalf of the rebel tribes and Islamists in Libya helps develop domestic support for Obama’s decision to join that country’s civil war.

The other complicating factor for Obama’s bin Laden/Arab World shot is that Israeli Prime Minister Benjamin Netanyahu will be addressing Congress this week at the behest of Speaker John Boehner. It will give Netanyahu, who has been a thorn in Obama’s side on various peace proposals, a chance to voice concerns about the Arab movement that Obama supports.

It will also give Netanyahu a chance to develop bipartisan congressional resistance to any move by the president to join the United Nations in recognizing the Palestinian territories as an actual nation.