It was another dreadful week for world markets as fears of a second global recession carried the day yet again, this time precipitated not just by further European inaction in coming up with a solution to attack both the sovereign debt crisis as well as recapitalize the banks, but an unbelievably bad German bond (bund) auction, whereby the Germans tried to auction off 6 billion euro in 10-year paper and only 3.6 billion was scooped up by private investors. The German 10-year shot up to 2.26%, above Britain’s 2.19% yield for like maturity, a first. [By week’s end Germany was still at 2.26%, but the U.K. was at 2.29%.]
The obvious conclusion being if the one country that is supposed to somehow save the continent and the eurozone, the healthiest economy to boot, can’t find buyers for its quality bonds, who the heck is going to step up and buy all the crappola hitting the market in the next few years? And this while the European economy is tanking and by virtually every expert already in recession.
So the one issue that keeps coming up is this. The European Central Bank has to be the lender of last resort and somehow save the PIIGS [Portugal, Ireland, Italy, Greece and Spain] for starters, as well as the big banks with a huge exposure to all of them, but this is an impossible task. Reminder, the original European Financial Stability Facility (or Fund)…EFSF…was for 440 billion euro but has only about 235bn left. That was nonetheless supposed to be enough to backstop Greece, Ireland and Portugal, the three countries already being bailed out. But then contagion set in, in the case of Italy and Spain. The EFSF, then, per an Oct. 26 agreement, was to be leveraged up to perhaps 1.4 trillion, but Italy’s sovereign debt alone is 1.9 trillion euro. And we aren’t talking about what to do with the banks that need 100s of billions of euro in new capital themselves.
But throughout the latest round of discussions between German Chancellor Angela Merkel and French President Nicolas Sarkozy, Merkel continued to make it exceedingly clear that she would not accept a greatly expanded role for the ECB whereby, perhaps with IMF help (though that outfit has limited resources of its own at this stage), it could just print 4 trillion in euro and paper the world with it…end of crisis!
There is another EU summit on Dec. 9 and this is a new target date to watch. I mean, folks, this all started in the spring of 2010 and could have been nipped in the bud back then. But for now, Merkel insists there is no bazooka, no “big bang,” as she said.
“We have frittered away political trust in the euro,” the chancellor added. “That is why I deeply believe that you can’t restore this confidence with purely financial means, but that only a coherent political response can create this confidence.”
Well, heck, Angela, let’s start with the fact that if you are looking for political solutions, both Greece and Italy are now being run by unelected technocrats!
At least Spain, in electing Mariano Rajoy last weekend, has a politician to deal with the many issues his nation faces.
“Hard times lie ahead,” Rajoy told supporters. “We are going to govern in the most delicate situation Spain has faced in 30 years.”
As to the ever present idea of eurobonds and greater ECB involvement in bailing out troubled economies, Merkel is concerned that joint bonds would reduce pressure on member states to stick to their austerity programs and reduce their debt loads (let alone that existing EU treaties prevent the ECB from buying bonds as the lender of last resort).
Editorial / Financial Times…on the eurobond concept.
“Peripheral countries would benefit disproportionately, thereby helping to ease overall debt burdens. The weighted average of the eurozone’s borrowing costs is 4.7%. Greece could cut its interest bill by 15% of GDP in this way, according to Capital Economics. Germany’s interest bill would rise proportionately, of course – by some 2.5 percent of GDP. What’s not to like?
“Moral hazard, for starters. By offering the likes of Greece or Italy such rewards, eurozone bonds could remove these countries’ incentive to regain lost competitiveness. Nor would these bonds reduce the stock of existing debt. Unless there was a degree of fiscal union and budgetary enforcement in the eurozone that trampled on national sovereignty, investors would rightly be skeptical about buying such instruments. If the yield on eurozone bonds was to become significantly higher than that on debt of the bloc’s triple A states, the project would crumble.
“And then there is the clinching argument – that Germany will not accept them. An ersatz form of eurozone bond issued by the European Financial Stability Facility already exists. Anything more ambitious is a non-starter until the crisis has abated.”
Mohamed El-Erian / Financial Times
“Just when you think the European crisis cannot get much worse, Wednesday’s shunned Bund auction showed that it can. With this, the risks for the global economy as a whole, and for virtually every country, increase materially.
