CNN CNN


 

Return to Transcripts main page

YOUR MONEY

The Impact of the Likely Debt Ceiling Deal

Aired July 31, 2011 - 15:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


ALI VELSHI, HOST: Fred, thank you very much. This is a special live edition of YOUR MONEY, where we are breaking down exactly what is happening with respect to this deal and what it all means.

I'm joined now by Stephen Moore. He's -- I'm joined now by Norm Ornstein. He's a resident scholar at the American Enterprise Institute.

Norm, welcome to the show. Thank you for being with us.

NORM ORNSTEIN, RESIDENT SCHOLAR AEI: Thanks, Ali.

VELSHI: I want you to listen to what Mitch McConnell said to Candy Crowley just a few hours ago. Listen to this.

(BEGIN VIDEO CLIP)

SEN. MITCH MCCONNELL (R-KY), MINORITY LEADER: I think this agreement is likely to encompass up to $3 trillion in spending reductions, no tax increases that we know will kill jobs. The president made that argument last December when he passed a bill to extend the current tax rates for two more years. He understands that tax increases are a job killer, particularly when you have over 9 percent unemployment.

(END VIDEO CLIP)

VELSHI: Norm Ornstein, that is disingenuous, to say the least, that the president realized that tax increases were a job killer, which is why he extended the Bush-era tax cuts at the end of 2010. There's one reason and one reason only that the president extended those Bush era- tax cuts, and that is because he needed a deal to extend unemployment.

This is the kind of misinformation campaign that is continuing on Capitol Hill. I sent out a tweet a couple of hours ago, and I said this, Norm. I said, Could anybody, anybody provide me with research, not opinion, but research that tax increases kill jobs? Please send my way, if you can. I haven't got anything that is of substance that's been sent my way.

Tell me if you know of research that indicates that tax increases kill jobs because there are no tax increases anywhere in this bill that covers the next 10 years.

ORNSTEIN: No. And of course, we're seeing a lot of disingenuousness across the board here, Ali. A lot of it is the talking points that you see, in this case, Republicans repeating all the time -- We can't have tax increases. Well, if the economy is weak and you're worried about tax increases, how can you push for dramatic and drastic spending cuts right now that anybody...

VELSHI: Right.

ORNSTEIN: ... who's taken Econ 101 knows would be disastrous for the economy, as well? And you're certainly right about the deal that was cut on the taxes last year. It was all about finding some way to get a back-door stimulus package when the economy was still weak.

VELSHI: Right.

ORNSTEIN: And that, of course, is one of the questions now. We've still got a weak economy. Is this deal going to push for immediate spending cuts, which would not be very good? Will it include any of those payroll tax cuts that were a part of that earlier deal, to get them extended? What does it do to get the economy moving now?

VELSHI: Let's discuss -- as you point out, Norm -- let me -- let me tell you what we think we know right now. This hour, we -- there are indications that we're getting close to a deal which could cut spending by $3 trillion over the course of the next 10 years. And if what our sources are hearing is correct, it will, as we discussed, include no tax increases, just spending cuts. No deal yet. Members of the House and members of the Senate are being asked to stay close.

Chrystia Freeland is with me. She is an editor at Thomson Reuters Digital, a good friend of ours. Chrystia, what is it -- it does appear that the Democrats have entirely capitulated and that the Republicans have almost fully won this debate.

CHRYSTIA FREELAND, EDITOR, THOMSON REUTERS DIGITAL: Yes, Ali, I think that's absolutely right. And I think what we need to watch for in these final hours of trying to reach a deal is whether there's going to be a significant pushback from the more liberal Democrats because I think it's becoming more apparent that if this deal goes through, it's really total victory for the Republicans.

The president, I think, has to worry a little bit on the politics of this, that this is going to be played as, you know, a deal in which he lost, he failed. And we saw the first sign of that this morning with "The New York Times" depicting this deal as, you know, as a real political loss for the president.

VELSHI: It was a front page story there, where they're talking about, you know, whether or not he'll face some kind of pushback from the extreme liberal part of the Democratic Party.

But Norm, it doesn't look like that because, really, that wing of the Democratic Party is going to be more scared of the remarkable effect that the Tea Party has had on this debate. The Tea Party has been a big influencer here. So has -- so has -- you know, so have those pledges to not increase taxes by Americans for Tax Reform.

What's your sense of what this does for any future discussions about spending, budget cuts, tax increases or stimulus? ORNSTEIN: Well, here's what I think the administration would say right now, Ali. And we don't know all of the details of this deal. If the deal includes a promise that we're going to get expedited action on a tax reform package, which would have to include something like an $800 billion to $1 trillion revenue increase as part of it, doing lower rates and broadening the base but with revenues, the sort of thing that the speaker, John Boehner, and the president were talking about, it may not be quite as bad a deal for the president.

And what the White House is saying, Look, we have a stopgap here. If they don't want to increase revenues by the end of 2012, Barack Obama is still the president and he vetoes the repeal of the Bush tax cuts, so they end up with a worse situation.

