Financing desk comments

I’m lost for an explanation as to whey the Fed ignored the year end liquidity issue entirely, after alluding to it in various speeches and allowing the impression that they were going to address it at the meeting persist.

Keep me posted as to how LIBOR is over the turn (as well as fed funds over the turn) late morning after the dust settles, thanks. The NY Fed may have something in mind to bring rates more in line with the Fed’s target rate.


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FOMC

(interoffice email)

> Dovish statement not matched by actions (no lowering of FF-Discount Rate
> spread). As Tom Brady recently commented, “Well done is better than well
> said”.

Yes, seems they ignored the FF/LIBOR an year end issues in general. After two cuts in the FF and the discount rates that did not address ‘market functioning’, markets wer discounting some positive action, such as a larger discount rate cut or removal of the stigma. This is very disconcerting and give the appearance that the fed ‘doesn’t get it’.

> KEY POINTS
> Slower economy is no longer a forecast, it’s a reality (“Economic gwth is
> slowing”), which means they could drop the word ‘forestall’.

Yes. Perhaps they mean the lower GDP forecasts when they say ‘slowing’, as not much else that has been released is signaling a slowdown.

>
> i.e., future easing is now to counter a weak economy not one likely to
> weaken
> They dropped the neutral bias, now saying only that ‘some inflation risks
> remain’
> Financial market deterioration mentioned twice: ‘Strains in financial
> markets have increased’, and ‘the deterioration in
> financial market conditions’.

Yes, but did nothing to address that issue.

> Former Fed Governor Philips on CNBC saying she was surprised additional
> action wasn’t taken on discount rate.
>
> The Federal Open Market Committee decided today to
>
> lower its target for the federal funds rate 25 basis points
>
> to 4 1/4 percent.
>
>
>
> Incoming information suggests that economic growth is
>
> slowing, reflecting intensification of the housing
>
> correction and some softening in business and consumer
>
> spending. Moreover, strains in financial markets have
>
> increased in recent weeks. Today’s action, combined with the
>
> policy actions taken earlier, should help promote moderate
>
> growth over time.
>
> Readings on core inflation have improved modestly this
>
> year, but elevated energy and commodity prices, among other
>
> factors, may put upward pressure on inflation. In this
>
> context, the Committee judges that some inflation risks
>
> remain, and it will continue to monitor inflation developments carefully.
>
>
>
> Recent developments, including the deterioration in
>
> financial market conditions, have increased the uncertainty
>
> surrounding the outlook for economic growth and inflation.

Uncertainty increased for both.

>
> The Committee will continue to assess the effects of
>
> financial and other developments on economic prospects and
>
> will act as needed to foster price stability and sustainable
>
> economic growth.
>
Again, nothing about market functioning or liquidity.

OCT Statement

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.


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Dec 11 balance of risks update

Labor markets remain stronger than expected, right up through this morning’s Manpower survey for next quarter. Inflation risks remain elevated, with estimates of 1.5% PPI and 0.6% CPI the consensus for Thursday and Friday, and CPI core moving higher as well. While several funding spreads have widened vs. fed funds, absolute rates for reasonable quality mtgs. and corp. bonds are down- what the Fed calls an ‘easing of financial conditions’ for this component. And removing the stigma from using the discount window will ease year end issues.

A 0.25% fed funds cut and 0.50% discount rate cut are priced in for today’s meeting, and more cuts are priced in for future meetings. At the same time the balance of risk as highlighted below, with those cuts priced in, seems tilted towards inflation.

Conclusion:

Those closest to the Fed expect a 0.25% cut in the fed funds rate and a 0.50% cut in the discount rate. They see the Fed’s motivation as fear of the balance of risks swinging sharply back towards ‘market functioning risk’ if the Fed doesn’t deliver the cuts already priced in. It’s a case of ‘let’s put to bed the market functioning issues first, and then move on to other issues.’

