Classic from 1999-

Congrats on the budget surplus on the left, and warning that savings is too low on the right!

WSJ July 1999

Pretty much all forecasters expect improvement in 2014 largely from what they call a reduction in fiscal drag. Their logic goes something like this (with the actual numbers varying a bit with different analysts):

Without the deficit reduction in 2013 that subtracted 2% from growth, growth would have been 4%. Therefore, when the fiscal drag ends, growth will return to the underlying 4% pace.

I’m suggest their logic is faulty.

The difference is that of ‘adding less’ vs ‘subtracting’

It’s not like the private sector alone was expanding at a 4% clip, and then govt came along and took away 2%.

It’s that by my count the private sector was growing at -2%, and govt was going to add 6% to that for 2013, but proactively reduced its support to only 4% in 2013 by cutting spending and raising taxes, resulting in 2% GDP growth rather than 4%. And for 2014 that ‘lost support’ will not be added back.

Expanding:

Assume, for example, GDP started 2013 at 100, and was forecast to go to 104 as stated above. Assuming nominal growth about 1.5% over real growth, let me push that up to 105.5.

That assumption included, say, federal deficit spending of 6% of GDP (starting at maybe a 7% rate and ending at maybe a 5% rate).

That is govt was forecast to make a net positive 6% contribution to spending by spending that much more than its income, aka ‘credit expansion’. Or, said another way, the total government spending contribution was over 20% of GDP, with all but 6% of that ‘offset’ by taxation that reduced incomes elsewhere.

Also note that the economy is currently ‘demand constrained’ as there is an output gap. In other words GDP could be higher, as a matter of accounting, simply by, for example,
govt hiring more people who are currently not working for pay, via the govt spending that much more than its income (adding to the deficit). Or GDP could be lower simply by govt cutting back, which is what actually happened, as recognized by the analysts.

That is, net govt spending was proactively reduced by about 2% due to tax increases and sequesters.

And federal deficit spending averaged perhaps 4% of GDP rather than 6% of GDP, thereby reducing said GDP..

That is, government contributed that much less to GDP. And that lost contribution will not be restored, as, if anything, there will be further deficit reduction forthcoming from Congress in 2014.

So my point is the 4% forecast for 2013 was not that much private sector growth that was then reduced by the deficit reduction measures. Instead, the growth forecast included the federal deficit contributing 6% to GDP, which was subsequently reduced by Congress to only 4%.

In fact, without the remaining 4% contribution of that net federal spending, nominal GDP might have been -.5% and real -2%.

And 2014 is starting out with federal deficit spending forecast to add only about $600 billion, which is less than 4% of GDP.

So to recap, the original forecast for 4% growth included the full 6% contribution from govt. And when that contribution was proactively reduced to 4%, growth forecasts were correctly cut to 2%.

And my point is that the assumed ‘underlying growth rate’ of 4% in fact presumed the then 6% contribution from govt which was subsequently reduced, thereby lowering ‘the underlying growth rate’ for 2013 to 2%.

It’s not that the private sector was responsible for 4% growth and that the govt took away 2% of that with the tax increases and sequesters.

In fact, it was more that the private sector was -2% on its own due to ‘demand leakages’/unspent incomes/savings desires including non residents) and govt support that was to boost that to +4% was cut back, resulting in a 2% rate of GDP growth for 2013.

I am not saying that GDP growth can’t pick up in 2014.

I am saying that the logic behind the widespread forecasts for a pick up in growth is universally faulty.

And that if growth does pick up it will be from an increase in non govt ‘spending more than incomes’, aka an increase non govt credit expansion.

While this is certainly possible, traditionally it comes from housing, which currently isn’t generating any credit expansion, and cars which are no longer generating meaningful increases.

Worse, in prior cycles we got the private sector credit expansion need to support relatively low output gaps only from expansion we never would have let happen if we had been aware of the consequences. These included the Bush sub prime expansion, the Clinton .com/y2k credit expansion, the Reagan S and L credit expansion, and the earlier Wriston emerging markets credit expansion. And I don’t see anything like that happening currently.

And so without the prerequisite acceleration of non govt credit expansion, the maths tell me 2014 GDP growth will remain at best at approximately the 2% level of 2013. And, with so little support from federal deficit spending, I see serious downside risks should private sector credit expansion falter for any reason.

And note too that the continuation of 2% GDP growth closes the output gap only by reducing estimates of potential output, primarily by assuming the drop in the participation rate is structural.

And even the modest employment gains we’ve seen are at risk. The growth rate of employment has been almost identical to the underlying rate of real growth, which improbably implies no productivity growth. So if there is any positive underlying productivity growth, and real growth remains the same, employment growth will decline accordingly.

