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On the Cliff
Absent some earth shaking event between now and November, Obama is going to win, the House will remain in the hands of the Republicans and the Senate will continue to be equally divided. The war between Reds and Blues will be just as bad as it was a year ago. The day after the election, the fight over the fiscal cliff will commence. I expect it will be ugly.
-I think there is zero probability that all of the issues now on the cliff will be pushed off to some future period. (Ultimate-can-kicking) Some of the cutbacks/tax increases that are now scheduled, will happen.
-I put the odds on falling off the cliff without any compromises at 40%. This scenario comes about if the Reps and Dems can’t agree on anything. If that is the case, we fall very hard on January 2. (No-can-kicking)
-Therefore, I see a 60% chance of a compromise that softens the consequences of the fiscal cliff, but does not eliminate it entirely. (Semi-can-kicking, but still kicking ourselves in the face)
If there is to be a compromise, it will be interesting to see who gets what, and who gives up what. It might play out with the following results:
I) The 2% reduction in FICA taxes is history. As of 1/1/13 every worker is getting hit with a 2% tax increase. This is a very regressive tax increase.
II) The Bush tax cuts for those making more than $250k are gone. This is a very Progressive tax increase.
III) The Bush tax cuts for those making less than $250k will be retained. This “centrist” compromises is the result of the "give" on #s I and II. Both sides will be able to claim that they did their best for “Middle Class Workers”.
IV) The Alternative Minimum Tax will be adjusted for inflation and will be fully phased in over a period of three years. This tax will hit 40m taxpayers (up from only 4m today). This is most definitely a middle class tax increase.
V) The capital gains tax rate is going to go up to at least 25%.
The result of I – V is that everyone who works, or has investment income is going to be paying more. No one will escape higher taxes.
Then there is the spending side of the ledger. The so-called, “sequestered” amounts. Here is where the real horse-trading will happen. Keep in mind that the timing of this critical argument debate will be in November and December. What else will be happening in those months that will influence the budget compromises? Talk of War.
It is almost certain that post the election, Iran is going to be front and center. Israel has promised to hold off on an attack of Iranian nuke facilities until after America votes. After November 6, the headlines will be about war. There will be big NATO/US Navy activity all over the Straits of Hormuz. This will shape the debate on military cutbacks.
With this as a backdrop, I don’t see the mandatory cuts for the military sticking. Most of the promised cutbacks will get eliminated, or pushed forward. Obama would welcome this, as it would allow him to trade more military spending for a deferral of the cuts in non-defense spending.
We will get a half loaf of spending cuts and increased taxes. The results will not significantly change the trajectory of the deficit, it will create an additional drag on the economy.
If all of the tax increases/spending cuts now pending are allowed to happen (we fall off the cliff) it will result in a drop in economic activity of at least 1.5%. It will bring about a recession that will last a minimum of six-months. The compromises that I outline above will still result in a contraction of economic activity. If we get (more or less) of what I see coming, then ¾% of annual GDP will be lost; for a long time.
What does a lousy ¾% mean? It means sub-stall speed. It means GDP will be well below 2% for 2013 and beyond. It could mean that growth falls below 1%. (Functional recession; unemployment up, tax receipts down)
++
There are two issues related to the "cliff" that are of interest to me. These are minor matters (in the scheme of things). They are Wall Street related. They go by the odd names of:
GARVEEs
&
BABs
Grant Anticipation Revenue Vehicle (GARVEE) bonds are tax free, issued by states and are backed by anticipated future revenues from D.C. for dedicated highway construction. The Fed backing (not a guarantee) makes these bonds trade rich relative to straight state debt.
The federal money to pay Garvee bondholders is at risk. Future payments from Washington are part of the sequestered amounts that will be on the negotiating table come November 7.
The rating agencies have been downgrading Garvees because of the risk of repayment. There is only $10B of Garvee bonds outstanding. I think this problem will be patched up (it's too small a matter to cause muni defaults). I also think that there will be no more Garvees issued. The fiscal cliff showed the flaw in the construction of these “bullet proof” bonds.