“Given this week’s developments, there should be no doubt in anyone’s mind that what started out as a dislocation in the periphery of the eurozone has now decisively breached the firewalls protecting the outer core and is seriously threatening the inner core. Unless this is countered quickly, European policymakers will find it even harder to catch up with the crisis, let alone get ahead of it.
“Europe must still stabilize its sovereign debt situation. But this is now far from sufficient. Policymakers must also move quickly to contain banking sector frailties, and do so using a more coherent approach to the trio of capital, asset quality and liquidity.
“In the eyes of the markets, the capital cushion of Europe’s banking system as a whole is no longer sufficient to support its balance sheet. This concern is not limited to the markets. Judging from their eagerness to dispose of assets, bank managements also believe that balance sheet delevering is key to the institutions’ survival and wellbeing….
“Problems in the banking sector have a nasty habit of accelerating and amplifying crises. Indeed, they significantly increase the risk of policymakers losing control. It is therefore critical for Europe to add this policy challenge to an already long ‘to do’ list.”
By the way, this week Belgium’s debt rating was cut, and Portugal’s and Hungary’s were cut to junk status.
Other euro bits…in no particular order…
Merkel and Sarkozy at week’s end were talking about EU treaty changes in time for the Dec. 9 summit but this is insane. It’s normally a years-long process. No way they can just ram them through, especially since they involve greater oversight of national budgets and statistics, as well as create debt limits for governments, while trying to reach consensus in the eurozone on pension ages and tax levels.
The U.K. and Germany each reported third quarter GDP rose 0.5% over the second quarter. This is good, right? It’s irrelevant, is what it is. Fourth quarter GDP should be flat at best, most likely negative.
A joint services/manufacturing index for the EU came in at 47.2 for November vs. 46.5 in October, still putrid, while a reading on industrial orders for the eurozone in Sept. over Aug. fell 6.4% (Germany down 4.4%, France down 6.2% and Italy off 9.2%).
Italy’s borrowing costs soared, with the two-year nearing 8% while the three-year bond peaked at 8.13%. The key 10-year hit 7.60% before finishing the week around 7.30%. Six-month bills carried yields of 6.50%!
Belgium, not one of the PIIGS but always on the periphery, saw its 10-year hit a yield of 5.85% on Friday, up from 4.79% on Monday. Belgium deserves it as the country hasn’t had a government since native Eddy Merckx was winning the Tour de France.
Things are not going well for Britain and Prime Minister David Cameron. A poll for the London Times showed that 79% of voters believe the country will fare ‘badly’ over the next year against 18% who think it will do ‘well.’
Chinese vice-premier Wang Wishan, responsible for overseeing the financial sector, said this week:
“Right now the global economic situation is extremely serious and in a time of uncertainty the only thing we can be certain of is that the world economic recession caused by the international crisis will last a long time.”
Which leads me into a discussion of…
Washington…yuck
The supercommittee failed to come up with the $1.2 trillion in deficit reduction it was charged with doing and so now sequestration kicks in, $1.2 trillion in automatic cuts over ten years, half from defense, but not starting until 2013. President Obama faulted congressional Republicans, saying they “refused to listen to the voices of reason and compromise” during the debt talks. Obama also warned that he would veto any attempt to unwind the automatic spending cuts. There will be “no easy off-ramps on this one,” he said.
Republican committee member Pat Toomey, senator from Pennsylvania, countered: “Unfortunately, our Democratic colleagues refused to agree to any meaningful deficit reduction without $1,000bn in job-crushing tax increases.”
Peter Peterson, the long-time advocate for balancing the federal budget, called the panel’s failure “deeply disappointing.”
“A divided government cannot succeed until elected officials choose to lead the country toward solutions instead of relentlessly defending their own political ideology.”
Politicians from both sides, as well as many a pundit, said it’s now about the 2012 election, as if this is going to change things. It won’t.
