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Perfect Storm – February 2013?
I wish I could get a penny for every dollar that is going to be paid to
lobbyist to fight the various recommendations of the Fiscal Commission.
As advertised, they basically took no prisoners save a small portion of
the older population that would starve without a monthly SS check. I
think this exception was in response to the deficit panel being referred
to as the “Cat Food Commission”. They may have dodged that bullet, but just about every other group in society is going to have a gripe.
-The mortgage deduction would be largely gone. There are a dozen industry groups that will rain on that parade.
-Social Security would be “socialized”. Some say SS is a third rail. We
are about to see that in action. A big savings comes from a
recalibration of COLA increases. So right away you have 60mm Americans
apposed to this.
-$1.1 Trillion of tax deductions would be done away with. Think of all
the tax lawyers and accountants that will line up to cry about this one.
-Get this. Federal workers would be required to put up half of their
retirement contributions versus the 1/14 that they currently pony up
for. You can imagine the howls we will get on that.
-The military budget gets a hatchet job. So the entire military industrial complex will rise up with one voice to appose it.
-My quick read of the proposals confirms my prior expectations that
anyone in America who is under 45 should just bend over now. Most of the
pain of the fiscal commission will be felt a few decades out. This
group of folks is getting creamed and as far as I know they have no
advocate. As this plan gets rolled out I suspect that the opposition
from younger people will rise to a level that will make the US look like
France.
But none of these things really matter. What's important is to focus on this critical comment:
4. Don’t Disrupt a Fragile Economic Recovery
Start gradually; begin cuts in FY 2012.
Gradually indeed. There is a total of a whopping $17 billion of cuts in mandatory payments through January 1, 2014.
Next week there will be a great debate on what to do with the Bush tax
cuts. Actually I don’t expect much debate at all. Our legislators hate
to raise taxes and I don’t think they have the guts to do it now. They
will point to the big unemployment numbers and pass the tax trash for 24
months. They will defer the hard choices on income taxes and the
critical AMT.
Then there is good old Ben Bernanke. As of now his plan is to finish
QE-2 next June. QE-1-Lite (the top up) will, in theory, be an evergreen
program. But after 24 months the MBS portfolio will have been
substantially reduced and the monthly prepays and related POMO Treasury
buys will be significantly less than we are getting today. I think there
is no stomach in America for a QE-3. The global (and now domestic)
hostility to this crazy experiment makes the possibility of a 3pete
decidedly slim.
So mark your calendars. Sometime early in 2013 we will self immolate as
all of the promised steps of belt tightening, budget cuts, smaller
government, smaller social payouts hit. At the same time taxes will be
going up for every single wage earner regardless of what they make. High
earners will get butchered. To top it off Big Ben will have to be
throwing out a hefty sized anchor at pretty much the same time. The
markets will surely see it coming.
The last transition of executive power was in the midst of an economic
panic. Based on the timetable and the proposals in front of us we are
setting up for a repeat. We will get the answer to that next week when
the tax issue is pushed forward a few years. My bet is that hard
choices on spending, monetary and tax policy will all be kicked down the
road 25, 26 months. I wonder if our leaders understand that?
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Right now I'm leaning towards a future for America that looks an awful lot like Japan. The S&P is overdue for a 50% decline, real estate still has room to fall, long term insolvency of US zombie banks and an ever growing government debt just to keep the peons fed.
Unlike Japan the peons don't have savings so the ultimate size of US govt debt will be greater than Japan's.
At some point, the US will accept its dethronement and the USD will be removed as the global trading currency, replaced by a remodeled SDR. Consequential inflation can be contained many ways by the Fed eg releasing its holdings of toxic assets to market (reinflating them) or forcing TBTF to do the same and absorbing those that try to default (essentially, this has the same effect as a foreign power invading and taking land, because that's who the buyers will be with their excess fiatscos).
Long story short, I think the Fed is actually doing a pretty good job here. The future for America isn't bright but it's not doom either. Just generally sucky. America is going to lose its privileged access to other nations' produce and US citizens are going to have to get used to living with less. At some point, the military will either have to come home and break up, or use their shit.
That's when things might get interesting.
I don't doubt they will kick the can, but the system very well might not be in place in 2013. If Zimbabwe Ben does as he says he will I cannot imagine most in the world will happily accept dollars for their work and natural resources, call me crazy. It's also abundantly clear that there is no intention to fix the structural problems facing the US, but to continue looting, and things like that tend to get really nasty after the looters start ripping out the wiring in the walls. So sure 2013 Fed might be a bad time, but I think we will know well before 2013 how well and truly screwed we are.
