Tuesday, October 05, 2010

Double Dip Risk And The November Elections 

Political considerations prompted the Democratic leadership of both houses of Congress to leave Washington DC without passing a budget and addressing the looming scheduled tax increase coming at year end. The Pelosi-Reid leadership did not want to extend the Bush tax cuts for 2 years despite having bipartisan support to do so. They preferred instead to go home to campaign and defer the budget process.

Some might call that irresponsible.

This decision has substantially increased the likelihood of a decline in GDP in 2011. Whereas fiscal stimulus added 1.5%+ to growth in 2010, the scheduled increases in tax rates is projected to substract 1.5%+ from growth in 2011. And since growth in the second half of 2010 has already decelerated materially to less than 2% (and perhaps quite a bit less), our Congress has left our economy in a very precarious situation.

It may be that the post November lame duck Congress returns to work and reverses course. It may also be the case that a newly elected Congress may be able to change course as well. But that is highly uncertain. And we do not know what President Obama would choose to do with a bill which extended the Bush tax cuts. From where we sit today, what we know is that taxes are scheduled to increase in a very weak economy.

In the midst of the Great Depression, and believing the country was emerging from the painful economic contraction, the Congress and FDR's administration chose to increase taxes. This conspired with the contractionary monetary course the Fed chose to follow. That had the effect again of brutally contracting the economy, a situation that persisted until WWII.

Our Congress is deeply, embarrassingly incompetent. Willful incompetence in my view is simply the equivalent of corruption. Incompetence which springs from ignorance is merely stupidity at work. Whether the current Democratic leadership of Pelosi and Reid is one or the other doesn't really matter. Of course, I have an opinion. But the result is the same.


By Anonymous feeblemind, at Tue Oct 05, 09:34:00 AM:

Suppose the dems want a double dip?

If they lose the House they can then blame the double dip on the new Republican Congress.  

By Anonymous Anonymous, at Tue Oct 05, 10:12:00 AM:

I don't think we've thought enough about the lame-thief (not "duck") that we'll have for about ten weeks, although, there is not much we can do about it.
Why do we believe that the losers will act more responsibly after the election than they did before. The 30 or 40 thieving democrats who appear to oppose Pelosi will turn back to scum after many of the lose.
The Kenyan will put on pressure to get more of his idiocy passed and promise all sorts of rewards to the soon-to-be former Congressmen.  

By Anonymous Ignoramus, at Tue Oct 05, 10:45:00 AM:

“Doesn't anybody notice this? I feel like I'm taking crazy pills” -- Mugatu in Zoolander

This is about more than the fate of the Bush tax cuts.

Going into November 2 the generic Democratic talking point on taxes has been that “to cut taxes for the wealthy would irresponsibly increase the deficit by nearly $1 trillion over ten years.” The Democrats leave out that keeping the Bush tax cuts in place for everyone else would raise the deficit by over $3 trillion over ten years.

But meanwhile we have an unsustainable trillion dollar annual structural deficit. Right now we’re borrowing 40 cents of every federal dollar spent. That’s the elephant in the room.

The Peter Orzag-produced White House budget released back in the summer assumed that we’d have a decade of strong growth starting with an unprecedented five years of annual 4.5% GDP growth. Even with that assumption, that budget still “blew up.” Memo to Obama & Co: We’ll be lucky to average 1% growth on current trajectory. This will have momentous consequences.

The USA’s 2011 fiscal year already started on October 1 without a Congressional budget. Not because politicians hit an impasse arguing over it … it was never even substantively discussed. Nancy couldn’t deal with it. After November Obama will try to make Boehner & Co the fall guys … “Guard the Change!.” Developing ….  

By Blogger D.E. Cloutier, at Tue Oct 05, 12:04:00 PM:

This comment has been removed by the author.  

By Blogger D.E. Cloutier, at Tue Oct 05, 12:11:00 PM:

Anon @10:12 a.m. "The Kenyan"

Is that supposed to be clever? It's boring. B-o-r-i-n-g.

