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Goldman Explains What The Supercommittee Failure Means

Tyler Durden's picture





 

By now everyone knows that the Supercommittee is an official dud. But what does that really mean for the economy and the stock market? Goldman's Alec Phillips chimes in with one of the better explanations of what this means. "The fiscal super committee announced today (November 21) that it would not reach agreement, and that its deliberations had concluded. Super committee failure means that (1) there is greater risk that the payroll tax cut expires, though there is still a chance this could be attached to a year-end spending bill; (2) spending cuts in 2013 will be more severe than they would have been under a super committee agreement; but (3) spending in 2012 will remain unchanged versus previous expectations." As for the one item everyone wants to know more about, i.e., the US downgrade, here is Goldman's take: "No ratings downgrades for now, but another "negative outlook" seems possible. S&P and Moody's have indicated that they will not take negative action on the US sovereign rating due to the super committee's failure to agree. Fitch has not yet concluded its rating review, but indicated in August that the Super Committee's failure to reach agreement would likely result in negative ratings action, which most likely means moving the outlook on its AAA sovereign rating from stable to negative (this would place Fitch in an equivalent position to Moody's). Fitch has indicated it will conclude its review by the end of the November."

Fiscal Policy After the Super Committee, from Goldman Sachs

The super committee has officially announced that it has failed to reach agreement. Although the super committee's formal deadline is not until midnight on Wednesday, November 23, the rules that govern the super committee require that the Congressional Budget Office provide a final estimate of the budgetary effects of any agreement 48 hours ahead of a vote, which puts the effective deadline at midnight tonight and agreement apparently out of reach.

Going into this process, we saw two potential scenarios coming out of the super committee process: (1) no agreement whatsoever, or (2) a partial agreement reaching about halfway to the $1.2 trillion deficit reduction target, with the automatic spending cuts or other strategies used to make up the difference. We viewed the latter as more likely given (1) public pressure on lawmakers to reach basic agreement on key issues, (2) a modest amount of common ground between the parties on deficit reduction policies, and (3) the opportunity for both parties to get something they desired out of the super committee process. For Republicans, avoiding some of the automatic defense cuts was the most important source of motivation, while we thought Democrats would be swayed by potential extension of the payroll tax cut and possibly emergency unemployment benefits, along with perhaps some other jobs-focused provisions.

These motivations proved insufficient to overcome the broader political pressures each side faced going into a very competitive election year. Although House Speaker Boehner (R-OH) did late last week propose a package of $600bn as the basis for the partial agreement that had earlier seemed likely to us, its composition was far from what seemed likely to win agreement, and time to reach a deal ran out. We see the following as the most important implications of the super committee's failure to reach agreement.

1. Extending the payroll tax cut and emergency unemployment benefits just got harder… The payroll tax cut and emergency unemployment benefits expire at year end, unless Congress acts to extend them. The most obvious means for extension has been inclusion in the super committee package and failure to reach agreement has reduced the likelihood of extension of these provisions, for two reasons: (1) offsetting the cost of a payroll tax cut ($110bn/yr) and/or emergency unemployment benefits ($50bn/yr) extension is more difficult to do outside of the super committee process, where "creative accounting" such as the use of war savings would have been more easily tolerated by both parties, and (2) the political debate is likely to get more acrimonious following super committee failure, which could make it more difficult to agree on other items.

Our current economic forecast assumes extension of the payroll tax cut but not emergency unemployment insurance. While we have viewed the risks to this scenario as evenly balanced -- there had been some risk that they payroll risk might not be extended, but also a considerable chance that unemployment benefits might be extended at the last minute--the risk now appears to the downside. The probability of a payroll tax cut has declined, and the prospects of extension now hinge mainly on whether Democrats can increase support for an extension by addressing Republican priorities in the same legislation. However, most of the items Republicans would be likely to seek would also come with a cost, and such a package could quickly become too expensive to pass. Emergency unemployment benefits, which had seemed to be a close call before, now look more likely to expire, though extension is still, for now, part of post-super committee negotiations along with the payroll tax cut.

