Congressional Budget Office
I left yesterday for the bobbling heads - to the artists of verbiage that weave arguments of their own accomplishments much as the artists of Three Card Monty hide the truth behind their shells. Yesterday we had a nice rally in the equity markets. No surprise; the sigh of relief was palpable that Congress did something, anything to address our fall over the cliff. I would not get too excited however. We raised taxes, we penalized those succeeding and we did it in a meaningful manner. We did not cut the national debt as sung by the chorus across the airwaves. In fact, according to the Congressional Budget Office we decreased revenues by $3.6 trillion over ten years. We did not protect the middle class, but because of the expiration of the payroll tax decrease, Federal taxes will rise for 77% of all working Americans. Thus we rewarded non-working Americans at the expense of those with jobs. The game was the continuation of postponement and avoidance and reckless governance of the nation.
This deal has made our debt problems worse.
While elated that the full 3.5% US fiscal drag was avoided, many observers are understandably dissatisfied with the fiscal compromise that was struck.
Marianne Faithfull's song "What's the Hurry" may ironically offer some insight. She asked, "What's the panic, where's the static?" That seems to be the key. The fiscal cliff in the US was never about economics, but always about politics. The politicians had tied their own hands and lo and behold figured out a way to untie them.
Politicians, regardless of nationality or political persuasion, like the people they represent, are loath to make difficult decisions unless they are forced. The pressures that usually emanates from large deficits and debt is inflation and higher interest rates. These are not present in the US. Contrary to the claims of many economists, US interest rates remain low as does inflation.
Moody's has stepped forward with the first warning shot across the bow that:
- *MOODY'S: MORE MEDIUM TERM ACTIONS MAY BE NEEDED TO SUPPORT Aaa
Has contradicted itself (from September) on the debt-ceiling breach; and warns that while the deal 'mitigates' some fiscal drag, it does not remove it. To wit: the IMF piles on:
- *IMF SAYS `MORE REMAINS TO BE DONE' ON U.S. PUBLIC FINANCES
- *IMF SAYS U.S. DEBT CEILING SHOULD BE RAISED `EXPEDITIOUSLY'
Full statements below.
Maybe I should get a Nobel, that, or maybe PK shouldn't have one…..
When it comes to US austerity, a very sensitive topic as framed best by the "spending cuts" portion in the Fiscal Cliff debate, the ideas range from the surreal to the outright idiotic: as an example in the most recent Obama proposal spending would be "reduced" in the form of $290 billion in interest savings - not an actual spending reduction, but a hope and a prayer that because rates are lower, the government will "save" money with rates continuing to be lower (something which immediately causes a #Ref! explosion for anyone not using government math), $130 billion in savings that would come from once again rejiggering the definition of 'inflation', as well as "savings" from not funding extra defense spending because the US is not engaged in a pro forma war. Like we said: surreal and idiotic, or in other words, no actual real cuts to spending. Yet even as the nation is gripped by the melodrama of fake spending cuts offset by the threat to tax millionaires more (all of whom will merely find more creative and effective ways to hide their wealth and income offshore), spending increases are all too real, such as last night's order by Obama's just issued an executive order to end the pay freeze for federal employees, which is the equivalent of a wage increase. A truly deserved rise in wages for a job well done by the most dysfunctional Congress America has ever seen.
The beginning of the year has traditionally been a time of optimism when we all look forward to the exciting things that are going to happen over the next 12 months. Unfortunately, there are a whole bunch of things about 2013 that we already know are going to stink. Taxes are going to go up, good paying jobs will continue to leave the country, small businesses will continue to be destroyed, the number of Americans living in poverty will continue to soar, our infrastructure will continue to decay, global food supplies will likely continue to dwindle and the U.S. national debt will continue to explode. Our politicians continue to pursue the same policies that got us into this mess, and yet they continue to expect things to magically turn around. But that is not the way that things work in the real world. Bad decisions lead to bad outcomes. Sticking our heads in the sand and pretending that everything will be “okay” somehow is not going to help anyone.
The tactic of quoting CBO predictions was a constant during the Presidential campaign and now the Fiscal Cliff debacle. But the CBO’s long-term track record of constantly missing the mark seems pretty obvious to anyone paying attention. It’s like a weatherman in Seattle who tells you that every day is going to be sunny. At some point, a reasonable person just stops listening. The problem is that people have been deluded for so long into believing that economics is an actual science... and so it must be true. Well, for a time, so was bloodletting. Or the ‘ethnic sciences’. The whole argument is a clever deception, all to conceal a simple truth: that the US has long since passed the point of no return where they’re borrowing more money just to pay interest on money they’ve already borrowed. There is no victor in the debate. Only an entire nation of losers, and a tiny handful of people who see the writing on the wall and take steps now to prepare. Which are you?
Denial doesn't change reality. It only cripples our response to reality. Psychologists and behavioral economists have found that we deceive ourselves (conceal the truth) to serve our own interests. Perhaps this is why the mainstream ignores the Id Monsters in the shadows: shadow banking, shadow housing inventory and shadow liabilities.
Who knows? I might even become an EE'er. This joke is on me.
At the end of October, as the Tristate Area was being flooded by Hurricane Sandy, one after another Wall Street firm tried to position Sandy virtually as a non-event, with total damage "forecasts" by such "reputable" firms as Goldman Sachs and Bank of America forecasting a total bill between $10 and $20 billion (as anything above that and the Q3 damage to GDP would be far more substantial than their recently bullish forecasts had accounted for, and would also imply a substantial spillover effect into Q1 2013), the same as various insurance companies who had other far more obvious reasons to undershoot on the total damages. We said the opposite, and based on historic damage forecasts, predicted the damage would likely be between $50 and $100 billion. Once again the sellside consensus was wrong and a fringe blog was accurate, as the CBO has just released the Obama administration's full aid request. Bottom line: $60.4 billion, or roughly what one year of what the ultimate tax hike compromise will bring into the government's treasury. Furthermore, if fully funded by debt today, this amount would send the US (which has a $57 billion debt buffer as of this moment) over the debt ceiling immediately.
It’s as if they are trying to poison the well.
US leaders see that this strategy has worked for EU leaders (those who went along with it are still in office, those who didn’t have been kicked out). And so they are now adopting a similar strategy with discussions on the fiscal cliff.
Obamacare - There was a significant “drafting” mistake in the original legislation.
Tim Geithner's time is almost done, but the former NY Fed head is only one of very many whose position is expected to be replaced in Obama's second term (just so there is a non-continuous chain of command if and when the time comes for the people to demand an explanation for the state of the US economy from the talented Mr. Geithner). Who else is out and who is expected to be in? The following list attempts to cover all upcoming rotations at the top of the US cabinet. What is not attempted is a prediction of where in the private sector people such as Geithner will end up: that is considered largely self-explanatory.