Data Highlights:

  • ECONOMY – SHOW ME THE WEAKNESS!
  • EMPLOYMENT – better than expectations right up through today:
    • ADP employment strong.
    • Payrolls up 94,000- above expectations.
    • Unemployment rate 4.7% – down slightly.
    • Weekly claims very slightly higher.
  • HOUSING – exceeds expectations:
    • Mortgage applicationsstrong and trending up.
    • New home sales 728k vs. 750k expected, and 716k previous month.
    • Existing home sales 4.97million vs. 5million.
    • Permits 1.178m vs. 1.200million expected, previous month revised to 1.261million from 1.226million.
    • Pending home sales up 0.6% vs. down 1% expected. Previous month revised to up 1.4% from up 0.2%.
    • Housing starts 1.229 vs. 1.117 expected.
    • NAHB housing index 19 vs. 17 expected.
  • AND THE REST is still showing no sign of weakness:
    • CEO survey positive.
    • Q3 GDP revised up to 4.9%.
    • Personal income and spending up .2%, (.1% less than private forecasts), real spending flat.
    • Total vehicles sales over 16 million and unchanged.
    • Factory orders up 0.5% and 0.3%, above expectations.
    • October construction spending down 0.8%, vs. up 0.2% for September, year over year down 0.6%, somewhat below expectations.
    • Durable goods – 0.7% vs. up 0.3% expected but previous month revised from 0.3% to up 1.1&.
    • Capacity Utilization 81.7 vs. 82 expected.
    • Industrial production was down 0.5% vs. up 0.1% expected.
    • Retail sales ex autos up 0.2% in line with expectations, core up 0.1%.
    • Sep trade balance -56.5 vs. -58.5 expected.
    • Consumer confidence down- too many people watching CNBC.
  • INFLATION RISKS HIGHER:
    • CPI consensus (Dec 14): 4.1% YoY from 3.5%, core 2.3% YoY from 2.2%.
    • December Michigan inflation expectations up- one year 3.5% from 3.4%, five year 3.1% from 2.9%.
    • October PCE deflator up 2.9% YoY, vs. 1.8% pre Oct 31 meeting .
    • October Core PCE up 0.2%, up 1.9% YoY, vs. 1.8% pre Oct 31 meeting.
    • OFHEO home price index down 0.4%, first decline since 1994, but still up YoY.
    • Import prices up 1.8% vs. 1.2% expected, YoY up 9.6% vs. 9% expected.
    • Prices received up in all the reported surveys (ISM, Purchasing Managers, region feds, etc.).
    • Prices paid all up except Phil Fed survey prices paid down slightly.
    • Although the net percentage of firms raising selling prices slipped to 14% in November from 15% in October, the percentage of firms planning to raise prices rose to 26% from 22%. The NFIB noted, “There was no significant progress on the inflation front.”
    • 10 year TIPS floater at 1.85% shows expectations of Fed only keeping a real rate of less than 2% for the next ten years.
    • 5×5 TIPS CPI break even rate is down to 2.42% vs. 2.49% October 31.
    • Crude oil is at $89, down from $94 at the last meeting, and vs. about $55 last year.
    • Saudi oil production up, indicating higher demand at the higher prices.
  • MARKET FUNCTIONING/FINANCIAL CONDITIONS – little movement but markets muddling through the ‘Great Repricing of Risk’:
    • Bank loans up, commercial paper down.
    • Assorted losses and recapitalizations but no business interruptions.
    • S&P index down about 1% since October 31, but remains up about 8% for 2007, and substantially up from the inter meeting lows.
    • 3 month FF/LIBOR spread is 73 bp, wider since October 31.
    • Mortgage rates down, jumbo mortgage spreads are wider but off the widest levels.
    • Mortgage delinquencies up, probably within Fed forecasts.

♥

Bear Stearns U.S. Economics: Small business optimism down

The NFIB small business optimism index fell to 94.4 in November from 96.2 in October. Although the net percentage of firms planning to expand was little changed at 13% in November versus 14% in October, the net percentage of firms expecting the economy to improve fell sharply to -10.0 from -2.0.

Watching too much CNBC.

In November, 7% of firms reported that credit was harder to get, up from 6% in October. The NFIB noted “Credit conditions continue to look normal … There is no credit crunch on Main Street, all the angst appears to be confined to Wall Street and its observers” (November’s percentage of firms reporting that credit was hard to get compares to an average of 5% for the 21-year history of the monthly survey).

