Congressional Budget Office
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.
They say "be careful what you wish for", and they are right. Because, in the neverending story of the American "recovery" which, sadly, never comes (although in its place we keep getting now semiannual iterations of Quantitative Easing), the one recurring theme we hear over and over and over is to wait for the great rotation out of bonds and into stocks. Well, fine. Let it come. The question is what then and what happens to the US economy when rates do, finally and so overdue (for all those sellside analysts and media who have been a broken record on the topic for the past 3 years), go up. To answer just that question, which in a country that is currently at 103% debt/GDP and which will be at 109% by the end of 2013, we have decided to ignore the CBO's farcical models and come up with our own... To answer just that question, which in a country that is currently at 103% debt/GDP and which will be at 109% by the end of 2013, we have decided to ignore the CBO's farcical models and come up with our own. The bottom line: going from just 2% to 3% interest, will result in total 2022 debt rising from $31.4 trillion to $34.1 trillion; while jumping from 2% to just the long term historical average of 5%, would push total 2022 debt to increase by a whopping $9 trillion over the 2% interest rate base case to over $40 trillion in total debt!
Friday Night Dump: CBO Admits Error, Now Expects Another $600 Billion In Deficits From Obama Tax CutsSubmitted by Tyler Durden on 01/04/2013 18:59 -0400
Two weeks ago, when we commented on the biggest farce in financial thinking at the time (promptly replaced by the even more lunatic platinum coin "idea"), namely that one of the main "spending cut" proposals of the Obama administration, one amounting to $290 billion, was the assertion that the US will save hundreds of billions because, get this, interest rates are now lower than they were before. We commented as follows: "this is where one's Excel refs out, because the interest payment on Treasurys, at least in a non-banana republic, one set to see 120 debt/GDP in 3-4 years, is a function of fiscal decisions (central-planning notwithstanding), and to make the idiotic assumption that one can control interest rates for 10 years (central-planning notwithstanding), just shows what a total farce this whole exercise has become, and also shows that nobody in the administration, or the GOP for that matter, has even modeled out the resultant budget pro forma for the proposed tax hikes and budget "savings" as that would blow up said excel model immediately." We now learn that one other entity that did not fully model out the last minute Fiscal Cliff deus ex, and especially not the recursive debt relationship in a country where half the government spending is funded by debt, is the always amusing CBO (whose epic prediction failure rate has been discussed here on numerous occasions). It appears that they just did, after the close, on Friday. The outcome? Their initial estimate of a $4.0 trillion budget increase was wrong and when one factors in the fact that this incremental spending would have to be funded by, you guessed it, debt, debt which has interest, the full impact of the Obama tax cut rises deficits by 15% to $4.6 trillion over the next decade.
The USA now has two big drivers of debt.
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.
"The scaled-down deal passed in the Senate addressed the fiscal cliff but did nothing to address longer term fiscal health of the nation. This puts the US rating at risk for a downgrade. However, credit rating agencies may decide to wait and see what emerges from the subsequent talks. There is an implicit new cliff at the end of February related to the sequester and to the expected exhaustion of extraordinary measures related to the debt ceiling. This date is expected to be used by Republicans as leverage for spending cuts. President Obama has already signaled that a new round of spending cuts – those related to the sequester as well as entitlement spending – will have to be matched by additional revenue increases. Therefore entitlement and tax reform are likely to be at the center of discussions over the next two months."
And so after much pomp and posturing over the past 48 hours, much of which will likely reshape the layout of the GOP in both chambers, both the Senate and the House passed the first concurrent tax hike and permanent tax cuts in about two decades. The net result of this will be a roughly 1% drag on GDP, even as the US budget deficit increases relative to the CBO's old baseline, and the beneficial impact from the tax hikes offsets roughly two weeks of spending. In other words, while addressing the tax part of the equation, politicians delayed the spending part of the problem for exactly 60 days by punting on the expiration of the sequester, or the government spending cuts. They also delayed addressing the debt ceiling, perhaps the most integral part of the Fiscal Cliff, which has now been breached and which as of this moment means the US can't incur one additional dollar in additional debt. So looking forward it means the US now has about 4 separate cliffs: the debt ceiling cliff in February/March, the sequester cliff in March, the farm bill cliff in September and the expiration of jobless benefits on December.But that's all in the future, and it will all be a function of just how quickly the GOP rolls over to once again confirm that when it comes to the stock market, America has just one political party. The party of up at all costs, which in turn is manifested right now in the first futures print of the New Year, with both the S&P and the DJIA futures up nearly 2%, and with the E-Mini up some 50 points, or half a turn of S&P multiple expansion in two trading sessions: a nice rally to show just who Washington truly works for.
UPDATE: *LATOURETTE SAYS CANTOR WON'T SUPPORT BILL 'IN CURRENT FORM'
It seems all is not going according to plan in D.C.. Perhaps it was the $4 Trillion deficit rampage the CBO just scored, or that the Republicans awoke from their slumber but as House meetings end, it appears Citi's worst case scenario is about to take place - the bill is going back to the Senate with spending cut amendments. As Politico notes, amending the bill would throw into serious flux the carefully negotiated agreement between Senate Minority leader Mitch McConnell and Vice President Joe Biden. While headlines noted the possibility, Rep Spencer Baucus (via Robert Costa) just confirmed the deal will "go back to the Senate."
- *BACHUS SAYS HOUSE REPUBLICANS 'THERE' ON TAX PROVISIONS
- *BACHUS SAYS HOUSE MAY SEND BILL BACK WITH SPENDING CUTS ADDED
One thing is clear, Politico adds: there is serious disdain among House Republicans for what the Senate did in the middle of the night. Retiring Rep. Steve LaTourette of Ohio asked House Republicans why the House would “heed the votes of sleep deprived octogenarians,” according to a source in the meeting.
First - it is no longer the "Bush (temporary) tax cut" - it is now the "Obama (permanent) tax cut", with a loophole for the 1%ers (whose big picture "impact" we showed previously)
Second - according to the just released scoring by the CBO, the total impact to the US budget deficit of said permanent tax cuts, will be a $4 trillion increase in the deficit over the next decade. In reality, due to the CBO's perpetual optimistic bias, this number will likely be orders of magnitude lower than what it ends up being.
Maybe the US can just increase the taxes on the uber wealthy some more, and pray that unlike Obelix, they have never heard of Belgium.
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.