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Eat Peas and get Confidence – Not!
Obama said some interesting things at his press conference yesterday.
Central to his words was the theme that when the USA get its hands on
the debt ceiling crisis and establishes a framework for a return to
fiscal reality there will be a resumption of confidence. With that
renewed confidence would come more consumer spending, more business
spending and investment, investors (both in and out of the country)
would be looking for new opportunities to put money to work. The
confidence that would come from a resolution of the budget dilemma
would, by itself, be the tonic the economy needs to get moving forward
again.
I think that is all rubbish. I will try to make the
case that exactly the opposite will happen. There may very well be a
relief rally for a bit after news of a deal. But I say that relief will
turn to fear in a matter of months. Start with the President's words
that I thought were important:
He made it clear on several occasions; The time is now.
We have to eat our peas.
But no sooner did he make clear his commitment to tackling the problems he said this:
I want to be crystal clear. Nobody has talked about increasing taxes now. Nobody has talked about increasing taxes next year. We’re talking 2013 and the out years.
This reconfirms old news. Anything that will come as part of the Plan will not be effective until 2013. No cuts, no tax increases.
This next part confirms what I (and others) have been saying. As part of
the deal to raise taxes and cut spending in future years there will be a
short-term stimulus program. The President made clear what will be a
part of the package:
(cuts in FICA payroll taxes) would be a component of this overall package.
Now take a big leap and assume that this happens. What will we have?
*In 2012 there would be an expansion of the (one time only) reduction in payroll taxes.
Employees would get an additional 2% reduction (total 4%) and employers
would get a 3% cut. This reduction would be tied (in part) to job
creation.
*In 2012 there would be no other changes of substance to the current 2012 budget. The total additional stimulus would be $350 billion (all through FICA reductions). The new stimulus would provide a boost to GDP of about 1.5%.
HOWEVER
Starting in January 2013 the roof will cave in. The short-term stimulus will have ended. The cuts and new taxes will be kicking in.
*Workers will get hammered. They will face a 4% increase in
payroll taxes (versus the December check). That comes to $2,000 per year
for the average family. That’s a very big number and it hurts the
bottom end of wage earners the hardest. The YoY change will result in an
increase in worker's FICA taxes by $240 billion!
*Business FICA taxes will also go up $120 billion. With that increase (reversal of the “one time” holiday) will go any incentives for hiring new workers.
That’s just a reversal of the
short-term stimulus that returns us to “normal”. Then there would be
those new tax increases/spending cuts.
*The Bush tax cuts on +250k will be gone. That will be another $50b that gets transferred to the Feds.
*The AMT is going to have to be re-indexed. This hideous tax will
hit millions of taxpayers in 2013. It will cause homeowners with
children to scratch their heads in dismay. Family incomes above $105k
will all pay higher taxes as a result. Call that another $50b.
*Corporate taxes are going up. This will not add up to much. Maybe $20b guts sucked away from the fat cats.
*Speaking of fat cats, the Hedge Fund crowd will lose their special tax position. Their income will be treated as “Ordinary” versus “Capital”. That’s another $10b or so out of circulation.
*Taxes on dividends and capital gains are headed higher as well. This will be phased in over time in an effort to appease the big Wall Street donors. It could add up to $20b in 2013.
*Deductions of all sorts are going to be getting phased out. This will not be a big $ item in 2013, but anyone looking at the future will realize that most “prized”
deductions will be lost in less than five years. This too will change
the mood for investing in something like a house. It might even change
one’s plans for having a child. There won’t be any deductions for the
$400,000 it costs to raise a kid these days.
*The rate of automatic increases (COLA adjustments) for Social Security will be altered.
Those on SS will not see a lower check in Jan. 2013. But they can
expect to see that the checks will not grow anywhere near as fast as
inflation for the next twenty years or so.
That will scare the crap out of a bunch of them. How will they respond?
Trying to cut back on some more spending is the only way. It’s
impossible to measure this reaction, but it surely will be felt to some
extent. This too will be a drag on GDP.
*The rate of increases in Medicare/Medicaid disbursements will be altered.
