The real battle in Washington is not the debate over the debt ceiling. Everyone knows that it will be raised eventually. The real battle is whether the deficit is important – or not. 

If The Debt Ceiling Is Not An Issue 

The debt ceiling seems like it would be an important issue, but only if you embrace the idea that deficit spending is both dangerous, at excessive levels, and should be minimized, at least over time. 

If, for example, a core belief is that deficit spending can continue indefinitely, then the debt ceiling is simply a matter of paperwork. 

This seems to be the negotiating position of President Obama currently, on the deficit ceiling. 

The Republicans have been trying to use the impending debt ceiling as a negotiating bargaining chip. 

However, President Obama has realized that the Republicans have virtually no negotiation leverage with the debt ceiling. 

After all, if President Obama refuses to negotiate spending issues as part of raising the debt ceiling, it is virtually certain that the Republicans would be blamed for any default that the US might incur on unpaid debt. 

President Obama, with the help of the media, would be able to position any default as one that would be the Republicans fault. He might even be willing to let the US default if it could be clearly blamed on the Republicans. After all, the default would likely be temporary. 

If so, President Obama might be able to use this as leverage against Republicans in the 2014 elections. 

In fact, President Obama has little to lose in refusing to make spending reduction an issue in Washington.  

The Republicans have been slow to realize this, but that is because President Obama, who was once critical of the Bush administration’s deficit spending, actually does not seem to feel that deficit spending is a problem to be addressed. 

If Deficit Spending Is Not A Problem  

Who believes that deficit spending is not an issue? 

The leading public advocate of the benefits of deficit spending is Paul Krugman, Nobel Prize winning economist and a devote supporter of the Obama administration. 

Mr. Krugman has argued for a long time that the solution to the slow economy is even more deficit spending than has been done before. His main criticism of the stimulus spending of 2009 and 2010 has been that it was far too small. 

The question of how such spending is necessary to actually produce economic growth never seems to be brought up, but Mr. Krugman is adamant that the stimulus spending to date has not been enough. 

President Obama’s View 

The real question in the deficit spending debate is whether President Obama views the deficit as a problem. 

In the past, he was a vocal critic of the Bush administration’s deficit spending. 

In 2006, then Senator Obama made the following statement, when a vote on raising the debt ceiling: 

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.”

However, today, President Obama has been encouraging increased investment in education, infrastructure, without any reductions in spending for persons who receive government aid. 

This essentially could be interpreted to mean that President Obama does not really care about deficit spending, but without any recent  clear statements on whether he views deficit spending as an issue or not it is hard to speculate. 

We tend to think that President Obama is now more concerned with leaving his own personal lasting imprint upon the Presidency – and America – than he is with bring financial disciplines to Washington. 

If anything, President Obama probably believes that increased taxes are enough to keep deficit issues at bay. 

This was certainly his rallying call during the election process, when he repeatedly stressed the idea that the “rich should pay their fair share.” 

While such a viewpoint was a powerful campaign issue, as it aroused emotions, from a financial perspective, it was relatively minor. 

As we pointed out in an Ahead of the Curve column dated December 5, 2012 “The Absurdity Of The Fiscal Cliff Debate”, the argument over taxation of incomes over $250,000 only amounted to $42 billion worth of revenue in 2013 (assuming no change in behavior by taxpayers due to the new rates). 

What this meant is that the issues of deficit spending got swept under the rug of financially insignificant emotional issues during the campaign. 

This leaves the question of President Obama’s view on deficit spending largely unknown right now. 

It certainly doesn’t seem to be of the same importance as it is to Republicans.  

What this all means for the budget negotiations in the upcoming year is unpredictability. 

Does It Matter? 

So far, the markets have seemed to tolerate unpredictability in Washington’s fiscal direction, but we wonder how long such a patience will last. 

It is beyond the scope of this single article to discuss why deficit spending is an issue that must be addressed somehow. 

We have long argued that both new revenues and spending cuts must be addressed in order to avoid a runaway financial situation. 

The real problem is that deficit spending becomes an important issue when the purchasers of US debt begin to make demands on the social structure of the US. 

This is what has caused the turmoil  in Greece in recent years.  

There is an argument that the US could never become Greece, but if purchasers of US debt began to demand 7% interest rates, as purchasers of Greek debt did several years ago, the US might well lose control of the financial future.  

To rescue Greece, the European Union began to make demands on Greece to bring the annual deficit spending to a “realistic” level of 3% of GDP. 

The US currently has run a deficit spending of almost 10% of GDP for four years. 

The long term future of the US depends upon the credibility of the US dollar in the rest of the world. 

Extensive deficit spending slowly weakens that position over time. While we haven’t reached the critical point were confidence collapses, and a shift to some other global currency as the standard occurs, we are headed in that direction.  

How far away from the point we are, is unknown. 

The problem, of course, is that once the critical point of confidence in the US dollar is breached, it cannot be easily recovered. We can only hope that the political divisiveness in Washington doesn't bring us so close that we slip over the edge without intention from either side of the political argument. 

Comments may be emailed to the author, Robert V. Green, at aheadofthecurve@briefing.com