It's hard to convince many Independent voters that Conservatives aren't racists. This kind of childish remark from someone in the Conservative coalition doesn't help at election time. You turn off more people than you recruit with your silliness.

Quite frankly, I wonder whether you are a Democrat pretending to be a Republican.

If not, wise up.  

By Blogger Georg Felis, at Tue Oct 05, 01:30:00 PM:

TH: I think you’re confusing incompetence with malice. The Lefty Dems have been highly effective with ramming their policies through the legislative process no matter how badly it hurts the economy, the citizens of the country, and the history of the United States. Where the incompetence shows up is the *design* of these policies, and the published anticipated result of implementation (which looks nothing like the actual results). They have to either be very stupid and not know what will happen because of their activity, or very smart and *do* know what will happen, and their successes to this point make me hesitate to call them stupid. Henceforth, malice.

DEC: It kind of looks like the Anon poster above is one of those Eeyore Republicans of which we are too accustomed. No matter what happens, no matter how well things go, it is horrible news, the world is going to end, Republicans have failed again, et al. Just tolerate them (after all, the Republican party is the party of tolerance) and use them as guidance. As long as your opinions are somewhere between Eeyore and Pollyanna, you are doing something right.  

By Blogger Dawnfire82, at Tue Oct 05, 02:35:00 PM:

Georgefelis: Heading off the inevitable correction... post was by Cardinalpark, not Tigerhawk. Different people.  

By Blogger D.E. Cloutier, at Tue Oct 05, 02:41:00 PM:

Georgfelis, I don't care what a clown does at home. But I do care when he hinders the act of the lion tamers.  

By Blogger Noumenon, at Wed Oct 06, 07:26:00 AM:

Thanks for consistently referring to it as a "scheduled tax increase" and not something that the Democrats decided to spring on us from nowhere.  

By Anonymous E Hines, at Wed Oct 06, 07:31:00 AM:

Ask any Democrat if s/he can say,"Cut spending." You'll get lots of excuses why it can't be cut and lots of push back like, "Where would _you_ cut?" But no Democrat will give the correct answer.

I still claim that Obama and his ilk know what they're doing, and they're doing it anyway. After the dust settles, ObamaCare is passed, the Democrats will likely take severe hits in the next couple of elections. But by 2014 or 2016, they'll be back, and ObamaCare will still be in place. Iran will have nuclear weapons, and so will terrorists, as a result. The US will have withdrawn from the world stage, broke and without allies, but that's irrelevant to the Democrats--they want us apologized for and not dictating American values (which are, after all, not better than anyone else's) to the rest of the world. And that's what they've been about all along.

Eric Hines  

By Anonymous Anonymous, at Wed Oct 06, 09:28:00 AM:

California bonds were priced at a greater spread than Portugal yesterday, and Mexico borrows more cheaply than Illinois. Those prices are our future, and for those who wonder "so what?", I'd only point out that average maturity on Treasury debt is around five years right now and the yield is about 3.4%. That means when all that debt gets refinanced, and because the idiots in the Treasury haven't stretched out maturities it'll all have to be refinanced within the next five years (to say nothing about financing our new borrowings), it'll get done at much higher rates.

This is the very near future: The economy will shrink and our businesses will become far less competitive against other countries industry. Our ability to finance national defense will be less, our social safety net will be forced to shrink and the size of government will have to get smaller. Ask Greece.

Like it or not, thats America's unalterable future. So, hey Democrats!, do you want to control the change or be forced into it? Because you're going to see it either way.  

By Anonymous Anonymous, at Wed Oct 06, 09:32:00 AM:

Sorry, forgot to include the Bloomberg link.

This has gone beyond politics and ideology now. We'll see how noble everyone wants to be about paying for each others mortgages and healthcare when no one has a job.  

By Anonymous Ignoramus, at Wed Oct 06, 11:24:00 AM:

“Like it or not, that’s America's unalterable future”
I disagree. The future isn’t written.

Ben Bernanke said yesterday: “If current policy settings are maintained, and under reasonable assumptions about economic growth, the federal budget will be on an unsustainable path in coming years, with the ratio of federal debt held by the public to national income rising at an increasing pace.”

