Budget Deficit

The Millionaire Man Exodus: What Obama Can Learn From The UK's "Tax The Rich" Plan

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.

 

Guest Post: Paul Krugman's Dangerous Misconceptions

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).

The Buffett Tax Explained Using A Hippopotamus And An Oxpecker

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.

How Do the Chinese View the Gold Market?

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.

The Cost Of Kidding Yourself

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.

Europe's Latest Can-Kicking Euphoria Fading Quick

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.

Guest Post: The New Future Of Energy Policy

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.

 

The Farcical Tragicomedy Of The "Sustainable" Greek Debt/GDP "Denominator"

Somewhere in the deep bowels of Brussels bureaucratic labyrinth, a murder of European ministers (as they most closely approximate the Corvus Corvidae Genus/Species) currently sitting down and trying to come with a solution that "fixed" Greece. It will do no such thing: in fact, all that the Eurogroup is doing today, in addition to trying to do with it already did twice before without success, is to find a socially palatable way to disclose a policy that will see Greek debt haircut by a very modest amount (modest enough to be considered prohibited under Article 123, but who is counting any more), either through an outright haircut of official sector debt (something Germany has repeatedly said "9" to), or through a debt buyback of existing private debt (something which will have no impact now that the debt has soared following a long-running political leak which has allowed bondholders to trade accordingly). Aside for applying lipstick on a dead pig, what Europe is doing is focusing on the numerator in the all critical debt/GDP ratio. Sadly, this is just half of what Europe should be focusing on. The other half? Why GDP of course. Because it is here that things get truly hilarious.

In summary: Greek 2022 debt/GDP will be 115% if and only if Greece not only cuts its debt by EUR50 billion, but manages to grow its GDP by EUR60 billion.

Overnight Sentiment: No Progress Means Lots Of Progress

Another week begins which means all eyes turn to Europe which is getting increasingly problematic once more, even if the central banks have lulled all capital markets into total submission, and a state of complete decoupling with the underlying fundamentals. The primary event last night without doubt was Catalonia's definitive vote for independence. While some have spun this as a loss for firebrand Artur Mas, who lost 12 seats since the 2010 election to a total of 50, and who recently made an independence referendum as his primary election mission, the reality is that his loss has only occurred as as result of his shift from a more moderate platform. The reality is that his loss is the gain of ERC, which gained the seats Mas lost, with 21, compared to 10 previously, and is now the second biggest Catalan power. The only difference between Mas' CiU and the ERC is that the latter is not interested in a referendum, and demand outright independence for Catalonia as soon as possible, coupled with a reduction in austerity and a write off of the Catalan debt. As such while there will be some serious horse trading in the coming days and week, it is idiotic to attempt to spin last night's result as anything less than a slap in the face of European "cohesion." And Catalonia is merely the beginning. Recall: "The European Disunion: The Richest Increasingly Want To Fragment From The Poorest" - it is coming to an insolvent European country near you.

Fiscal Cliff Update: 'Little Progress Toward A Compromise In Past Ten Days"

Two Fridays ago, just as AAPL was in danger of plunging below the absolute last support level of $500 after which freefall for it and the entire market begins, a truly unexpected deus ex machina appeared for those still clinging to long stock positions: politicians, in this case John Boehner and Nancy Pelosi, who held a press conference in which they defined the recently launched "Fiscal Cliff" talks as "constructive." In reality, this appearance was nothing but a photo opportunity for talking heads (as explained in "Risk Ramp on Boehner Banality"), and one which as Nancy Pelosi herself admitted later, served simply to halt what then looked like an assured free fall in the markets. Since then the ongoing rally in stocks and the EURUSD has been predicated on the "constructiveness" of the talks actually being real. Judging by the latest update from Reuters, Goldman will likely be right, if only in the short term. As Reuters admits, " U.S. lawmakers have made little progress in the last 10 days toward a compromise to avoid the harsh tax increases and government spending cuts scheduled for Jan. 1, a senior Democratic senator said on Sunday." That this update comes after the "big" market swoon into the recent lows from November 16, is certainly cause for alarm, because it means that at least one more violent market whipsaw to the downside will have to take place before there is any cliff progress to report.