Additional clarity on the path forward on these issues may not come until next week. At that point, Congress will return from recess and congressional leaders will begin putting together the strategy to extend funding for government operations past December 16, when the current stopgap funding measure expires. If either the payroll tax cut or emergency unemployment benefits are likely to be extended, it is likely to occur as part of this year end spending legislation, which already looks likely to be the vehicle to take care of some smaller (and less controversial) items such as the annual "doc fix" to reverse a large scheduled cut in Medicare payments to physicians.

2. …But few other effects for 2012. Although the debt limit agreement reached in August (known formally as the Budget Control Act) cut spending by $25bn in FY2012 (slightly more on a calendar basis), that amount is already included in our forecast, and neither the automatic spending cuts nor any of the possible super committee scenarios would change this by more than a few billion dollars. Therefore, apart from the uncertainty around expiring stimulus provisions, the outcome of the super committee should have very little direct effect on fiscal policies in 2012.
Federal fiscal drag for 2012 may be decided in the next few weeks

3. Additional fiscal skirmishes are likely over the next year, but no major reforms are likely until after the 2012 election. The super committee's rules would have made any fiscal reforms it agreed to much easier to enact. Those expedited procedures disappear now that the super committee has failed. Their absence, along with the broader political tension between the parties, makes fiscal reform unlikely for the next year. In the meantime, additional debates are likely, since Congress will have to vote to appropriate funds more than once between now and the next election, and will also debate expiring tax measures. While those debates will serve as catalysts for the two parties to push their priorities, the likelihood of meaningful reforms coming out of those events seems very low.

4. No ratings downgrades for now, but another "negative outlook" seems possible. S&P and Moody's have indicated that they will not take negative action on the US sovereign rating due to the super committee's failure to agree. Fitch has not yet concluded its rating review, but indicated in August that the Super Committee's failure to reach agreement would likely result in negative ratings action, which most likely means moving the outlook on its AAA sovereign rating from stable to negative (this would place Fitch in an equivalent position to Moody's). Fitch has indicated it will conclude its review by the end of the November.

5. Automatic spending cuts in 2013 create new uncertainty. The automatic spending cuts that take place in 2013 (these are known as "sequestration" in Washington parlance) would reduce spending by roughly $75bn in 2013. Lawmakers may attempt to intervene to postpone or reverse some of these cuts; some Republicans have already said they will push to reverse the defense-related cuts in particular because they believe that they would unacceptably weaken the military. However, reversing them won't be easy and may not find sufficient support unless the savings they would have produced are replaced with new savings from another area. President Obama has also threatened to veto legislation that reverses the cuts without paying for them. Thus, members of Congress who support reversing the defense cuts would need to come up with savings elsewhere that are acceptable to a majority of Congress. Given the failure to agree on exactly this issue over the last few weeks, it is difficult to see how lawmakers would be able to reach agreement on it next year, closer to the election. If not, this issue would then become part of the post-election policy mix.

Automatic spending cuts loom in 2013

Effect on federal of automatic "sequester"; billions of current dollars and percent of GDP

6. The focus will soon turn to the year-end 2012 debate. Once Congress decides whether to extend the payroll tax cut and emergency unemployment benefits, the focus is likely to turn to the even larger issues that will need to be addressed at the end of 2012: (1) the likely attempt to undo the automatic spending cuts that kick in in January 2013, (2) the expiration of the 2001/2003 tax cuts after December 2012, and (3) the need to increase the debt limit, which will hit in late 2012 or early 2013 (the exact timing will depend on revenue patterns and policy choices). There are too many potential scenarios to list here, since decisions yet to be made this year that will affect next year's debate, as will the upcoming election. However, the amount of expiring policies and spending cuts set to take effect over the next few years is large, as shown in the table below. These numbers highlight the fact that the risk from a political impasse is not only that Congress fails to enact long-term fiscal reforms, but also that it fails to extend current policies and in doing so adds to the drag on growth from fiscal policy.

 


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Tue, 11/22/2011 - 00:45 | Link to Comment SHEEPFUKKER
SHEEPFUKKER's picture

The U.S. dis-credit rating. Who the f cares about this shit? Anyone with half a brain knows what is really going on. Warren Buffoon's quad A rating is priceless. 