Now, that's, you know, the best case that you can make perhaps with this kind of deal. But it's not over with yet. And at the same time, whatever budget cuts you get emerging from this "super-committee," you're going to have six Democrats from the House and Senate, three Republicans from the Senate, and probably at least one of those Republicans will agree to something like the "gang of six" plan...

VELSHI: Right.

ORNSTEIN: ... to make this a broader package. So in the end, it may not be quite as bad as it looks, just as that package on the tax cuts looked awful to Democrats until they looked at the fine print.

VELSHI: Right. Well, that's an interesting point you make. Let's bring Stephen Moore in. He's an editorial writer with "The Wall Street Journal."

In fact, Stephen, in some cases, the president has for some time been prepared to go further than the "gang of six," further than even his own deficit commission. But as Norm points out, one of things we're hearing about this potential deal that may be announced in the next few hours -- we don't know -- is that it's going to have this committee Norm describes.

I don't know, whether you're liberal or conservative, whether there's fundamental disagreement on what you want to do. It's just disagreement on the fact that you want to do it. In other words, what is this committee going to do that the "gang of six" hasn't done, that the two blue-ribbon panels and commissions haven't done? We know what has to be done.

STEPHEN MOORE, EDITORIAL WRITER, "WALL STREET JOURNAL": Well, first of all, Ali, you know, I heard the previous discussion about how Republicans have won this fight. And you know, when I talk to Republicans on the Hill -- now, I'm talking to some of the more conservative Tea Party members...

VELSHI: Right.

MOORE: ... they're not so thrilled about this. And the reason they aren't is that it appears that the cuts in this first tranche of cuts before this committee deliberates are about somewhere in the neighborhood of a trillion dollars. Now, look, we know most...

VELSHI: Right.

MOORE: ... of those cuts are phony. They're promises to cut, you know, spending in 2017, '18, '29, '20. You know, Norm has lived through these things. The spending cuts never come. And so there's a lot of perception on the right that this was like all of this tumult for nothing, that we really got nothing out of this.

Now, In terms of your question about this committee, it'll be very interesting to see. If they were to come up with a package that cut tax rates, somewhere around 25 percent, and raise some revenues at the same time, you might even get people like me, Ali, to go for that kind of deal, as much as I hate taxes, because I do think it's so critical to bring those rates down.

VELSHI: Well, OK, let's just talk about this. So I think we all -- I think everybody in America would agree we would rather not pay more taxes. Where our disagreement is, is whether or not we need to pay more taxes.

And Chrystia, what seems to continually get thrown under the bus is this idea of comprehensive tax reform because that is something that, philosophically, could be embraced by conservatives, by guys like Stephen, it could be embraced by liberals, to say, If more people who are supposed to be paying taxes pay taxes at a fair rate, then maybe some people will pay lower taxes and some people will higher taxes, but it'll seem more fair.

Why does that discussion not really take front seat?

FREELAND: Well, I think you're right, Ali, and that should be the central discussion. Hearing Stephen, you know, that -- it brings joy to my heart...

(LAUGHTER)

FREELAND: ... because I think, you know, if Stephen Moore is going to sign up, then I think that we can be pretty sure...

MOORE: I said maybe!

(LAUGHTER)

FREELAND: ... that the right (ph) is going to sign up to this. And I think you're absolutely right, Ali. What is particularly appealing to all of us, I think, about comprehensive tax reform is the people who get the tax breaks are the privileged. They are the big companies that can afford to find lots of great tax lawyers. And I'm not saying that's a bad thing. You know, if it's legal to avoid taxes, then you should be avoiding them. But it behooves legislators to write tax laws such that the rich and big companies are paying their fair share...

MOORE: But Chrystia...

FREELAND: ... and that's not happening in America.

MOORE: Let me just interrupt you for one second. I've been saying that for 20 years. I've been saying, you know, the people who take advantage of all these loopholes and special interest favors in the tax code are rich people.

So if you were to have something with lower rates, Ali, that broadens the base, it wouldn't be a big tax increase for the rich because they'd lose a lot of those tax advantages they have. I think everybody would come off better because we would make America a more competitive place.

ORNSTEIN: Ali, let me make two points here...

(CROSSTALK)

VELSHI: ... our staff doctor here to check out Stephen Moore. He's talking about increasing taxes.

(LAUGHTER)

VELSHI: Norm, hold that thought for a second because we, unlike the federal government, would like to pay our bills. We're going to take a quick break to do that, and we're going to come back and then I'm going to talk to you about this, Norm. I'm going to specifically talk to you about whether or not this is the right time in our nascent recovery to be talking about cutting.

Stephen, Chrystia and Norm, stay where you are. This is a special live edition of YOUR MONEY. We're coming right back.

(COMMERCIAL BREAK)

VELSHI: Special live coverage of this debt debate continues here on CNN. This is a special edition of YOUR MONEY. I'm joined by a number of experts on this, and we really want to get down to the impact of this deal, if there is a deal. We don't know that there is one. We've heard from our sources that there is possibly going to be an announcement of a deal soon. That's as specific as I can get to you.

Norm Ornstein is a resident scholar at the American Enterprise Institute. Stephen Moore is an editorial writer with "The Wall Street Journal" and Chrystia Freeland, editor at Thomson Reuters Digital.

