[Congressional Record Volume 141, Number 170 (Tuesday, October 31, 1995)]
[House]
[Pages H11574-H11576]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                       THE BALANCED BUDGET DEBATE

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from Michigan [Mr. Smith] is recognized for 5 minutes.
  Mr. SMITH of Michigan. Mr. Speaker, we hear a lot about numbers and 
figures and procedure and how things move through the House and the 
Senate and get ultimately signed into law or not signed into law; but I 
think it is important in this debate over a balanced budget that we not 
lose sight of our real objectives. The question before the American 
people, and the American people are going to have to answer this 
question: Do you want more taxes and a larger government or do you want 
a smaller government and less taxes?
  It is hard for politicians to cut spending, whether those politicians 
are in the White House or in this Chamber or over in the Senate. 
Members of Congress and the White House have decided that if they do 
more things for people, if they spend more money on more programs, if 
they take some pork-barrel projects, the propensity to get reelected is 
greater.

                              {time}  1945

  And so that is the tradition that this body has been operating under 
for the last 40-plus years. In the process of not increasing taxes, we 
have developed a huge debt for this country, not only the existing debt 
of $4.9 trillion that is overwhelming, but we have done more than that. 
We have now made so many promises that the unfunded liability for 
Medicare, for example, is another $5 trillion. The unfunded liability 
or actuary debt for social security is another $3.2 trillion. The 
promises we have made and not funded for civil service retirees is 
another half a trillion dollars.
  Now recently we have promised every private pension fund that the 
Federal Government will stand behind that pension fund and make it 
solvent.
  Our goal of what we have called the debt limit coalition, 160 members 
that have sent a letter to the President, we have also written the 
Speaker, Newt Gingrich; we have written Bob Dole; we say we think 
balancing the budget by 2002 or sooner is so important that we are not 
going to vote to increase the debt ceiling. I mean, that is to give us, 
some of ourselves, the intestinal fortitude. It is to put pressure on 
the White House to come to this conclusion.

  The Federal Government last year borrowed approximately 41 percent of 
all of the money loaned out in the United States. Can you imagine what 
would happen to interest rates if the extra demand of Federal 
Government borrowing was not there? Can you imagine what the additional 
funds in the economy for people that want to 

[[Page H11575]]

buy a car or build a home or go to college or, more importantly, expand 
their business? Can you imagine what a great stimulus that would be?
  Alan Greenspan, the chairman of the Federal Reserve, suggested that 
if we have got the wherewithal to end up balancing this budget, we have 
got such a strong underlying economy in the United States we would see 
jobs and the economy take off like has never happened before.
  That is why this body has got to stick to its guns and insist in the 
reconciliation bill and in these appropriation bills that we end up on 
the glide path to a balance budget.
  Jim Glassman in today's Washington Post said that default just is not 
a great fear, many Wall Streeters say, and he quotes Mickey Levy who 
says the market recognizes any default would have nothing to do with 
economic soundness and everything to do with political game-playing. He 
says that the meeting that we have arranged tomorrow with Mr. 
Druckenmiller and Mr. Langone, who will be speaking at 10 a.m. to a 
joint meeting of the House and Senate, be available to the press at 
11:00, be available at Heritage for a public forum at 12 o'clock and 
another press luncheon at 1 o'clock, are going to be saying that, look, 
what is important is the goal that we stick to our guns, that we 
ultimately have a balanced budget.
  I would like everybody listening and my colleagues in the House and 
the Senate to attend that 10 a.m. meeting tomorrow morning. It is 
important for our future. We are concerned with the numbers. We are 
concerned with achieving what is good for America, our kids, and our 
grandkids, and it is not leaving them a debt and a mortgage. It is 
ending up with a balanced budget and a strong economy.
  Mr. Speaker, I am including at this point in the Record at statement 
by Jim Glassman and also a scenario that I have written on the current 
debt ceiling.
  The material referred to is as follows:

               [From the Washington Post, Oct. 31, 1995]

                           What Train Wreck?

