Counterparties: We know what the fiscal deal will look like

By Ben Walsh
November 19, 2012

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The fiscal cliff has already found at least one victim, the WSJ reports: “half of the nation’s 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next”.

Investors and small business owners, the NYT reports, are worried about about things like higher capital gains taxes — one lawyer says he’s never seen such a “flood of desire and action to transfer a business and cash out”. For big companies, meanwhile, there’s $150 billion worth of corporate tax breaks to fret about.

Tim Geithner, on the other hand, apparently isn’t terribly concerned about the fiscal cliff (or any of austerity’s other “thousand tortured metaphors”): he says a deal is “doable within several weeks”. Politico’s Ben White surveys the negotiations and finds reason to agree with Geithner:

There seems little chance the cliff battle will go near or past the December 31 deadline. Nearly every signal from Republicans suggests they understand they have lost the war over taxes going up on the wealthiest Americans and are just trying to figure out how to get the least objectionable deal that includes real spending cuts and a trigger for tax and entitlement reform.

The President made calls to business leaders (including Jamie Dimon) to build support for a resolution to the issue. While the two haven’t exactly seen eye-to-eye of late, Dimon supports the central item of the administration’s negotiation position — tax increases on the wealthiest Americans.

So don’t listen to Alan Greenspan, who says another recession would be a small price to pay for fiscal reform. As Tim Duy says, Greenspan is obsessed with the idea that “large deficits [will] bring economically ruinous high interest rates and, unless held at bay by the Federal Reserve, runaway inflation”. That just hasn’t happened.

Thankfully for the American economy, the President isn’t listening to Greenspan. Much more likely, as Felix highlights, is incremental policy change: tinkering with something as complex as the US tax code is almost always preferable to “dismantling the machine entirely and rebuilding something brand new”. — Ben Walsh

On to today’s links:

How can meaningless, pre-drafted, and simply polite press releases make the Dow rise 104 points? – Capital Games and Gains

Crisis Retro
The mortgage crisis told through a poor Memphis resident and the banker who bundled her loan – Bob Ivry

Bad News
You can’t say that on the internet: “the emergence of new, algorithmic gatekeepers” – Evgeny Morozov

Learning to love volatility and building an antifragile economy – Nassim Nicolas Taleb
Taleb’s latest is an unintentional homage to “Deep Thoughts by Jack Handey” – Lisa Pollack

Big Ideas
The best way for Walmart to boost the economy? Pay its workers at least $25,000 a year – Demos

On the Lam
“If I am captured, this blog will continue”: John McAfee’s preemptive post-script –

How to barbecue a turkey – the super easy way for morons – Choire Sicha

More sales-and-trading layoffs at “efficiency ratio”-conscious Citi – WSJ

“Basketball is the game that has the most skill”, but baseball “is close to random” – Wired

Facebook needs to accept that “its best purpose in life is as a huge time suck”- Mark Cuban

Gray Matter
What made Einstein’s brain different: possibly extra folds and convolutions – Science

Popular Myths
No, US debt is nothing like an adjustable-rate mortgage – USA Today

Growth Industries
The shadow banking has grown to about $67 trillion – Bloomberg
Shadow Banking System Is Back Down To About Half The Size Of Regular Banking System – Matt Levine

Philip Roth is collaborating (via email) on a novella with an 8-year old – NYT


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Alan Greenspan worries about ““large deficits [will] bring economically ruinous high interest rates.”

You guys should get out more often… this movie is still in theaters… it’s a foreign film.

Absolutely love your idea about WMT paying their low skill high effort employees $25,000 to boost the economy at the expense of their investors and customers. Did you even check to see that in the economic recovery year of 2011 Walmart’s net income fell?

Even in the 1st world low skill workers will never again be able to attain a middle income. In the U.S. we subsidize rent, food, healthcare, and even offer a negative federal tax rate to the working poor. Billions of people live well on what we call a poverty line level income.

Posted by y2kurtus | Report as abusive

@y2kurtus: I apologize in advance if I missed your sarcasm.

“this movie is still in theaters… it’s a foreign film.”

If you are agreeing with Greenspan’s concerns, please read up on sovereign currency issuers, own-currency denominated debt, worlds reserve currency, and how all of those things are different in the U.S. that in those foreign countries.

“Billions of people live well on what we call a poverty line level income.”

So, as long as there are nomadic yak herders on the Steppes, your poor Americans had better shut up about capital gains taxes – at least you don’t live in a tent and burn yak dung for heat; you could have it worse, you know.

Is that really an argument against tax policy changes in a wealthy first-world country?

Posted by SteveHamlin | Report as abusive

Yes, we should listen to Ben’s smug reassurances that large deficits won’t ultimately cause high interest rates and high inflation because it “hasn’t happened yet” in the U.S., with all of a 4-year sample size to observe, ignoring well-established macroeconomic theory and numerous other examples.

Has everyone already forgotten the housing boom and bust? Just because a trend is unsustainable doesn’t mean it can’t continue for several years. It just can’t continue forever, and, as a rule, the longer it continues, the uglier the aftermath when the necessary correction occurs.

Posted by realist50 | Report as abusive


I suggest you read some Paul Krugman and his discussions on liquidity traps. Fascinating stuff and has more or less nailed our current situation over the past 4 years.

Posted by GDH | Report as abusive

“how all of those things are different in the U.S. that in those foreign countries”

Things are ALWAYS different, until they aren’t.

I basically agree with SteveHamlin on the differences, but I don’t trust our understanding enough to be certain that the differences will persist. Nor do I trust economists (who don’t all agree on this anyways).

Posted by TFF | Report as abusive

@GDH – I have read Krugman. I just don’t agree with his diagnosis nor his tone, in which everyone who disagrees with him is an idiot or a scoundrel. He does a great job of preaching to the choir of those who agree with him anyway, however.

Posted by realist50 | Report as abusive