Congressional Budget Office
This chart seems to sum up our fiscal challenges as well as anything else...
Political activity related to reforming Fannie Mae and Freddie Mac has picked up over the last few months and additional legislative activity is expected this fall. As Goldman notes, while there is still substantial political disagreement, a loose consensus has begun to emerge on some issues. However, despite somewhat greater agreement on certain aspects of GSE reform, lawmakers still face a basic dilemma. Housing finance reform has languished in large part because of the disagreement over the appropriate federal role, as well as a concern that reform would ultimately lead to an increase in borrowing costs. Recent GSE reform proposals such as Corker-Warner appear to have attracted support by calling for high levels of private capital. However, such high levels of capital would require a return to investors, increasing borrowing costs. Overall, Goldman's expectation continues to be that GSE reform is unlikely to be enacted this year or next.
If S&P had any guts it would lower the US another notch.
The gorilla in the room may sleep soundly for the rest of July and August, but expect a foul temper when he wakes up in September. At that time, Congress once again haggles over our debt ceiling.
Sovereign debt is the bonds that are issued by national governments in foreign currencies with the intent to finance a country’s growth. The risk involved is determined by whether that country is a developed or a developing country, whether that country has a stable government or not and the sovereign-credit ratings that are attributed by agencies to that country’s economy.
When every indicator of stress is screaming 'bubble' in the student loan debacle, it would make perfect sense for the government to ignore it and maintain the status quo. As the WSJ reports, the never-ending federal effort to "make college affordable" simply provides the resources to sustain higher prices - especially as an increasing amount of the rising subsidies are pocketed by universities. This policy disaster which results in rising costs, taxpayer losses and over-strapped borrowers is now manifest. So naturally this week Senate liberals will bring to the floor a plan to ensure that the policy continues unchanged (and the CBO-estimated $95 billion losses) - and dismisses a coalition plan that ties student loan rates to 10Y Treasuries, providing some marginal encouragement to students to decide whether their chosen course of study is worth the money.
Confused by last night's bombshell white flag of defeat by the Obama administration which delayed the implementation of the employer mandate, aka the "shared-responsibility rules" by one year until 2015 derailing the public education campaign that the rollout of Obamacare was set to take place in October? Then the following list of 6 questions and answers from Politico analyzing the ins and out of the decision is for you.
Richmond Fed's Lacker: "Falling Markets Should Not Be Too Surprising... Further Volatility Seems Likely"Submitted by Tyler Durden on 06/28/2013 09:24 -0400
"Bond and stock markets fell sharply in response, but that should not be too surprising. The Chairman’s statement forced financial market participants to re-evaluate the likely total amount of securities the Fed would buy under this open-ended purchase plan — in other words, how much liquor would ultimately be poured into the punch bowl. Market participants also had to reconsider their estimate of when the Federal Reserve would begin to remove the punch bowl by raising interest rates. These reassessments appear to have warranted price changes across an array of financial assets. As market participants gain additional insight from the words of Federal Reserve officials or by policy actions in coming quarters, further asset price volatility seems likely." - Richmond Fed's Jeffrey Lacker
Nike recently published a series of ads declaring “winning takes care of everything,” in reference to Tiger Woods’ recapture of the world #1 golfer ranking. The slogan went over with certain critics like an illegal ball drop. Many economists insist that “economic growth takes care of everything,” and the related debate is no less contentious than the Nike ad kerfuffle. Listening to some pundits, you would think there’s one group that appreciates economic growth while everyone else wants to see the economy crumble. It seems to me, though, that growth is just like winning – there’s no such thing as an anti-winning camp, nor is there an anti-growth camp. More fairly, much of the growth debate boils down to those who think mostly about long-run sustainable growth and those who advocate damn the torpedoes, full speed ahead growth. I’ll break off one piece of this and consider: How much of everything does growth take care of?
Not so long ago, the Congressional Budget Office (CBO) said it expected the U.S. government to register a budget deficit in the current fiscal year of $642 billion. But hold on a minute... The budget deficit so far (as of May 31, 2013) has already hit $626.3 billion, and we still have four more months to go in the government’s current fiscal year! The U.S. has been the family that spends more than it earns for many years now. In the short term, spending more than one takes in can work (especially if the Fed just prints new money and gives it to the government to pay its bills). But in the long term, if fundamental changes are not made to the government’s spending habits, financial chaos just starts all over again. Posting a budget deficit year after year is not sustainable. The debt-infested eurozone nations did very much the same; they borrowed to spend. Look where they are now.
"I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.... The accident -- the fiscal train wreck -- is already under way.... How will the train wreck play itself out? Maybe a future administration will use butterfly ballots to disenfranchise retirees, making it possible to slash Social Security and Medicare. Or maybe a repentant Rush Limbaugh will lead the drive to raise taxes on the rich. But my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.... And as that temptation becomes obvious, interest rates will soar. It won't happen right away. With the economy stalling and the stock market plunging, short-term rates are probably headed down, not up, in the next few months, and mortgage rates may not have hit bottom yet. But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.... I think that the main thing keeping long-term interest rates low right now is cognitive dissonance."
In a confirmation that the S&P is starting to get worried about the drones surrounding the McGraw Hill building resulting from the ongoing litigation with Eric Holder's Department of Injustice, not to mention a reminder that US downgrades always happen after hours, while upgrades must hit before the market opens, Standard & Poors just upgraded the Standard & Poors 500 the US outlook from Negative to Stable. On what "receding fiscal risks" did the S&P raise its assessment of the US - the fact that the US is now at its debt limit, that there is no imminent resolution to the credit issue, or the 105% and rising debt/GDP - read on to find out. And of course, the countdown until the S&P wristslap settlement with the DOJ is announced begins now, as does the upgrade watch by Buffett's controlled Moody's of the US to AAAA++++.
Preview of tomorrow's Bernanke testimony and FOMC minutes.
My guess is that in 2-3 years most folks in the country are going to hate Obamacare, but it it will be impossible to get rid of by then.
It’s amazing what people can trick themselves into believing and even shout about when you tell them exactly what they want to hear. It was disappointing to see Brad DeLong’s latest defense of Fed policy, which was published this past weekend and trumpeted far and wide by like-minded bloggers. If you take DeLong’s word for it, you would think that the only policy risk that concerns hedge fund managers is a return to full employment. He suggests that these managers criticize existing policy only because they’ve made bad bets that are losing money, while they naively expect the Fed’s “political masters” to bail them out. Well, every one of these claims is blatantly false. DeLong’s story is irresponsible and arrogant, really. And since he flouts the truth in his worst articles and ignores half the picture in much of the rest, we’ll take a stab here at a more balanced summary of the pros and cons of the Fed’s current policies. We’ll try to capture the discussion that’s occurring within the investment community that DeLong ridicules. Firstly, the benefits of existing policies are well understood. Monetary stimulus has certainly contributed to the meager growth of recent years. And jobs that are preserved in the near-term have helped to mitigate the rise in long-term unemployment, which can weigh on the economy for years to come. These are the primary benefits of monetary stimulus, and we don’t recall any hedge fund managers disputing them. But the ultimate success or failure of today’s policies won’t be determined by these benefits alone – there are many delayed effects and unintended consequences. Here are seven long-term risks that aren’t mentioned in DeLong’s article...