Build America Bonds are taxable state debt issues. This hybrid security was a child of the crisis of 2008. It died in 2010 after $180B of BABs were issued. Republicans hated BABs, Democrats (led by Tim Geithner) loved BABS.
There is an odd feature to BABs; they become callable if sequestration takes place:
BABs were issued in the terrible days of 2009/10. Recall that the likes of Meredith Whitney were calling for massive muni defaults back then. As a result, the $181b of BABS that were issued all had nice fat coupons on them. The States would love to call that paper at par; they could replace it with much cheaper debt today. The losers would be the bondholders. They would see their nice yielding bonds called away. No one cares about bondholders anymore, so BABS are dead.
Garvees and BABS are inventions of Wall Street. They are structured financial transactions that allow states to borrow more money by accessing different investor bases (tax vs tax exempt). In the end, Garvees and BABS will be throwaways in the horse trading. Their loss does not add up to much. However, if you are thinking that the solution to America’s economic problem is a major infrastructure build out, forget it.
A program big enough to create a few million jobs and modernize our roads, bridges, seaports and airports can’t be done with more federal borrowing. It has to come from the states. Shutting down BABs and Garvees is also saying “no” to that infrastructure plan.
The worst case outcome would be that there are no compromises; and we fall off a fifty-foot cliff, and die. The best case is that we fall off a twenty-five foot cliff, and only suffer a few broken bones and a concussion. Options that were once available to the country to dig out of an economic hole will have been lost. A long period of economic mediocrity is the most likely outcome.
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Good article Bruce. Even Buffet opined, "a long painful recession" before The Man told him to sit down and be quiet.
The amazing thing is how much prices are dropping for retail (like clothes) and housing. I went to the mall this weekend and the stores that were not boarded up (yet) were selling clothes at 60-90% off. I talked to one or two ladies and asked their opinions...."not buying until it is at least 80% off."
Yips!
However, that's my attitude for all this overpriced stuff. I told my realtor not to bother my son about a house until they are 80% off. INterestingly, I'm beginning to see houses sink to less then $45 psf before someone buys.
Keep up the excellent articles, Bruce. I enjoy them and learn alot. Thnx!
Everything that doesn't cut the deficit RIGHT NOW by at least 50-100% IS can kicking.
the USA is raising towards a collision not between the haves and have not's but the spend and spend nots. those that pay their bills and live within their means...ala "the German approach"...are about to be richly rewarded in the USA in my view. And i'm not talking just the citizenry...but Governments that live within their means as well. All energy rich states look set to prosper ENORMOUSLY over the coming decade(s). Those that are "entitlement rich" (New York, Illinois, California) look to me to be in GRAVE danger. I find it ironic actually the vitriol directed at those who wish to drill in the shale "in these here parts"...but am not surprised. the "elitism run amock" folks simply have lost the very notion of folks who have to work for their money...let alone the very idea of money as something "to given by something other than the Government"...in New York of all places! Taxes, fees, corruption both soft and hard have driven all the good people from this place...and all that are left are the politically correct. I'm not worried about the country as a whole...however this election turns out. I still believe Mitt Romney is a FORMIDABLE candidate...and while the idea that Israel won't strike before the election is probably correct...the same cannot be said of either Egypt or Iran however. Clearly what comes after the election is fairly obvious to all who have turned off the television and started on the "long hard slog of getting the facts"...courtesy of Zero Hedge of course...and the commentariat here and at large. still it astounds me that it astounds no one in the chicken shit media complex that...for fear of what goes on at this site i imagine...they will never dare report one shred of truth in any story anymore. we are so far from freedom in this land these days it is almost with sorrow that these clowns haven't successfully..."hyperinflated." they've certainly successfully hyperventilated. "among all the other things" of course. i wonder...can they even get it up anymore?