Tue, 11/22/2011 - 01:12 | Link to Comment Harlequin001
Harlequin001's picture

The CEO that downgraded the US has gone hasn't he?

What makes anyone think there will be any more downgrades, until it's too late to get out anyway?

Next step; Dick Bove for S&P CEO, Cramer for CFO and problem solved...

Tue, 11/22/2011 - 02:28 | Link to Comment The Big Ching-aso
The Big Ching-aso's picture

 

 

The Super Committee having done Super Nothing which derivative to the endemic Super Fuckups in Congress doing pretty much everything Super Clusterfucked, the Super Nothing Committee is in actuality a Super Plus.

Tue, 11/22/2011 - 02:43 | Link to Comment Harlequin001
Harlequin001's picture

reminds me of a script from the 'Incredibles'...

just sayin'...

Tue, 11/22/2011 - 09:28 | Link to Comment Don Birnam
Don Birnam's picture

 "We viewed the latter as more likely given (1) public pressure on lawmakers to reach basic agreement on key issues..."

"Public pressure" -- i.e., Goldman, and their Wall Street brethren. Laughable, the sheer gall of these thieves.

Tue, 11/22/2011 - 10:04 | Link to Comment Big Slick
Big Slick's picture

Moody's, Fitch, and S&P. 

 

These are the geniuses who accurately rated our subprime investments, right?

 

Tue, 11/22/2011 - 00:47 | Link to Comment navy62802
navy62802's picture

What an absolute farce. This sequestering plan is the plan for now. But Washington lobbyists have an entire year to negotiate their way out of these "mandatory" $1.2 Trillion in cuts. When 2013 rolls around, even these meager deficit reduction measures won't be around.

But hey, futures are green right now. So there's nothing to worry about. It's all good, right?

Tue, 11/22/2011 - 06:34 | Link to Comment oogs66
oogs66's picture

How much money is the defense industry going to spend on lobbying ?

Tue, 11/22/2011 - 07:23 | Link to Comment Ghordius
Ghordius's picture

"...some Republicans have already said they will push to reverse the defense-related cuts in particular because they believe that they would unacceptably weaken the military..."

They are already at work, since Ike's times they are relentless...

It is the question about how to defend the US of A from an attack of all the rest of the world, including the untrustworthy NATO allies, plus Krugman's aliens contributing the same firepower.

Half of the military spending of the whole world seems to be just the right amount, one quarter only would be utterly too little...

It's sad, sad, sad... I love the USA, even though sometimes it's like loving a Hot Californian Blonde with the attention span of a fruitfly...

Tue, 11/22/2011 - 11:46 | Link to Comment FreeNewEnergy
FreeNewEnergy's picture

Who gives a flying pig's ass if unemployment benefits and the payroll deduction go away? Like Herman Cain (asshole supreme) said, if you're out of work, it's your fault. The man has no future in politics, that's for sure.

As for payroll taxes, who not cut the Gordian knot and just stop paying. You'll have happier employees and more cash for about six months, then the Federales will come hunting and your business will be toast. But, since there's little hope for American business, you could just take your dough and head to South America, escape the Kleptocracy and live well.

Taxes? Who's going to pay them before food? Gas? Heat? And all those worker's comp, unemployment insurance, SS and Medicare taxes they screw you out of every pay period, screw them.

Pay cash, buy some PMs with the money you keep and learn how to shoot and run at the same time. The day of reckoning is upon us.

"Government is quickly losing the ability to govern." - John Bogle, a couple weeks ago on CBS news.

Tue, 11/22/2011 - 00:46 | Link to Comment Terminus C
Terminus C's picture

Fuck Goldman and his Sach.  Not sure why we should even consider what these cunts say.

Tue, 11/22/2011 - 01:28 | Link to Comment DeadFred
DeadFred's picture

GS is the single best source of contrarian info. Fade everything they say. They are parasites so why would anyone think they would give away information. There is ALWAYS an ulterior motive for their words. Read the article and try to figure out how they are trying to con you and you will be a wiser investor.

Edit: I know it's a disturbing job but like a med lab analysing a stool sample valuable information is obtained.