Agreed, and this goes unreported in the financial press.

The percentage of small firms planning to increase employment was unchanged at 11% in November, although 19% of firms reported jobs as being “hard to fill,” down from 22% in October.

Employment holding up confirming other data.

Although the net percentage of firms raising selling prices slipped to 14% in November from 15% in October, the percentage of firms planning to raise prices rose to 26% from 22%. The NFIB noted “There was no significant progress on the inflation front.”

Right – supports risks tilting toward inflation.


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Manpower survey better than expected

Bernanke stated he was watching the labor markets closely, right up to the meeting, and the latest survey further confirms its holding up at least as well as expected, if not quite a bit better.

The headline and lead in, however, continue to indicate a reporting bias toward a slowdown:

U.S. Employers Trim First-Quarter Hiring Plans, Manpower Says

By Bob Willis

Dec. 11 (Bloomberg) — Employers in the U.S. trimmed hiring plans for the first quarter of 2008 as the economy cools, according to a private survey released today.

Manpower Inc., the world’s second-largest provider of temporary workers, said its employment index for January through March fell to 17, the lowest since the first three months of 2004, after holding at 18 for the three prior quarters.

The decline wasn’t large enough to signal employment would slump, suggesting the labor market is holding up enough to sustain consumer spending. Federal Reserve policy makers, who are forecast to lower interest rates later today, are counting on rising wages to help Americans weather the housing recession.

“We’ve kind of pointed down a little, but we didn’t fall off a cliff like we did in other downturns,” Jeffrey Joerres, chief executive officer of Milwaukee-based Manpower, said in an interview. “Companies may not be euphoric about hiring, but they are still hiring.”

Right, so why wasn’t the headline ‘survey doesn’t signal a slump’? The reporting bias has been as strong as I’ve ever seen it.

The survey was in line with the Labor Department’s monthly jobs report issued last week. Employers added a greater-than- forecast 94,000 workers to payrolls in November and the unemployment rate held at 4.7 percent. The economy has created an average 118,000 jobs a month so far this year, compared with 189,000 a month in 2006.

These are not rate cut numbers.

Manpower’s index slumped 8 points in the second quarter of 2001, at the start of the last recession.

Before adjusting for seasonal variations, 22 percent of the roughly 14,000 companies surveyed said they will boost payrolls in the first quarter, down from 27 percent in the previous three months.

Little Change

Twelve percent said they’d trim hiring in the coming quarter, and 60 percent anticipated no change, the survey showed.

The overall index subtracts the percentage of employers planning to cut jobs from those who plan to add workers and adjusts the results for seasonal variations.

The world’s largest economy will expand at a 1 percent annual pace this quarter, bringing 2007’s growth rate to 2.2 percent, according to the median estimate of economists surveyed this month by Bloomberg
News. It grew at a 4.9 percent annual pace in the third quarter and 2.9 percent for all of 2006.

That’s a two quarter average of 3%, as actual employment and output grew modestly and inventory in Q3 borrowed some GDP from Q4. And the fed knows that if recent history is any guide, there is a good chance net exports were higher than expected in Q4 and it could be revised up.

The Fed will probably lower its target lending rate by a quarter point to 4.25 percent later today, its third consecutive reduction, according to a separate Bloomberg survey.

That’s the consensus, and the fed may do it out of fear that if they do not accomodate what markets have priced in, the sky will fall.

Half Limit Hiring

Employers in five of 10 industries polled by Manpower planned to limit hiring next quarter compared with the previous three months. Manpower’s measure of hiring intentions was weakest for construction companies. The index for government agency hiring showed the biggest drop.

And the risks are to the upside, as construction is already near zero. There is no where to go but unchanged or up.

Hiring plans at all but one of the industries were lower than year-ago levels, the report showed. Manufacturers of long- lasting goods, such as computers and appliances, projected little change from the first quarter of 2007.

The hiring outlook is strongest at mining companies, followed by service industries and wholesalers.

Regionally, employers in the Northeast, South and West predict no change in hiring, while employers in the Midwest anticipate a slowdown in activity.

