Romney/Ryan And The Fiscal Cliff

Tyler Durden's picture

Romney's selection of Paul Ryan as his veep clarifies the policy debate (forcing typically middle-of-the-road voters to become more polarized to the size of government) into the November election and materially changes the odds of the fiscal cliff's resolution. As Morgan Stanley's Vince Reinhart notes, "by tying one side to an explicit plan for fiscal consolidation, the Ryan selection makes it much more likely that the campaign will focus on the appropriate role of the government.  That is, the debate will be about the right level of federal expenditure relative to national income, the progressivity of the tax system, and the extent to which family incomes are protected on the downside by Washington, DC." Although theoretically the Ryan pick raises the chance of a benign, before-the-election resolution to the fiscal cliff 'issue', it also worsens the likely outcome if the legislative stand-off continues into 2013 - which the odds suggest is the case.

 

 

Morgan Stanley: Ryan Pick Clarifies the Policy Debate

November election now focused on the role of government.  Mitt Romney has now defined his likely economic policies by proxy through his vice presidential pick. 

By tying one side to an explicit plan for fiscal consolidation, the Ryan selection makes it much more likely that the campaign will focus on the appropriate role of the government.  That is, the debate will be about the right level of federal expenditure relative to national income, the progressivity of the tax system, and the extent to which family incomes are protected on the downside by Washington, DC.

Before Ryan Pick... voters largely indifferent to role of government decision...

 

After Ryan Pick... more polarized...

 

The Ryan plan envisions a 14 percentage point lower debt-toGDP ratio by 2022 than the president's budget (see my first exhibit in Appendix).  This entails a cumulative $5 trillion cut to expenditures relative to the White House plan.  The drama on Medicare is postponed, but when it comes, it is significant. Obamacare would end in favor of a market-related exchange.  Fannie and Freddie are to be ended, and Dodd-Frank is to be rolled back.  The Fed would be given the single mandate of price stability.

Among the plans in play, Paul Ryan’s would shrink the government the most – if his plan's arithmetic could be trued up.  Regarding the fiscal cliff, we think the Ryan pick raises the chance of a benign, before-the-election resolution.  But it also probably worsens the likely outcome if the legislative stand-off continues into 2013. 

 

First, the cooperative outcome.  A robust debate about fiscal policy will draw voters’ attention to the harm caused by the cloud of uncertainty from the failure of politicians to find a legislative solution.  The deadweight loss includes the elevated risk of recession, potential changes in tax rates that make planning more difficult, and potential adverse effects on local communities from deep cuts in the defense budget if sequestration kicks in.  The latter issue looms particularly large in important swing states with critical Senate contests, including Florida, Massachusetts, and Virginia.  More vigorous voter scrutiny might force politicians to temporarily settle the issue in the run-up to the election. 

Contesting the election on big fiscal principles, however, also raises the chance of a punishing 2013 outcome. Individual election victors will view themselves as having a mandate from voters who had been given a clear choice.  But what happens if, in the aggregate, voters opt for a divided government?  The latest quotes from Intrade (see below) suggest that is the likely outcome.  If the control of the White House and the Congress continues to be split, it might be even harder to compromise next year, even compared to this year’s polarized results.

 

Not much chance of Fed action.  We've consistently held that the Fed would prefer to keep on hold in the election season.  Since the most recent meeting, financial conditions have eased and data have been a bit more upbeat.  Indeed, our tracking estimate of GDP growth has moved up threetenths.  In addition, there has been no mention by Fed officials of a lending program.  Accordingly, we marked our assessment of action at the September meeting down to 30 percent.

Fiscal Cliff Trades

Under current law, the US federal government will implement severe fiscal tightening at the beginning of 2013.  The potential impact of this ‘fiscal cliff’ includes legislative gridlock, falling economic indicators, downward pressure on GDP growth, and declining disposable income.  The potential impact to markets could include rising systemic risk, the US Treasury 10-year yield moving past historical lows, flat earnings growth, and rising short-term hedging demand.  

So uncertainty reignsIn interest rates we would be long duration in the 10-year sector and suggest a 2s10s curve flattener.  In FX we would be short USD/JPY on tighter yield differential.  But in my view, now is a great time to put on hedges around the looming uncertainty.  In the credit space, for instance, we favor buying MCDX as macro hedge.

 

Source: Morgan Stanley

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
radicall's picture

You would think so but it is NOT TRUE. Romney/Ryan are attacking Obama that he will cut Medicare spending and defense budget.