Tue, 11/22/2011 - 08:46 | Link to Comment twotraps
twotraps's picture

good morning....nothing like a little jolt of coffee and reading your comment to get the blood flowing.  Thought the same thing, no downgrade bla bla bla sounds like stocks are a buy then right??   Not sure why we listen either.

Tue, 11/22/2011 - 10:02 | Link to Comment Big Slick
Big Slick's picture

Reading the GS analysis I marvel at the skill of writing a mis-direction piece while at the same time hedging your  predictions so that when/if anyone reads this on Monday morning (i.e. after its all over) they can't say it was full of crap.

The world's best hedgers writing the worlds best hedge piece.

 

Tue, 11/22/2011 - 00:48 | Link to Comment Spitzer
Spitzer's picture

The US cant agree to stop spending like retards and Europe cant agree to print money yet the dollar rallies. The market is full of mental cases.

Tue, 11/22/2011 - 00:48 | Link to Comment Gamma735
Gamma735's picture

We don't need to worry about all the excessive debt.  The Mayans had it right, Jesus will return in 2012. 

Tue, 11/22/2011 - 10:19 | Link to Comment Big Slick
Big Slick's picture

He's here already.  QB for the Broncos.

Tue, 11/22/2011 - 00:57 | Link to Comment riley martini
riley martini's picture

 A downgrade would bring on an investigation by the fascist with insider theft accounts and the firing of the CEO of the ratings agency .  Chances of a lap dog rating agency downgrade 0.

Tue, 11/22/2011 - 00:59 | Link to Comment BKbroiler
BKbroiler's picture

good. both parties get it in the ass.  the only who isn't bothered is Ron Paul.

Tue, 11/22/2011 - 01:05 | Link to Comment bob_dabolina
bob_dabolina's picture

 Goldman's take: "No ratings downgrades for now, but another "negative outlook" seems possible.

Ratings downgrade imminent.

Tue, 11/22/2011 - 07:14 | Link to Comment ThatThatcher
ThatThatcher's picture

Moody’s stated the developments were ‘informative but not decisive’ whilst S&P felt this was ‘consistent’ with their decision on Aug 5th  to downgrade the country’s ratings. Moody’s: Aaa, negative. S&P AA+, negative. Meanwhile, Fitch’s will conclude their review by the end of November but released a statement that they would likely reduce the outlook to negative, indicating a 50% chance of a downgrade in the next two years. http://www.fitchratings.com/creditdesk/press_releases/detail.cfm?pr_id=734030

Tue, 11/22/2011 - 01:12 | Link to Comment ffart
ffart's picture

S&P and Moody's have indicated that they will not take negative action on the US sovereign rating due to the super committee's failure to agree. Fitch has not yet concluded its rating review, but indicated in August that the Super Committee's failure to reach agreement would likely result in negative ratings action, which most likely means moving the outlook on its AAA sovereign rating from stable to negative (this would place Fitch in an equivalent position to Moody's). Fitch has indicated it will conclude its review by the end of the November."

Are we about to experience Peak Bullshit?

Tue, 11/22/2011 - 01:29 | Link to Comment lolmao500
lolmao500's picture

If only just one party held power in both house and senate, everything would be fixed and this scam could go on for a while longer!

Tue, 11/22/2011 - 01:31 | Link to Comment JR
JR's picture

Aside from Goldman’s hopeful list to Santa, IMHO, to undo the automatic spending cuts, let the 2001/2003 tax cuts expire after December 2012, increase the debt limit and, if Rubin has his way, leave legit SS recipients holding an empty bag, Santa’s Bad Boy Denninger is stirring up Santa’s little helpers with the bad news about the Goldmans who stole Christmas…

Here You Go: It's Over | 2011.11.21

We're done folks.

CNBC is reporting that there are now clients running out of the markets entirely because they do not believe their customer funds are safe.

That's the end of it.  The belief that there are more MF Globals has now taken hold.  The thieves have pushed it too far and now we've got the start of a global liquidity run, and with good reason.

The authorities both in the regulatory side and on the prosecutorial side have refused to put a stop to the thievery and now the risk factors have turned into realized risk.