Globally, hiring plans in Peru, Singapore, India, Argentina, South Africa, Australia and Japan were among the strongest, while employers in Ireland reported the weakest hiring plans.

The Manpower survey is conducted quarterly and has a margin of error of plus or minus 0.8 percentage point in the U.S. and no more than plus or minus 3.9 percentage points for national, regional and global
data.

To contact the reporter on this story:Bob Willis in Washington
bwillis@bloomberg.net .


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China’s export prices

Checked with our China economist, it appears that China’s export price has been rising since early 06. Compared to the price by end of 06, export prices are already 7.4% higher (See charts attached)-an interoffice email

2007-12-11 China Export Input Prices2007-12-11 China Export Prices vs Term of Trade

While headlines focus on China’s internal inflation issues, more relevant to the fed are China’s export prices, which become our import prices.

And it is not wrong to view import prices as functionally equivalent to unit labor costs, due to outsourcing of labor investment inputs.

And a weaker $ vs Yuan will add to our ‘import inflation’.

Fed hawks know this and probably sense a ripping inflation in the pipeline.

Fed expected to lower rates despite raging inflation – MarketWatch

And the risk is headlines could get much worse after they cut.

For example:

‘Oil prices rise as Fed rate cuts drive down the dollar’

‘Fed cuts rates, driving up gas prices, to bail out banks’

MarketWatch article – Fed expected to lower rates despite raging inflation

Washington Mutual to take writedown, cut jobs

Yet another shoe that didn’t fall. No business interruption, no change to aggregate demand, a relatively few layoffs over time, and this is a major California lender where housing is hurting perhaps the most of any state.

Washington Mutual to Take Writedown, Cut Jobs (Update1)

2007-12-10 17:00 (New York)

(Adds writedown in the first paragraph and downgrade in the third paragraph.)
By Elizabeth Hester

Dec. 10 (Bloomberg) — Washington Mutual Inc., the largest U.S. savings and loan, will write down the value of its home lending unit by $1.6 billion in the fourth quarter and cut 3,150 jobs as losses in the mortgage market increase.

Washington Mutual also will cut its quarterly dividend to 15 cents a share from 56 cents and close 190 of 336 home loan centers, the Seattle-based bank said in a statement today. The company said provisions for loan losses in the quarter will be $1.5 billion to $1.6 billion, about twice as much as it previously expected.

Fitch Ratings downgraded the firm’s rating to “A-” from “A,” citing “worsening asset quality,” and “extremely challenging conditions in the U.S. residential mortgage market.” Washington Mutual said it plans to raise $2.5 billion to shore up its capital by selling convertible stock.

Industry-wide mortgage originations will probably shrink 40 percent in 2008 to $1.5 trillion, down from about $2.4 trillion this year, Washington Mutual said in the statement. The firm plans to cease lending through its subprime mortgage channel.

The company said it would cut 2,600 jobs in its home loans unit, or about 22 percent of that division. The remaining job cuts will come from corporate and support staff, the statement said.

–Editor: Otis Bilodeau.

To contact the reporter on this story:
Elizabeth Hester in New York at +1-212-617-3549 or ehester@bloomberg.net.

To contact the editor responsible for this story:
Otis Bilodeau at +1-212-617-3921 or obilodeau@bloomberg.net.


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Bowling alley to run out of points!

National Debt Grows $1 Million a Minute

The Associated Press
Monday 03 December 2007

Washington – Like a ticking time bomb, the national debt is an explosion waiting to happen. It’s expanding by about $1.4 billion a day – or nearly $1 million a minute.

What’s that mean to you?

It means net financial assets are growing by only that much. 1.5% of GDP isn’t enough to support our credit structure needed to sustain aggregate demand over time.

It means almost $30,000 in debt for each man, woman, child and infant in the United States.

No, it means 30,000 in net financial assets for each.

Even if you’ve escaped the recent housing and credit crunches and are coping with rising fuel prices, you may still be headed for economic misery, along with the rest of the country.

Yes!

That’s because the government is fast straining resources needed to meet interest payments on the national debt, which stands at a mind-numbing $9.13 trillion.

No, it’s because the deficit is too small to supply the net financial assets we need to sustain demand, given the institutional structure that removes demand via tax advantage savings programs.