Working in the coal mine: "How long can this go on?!"
Thanks for another informative article, Bruce. Whatever happened to Wendy who you were helping find a job? Just curious.
There's a little poison in their for everybody, for sure
The mortgage interest deduction repeal was for houses over $500K (WSJ); which might let this one survive.
Of course, by then cars could cost that much the way Rainman Bernanke is raining dollar bills
How about the estate tax for small business owners?
How about 401Ks and SEPs? No bipartisan panel whispers of confiscations for sure.
Confiscations of 401Ks is only a one party thing...
I'm not sure that the US gov will have the ability to kick it down the road another 24 months. Note that I have been wrong before - in 2008 when the banks were insolvent, I thought that would be the reset.
Right now, it is a little bit different. Biggest difference is the rest of the world is totally pissed off at USA's attempt to devalue the dollar.
If China finally grows a pair and tells Geithner and Obamatron to shut down the printing press, then maybe our course will change. OTOH, maybe aerodynamic swine will launch first! :(
bring it on.
a trader can handle anything thrown at one.
crashes.
financial collapse.
50% plus income tax.
rigged markets.
the fed.
hope and change.
dems. repubs. tea p.
no social security.
no medicare.
........
a trader trading a complete trading plan will continuously make more money than one loses no matter the state of economy.
remix. "I beg your pardon;” america “never promised you a rose garden"
twittering as stocktradr
You must be channeling Jesse Lauriston Livermore..
I got my first spam email from some guy fighting against social security cuts. That didn't take long.
I wish someone would explain this to me:
1) What is wrong with the AMT? The AMT is essentially a tax with 31% top bracket with most deductions removed or phased out. The top rate is a little steep for so few deductions, but other than that it seems reasonable. Why not just get rid of the regular 1040 tax code completely and have everyone pay the AMT instead?
2) Since I already pay pretty deeply in the AMT, and since Bush didn't affect the AMT tax rates, doesn't that mean that the Bush tax cuts are irrelevent to me - at least in terms of ordinary income? When the tax cuts expire, my AMT will still be higher than the regular tax calculation, so I'll keep paying the AMT like before, right? The only difference will be that the difference between the two will be smaller.
I understand that this may not be true for people who live in states without an income tax, but for the rest of us, Bushes tax cuts seem irrelevent. That also means that for the government, tax income won't increase from upper earners if Bush's tax cuts expire. So why fight over it?
Oh yea, this thread is about the commission - I guess there work is the best that can be hoped for. Getting rid of the interest deduction is probalby necessary. Realters will love it.
You are too high up on the food chain to understand it sounds like.
The majority of American households are living paycheck to paycheck and cannot afford to pay one cent more in taxes, healthcare, food, gas, etcetera, etctetera.
And no, it isn't just about consumption.
Before 1913 there was no income tax at all and no Federal Reserve.
Consider that we have created a beast that cannot be killed and that will likely eat us no matter what we do.
In a way, its the genius of their sick plans. Get everyone on the dole for something, and then everything becomes a humoungous lobbyest filled battle, with hearts to tug on both right and left.
I even heard Rand Paul on a vid tonight defending physicians salaries from Medicaid/Medicare.
Remember hearing a farmer ranting about the blacks in the cities being on welfare, "lazy bums, we weren't raised like that, blah blah blah" but when I brought up farm subsidies, it was a totally different tune, let me tell yah.
Repeat this scenario across the board.
My quick read of the proposals confirms my prior expectations that anyone in America who is under 45 should just bend over now.
God I hope I live long enough to see the last baby boomer die (no offence BK).
My first awareness of this demographic was when I was a suburban kid. Baby boomers were the loud and obnoxious teenagers and young adults ripping around in their cars, blasted out of their minds at 3am (drunk driving was barely illegal). They could be dangerous to be around and ostentatious about their "non-conformity." But not long after I came of age I noticed that they were now all grown up with kids and had succeeded in making practically all fun of any kind illegal.
Yesterday's A-hole counter-culture radicals are today's A-hole establishment statists. Worst of all, they seem to suck up all the wealth sustaining oxygen from the economic enironment as they march through the decades (all decades are "me" decades to them) voting themselves all kinds of goodies and forcing their big ideas on the rest of us. Social Security is the perfect example of this but there are other demographic tipping point disasters in store for us too.
