Posts Tagged ‘Budget Deficit’

Too Much Interest in Interest Rates

Friday, October 3rd, 2014

There has been much market panic of late over the possibility that the Federal Reserve Board will be raising interest rates sometime in the not-too-distant future.

Small cap stocks were the first casualty.  As September ended, the S&P 500 was still up 7.3% for the year, while the Russell 2000 was down 3.8% and off 7.4% from its high in July.  Even after being up more than 40% year-over-year at the end of December, the Russell 2000 was negative year-over-year on Wednesday before having its best day in six weeks on Thursday. 
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As The Wall Street Journal explained, “Given that periods of market turmoil tend to buffet small stocks more than their larger counterparts, many investors in small companies are fearful as the Federal Reserve moves toward raising interest rates.  Even investors hopeful for small stocks are proceeding with caution.”

But should the markets be this skittish over interest rates?

In September, Fed Chair Janet Yellen announced that interest rates will remain low for “a considerable time” even after quantitative easing (QE), the Fed’s bond-buying program, ends.  QE is scheduled to end this month, but could be extended.

Economic data continues to be mixed.  The official U-3 unemployment rate dropped to 5.9%, but the percentage of Americans participating in the workforce is at a 36 year low.  Jobs are increasing, but four out of five of them are for low or minimum wages.  So QE could be extended, since its alleged purpose is to help the economy grow.

Even if QE ends this month, the “considerable time” Ms. Yellen cites could, indeed, be considerable, given the consequences of raising interest rates.

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Only a Half Trillion Dollars

Thursday, July 24th, 2014

It’s a sign of how much trouble we’re in when a budget deficit of a half trillion dollars seems like fiscal restraint.

It is progress, given that annual budget deficits were running above $1 trillion a year throughout President Obama’s first term and have been as high as $1.4 trillion.  And it could have been worse.  Recall the effort made by President Obama to stop the automatic spending cuts that took place when sequestration was adopted.

But a half trillion dollars is still a mountain of money.  It helps to give the number some context.CBO Chart

To reach a half trillion dollars, you would have to spend $8 per second beginning with the year 0 and continue spending through today.  If you had a stack of $1 bills adding up to $500 billion and were able to put them one on top of another, the stack would be 34,000 miles high.

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No, We Can’t

Thursday, October 17th, 2013

Someone had blunder’d:
Theirs not to make reply,
Theirs not to reason why,
Theirs but to do and die.

                                          From “The Charge of the Light       Brigade”

Take pity on the can.  It’s been kicked so far down the road, it could circle the globe a dozen times.  It’s been battered more than the New England Patriots’ starting lineup.  It’s been kicked harder than an Adam Vinatieri football.

And still it persists.

This week, Congress and President Obama reached a deal that reopens the government through January 15 and suspends the debt ceiling through February 7.  Calling it a deal, though, is an exaggeration.  One side, the Democrats, refused to negotiate.  The other side, the Republicans, asked for something it had no hope of getting.  So everyone agreed to kick the can three months down the road.free-the-fowl-games-photo-420-1196-FF11015_0

Beyond that, according to The Wall Street Journal, “The bill includes one minor change to the health law sought by Republicans, setting new procedures to verify the incomes of some people receiving government subsidies for health-insurance costs.  It also provides back pay for all federal workers who were furloughed during the government shutdown.”

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Spending Our Way to Prosperity

Sunday, October 6th, 2013

Focusing on the government shutdown is like rearranging the deck chairs on the Titanic while drawing closer to the iceberg.

The iceberg in this case is the massive government debt that will be made worse by the implementation of the Affordable Care Act.

Later this month, Congress will need to lift the debt ceiling from its current $16.7 trillion to keep the government solvent and enable the U.S. to continue paying its massive bills.  In the meantime, as a result of the negotiations that led to sequestration, Congress had until the end of September (the end of the fiscal year) to reach a spending agreement.Yield Curve

It didn’t, of course, and now the government has shut down.  But what does the shutdown really mean?

The shutdown affects only “nonessential” services.  That means 85% of government services are still being funded and 63% of federal employees are still working.  Mail is being delivered, military personnel are still keeping us safe, and payments are still being made for Medicare, Medicaid, Social Security, the Supplemental Nutrition Assistance Program (SNAP) and the countless other programs that we can’t afford.  Amtrak trains will continue running, so if your train is late, don’t blame it on the shutdown.

