Budget Deficit

• Bernanke Wields New Tools to Reduce Unemployment Rate (BBG)
• Home Seizures Rise as Banks Adjust to Foreclosure Flow (BBG)
• EU Backs Release Of Greek Aid (WSJ)
• Democrats Confident They Have 'Cliff' Leverage (WSJ)
• Americans Back Obama Tax-Rate Increase Tied to Entitlement Cuts (BBG)
• Goldman flexes tentacles: Treasury open to Carney radicalism (FT)
• Launch Fuels Asia Security Concerns (WSJ)
• BOJ’s Unlimited Loan Program Seen Open to Use by Hedge Funds (BBG) - there are Japanese hedge funds?
• Abe Set to Face Manufacturing Gloom as Japan Contracts (BBG)
• US and UN condemn N Korea rocket launch (Guardian)
• Eurozone agrees common bank supervisor (FT)
• Berlusconi Adds to Italy Turmoil by Signaling He’d Step Aside (BBG)

To paraphrase Tim Geinter: "Risk of the Fed ever ending its monetization? No risk of that." Why? Because as the FMS just reported, the February budget deficit was $172 billion, up $52 billion from a month ago, and $35 billion from a year ago. In brief: in the first two months of Fiscal 2013, the US accumulated a $292 billion budget deficit (compared to $236 billion a year ago), a number which is simply scary when annualized. What does this mean? That as long as the Treasury runs $1+ trillion budget deficit, the Fed will never, ever be allowed to stop monetizing, especially with China and the other legacy foreign borrowers just saying nein. Which in turn means that it will now be in the Fed's favor to paint the economy with uglier colors (recall that the Fed now needs unemployment deterioration to have infinite free monetization reign). Does this mean that going over the Cliff is now an absolute certainty.

In a session that has been largely quiet there was one notable macro update, and this was the German ZEW Economic Sentiment survey, which after months in negative territory, surprised to the upside in December, printing at 6.9, on expectations of a -11.5 number, and up from -15.7. This was the first positive print since May, and in stark contrast with the dramatic cut of German GDP prospects by the Bundesbank from last Friday, which saw 2013 GDP slashed by 75% from 1.6 to 0.4%. In fact, moments after the ZEW report, which is mostly driven by market-sentiment, in which regard a soaring DAX has been quite helpful, the German RWI Institute cut German 2012 and 2013 GDP forecasts from 0.8% to 0.7% and from 1% to 0.3%. In other words, any "confidence" will have to keep coming on the back of the market, and not the economy, which is set to slow down even further in the coming year. But for a market which will goalseek any and all data to suit the narrative (recall the huge miss in US Michigan consumer confidence which lead to a market rise), this datapoint will undoubtedly serve as merely another reinforecement that all is well, when nothing could be further from reality. Also, since we live in interesting "Baffle with BS" times, expect the far more important IFO index to diverge once again with its leading ZEW indicator (as it did in November) - after all everyone must be constantly confused and live headline to positive headline.

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.

It would appear that many are lookng at the Greek serial default debacle as a muppet wearing Goldman-tinted gold colored glasses. Here's a more realistic view, complete with the math to back it up!

The use of economic pain to expand governmental control of a nation is not a new concept.  It has been a tool successfully used many times in history. The reality that "taxing the wealthy" does not increase revenue or promote economic growth is lost on the 80% of Americans that are economically uninformed and are just struggling to maintain their current standard of living. The path over the "fiscal cliff" is bad for the economy, the average American family and the stock market.  However, for the White House, going over the "cliff" is the next move in this elaborate game of chess which will clear the path towards completing Obama's long term objectives of complete socialization of the American economy.

• Union solidarity rubs up against slow economy in LA port strike (Reuters)
• Geithner predicts Republicans will allow higher tax rates (Reuters). And "no risk" of a US downgrade, "no risk"
• Geithner takes hard line on fiscal cliff (FT)
• Narrowing LDP lead points to Japan post-election confusion (Reuters) - not to mention, USDJPY plunges if LDP loses
• Vietnam Says China Must Avoid Trade Weapon in Maritime Spat (Bloomberg)...  and real one, one hopes
• Greece unveils bond buyback plan (FT)
• ECB Can’t Deliver Spain Spread Rajoy Wants, Wellink Says (Bloomberg)
• UK’s euro trade supremacy under attack (FT)
• Merkel Signals Debt Write-Off Possible as Buyback Begins (Bloomberg)
• ECB's Noyer Says Bond-Buying Plan 'Is Bearing Fruit' (WSJ) - as long as just plan, and not execution.

The Fiscal Cliff is the name given for the 2013 increase of Federal Government taxes and budget cuts. The Bush-era tax cuts expire and the 2013 "Budget Control Act" kicks in, among other budget cuts & new taxes. The Fiscal Cliff is set to reduce the 2013 US Government budget deficit by roughly half; will remove $607 Billion from economy (GDP), resulting in 4% drop, pushing it back into recession; it can NOT be avoided. It must happen to fix the budget deficit; any delay must be paid for later; it will NOT reduce the US debt, only slow down the growth. The Fiscal Cliff's (new taxes and budget cuts) size and impact are visualized below in physical $100 bills.

