“As Fed chairman, every time I expressed a view, I added or subtracted 10 basis points from the credit market. That was not helpful. … And so you construct what we used to call Fed-speak. …I would catch myself in the middle of a sentence. Then, instead of just stopping, I would continue on resolving the sentence in some obscure way which made it incomprehensible. But nobody was quite sure I wasn’t saying something profound when I wasn’t.”
[Not an exact transcript - just notes to myself]
On question of letting all tax cuts expire so we can cut them next year [The Patty Murray idea]: “It’s not something any of us should contemplate.”
Timing of a plan: What we want to do is bring both sides together after the election.
Recognition that we need a long-term plan: “Our challenges are very manageable. But we can’t put them off forever. We can’t delay this.”
“If we say right now to the world, we’re going to extend all those deadlines, and we don’t do anything to get more growth now and lock in some fiscal savings, “what’s the going to do for confidence.”
“It would not be responsible to put those things off.”
Extending the taxes for the wealthy would be deeply irresponsible. It would cost $1 trillion over 10 years. Where are you going to find that $1 trillion. There’s not an economically responsible trade off. To delay would be expensive.
The president is trying to balance two things:
1) Healing the damage. more growth now
2) Break the political stalemate and restore fiscal sustainabilty.
“Let’s extend the middle class cuts. If we do that, that takes away most of the uncertainty from the fiscal cliff.”
“And let’s have a balanced package of fiscal reforms, that raises revenue through tax reform and savings that extend the solvency of medicare, medicaid and SS. And leaves money for investment in education and infrastructure.”
On the Bush tax cuts:
“He’s going to stand by that. He’s absolutely committed to that.” [to letting them expire - the tax cuts for the rich]
Why didn’t we embrace it more fully?
There are two reasons:
1) They chose as their mix too deep on defense for a commander in chief to embrace
2) Savings on entitlements were designed in a way that were very tough for us to support
Here’s the full quote from CNN.com. http://www.cnn.com/2012/01/09/politics/gop-nh-main/index.html?hpt=hp_t1
Asked about health insurance at an event in Nashua, New Hampshire, Romney said he wanted a person to be able to own his or her own policy “and perhaps keep it the rest of their life.”
“That means the insurance company will have the incentive to keep you healthy. It also means if you don’t like what they do, you can fire them,” he said.
“I like being able to fire people who provide services to me,” Romney added. “If someone doesn’t give me the good service I need, I want to say I am going to get somebody else to provide that service to me.” - Jan. 9, 2012
“Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.
“This is, however, a really bad analogy in at least two ways.
“First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.
“Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.”
Investment strategists and money managers expect the S&P 500 will rise 7%, on average, in 2012, according to an exclusive CNNMoney survey.
While Schaeffer’s Investment Research’s Ryan Detrick agrees that debt problems will result in ongoing volatility, he’s more optimistic about the market’s overall performance for the year.
“Europe’s problems are obviously still out there, and there’s potential for more curve balls, but we’re making a bullish assumption: things won’t spiral out of control and we will get some good news,” said Detrick, whose year-end target for the S&P 500 stands at 1,450, which translates to an impressive 15% gain for the year.
From WSJ: in short, sounds like everything’s still a mess, but you can buy gold, government bonds…and stocks.
“Robert Prince, co-chief investment officer at Bridgewater, and his managers at the world’s biggest hedge fund firm are preparing for at least a decade of slow growth and high unemployment for the big developed economies. Mr. Prince describes those economies—the U.S. and Europe, in particular—as “zombies” and says they will remain that way until they work through their mountains of debt.
“What you have is a picture of broken economic systems that are operating on life support,” Mr. Prince says. “We’re in a secular deleveraging that will probably take 15 to 20 years to work through and we’re just four years in.”
“In the U.S., leveraged investors who can borrow money at rates near zero could find a good deal in Treasurys, Mr. Prince says.
“Gold prices should resume a rally amid continued printing of money by the Fed and other central banks, Mr. Prince says.
