Counterparties: Sequestration nation

February 27, 2013

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The sequester, those $85 billion in automatic, immediate spending cuts scheduled to go into effect on Friday, wasn’t even supposed to happen.

Instead, the sequester was included in the 2011 Budget Control Act and was only supposed to kick in if both parties failed to make a deal to cut US debt. The cuts were intended to be so “arbitrary and widespread that they would be unpalatable to both sides”. Months later, we’re left with no debt deal, a package of cuts nobody likes, and our nation’s top lawmakers instead debating more pressing matters like who needs to “get off their ass”.

The economic consequences of the sequester are the only part of this process that are relatively straightforward. The package of cuts could cut as much as 1.25% from GDP this year, Annie Lowrey reports. The Bipartisan Policy Center says this could cost America 1 million jobs over the next two years. Worse, Ben Bernanke told Congress yesterday that the cuts will hurt growth so much, they could actually make the deficit bigger rather than smaller.

The White House, for its part, has been on a campaign to detail how these discretionary spending cuts will hurt first responders, the military, and air traffic controllers. (It’ll also hurt the zoo.) The sequester is already causing immigration officials to release detained immigrants. But Phil Gramm reminds us that the US went through a similar drama in 1986: “The nation survived then. It will now.”

Binyamin Appelbaum has a tremendous piece today that places the sequester in historical context. The Federal government is shrinking at “a pace exceeded in the last half-century only by the military demobilizations after the Vietnam War and the cold war”. Government spending normally falls during recoveries, he notes:

But this time is different. Growth has remained sluggish and millions remain unemployed even as the federal government, riven by partisan differences, has largely turned its attention to deficit reduction.

The sequester, as a Goldman Sachs analyst told Appelbaum, isn’t like other periods of government shrinkage, when cuts mostly fell on the military. These cuts are focused on discretionary spending — and don’t address the biggest drivers of our debt. It’s as if Congress is trying to do its job poorly: “It is cutting some of the best spending that government does,” economist Tyler Cowen told Appelbaum. — Ryan McCarthy

On to today’s links:

JP Morgan hires JP Morgan to sell the LA Times – Matthew DeBord
Jamie Dimon would like you to know why he’s richer than Mike Mayo – YouTube

Make it Rain
Twitter could be a Google-like “money-gusher” — and may actually be worth $10 billion – Dennis Berman

Right On
Dozens of big companies will sign onto a Supreme Court brief supporting gay marriage – Fortune

The Fed
Bernanke has the second-worst unemployment record of any post-war Fed – Floyd Norris

Tens of millions are suffering unnecessarily because of austerity – Martin Wolf

Good Luck With That
To help itself and its customers, Wal-Mart should embrace socialism – Gawker

Fannie and Freddie’s regulator killed a sensible reform and cost taxpayers hundreds of millions – Jeff Horwitz
It’s time to abolish the FHFA – Felix

“Children are dangerous disease vectors, indiscernible from other vermin” – Ken Layne

The SEC is investigating Michael Milken – Fortune

It’s really hard to tell the difference between investing and speculation – CFA Institute
Morgan Stanley, Russian-mall magnate – Globe St

New Jersey just legalized online gambling – Reuters

The annotated wisdom of Louis CK – Splitsider

Financial Arcana
Sovereign CDS volumes are down nearly 50% since an EU-wide ban – IFRE

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