Norm, let me start with you. I want to show you GDP. We've got a report on the second quarter, the second three months of this year, what GDP is. Now, I've taken this all way back a few years, back to 2009. And you can see back at the worst of the crisis, we lost 6.8 percent. That was economic growth shrank by 6.8 percent. And we've sort of seen steady but uneven growth.

And then look what happened in the first quarter. We just found out that we only grew by .4 of a percentage point. And in the second quarter, 1.3 percent.

That is -- name your word, Norm -- tepid, you know, lukewarm, not so good. Tell me what you make of this and how this debt discussion should be influenced by what we've seen in GDP.

ORNSTEIN: Well, you know, the economy is close to being in intensive care. And you don't want, when you have a patient who's very sick, to go back to the medieval practice of bleeding. Right now, we need something more than to jump-start this economy, and I worry that the deal that we're going to work out is going to make budget cuts too soon and isn't going to get us some of the things that we could use to stimulate.

We've got some very good ideas out there. One that was pushed by Reed Hunt (ph), the former chairman of the FCC, and Tom Mann (ph) at Brookings is to have an infrastructure bank that's funded by bringing back some of those repatriated profits of corporations abroad. We could use something that might jump-start the economy in that way.

I'd like to see the payroll tax cut continued, and then have budget cuts and the revenues that we need phased in beginning next year. It's delicate and difficult to do that, but you hope that part of this bargain is a recognition that this is not the time to put the deep freeze on with a patient that's in trouble.

VELSHI: You know, we're talking a lot, Chrystia, about what happens in the next several hours, within the next six hours, when Asian markets start to open, if they don't have word of a deal. I'm curious as to what you think is going to happen in light of -- let's take a look at what the -- what the Dow did in July. It's a good representation. The S&P did something very similar. But in the month of July, this market lost 2.2 percent. And over the course of the last week or so, mostly driven by this discussion, but part of it driven by those weak GDP numbers on Friday, the Dow gave up about -- you know, U.S. markets gave up about $700 billion in market capitalization.

And as I told you earlier, someone criticized me for saying that, suggesting that those are not real losses. But they are real losses if you sold out of your 401(k) on Friday because you were panicked about whether or not these guys would have a deal and you'd lose a lot of money on Monday. So where do markets play into this whole issue?

FREELAND: Well, I think you're absolutely right, Ali, that we have started to see the market reaction now. Last week, we started to see markets really take this seriously. You know, I think for a while, markets just thought, This is such a crazy thing, surely they will do a deal. And what we saw last week was for the first time, markets really thinking, Wow, maybe they won't reach a deal.

I think you've also heard now over the weekend from foreign governments saying, you know, Please, Washington, this is important to us. This isn't just a U.S. discussion, and there is a real chance that you're going to shake the entire world economy.

Final thing I'd like to say, Ali, is it is time, I think, for business to step up to the plate. We talk about this discussion mostly as a political discussion, but what I feel is missing is the voice of business coming out and saying, you know, We care about this, and if we get the wrong answer from Washington, this is really going to shake, you know, a really fragile economy that has an impact on us.

VELSHI: Yes, and Stephen, we started to see that happening in some corners of business, from strange corners. I mean, the U.S. Chamber of Commerce came out and talked about it. Stephen, let me ask you, though. We all -- I think, again, across the political spectrum, what people can agree upon is that economic growth creates jobs. It allows you to get more revenue as a government. It allows you to pay these debts off. And how you get there is what's in question, right, whether -- whether it's tax cuts or spending cuts or spending increases or stimulus. Look, there are a lot of questions on how you get there.

I would argue that some have said -- boy, that's a qualification, if I've ever heard one!

(LAUGHTER)

VELSHI: I would argue that some have said that this is a bit of a hoodwink, that some conservatives have somehow convinced a lot of Americans that deficit is a substantially bigger problem at this point in time than our lack of job creation. And I would suggest to you that some would postulate that that's not true.

(LAUGHTER)

MOORE: All right. So look, I think...

(CROSSTALK)

VELSHI: ... problem in here.

(LAUGHTER)

MOORE: I think we got two -- two competing problems. We've got a problem where this debt...

VELSHI: Right.

MOORE: ... is gigantic. And here's where a disagree a little bit with Chrystia and others on this one. They say, We just need a resolution to this. No, we need a resolution that actually does something substantial and credible to deal with this debt!

Look, Chrystia, my concern is we do this debt deal and people just say it's a charade, that it doesn't really deal with the fundamentals of this debt. And in my opinion, that's what could spark a financial crisis.

The problem in our country right now isn't that we have this debt ceiling, it's that we have a $14.5 trillion debt that's going to $25 trillion! I've never sweated the debt too much. It depends a lot about what you finance with it.

VELSHI: Yes. MOORE: But you know, when you're starting to talk about debt that gets to 80, 90, 100 percent GDP, as you know, Ali, you've had many people on this show who've said that's the danger zone!

VELSHI: I'll tell you this. I'll tell you this part. This part is my opinion. The fact that we have 15 million people officially unemployed in this country unfortunately...