Lastly, the ‘automatic fiscal stabilizers’ are continuously at work. So when private sector credit expansion does contribute to growth, the govt ‘automatically’ cuts back its support via reduced transfer payments and increased tax receipts, thereby tempering the positive effect of the private credit expansion, and making it that much more difficult for the growth to continue.

This means that even the current 2% growth rate will at some point get ground down by our current institutional structure. With growing risks that this could be very much sooner rather than later.

And that much closer to the end of this cycle, absent a big fat credit bubble

CBO: Federal Deficit declined Sharply in October and November compared to last year

Federal Reserve Interest Rates Should Be Near Zero Forever

By Warren Mosler

The fiscal role of the KfW

By Bill Mitchell

What’s new here is somehow Hussman has picked on the idea that corporate profits fall as the federal deficit falls. He stops short of suggesting we need a higher federal deficit, of course.

After all his endless inane out of paradigm raving against federal deficits it might take him a few months to reverse course. ;)

Nor does he mention the well known Levy Profit Equation from maybe 75 years ago that shows same, or Wynne Godley’s work or any of the MMT sources that he no doubt perused regarding sector balances.

An Open Letter to the FOMC: Recognizing the Valuation Bubble In Equities

By John Hussman

No talk yet of waiving the sequesters?

McConnell: Stand Firm on Spending

November 19 (WSJ) — With budget negotiations stalled, Senate Minority Leader Mitch McConnell is pushing his GOP colleagues to resist efforts to ease across-the-board spending cuts due to take effect in mid-January. Mr. McConnell has argued it is better to let the cuts take effect than to agree to a budget deal that would allow overall spending to increase or revenues to rise. House Budget Committee Chairman Paul Ryan, also speaking at the Journal event, said he would continue negotiating with Democrats to reach an agreement but didn’t express optimism. Mr. Ryan, who chairs the conference, said if necessary Republicans would pass a bill to keep the government open and allow the sequester’s new spending cuts to take effect.

Fiscal consolidations and spillovers in the Euro area periphery and core

Do you think they know austerity causes loans to go bad?

Troubled loans at Europe’s banks double in value (FT) European banks’ non-performing loans have doubled in just four years to reach close to €1.2tn and are expected to keep rising. A report by PwC found that non-performing loans (NPLs) rose from €514bn in 2008 to €1.187tn in 2012, with rises in the most recent year driven by deteriorating conditions in Spain, Ireland, Italy and Greece. It predicted further rises in the years ahead because of the “uncertain economic climate”. Richard Thompson, a partner at PwC, said the “reshaping” of European bank balance sheets had several more years to run as lenders shed troubled and unwanted loans and attempted to strengthen their balance sheets. He estimates European banks are sitting on €2.4tn of non-core loans that they plan to wind down or sell off. The first eight months of 2013 have seen €46bn of European loan portfolio transactions, equal to the entire amount recorded in 2012.

Do you think they know higher rates support higher inflation and weaken the currency?

India’s Central Bank Expects Inflation to Remain Stubborn (WSJ) The Reserve Bank of India Monday sounded concern about inflation, which it said would remain outside its comfort zone this fiscal year. In its half-yearly review of macroeconomic and monetary developments, released a day before its monetary-policy meeting, the RBI also highlighted the need to boost economic growth. But its stress was more on inflation. Inflation at the wholesale level—the main measure of prices in India—notched a seven-month high of 6.46% in September. It has remained above the central bank’s comfort level of 5% for four consecutive months through September. The RBI said it expects both consumer and wholesale inflation to remain around their current levels. “This indicates persistence of inflation at levels distinctly above what was indicated by the Reserve Bank earlier in the year,” it said.

Problem is the private sector is path dependent/pro cyclical. When sales slow incomes slow sales slow, employment slows, etc. etc.

Govt can be/is counter cyclical. When sales slow tax payments fall and unemployment comp. rises, etc. etc. AKA ‘automatic fiscal stabilizers.’

This cycle’s prior slowdowns had a safety net of govt deficit spending of near 10% of GDP, then a year or so later maybe 7%, etc. As the automatic fiscal stabilizers cut back that govt support with the modest recovery raising tax liabilities and cutting transfer payments.

But today, after this year’s proactive deficit reduction measures, we’ve gapped down to maybe a 3% deficit for ‘support’ when things slow. And it feels to me like the demand leakages have begun ‘winning’ when govt proactively stepped back to ‘make room for the private sector’.

What that actually means is the private sector now must (deficit) spend increasingly more than its income on goods and services to offset those agents spending less than their incomes (demand leakages), or the output doesn’t get sold. By identity. To the penny.