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One Man’s Ceiling Is Another Man’s Floor

Friday, September 27th, 2013

“There’s been some hard feelings here
About some words that were said …
Remember, one man’s ceiling is another man’s floor.”
                                                         Paul Simon

Here we go again. Hold on to your wallets, taxpayers. It’s time for another debt ceiling “negotiation.”

We use the term “negotiation” loosely, as it’s now extinct in Washington.

On one side, we have House Republicans waging an unwinnable battle, saying they’ll agree to suspend the debt ceiling limit for a year in exchange for a one-year delay of the individual mandate for ObamaCare, tax reform, approval of the Keystone pipeline and other concessions. While such changes would potentially provide a huge benefit to the economy, they have zero chance of passing in the Senate, which is controlled by the Democratic majority.Debt ceiling

On the other side, we have President Obama and Senate Democrats saying the Republicans are trying to shut down the federal government, because they are not willing to lift the debt ceiling without concessions from the President.

There will be no concessions by the Democrats. As President Obama put it, “I will not negotiate on anything when it comes to the full faith and credit of the United States of America.”

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Sequestration: The Crisis Du Jour

Friday, February 22nd, 2013

It’s crisis time again in Washington, D.C.  Having just barely avoided a swan dive off the fiscal cliff, the leaders of our country are now locked in battle over the pending sequestration.

“Locked” is the operative word here, as the deep freeze that’s hit New England this week is likely to thaw well before the freeze in progress over sequestration.

If nothing else, this standoff has added to our vocabulary.  “Sequestration,” as we’ve learned, is a procedure that triggers automatic spending cuts.  It also means “the seizure of property for creditors,” as in, “China will begin sequestering U.S. property if we can’t control our debt and pay our bills.”  That definition may be more appropriate in years to come, but for now, let’s concentrate on the immediate future.

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Fiscal Cliff Turns Into Fiscal Bluff

Friday, January 4th, 2013

“What’s a five letter word for ‘cliff’?“ an editorial page cartoon asked.  The answer: “Bluff.”

To bluff is to mislead and that’s an appropriate summary of the fiscal cliff agreement, which will raise taxes and spending, while failing to consider the country’s growing debt crisis.

The market reacted positively, with the Dow Jones Industrial Average initially up more than 2% and markets in other parts of the world showing similar gains.

The market reaction was not, we suspect, because a well-crafted agreement that benefits America had been negotiated, but because the “fiscal cliff” had been avoided at the last possible second.  Consider what the agreement does – and what it doesn’t do.

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From Goldfinger to Groundhog Day

Friday, December 21st, 2012

Tick.  Tick.  Tick.

It’s like that scene in “Goldfinger,” where the seconds are ticking down and James Bond is trying to defuse the bomb.  He succeeds, of course, just in time.

Of course, John Boehner is not James Bond and real life is far more complicated than the movies.

Tick.  Tick.  Tick.

The real problem is not a cliff, but a chasm.  The degree of separation between Democrats and Republicans in Congress has never been wider.

On one side, President Obama and his Democratic supporters are hell-bent on raising taxes on the wealthy, which may not do much to tame the deficit, but may achieve the goal of moving toward class equality.  Democrats believe that more spending is needed to stimulate the economy, even though spending is at an all-time high and the economy is still in dismal shape.

On the other side, Republicans are dead set against raising taxes, and want spending cuts, tax reform and entitlement reform.  Medicare, Social Security and government employee pensions have created unfunded liabilities of more than $86 trillion, but the chances of working out a rational reform before the end of the year are about the same as the chances of winning Powerball.  Maybe less.

Tick.  Tick.  Tick.

Congressman Boehner’s “Plan B,” which would have raised taxes on millionaires, did not even make it to a vote.  He could go through the entire alphabet and the results would likely be the same.

Republicans in Congress would rather go over the fiscal cliff than approve taxes on the wealthy, who are viewed as job creators.

Democrats would rather go over the fiscal cliff than approve major spending cuts, as spending is viewed as an economic stimulant.

Tick.  Tick.  Tick.

Maybe Gary Cooper in “High Noon” provides a more appropriate comparison.  The clock on the wall ticks down and you know that confrontation is unavoidable and blood will be spilled.