Instead of running full speed into financial oblivion these programs
will lower the trajectory of expenditures to a walk. Whatever
expectations you now have regarding the growth of the health care
industry, you have to take them down a notch or two post 2013. That’s a
massive change in thinking. Every hospital, doctor and
treatment/diagnostic facility will be gearing down future plans.
I could go on for a fair bit. I hope you get the picture. The Plan that
Obama outlined is going to result in a massive YoY adjustment in 2013.
The reversal of the FICA (one time) tax holiday is $350b. Other tax
increases could easily add up to another $100b. This is equivalent to a
3% immediate hit to GDP. I can’t think of a bigger historical YoY shift
in taxes.
As I suggest, there are many other factors that will come into play.
Consumption patterns and investment decisions will be altered. It all
adds up to a very murky economic picture starting in 2013.
Obama is right when he says that confidence is a critical component of economic expansion. My question is:
“How are people going to be feeling a few months from now when the euphoria passes and the reality sets it?”
The press will have a field day with the story. Every blue chip
economist and Wall Street pundit will be pointing to the same charts and
concluding:
A recession is likely in 2013
Fear of the future is a powerful force. People will have a year to worry
about the changes that are coming. They will worry over how those
changes will affect their pocket books. I can’t think of a more
depressing scenario.
There might be a month or two of renewed confidence following a budget
deal. By wintertime it will fade. It will be replaced with the exact
opposite. How could it not?
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Thanks, BK, I never knew there was a US department putting together an annual number on that.
One just wonders how child rearing costs one only about $1000 per month extra (or $12,500 per year), over the whole 18 years span... and when they turn 18 you kick'em out!
Hyper-Deflation
is hyper-impossible.
and is hyper-unknown in monetary history.
The converse, on the other hand, is hyper-familiar, and hyper-possible, if not hyper-likely.
compare/contrast hyper-inflation (money==0) with hyper-deflation (money==0)
Seriously, both endings are (well, seem to me to be) the same.
Seems like money evaporates, revenooers come for chickens and eggs, ... wow.
I wonder how South-side Chicago lives through this? Can't be pretty and would be a lot faster than Detroit ...
- Ned
{but at least w/inflation: "we paid off the debt" to set up another cycle}
{{I read about Islam commentary w/re lending. Any [thoughtful] comments/observations?}}
Sure makes sense the way it's laid out here.
Is this a zero sum game though? If the economies of either the EU or China collapses before 2013 but does not take us with them, will the US not be called upon to make up the demand difference? Like an economic Marshall Plan? There has to be an end game to such an obvious scenario of mutually assured destruction that encompasses something more than rampant global monetization. Just like the law of relativity if all economies inflate at the same rate then nothing will change.
Deferring new taxes and spending cuts to 2013, is a laugh. It's just a way both sides can say they got what they asked for.
It's a win/win. They'll increase debt ceiling, and when 2013 nears, they'll just defer taxes and spending cuts again.
And with all the new stimulus they will do in the meantime, the debt will skyrocket. There is no doubt, there will be QE3.
Who else is going to buy the treasuries?
RE: "There is no doubt, there will be QE3. Who else is going to buy the treasuries?"
If the PIGS are falling like dominoes, and the EURO is weak, won't the europeans be buying Treasuries for the saftey of the dollar?
This is what I was thinking as I read the report; no they won't. The political will will be missing to put the screws down in 2013; this is just a way to look grown-up until after the election.
"That’s another $10b or so out of circulation."
------
I certainly don't love taxes, but taxing Hedge Fund Managers at a normal income rate doesn't qualify as "taking money out of circulation". The Fed spends EVERY dollar it takes in, plus more. Also, I venture to guess about 100% of all money handed out through Social Security, Medicare, Medicaid, and welfare is spent and goes through the economy several times over through the multiplier effect. What do hedge Fund Managers do with their "extra" $100+ millions? Do you think they spend it all?