Regardless if the Fiscal Cliff is resolved tomorrow (impossible), on December 31 (unlikely), or in tandem with the debt ceiling hike some time in March 2013, after all the government fund buffers have been soaked dry as they were back in August 2011 (most likely), one thing is certain: America's wealthiest are about to see their taxes soar - that's more or less a given. The question is what happens then. Will, the wealthiest - those who have access to and can buy banking, incorporation, citizenship and legal services in any global jurisdiction in a world that has never been this decentralized and this , take it all quietly up until that point on the Laffer curve says they will commit mass suicide, or maybe, just maybe, because they don't feel like being force to pay uncle Sam even more than they currently do with the proceeds not used for something constructive like paying down debt, but instead to fund government corruption and inefficiency, they will pick up and leave without saying goodbye or even looking back, and in the process crush future US government tax revenues even more and send the deficit soaring more. "No risk in that", many will say - after all where can they go? Well, apparently many places. Because if the UK, where as the Telegraph reports a stunning two-thirds of domestic millionaires opted to leave the country than pay a "punitive" 50% tax, is any indication it is possible that the imminent tax hike on America's wealthiest is going to be one of the most destructive things that can happen to America's already unsustainable budget deficit.

In a recent article at the NYT entitled 'Incredible Credibility', Paul Krugman once again takes aim at those who believe it may not be a good idea to let the government's debt rise without limit. In order to understand the backdrop to this, Krugman is a Keynesian who thinks that recessions should be fought by increasing the government deficit spending and printing gobs of money. Moreover, he is a past master at presenting whatever evidence appears to support his case, while ignoring or disparaging evidence that seems to contradict his beliefs. Krugman compounds his error by asserting that there is an 'absence of default risk' in the rest of the developed world (on the basis of low interest rates and completely missing point of a 'default' by devaluation). We are generally of the opinion that it is in any case impossible to decide or prove points of economic theory with the help of economic history – the method Krugman seems to regularly employ, but then again it is a well-known flaw of Keynesian thinking in general that it tends to put the cart before the horse (e.g. the idea that one can consume oneself to economic wealth).

When Warren Buffett claimed that a lot of secretaries pay higher tax rates than the super-wealthy, JPMorgan's Michael Cembalest wanted to take a closer look, and sure enough Buffett’s assertion is only the case in a minority of situations (like his own). We would therefore not expect to see large revenue estimates from an analysis of the fiscal impact of the proposals in the Fair-Share Act of 2012, since there are not that many people that would be impacted by a minimum 30% effective tax rate. Sure enough, the incremental revenue raised by the Fair-Share Tax Act is around $8 billion per year. This is real money and may be sound public policy, but in the context of a $1 trillion budget deficit expected for FY2013, it’s a rounding error. To convey this zoologically, we show two animals whose volume is proportionally the same (125 to 1): a hippopotamus, and its symbiotic companion, the yellow-billed oxpecker. We would like to think that elected officials and political commentators would avoid grandstanding and not mislead anyone on the fiscal impact of their proposals, but right now, there are some people who need help distinguishing between birds and hippos.

Have you ever wondered what the typical Chinese gold investor thinks about our Western ideas of gold? We read month after month about demand hitting record after record in their country – how do they view our buying habits? Since 2007, China's demand for gold has risen 27% per year. Its share of global demand doubled in the same time frame, from 10% to 21%. And this occurred while prices were rising. Americans are buying precious metals, no doubt. But let's put the differences into perspective.

Five years ago, every American would have considered a trillion-dollar budget deficit a national tragedy.  If you believe the CNBC parrot show, NOT having a trillion-dollar deficit is now a sure sign of the Apocalypse.  I speak of course of the cleverly dubbed “Fiscal Cliff,” which panicked CNBC apologists are required to mention no less than 5,000 times a day. Creating the illusion of economic growth is easy if you can print money.  It’s a prank you can play on an entire country.  Cut the value of the currency in half and the economy’s size will appear to double.  If it doesn’t, you’re in recession (whether you know it or not).   Cavemen probably understood this concept better than America’s best economic minds.

It wouldn't be Europe if the insolvent continent did not announce, to much pomp and circumstance, another final rescue for a broke country which was nothing but a short-termist can kicking exercise. It also wouldn't be Europe if the leaders did not do much if any math when coming up with said "rescue", and it certainly wouldn't be Europe if the initial EURphoria following such an announcement was not promptly faded. Sure enough, all three have now occurred with the EURUSD soaring to over 1.3000 in the moments after last night's soon to be obsolete announcement, only to see a gradual and consistent sell off over the next several hours, dropping to a week low of just under 1.2940 as details emerged that... there were not details. To wit, as Market News reported:

• EU COMMISSION: FUNDING FOR GREECE DEBT BUYBACK NOT WORKED OUT YET

In other words, the use of funds for the third Greek bailout has been more than detailed. The only tiny outstanding issue - the source of funds.

Not surprisingly, in the weeks since the historical hurricane made landfall, new attention is being paid to the mounting costs that coastal world megacities may face. Intriguingly, however, this new conversation about climate, energy policy, and America’s reliance on fossil fuels comes after a five-year period in which the U.S. has dramatically lowered its consumption of oil and seen an equally dramatic upturn in the growth of renewable energy. The combination of declining oil use and a greater reliance on the global powergrid is going to shape energy and climate policy. Especially at a time when the concerns of climate change – or, rather, rising seas and the greenhouse dangers of fossil fuel dependency – are being increasingly raised. This will make for a rather muddled and complex array of diverging policy initiatives. Moreover, as new oil supplies emerge from domestic American sources, the dream of resurrecting this cheap oil era will no doubt come back around several more times. But none of these new resource plays will change the trajectory of global oil supply much, nor will they lower the price of oil. So far, new oil supply mostly offsets declines elsewhere – but at substantially higher marginal cost. This should now be clear.