I know this is all the stuff of gross generalization and it's not all their "fault." But when you're too young to be a boomer (and your parents are too old to be boomers) you go through life aware of one bit of economic, political and social culture after another morphing into something completely different compared to how it was for people standing in your shoes just a few years before. Sometimes it's for the better of course but a lot of the time it isn't or you miss what has been lost more than you appriciate the new benefits.
At times it can certainly bring on a sense of anomie. And in the future, if BK is right, perhaps penury as well.
i've been naively licking boomer scraps for years, wanting to be like them, emulating their success and chasing their rainbows. my parents are also too old to be boomers, they are silents, putting me at the beginning of gen x, which is maybe why this site speaks to me so... this is the first time i've been glad NOT to be a boomer. no offense, but at least i have a little more time to adapt and recover, just being slightly younger. we are starting to see many of our formerly solid boomer friends hit an economic wall. promises made will not be kept, people without friends with money will fall by the wayside, starve and die thanks to QE inflationary side effects... i wish more of them would open their eyes to sites like these BEFORE they empty out that last 401K, putting at least some savings in gold and silver, even if you can't eat it, snort it or make it pay interest. yes, the truth can be ugly, but only in accepting it can you adapt and survive... how to we get people to wake up? btw, this is my first comment, been lurking for a year and a half, thanks to everyone who contributes, even the assholes. zh is my number one news source, because the truth is right here.
Well said tofu. I've discovered you can't wake people up so I no longer even try. I wait for some sign that they have begun to wake up, that's when they become sponges to the truth. But don't push or they'll run like rabbits. It's seems it's hard for most to leave the security of the matrix. Any way that's been my experience since the collapse has begun.
AGREED! I heard about this site from Rush Limbaugh when he was asked to name the sources that the Fed was printing money and propping up the stock market. Like you, I was hooked on this site when I first visited about a month ago!
I've learned so much from Tyler et al...but reading the comments are really insightful as well. This and Drudge is where I hang my hat.
hey, boomers have barely started to collect SS; and why should'nt they
Boomers also have one advantage over others, they grew up in the 60's a/k/a helter skelter
that experience is about to be relived, except the out of conrtrol entity is your govb't goons
it is tru that most americans are statist in their beliefs, but not all of them
the young need to get past blaming a certain generation and get on with creating their own reality
I can picture Manson in his cell, reading the San Fran Chronicle, laughing his ass off...
I think I understand what you are saying:
http://arkadaba.blogspot.com/2010/07/generations.html
But I'm dating a boomer now (and an ex wall streeter) - talk about a conflict of interest! But I can deal with it.
I think "it" could happen as soon as December, 2010. I think "Krugman is right" in the sense that "once you're in QE bro, you're ALL IN." Hard to tell because "we're talking theoretical" which no matter what you think is GREAT for the media business. If Ireland is any example "we might need 500 billion in one week" if the goal is "to make our trades look profitable." Of course I've never been clear as to "what the goal is in the first place" so go figure. I think I have been consistent however...as in "sucks to be you Greece!" (phew, that was close) and "sucks to be you Ireland!" (man, it's gettin' hot in here) and "sucks to be you Eurolander" (and we go down, down, down...that Ring of Fire) and "geez--if that happens to us I hope whoever's responsible phucking dies." Now if you find yourself laughing at this all I have to say is "gooooood. Verrrry good" because "should the orders come down from higher you're the type who'll know exactly what to do."
Just get it over with. I can't take it anymore
Early 2013? Seems the storm clouds arrive for the inauguration of Obama or some other stooge.
Do you know if the current lame duck Congress will expand the debt ceiling or will it wait till after the new Congress is seated in January? That's the wild card in this QE experiment, correct?
BK wrote: "My bet is that hard choices on spending, monetary and tax policy will all be kicked down the road 25, 26 months."
With all due respect, Bruce, I think you are being optimistic here. IMHO, I don't think our elected officials (I won't call them "leaders") will make such hard choices. The choices will be imposed by the Bond Markets.
25, 26 Months? I'm still betting on Dec 21, 2012. Heck, it's as good a date as any; and this far out, there's still a lot which can happen. Reggie was giving the Banks 1-2 years, so this all may be in sync.
More like July or August of 2012. December is when the new currency is in place. Merry fuckkin' Xmas, suckahs!
I sorta liked the proposals. The talking heads went all schizo on the tube today. Each has his/her own pet bull crap that "needs saving". Well, if they could do ALL they propose tomorrow I'd be completely for it. And for those who would argue the point, don't pick out one thing and defend keeping it unless you also propose the offsets!