I’ve been telling you for months what will happen, though. Once the two parties couldn’t come up with a substantial, $4 trillion deficit-reduction package this summer, I’ve been calling for a Crash next year, one that will be related to the feeling hitting the markets all at once that we are indeed no different than Europe. Our leaders’ failure, particularly the president’s, to enact a legitimate plan that markets would have rejoiced over seals our fate in 2012. I told you a few weeks ago that next year could look a lot like 1860 (a theme CNBC’s Jim Cramer began to pick up on this past week, not that I ever want to be associated with him). The political debate will be as ugly as any in our lifetime.
The Wall Street Journal’s John Bussey interviewed Erskine Bowles and Alan Simpson of Simpson-Bowles fame and just a reminder as to the extent of the mess.
Erskine Bowles:
“I think we face the most predictable economic crisis in history. It’s as clear as the nose on my face that the fiscal path they are on here in Washington is not sustainable. And worse yet, I know every member of that fiscal commission knows it, too.
“The economics is very clear. The politics, very difficult. I’ll give you one little simple arithmetic example. If you take 100% of the revenue that came into the country last year, every single dime of it was consumed by our mandatory spending and interest on the debt. Mandatory spending in English is basically the entitlement programs. Medicare, Medicaid and Social Security. That means every single dollar we spent last year on these two wars, on national defense, homeland security, education, infrastructure, high value-added research – every single dollar was borrowed, and half of it was borrowed from foreign countries.
“That’s a formula for failure in anybody’s book. And this is not a problem that we can solely grow our way out of.”
John Bussey asked the two about President Obama’s non-reaction to their report when they released it in December, and how the president then didn’t even mention it in the State of the Union, my own big issue at the time.
Bowles:
“I negotiated the budget for President Clinton. And every investment banker will tell you the key to success is knowing your client and defining success up front. So, I knew what success was on his part, and I could go in there and negotiate the deal.
“I did not know President Obama, and neither did Alan. So we spend a tremendous amount of time with him and his economic team up front defining success. And we negotiated a deal that got a majority of Republicans to vote for it, so he had plenty of cover on the other side. It also exceeded every single one of the goals that he had given us.
“I fully expected them to grab hold of this. If it had been President Clinton, he would have said, ‘God, I created this, this is wonderful. It was all my idea.’
“So we were really surprised. My belief is that most of the members of the economic team strongly supported it. Like every White House, there’s a small cabal of people that surround the president that he trusts and works with, and I believe it was those Chicago guys, the political team that convinced him it would be smarter for him to wait and let Paul Ryan go first, and then he would look like the sensible guy in the game.
“We then expected, before the State of the Union, that when he did the stimulus, that that would be a great time to say not only, look, we’re going to do this to get the economy moving forward, but we have to do it within the context of long-term fiscal reform and responsibility. And he didn’t.”
Robert Samuelson / Washington Post
“From 2005 to 2035, (the cost of entitlements) will nearly double as a share of national income, projects the Congressional Budget Office. How big a government do we want? What’s the balance of fairness between young and old? How much should other programs be reduced or taxes raised? Many Democrats duck the fundamental policy questions and reject any benefit cuts.
“Only President Obama can start such a debate. He has the bully pulpit, but he hasn’t used it. Here’s an exchange between ABC White House correspondent Jake Tapper and the president, at a July 15 news conference, that captures Obama’s calculated obscurity.
“Tapper: ‘In the interest of transparency, leadership and also showing the American people that you have been negotiating (with Republicans) in good faith, can you tell us one structural reform that you are willing to make to one of these entitlement programs that would have a major effect on the deficit? Would you be willing to raise the retirement age? Would you be willing to means test Social Security or Medicare?’
“Obama: ‘We’ve said that we are willing to look at all these approaches. I’ve laid out some criteria in terms of what would be acceptable. So, for example, I’ve said very clearly that we should make sure that current beneficiaries as much as possible are not affected. But we should look at what can we do in the out-years, so that over time some of these programs are more sustainable. I’ve said that means testing on Medicare, meaning people like myself, if – I’m going to be turning 50 in a week. So I’m starting to think a little bit more about Medicare eligibility.(Laughter). Yes, I’m going to get my AARP card soon – and the discounts. But you can envision a situation where for somebody in my position, me having to pay a little bit more on premiums or co-pays or things like that would be appropriate.’
“Noncommittal gibberish. There is no leadership from the nation’s ‘leader.’ Space precludes running all his rambling response; the excerpt above was about half. Tapper followed up.