How much do you think a 300' yacht costs?
well, we can extrapolate: John Kerry's 76' yachg cost his second wife's first husband's trust fund $7MM US.
http://www.huffingtonpost.com/2010/07/23/john-kerry-saves-500000-b_n_656...
and in naval architecture, there is an L-squared relationship w/speed and ???
- Ned
It depends how you describe "out of circulation". And no, they don't spend it all.
I think this will happen. I think it should have a few years ago. So I'm not apposed to it.
But this piece was about what happens in 2013. This business with Hedge fund income will have a deflationary consequence. We agree that that is necessary. But we (should) also agree as to the results.
Is this a big deal? No. It's just another one of those straws the camel will be carrying around. My point was that there were lots of straws. Not that one was good or bad.
10 billion here, 10 billion there. It adds up.
yes. agree.
400K for a kid?
I'm thinking about twice that, 1M of you add the resultant shrink bills and xanax.
I have no children but what I see parents spending money on is insane, including the $100 per day private school for a 5 year old, $200 smartphone with internet for a 14 year old or the late model car for 17 year old. Forget the $50k per year for college.
No wonder the little _______ won't take part time jobs.
No wonder the little _______ won't take part time jobs.
Hmmm ...
"A recession is likely in 2013!"
An argument is made elsewhere there is a recession now in 2011. That leaves 2012, will that be a recession- free 'donut hole'?
Any increase in spending/liquidity in the US drives petroleum prices higher leading to demand destruction and ... that pesky recession in ... what year do ya want?
Right now, Obama and Congress are about as relevant as the stoopid Fed. Nobody pays attention to that Bernank dood b/c he has no more arrows in his quiver. He raises, he lowers, he adds, he subtracts and what does it matter? Nothing.
Now, it is the 'core' of the Establishment: Obama and Company. What can they do beside screw things up? What kind of 'deal' can they be expected to come up with? If Congress defaults, the US will become very hard pressed to afford fuel to run its hundreds of millions of wonderful, desirable cars, SUVs and giant pickup trucks. Our energy suppliers have the United States of America by the short hairs and what they want is the status quo and nothing funny like a cash crunch.
Consequence: Establishment becomes a fading shadow, disappearing into the murk. A deal? What deal? Who cares?
Drive a car or have a job, drive a car or have something to eat: drive a car or have a functioning government ... the choice just keep getting worse all the time.
At least that one's a no-brainer!! Vrrrroooomm.....
End the Feds!! (Federal Reserve & Fed.gov)
End the European 'Experiment'!! (EU & EUR)
De-fund the IMF!!
How convenient - he could have waited - oh - another 3-5 days or so: http://www.cnbc.com/id/43729095
Just on the heels of "He (McConnell) said a solution to the debt problem seems unattainable so long as Obama is president." comment.
"Senate Republican leader Mitch McConnell proposed a "backup plan" Tuesday that would allow a divided Congress to raise the U.S. debt ceiling with just the votes of Democrats.
The complicated legislative maneuver would avert an imminent default and let Republicans wash their hands of the politically toxic issue.
As outlined by McConnell, President Barack Obama would formally request an increase in the $14.3 trillion debt ceiling, which Congress would reject through a "resolution of disapproval."
Obama would then veto that resolution and send it back to Congress. If Congress failed to muster the two-thirds vote needed to override a veto, the debt ceiling would effectively be lifted by the amount Obama had requested.
Obama and congressional leaders have failed so far to come up with a budget deal that could pass both the Republican-controlled House of Representatives and the Democratic-controlled Senate."
Pete
accidental duplicate
You know you're fucked when your political process resembles the rule changes in Calvinball.
Wow, that is just stunning. I have a healthy dose of disrespect for the Fox News watching mainstream Republican voter, but it's still difficult to swallow that these guys can get on television and outright admit that they are engineering a way to pass that which they claim to oppose. "Ok, here's the deal. We all want to pass this debt limit increase so we can keep the printed dollars flowing to our biggest donors, but we told our voters we would vote against it and they will be really pissed if we back down. So here's a way we can increase the debt ceiling but pretend to vote against it. Brilliant! And we can still campaign next time on our opposition to the thing we were actually in favor of and helped to pass!"
