CBO on $2 Trillion deficit cut -
"Blowing in the wind"
Senators Kent Conrad (D-NDAK) and Jeff Sessions (R-AL) asked the CBO to “score” (link)
the consequences of a $2 T ten-year deficit reduction package. The
results of the work by the good folks at the CBO blew my mind. $2T over ten years barely moves the needle.
The CBO report assumes that there is a phased in package that starts
with a reduction of the deficit by $100b in 2012 and grows to a
cumulative $2t over time. A graph that the CBO used:
CBO produced three sets of results. This looks at their ‘base case’:
Note that the CBO concludes that there will be very minor changes in
interest rates as a result. Only 1/8% of a percent (on average) for the
ten-year bond. Note also that they think there might be a reduction in
short-term rates.
These potential changes in interest rates are actually not measurable.
This is pure guess work on the part of the CBO. I found it amusing that
they think the first year consequence will be a reduction in 3 month
bills by 41 basis points. Given that bills are now comfortably trading around 5 BP this looks a bit silly.
I would agree with the CBO on their projections for GDP. They assume
that broad economic activity will actually decline directly as a
consequence of the belt tightening. They see the fiscal drag lasting four long years before any payback to the economy is realized.
One thing clearly wrong with the CBO analysis is that they assume that a deficit reduction package will kick in during 2012. That is not the case. Any deficit reduction plan will start in 2013. 2012 will see more big deficits and no cutbacks. (No sense in raining on the parade during an election year)
My take on the CBO report is that we are dealing with very big numbers.
We think that a $2T reduction in the deficit is a very important step.
That it really should make a difference in our debt profile and the
sustainability of our financial system. Actually, $2 Trillion is a drop in the bucket. It doesn’t move the needle.
I wonder what Conrad and Sessions are thinking about looking at the CBO report. They might just conclude:
“It doesn’t matter what we do. We’re screwed either way”
The Government Accounting Standards Board (“GASB”) has produced some new
rules that, if adopted, would drive a stake into the muni bond market.
While this move toward better disclosure is welcome, it comes at a very
bad time. Munis sat on the bench for the first half of the year and did
not issue debt (50% YoY reduction in the last six months). Now they will
have to come forward with new paper, lots of it. I find it amusing that
that the GASB is doing their level best to muck up that process.
From the (normally subdued) Bond Buyer: (Sticker shock??)
The
exposure draft would require state and local governments to report
unfunded pension liabilities on their balance sheets, creating "sticker shock" and potentially raising concerns from politicians, rating agencies, and others (AKA: Investors) about how the liabilities will be funded in the future.
Imagine that! Munis would have to report their unfunded liabilities. That would be
a sticker shock to muni bond buyers. They are just trying to get their
money back and a lousy 3% interest. That's not much incentive to take
risks. Clearly there are risks.
It gets worse. There are proposed “penalties” to those Munis that have
unfunded accounts (pretty much all of them). Once a pension account is
determined to be underfunded the entire pension plan must be restated
using a risk free interest rate. That act alone will kill almost every
muni out there.
GASB recommends that pension plans use a historic rate of return — typically 7% to 8% — only to the extent the plan has sufficient assets, set aside in an irrevocable trust, to make projected benefit payments.
BUT:
When a
plan reaches a point of no longer having sufficient assets set aside in a
trust for long-term investments, it would have to shift to a lower,
so-called risk-free rate of return pegged to a tax-exempt, high-quality,
30-year municipal bond index rate, typically 3% to 4%.
Munis across the country have been running pension plans that have had
monster "hidden"deficits for years. GASB knows that, so you have to give
them an "A" for pushing for more accurate disclosure. But the timing of this could not be worse. Nearly every bond indenture will have the Emperor’s clothes torn off. The nakedness of gigantic unfunded liabilities will be exposed.
Does it matter if it is finally in ink? I think so. (The press will have a field day) There will be a (new) giant red flag that says, “We’re busted!” Who in their right mind would want to buy that paper?
Can't Obama and Boehner just have and old fashioned classic duel?