"I still believe Mitt Romney is a FORMIDABLE candidate"
You can drill for shale up your own ass lil' Romneybot...
drill baby drill
Any state that prospers as much as you think they will will be flooded with professional recipients and you know it, how do you think the once great state of California was destroyed?
As for the Jews holding off on bombing I-ran after the elections, I'm not so sure......October 6th may show headlines of war.
There will be headlines, either way.
Oh, BTW, we're already in a recession. "Falling off the cliff" is going to cement the downward spiral.
This sucker's going down.
"This sucker's going down"
W was a motherfucking seer
It's not the Jews doing Iran. It's the government of Israel. Two very different animals, as you already knew, but needed reminding.
Warning: This conversation is being (purposely) derailed. Get back on the main track now.
It's the Jews in Israel as you need reminding. It certainly isn't the few Christians in Israel, nor the Israeli Arabs or Druze, or the Bedouin for that matter.
'economic mediocrity'
That is what I excel at.
Splash, cold water
I hope you're wrong Bruce, but I'm very much afraid you're right.
Maybe working a little to hard at this. Forget taxes, budgets, anything that used to matter when there were markets.
What's to keep the motherfuckers, worldwide, from printing endless money, kept mostly in the big banks, but occasionally used to buy up any damn thing they want? I've been critical of the conspiracy theory here, with reason, but I don't see why they would do anything else, or for that matter HOW they would do something else. This sucker can't be unwound without a depression, and no politician will allow that, if there is a choice, no matter how crazy.
I was thinking this morning that I've been reading ZH for over two and a half years. I know you have been around longer than me. The issues back then were: impending Greek default, the real estate disaster, state and municipal default, and... hang the criminal fool Bernanke. I shit you not. Did you ever see Ground Hog Day?? What has changed?
There is always the possibility of a black swan, something they can't contain, but the Global Ponzi has proved far more resilient than I would ever have believed.
So, serious question. How do we kill the Steelie Beast? I'm an arb. You're a bond dude. There is plenty of talent and experience around. I'm thinking leverage on steroids. Fight fire with fire. Any thoughts?
I too ask similar questions. The reality however is that there can be no change without self awareness. Since the majority still believes that our problems can be fixed by electing someone "from the other political party," change will have to wait.
Other than a swan event occuring, we will be in a "kick the can" mode for a long time.
Bruce, good "inside the beast" evaluation.
- Ned
{Worth your while to get up to the 'gunks for those "cliff views". Try "high exposure".}
Are Obummer and Francois Hollande related?
Yes. The same guy operates both of them.
The only thing that needs to be pushed over the cliff is Wahington DC. When all the clowns, puppets and bamboozlers and dead and buried, we can go back to being the great country we once were.
They'll never go away, so long as we obey them.
These types of people can only go away for a very short period of time before they're replaced... the patriots of today are the tyrants of tomorrow. Humans haven't been able to implement any sort of stasis in this regard...
"the patriots of today are the tyrants of tomorrow"
not always...Many times the "patriots of today" are just the people who most want to be left alone tomorrow.... or have the least to lose.
and don't forget the Carpetbaggers, the Lords of the Copybook Heading and the sharp elbow crowd
Ok, so we're either left with: (a) the patriots immediately becoming tyrants; or (b) the patriots wanting to be left alone, which then ensures tyrants re-emerge. The point is this, it's an exercise that provides temporary relief at best. Ultimately, the justification for action is simply that new scenery is desired, not that any fruitful result will ensue.
If we're going to argue from induction, then what are the odds our glorious patriotic leaders implement a system whereby they mandate that they (as our new government) have limited powers and these limited powers should remain in perpetuity? Absolute power...
The odds are they they would mandate exactly that, but over years and years we'd creep back to where we are now. Anyone who thinks about it ought to see that setting the thing up isn't the hard part; maintaining it is.