                         (By James K. Glassman)

       When President Clinton sat down with advisers to plot a 
     budget in 1993, they told him he had to convince the bond 
     market he was serious about cutting the deficit. Then, 
     perhaps, interest rates would fall, and the economy would 
     prosper.
       Bob Woodward relates the scene in his book ``The Agenda'':
       ``Clinton's face turned red with anger and disbelief. `You 
     mean to tell me that the success of the program and my 
     reelection hinges on . . . a bunch of f-ing bond traders?' . 
     . .''
       ``Nods from his end of the table. Not a dissent.''
       Having learned this lesson once; Clinton is applying it 
     again. He seems to be hoping that the bond market, spooked by 
     the prospect that a ``train wreck'' will cause the Treasury 
     to default, will pressure Republicans into a budget 
     compromise.
       This time, however, the bond-market strategy is not 
     working. Instead of panicking, Wall Street actually appears 
     encouraged that Republicans are so serious about a balanced 
     budget that they'll risk being blamed for the financial 
     dislocations a train wreck could cause.
       Here's what's happening. Leaders of Congress are using a 
     time-honored weapon--the debt ceiling--to force Clinton to 
     accept the budget they passed last week. If Clinton does not 
     relent, then Congress won't raise the limit on the amount of 
     debt the Treasury can issue, now set at $4.9 trillion.
       The White House response has been to brand Republicans as 
     extremists: In order to achieve their Medicare and tax cuts, 
     these loonies would even force the United States to break 
     promises to bondholders, both here and abroad. For example, 
     without the ability to issue new bonds (and thus raise cash), 
     the Treasury might have to postpone interest due on Nov. 15 
     on some outstanding bonds.
       In the language of finance, this delay is called a 
     default--and, in normal circumstances, it's a very big deal.
       ``You are talking about defaulting on the full faith and 
     credit of the United States for the first time in the history 
     of our country,'' said Treasury Secretary Robert Rubin a few 
     weeks ago in a theme he's repeated almost daily.
       Rubin's line fits into a broader White House strategy. 
     ``The idea,'' says Rep. Christopher Cox (R-Calif.), ``is to 
     make the Republicans look scary and them look safe.''
       But there may be more to it. The administration appears to 
     be hoping that the prospect of a default will frighten Wall 
     Street and drive down bond prices (which means driving up 
     interest rates). Under this scenario, the Republicans, pushed 
     by their financier pals, will capitulate and soften their 
     budget demands.
       But that hasn't happened. Instead of falling, bond prices 
     have risen--as interest rates have dropped. The rate on the 
     30-year Treasury bond has fallen from 6.6 percent in late 
     September, when Speaker Newt Gingrich made it clear that he 
     would use the debt ceiling to accomplish his budget aims, to 
     6.3 percent--the lowest level since January 1994.
       Default just isn't a great fear, many Wall Streeters say. 
     The market recognizes that any default would have nothing to 
     do with economic soundness and everything to do with 
     political game-playing,'' Mickey Levy, the chief economist 
     for NationsBank Capital markets, told me.
       The market likes the GOP budget, and it likes the economy's 
     current fundamentals--reasonable growth, low inflation. So 
     rates are dropping. ``I've talked to traders,'' said Levy. 
     ``They say, `Oh God, if rates go back up at all [because of 
     default fears], it just gives us an opportunity to buy.' ''
       Stanley Druckenmiller, who runs the day-to-day operations 
     of George Soros's massive hedge funds, emphasized that. ``The 
     market deals in reality and not technicalities.'' Even if the 
     Treasury technically delays some interest payments, the 
     reality is that the ``sovereign risk'' involved in buying 
     U.S. bonds will not increase. On the contrary.
       Druckenmiller became concerned last month at a dinner with 
     Sen. Pete Domenici (R-N.M.) that many members of Congress 
     were under the impression that Wall Street feared a default. 
     Since them, he and Kenneth Langone, who chairs Invemed Inc., 
     a New York investment bank, and founded the Home Depot have 
     been trying to set the record straight.
       On Sept. 26, they bought an ad in The Washington Post that 
     said: ``Let's not allow fears of temporary `market 
     instability' to serve as an excuse for equivocating on 
     spending cuts and entitlement reform . . . . If the so-called 
     train wreck occurs, the markets will focus, on the eventual 
     outcome. If the markets believe the chaos will finally lead 
     to decisive action, they will rise.''
       The Congressional Budget Office, in an August report, took 
     the opposite position. ``Even a temporary default--that is, a 
     few days delay in the government's ability to meet its 
     obligations--could have serious repercussions in the 
     financial markets,'' including ``a permanent increase in 
     federal borrowing costs.''
       Even conservative consultant Jude Wanniski warned that 
     Republicans risked ``political disaster'' by not raising the 
     debt ceiling and that ``financial markets . . . would take a 
     severe beating'' as default loomed.
       But Druckenmiller, who regularly bets billions on the 
     direction of interest rates, scoffs at this notion. He points 
     out that the costs of a train wreck are minor compared with 
     the benefits of a balanced budget. For one thing, the 
     Treasury won't have to keep borrowing. By the simple 
     mechanics of supply and demand, bonds will become scarcer and 
     more valuable. Rates will fall.
       At the invitation of Rep. Nick Smith (R-Mich.), 
     Druckenmiller and Langone will be speaking tomorrow to a 
     joint meeting of the House Republican Policy Committee and 
     the Senate Steering Committee--along with Edward Hyman of 
     ISI, who may be the smartest economist on Wall Street, and 
     James Capra of Capra Asset Management, a talented bond trader 
     who formerly worked for the New York Fed.
       The message they'll send is expected to be this: Don't 
     waver on your budget goals, and don't worry about the bond 
     market. Adopt sound policies, and interest rates will fall. 
     So far, anyway, that's exactly what they've done.
                                                                    ____