Take a look at the futures market and you’ll see that it’s already spilling.  Last night, S&P 500 futures dropped from 1437.25 to 1391.25 as soon as Congressman Boehner’s plan was scrapped.  The value of the dollar also tumbled, as witnessed on the EUR/USD, which pairs the dollar with the euro.

Tick.  Tick.  Tick.

Another movie that comes to mind is “Groundhog Day,” where Bill Murray’s day is endlessly repeated until he gets life right.

The déjà vu is appropriate to today’s negotiations.  Consider the U.S. Macro Surprise Index, which quantifies the extent to which U.S. economic indicators exceed or fall short of consensus estimates.  This year’s path is almost identical to last year’s, when Congress put off making tough decisions by extended tax breaks for another year.

Then again, “Groundhog Day” had a happy ending.  Maybe “The Day the Earth Stood Still” is a better comparison.

So This Is Compromise?

Friday, November 30th, 2012

“We are both heading for the cliff.  Who jumps first is the Chicken.”

                                                                                                      – Rebel Without A Cause

Post-election, both Democrats and Republicans have promised to compromise and avoid the fiscal cliff.

So what would you consider a compromise?  A little tax increase, perhaps, along with some spending cuts, then call it a day?  That’s not happening.

Apparently, by “compromise,” they mean not giving an inch.  With the end of the year just a month away, both parties seem to be digging in and playing a game of chicken.

President Obama doubled down by calling for a $1.6 trillion tax increase – twice the increase that will take place if no action is taken and we go over the fiscal cliff.  Media has focused on a couple of Republicans who have said that they will break their pledge of no tax increase … but mostly there has been talk and no concrete plan for avoiding the fiscal cliff.

Remember the scene in “Rebel Without a Cause,” where two cars race toward a cliff and the first driver to jump out of the car is “the Chicken?”  The winner went over the cliff and died in a fireball as his car slammed into the ground.

Real life is resembling that 1955 film, but this time when the car goes over the cliff we will all be along for the ride.

Looking Over the Fiscal Cliff

Tuesday, November 27th, 2012

You’ve heard plenty about the fiscal cliff.  But little attention has been paid to what’s beyond it.

What’s beyond it is another higher, steeper cliff.

The federal debt now exceeds $16 trillion and Congress will need to vote shortly to raise the debt ceiling in order to keep the government operating.  We’re running an annual budget deficit exceeding $1 trillion, so the debt will only get higher.

The longer we try to maintain the status quo, the more difficult it will be to bring the debt back in line.  We’re reaching the point where every dollar in the federal budget will be needed just to service our debt.  That means your taxes will no longer go toward building new highways, helping the poor or protecting the United States.  They will be needed to pay off the enormous debt that the President and Congress have incurred.

The only way to keep the government functioning under those circumstances, even if we cut spending and raise taxes, will be to incur more debt.

The bigger issue, though, is the unfunded liabilities from government entitlement programs.  According to The Wall Street Journal, we have already incurred $86.8 trillion in liabilities for Medicare, Social Security and future retirement benefits for federal employees.  If we could freeze time and incur no further liabilities, we would still need to pay out $86.8 trillion.

Both Medicare and Social Security are “pay as you go” systems.  As baby boomers retire, payment for these two entitlements will come from those who are still in the workforce.  As they are a much smaller population than the baby boomer generation, they will need to pay more or both Medicare and Social Security will collapse.

But how much more will be needed?  A commentary in The Wall Street Journal, “Why $16 Trillion Only Hints at the True U.S. Debt,” includes the following glum assessment:

“When the accrued expenses of the government’s entitlement programs are counted, it becomes clear that to collect enough tax revenue just to avoid going deeper into debt would require over $8 trillion in tax collections annually.  That is the total of the average annual accrued liabilities of just the two largest entitlement programs, plus the annual cash deficit.

“Nothing like that $8 trillion amount is available for the IRS to target. According to the most recent tax data, all individuals filing tax returns in America and earning more than $66,193 per year have a total adjusted gross income of $5.1 trillion. In 2006, when corporate taxable income peaked before the recession, all corporations in the U.S. had total income for tax purposes of $1.6 trillion. That comes to $6.7 trillion available to tax from these individuals and corporations under existing tax laws.

“In short, if the government confiscated the entire adjusted gross income of these American taxpayers, plus all of the corporate taxable income in the year before the recession, it wouldn’t be nearly enough to fund the over $8 trillion per year in the growth of U.S. liabilities.”