Bernanke Promises More Of The Same, Warns Of Fiscal Cliff - Live Webcast

The week's most anticipated speech (given Obama's absence from DC) is here. Bernanke's Economic Club of New York extravaganza - where he has previously hinted at new or further policy - is upon us. Sure enough, it's a smorgasbord of we'll do whatever-it-takes (but won't bailout Congress) easing-to-infinity, housing's recovering but we want moar, simply re-iterating his comments from last week...

  • *BERNANKE SAYS FISCAL CLIFF WOULD POSE `SUBSTANTIAL THREAT'
  • *BERNANKE SAYS CONGRESS, WHITE HOUSE NEED TO AVERT FISCAL CLIFF
  • *BERNANKE SAYS FED TO ENSURE RECOVERY IS SECURE BEFORE RATE RISE
  • *BERNANKE SAYS HOUSING RECOVERY `LIKELY TO REMAIN MODERATE'
  • *BERNANKE SAYS CRISIS REDUCED ECONOMY'S POTENTIAL GROWTH RATE

However, as we have noted previously, once you've gone QE-Eternity, you never go back... and we would this is the 3rd time in a row that someone from the Fed has spoken and stocks have sold off.

On Surviving The Monetary Meltdown

After 40 years of boozing on easy money and feasting on fantastical asset price inflations, the global monetary system is approaching catharsis, its arteries clogged and instant cardiac arrest a persistent threat. ‘Muddling through’ is the name of the game today but in the end authorities will have two choices: stop printing money and allow the market to cleanse the system of its dislocations. This would involve defaults (including those of sovereigns) and some pretty nasty asset price corrections. Or, keep printing money and risk complete currency collapse. We think they should go for option one but we fear they will go for option two. In this environment, how can people protect themselves and their property? Our three favourite assets are, in no particular order, gold, gold and gold. After that, there may be silver. We are, in our assessment, in the endgame of this, mankind’s latest and so far most ambitious, experiment with unconstrained fiat money. The present crisis is a paper money crisis. Whenever paper money dies, eternal money – gold and silver – stage a comeback. Remember, paper money is always a political tool, gold is market money and apolitical.

Directionless Drift Marks Eventless Session

There was precious little in terms of actionable news in the overnight session, which means that, like a broken record, Europe falls back to contemplating its two main question marks: Greece and Spain, with the former once again making noises about the "inevitability" of receiving the Troika's long delayed €31.5 billion rescue tranche. The chief noise emitter was Italian Finance Minister Vittorio Grilli who said he was "confident that euro-region finance chiefs will reach an agreement on aiding Greece when they meet next week." He was joined by Luxembourg Finance Minister Frieden who also "saw" a Greek solution on November 20. Naturally, what the two thing is irrelevant: when it comes to funding cash flows, only Germany matters, everything else is noise, and so far Schauble has made it clear Germany has to vote on the final Troika report so Europe continues to be in stasis when it comes to its main talking point. In fundamental European news, there was once again nothing positive to report as Euro-area exports fell in September as the region’s economy slipped into a recession for the second time in four years. Exports declined a 1.1% from August, when they gained 3.3%. Imports dropped 2.7%. The trade surplus widened to 11.3 billion euros from a revised 8.9 billion euros in the previous month. Global trade, at whose nexus Europe has always been at the apex, continues to shrink rapidly. Elsewhere, geopolitical developments between Israel and Gaza have been muted with little to report, although this will hardly remain as is. Providing some news amusement is Japan, where the LDP opposition leader Shinzo Abe continues to threaten that he will make the BOJ a formal branch of the government and will impose 2% inflation targeting, which in turn explain the ongoing move in the USDJPY higher. This too will fade when laughter takes the place of stunned silence.