And like homeowners who took out adjustable-rate mortgages, the government faces the prospect of seeing this debt – now at relatively low interest rates – rolling over to higher rates, multiplying the financial pain.

Only if the fed hikes rates.

So long as somebody is willing to keep loaning the U.S. government money, the debt is largely out of sight, out of mind.

Government securities offer us interest bearing alternative to non interest bearing reserve accounts.

But the interest payments keep compounding, and could in time squeeze out most other government spending –

Operationally, spending is totally independent of revenues. The only constraints are self imposed.

leading to sharply higher taxes or a cut in basic services like Social Security and other government benefit programs. Or all of the above.

Only if congress votes that way..

A major economic slowdown, as some economists suggest may be looming, could hasten the day of reckoning.

The national debt – the total accumulation of annual budget deficits – is up from $5.7 trillion when President Bush took office in January 2001 and it will top $10 trillion sometime right before or right after he leaves in January 2009.

Too small as it is the equity behind our credit structure.

That’s $10,000,000,000,000.00, or one digit more than an odometer-style “national debt clock” near New York’s Times Square can handle. When the privately owned automated clock was activated in 1989, the national debt was $2.7 trillion.

It is also the national ‘savings’ clock as government deficit = non government accumulation of net financial dollar assets.

It only gets worse.

So does this article.

:(

Over the next 25 years, the number of Americans aged 65 and up is expected to almost double. The work population will shrink and more and more baby boomers will be drawing Social Security and Medicare benefits, putting new demands on the government’s resources.

The government spends by changing the number in someone’s bank account. Spending puts the same demands on government resources as running up the score at a football game puts strain on the stadium’s resources needed to post the score.

These guaranteed retirement and health benefit programs now make up the largest component of federal spending. Defense is next. And moving up fast in third place is interest on the national debt, which totaled $430 billion last year.

All interest expense is net income to the non government sectors.

Aggravating the debt picture: the wars in Iraq and Afghanistan, which the nonpartisan Congressional Budget Office estimates could cost $2.4 trillion over the next decade

That will be an aggregate demand add. What are the subtractions going to be? Increased pension funds assets, IRA’s, insurance reserves, and all of the other tax advantage ‘savings incentives’. To date, these have dwarfed government deficit spending and resulted in a chronic shortage of aggregate demand and massive economic under performance.

Despite vows in both parties to restrain federal spending, the national debt as a percentage of the U.S. Gross Domestic Product has grown from about 35 percent in 1975 to around 65 percent today.

Last I heard it was still 35%? But, as above, whatever it is, it is still not sufficient to support demand at ‘full employment’ levels. Our employment rate assumes large chunks of the population aren’t working because they don’t want to and wouldn’t work if desirable jobs were offered to them. The experience of the lat 90’s shows this isn’t true. With the right paid jobs available, employment could increase perhaps by 10%.

By historical standards, it’s not proportionately as high as during World War II – when it briefly rose to 120 percent of GDP, but it’s a big chunk of liability.

Didn’t seem to hurt war output!

“The problem is going forward,” said David Wyss, chief economist at Standard and Poors, a major credit-rating agency.

“Our estimate is that the national debt will hit 350 percent of the GDP by 2050 under unchanged policy. Something has to change, because if you look at what’s going to happen to expenditures for entitlement programs after us baby boomers start to retire, at the current tax rates, it doesn’t work,” Wyss said.

The only thing that ‘doesn’t work’ is the 10% of the work force that is kept on the sidelines by too tight fiscal policy.

With national elections approaching, candidates of both parties are talking about fiscal discipline and reducing the deficit and accusing the other of irresponsible spending.

Yes, and that is the biggest continuing systemic risk to the real economy – not a bunch of write downs in the financial sector.

But the national debt itself – a legacy of overspending dating back to the American Revolution – receives only occasional mention.

Who is loaning Washington all this money?

Who has all the money looking to buy government securities is the right question. And it’s the same funds that come from deficit spending. Deficit spending is best thought of as government first spending, then selling securities to provide those funds with a place to earn interest. The fed calls that process ‘offsetting operating factors’.