“Tapper: ‘And the retirement age?’
“Obama: ‘I’m not going to get into specifics.’
“Well, there you have it. The president won’t talk specifics, but government consists of specifics. The reason we cannot have a large budget deal is that Americans haven’t been prepared for one. The president hasn’t educated them, and so they can’t support what they don’t understand. Left or right, there are no comfortable positions. No one relishes curbing Social Security or Medicare benefits. But without changes, taxes will go way up, the rest of government will shrink dramatically or huge deficits will persist.”
You know who would have been effective these days, in his prime? Ross Perot. Call him what you will (I proudly voted for him in ‘92), but he was ahead of his time when it came to deficits.
Charles Krauthammer / Washington Post…on how some Republicans, such as Sen. Tom Coburn (Ok.) have actually supported increased tax revenue, as did supercommittee member Sen. Pat Toomey, let alone House Speaker John Boehner as part of the grand bargain with President Obama that fell through last summer.
“So why does the myth of the (Grover) Norquist controlled anti-tax monolith persist? You might suggest cynicism and perversity. Let me offer a more benign explanation: thickheadedness – the inability to tell the difference between tax revenue and tax rates.
“In deficit reduction, all that matters is tax revenue. The holders of our national debt care not a whit what tax rates yield the money to pay them back. They care about the sum.
“The Republican proposals raise revenue, despite lowering rates, by opening a gusher of new income for the Treasury in the form of loophole elimination. For example, the Toomey plan eliminates deductions by $300 billion more than the reduction in tax rates ‘cost.’ Result: $300 billion in new revenue.
“The Simpson-Bowles commission – appointed by President Obama and endorsed by Coburn – used the same formula. Its tax reform would lower tax rates at a ‘cost’ of $1 trillion a year while eliminating loopholes that deprive the Treasury of $1.1 trillion a year. This would leave the Treasury with an excess – i.e., new tax revenue – of $100 billion a year or $1 trillion over a decade.
“Raising revenue through tax reform is better than simply raising rates, which Democrats insist upon with near religious fervor. It is more economically efficient because it eliminates credits, carve-outs and deductions that grossly misallocate capital. And it is more fair because it is the rich who can afford not only the sharp lawyers and accountants who exploit loopholes but the lobbyists who create them in the first place.
“Yet the Democrats, who flatter themselves as the party of fairness, are instead obsessed with raising tax rates on the rich as a sign of civic virtue.”
Editorial / Washington Post
“That the lawmakers were…unable to reach agreement does not bode well for future negotiations. The 2012 election may produce a change in the occupant of the White House and control of one or both houses of Congress, but it is not likely to produce a clear mandate for either party’s vision of debt reduction. The compromise that proved elusive for the supercommittee will remain necessary. Perhaps it can be achieved in the action-forcing context of the trigger and expiring tax cuts. Working on deficit reduction, after all, requires a triumph of hope over experience.”
Batten down the hatches, folks. You ain’t seen nuthin’ yet.
China
I guess I should change my heading above from “Europe, Washington and Wall Street” to include China, because it obviously impacts market sentiment almost as much as Europe some days, such as when HSBC released their preliminary purchasing managers’ index (PMI) on manufacturing for China in November, 48, or off the 50 dividing line between growth and contraction, this after a 51 reading in October was bullish for being better than expected.
China is slowing. The central government knows this. One leading banking official, chairman Jiang Jianqing of the Industrial & Commercial Bank of China, said China would nonetheless maintain its tight monetary policy over inflation fears.
But that doesn’t mean Beijing can’t play with bank reserve requirements, which is what they are already doing with some rural banks to help small businesses. I also think China will lower interest rates because inflation is going to come down sharply from here.
The problem is exports are slowing precipitously, with 1/5th going to Europe. In Guangdong, for example, 450 small factories have closed (those making toys and clothing, primarily), as the World Bank warned China’s growth will decline to 8.4% next year. Hong Kong warned that a full third of its 50,000 factories in China could shut down over the coming months.
[Another economic report I read from a Chinese government mouthpiece said growth in 2012 will still be 9.2%.]