MOORE: I agree with that!

VELSHI: ... doesn't make markets go down and doesn't make people...

MOORE: That's a huge problem!

VELSHI: ... doesn't have people panic and doesn't get us into these kind of things. I would wish that we'd be having this discussion about jobs.

You guys are great. Thank you so much -- Stephen Moore, "The Wall Street Journal," Norm Ornstein of the American Enterprise Institute and Chrystia Freeland of Reuters.

Coming up next: What has the Tea Party done? And is it good for America or have they taken us to the brink? We'll discuss that on the other side of the break.

(COMMERCIAL BREAK)

VELSHI: Our special live coverage continues here on YOUR MONEY.

There is word from our sources of a potential deal and leaders of both parties have suggested that a deal is in the works, but there do seem to be differences as to whether this is actually getting done or not. Obviously, that clock is ticking closer to the August 2nd deadline.

Mark Skoda is joining me now. He's a founder and chairman of the Memphis Tea Party. Mark, thank you for being with us. I want to talk to you about this deal. I'm sure you have been hearing about it from your own sources, not just our reporting or the media's reporting. It does look like a deal to cut $3 trillion in spending over the next 10 years with no tax increases anywhere.

You and I talked about this yesterday, and you said yesterday that you thought, as a founding member of the Tea Party, that this has been a win. Do you still think so?

MARK SKODA, PRES. AND FOUNDER, MEMPHIS TEA PARTY: Yes, look, this -- I've studied this a little bit. It seems there's a few things that are very interesting about this deal. First, apparently, it's real, measurable dollars because while the first part of it I think is about a trillion dollars, the other $2 trillion actually are also involved with a trigger mechanism that reduces both Medicare entitlements, and of course, the defense budget, if they don't agree to...

VELSHI: Right. SKODA: ... concrete reductions of that additional $2 trillion. Secondly, they have a balanced budget amendment vote. Now, we knew that there was no way the balanced budget was going to pass in the Senate with its current makeup.

VELSHI: Right.

SKODA: So it puts people on record. I think that's a good aspect. The only thing I don't like in this deal...

VELSHI: You know, the balanced budget idea...

(CROSSTALK)

VELSHI: Mark, I'll just stop you there for a second. That's a very complicated thing to get. I mean, you've got to get -- you've got to get...

SKODA: Yes, it is.

VELSHI: ... a super-majority. Then you've got to get it through almost, you know, 40 states. I mean, that's a long-term project.

SKODA: Of course, and that's why I never felt that that should be an absolute mandate to passing both houses. There was no way it was going to do that. On the other hand, I like the fact that people are going to declare where they stand on the balanced budget amendment, and people can run on that basis and say, Here's what we believe about...

VELSHI: Right.

SKODA: ... these individuals. And I think, finally, you know...

VELSHI: All right, let's go...

(CROSSTALK)

VELSHI: Sorry. Go ahead.

SKODA: As I said, the 2012 issue is still problematic for me. On the other hand, if the one (ph), two (ph) dances (ph) involved with the triggers and I know that the other $2 million -- the $2 trillion -- pardon me -- is absolutely certain, then I have a lot of faith that we can go to 2012 and then fight this battle, take back the Senate, and retire this president.

VELSHI: All right. Good question. And that's a discussion for another time, whether politically, the Tea Party comes out of this stronger or weaker.

But let's talk to Peter Morici for a second, of the University of Maryland School of Business. Peter, there are a bunch of things -- you were with us yesterday. I spoke to Bill Gross of Pimco. I'm going to run that interview a little later. But really, there are a number of options as to what can actually happen to U.S. debt right now. Let's take a look at the potential risks to the U.S. AAA credit rating. One is a slight downgrade to the credit rating if no deal is reached, or for that matter, a slight downgrade to the U.S. AAA credit rating if there is a deal reached because maybe the deal doesn't go far enough.

Then there's a question of a major downgrade if no deal is reached and we actually end up defaulting on an interest payment to a bondholder. And then there's the question of having to refinance existing U.S. debt, which we'll talk about in a minute.

Where do you think we stand right now in terms of a downgrade to our credit rating and cost to U.S. -- to the U.S. for borrowing?

PETER MORICI, UNIV. OF MARYLAND SCHOOL OF BUSINESS: If we have a deal in the next couple of days -- and we don't have to have it by tomorrow night, we just need to have it, say, by Thursday -- and the interest gets paid as we go through the week, it'll be a small downgrade. And we're starting to look like the kind of downgrade that Canada, Australia, Japan had, that for various reasons did not have a long- term consequential effect on the interest rates that they pay.

Now, I say that is possible as long as we continue to stay focused on having the kind of budget we need. We can argue about whether the government's too small or too big, but we're going to have to pay for the government that we have and we're going to have to get rid of the government that we're not willing to pay for. We have to get this thing in order.

VELSHI: Well, that's a smart argument. Peter, that's a smart argument. I mean, I wish that was what it was. This concept about whether it's too small or too big is secondary to what we can afford to pay for, and that's got to be...

MORICI: Right.

VELSHI: ... what directs that discussion, doesn't it.