So, QE2 ends in June, 2011. Then what? We go cold turkey? Don't think so. QE is like WWIII. WWIII has been a constant since the end of WWII. So this QE is to be a constant for the foreseeable future or until the collapse. Two choices: outright default or default through QE. "If there is a fork in the road, take it!"
Without a balanced budget amendment, all of this is just smoke and mirrors. Readers who are old enough to remember the Gramm-Rudman-Hollings balanced budget act of 1985, will recall that it in no way balanced the budget. It just reduced deficits for a few years and was quickly buried when public's attention turned elsewhere. Balanced budget commissions and bills are just tools that politicans use to temporarily turn down the heat on the issue until people get distracted by some other issue.
And to be fair, suppose that you were the president. Would you be inclined to fight a massive battle against all of the interest groups in order to balance the budget, knowing full well that the next president could (and probably would) just go on a spending spree and undo all of your hard work?
Any politician who talks about reducing the deficit or balancing the budget, but who does not support a balanced budget amendment is just stringing people along.
big business interests own our govt and they in now way want balance budget amendment. If you have to pay as you go, they you start to make hard choices. If you told people, we will reduce you soc security or we cut defense, they might actually choose to cut defensse. Of if you said we could tax dividend/hedge fund income say as wages or cut Medicare, they might actually choose taxing rich....
I've seen 30 years of nothing but political bullshit shuffling, sophistry, and sell outs. Lonely voices of the few trying to do the right thing, but the majority rats.
If I were President I would have commanded the armed forces and domestic security agencies to seize the Records of the TBTF banks, corporations, and Congress, then started military tribunals and begun immediate jailing and/or hangings for treason as well as clawbacks of bonuses, salaries, assets, etc. of those complicit in the fraud.
Of course, I'm not in on the Ponzi...
As a 23 year old, I can say that most people my age have no expectation of the social safety net. Social Security is an abstraction, and many have resigned the fact that it won't be there.
That said, they also don't save anything and have no realistic view of the possible future pain.
Fret not, young one. It works out for the best and you are young enough to rebound. It is nice that one your age is taking an interest in the Ponzi. Maybe you can position yourself to survive with style.
younger people need to reject the ponzi, and start looking at doing things that make sense for them
i was surprised last winter at how many young people showed up at a maple syrup making state convention; with fewer corporate jobs some are looking at other options
the young people need to reject a consumerist ponzi scheme, that was designed to fail miserably
and start rejecting the assclown programing the public indoctrination center spew out
I don't know how a moral person could work in these asshat schools these days
...Have you seen the pay the asshats give out? Or the bennies? Srsly!
I don't see much chance that these modest recommendations will be implemented, but the tax rate reductions combined with increasing the tax base are definitely the way to go, but our poor demagogued nation will resist any such.
More radical remedies, including a 40% cut in federal pay and benefits, complete abolition of all GSEs, and elimination of most if not all subsidies, are going to be essential. The public is not going to suffer, as they will, while watching the privileged classes of govt workers and subsidized industries continue to suck at the public teat. But the Ruling Class will dig in its heels against any meaningful cuts, so default or hyperinflation are still strong possibilities.
In the past, I used to hear that government employees made less than their private industry counterparts. Now, are they making more? If so, maybe private industry is now underpaid as opposed to public employees being overpaid. I am not disagreeing with you. I just would not want to see underpaid people argue that others should be underpaid in order to be fair. I think it would make the rich elite smile to see people demanding others to be underpaid just like them and Viola! a lower standard of living is now the norm. If private industry salaries have fallen against public salaries, then I would rather see people demand that private industry salaries be raised. I'm trying to see the bigger picture if there is one to be seen.
you make a similar points that I make often...when I grew up in a white working class neighborhood in 70s, guys would graduated from HS, immediately get a job at a local factory and make good enough money and benefits to be able pay for a family of four or five easily even without wife working. They could immediately buy a truck upon working, and would often get a new one every few years, they could easily buy a decent house in a a decent, solid neighborhood in their mid twenties and have it paid off in 40s early fifties. They would get a good pension when it was all done. No need to buy a fixer upper, no need to drive a junker car, didn't go broke sending kids to college, no one every needed or want to take out second mortgage for kids school etc..