No shit.

Big Ben’s introductory clause is key. This is fixable. Big Ben attributes the problem to an aging population and health care costs. I agree that these are big drivers. People just live too long these days.

Here’s my prescription: When you get past 75 all you get from the government is the nurse of your choice and all the morphine you want. I’m serious. We all say we want to live forever but do you want to be 85, drooling and wearing adult diapers. If I get old enough to hear Older Boomers whine and whine about they’re getting old, I may just have to off myself early.

What we need over the next five years is debt deflation, less consumer spending and more consumer saving, and big cuts in government spending. We need to put a cap on social benefits and make sensible cuts to defense and homeland security. A few federal agencies should be shut down entirely. E.g., The EPA needs to be shut down and rebooted, else no one will have a privatge sector job.

Pension reform is important too. I have an easy fix. We create two kinds of dollars. Outstanding dollars get valued 1:1. Outstanding pension obligations are exchangeable today at a discount. If you don’t exchange today, you’re on your own. No later bailouts. Government employees will need to have a serious discussion with their pension leaders.

This won’t be pretty, but it’s necessary. Politically, it pits Young vs Old.

Obama is of course on the wrong side of all of this.  

By Anonymous Anonymous, at Wed Oct 06, 12:52:00 PM:

Anon Attorney here.

There was no recovery. If you back the increase in government stimulus deficit spending-driven GDP out of the GDP numbers you will find that real GDP has continued declining. This is covered in detail in some of the financial blogs, e.g., The Market Ticker, Zero Hedge, Naked Capitalism.

QE2 comes in November, probably accompanied by Stimulus 2 in early 2011, primarily to bail out states and local governments. States become irrelevant as their borrowing capacity recedes, to be replaced by a permanent state of Federal transfer payments of printed money. Red ink and ZIRP as far as the eye can see.

Your historical analogy to the Great Depression is spot-on.

Not a pretty picture.  

By Anonymous Anonymous, at Wed Oct 06, 01:16:00 PM:

"Like it or not, thats America's unalterable future. So, hey Democrats!, do you want to control the change or be forced into it? Because you're going to see it either way."

Sorry to confuse- the word "unalterable" refers to the fact that government will be getting smaller, either willingly or unwillingly, and not to the deteriorating price of American credits and the deteriorating condition of America's economy. We can indeed change our present policies, as you say, and prevent the deterioration and eventual crash of our government spending (though the politicians in charge today won't make the necessary changes). If we don't make those changes as you advocate, though, we will eventually be forced to make the changes.

Our ability to finance government is limited first by other countries willingness to lend to us (because even 100% tax rates on "the rich" can't pay for our current spending) and, second, by the monetization we can stand. Once China won't finance any more American deficits, and once the Fed can't print any more dollars, then government will get smaller. Unalterably.

So, the only question is: do we want to run the process, and make choices as to how that happens, or do we want to keep on spending until we don't have any more money to spend, and have changes thrust upon us by our creditors.  

By Anonymous Ignoramus, at Wed Oct 06, 01:20:00 PM:

"probably accompanied by Stimulus 2 in early 2011, primarily to bail out states and local governments"

But we have a Red State / Blue State divide, which will soon be clearly reflected in the membership of the House. There's a reason California and Illinois bonds are trading at higher yields than Mexico and Portugal's

A major state going broke would be a real eye-opener, wouldn't it?

1975 Daily News headline: Ford to NYC: Drop Dead  

By Anonymous Ignoramus, at Wed Oct 06, 01:23:00 PM:

Meanwhile, from Obama’s recent weekly address: Solar Power & a Clean Energy Economy

“The President points to a revolutionary new solar plant that will employ 1,000 people and power 140,000 homes. The plant is possible because of the President’s investments in the clean energy economy, which Congressional Republicans want to eliminate.”

Source: http://www.whitehouse.gov/blog/2010/10/02/weekly-address-solar-power-a-clean-energy-economy

Is Obama insane, or just totally innumerate?  

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