Iowa Update

Getting close to the early primaries, so time to update my forecast. Michelle Bachman has faded from the front spot in Iowa and Pawlenty has dropped out of the race. Herman Cain was the flavor of the month but now Newt Gingrich is surging. I am still waiting to see who Mike Huckabee will endorse, but for now my prediction is: 1st: Newt Gingrich 2nd: Ron Paul 3rd: Mitt Romney 4th: Rick Perry The top two spots could easily be switched. Caucuses are more susceptible to influence by enthusiastic voter which Ron Paul has in abundance. The support for Gingrich is weak and most as an alternative to Romney. Still, so long as Romney runs a respectable third, I don't think Iowa will hurt him. Romney does not seem comfortable being the front runner despite his lead in fundraising and endorsements. He is the marathon man; simply outlasting his competition. It is likely that Michelle Bachmann and Gary Johnson will drop out of the race after the caucus, though Bachmann may hold out through the New Hampshire primary. Rick Santorum may drop out but is more likely to go on the New Hampshire.

The Real Choice about the Debt

A vote for default is a vote for higher taxes.

While it is currently true that government revenues exceed interest payments, once a default occurs interest rates will rise. As soon as interest payments exceed government revenues, because the spending on the remainder of government (defense, border patrol, state department, Federal court) can never go below zero, the only recourse left would be to raise taxes. Even printing money would be ineffective because interest rates would only rise higher because of inflation expectations.

Confusion about the 14th Amendment

There has been much discussion about the coming debt ceiling limit deadline to avoid a default by the U.S. government. Capital Gains asks "Is August 2 Or July 22 The Day The Government Turns Into A Budget Pumpkin?" People seem to be confusing two different concepts: "default on" and "abrogate".

To default on debt means not paying the debt in the time and amount originally agreed to. To abrogate debt means to repudiate or reduce the amount of the debt. Section 4 of the 14th amendment clearly prohibits abrogation of the debt. I do not see any restriction on defaulting on the debt.

The point is that some in Congress are talking as if not raising the debt ceiling would result in abrogating the debt. After a default, the debt will still be there and much harder to repay as lenders would be reluctant to extend us the money to even rollover the existing debt.

Let us hope that wiser heads prevail in this discussion.

A solution

As suggested on Hoocoodanode:
National Mortgage loss recognition act of 2011:

All current, non-modified mortgages originated in 2006 or 2007 owned by a privately issued MBS shall be written down by 5% of principal value or $20,000, whichever is less.
Mortgage owners, or servicers as their agents, may request an appraisal of the property, prior to the writedown. If the appraised value of the property is greater than the principal value, no writedown need occur. If the appraised value is less than the principal, the principal shall be written down to the greater of the appraised value or 95% of the remaining principal.

This would speed up the process of clearing out the overprice mortgage loans. By reducing the principal value of the mortgage, the MBS would gain transparency and thus become more liquid. It will also bring some homeowners into positive equity, meaning they are free to sell the house or possibly refinance. Even if they don't have positive equity, the amortization of the loan would be accelerated by the writedown and they will reach positive equity much sooner.

Preliminary Primary Forecast

Now that the Republican nomination field is mostly set (except Sarah Palin hasn't announced she isn't running), I can make an initial forecast of the Republican nomination.

Iowa Caucus
1st: Michele Bachman
2nd: Tim Pawlenty
3rd: Mitt Romney
4th: Newt Gingrich
Assumption: Mike Huckabee will endorse Tim Pawlenty before the Iowa Caucuses.

New Hampshire Primary
1st: Mitt Romney
2nd: Ron Paul
3rd: Newt Gingrich
4th: Michele Bachman
Wildcard: will the Tea Party voters make a strong showing in New Hampshire or will more traditional conservative dominate? I'm guessing the latter.

South Carolina Primary
1st: Mitt Romney
2nd: Michele Bachman
3rd: Tim Pawlenty
4rd: Newt Gingrich

I still expect Romney to be the nominee but the question is how long the nominating contest goes on. I expect it to whittle down to Romney vs Bachman fairly quickly. How long Michele Bachman can resist the pressure to fall into formation?

Bring home the troops.

It is past time to remove U.S. troops from Korea. Sixty years of war is enough. South Korea is a developed country, with strong trade ties to China, the real threat in the the region. The South Korean Army is strong enough to handle the threat from the ramshackle DPRK Army, even without China's likely opposition to any substantial attack by the North Koreans.

The U.S. could save money by moving the troops back to the U.S. and putting them in the rotation to serve in Afghanistan and Iraq. Given all the various missions the U.S. military has been given, our present forces have been stretched thin. It is not realistic to trim defense spending unless we also begin to prioritize missions and trim those that are less pressing.

Half baked idea

Having gone through a round of brinkmanship on the budget without accomplishing much, we should consider how to approach the underlying problem. While people always think they are paying too much in taxes, that is not the root cause of the current struggle. After all the budget didn't decrease spending very much, since increases in defense spending offset most of the drop in domestic spending. The problem is that people don't want their taxes funding certain spending.

Here is a proposal to address that. Congress could create a National Endowment for Defense and Security and a National Endowment for Poverty Reduction. Taxpayers would then be able to donate money (minimum $200) to the endowment of their choice and get an 80% tax credit. The endowment money would be invested in 10-year TIPS or equivalent and the interest from those securities would go directly to programs for that area, bypassing the appropriations process.

This would mean that taxpayers can choose to direct their tax dollars. So if a person didn't want his money going to poverty programs, he could donate to the National Endowment for Defense. Or if they object to defense spending, they could donate to the National Endowment for Poverty Reduction.

Notice this doesn't decrease their taxes, it actually increases revenue. But it does decrease the amount of money that Congress has available to appropriate. Most people would not donate and simply allow Congress to allocate their tax dollars. But those who want to direct their tax dollars can pay up and know what purpose their money is supporting.