Ordinary investors who buy Treasury bills, notes and U.S. savings bonds, for one. Also it is banks, pension funds, mutual fund companies and state, local and increasingly foreign governments. This accounts for about $5.1 trillion of the total and is called the “publicly held” debt.

It’s also called the total net financial assets of non government sectors when you add cash in circulation and reserve balances kept at the fed.

The remaining $4 trillion is owed to Social Security and other government accounts, according to the Treasury Department, which keeps figures on the national debt down to the penny on its Web site.

Intergovernment transfers have no effect on the non government sectors’ aggregate demand.

Some economists liken the government’s plight to consumers who spent like there was no tomorrow – only to find themselves maxed out on credit cards and having a hard time keeping up with rising interest payments.

Those economist have it totally backwards and are a disgrace to the profession.

“The government is in the same predicament as the average homeowner who took out an adjustable mortgage,” said Stanley Collender, a former congressional budget analyst and now managing director at Qorvis Communications, a business consulting firm.

Wrong.

Much of the recent borrowing has been accomplished through the selling of shorter-term Treasury bills. If these loans roll over to higher rates, interest payments on the national debt could soar.

Wrong. The fed sets short term rates, not markets, and long term rates as well if it wants to.

Furthermore, the decline of the dollar against other major currencies is making Treasury securities less attractive to foreigners – even if they remain one of the world’s safest investments.

For now, large U.S. trade deficits with much of the rest of the world work in favor of continued foreign investment in Treasuries and dollar-denominated securities. After all, the vast sums Americans pay – in dollars – for imported goods has to go somewhere.

He’s getting warmer with that last bit!

But that dynamic could change.

“The first day the Chinese or the Japanese or the Saudis say, `we’ve bought enough of your paper,’ then the debt – whatever level it is at that point – becomes unmanageable,” said Collender.

Define ‘unmanageable’ please.

A recent comment by a Chinese lawmaker suggesting the country should buy more euros instead of dollars helped send the Dow Jones plunging more than 300 points.

Ok.

The dollar is down about 35 percent since the end of 2001 against a basket of major currencies.

Ok. Is that all there is to ‘unmanageable’? How about 10 year treasuries coming down below 4% as the dollar went down? How does he reconcile that?

Foreign governments and investors now hold some $2.23 trillion – or about 44 percent – of all publicly held U.S. debt. That’s up 9.5 percent from a year earlier.

Point?

Japan is first with $586 billion, followed by China ($400 billion) and Britain ($244 billion). Saudi Arabia and other oil-exporting countries account for $123 billion, according to the Treasury.

“Borrowing hundreds of billions of dollars from China and OPEC puts not only our future economy, but also our national security, at risk.

In what way? This is nonsense.

It is critical that we ensure that countries that control our debt do not control our future,” said Sen. George Voinovich of Ohio, a Republican budget hawk.

They already don’t. We control their future. Their accumulated funds are only worth what we want them to be. We control the price level. They are the ones at risk.

Of all federal budget categories, interest on the national debt is the one the president and Congress have the least control over. Cutting payments would amount to default, something Washington has never done.

Why would they? Functionally that’s a tax, and there are sufficient legal tax channels. So why use an illegal one?

Congress must from time to time raise the debt limit – sort of like a credit card maximum – or the government would be unable to borrow any further to keep it operating and to pay additional debt obligations.

Yes, that is a self-imposed constraint, not inherent in the monetary system that needs to go. If congress has approved the spending, that is sufficient.

The Democratic-led Congress recently did just that, raising the ceiling to $9.82 trillion as the former $8.97 trillion maximum was about to be exceeded. It was the fifth debt-ceiling increase since Bush became president in 2001.

Democrats are blaming the runup in deficit spending on Bush and his Republican allies who controlled Congress for the first six years of his presidency.

Not that I approve of the specifics of his tax cuts and spending increase, but good thing he did run up the deficit or we would be in the middle of a much worse economy.

They criticize him for resisting improvements in health care, education and other vital areas while seeking nearly $200 billion in new Iraq and Afghanistan war spending.

Different point.

“We pay in interest four times more than we spend on education and four times what it will cost to cover 10 million children with health insurance for five years,” said House Speaker Nancy Pelosi, D-Calif. “That’s fiscal irresponsibility.”

