That David Rosenberg - the skeptic - threw up all over the Q2 (and revised Q1) GDP in his note to clients yesterday is no surprise. Even Joe Lavorgna did it (which makes us quietly wonder if America is not poised to discover cold fusion, perpetual motion, nirvana, a truly edible iPad, and peace on earth). That David Rosenberg - the deflationist - makes light fare ("ceiling will be raised") of the ongoing debt debacle is also no surprise: after all should the US default, the long bond strategy the Gluskin Sheff strategist has long been espousing will go up in a puff of smoke. What, however, is surprising, is the fact that as of yesterday's Breakfast with Rosie we get to put a political face to the financial man, and it very well may be... David Rosenberg - Tea Partier.
While it is a rare event for a reputable financial commentator to interject political observations into a client note, that is precisely what Rosie did last night, by essentially espousing the (correct) Tea Party advocacy of a balanced budget. To wit: "You know what — I am sick and tired of all the so-called mainstream pundits out there lambasting the Tea Party. Those who know me, and know me well, know that I am not some right-wing nutbar but come on. Why is everyone so scared about committing to a balanced budget amendment? Why is there so much fear about admitting that living within your means is not a terrible thing? Government spending, in the United States, is simply out of control." Hear, hear. We hope more bond commentators step up and say the same thing (except for Jim Caron of course: we expect him to say the opposite, just as we keep expecting him to admit after 3 years of wrong calls that he may have been in fact a little off in his expectations of an economic recovery and the whole bull steepener thing). What we are confused by is that according to some of the more virulent(ly amusing) neo-Keynesian theories, the more debt issued by the monetary reserve authority, the lower the prevailing interest (in a nutshell) due to more demand, or some such perversion of supply and demand. By advocating a balanced budget approach Rosie is basically saying cut the debt issuance. Could it be that, gasp, lim ? infinity debt does not equal lim ? zero interest rates? And could Rosenberg be saying that, gasp, infinite debt supply does not mean infinite +1 demand? We sure hope to find out.
In the meantime, here is the relevant section from Rosenberg on the topic of the Tea Party and the Balanced Budget:
You know what — I am sick and tired of all the so-called mainstream pundits out there lambasting the Tea Party. Those who know me, and know me well, know that I am not some right-wing nutbar but come on. Why is everyone so scared about committing to a balanced budget amendment? Why is there so much fear about admitting that living within your means is not a terrible thing? Government spending, in the United States, is simply out of control.
Over the past decade, federal expenditures rose at an average annual rate of 6% while the growth rate in the number of households has risen at a 0.8% annual rate. At around 25% of GDP, spending is higher now than at any other time since 1946. That is an outlier. Admittedly, revenues at 15% of GDP are abnormally low as well, and while a partial by-product of the recession and sluggish recovery, loopholes galore and endless tax gimmicks are also at play — in the 1991 economic downturn that ratio was around 18% and in the severe economic decline in the early 1980s, it was 19%. Revenues have to go up and there's a cool trillion sittin' right there in loopholes — oh, sorry, deductions and "tax expenditures", we don't want to offend anybody — that could be eliminated without sacrificing growth while reducing the ridiculous complexity of the tax code. A few less lawyers and IRS staff would be just fine by us.
But to think that the U.S. government cannot manage to deliver effective and essential services with a $2.5 trillion revenue base is absurd. If that is what spending has to ultimately equal, so be it. Isn't 21 grand per household of government benefits enough? Before 2005, such a level of government expenditure per household was unheard of (in Bill Clinton's final days as President, that ratio was barely above $16,000). At the height of LBJ's "Great Society" glory, government spending per household didn't even approach $3000.
So indeed, the problem is more with this massive spending infrastructure. Even the word "entitlement" is so grotesque. Entitled to what? Taxpayer funds? Come on, man! Tighten the belt and make the move towards fiscal integrity. After all, the shift towards austerity is already occurring at the state and local government levels. Households have been paring debt and raising their savings rates for two years. And Congress and the President should actually start behaving more like children (that's right) because the Denver Post just ran a story titled Tooth Fairy Gets Frugal in Shaky Economy. Indeed, the "going rate" for that loose tooth that made it under the pillow has declined from $3 on average a year ago to $2.60 today. And guess what? The kids are all right.
Time for the guys in Washington to follow on the heels of that generation. All it takes is for the President to sign on to a balanced budget amendment, and this whole fiasco is over.
Then again, and we hope we're not too harsh, but if Mr. Obama thought they actually did have a spending mismatch, he would have offered up some restraint on that score when he unveiled his budget six months ago.
Source: Gluskin Sheff