MORICI: If we start to move in that direction, we can afford what I call a consequential downgrade, one that fundamentally alters the cost of capital...

VELSHI: Right.

MORICI: ... in the United States, reduces growth, reduces jobs, things of that nature.

VELSHI: All right, Jeanne Sahadi with CNNMoney -- she has followed this. Boy, she is a real expert on this. Jeanne, let's just talk about this for a second. We've got what I'm calling a small downgrade or -- you know, a little downgrade versus a major downgrade. Peter's calling it a consequential downgrade.

Bottom line is, sometime in the next month, some very important things are going to have to happen from the federal budget. Got to pay a big Social Security payment on the 3rd of August, the day after this deadline, Wednesday. We've got some big interest payments to pay. And at some point, the U.S. has got to roll over or refinance, basically, some of its major debt. Tell us about this.

JEANNE SAHADI, SR. WRITER, CNNMONEY: Sure. Well, that -- that's the -- that's the boogeyman in the room. We are -- you know, even if we don't increase the debt limit, the treasury will be allowed to roll over existing debt. So in other words, if a bond comes due and they owe $100 plus interesting, they can go into the bond market and get $100 plus interest and pay the bond investor.

The concern is we've had such low rates, if this sort of becomes even more of a debacle, if they don't raise the debt ceiling in time or if people don't like the debt reduction deal, investors could start to demand higher rates, so that when the treasury goes to pay off that principal and pay the interest and they go to the bond market to borrow that money, they may be charged more to do it. So that's going to increase our overall debt burden.

That's how that's going to work. But we don't know that that's going to happen, but that is -- that's a scary prospect because we have a lot of debt to roll over.

VELSHI: We don't know. You're right. And it is our responsibility here to give everybody the entire range of possibilities, from nothing happening, which is possible, to very serious stuff happening.

And Mark, just to press the point with you, I'm going to give you the serious stuff scenario right now, what could happen. The impact of a failure of a deal here could cause, as Jeanne just said, U.S. debt costs to increase. It could cause a downgrade of Fannie Mae and Freddie Mac, which would possibly mean an increase in interest rates and a slowdown of the housing market.

It could cause stock prices to fall further and for people who get panicked who are not financial experts to sell out of their 401(k)s and IRAs and lose some money. We've already seen that happen. We've already seen markets go down by about $700 billion in the last week. We don't know who took those losses.

Is that worth it? Is it worth that kind of uncertainty to get tax cuts?

SKODA: Well, look, again, we're not doing tax cuts, right? I think we're at this point doing deficit cutting.

VELSHI: Right.

SKODA: And so I think in the context of the dialogue, we've gotten to a point now where all the tantrums are out on the floor. We're now down to the brass tacks.

VELSHI: Right.

SKODA: I mean, the good news is, absent the Tea Party, there would never have been this discussion in the first place. And the truth be told, I don't want to see a default and I don't want to see a complete cart blanche raise in the debt ceiling.

As I've always said from the very beginning of this, we've done this 100 times before, let's do it again, but let's make sure we extract out an appropriate reduction in spending that's reasoned, verifiable and demonstrable to the credit markets because the credit markets are going to look at this, too, and say, Is this a real deal? And I think we're close to that. I'm not certain we can get it done, but I think we're close to that.

VELSHI: And as Bill Gross told me -- and you're going to hear from him in a little while -- it's more than what the credit rating agencies said. The credit market is much bigger than the credit rating agencies, and they will look at it very closely and make their own decision.

Stay with us. We'll continue this discussion. This is a special live edition of YOUR MONEY on CNN with Mark Skoda, Peter Morici, and Jeanne Sahadi, stay right with us.

(COMMERCIAL BREAK)

VELSHI: Back with a special live edition of YOUR MONEY. Here at CNN we are waiting on a deal. We have heard word that a deal is under way, it's in the works between Republicans and Democrats on Capitol Hill, but depending on who you ask and what hour you ask them, the deal is either almost either done or there's a lot of distance and a lot of problems with it.

Let's go right to Jeanne Sahadi, who has been speaking about the terms of the deal that we've heard reported. And there are a couple of key elements to this, Jeanne, one is $3 trillion in cuts over 10 years, no tax increases, and a committee of members of Congress, members of the House and the Senate who will have to look at making some important cuts. And if they don't get those done, some automatic cuts will be triggered.

Tell us what you know about this and whether -- or how this is going to work.

SAHADI: Well, I actually asked some fiscal hawks that I've talked to, they were around way before the tea party, by the way, they've done this for a living and they understand the budget. They are not as impressed as I thought they might be.

You know, initially the trillion dollars, as we understand it, would take place over 10 years, that's going to be in the discretionary pot. And that's not really where the deficit problems come from. It's really on the entitlement side. We could really help the situation by reforming taxes.

Now the special committee may, in fact, be able to address those things, but if they hit deadlock, which a lot of people expect they will, they'll have a hard time agreeing on the entitlement reform and the tax reform, then we're either going to have a balanced budget amendment, which is very unlikely to happen, or we're going to have this across the board cut which is going to be a lot more willy-nilly and not smart, frankly in the way entitlement reform needs to be, because we get a lot of people who depend on these entitlements, we need to do it in a very smart way. And I'm not sure across-the-board cuts is the way to go on that.