She is way out of paradigm. We can ‘afford’ both if the real excess capacity is there without raising taxes.

Republicans insist congressional Democrats are the irresponsible ones. Bush has reinforced his call for deficit reduction with vetoes and veto threats and cites a looming “train wreck” if entitlement programs are not reined in.

Both sides are pathetic.

Yet his efforts two years ago to overhaul Social Security had little support, even among fellow Republicans.

It was ridiculous. There is no solvency risk with social security or any other government spending requirement. Only a potential inflation risk. And the total lack of discussion regarding that is testimony to the total lack of understanding of public finance.

The deficit only reflects the gap between government spending and tax revenues for one year. Not exactly how a family or a business keeps its books.

Even during the four most recent years when there was a budget surplus, 1998-2001, the national debt ranged between $5.5 trillion and $5.8 trillion.

As in trying to pay off a large credit-card balance by only making minimum payments, the overall debt might be next to impossible to chisel down appreciably, regardless of who is in the White House or which party controls Congress, without major spending cuts, tax increases or both.

“The basic facts are a matter of arithmetic, not ideology,” said Robert L. Bixby, executive director of the Concord Coalition, a bipartisan group that advocates eliminating federal deficits.

Deficit terrorists.

There’s little dispute that current fiscal policies are unsustainable, he said.

Sad but true.

“Yet too few of our elected leaders in Washington are willing to acknowledge the seriousness of the long-term fiscal problem and even fewer are willing to put it on the political agenda.”

Fortunately!!!

Polls show people don’t like the idea of saddling future generations with debt, but proposing to pay down the national debt itself doesn’t move the needle much.

Our poor kids are going to have to send the real goods and services back in time to pay off the debt???? WRONG! Each generation gets to consume the output they produce. None gets sent back in time to pay off previous generations.

“People have a tendency to put some of these longer term problems out of their minds because they’re so pressed with more imminent worries, such as wages and jobs and income inequality,” said pollster Andrew Kohut of the nonpartisan Pew Research Center.

Good!

Texas billionaire Ross Perot made paying down the national debt a central element of his quixotic third-party presidential bid in 1992. The national debt then stood at $4 trillion and Perot displayed charts showing it would soar to $8 trillion by 2007 if left unchecked. He was about a trillion low.

Fortunately!

Not long ago, it actually looked like the national debt could be paid off – in full. In the late 1990s, the bipartisan Congressional Budget Office projected a surplus of a $5.6 trillion over ten years – and calculated the debt would be paid off as early as 2006.

That therefore projected net financial assets for the non government sectors would fall that much. Not possible!!! Causes recession long before that and the countercyclical tax structure fortunately builds up deficit spending (unfortunately via falling government revenue due to unemployment and lower profits) sufficiently to ‘automatically’ trigger a recovery.

Former Fed chairman Alan Greenspan recently wrote that he was “stunned” and even troubled by such a prospect. Among other things, he worried about where the government would park its surplus if Treasury bonds went out of existence because they were no longer needed.

Not to worry. That surplus quickly evaporated.

As above.

Mark Zandi, chief economist at Moody’s Economy.com, said he’s more concerned that interest on the national debt will become unsustainable than he is that foreign countries will dump their dollar holdings – something that would undermine the value of their own vast holdings. “We’re going to have to shell out a lot of resources to make those interest payments.

Interest payments do not involve government ‘shelling out resources’ but only changing numbers in bank accounts. ‘Unsustainable’ is not applicable.

There’s a very strong argument as to why it’s vital that we address our budget issues before they get measurably worse,” Zandi said.

“Of course, that’s not going to happen until after the next president is in the White House,” he added.

Might be longer than that.


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Dodd’s novel idea for subprime borrowers

Dodd’s bill has similar goals to one passed by House lawmakers last month.

It would enact stricter standards for subprime loans made to borrowers with poor credit — and for other “nontraditional” loans that allow borrowers to defer principal or interest payments, according to an outline distributed at a briefing for reporters Monday.

For those types of loans, lenders would be required to determine that a borrower can pay back the loan.

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