“Mr. Prince also thinks stocks are attractive from a long-term perspective, especially compared with bonds or cash. Broadly, discounted earnings-growth rates, which reflect the expectations about future earnings implied by current prices, are negative, he says.
“A moribund economic outlook “is pretty priced in right now,” he says. “If we have a long, drawn out deleveraging process without substantial air pockets, chances are equities are a pretty good bet, ironically.”
I always need to take an extra minute to think through baseline issues. David Walker explains it pretty well in Politico (Oct. 20).
The supercommittee could choose from two primary bases to keep score. The first is the Congressional Budget Office’s extended baseline, or the current-law baseline. This assumes that the Bush tax cuts will expire at the end of calendar 2012; the alternative minimum tax will not be addressed and physician reimbursements under Medicare will be cut dramatically.
The other is the CBO’s alternative baseline, or the current-policy baseline — which assumes that most of the Bush tax cuts will be extended; the alternative minimum tax will be patched and physician payments will not be cut dramatically.
The latter method results in more than $6 trillion in additional deficits over the next 10 years.
Because the hole is deeper under current policy, it’s much easier for Congress to show big progress. That’s why Walker recommends looking at current law.
Tax breaks ($253 billion)
Half of payroll tax (3.1%) on first $5 million payroll; Full holiday for added workers or increased wages (how long?) ($65 billion)
100% expensing of investment: $5 billion
$4,000 for hiring LT unemployed ($8 billion)
Extend payroll tax for workers ($175 billion)
“Returning Heroes”: $5,600 to $9,600 to encourage hiring of unemployed veterans
Infrastructure: $105 billion
$50 billion: Immediate investment in infrastructure
$10 billion: iBank
$15 billion: construction workers on vacant and foreclosed homes
$30 billion investment in school infrastructure
Access to high-speed wireless
Aid to states ($35 billion)
$30 billion to prevent layoffs of 280,000 teachers
$5 billion for public safety and first responders
Safety Net: $54 billion
Unemployment Insurance programs ($49 billion)
Pathways back to work fund ($5 billion)
Speeding up payments
Work with SEC to reduce burdens for raising capital
the agency is considering ideas, like gaining the right to deliver wine and beer, allowing commercial advertisements on postal trucks and in post offices, doing more “last-mile” deliveries for FedEx and U.P.S. and offering special hand-delivery services for correspondence and transactions for which e-mail is not considered secure enough.
Mr. Donahoe’s hope is to cut $20 billion of the $75 billion in annual costs by 2015. To do that, he wants to close many post offices and slash the number of sorting facilities to 200 from 500 and trim the agency’s work force by 220,000 people, from its current 653,000. (A decade ago, the agency employed nearly 900,000.)
A third option for further monetary policy easing is to lower the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System.
Inside the Fed this rate is known as the IOER rate, the “interest on excess reserves” rate. The IOER rate, currently set at 25 basis points, could be reduced to, say, 10 basis points or even to zero.
On the margin, a reduction in the IOER rate would provide banks with an incentive to increase their lending to nonfinancial borrowers or to participants in short-term money markets, reducing short-term interest rates further and possibly leading to some expansion in money and credit aggregates.
However, under current circumstances, the effect of reducing the IOER rate on financial conditions in isolation would likely be relatively small.
The federal funds rate is currently averaging between 15 and 20 basis points and would almost certainly remain positive after the reduction in the IOER rate. Cutting the IOER rate even to zero would be unlikely therefore to reduce the federal funds rate by more than 10 to 15 basis points.
The effect on longer-term rates would probably be even less, although that effect would depend in part on the signal that market participants took from the action about the likely future course of policy.
Moreover, such an action could disrupt some key financial markets and institutions. Importantly for the Fed’s purposes, a further reduction in very short-term interest rates could lead short-term money markets such as the federal funds market to become much less liquid, as near-zero returns might induce many participants and market-makers to exit.
But I read it as them saying, this is your last chance.