VELSHI: So that trigger that will kick in if they can't come to a deal, but, I mean, honestly, Jeanne, how pessimistic of you to think that a bunch of members of Congress from different parties won't come to a deal.

Hey, Mark Skoda, I'm on Twitter right now, and somebody just tweeted me to say, if the tea party -- where did it go, I just had it here, they basically said, if the tea party focuses their attention on creating jobs, they'll get my vote.

You know, my argument all along has been if we had more jobs, it would stimulate economic growth, and then this wouldn't be the central discussion that we're having, debt and deficit would be secondary to the 15 million officially who are unemployed in America.

Is that -- can the tea party do that? You guys have really shown your ability to organize. Can you change having -- take this win and switch over and say, let's get jobs created and, by the way, that means talking to corporate America too about this?

SKODA: Do you know it's interesting you should ask that. Because I had my vice chair in Europe this past three weeks, we met with people from the Swiss coalitions as well as French, we met with bankers. We're looking at trying to bring Memphis some additional business here.

I'll give you another point, I have 100 jobs I'm trying to fill right now. They're commission jobs. I had a guy who we actually interviewed, we were ready to offer the job, he said his wife wouldn't take it because, well, it was commission.

I said, well, what are you doing now? He said, I'm on unemployment. I scratched my head. Look, the unemployment statistics are very interesting. I went and looked at them yesterday: 4.2 percent of college grads are unemployed, 12 percent of high school graduates unemployed, 16 percent of anybody else is unemployed.

So we have a real problem here with education and, frankly, you're right, we need to talk about jobs, but in order to do that effectively, we need also to talk about regulation, because the multinationals, as we see from the earnings results, terrific results, terrific, because they are moving overseas.

Jeff Immelt moved the whole GE X-ray group over to Beijing. We've got Boston Scientific moving over to China as well.

But the small business guys like me are here in America, we need to free up regulatory restrictions, the EPA, the National Labor Relations Board, Health and Human Services, OSHA, et cetera, and allow people like me and small businessmen generally to create the opportunities...

(CROSSTALK) VELSHI: You just named four agencies that a lot of Americans depend on to keep -- they think they depend on to keep themselves safe in their workplace. It seems obvious to you, you...

(CROSSTALK)

VELSHI: ... need to get rid of them, but to a shop worker they -- but I'm not sure, I mean, I don't want to talk for the shop worker who gets injured and has OSHA, and has a labor relations board, and has a union to back them up, that's not a universal view that we need to get rid of those things.

SKODA: Of course it's not. But, again, I go back to -- my work life goes back to the 1970s, and certainly we didn't have the kind of oversight today. Americans with Disabilities Act, as you know, currently covers 84 million people.

The new statutes and guidelines they are proposing would take that to 100 million. One third of America would be classified disabled under the new ADA standard.

So, look, the problem is this whole regulatory environment is crushing this innovation, and particularly for people who are just trying to earn their way up and move into the workforce, as I just talked about, high school education only, or those who don't have a high school education, the 21st Century jobs are not available there for them. That's the real problem.

VELSHI: Well, that, 100 percent agreement on that. You are absolutely right. You mentioned the unemployment rate for people with a university diploma, university degree. That is half the national unemployment rate. So education still works.

Peter Morici, solve this problem for us. This is a multilayered, multifaceted problem that involves taxation and involves the ability to spend on the right things, it involves infrastructure, it involves our currency, the strength or weakness of our dollar and trade.

What -- once we get by this, if by the end of today we have a deal, where do we direct our energies? Because I would love it if all of that energy and passion in Washington went to something that is going to get this economy going?

MORICI: Regarding the government, if we look at the basic things the government is supposed to do, some level of income security, provide everybody with an opportunity to have health care, a safe workplace, a level playing field in business, the problem is not with what the government does but many cases it has been ineffective. It has been too expensive.

Let's take health care. We spend 19 percent of GDP on health care. The Germans, who have a private system with reimbursements from the government similar to ours, pay 12. They pay $800 per person for drugs. We pay $400. We simply cannot compete if we're going to create jobs, for example, in manufacturing. If we have to pay twice as much for an employee program, for it to ensure a family of an employee, as the Germans do, it's not so much what our government does or what we ask it to do, it's reasonable. It's that we have a wonderfully efficient private sector, but somehow or other, because we have always viewed the government with an askance look, we have not focused on getting good people in government so it runs well.

VELSHI: You're absolutely right about that. That's a good point to leave this on. Thank you to all of you for joining us.

Jeanne, your reporting on this is absolutely fantastic. Jeanne Sahadi, senior writer at money.com, if you want to stay on top of this thing, go to money.com.

Peter, your analyst, fantastic as usual. Peter Morici is a professor at the University of Maryland School of Business.

And in terms of getting good people involved in politics, Mark Skoda, you're looking at him. There's a guy who's actually involved, founder of the Memphis TEA Party. Good to have you all.

These guys are leaving, do not say good-bye. You're about to hear from Bill Gross, probably the most important man in the world when it comes to talking about bonds and debt, he's up next.

