ES -- DX/CL -- isee -- cboe put/call -- specialist/public short ratio -- trinq -- trin -- aaii bull ratio -- abx -- cmbx -- cdx -- vxo p&f -- SPX volatility curve -- VIX:VXO skew -- commodity screen -- cot -- conference board

Friday, November 13, 2009


obama to move away from deficit spending in 2010

politico scoops the news, which comes in light of jon corzine's loss of the governorship of solid blue state new jersey.

The president's plan, which the officials said was under discussion before this month’s Democratic election setbacks, represents both a practical and a political calculation by this White House.

On the practical side, Obama has spent more money on new programs in nine months than Bill Clinton did in eight years, pushing the annual deficit to $1.4 trillion. This leaves little room for big spending initiatives.

On the political side, Obama can help moderate Democrats avoid some tough votes in an election year and, perhaps more importantly, calm the nerves of independent voters who are voicing big concerns with the big spending and deficits. ...

“Democrats have to reassure voters we are not being reckless,” said a Democratic official involved in the planning. “The White House knows this and that's why we'll be hearing a lot about reducing the deficit early next year. Democrats owned this issue for the past four years and cannot afford to cede it to Republicans now."

... [M]any moderate Democrats are deeply troubled by two recent signs of serious discontent among independent voters. The first was how badly Democrats lost among independent voters in the New Jersey and Virginia gubernatorial races. The second was a Gallup poll released this week that showed Republicans winning the independent vote by 22 points in generic matchups for House and Senate races. That same poll had the parties tied among independents in July.

edward harrison caught the news and interpreted it with typical incisiveness.

I am now moving from multi-year recovery to a double dip baseline.

there's nothing in harrison's post i disagree with. this is the nightmare scenario -- paul krugman must be gasping for air on the floor of his office right now. in my view the question isn't about the directional economic consequences of such a move to reduce deficit spending in 2010. indeed i think the only question will be just how disastrous a collapse awaits.

i would argue from the following premise:

when the united states raised taxes and cut spending in appeasement of deficit hawks following the election of 1936 and roosevelt's politically unpopular aggressive challenges of the supreme court in 1937, after four years of GDP growth on the back of the new deal from the liquidation low in 1933, the balance sheet recession of the 1930s was nearly eight years old -- and four of those years had been spent in a titanic default cycle which washed away an incredible nominal amount of american private sector debt (and with it a third of GDP). as real debt levels (eg, as measured in comparison to GDP and incomes) had returned only to late-1920s levels, however, americans were broadly engaged in continuing balance sheet repair. the extent to which that was true was revealed in the crash of 1937-38.

when japan committed politically to reducing deficits following the election of the hashimoto government in 1996, it was already some seven years distant from its equity market crash and five years past the real estate peak. during that time banks had been, much as here today, turned into quasi-GSEs and loaded with liquidity. the corporate sector at the heart of the debt collapse had been turning income toward debt reduction rather modestly during the intervening period, and began in earnest only following the liquidity crisis and cyclical recession of 1997. but even at that point, japanese GDP had with the aid of fiscal stimulus been slowly expanding with very low inflation for some time, helping to lower real debt levels.

where the united states of 1937 and the japan of 1997 were a number of years removed from their bubble bursts when first their respective governments attempted to reduce deficits, the united states of 2009 remains just over a year into its period of balance sheet repair. virtually nothing has yet been done to lower household debt burdens -- in fact, in relation to incomes and GDP, private sector debt burdens are quite possibly higher now than at the outset. this implies that we are a more highly leveraged society than either of our antecedents -- and will potentially as a result experience any second dip with a more exquisite acuity than either of our antecedents were forced to bear.

that said, there is hope: political duplicity.

The big question for Obama – and the country – is whether the sudden concern about deficits will be more rhetoric than reality once his first State of the Union address concludes.

... The Wall Street Journal reported Thursday the White House is considering applying some money from the $700 billion financial bailout bill to deficit reduction, and that Cabinet agencies have been asked to submit two budget plans for next year, one that freezes spending at existing levels and one that trims spending by 5 percent. Congress has long history of taking those requests and piling on money for programs it favors.

continuing on plus some lard is perhaps a modestly-negative-growth scenario given the effects of slowing stimulus spending. a 5% cut is something altogether more disastrous. but what seems clear from this statement of intent following the gubernatorial races of last week is that the federal government will not be passing a comprehensive stimulus package which replaces the diminishing effect of its first effort. and that means we are approaching the double dip.

Labels: ,

That part about applying some of the money from the $700 billion bailout to deficit reduction is both funny and sad--funny to think that anyone could consider not spending money they didn't have on an "emergency" that turned out not to exist to be deficit reduction, and sad because the MSM presumably reported it without a hint of irony.

------ ------- ------
gm, what do you make of Buffett calling for Obama to cut back on deficit spending as well?

------ ------- ------
GM, you completely missed the sleight of hand here. This whole fiscal responsibility 'scoop' from Politico is an intentional deception created to help get the debt ceiling raised. Also, it is pitiful that your only concern is the possible loss of continued and increased massive stimulus. Don't you understand that the moral hazard of it has brought this country to it's death?

