Congressional Budget Office
Following today's sequester-delay-seeking, tax-hiking, close-the-loophole speech by the President, it would appear that fiscal policy debates will be balanced a little more to raising effective rates on corporates (as opposed to the 'statutory' rate so many discuss). The US has the second highest global 'statutory' tax rate but less than 10% of S&P 500 firms have paid this rate over the last decade. Somewhat shockingly, since 1975, taxes have had the largest cumulative positive impact on S&P 500 ROE as effective rates fell from 44% to 30%. They estimate each percentage point rise in effective tax rate would lower S&P 500 ROE by 22 bp and EPS by $1.50, all else equal. Closing all the loopholes would smash year-end 2013 expectations from Goldman's 1575 to around 1300 with Staples and Tech the hardest hit. With the 'market' the only policy tool left, it would seem not even the Fed could monetarily save us from this fiscally fubar action.
Everything is going to be on easy street....Chicken in every pot.
We won't spend any time discussing the accuracy of the "impartial" Congressional Budget Office: we already did that in August 2011 when we showed that back in 2001 the CBO forecast total 2011 public debt would be negative $2.4 trillion; instead the real number was positive $10.4 trillion, a delta of only $12.8 trillion. We also won't spend much time on the just released CBO headline grabbing projection that the 2013 budget deficit will be under $1 trillion, or $845 billion to be precise. Instead we will show the progression of the CBO's baseline forecasts for the period 2012 and onward. We will also note that the now-forecast 2013 budget deficit of $845 billion was supposed to be a deficit of just $585 billion one short year ago, a token 40%+ error rate, but in the immortal words of Hillary Clinton: "who cares." Of course we should note that if we apply the same forecast error to the 2013 budget, it means the real final deficit print will be $1.2 trillion - just a tad more realistic. Finally, we will certainly note that while the CBO believes 2013 may see the first sub $1 trillion deficit in 4 years, a number which will decline modestly in the coming years, the deficit then proceeds to grow and grow and grow, until we reach 2024, at which point the US deficit returns to $1 trillion once again... and never gets smaller. And this is the optimistic version.
Shooting arrows at kids who are five years old today is nothing to celebrate, even if the arrows won't hit for another decade or two.
As reported previously, when Bloomberg broke the news two days ago, it now appears that the official appointment of Jack Lew as the new SecTres will take place tomorrow. From Bloomberg: "President Obama will announce tomorrow that White House Chief of Staff Jack Lew is his pick for Treasury secretary, person familiar with the matter tells Bloomberg’s Han Nichols." In other words - goodbye Timmah: best of luck writing your new book, which in the tradition of every ex-public servant who departs the government where they kept their mouths firmly shut, we assume will be all about bashing Tim Geithner.
Bloomberg is out after hours with news that was expected by many, but which was yet to be formalized, until now: namely that following today's flurry of contntious nomination by Obama, the latest and greatest is about to be unveiled - Jack Lew, Obama's current chief of staff, is likely days away from being announced as Tim Geithner's replacement as the new Treasury Secretary of the United States. In other words, Jack will be the point person whom the people who truly run the Treasury, the Treasury Borrowing Advisory Committee, chaired by JPM's Matt Zames (who just happens to also now run the notorious JPM Chief Investment Office which uses excess deposits to gamble - yes, you really can't make this up) and Goldman's Ashok Varadhan, global head of dollar-rate products and FX trading for North America (recently buying a $16 million pad at 15 CPW) will demand action from.
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.