Meanwhile, you have the property bubble and how quickly does that deflate? What’s the impact on the smaller banks in particular? This is where I’m convinced the government will not let the situation get out of hand. I have written in this space in the past few months that Beijing will have no problem letting small banks fail that have been irresponsible. But it will protect the larger institutions and thus prevent a systemic crisis, assuming Europe’s recession doesn’t evolve into a depression.
The obvious conclusion being if the one country that is supposed to somehow save the continent and the eurozone, the healthiest economy to boot, can’t find buyers for its quality bonds, who the heck is going to step up and buy all the crappola hitting the market in the next few years? And this while the European economy is tanking and by virtually every expert already in recession.
So the one issue that keeps coming up is this. The European Central Bank has to be the lender of last resort and somehow save the PIIGS [Portugal, Ireland, Italy, Greece and Spain] for starters, as well as the big banks with a huge exposure to all of them, but this is an impossible task. Reminder, the original European Financial Stability Facility (or Fund)…EFSF…was for 440 billion euro but has only about 235bn left. That was nonetheless supposed to be enough to backstop Greece, Ireland and Portugal, the three countries already being bailed out. But then contagion set in, in the case of Italy and Spain. The EFSF, then, per an Oct. 26 agreement, was to be leveraged up to perhaps 1.4 trillion, but Italy’s sovereign debt alone is 1.9 trillion euro. And we aren’t talking about what to do with the banks that need 100s of billions of euro in new capital themselves.
But throughout the latest round of discussions between German Chancellor Angela Merkel and French President Nicolas Sarkozy, Merkel continued to make it exceedingly clear that she would not accept a greatly expanded role for the ECB whereby, perhaps with IMF help (though that outfit has limited resources of its own at this stage), it could just print 4 trillion in euro and paper the world with it…end of crisis!
There is another EU summit on Dec. 9 and this is a new target date to watch. I mean, folks, this all started in the spring of 2010 and could have been nipped in the bud back then. But for now, Merkel insists there is no bazooka, no “big bang,” as she said.
“We have frittered away political trust in the euro,” the chancellor added. “That is why I deeply believe that you can’t restore this confidence with purely financial means, but that only a coherent political response can create this confidence.”
Well, heck, Angela, let’s start with the fact that if you are looking for political solutions, both Greece and Italy are now being run by unelected technocrats!
At least Spain, in electing Mariano Rajoy last weekend, has a politician to deal with the many issues his nation faces.
“Hard times lie ahead,” Rajoy told supporters. “We are going to govern in the most delicate situation Spain has faced in 30 years.”
As to the ever present idea of eurobonds and greater ECB involvement in bailing out troubled economies, Merkel is concerned that joint bonds would reduce pressure on member states to stick to their austerity programs and reduce their debt loads (let alone that existing EU treaties prevent the ECB from buying bonds as the lender of last resort).
Editorial / Financial Times…on the eurobond concept.
“Peripheral countries would benefit disproportionately, thereby helping to ease overall debt burdens. The weighted average of the eurozone’s borrowing costs is 4.7%. Greece could cut its interest bill by 15% of GDP in this way, according to Capital Economics. Germany’s interest bill would rise proportionately, of course – by some 2.5 percent of GDP. What’s not to like?
“Moral hazard, for starters. By offering the likes of Greece or Italy such rewards, eurozone bonds could remove these countries’ incentive to regain lost competitiveness. Nor would these bonds reduce the stock of existing debt. Unless there was a degree of fiscal union and budgetary enforcement in the eurozone that trampled on national sovereignty, investors would rightly be skeptical about buying such instruments. If the yield on eurozone bonds was to become significantly higher than that on debt of the bloc’s triple A states, the project would crumble.
“And then there is the clinching argument – that Germany will not accept them. An ersatz form of eurozone bond issued by the European Financial Stability Facility already exists. Anything more ambitious is a non-starter until the crisis has abated.”
Mohamed El-Erian / Financial Times
“Just when you think the European crisis cannot get much worse, Wednesday’s shunned Bund auction showed that it can. With this, the risks for the global economy as a whole, and for virtually every country, increase materially.
“Given this week’s developments, there should be no doubt in anyone’s mind that what started out as a dislocation in the periphery of the eurozone has now decisively breached the firewalls protecting the outer core and is seriously threatening the inner core. Unless this is countered quickly, European policymakers will find it even harder to catch up with the crisis, let alone get ahead of it.