The affirmation of the US ‘AAA’ sovereign rating reflects the fact that the key pillars of US’s exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base. Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to ‘shocks’.
The fiscal profile of the US government has deteriorated sharply and is set to become an outlier relative to ‘AAA’ peers. The overall level of general government debt, which includes debt incurred by states and local governments, is estimated by Fitch to reach 94% of GDP this year, the highest amongst ‘AAA’ sovereigns. However, federal government indebtedness is lower than in other major ‘AAA’-rated central governments. Fitch estimates that federal debt held by the public will be equivalent to approximately 70% of GDP this year compared to around 75% for the UK (‘AAA’) and France (‘AAA’).
Fitch currently projects federal debt held by the public and gross general government debt stabilising in the latter half of the decade at 85% and 105% of GDP, respectively, higher than for any other currently ‘AAA’-rated sovereign. In Fitch’s opinion, this is at the limit of the level of government indebtedness that would be consistent with the US retaining its ‘AAA’ status despite its underlying strengths.
In the event that the Joint Select Committee is unable to reach an agreement that can secure support from Congress and the Administration, Fitch would be less confident that credible and timely deficit-reduction strategy necessary to underpin the US ‘AAA’ sovereign rating and Stable Outlook will be forthcoming despite the USD1.2trn of automatic cuts that would follow.
Of the total gross federal debt of $13.6 trillion in 2010, $4.6 trillion was owed by the Treasury to these government trust funds and only $9 trillion to the public, which included international investors (47 percent), domestic private investors (36 percent), the Federal Reserve (9 percent) and state and local governments (8 percent).
From Uwe Reinhardt’s column in NYT (August 15, 2011)
From CBO’s score of the Debt Ceiling Compromise: (Aug. 1, 2011)
Step 1: $917 billion
Caps on discretionary spending
$741 billion in spending
$156 billion in reduced interest costs
What the caps would be:
2012 Discretionary Spending (Budget Authority - proposed): $1.043 trillion
2012 Discretionary Spending outlays: $1.267 trillion
2012 Discretionary Spending Outlays (Proposed): $1.241 trillion
2012 Change in outlays in proposal is enacted: $25 billion
2021 Discretionary Spending: $1.234 trillion
2021 Discretionary Spending outlays: 1,391
2021 Discretionary Spending Outlays (Proposed): 1,278
2021 Change in outlay in proposal is enacted: -112
Step 2: $1.2 trillion
Legislation from the joint committee, that would either
a) develop new deficit reduction ideas or
b) automatically enforce additional discretionary and defense cuts.
If no deal is reached:
2013: Cut defense and non-defense by the appropriate percentages required to reach the target for that year
2014 – 2021: Additional caps.
Medicaid and Social Security and other safety net programs would be exempt.
Medicare cuts would be capped at 2%
How the math might work: The Bipartisan Policy Center estimates that Treasury will be short by about $134 billion for the month of August.
That cash deficit will build steadily throughout the month.
So, on Aug. 3, for instance, the center estimates that Treasury will take in $12 billion in revenue and have to pay out $32 billion, creating a $20 billion cash deficit. Among the biggest bills due that day: $23 billion for Social Security payments, $2.2 billion for Medicare and Medicaid payments, and $1.8 billion due to defense vendors.
On Aug. 4, the group estimates that the cash deficit will increase to $26 billion, with only $4 trillion in revenue coming in, compared to $10 billion in bills, the largest of which would be for Medicaid and Medicare.
Come Aug. 5, the cash deficit grows another $5 billion to $31 billion.
By Aug. 15, the Bipartisan Policy Center estimates that the running cash deficit will hit $74 billion. That day the Treasury will take in an estimated $22 billion in revenue and have to pay out roughly $41 billion. The biggest bill that day is a $30 billion interest payment.
“Who’ll get paid”: CNNMoney
“My position, and the implications of the pledge regarding such “temporary” tax cuts, is clear. If there were no vote in Congress and taxes rose automatically, then no politicians would have voted for higher taxes and no elected official would have broken his or her pledge.