At this juncture, we have no idea who all of the players will even be... nor their intentions. To say that it's somehow probable ("odds are") that these people will set up a vastly limited government and themselves cede power (because they'll have to take more than that to get the ball rolling), is a pretty naive stretch. I can't fathom that history bears out this response either. At the very least, we're just as likely to end up with a dictator.
I agree that maintenance is the harder part (which begs the question of motivation in the first place, if we know ahead of time it will fail, but I digress). The problem is that before one could even entertain maintenance issue, the power struggle will have to be decided... which is a really, really risky endeavor. It is most certainly not a panacea.
The other issue is that setting up a system of government IS a really, really difficult thing unto itself. Maintenance is harder, but the initial form is incredibly difficult (and also bears on the difficulty of maintenance). There are an incredible amount of competing issues to deal with, and the slightest tweak to one may spell catastrophe for another. This is why we never find stasis... because, at least through the present, humans have not been able to devise and implement any system I would deem noteworthy. Some are certainly more barbaric than others... and some tend to coincide better with our inherent feeling of liberty... but, in the end, they're all fleeting at best. Most of the positive aspects of any system of government are revisionist history. The simple fact is that they tend to favor the people who create them, sometimes punitively. I think a lot of the "patriots" forget this fact or, alternatively, play in its hypocrisy.
Here is a question worth considering: If you could be assured that there was a time limit and that power would be turned over peacefully afterwards, would you accept a dictator in order to have certain changes made?
You'll have to also assume the changes being made are ones you'd agree need to be made. So really the question tries to isolate you preference for the system of democracy versus good stewardship.
This is... not a practical question... given it is contemplated by every teenager for sure and possibly before that for some (certainly every small dog has contemplated this... although, they tend to live it in each household). The only thing you need to know is that the dictator would not step down.
The only interesting thought experiment in this scenario is whether we would have any opportunity cost with the dictatorship... and the only way to know that would be to give a few more details on the dictator. While it would be academically possible for a dictator to yield the highest ratio of happiness and fulfilment in all of his/her citizenry, in practice this is laughably absurd... proven time and time again that absolute power corrupts absolutely. The promises of today are the lies of tomorow and the tragedies of next week. The only saving grace of the dictator is that this tends to happen with each government... hence our fragility.
However, ultimately, I am humble enough to understand that I do not know what is best for the next person (or at least I don't know that I know), so a dictatorship, in the scenario you have presented, is out of the question. Although, I'm not sure why you're particularly interested in me...
The voters don't have a choice! The system has degraded to the point that both sides are losers. Some think this is a corporate conspiracy/plan and perhaps it is. Either way, even informed voters don't have a choice.
Regarding fiscal cliff.....I think some compromises will occur; however, I'm not sure it's going to make much difference. I think we're in a slow grind down as more and more people accept the crisis we're in. So they slowly cut their spending and try and save more. I think the stage has been set and there's not a whole lot than can be done, save a massive fiscal spending program and the odds of that seem slim.
It doesn't surprise me at all the the most destitute states are the dark blue ones.
That might be true for the states themselves, but not their citizens.
With this economy a wet dishrag should be out-polling Obama. The whole thing is manipulated for show and it doesn't matter who wins. Got food?
You forgot the dividend tax increase, which is going to bite all those Florida retirees bigtime. The tax rate on dividends increases from 15% to 43% ...
Talk to those retirees,,, the first 65k in dividends and cap gains has had a 0 tax rate the last 4 or 5 years.
Please explain; it seems like I'm paying too much then.
When they talk of 250K and above for income, are they talking of:
-Adjusted gross income AGM (line 38 if 1040) or
-Taxable income (after applying deductions line 43 of 1040)?
If the tax cut vanishes for 250K and higher, do they do it by reducting deductions from AGM or just increasing tax on taxable income?
Thanks
The real arm twister will be any real phase back of heretofore inflation adjusted alternative minimum tax.
This would be the brute force flat tax with marginal rate of 32.5 to 36 percent for the 50K AGM to 250k taxable income,
assuming they reduced the exclusion to 50k.