“Europe must still stabilize its sovereign debt situation. But this is now far from sufficient. Policymakers must also move quickly to contain banking sector frailties, and do so using a more coherent approach to the trio of capital, asset quality and liquidity.
“In the eyes of the markets, the capital cushion of Europe’s banking system as a whole is no longer sufficient to support its balance sheet. This concern is not limited to the markets. Judging from their eagerness to dispose of assets, bank managements also believe that balance sheet delevering is key to the institutions’ survival and wellbeing….
“Problems in the banking sector have a nasty habit of accelerating and amplifying crises. Indeed, they significantly increase the risk of policymakers losing control. It is therefore critical for Europe to add this policy challenge to an already long ‘to do’ list.”
By the way, this week Belgium’s debt rating was cut, and Portugal’s and Hungary’s were cut to junk status.
Other euro bits…in no particular order…
Merkel and Sarkozy at week’s end were talking about EU treaty changes in time for the Dec. 9 summit but this is insane. It’s normally a years-long process. No way they can just ram them through, especially since they involve greater oversight of national budgets and statistics, as well as create debt limits for governments, while trying to reach consensus in the eurozone on pension ages and tax levels.
The U.K. and Germany each reported third quarter GDP rose 0.5% over the second quarter. This is good, right? It’s irrelevant, is what it is. Fourth quarter GDP should be flat at best, most likely negative.
A joint services/manufacturing index for the EU came in at 47.2 for November vs. 46.5 in October, still putrid, while a reading on industrial orders for the eurozone in Sept. over Aug. fell 6.4% (Germany down 4.4%, France down 6.2% and Italy off 9.2%).
Italy’s borrowing costs soared, with the two-year nearing 8% while the three-year bond peaked at 8.13%. The key 10-year hit 7.60% before finishing the week around 7.30%. Six-month bills carried yields of 6.50%!
Belgium, not one of the PIIGS but always on the periphery, saw its 10-year hit a yield of 5.85% on Friday, up from 4.79% on Monday. Belgium deserves it as the country hasn’t had a government since native Eddy Merckx was winning the Tour de France.
Things are not going well for Britain and Prime Minister David Cameron. A poll for the London Times showed that 79% of voters believe the country will fare ‘badly’ over the next year against 18% who think it will do ‘well.’
Chinese vice-premier Wang Wishan, responsible for overseeing the financial sector, said this week:
“Right now the global economic situation is extremely serious and in a time of uncertainty the only thing we can be certain of is that the world economic recession caused by the international crisis will last a long time.”
Which leads me into a discussion of…
Washington…yuck
The supercommittee failed to come up with the $1.2 trillion in deficit reduction it was charged with doing and so now sequestration kicks in, $1.2 trillion in automatic cuts over ten years, half from defense, but not starting until 2013. President Obama faulted congressional Republicans, saying they “refused to listen to the voices of reason and compromise” during the debt talks. Obama also warned that he would veto any attempt to unwind the automatic spending cuts. There will be “no easy off-ramps on this one,” he said.
Republican committee member Pat Toomey, senator from Pennsylvania, countered: “Unfortunately, our Democratic colleagues refused to agree to any meaningful deficit reduction without $1,000bn in job-crushing tax increases.”
Peter Peterson, the long-time advocate for balancing the federal budget, called the panel’s failure “deeply disappointing.”
“A divided government cannot succeed until elected officials choose to lead the country toward solutions instead of relentlessly defending their own political ideology.”
Politicians from both sides, as well as many a pundit, said it’s now about the 2012 election, as if this is going to change things. It won’t.
I’ve been telling you for months what will happen, though. Once the two parties couldn’t come up with a substantial, $4 trillion deficit-reduction package this summer, I’ve been calling for a Crash next year, one that will be related to the feeling hitting the markets all at once that we are indeed no different than Europe. Our leaders’ failure, particularly the president’s, to enact a legitimate plan that markets would have rejoiced over seals our fate in 2012. I told you a few weeks ago that next year could look a lot like 1860 (a theme CNBC’s Jim Cramer began to pick up on this past week, not that I ever want to be associated with him). The political debate will be as ugly as any in our lifetime.