(COMMERCIAL BREAK)

VELSHI: Economics 101, probably in the first week of classes says that if an entity, a government, an individual, a business is at more risk of not paying its bills in a timely fashion, the cost for that entity to borrow increases.

I spoke with Bill Gross, the founder and co-chief investment officer at Pacific Investment Management Company, you'll know it at PIMCO. He is quite possibly the most important bond man in the world.

I started by asking them to tell me how that lesson from Economics 101 plays out into this debt discussion, is it still valid?

(BEGIN VIDEOTAPE)

BILL GROSS, FOUNDER & CO-CHIEF INVESTMENT OFFICER, PIMCO: I think risk spreads, widen, interest rates go up if a creditor is at risk of not paying its debts. We saw that in California. California in 2009, for instance, April of 2009 began to issue IOUs, and the cost of the debt, the debt that later came to pay off those IOUs was 100 basis points, or 1 percent higher than it was before the issuance of the IOUs.

So whenever an issuer or a creditor basically stiffs either vendors or certainly debt-holders, the cost to that issuer goes up by increments of 25, 50, 100 basis points. It becomes very expensive.

VELSHI: Now, 100 points, 1 percentage point, my viewers my know it as. Bill, let me ask you this, because this is a fine point of debate, but you're one of these guys who trades in bonds. So you mention if they stiff the creditors or vendors. Now some are saying Moody's is saying, for instance that they'll only consider stiffing creditors on principal or interest as a default.

Others are less clear, and Ben Bernanke said it could be anybody. As a guy who buys and sells bonds, would you see it differently if the U.S. defaults on interest or principal versus not paying bills to vendors or other expenses that it has?

GROSS: Well, certainly there's a distinction. I think the Treasury has laid out the distinction and worked with the Fed over the past few days to make sure that debt-holders are paid first and those in lesser priority in terms of Social Security and the like.

So it does make a difference, but to the extent that anyone does not receive their payments on time, it basically lessens the reputation of the United States. I mean, this debt crisis has numerous implications for the economy and the investment markets.

We're speaking to lower growth. We're speaking to higher interest rates that I just talked about. We're speaking to a lower dollar and reduced confidence in financial markets and the ability of Washington policy-makers to stabilize them going forward.

So, you know, Congress has basically proven itself to be dysfunctional and this will carry on for months, even if the crisis is basically resolved over the next few days.

VELSHI: Bill, let me ask you this, I want to put a map up here. Moody's and Standard & Poor's, if you take both of their ratings of triple-A countries around the world, you come out to about 15 countries that are rated as triple-A.

Each of them, by the way, each of those rating agencies have a couple more that are triple-A. Legendary hedge manager Jim Rogers the U.S. doesn't belong in this club and should have been downgraded years ago.

Do you agree and do you think there's a downgrade coming regardless of what happens between now and Tuesday?

GROSS: Well, eventually there's a downgrade coming. And it depends on Moody's, Standard & Poor's, and Fitch. And they're very slow- moving. You know, this country has 10 to $12 trillion worth of outstanding debt.

In addition, however, we've got about $60 trillion worth of liabilities. I call this, Ali, a dead man walking -- debt man walking. D-E-B-T, as opposed to D-E-A-D. You're a debt man walking. I'm a debt man walking. We all are.

And basically what that means is that instead of a piece of paper at 10 to $12 trillion and counting, we have liabilities going forward for Medicare, for Medicaid, for Social Security that total about $60 trillion. So in combination we have a $70 trillion debt, that's five to six times GDP. It puts us in the category basically of the worst countries in the world in terms of total debt.

(END VIDEOTAPE)

VELSHI: PIMCO's Bill Gross. Boy, I wish we had some certainty on whether or not there is a deal and whether or not we're going to get a downgrade. Even if we get past the next few days, how does the U.S. avoid paying more interest over the course of the next year? I'll ask my guests when we come back. You're watching a special live edition of YOUR MONEY right here on CNN.

(COMMERCIAL BREAK)

VELSHI: Continuing the conversation on the expectation of a deal or maybe no deal, but a deal to raise the debt ceiling, I'm joined by Peter Morici of the University of Maryland School of Business, and Jeanne Sahadi of CNNMmoney.

Jeanne, one of the things we're hearing about this potential deal again, no confirmation of it, is that it will allow the debt ceiling to increase by a certain amount now. It'll empower a commission, a committee of members of Congress, members of the Senate and the House to come up with some more cuts, and if they don't come up with those cuts, it will trigger some across-the-board cuts to entitlements.

You've been talking to some people and you don't think -- or at least they don't think this is a really good way of doing things.

SAHADI: Well, one person in particular, Bob Bixby, who runs the Concord Coalition, which is a deficit watchdog group, he actually came up with an interesting suggestion.

He's dubious that if in fact the commission doesn't come up with -- if the commission basically deadlocks and then they toss to an across- the-board cut, he's dubious lawmakers would actually enact those cuts. It would be sort of like the Medicare "doc fix" where in law the rates for Medicare physicians are supposed to go down, but then it's always reversed every year.