------ ------- ------
rb, i haven't heard the totality of buffett's argument, but on first blush i disagree with him. let me also try to address anon's point.

tax revenues will naturally rise with economic activity (if it rises), but the private sector is still holding ~300% of GDP in debt. there's only two mechanisms for delevering it without a colossal deflation -- run massive current account surpluses for many years, or run massive public sector deficits for years.

there's a third alternative, which the government is trying -- which is to reinflate asset prices to reverse the minksy shock of 2007-8 which created this huge balance sheet impairment. this is the greenspan playbook. but this is difficult -- a minsky moment has much to do with social mood, and going back to status quo does not delever the economy or move us to greater stability -- again, see greenspan. it would also involve, given that securitization is gone and not coming back, government financing a lot of private loans by reinvigorating the GSEs at terms as ridiculous as those seen in 2005. and it would also have to support incomes (ie counter unemployment) anyway through the inflation so that the capacity to service debt minimally remains. i doubt its possible, and current attempts are only mitigation.

worse, running massive current account deficits is also highly unlikely. it wound require a large discount of the trade value of the dollar to turn the US into a net exporter, and a structural change to the physical economy. critically, the US does not control the trade value of its currency -- other exporting nations maintain pegs against it for mercantile purposes, and their reaction to the crisis has largely been to reinforce those pegs. that these pegs were really the genesis of the global leverage cycle and subsequent instability seems to be nowhere in anyone's concern. i think everyone agrees that the trade balance must at least narrow, but it will take years to effect that change. and in theory, isn't the point of avoiding government deficits preserving the value of the dollar on some level?

in any case, though some help is already arriving in trade deficit reduction and asset reinflation, it seems clear that the majority of the adjustment will come either in large and persistent government deficits OR in a fairly dramatic reversal of reinflation. that is really the choice, it seems to me.

so if buffett wants to narrow the government deficit at this early juncture, with balance sheet damage still severe and private sector leverage still so high, i think he's (perhaps unwittingly, perhaps not) calling for deflation. perhaps he thinks we're in an ordinary recession and not a balance sheet recession. perhaps he thinks government stimulus is overwhelming the propensity to save and overstimulating, so that scope for some reduction in the deficit without impeding balance sheet repair is possible. i can't say.

as to moral hazard, i have to question whether it is more or less moral for the government to increase the funding duration of the society by refinancing private sector debt -- or instead to engage deliberately in policiies which will impoverish the country and quite probably lead to malnutrition and even starvation on a significant scale in this country if not globally. people are already going hungry at 10% unemployment. what would this country look like at 20%? how about 30%? believe me, if i thought the stakes were anything less, my disposition would be to let failures fail. but the size of the debt is such that engaging in deflation out of "moral" concerns or any others will i think tear the country to pieces. that's not an option.

------ ------- ------
"there is hope: political duplicity."...

I'd say there's more than hope. What better example of duplicitousness do you need than the last line of the politico article:

“We've got to show people that we are responsible stewards for their taxpayer dollars..."

------ ------- ------
GM, Does a Politico article make policy ?
At the same time some people from Goldman talk about 250 bn 2010 stimulus.

I am not from the US, so it is hard to figure out if this is real. What are the reasons that this article might indicate real White House strategy for 2010 and not some trial balloon or Red Herring or whatever?
Why do you give it full weight ? How sure are you in percentage terms that this is real?

I only question because I acknoledge the implicit importance of it all .....

------ ------- ------
hubert -- it's not that politico makes policy, as it clearly doesn't. but the obama adminstration is at minimum making quite a show of it. calling for executive budgets to present either flat or (-5%) is no joke.

blinkered republicans screaming about obama surprises no one. but one shouldn't discount the populist ire afoot among swing voters in the US -- the democrats just got done with a terrible election on november 3 in which vacillating independents forced two democratic governors out of key swing state virginia and solidly-democratic new jersey. that must have the democrats and the obama administration terrified. rightly or wrongly, they take these developments as evidence that the swing voters agree with some of the republican arguments -- and anecdotally, my experience corroborates that view. so look for the administration -- which has been far from leftist anyway -- to move further to the right in an effort to limit the political damage among swing voters ahead of the congressional elections in 2010.

i suspect that will backfire by sparking a double dip, another acceleration of unemployment and even deeper economic resentment as republicans portray obama and a heavily democratic congress as having utterly failed with incorrect ideas (when in fact it will at least in part amount to for a lack of conviction in the correct ideas).

------ ------- ------
gm, fear not. This whole article is simple subterfuge; the looting of the treasury will continue with your precious "stimulus" dollars continuing to line the pocket of rich bankers and wall streeters. Do you think this gangster administration is going to let a little setback like losing two governor elections stop it from it's looting mission? Hah!

Draw a glass of brandy, sit in your easy chair with your laptop, and peruse, and tell yourself as you read that great piece of fiction: "See! This is doing great things for the country!"

------ ------- ------
"peruse, and tell yourself as you read that great piece of fiction"

I think you're wrong. There is no fiction there. read the list of grants. 50k here... 100k there... it's money shot from a fire hose at marginally productive businesses across the country. It's keynesian.

Whether it succeeds though is another matter. It's not hard to find folks who are enthusiastic about shooting government money at pet projects, or on a higher more abstract level "increasing aggregate demand". It's another matter entirely when Uncle sam shows up at their door step 2, 5, 10 years down the road, hat in hand telling them it was all borrowed from the future and the future's here.

but what's the alternative? Whether you or gaius marius agree with the above, surely it must be aknowledged that extreme poverty on a national scale could lead to scenarios we'd all rather avoid. But then, if it's true that keynes is sleepwalking us to totalitariansim, presumably we should want to avoid that as well....

Dammit.. where's that brandy you promised?

------ ------- ------

------ ------- ------

Post a Comment

Hide comments

This page is powered by Blogger. Isn't yours?