 

R&R is for INCREASING deficit by handing out bigger tax cuts to their buddies. There is no spending cut there except cut some social programs and siphon the money to people who can actually "donate" to their cause. The End.  

Comay Mierda's picture

there is a big elephant in the room that no one is talking about

and his name is Hyperinflation

MSM keeps pretending endless deficit spending in a consumption-based economy has no consequences

Entitlements and the Military Industrial Complex will cause the dollar collapse.

And they will say NO ONE saw it coming

LetThemEatRand's picture

The one grain of truth in all of this is that if I am legitimately raped by the Fed, I cannot become pregnant.  

Spastica Rex's picture

Funniest comment in days. Priceless.

Manthong's picture

Yeah, +1..

However, you are left infected with many nasty terminal STD’s including the new one.. aggressive Bernankebola of the butt.  

sessinpo's picture

Congradulations! You are the proud parent of a +$16 Trillion dollar debt baby.

DoChenRollingBearing's picture

Going off the "Fiscal Cliff" means holding CA$H, real long green, becomes King.  Very deflationary.

However, my guess (worth zero) is that yet another phony deal will be made, another ugly "compromise".  THAT would be inflationary.  

If we get something similar to the Ryan Plan, well, longer run that certainly would be good, more .gov spending IS the problem.

spine001's picture

Incorrect, Ben Bernanke mentioned when asked by the Finance committee of the House that "Financial Instability risk" increases with more QE and that they are looking into that. I do know as a fact that it is in their models. The system could start oscillating out of control and that is scaring them shitless... :)

 

Until next time,

Engineer

lasvegaspersona's picture

The Fed prints, not to improve the ecomony but to fund the USG.

The government MUST spend or the GDP will fall.

There is no way the budget can be cut without disasterous effects on the economy.

....and yes, then we will get the hyperinflation....everyone knows (of those paying attention)

please do not panic those in stearage, their fate is bad enough, no reason to add  fear to their last moments...

odatruf's picture

The people in steerage should know that at this point their choices are to stay where they are / keep on watching Dancing Idol / hoping someone else is smart enough and wants to fix the problems OR they can get off their asses, recognize the ship is going down and put some ores (haha, see what I did there?) in the water. As in: stop sucking up the SNAPs, stop expecting everything in exchange for nothing and get to work by taking action. Learn issues, vote accordingly, and hold those in power accountable. And ultimately, they ought to be prepared to to take actions that are not unlike those taken 236 years ago in Concord, Lexington and elsewhere.

sessinpo's picture

"The government MUST spend or the GDP will fall."

 

Both Sides Fail. End Game

kaa1016's picture

Why anyone believes anything these people say is beyond me.

Watauga's picture

Good grief what an Obama shill you are.  Did you read that direct from the Democrat talking points memo?

nmewn's picture

Yes, he did...followed by LTER doing an "illegitimate" dance on the table wearing a doctors smock throwing "free pills" into the audience...lol.

Good times ;-)

monoloco's picture

Any savings realized from cutting social programs is likely to be eaten up by military spending and a war with Iran. Tax cuts and a big war, where have we seen that movie before?  No matter who gets in we're fucked.

mrktwtch2's picture

okay..now what do we do..??..lol

slaughterer's picture

"okay... now what do we do..?"

For the next 2 hours, you short silver.  

1100-TACTICAL-12's picture

BLAH>>>BLAH>>>BLAH>>>  It does'nt matter who's playin the violin , the show is almost over.

10mm's picture

If R&R are in,you for sure do not want to be in the BIG Citys.

10mm's picture

I agree.Im not Red Team/Blue Team.But im prep team,and i know R&R are not big city friendly.

nmewn's picture

You're not supposed to use same ID when agreeing with yourself.

Nice touch with the Red Team/Blue Team meme though ;-)

fijisailor's picture

Don't fool yourself into believing there will be any significant difference between an Obama or Romney presidency. 

CClarity's picture

Agree with regards to the economy.  Disagree with respect to women's reproductive health.

Vooter's picture

If the Republicans take office and pass draconian reproductive health laws, IGNORE THE LAWS. The United States government and corporate America have made it perfectly clear that lawlessness is a good thing, and the American people should definitely take them up on it, in spades...

Everybodys All American's picture

the wall st outlaws have flourished under Obama unfortunately.

lasvegaspersona's picture

dude if you are going to break the law you'd better own a bank or be a former Senator or governor or someone else above the law ...we take laws seriously in this country if you are just a poor dumb schmuck

Vooter's picture

"we take laws seriously in this country if you are just a poor dumb schmuck"

FUCK this country...

kridkrid's picture

Wedge issue, meant to keep people divided. Divide and conquer. I doubt things will change on that front, but who knows.