“But that is different from supporting a plan by some Democrats that would end some or all of these lower tax rates, higher per-child tax credits and the A.M.T. patches…”
1) Response to idea that rating agencies don’t matter because they’ve been wrong before and don’t have the best analysts: The good news, you don’t have to be very good at math to know that someone won’t get paid in August. And that means default.
2) Why we need to raise the debt ceiling AND get a long-term plan.
If you don’t raise the debt ceiling, you get a short-term downgrade.
If you don’t do a long-term deal, you also get put on a warning.
3) Impact of spending cuts
Even if bond markets stay calm, you’re cutting spending by 40%.
4) Answer to folks who say we can get by just paying interest and principal on bonds:
S&P and Fitch say any non-payment could count as default. Bernanke said it well too: “Whether default is on securities, or on obligations to Medicare recipients, it’s a default of some kind.” (CNNMoney, July 14)
Here are notes from the Moody’s note (July 13, 2011), in which it placed the U.S. bond rating on review for possible downgrade. It laid out two issues:
1) Short-term, not raising the debt ceiling raises the risk (albeit small) of reduced payments on bonds.
2) Long-term, Moody’s said the U.S. needs a plan for deficit reduction.
What Moody’s did not get into: What if the U.S. does not raise the debt ceiling, but keeps making interest payments while missing other obligations.
Moody’s Investors Service has placed the Aaa bond rating of the government of the United States on review for possible downgrade.
prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes. As such, there is a small but rising risk of a short-lived default.
If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed. However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction.
“I can tell you exactly how many angels can fit on the head of a pin, but I have no idea what a tax increase is,” said Douglas Holtz-Eakin. Bloomberg, July 7, 2011
Republicans still say “no new taxes”. Eric Cantor as quoted in the NYT:
“If the president wants to talk loopholes, we’ll be glad to talk loopholes,” Mr. Cantor said. “We have said all along that preferences in the code are not something that helps economic growth over all. But, listen, we are not for any proposal that increases taxes. Any type of discussion should be coupled with offsetting tax cuts somewhere else.”
My take: So this doesn’t really seem like a shift. Everybody has said they are for tax-code simplification. The question has always been whether we use it to raise revenue and lower debt.
WSJ’s (generous) take: Adding to the sense of progress in the debt talks, which had seemed stalled just a few days ago, House Majority Leader Eric Cantor (R., Va.) said Republicans would consider scaling back tax breaks identified by the White House.
Although Mr. Cantor called for corresponding tax cuts, his comments mark the first time the GOP has opened the door to proposals from Mr. Obama that would tackle the thorny issue of taxation, the biggest stumbling block in Washington’s bid to come up with a deficit-cutting deal.
In his Wednesday comments, Mr. Cantor said: “If the president wants to talk loopholes, we’ll be glad to talk loopholes….We’ve said all along that preferences in the code aren’t something that helps economic growth overall.”
What Bernie Sanders wants, as quoted in NYT:
Senator Bernard Sanders, independent of Vermont, urged the president not to yield to Republican demands to reduce the deficit by cutting hundreds of billions of dollars from Medicare, Medicaid and other domestic spending. He said that “the president has got to demand that at least 50 percent of deficit reduction come from revenues,” including higher taxes on the wealthy and large corporations.
How NYT played Boehner’s position:
Officials said Mr. Boehner suggested that he was open to the possibility of $1 trillion or more in new revenue that would be generated by addressing tax issues already raised in the talks, like killing breaks for the oil and gas industry, eliminating ethanol subsidies and ending preferential treatment for corporate jets.
Aides to Mr. Boehner said that no tax increases were on the table and that he had not agreed to the expiration of any tax cuts.
Progress on Social Security (WSJ):
A senior administration official said: “Reports that we are putting Social Security on the table tomorrow are inaccurate. The president does not think it is a major driver of the deficit, but has always been open to ways to strengthen the program in a balanced fashion.”