So with HS education and willingness to show up to work everyday, they had a solid middle class life. Kids who went to college noted how the guys that just started working in plant out of HS really had a BETTER economic lifestyle, at least for first 10-15 years of working, but people still went to college because they figured work would be more interesting, not as physical,dirty and maybe 15-20 years down the line they could make more money than plant guy. The neighborhood was sort of classless in that even the guys that ran the lab of 30 scientest at 3M was living next to guy that worked the line, next to teacher, next to city parks and rec guy etc..
So now working class private workers have no hope of middle class lifestyle generally. Any low skill job that used to pay pretty well is either being done by illegal immigrants or has been outsourced to China etc.
However, a federal worker still can live a nice middle class life style, and often police and prison guards are really really doing well.
The govt workers over paid is a little too simplified but has truth. Most govt workers have much more education than private workers on average. Also, big executives in private businesses often make obscene money while govt managers just make really good money. But in general govt workers are now doing better than private workers as their wages have not been reduced or flattened as private workers and their benefits are amazing. As an example, most civil engineers I know in private sector are hurting, have lost work, have had salary reduced, but those working for Fed highways etc are not laid off, keep getting raises and have great pension to look forward to, and their working salaries are HIGHER than private engineers. But keep in mind, federal employees get no Soc Security.
Most private workers have to save for retirement. If interest rates are 1 or 3 percent, how much to you have to save to live. Most private workers don't get to pool retirement, so if they luckily live long, they run out of money whil govt workers have a pool, so the long-lived continue to get pension.
So private workers have declined in lifestyle, and govt workers, especially cops, fire and prison guard and some federal employees have really gone up in lifestyle largely to pension benefits but in some states, even the working salary of cops is ridiculously high compared to private workers.
Now we are the point the only way to have the middle class, secure life the working class people in my old neighborhood had is to be a govt employee. And the private worker taxpayers are jealous, rightfully so.
Govt workers for equivalent education, experience should not be making more than general marketplace and it has now gotten to the point where they are. However, to think this a major part govt spending and they reducing govt workers to private working levels will be major cure is not correct. In some Cali towns this is the case because city council collude with police etc and they are sucking town dry. And being hard on fed workers will yield some money but compare that to whole budget, Defense spending, Medidare, Soc Security, interest payments...drop in bucket.
Not to worry! Everyone will soon be paid with $Trillions of FRNs! :(
Google it, you'll see why everyone is so pissed off.
I call/write my Congressman fairly frequently. I had in mind to suggest to him that since mortgage rates were now so low, that if the government wan't to take a step in removing itself from my life, doping away with the mortgage deduction would be a good place to start and it wouldn't be noticed that much. I guess that I was prescient.
Wo betide he who buys real estate now. We know that rates have to go up. Hell. They are even going up in the presence of QEII. Go figure. My TBTs are doing great. (I sold covering calls, and now I am sad.) So when rates go up and the deduction i gone, those house prices will keep on sliding. Of course by then the banks would have found some way to have wiggled out of all the bad mortgage debt they were holding.
Shit, I hope not. My B-day is in February. Fucking rain on my parade!
Americans will die singing, "NIMBY!"
Don't know if you read the posts I made following your earlier articles, but these recommendations by the Fiscal Commission are exactly what I would expect QE reversal to look like. Unless TPTB lose their minds, none of it will be implemented until the banking sector is truly stabilized.
Don't hold your breath.
While I might agree that the market currently has no stomach for QE3, I'm not so sure it's going to be that way by the time QE3 actually comes around. Throw in some more crash action between now and then and markets might come around to the point of view that QE ain't such a bad thing.
I read everyone's comments.
Comments bitchez!
Edmund Fitzgerald, meet Gale (of November, that is!)
bruce,
off topic, but yer a pretty good student of the fed etc.
i have a basic question that i can't seem to answer. my question is:
if the Fed were to ever realize losses on its book, where would those loses show up?
thanks.
The Fed's net income for a year is transferred to Treasury at the end of the year. This year they made ~50b. They could have a loss one year from what they are doing. If they did that loss would be passed back to the tax payers.
But keep in mind that the Fed does not do mark to market. So if interest rates were to rise they could suffer a book loss that we would never see.
For what it is worth I do not see the Fed taking big losses. The accounting protects them and they can control the interest rates that the pay to finance their bond holdings.
....so in the remote scneario whereby the FED is deemed insolvent (choose yer reason) then one would have to impute that hole to the Treasury. (i.e. is the TSY 'legally' accountable for FED losses?)
....which would mean incremental TSY issuance to fill said hole.
....which would mean incremental purchases by the FED
....and then the currency dies.
this is the transmission mechanism, right? (hypothetically speaking)