Instead he said what they should do is require that a bipartisan group of 10 senators bring a bill to the floor that would encompass a lot of what the "gang of six," which is this bipartisan group of senators, has put forward.

They've been working on this for seven months. If we're talking between now and Thanksgiving, there's no reason they can't come up with a bill. They've gotten some extra support from other senators in both parties in recent weeks.

That would be kind of an interesting way to go because that does have entitlement reform and tax reform as well as other spending cuts.

VELSHI: All right. Peter Morici, I want to ask you real quickly, we may avoid a downgrade in the next day or so. But Standard & Poor's, Moody's, all of these folks say we may not have solved this problem well enough. How do we avoid a downgrade in the long term and keep America's triple-A credit rating? Is it possible?

MORICI: Yes, it is possible if we can get the economy growing at, say, 3 percent or a little better, which we haven't done for two decades. What that means is the tea party is going to have to throw over its shoulder and forget a lot of conservative ideologies.

The notion that, for example, deregulation and tax cuts will solve the problem. Wall Street doesn't need lower taxes and it certainly needs to be regulated, but we need to regulate it more effectively, efficiently, so it costs less money and the jobs don't run overseas.

Likewise on the left, the folks that align themselves with the Democratic Party and the left wing in the House have to get away from this notion that they can legislate whatever benefits, as they did the last four years, and run up a large deficit, you know, can be legislated and somehow or another miraculously the revenue is going to appear.

We need to start taking a realistic view of what we need to do to make our markets, our financial markets, our labor markets, and so forth run effectively, and to provide government services the way the Europeans do, at a price the Europeans can afford.

VELSHI: All right. We are about five hours away, by the way, from the first markets opening up for the week. We were thinking we might have a deal by now. Who knows whether it's going to happen between now and then. Both of you stay there. We're going to discuss what you can expect in the coming hour. Stay with us. Special live edition of YOUR MONEY on CNN.

(COMMERCIAL BREAK)

VELSHI: All right. We are a few hours away to the first markets opening. And that has an influence -- the Asian markets will have an influence on European markets and then our own markets, they will be responding to what we think we've got coming out of Washington.

Maybe there'll be a deal in the next five hours. We don't really know. I want to bring in Ned Riley, a good friend of mine. He's the chief investment officer of Riley Asset Management.

Hey, Ned, I want to show you what the markets did last week. Not that I have to tell you. I really want to show our audience. Let's take a look at the drops that we saw: the Dow, 4.25 percent; the S&P, almost 4 percent; the NASDAQ almost -- a little better than 3.5 percent down.

A lot of this was on GDP -- the bad GDP numbers. But a lot of it was on this mess in Washington. What happens in five hours from now when Tokyo opens and Sydney opens and if we don't have a deal?

NED RILEY, CHIEF INVESTMENT OFFICER, RILEY ASSET MANAGEMENT: Well, I think the markets are probably going to be down just in anticipation of no deal at all. Last week obviously there was some discounting of that event.

But ironically I'm going to bull all the way along here and I would have said the markets should have declined a lot more dramatically than the 5 percent, probably 10 or 15 if there was a possibility that we would violate the debt ceiling, if we would not be paying our bills.

You know, this is a very serious issue. If they don't pass something, at least as a Band-Aid -- right now this is a farcical process. I can't believe that we're in this situation. Although there have been many times in my history that I've gone through these issues of balanced budget amendments and we can't balance the budget, therefore we're going to have to shut down the government.

So I guess from this perspective there are enough of us running around right now to say, eventually things are going to straighten out OK. I like the markets right now, notwithstanding the mess in Washington.

And the only thing I do have to say to the Congress and the Senate is that they should pass a bill that would not allow them to rerun next year if they don't get something passed, and if they don't get something that's good for the economy. That's my solution.

VELSHI: Hey, Ned, markets might drop along with your mike. I think your mike just dropped. Pick that up. Because I want one more question from you out of this. My viewers...

(CROSSTALK)

VELSHI: ... who are watching this right now -- yes, there you go. You're a lot clearer -- well, you're pretty clear anyway.

My viewers who are worried about this maybe didn't cash out of their 401(k)s last week because they thought, like the rest of us, there'll be a deal. They start to see things going south tonight or no deal, should you be doing anything if you're the average investor right now?

RILEY: I'd wait. If there's a drop in the market, I'd use that as an opportunity to buy. Buy technology stocks. Buy the companies that are well-managed, well-capitalized, and a lot of cash on the balance sheets. That's the place to be over the next two to three years.

VELSHI: Ned, good to see you, my friend. Thank you so much for coming and talking to us. Ned Riley is chief investment officer of Riley Asset Management. That is going to wrap it up for this special live edition of YOUR MONEY.

We're here every Saturday 1:00 p.m. Eastern, Sunday at 3:00 p.m. You can also catch Christine Romans, "YOUR BOTTOM LINE," Saturday mornings at 9:30 a.m. Eastern. And stay connected 24-7 on Facebook and Twitter. My handle is @AliVelshi, I read and respond to everything I see.

Don't go anywhere. "CNN NEWSROOM" with Fredricka Whitfield starts right now.