I feel sorry for the staff that has to crunch the ficticious numbers, seperate the facts, know the solution, but nothing ever changes. Next will be a large wooden badger. You'll see.
I Love how you guys use the debt photos at the bottom too. Good job
It's not enough to engage in economic insanity. Why not have an insane cottage industry explaining the sanity of the insanity.
No wonder they prescribe so many anti-depressants.
Publish the figures. May be the best way to dismantle the coming Police State. Starve the S.O.B. Milestones
No, this is how they are dismantling local communities in order to create a centralized police state. Every local politico will have no choice but to worship Rome on the Potomac. The states are already toast, and this move will take down any local efforts at self-sufficiency.
State self-sufficiency not a problem,and has nothing to do with bonds. 1) get all state National Guard Units back w/in the state borders. (2) Secede.
If you have country the size of Germany that May be true, but the USA, a totally centralized police operation would strangle on its own spit. The police are no smarter than the average man on the street. Might want to reconsider your thoughts. Milestones
I take it you haven't seen the FEMA tanks? All local enforcement will align with the feds as they will be the only ones with any money.
This is already happening, BTW. The feds will design a raid, and invite as many local orgs as possible to get in on the action, for a share of the loot.
Here's a current example. http://www.campzoe.com/
Maybe this is what "they" want. Cost-to-coast chaos in municipal pensions would provide a great impetus for some dramatic changes - a crisis far too good to let go to waste.
Let's see, they already undermined the muni market with the IRS backed (and thus taxable, of course) Bankrupt America Bonds. BTW, the IRS is auditing local govs across the land, going after unpaid taxes where they know no records exist to support the deduction, like tax-free police uniform cleaning where they just have a single lump sum in the books instead of every receipt. The IRS then withholds the amounts from the BAB payments, putting the local govs even further behind.
It looks like they are going to get an out though, for while they may no longer have a muni market, it looks like they will be relieved of pension responsibilities.
So, somewhere out there is a mechanism in place to reclassify pensions into... wait for it... TREASURYS!!!!111!!1!!
Meanwhile the pension plans just have to sit and wait for their Ponzi to crumble, so that Uncle Sugar can bail them out with the "restatement" that it's either more debt paper, or nothing. Fucking brilliant.
Interesting stuff, though I wonder how they could pull the transition off without devastating the non-treasury markets.
Absolutely agree. The idea would seem to be to freeze local government out of the bond market to force them into the arms of the TPTB controlled banks. - Next stop is theft of public assets through forced privatization.
"Public Assets", that is, stuff controlled by State Socialists and other apparatchiks.
Bridge loans for everyone!
Courtesy of GS, of course, God bless 'em.
Hmm... sounds vaguely familiar. Where have I recently heard the bit about privatization of public assets?
...it's all Greek to me.
please , Bruce you'are smarter than that..
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a $2 T ten-year deficit reduction package. The results of the work by the good folks at the CBO blew my mind.
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blew your mind... that's quite a strong phrase..
seems you missed most important word in all those debt reduction talks.. THEY ARE ALL 10 years plan,..
so any figure you hear you must divide by 10.. so 100 /200/ 400 bln per year. its nothing..
for last 3 years true US debt deficit was 1.6-1.8 trln..
and no improvement in 2011 fin year.. revenues are up 150 bln, but oulays are up 100 bln too..
so any plan that less than 10 trln in 1 years is pure nonsense..
hope i didn't blow your mind
alx
Maybe you should read it again? A little more slowly this time...
You father kept this watch for 8 years
up his ass so the gooks wouldn't find it
and then when he died, he gave it to me.
I kept this watch up my ass for 7 long years
because of the promise I made to your father
Translation: Tick tock, asshole.
the upward pressure on many interest rates will be, at least initially, more credit wariness than inflation fears, imo.
Worldwide bond market crash. Kaboom!
sort of like your first 10 or 15 years of mortgage payents on a 25yr amort
Nice 'Debt' tags. LOL
Classic. Those kids can really paint.
I think it should be an act on America's Got Talent. LOL
Or on the walls of the white house, congress, treasury. Inside and out.