The Wall Street Journal’s John Bussey interviewed Erskine Bowles and Alan Simpson of Simpson-Bowles fame and just a reminder as to the extent of the mess.
Erskine Bowles:
“I think we face the most predictable economic crisis in history. It’s as clear as the nose on my face that the fiscal path they are on here in Washington is not sustainable. And worse yet, I know every member of that fiscal commission knows it, too.
“The economics is very clear. The politics, very difficult. I’ll give you one little simple arithmetic example. If you take 100% of the revenue that came into the country last year, every single dime of it was consumed by our mandatory spending and interest on the debt. Mandatory spending in English is basically the entitlement programs. Medicare, Medicaid and Social Security. That means every single dollar we spent last year on these two wars, on national defense, homeland security, education, infrastructure, high value-added research – every single dollar was borrowed, and half of it was borrowed from foreign countries.
“That’s a formula for failure in anybody’s book. And this is not a problem that we can solely grow our way out of.”
John Bussey asked the two about President Obama’s non-reaction to their report when they released it in December, and how the president then didn’t even mention it in the State of the Union, my own big issue at the time.
Bowles:
“I negotiated the budget for President Clinton. And every investment banker will tell you the key to success is knowing your client and defining success up front. So, I knew what success was on his part, and I could go in there and negotiate the deal.
“I did not know President Obama, and neither did Alan. So we spend a tremendous amount of time with him and his economic team up front defining success. And we negotiated a deal that got a majority of Republicans to vote for it, so he had plenty of cover on the other side. It also exceeded every single one of the goals that he had given us.
“I fully expected them to grab hold of this. If it had been President Clinton, he would have said, ‘God, I created this, this is wonderful. It was all my idea.’
“So we were really surprised. My belief is that most of the members of the economic team strongly supported it. Like every White House, there’s a small cabal of people that surround the president that he trusts and works with, and I believe it was those Chicago guys, the political team that convinced him it would be smarter for him to wait and let Paul Ryan go first, and then he would look like the sensible guy in the game.
“We then expected, before the State of the Union, that when he did the stimulus, that that would be a great time to say not only, look, we’re going to do this to get the economy moving forward, but we have to do it within the context of long-term fiscal reform and responsibility. And he didn’t.”
Robert Samuelson / Washington Post
“From 2005 to 2035, (the cost of entitlements) will nearly double as a share of national income, projects the Congressional Budget Office. How big a government do we want? What’s the balance of fairness between young and old? How much should other programs be reduced or taxes raised? Many Democrats duck the fundamental policy questions and reject any benefit cuts.
“Only President Obama can start such a debate. He has the bully pulpit, but he hasn’t used it. Here’s an exchange between ABC White House correspondent Jake Tapper and the president, at a July 15 news conference, that captures Obama’s calculated obscurity.
“Tapper: ‘In the interest of transparency, leadership and also showing the American people that you have been negotiating (with Republicans) in good faith, can you tell us one structural reform that you are willing to make to one of these entitlement programs that would have a major effect on the deficit? Would you be willing to raise the retirement age? Would you be willing to means test Social Security or Medicare?’
“Obama: ‘We’ve said that we are willing to look at all these approaches. I’ve laid out some criteria in terms of what would be acceptable. So, for example, I’ve said very clearly that we should make sure that current beneficiaries as much as possible are not affected. But we should look at what can we do in the out-years, so that over time some of these programs are more sustainable. I’ve said that means testing on Medicare, meaning people like myself, if – I’m going to be turning 50 in a week. So I’m starting to think a little bit more about Medicare eligibility.(Laughter). Yes, I’m going to get my AARP card soon – and the discounts. But you can envision a situation where for somebody in my position, me having to pay a little bit more on premiums or co-pays or things like that would be appropriate.’
“Noncommittal gibberish. There is no leadership from the nation’s ‘leader.’ Space precludes running all his rambling response; the excerpt above was about half. Tapper followed up.
“Tapper: ‘And the retirement age?’
“Obama: ‘I’m not going to get into specifics.’