The market is done folks.  You can be right but if you make your bet in the markets, are right, and then get screwed anyway when someone steals the money and nobody goes to jail there comes a time when people begin to understand that it can happen to them and will unless they depart the market.

We're there folks.

Oh sure, there will be rallies and there will be selloffs.  But there is no longer a market, there is no longer a thing to trade, and there is no longer a reason to believe that superior analysis will lead to profit or even safety.

This isn't just about speculators - it is also about farmers, shippers, airlines, manufacturing concerns, everyone in business who has a need to hedge.

More than four years ago I said that the government had to step in and demand that both off-balance sheet games be ended permanently and in all forms and that all derivatives had to be put on an exchange, without exception, and that every dollar of underwater position had to be backed by an actual dollar of capital in real money, held and known to be safe.

The regulators refused and now it appears that what was put up on a regulated exchange was effectively stolen.

Well folks, then none of your investment accounts -- not your IRA, 401k, not even your bank account -- is safe.

Diversification is a strategy but the risk remains.  It is up to you to decide how much you're willing to risk losing to a crook.  If the answer is "none" or you cannot reduce the at-risk portion of your assets to what you're willing to lose to fraud then you can no longer participate in the market at all, in any form, nor even do business with a bank.

That sucks, but it is what it is and if this meme spreads -- and it will until it's stopped -- we run the risk of a "sudden stop" economic event.

I hope you're ready for it -- I am to the best of my ability, and you ought to be.

http://market-ticker.org/

Tue, 11/22/2011 - 08:52 | Link to Comment twotraps
twotraps's picture

really  well said.  been struggling with how to keep up with some return, without huge risk and or some investment where you could protect yourself against erosion of the dollar.  Not that easy and really tragic.

Tue, 11/22/2011 - 01:31 | Link to Comment James T. Kirk
James T. Kirk's picture

May I have your attention. We have just experienced total engine failure while cruising through Fantasy Island Galaxy. Don't bother to fasten your seatbelts. Hard landings don't exist when you unexpectedly pop out of hyperspace at Warp 9.

Tue, 11/22/2011 - 01:38 | Link to Comment dr.charlemagne
dr.charlemagne's picture

from a monitarist point of view the super failure is short term bullish since we know that they will now dismantle any meaningful spending cuts and the gov't will continue to pour out more more and more cash. they have decided to kick the f'ing can again by "default", oops, I mean "until default."

Tue, 11/22/2011 - 01:42 | Link to Comment Charles Martel
Charles Martel's picture

Isn't this a good thing?  Since these knuckleheads can't reach an "official" agreement then the automatic across-the-board spending cuts get implemented.

Tue, 11/22/2011 - 01:44 | Link to Comment ItsDanger
ItsDanger's picture

Even if they had agreed on some deal, it would accomplish nothing.  Treating the effect and not the cause never works in the long run.  They consistently operate outside of a budget anyways.  Something people just arent aware of it seems.

Tue, 11/22/2011 - 01:46 | Link to Comment catch edge ghost
catch edge ghost's picture

samen tonighn

Tue, 11/22/2011 - 01:57 | Link to Comment Bansters-in-my-...
Bansters-in-my- feces's picture

I see that S&P got there check from the USTreasury.

And where th fuck is Jon Corzine.?

Maybe Goldman can explain that.

No charges even....not for MF,NOT for Jon Corzine...?

Explain that Goldman Sachs.

And USA Justice Department.

What a fucking joke,you fat fucks.

Tue, 11/22/2011 - 02:27 | Link to Comment LookingWithAmazement
LookingWithAmazement's picture

Supercommittee Failure - no crisis. World will continue to lend money to the US, still the best option after all. 2012: grotwh returns with a vengeance. Bye bye "crisis", collapse, meltdown, Armageddon.

Tue, 11/22/2011 - 10:14 | Link to Comment Saro
Saro's picture

Not as funny or original as MDB, but I still chuckle a little. C-

Tue, 11/22/2011 - 02:28 | Link to Comment buyingsterling
buyingsterling's picture

Bullish for Ron Paul's chances. These 12 morons couldn't find cuts in ten years to match what he proposes to cut 1st year. And yeah, he can do it. The executive is king, and he'll have a mandate and coattails.

