When Tim Geithner announced an hour ago that the US debt ceiling will officially be "risen above" on December 31, he stated that there are approximately two months in which the Treasury can take emergency measures to delay the actual debt ceiling breach, a moment in time which we believe will take place some time in March. Upon further reflection, with the automatic spending cuts and tax hikes that will take place on January 1, the irony is that the debt ceiling extension may last materially longer due to a substantial reduction in the US budget deficit, potentially pushing the final threshold to as late April or even May which means the political theater is going to last for even longer than we expected - something which both parties now appear set to capitalize on as much as possible. So the question now is what are the options before Tim Geithner and what are the "emergency measures" the Treasury take to delay the inevitable moment when one of three things happens: i) the US hikes its ceiling, ii) the US begins living within its means, iii) the US defaults on its debt. Since the third, and certainly second are impossible, and since the debt ceiling theater is something we all lived through as recently as 2011, here is the article we penned in January 2011, when that long ago debt ceiling of a mere $14.3 trillion was about to be breached, and whose ultimate rise required a 20% market plunge together with an S&P downgrade of the then pristine US AAA rating (an event which Tim Geithner had said shortly prior there is no risk of ever occuring), answering precisely this question.
Facing reality is positive. That's the upside to the fiscal cliff. The last decade's fantasy that we could borrow our way to prosperity while lowering taxes on upper-income earners (because it's so cheap to borrow trillions at near-zero interest rates) is finally running into reality-based resistance.
The rumor mill on unnamed sources and strawmen is full tonight with Reuters, Bloomberg, and WaPo all reporting on a new new deal from Obama that 'meets the Republicans more than halfway' apparently. The crux appears to be a $1.2tn tax increase (over 10 years of course) thanks to higher rates on households earning over $400k (up from his original $250k but below Boehner's $1mm) and $930bn in spending reductions, including the much-discussed 'accounting' gimmick of cost-of-living-adjustments (and unChained CPI - see below) in Social Security. The offer also has a 'debt ceiling' proviso to increase the borrowing capability for two years via McConnell's proposal. S&P futures got a lift from this great 'austerity' news (that will perplex the Keynesians) but seemingly got most of the excitement out of the way this afternoon.
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.
The Dow plunged 313 points yesterday, but don’t believe news media reports that it was the nearness of the “fiscal cliff” that caused the selloff. What spooked investors is a bigger picture that recognizes the economically catastrophic implications of a second Obama term. To be clear, there is nothing Romney could have done to avoid the deflationary Depression that lies ahead. However, a Romney presidency might have at least served as a reality check on malfeasant fiscal practices, delaying the onslaught of hard times for perhaps long enough to allow Americans to put their financial houses in better order before austerity is imposed on us with the force of an earthquake, as it has been on Europe.
"Capitalists seem almost uninterested in Capitalism" is how Clayton Christensen describes the paradox of our recovery-less recovery. In an excellent NYTimes Op-ed, the father of the Innovator's Dilemma comments that "America today is in a macroeconomic paradox that we might call the capitalist’s dilemma." Business and investors are drowning in Fed-sponsored liquidity (theoretically, capital fuels capitalism) but are endowed with what he calls the Doctrine of New Finance - where short-termist profitability guides entrepreneurs away from investments that can create real economic growth. We are trying to solve the wrong problem. Our approach to higher education is exacerbating our problems. There is a solution, it's complicated, but Christensen offers three ideas to seed the discussion.
Since it would appear that QEternity has ostensibly failed in its main goal of pushing the stock market higher (and mortgage rates lower), the White House seems to be scrambling. Obama administration officials have concluded that the economy, while improved (apparently), is still fragile enough to warrant another bout of stimulus. The same old kitchen sink is being thrown at the problem as they are now resorting to the same fiscal stimulus that has also failed time and time again (as we noted here). As WaPo strawmans reports the White House is discussing the idea of a tax cut that it believes will lift American's take-home pay and boost a still-struggling economy (citing people familiar with the administration's thinking). This is Keynesian-based Einsteinian madness at its very best.
We know two things about the future: 1) Borrowing 35% of Federal expenditures every year is unsustainable; and 2) The Baby Boom generation of 75+ million may be working longer, but they are also retiring en masse, joining the ranks of Social Security and Medicare beneficiaries at the rate of 10,000 per day, a flood that will not ebb until the late 2020s. This raises the obvious question: if Federal spending must decline, then where is the money going to come from to fund 75 million retirees? Calling the Central Bank of Mars: Greetings, Martian friends.