                               Panelists

       Mr. Edward S. Hyman is Chairman of ISI Groups, Inc. For 
     each of the past 16 years, Mr. Hyman has been rated the #1 
     economist on Wall Street by the Institutional Investor poll 
     of investors. In addition, he oversees the management of 
     almost $1 billion in bond funds. Mr. Hyman is a regular guest 
     on ``Wall Street Week with Louis Rukeyser'' and is widely 
     quoted in the domestic and foreign press. ISI's broker dealer 
     clients are institutional investors in the United States and 
     abroad.
       Mr. Stanley F. Druckenmiller is Managing Director of Soros 
     Fund Management, a private New York-based investment 
     management firm that serves as principal investment advisor 
     to the Quantum Group of Funds. The Quantum Fund N.V., the 
     oldest and largest fund within the Quantum Group, is 
     generally recognized as having the best performance record of 
     any investment fund in the world in its 26-year history. Mr. 
     Druckenmiller also is chairman and founder of Duquesne 
     Capital Management, an investment advisory firm in 
     Pittsburgh, PA. Overseeing a combined $12 billion in assets 
     at both Soros Fund Management and Duquesne, he serves as 
     chief investment strategist and lead portfolio manager. As 
     such, he is directly responsible for the funds' global 
     currency, fixed income, and stock market position.
       Mr. James R. Capra is the sole shareholder of Capra Asset 
     Management, directing the firm's trading activities. Between 
     January 1991 and January 1995, Mr. Capra was a principal at 
     Moore Capital Management where he directed trading strategies 
     in government securities. Until 1991, Mr. Capra served as 
     Senior Vice President and proprietary trader on the 
     government securities desk at Lehman Brothers. In addition to 
     being one of Lehman Brothers' most profitable traders, Mr. 
     Capra also served as chief strategist for the fixed income 
     group. Between 1980 and 1983, he was an officer at the 
     Federal Reserve 

[[Page H11576]]

     Bank of New York, where he served as Director of Domestic 
     Economic Research. Between 1974 and 1980, Mr. Capra was the 
     Chief of Budget Projections at the Congressional Budget 
     Office where he coordinated the preparation of budget 
     estimates for annual congressional budget resolutions. His 
     budget projections unit was in charge of CBO calculations of 
     interest on the public debt and the status of the debt 
     relative to the debt limit.
       Mr. Kenneth G. Langone is Chairman and Managing Director of 
     Invemed Associates, Inc., a New York investment bank. Mr. 
     Langone is the founder of The Home Depot, Inc., of Atlanta, 
     and he currently serves on the Home Depot Board and Executive 
     Committee. He is Chairman and Chief Executive Officer of 
     Salem Nationalease Corp., of Winston-Salem, NC. Mr. Langone 
     also serves on the boards of Unifi, Inc., of Greensboro, NC; 
     St. Jude Medical, Inc. of St. Paul, MN; Baby Superstore, Inc. 
     of Greenville, SC; and GMIS, Inc. of Malvern, PA.
                                                                    ____


                          Debt Ceiling Update

                      (By Congressman Nick Smith)