Well, sure doesn’t look like it’s going to come from housing. And while cars remain up some it’s not nearly enough. And capex isn’t coming through as hoped for and as needed to fill the spending gap left by the govt cutbacks. And the 126,000 print for NFP private sector job growth fits the same narrative as well- no top line growth = no job/income growth, etc.

Not to mention QE and low rates in general from the Fed remain a source of drag via the interest income channel, and all as Congress continues to fight for bragging rights with regard to deficit reduction.

It’s all nothing that a big fat tax cut and/or spending increase wouldn’t reverse, of course, as the slow motion train wreck continues.

Wall Street’s Brightest Minds Reveal THE MOST IMPORTANT CHARTS IN THE WORLD

By Mathew Boesler

July was first initially released at up 162,000 which, while lower than expected, I noted was still inconsistent with low top line growth. That is, without top line growth there aren’t any new private sector jobs unless productivity is negative. And causation runs from sales to employment.

So there’s no reason to expect job growth without top line growth that exceeds underlying productivity increases.

Also, the conventional wisdom all year has been that when govt ‘gets out of the way’ the ‘underlying private sector strength’ will come through and growth will resume. It was noted that reduced job totals were lowered by govt cutbacks while private jobs remained high. I suggested govt employment cutbacks would reduce private sector job growth, as that many fewer govt employees meant that much less spending/sales/employment for the private sector.

Conclusion-
With fiscal support down to less than 3% of GDP from around 7% about a year ago, and at least 1.5% of that from the recent proactive tax hikes and spending cuts, and the automatic fiscal stabilizers as aggressive as they are, and with ‘financial conditions’ as they are, I don’t see any signs of the domestic credit expansion needed to support anything more than
very modest levels of real growth. And I also continue to see substantial risk of negative growth should the housing softness persist, auto sales revert back to the 15 million level, student loan growth continue to decelerate, business investment not accelerate, and net imports not do a lot.

Lower fuel prices are a plus but not yet nearly enough overcome the fiscal hurdles.

(feel free to distribute)

Employment Situation
Released On 10/22/2013 8:30:00 AM For Sep, 2013

Highlights
The payroll data and household numbers were mixed in September at the headline level but soft in detail. Markets were looking over their collective shoulder at the Fed. Total payroll jobs in September advanced 148,000, following a revised increase of 193,000 for August (originally up 169,000) and after a revised gain of 89,000 for July (previous estimate was 104,000). The consensus forecast was for a 184,000 gain for the latest month. The net revisions for July and August were up 9,000.

The unemployment rate slipped to 7.2 percent after dipping to 7.3 percent in August. Analysts expected a 7.3 percent unemployment rate. But the improvement was largely related to a decline in the pool of available workers, affecting the number of unemployed.

Turning back to payroll data, growth in recent months has been on a slowing trend. Private payrolls gained 126,000, following an increase of 161,000 in August (originally 152,000). The median forecast was for a 184,000 rise.

Wage growth eased in September, rising only 0.1 percent for average hourly earnings, following 0.2 percent the month before. Expectations were for a 0.2 percent gain. The average workweek held steady at 34.5 hours, matching the consensus projection

NFP:

Private NFP:

Y/Y growth in household labor force survey:

Not looking good. And Congress and the President not in any rush either, seems. Still looking to me like they are getting their sense of security from:

The stock market doing ok, believing a balanced budget is a good thing, both sides trying to take credit for this year’s drop in the deficit. Recalling the ‘fear mongering’ in front of the last round of tax hikes and sequesters. Recalling markets bounced back after the Aug 2011 debacle, etc. Voters convinced govt should limit spending to what it takes in.

That is, letting the US go cold turkey to a balanced budget is consistent with their ideology and with current political dynamics.

They are maneuvering only to try to make sure that if it works they get the credit and if it fails the opposition gets the blame.

And I hope I’m wrong!!!

Here’s how you have to think to win a Nobel prize:

Fama’s Fallacy:

There is an identity in macroeconomics… private investment [PI] must equal the sum of private savings [PS], corporate savings (retained earnings) [CS], and government savings [GS]…. (1) PI = PS + CS + GS…. Government bailouts and stimulus plans seem attractive when there are idle resources – unemployment. Unfortunately, bailouts and stimulus plans are not a cure. The problem is simple: bailouts and stimulus plans are funded by issuing more government debt…. The added debt absorbs savings that would otherwise go to private investment…. [G]overnment infrastructure investments must be financed — more government debt. The new government debt absorbs private and corporate savings, which means private investment goes down by the same amount…. Suppose the stimulus plan takes the form of lower taxes… lower tax receipts must be financed dollar for dollar by more government borrowing. The government gives with one hand but takes them back with the other, with no net effect on current incomes…