I dunno, as one with a healthy dose of disrespect for any ABC/CBS/NBC/MCNBC/CNBC/CNN etc watching mainstream Democrat, I think we've been down this road once before with the "Deemed passed" charade (a close second is the "vote for it to find out what's in it" Pelosi bomb).
Not arguing with you there. Same idiots, same falsely framed debate, different team color. But at least the Pelosi stuff is kind of confusing. McConnel is right out there saying "I'm for it but I'm pretending to be against it." Are there really voters so stupid that they will let him get away with saying later that he voted against it?
Faux News voters, of course!
Reid made it back in so I guess the answer is yes.
You're right of course. This one just seems so obvious that even a half-brain dead Idol watching voter would see through it. I suppose the answer is that most won't. Sad. Truly sad. And yes, the Blue Team is just as bad if not worse.
Both sides indeed, quotes of Obama during his brief stint as Senator explaining voting against the debt ceiling are in complete opposition to his argument now(almost John Kerry-esque). I think this ploy is just as likely to backfire if they try it, and would still take several votes to deliver.
so increasing the debt limit would increase the debt which could never be paid off anyway, and the markets would rejoice? it's up to china now to again downgrade the U.S. never make it to the end of this year!
Am I making myself clear ?.......crystal sir !
I'm pretty sure we're in a recession now. Vote this guy out!
Recession in 2013? Isn't that what Roubini has been forecasting lately? And Felix Zulauf in the radio interview a few days ago.
Doesn't seem possible, because the world is scheduled to end December 21, 2012.
Right?
Or was that a prediction by one of the Wall Street economists who predicted +150,000 jobs in June?
If so, we can probably safely ignore that prophesy.
As always, stuck on stupid. Can these pols become any more predictable? I'm beginning to look like the freaking Amazing Kreskin.
Oh, and just when does deflation begin?
When gold is reintegrated into the world monetary system --- and not a second before that.
Well, if gold is money, we've been watching deflation in the price of goods vs gold for a decade now.
All that said, deflation will occur at the end of this crisis. For what we now use as money will become worthless and there will be in effect, "no money." No useful fiat money that is. The pricing mechanism in fiat currencies will cease to exist and then and there you'll have the most extreme form of deflation.
IOW, never? ding ding ding... somebody give this man his door prize... a plush pink.... what is that thing, Walt? Don't tell me it's a teddy bear.
Do you mean monetary deflation? Or confidence?
I was being sarcastic. Every solution offered since this mess began has been inflating the money supply, either by hook or crook. The choice has always been 'inflate or die' and indeed the ruling class has chosen inflation time and again.
You might be too optimistic - recession seems likely going into 2012. Despite all the government "stimulus" the economy is faltering. Excessive government meddling has resulted a high level of uncertainty which is never good for small businesses. Also there's so many problems in Europe and China, this time contagion is likely to come from abroad, rendering any domestic policies meaningless.
Starting in January 2013 the roof will cave in =QE4
Now that's is going to be a serious bull market comming up.
or not...
The roof will NOT cave in.
Clearly it is the floor that will cave in.
You know what's under the floor, right?
Okay, I got that. The roof will fall and the floor will cave. God help us if the damn roof starts caving. Soon after the floor would be falling. And we all know there is nothing under the floor. Just a deep hole.
tks.bk
lol... i read your blog every day, but never realized how funny you could be til now,,, hahahahahha,,,,, good play....laughed hard at that.... thx
besides.........I like peas (but only if salted & buttered)
A basement flooded with hydrofluoric acid. But don't worry, it destroys nerve tissue on contact. So it's not initially painful.
Flames, baby. It also destroys nerve tissue on contact. Who the hell knows what happens after that?
All true. So they put a bandaid on with a $350b 2012 FICA holiday. Will that fix things? No. But it will probably kick the can down a year. That is why I think this 2013 date is one to watch.
Bruce, before the "YOU have to eat your peas" was "gotta' rip off the bandaid".
But I'm on the under w/2013.
- Ned