       The debt ceiling is now close to becoming binding on the 
     Department of Treasury. The latest indication from Treasury 
     is that they will be able to get by the Social Security 
     payments due the first week in November. However, Treasury is 
     arguing that they will not be able to proceed with the 
     regularly scheduled auctions for the week of November 6 
     without an increase in the debt ceiling. These actions raise 
     cash which allows for settlement of the interest payments due 
     November 15. It is the November 15 interest payment of 
     approximately $25 billion that Treasury will have difficulty 
     making without a debt ceiling increase.
       Our best estimates from the private sector indicate that 
     without disinvesment of trust funds or other extraordinary 
     measures Treasury will face a $15 billion to $30 billion 
     problem on November 15. Thus, it is possible that failure to 
     increase the debt ceiling will force extraordinary measures 
     on the Department.


                                Options

       There are at least three options that we have come across 
     in our discussions with Wall Street analysts. As might be 
     expected, each option has its negatives and its positives. 
     While not advocating any particular option at this time, we 
     thought it would be useful to share what our research has 
     yielded.
       1. Temporary Increase in Debt Limit: The first option is to 
     provide for a short term increase in the debt ceiling. This 
     might be justified if Treasury can demonstrate to the 
     Congress that it will be faced with extraordinary measures 
     prior to Congress' passage of the reconciliation bill. In 
     providing for a temporary increase we must be careful not 
     to lose leverage for passage of reconciliation. Some 
     investment analysts have indicated that if Treasury can 
     get by the November 15 layout, it is possible for them to 
     get to the end of February without another increase in the 
     debt ceiling. This would require getting by a low point in 
     the cash balance in early December, but January is a 
     positive cash flow month, and some delay of income tax 
     refunds might provide the opportunity to extend their cash 
     position for several weeks.
       Thus, some analysts have suggested a temporary increase in 
     the debt limit which would return to the $4.9 trillion at a 
     date certain. They note that as Treasury settlements of at 
     least $25 billion occur each Thursday, it is important which 
     day of the week is chosen for the end of the debt limit 
     extension. They recommended a Friday, as this gives time to 
     reach agreement on a reconciliation bill.
       2. Specified Authority to Disinvest Civil Service 
     Retirement Fund: An alternative would be to provide specific 
     statutory authority to allow for a limited disinvestment of 
     the Civil Service Retirement and Disability Trust Fund. This 
     fund has more than $330 billion available. Under 5 U.S.C. 
     Sec. 8348, the Secretary of the Treasury may suspend 
     investment and redeem the assets of the fund ``before 
     maturity in order to prevent the public debt of the United 
     States from exceeding the debt limit.'' When the debt ceiling 
     is finally increased, it can be increased sufficiently to 
     restore the Trust Fund with interest. This has been the 
     procedure in the past.
       Doing this would allow the debt ceiling to remained at $4.9 
     trillion. The disadvantage is that there might be a conflict 
     with those who felt that this would set a precedent allowing 
     Treasury to tap into trust funds for amounts which make the 
     debt ceiling irrelevant. However, our preliminary research 
     indicates that Treasury can already tap into this fund. We 
     could limit the amount by which disinvestment may occur and 
     accomplish the purpose of retaining leverage for the 
     reconciliation. We will be investigating this option further.
       3. Allowing Treasury to Securitize Assets, such as the 
     Federal Financing Bank, and Allow Civil Service Retirement 
     Fund to Invest in the Assets:
       Treasury holds assets, such as the Federal Financing Bank. 
     These assets are capable of being securitized. If the Civil 
     Service Retirement Funds were allowed to replace, say $30 
     billion of its Treasury debt with these assets, then the 
     Treasury could go into the markets and raise cash. We are 
     just beginning to explore this option.


                            Loss of Leverage

       It is important to examine whether Treasury can manage the 
     cash after November 15 with no need for an increase in the 
     debt limit for several weeks. If this were the case, then a 
     veto of the reconciliation bill could serve the President 
     until several months into the current fiscal year and 
     jeopardize the seven year balanced budget. There are two 
     December problems. One is an early December interest payment 
     which would require cash. The second is a late December 
     coupon settlement with Social Security, that under normal 
     conditions, would increase the debt by required issuance of 
     Government Account Securities. We are currently trying to 
     obtain reliable cash flow estimates for December and January. 
     Of course, requiring the debt limit to return to $4.9 
     trillion on a day certain under the first option, and 
     similarly limiting the length of time under the second and 
     third options would protect against this scenario.

                          ____________________