The magic is state income and property taxes are no longer deductions, and standard deductions per person are zeroed.
Follow the money, they "cant" tax the off shored corp income, or off shored hedge funds, or tax sheltered stuff.
The persons with day jobs or on shore businesses is where the pickings are.
Anyone worried about the 250K bush tax cut expiring has been too busy or forgotten to off shore/tax shelter their income.
Most day jobbers with that kind of income have big boy pants deferred compensation plans.
Is that a picture of the October stock market following Bernanke off the cliff?
It seems the markets aren't buying it very much any more. The half-life of this round of QEtc on the equity markets has been muted at best. It appears everything was priced in already.
Look for six to eight days of equity flight into bonds, with the US ten-year being the major recipient. Bond prices up, yields down. All of this barring some other verbal miracle that comes out of Someone Important's mouth. But it seems we're getting kind of drone to that, too.
:D
Like Evans. But that didn't last very long, did it?
Bruce, you eat up the hype. The last few spending "crisis" were totally phony. After all the grandstanding everything was funded. It is the "big shew".
They are going to keep spending, the tax crap is a joke, the minute the interest rates go to anything normal the entire tax income of the USA will go to interest. There is no escaping the numbers. Do you really think ZIRP forever?
zirp could end very quickly if a pissed off china says enuf of your dollar dominance.
never mind the peg as we have an arch enemy cornered with an out.
does anyone see china dumping treasuries like bombs out a cargo bay?
In that case, why wouldn't the Fed just buy 100% of new US debt issuances? It's not like they need real money to do it. They are already at 70% now, what's the difference?
What the Chinese or anyone else does is mostly* irrelevant so long as those nations also want to continue selling products here.
* - yes, yes, it would matter some day if we ever return to banking and economic reality. But until then, it doesn't matter.
"V) The capital gains tax rate is going to go up to at least 25%."
I don't see cap gains going that high-20% max. There still a lot of WS lobbying in Washington. Can you hear the scream about what will happen to the stock market if cap gains taxes go higher?
I think both parties are going to compromise on corporate taxes at 25%.
The populace is now permanently dumbed down and impoverished by government, controlled by the profiteers. You can see this on the faces of honest conservative congressmen and legislators, if not in their voices. It's best not to agonize though you can pray for a revival sea change, but now is the time to ready yourself to protect your family economics and security. Don't try to warn your children or grandchildren; they will sincerely think you are crazy. These challenges are about all a provider can manage for the foreseeable future. Build up your community relationships if you are in a decent neighborhood where folks will pull together- there will only be two or three who will listen to these kind of concerns. It's coming unglued, slow or fast. But it's coming, probably faster. The cup of wrath is now filled to near overflowing. Take heed!
Jeremiah, the Profitless
No actual bison were harmed in the making of this article.
It's not the fall that kills ya silly!
Stalin allegedly said that it maters not what the people vote for, what maters is who counts the votes
watching elections over the last 15 years or so confirms that with a vengeance
...and Hugo agrees.
"Venezuela's election system is high tech but low trust"
http://www.mcclatchydc.com/2012/09/30/170137/venezuelas-election-system-...
Stalin was wrong. The votes don't matter, and it doesn't matter who counts the votes. It's who selects the candidates and ballot issues. That's the person/group with the real power. The rest is window dressing.
" The short yellow bus" was capitalisms downfall!
Wealth loves to give back, poverty loves to take. Consumerism in it's purist form!
Wealth loves to give back....
You've never heard of Imperial Rome or its successors.
Great givers! of despotism; great takers of other people's wealth.
GBW would not have said it differently to you : compassionate capitalism; like Enron, like de-Saddamisation of WMD Irak! Like the financialista bubble of 2003-2008!
The greatest show on earth... à la Cecile de Mille!
Even NRA's Charlton Heston was in that movie!
PS : ...poverty loves to take back...what is rightfully its own!