“Well, there you have it. The president won’t talk specifics, but government consists of specifics. The reason we cannot have a large budget deal is that Americans haven’t been prepared for one. The president hasn’t educated them, and so they can’t support what they don’t understand. Left or right, there are no comfortable positions. No one relishes curbing Social Security or Medicare benefits. But without changes, taxes will go way up, the rest of government will shrink dramatically or huge deficits will persist.”
You know who would have been effective these days, in his prime? Ross Perot. Call him what you will (I proudly voted for him in ‘92), but he was ahead of his time when it came to deficits.
Charles Krauthammer / Washington Post…on how some Republicans, such as Sen. Tom Coburn (Ok.) have actually supported increased tax revenue, as did supercommittee member Sen. Pat Toomey, let alone House Speaker John Boehner as part of the grand bargain with President Obama that fell through last summer.
“So why does the myth of the (Grover) Norquist controlled anti-tax monolith persist? You might suggest cynicism and perversity. Let me offer a more benign explanation: thickheadedness – the inability to tell the difference between tax revenue and tax rates.
“In deficit reduction, all that matters is tax revenue. The holders of our national debt care not a whit what tax rates yield the money to pay them back. They care about the sum.
“The Republican proposals raise revenue, despite lowering rates, by opening a gusher of new income for the Treasury in the form of loophole elimination. For example, the Toomey plan eliminates deductions by $300 billion more than the reduction in tax rates ‘cost.’ Result: $300 billion in new revenue.
“The Simpson-Bowles commission – appointed by President Obama and endorsed by Coburn – used the same formula. Its tax reform would lower tax rates at a ‘cost’ of $1 trillion a year while eliminating loopholes that deprive the Treasury of $1.1 trillion a year. This would leave the Treasury with an excess – i.e., new tax revenue – of $100 billion a year or $1 trillion over a decade.
“Raising revenue through tax reform is better than simply raising rates, which Democrats insist upon with near religious fervor. It is more economically efficient because it eliminates credits, carve-outs and deductions that grossly misallocate capital. And it is more fair because it is the rich who can afford not only the sharp lawyers and accountants who exploit loopholes but the lobbyists who create them in the first place.
“Yet the Democrats, who flatter themselves as the party of fairness, are instead obsessed with raising tax rates on the rich as a sign of civic virtue.”
Editorial / Washington Post
“That the lawmakers were…unable to reach agreement does not bode well for future negotiations. The 2012 election may produce a change in the occupant of the White House and control of one or both houses of Congress, but it is not likely to produce a clear mandate for either party’s vision of debt reduction. The compromise that proved elusive for the supercommittee will remain necessary. Perhaps it can be achieved in the action-forcing context of the trigger and expiring tax cuts. Working on deficit reduction, after all, requires a triumph of hope over experience.”
Batten down the hatches, folks. You ain’t seen nuthin’ yet.
China
I guess I should change my heading above from “Europe, Washington and Wall Street” to include China, because it obviously impacts market sentiment almost as much as Europe some days, such as when HSBC released their preliminary purchasing managers’ index (PMI) on manufacturing for China in November, 48, or off the 50 dividing line between growth and contraction, this after a 51 reading in October was bullish for being better than expected.
China is slowing. The central government knows this. One leading banking official, chairman Jiang Jianqing of the Industrial & Commercial Bank of China, said China would nonetheless maintain its tight monetary policy over inflation fears.
But that doesn’t mean Beijing can’t play with bank reserve requirements, which is what they are already doing with some rural banks to help small businesses. I also think China will lower interest rates because inflation is going to come down sharply from here.
The problem is exports are slowing precipitously, with 1/5th going to Europe. In Guangdong, for example, 450 small factories have closed (those making toys and clothing, primarily), as the World Bank warned China’s growth will decline to 8.4% next year. Hong Kong warned that a full third of its 50,000 factories in China could shut down over the coming months.
[Another economic report I read from a Chinese government mouthpiece said growth in 2012 will still be 9.2%.]
Meanwhile, you have the property bubble and how quickly does that deflate? What’s the impact on the smaller banks in particular? This is where I’m convinced the government will not let the situation get out of hand. I have written in this space in the past few months that Beijing will have no problem letting small banks fail that have been irresponsible. But it will protect the larger institutions and thus prevent a systemic crisis, assuming Europe’s recession doesn’t evolve into a depression.