James Pethokoukis

Politics and policy from inside Washington

Why austerity won’t fix global budget mess

May 26, 2010 18:36 UTC

Bond guru Bill Gross makes this point:

Tougher sovereign budgets produce government worker layoffs, pay cuts, reduced pension benefits and a drag on consumption and the ability of the private sector to accept an attempted hand-off from fiscal authorities. Recession becomes the fait accompli, and the deficit/GDP ratio moves ever higher because of skyrocketing risk premiums and a plunging GDP denominator. In many cases therefore, it may not be possible for a country to escape a debt crisis by reducing deficits.

Me:  This certainly seems to be the case with Ireland, as it has for most countries trying this path to escape a debt trap. As I point out in this Weekly Standard piece I wrote, the best way to solve a sovereign debt problem is by cutting spending and boosting economic growth.


WORLD is broke ?

15,20 p.m.
New York City
Wall Street – NYSE Stock exchange

Fifteen minutes ago, Dow fell suddenly 900 points, scaring even the glamourous dogs peaceful morning walk at the high Central Park, with one of the most sudden drops ever seen in the US market.

One minute later, Dow and SP500 climbed again till a -3,6% level, closing around -3,20%, waiting for tomorrow´s new surprises.

It was said that Greece concerns over a possible debt default affecting additional countries in South Europe, has been the main driver of this panic scene.

A systemic risk once again flouring around the world economies, just in case several key european countries cannot pay their huge sovereign debt and renew therefore, their cash needs.

I am really impressed on how we forget our recent past, or how we care for things that one day after another have been there and nobody has paid any attention to.

1) HOW MANY TIMES has been said that the US PUBLIC DEFICIT is unsustainable ?

2) EVERYONE expects that one day, the US will pay its entire debt charge ? … Of course not. But this has been so, for such a long time that if one day the markets panic because of this reason I would not understand the surprise of many.

I completely agree that today´s situation or even these week´s drops in Dow and SP500 are driven by speculators playing games again. But this time, playing with entire countries such as GREECE, PORTUGAL, SPAIN or ITALY. But they play with issues that are there, that are critical and that nobody looks at them the way they deserve.

So, and as investors, how must we react to these events ?

Very simple. Ups and Downs, volatility, etc … But the riskiest thing now in markets worldwide is that this volatility is increasing heavily, and this makes extremely difficult to guess future market trends.

I strongly believe in the CYCLES theory ( I published a post in this blog with regards to this point called “CYCLING” ), but in our current market situation, even this theory becomes terribly doubtful.

SP500 was reaching maximum levels. That is true. So, a correction was expected.

But my doubt now is: Is this movement today a correction signal or maybe a once again systemic default risk ?

I really think the answer is NO. It is NOT acceptable that governments once again let the world enter into a systemic risk, so I really hope that this will only be some kind of wear correction.

Let´s see tomorrow … and the day after tomorrow … to confirm if this hope is real.

Meanwhile, it is also true that problems such as the countries PUBLIC DEFICIT is there, it has always been there, and if we get really serious with this, let me tell you the problem has not an easy solution.

Jose Luis Revilla Escudero
Chairman & CEO
WWShares, Inc
-Private Wealth Advisors-

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5 reasons why “Son of Stimulus” is a bad seed

May 26, 2010 18:34 UTC

The American Jobs and Closing Tax Loopholes Act? Really? Even by the disingenuous standards of Capitol Hill, calling the $174 billion spending package making its way through the House “a jobs bill” takes some real moxie.

Die-hard Keynesians, of course, will contend that so long as money gets pushed into the economy, how it gets spent isn’t so critical. But for a government running trillion-dollar budget deficits, at least every billion or so should count. And it’s hard to argue that this bill is optimized for job creation or economic growth.

1) For instance, the bill includes a one-year, $6.7 billion extension of the federal research and development tax credit. By not making it permanent, the credit is less likely to foster long-term investment. The bill also extends tax breaks for NASCAR and Hollywood, ensuring both Red and Blue state residents get fed their respective helpings of pork.

2) More than a quarter of the spending — $47 billion over 10 years — goes toward extending unemployment insurance benefits. Economists worry the increased availability of such assistance may reduce the intensity with which the jobless look for work and lengthen the duration of unemployment by nearly 10 percent. It’s also tough to pin down the job-creating impact of spending $63 billion to increase Medicare payments to doctors and $24 billion for higher Medicaid spending.

3) Even worse, the proposal enlarges the budget deficit. Less than a quarter of the tab is paid for, showing again just how easy it is for Congress to avoid self-imposed limits on deficit spending. And increased Medicare spending was excluded from healthcare reform so the bill could get a better score from the Congressional Budget Office.

4) The White House will argue that given the high unemployment rate, bringing down the deficit is less of a priority. But listen to what economist Carment Reinhart told the president’s deficit panel today (via The Hill):

The gross U.S. debt is approaching a level equivalent to 90 percent of the country’s gross domestic product, the level at which growth has historically declined, said Carmen Reinhart, a University of Maryland economist. When gross debt hits 90 percent of GDP, Reinhart told the commission during a hearing in the Capitol, growth “deteriorates markedly.” Median growth rates fall by 1 percent, and average growth rates fall “considerably more,” she said.

Reinhart said the commission shouldn’t wait to put in place a plan to rein in deficits. “I have no positive news to give,” she said. “Fiscal austerity is something nobody wants, but it is a fact.

5) Barack Obama’s original stimulus plan was $787 billion (though costs have pushed it up to $862 billion). While some advisers argued for $1.2 trillion, the president sided with those who believed an amount of such Brobdingnagian size would alarm financial markets — and probably voters, too. This latest legislation, combined with a $17 billion jobs bill passed in March, would put the tally at around $1 trillion, not counting interest. In due course, the math will be easy enough for the markets to understand.


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