Tue, 11/22/2011 - 02:29 | Link to Comment DonutBoy
DonutBoy's picture

Tis but a scratch

Tue, 11/22/2011 - 02:47 | Link to Comment Mark123
Mark123's picture

Can I get a high paying job writing this sort of useless crap for Goldman?  I would only ask for a meager $1 million year end bonus too.

 

What a f--king joke. 

Tue, 11/22/2011 - 06:37 | Link to Comment oogs66
oogs66's picture

You think too small - you have to think you deserve 5 million to get a job there and be disappointed when you only get 1 million

Tue, 11/22/2011 - 03:03 | Link to Comment Number 156
Number 156's picture

It failed because it didnt come up with the answer they wanted to hear.

Tue, 11/22/2011 - 08:18 | Link to Comment overmedicatedun...
overmedicatedundersexed's picture

Milken went to jail for alot less , as I remember he never stole trading accounts..Jon y boy..looks the type to say: put me in jail and I will talk and all you MFers are going with me..thats why the whole elite run MSM is not demanding his head.

Prediction: he will be run over by an out of control car while walking in London..you can't threaten the TBTF..mafia

Tue, 11/22/2011 - 08:29 | Link to Comment overmedicatedun...
overmedicatedundersexed's picture

motto on congress bathroom wall:" IF you do nothing you can't be blamed but you can point your fingers at the opposition and say it was because of them a win win" -..

congress knows: do nothing things get worse

                        cut spending things get worse (job loss)

                        print and spend things get worse but people willl vote you back to DC..

guess which one they do?

 

 

Tue, 11/22/2011 - 08:43 | Link to Comment tgmur10
tgmur10's picture

It was never designed to succeed in the conventional sense, so therefore, as it was designed, it was a complete success!!!   Chit, I think I’m getting the Crap……. 

Tue, 11/22/2011 - 08:53 | Link to Comment Ben Bunger
Ben Bunger's picture

US parties will not agree on anything until they have to. That is until they default. Risk-free rate the biggest oxymoron of the post war era.

Tue, 11/22/2011 - 08:58 | Link to Comment twotraps
twotraps's picture

Not the best analogy but lets say a parent gives her son and daughter a joint credit card.  They each get a good size allowance and both work with decent side-job income....the credit card runs over and they all have a little chat.  Again and again the kids can't work it out, despite income from various sources they continue to spend over the limit.    One reason for their failure may be they just have expenses they can't agree to...or there are special needs that are very difficult to cut at this time...or they are in a several year spending crunch due to college costs............or, just maybe, possibly, don't want to rule out that they absolutely don't fear the consequences of being over the limit.   Perhaps the missing part of the story is that there's no 'real' lasting punishment and always a way to game it or get around with excuses.  Are the kids really devious or are the parents teaching them to be good gamers and scammers.

Tue, 11/22/2011 - 09:50 | Link to Comment imsaul0968
imsaul0968's picture

For those of you who invest in an IRA or for long term goals, theres a better approach than buy,hold,hope. Stocks follow the economy so analyzing the economy, specifically the factors that are "leading indicators" and having exposure to equities only when the economy is headed in the right direction and avoiding equities in favor of safe haven baskets is a much more logical approach. And missing the major drawdowns is the only way to help ensure meeting your goals.  If you are interested in investing in a portfolio that tactically invests in equity and safe haven baskets via ETF's automatically, please email me at:

eclark@breakaway-partners.com

and I'll add you to the weekly market commentary & portfolio update distribution list.  Its free to add you and you can follow along our model and our views.  We have been RISK-OFF since 6/30 so have missed all this wicked volatility. Currently invested in short duration treasury baskets as flight to safety drives interest in our debt. 

Tue, 11/22/2011 - 10:34 | Link to Comment Poule Mouillee
Poule Mouillee's picture

Lessons for U.S. from Canada's "basket case" moment.

http://www.reuters.com/article/2011/11/21/us-crisis-idUSTRE7AK0EP20111121

Do NOT follow this link or you will be banned from the site!