Spastica Rex's picture

Precisely. And what ever rally changes with a change in party - have abortions gone down during Republican adminstrations? Have rubbers become harder to buy? 

odatruf's picture

See, there you go denying my reproductive choices.  You just said so when you suggested that people ought to be buying their own rubbers.

AT's picture

What?! You mean Republicans are opposed to gynecologists? Oh, wait. I get it. You really mean "disagree with respect to babies' rights not be killed". All clear now.

Spastica Rex's picture

Have Republicans ever reduced the incidence of abortion? Ever? Seriously - I would like to know. I know they say they want to, just like the Democrats say a lot of things they want to do and don't do them.

CommunityStandard's picture

With the way the future is looking for kids, an abortion is an act of kindness.

blunderdog's picture

Undereducated kids born out of wedlock to poor parents are as likely to turn out Republican as Democrat.  The children are the future.

ersatzteil's picture

Too true; the abortion issue, like gay marriage and immigration, seems very much like a planned and timed distraction from the issues that would unite the hoi poloi against the status quo, such as where that Social Security surplus went...

 

11b40's picture

Babies already have the right not to be killed.  They are people, and people have rights, although around 15% of the population, mostly older white males, seem to want to take rights about control over their bodies, their families, and the their future life plans away form the female gender.

Eggs are not people, and neither are corporations.

object_orient's picture

Your estimate of anti-abortion demographics is way off. America is roughly split in half on the issue, according to Gallup. There is a slight pro-life skew among 55+, but no real difference in gender. In my personal experience, the picketers outside Planned Parenthood are almost all women, and cultrually/racially diverse. Doesn't mean that they're right, however. Just sayin.

11b40's picture

No, you are wrong.  It all depends on how you ask the question.  It's really not "are you for or against abortion?"  Almost everyone finds it distasteful and unfortunate.  The question is about personal liberty and rights.

Do you believe a woman has the right to an abortion?

Do you believe a woman has the right to an abortion in the case of rape (forced, legit, or whatever else kind you can dream up)?

Do you believe a woman has the right to an abortion in the case of incest?

Do you believe citizens have the right to control their own bodies, or should politicians have that right?

If the answer to anyof the above is yes, then, even if you would never have one, or if you find it sad, immoral, or anthing else, you are not in favor of outlawing abortion, and should not approve of efforts to remove or restrict rights.

In other words, everybody should just mind their own business.  How's that for policy?

object_orient's picture

You are probably trolling (and it's working), but abortion services are already unavailable in most of the country. Low-income women are especially effected. Even if Romney wins, appoints anti-abortion SCOTUS judges and gets Roe v. Wade overturned, abortion would still be legal in most states. And why would the GOP eliminate one of its most galvanizing issues, in terms of national get-out-the-vote efforts and fundraising?

Unprepared's picture

<--- Obama/Biden

<--- Romney/Ryan

Your best bet to inadvertedly push the systemic reset button instead of the 'atomic' button.

camaro68ss's picture

Wheres your Ron Paul botton? I wont that one

Unprepared's picture

Do you honestly believe he'll make it down there?

And just to clarify, I meant who would bring the collapse faster.

kridkrid's picture

Ron Paul would bring about the collapse the fastest, which is why I support him.

FL_Conservative's picture

Is there a reason you didn't prepare a Ron Paul alternative?

 

Given the choices provided, I'll vote against Obama due to:

(1) the Keynsian economic focus; and

(2) his continuing insistence on using Executive decree to circumvent our Constitution.

bobnoxy's picture

Yet you voted for Bush who did the same thing?

FL_Conservative's picture

And what choices were there?  W and E-Gore / Kerry?  Talk about slim pickins'.

krispkritter's picture

  <---- Burn it down

  <---- SSDE: Same Shitheads, Different Election

 

ersatzteil's picture

I chose Romney/Ryan for laughs and just got a letter of thanks from the campaign, which included a cc offer from Chase with 25% apr...anyone get similar results from choosing Obama/Biden?

slaughterer's picture

<-- SILVER UP after FOMC

<-- SILVER DOWN after FOMC

fonzannoon's picture

There is no way silver has been running up on qe expectations lately. Whatever is driving the euro higher is taking silver with it. I fully admit I don't know what is driving the euro at this point. If Draghi has not been proven to be full of shit by now I guess he will never be.