- Japan grapples with own fiscal cliff (Bloomberg)
- Japan Protests After Four Chinese Vessels Enter Disputed Waters (Bloomberg)
- Asian Stocks Rise as Exporters Gain on China, U.S. Data (Bloomberg)
- An obsolete Hilsenrath speaks: Fed Keeps Rates Low, Says Growth Is Moderate (WSJ)
- ECB Said to Push Spain’s Bankia to Swap Junior Debt for Shares (Bloomberg)
- Spain’s Bad Bank Seen as Too Big to Work (Bloomberg)
- China postpones Japan anniversary events (China Daily)
- Carney Says Rate Increase ‘Less Imminent’ on Economy Risk (Bloomberg)
- Credit Suisse to Cut More Costs as Quarterly Profit Falls (Bloomberg)
- Obama offers a glimpse of his second-term priorities (Reuters)
- Draghi defends bond-buying programme (FT)
Readers may recall that Ron Paul once surprised everyone with a seemingly very elegant proposal to bring the debt ceiling wrangle to a close. If you're all so worried about the federal deficit and the debt ceiling, so Paul asked, then why doesn't the treasury simply cancel the treasury bonds held by the Fed? After all, the Fed is a government organization as well, so it could well be argued that the government literally owes the money to itself. He even introduced a bill which if adopted, would have led to the cancellation of $1.6 trillion in federal debt held by the Fed. Of course the proposal was not really meant to be taken serious: rather, it was meant to highlight the absurdities of the modern-day monetary system. In a way, we would actually not necessarily be entirely inimical to the idea, for similar reasons Ron Paul had in mind: it would no doubt speed up the inevitable demise of the fiat money system. Control can be lost, and it usually happens only after a considerable period of time during which their interventions appear to have no ill effects if looked at only superficially: “Thus we learn….to be ignorant of political economy is to allow ourselves to be dazzled by the immediate effect of a phenomenon."
If there is one dominant consensus in the financial sphere, it is that the Federal Reserve's $85 billion/month bond-and-mortgage-buying "quantitative easing" will inevitably send stocks higher. The general idea is that the Fed buys the mortgage-backed securities (MBS) and Treasury bonds from the banks, which turn around and dump the cash into "risk on" assets like equities (stocks). This consensus can be summarized in the time-worn phrase, "Don't fight the Fed." This near-universal confidence in a QE-goosed stock market is reflected in the low level of volatility (the VIX) and other signs of complacency such as relatively few buyers of put options, which are viewed as "insurance" against a decline in stocks. The usual sentiment readings are bullish as well.
But what if QE fails to send stocks higher? Is such a thing even possible? Yes, it does seem "impossible" in a market as rigged and centrally managed as this one, but there are a handful of reasons why QE might not unleash a flood of cash into "risk on" assets every month from now until Doomsday
Well, my fellow Slope-a Dopes, your favorite intrepid seafaring Frenchman got blown out of the water by Benjamin Moby-Dick Bernanke once again. I have to hand it to captain grey beard, for a guy with a curiously quivering lower lip, who seems so utterly unsure of himself every time he opens his moronic mouth, he sure does have some pair of ballistic brass balls. Not only did he delivered on his QE3 promise, but he actually turbo charged it into a terrifying trifecta! Boatswain BDI was left for dead, desperately drowning in a sea of red DOOMs (Deep Options Out of the Money). So now that Moby Dick has breached and surged the equity waves to new highs, where do we sail from here?
Miracles of cosmetic surgery.
How does the current 'recovery', which according to the NBER officially began in June 2009, compare to those of the past? The Council on Foreign Relations updates its recovery chartbook and succinctly notes that "the current recovery remains an outlier among post-war recoveries along several dimensions." Consumers remain reluctant to take on new debt and the stock of debt is lower than it was when the recovery officially began. The global economic slowdown is beginning to manifest itself in world trade. After staging the strongest recovery of the post–World War II era (thanks to the depth of the plunge), growth in world trade has begun to decelerate.
Reuters summarizes the key facts about the 42-year old House Budget Chair and potential future American vice president. Enclosed also select reactions from various individuals across the political spectrum to his nomination as well as a summary of his lifetime donors as well as those of Joe Biden.