Eugene Fama

good grief!!!
:(

The negatives:

Profit growth already low and slowing
Car sales rolled over in September
New home sales already rolled over
Housing starts flattened
Personal income anemic, and distribution issues further softening demand
800,000 federal workers not getting paid
0 rate policy/QE is a deflationary bias
Pro active austerity already initiated
Federal deficit looking too low for financial conditions
Markets/analysts have ignored/ridiculed the paradox of thrift so are ‘long and wrong’
Japan’s currency depreciation works against US and euro domestic demand

Not only no chance of fiscal relaxation if things go bad, but more likely further fiscal tightening.

So it’s thereby worse than flying without a net.

The positives:

Just rhetoric-
Americans are resilient and all that…

feel free to distribute.

Problem is the unpaid bills never get paid if the debt ceiling is never extended.

They become contingent iou’s

But good point nonetheless!

Failing To Raise The Debt Ceiling Doesn’t Reduce Government Spending

The austerity chart that’s worth 1000 Words

Remember, unlike just a tax hike or spending cut, hitting the debt ceiling means going cold turkey to a balanced budget, which is catastrophic as it eliminates the automatic stabilizers and triggers a downward spiral that, if left to continue, could take maybe 25% off of GDP in 90 days, and still be accelerating downward.

Boehner: We’ll win the fight to defund Obamacare

September 19 (Reuters) — U.S. House of Representatives Speaker John Boehner said he was confident that majority Republicans in the chamber would pass a stop-gap U.S. funding measure on Friday that denies money for “Obamacare” health insurance reforms.

At a news conference on Thursday, Boehner also said Republicans had “no interest” in defaulting on U.S. debt in the looming debate over raising the U.S. debt limit.

“We will deliver a big victory in the House tomorrow, and then this fight will move over to the Senate where it belongs. I expect my Senate colleagues to be up for the battle,” Boehner said.

FYI, from Merrill:

Cliff notes Forgotten, but not over The sequester may be forgotten, but it’s not over. Contrary to popular belief, it appears that most of the impact on growth comes in 3Q, not 2Q. This is one reason our tracking model is pegging growth this quarter at just 1.6%. The Federal workforce is shrinking Federal payrolls have been shrinking since the first half of 2011, but the pace has picked up since the beginning of this year. This reflects some layoffs, but mainly hiring freezes, natural attrition and presumably some workers balking at accepting the shift to part-time employment. Thus, the sequester simply is accelerating a drop that was already in progress. Government wages are falling Aggregate income of government workers has been falling since the end of last year. This reflects not just the drop in employment, but recently reduced hours from the furloughs. In particular, the Department of Defense began furloughing 640k employees on July 8. Doing the math, cutting work by two days a month would cause income to drop by $6.5 bn at an annual rate. That alone could explain the 0.5% drop in government wages and salaries July, which was the biggest mom decline since February 1993. Sequester’s impact is not evenly spread Surveys suggest that most Americans feel unaffected by the sequester. However, regions with heavy concentrations of federal workers or government contractors are feeling the pain. Even as the national unemployment rate continues to drop, there has been a notable pick-up in unemployment in Maryland and Virginia since hitting cyclical lows in April. Anecdotal evidence suggests more pain is on the way The latest Fed Beige Book suggests more pain in the pipeline. In the September 4 edition, there were nine references to sequester or sequestration versus only one reference in the July release. Defense firms in the Kansas City and San Francisco districts reported “that the effects of the sequestration have already been passed through to actual reductions in production.” Meanwhile, defense firms in the Boston region were concerned “about the prospect of larger effects in the fourth quarter.”

Yes, though August is subject to revision, and the underlying ‘private payroll’ growth, which lags fiscal adjustments, is now looking like it’s been hurt by the year end tax hikes and subsequent sequesters.

Yes

Yes, though Friday’s +.1 for personal income is more ‘macro’

Ok, fewer jobs but more spread out.

Yes, as it looks like un and under employed are transitioning to ‘out of the labor force’, and participation rates are falling for younger people as well and if you say half the drop in participation is cyclical you can add about 4% to the un and under employment rates.

Agreed. The Fed is heck bent on tapering. They don’t like QE as a tool. And Jackson Hole had presentations showing it doesn’t work with regards to output, employment, CPI, etc.

And the term structure of rates was lower, questioning what QE actually accomplishes in that regard, as it’s still going full force at the moment.

New Fed Chair

Confirmation is another story, of course. But seems his odds of confirmation should be better than, say, Jamie Dimon… ;)