Posts Tagged: economy

One Economist’s View – My Rough Notes

I spent an hour on the phone earlier in a conference call with James Marple, senior economist with TD Bank. Here are my notes. They’re rough… I haven’t polished them up, but it gives you a pretty decent overview of what he views with regard to deficits, debt, and the current debate.


Overall: GDP revised downward from Q108 today, showing recession far deeper than they knew. Revisions resolve mystery between job loss and GDP numbers. Housing market still a drag on the economy, but is mostly a legacy indicator at this time. Best deficit reduction scenarios would include tax and entitlement reforms to raise revenues with spending cuts in the future to avoid a double-dip or slower growth.
Debt ceiling: 
No historical precedent for what is happening now, which means predictions are not concrete. 4 possible scenarios, best to worst:
  1. Congress comes together, agrees on bill for long-term deficit reduction. Would cause rally in markets, undo pessimism priced into them right now. 
  2. Congress does a deal but doesn’t agree to enough deficit reduction to satisfy ratings agencies. If one ratings agency downgrades (e.g. S&P) probably not long term effect, but would pressure policymakers to come back to the table for further reductions
  3. 8/2 no deal, interest payments met but the rest of spending cut in half. If only a few days, expect interest rates to rise by at least 25 basis points. Risk of downgrade would be priced in, would cause a 1-2% drag on GDP in Q3 2011. Longer it drags on, the higher the risk of second recession, but slow growth inevitable. Would force all non-interest spending to drop by 50% which is what would cause economic drag.
  4. US treasury misses interest payment due to revenues not there or an error in estimates of revenues coming in could trigger nightmare scenario with immediate downgrade, 2008 repeated.

In response to questions:

  1. 14th amendment scenario: Does not alleviate uncertainty, exacerbates it because even though there is no default and possibility of being tied up in court/partisan battles instead of dealing with deficit reduction
  2. Clean bill with agreed-upon framework but not actual bill reducing deficit: Best case: reduces uncertainty in markets, reduces political risk, but doesn’t cure issue of deficit reduction. Not a terrible outcome but not desired either. The broader question in all of this necessitates clear gesture to fiscal consolidation — tax reform and entitlement reform with latter in out-years, revenue increases sooner. With housing market uncertainty already looming, slow job growth looming, essential to factor out as much uncertainty as possible. Markets need policymakers to make good-faith effort to address both in immediate fashion.
  3. What happens to precious metals/oil futures if no deal? Gold will be safe haven until a deal is struck, then it will drop precipitously. Oil, other commodities will depend on dollar reaction.
  4. How to calm people down? Biggest fear is uncertainty driving people to make run on the markets, banks which could trigger a depression-like scenario. Important to repeat that default is a highly unlikely event and will not happen even if 8/2 deadline passes. Even if there were a default, it would be viewed as a technical default due to political dysfunction rather than systemic. Interest payments will be made, and as long as that happens, no panic is necessary. Policymakers will not allow brinksmanship to that degree, and should remember that any rise in interest rates increases the deficit.
  5. Aren’t issues larger than the deficit and debt ceiling? Yes, clearly there are larger issues but the debt ceiling is now driving the debate. Biggest issues: growth isn’t large enough to drive down unemployment rate, but challenges are temporary and related to political risk. Housing market is legacy issue. Savings rate is up, worst of deleveraging cycle is behind us measures of consumer credit quality not deteriorating, delinquency rates decreasing. All positive factors. Best case scenario: spending cuts not front-loaded and tax code changes more immediate. This is a “senseless, self-imposed crisis.” With progress toward mitigating deficit, economy accelerates because there is stimulative policy in place if we can overcome political dysfunction.
  6. On stimulative economic policy, he says revenue as share of GDP fell to 14%, stimulus prevented far worse outcome but is now running out. Deficit top layer of other issues: revenues must increase, entitlements should be pre-funded to avoid a crisis out in the future. 
  7. Where is the safe harbor? Nowhere is 100% safe right now but treasuries are the safest assets out there still. Moving money to other countries’ bonds builds currency risk in. There is no riskless asset, but there is reason to believe this crisis will pass and be resolved.

Oligarchy and the Debt Ceiling

Earlier this week I posed questions about why the Tea Party caucus would stonewall against the interests of their Wall Street masters. I asked the wrong question. The question I should have examined more carefully is what Wall Street masters’ interests are.

We’ve been told that defaulting on our debt will be a catastrophe, and indeed it would. This is why a routine raise to the debt ceiling is the right thing for Congress to do. So why the “grand deal”? Arguably, the Tea Party caucus could be peeled off and a clean vote achieved with Democrats joining to raise it. Even with Joe Walsh’s “stonewall letter” now gaining traction in the House, it could be done.

Jed Lewison does the math on the McConnell/Reid Plan “B” (which I argue is dead in the water anyway):

That leaves us with some simple math: there are currently 432 members of the House (with three vacancies), so you need 217 votes to pass a bill. There are 239 Republicans, so if between 90 and 100 of them have ruled out supporting a “Plan B,” Boehner’s best case scenario is getting about 140 or 150 votes from his conference. That will leave him in the range of 70 to 80 votes shy of raising the debt limit.

Obviously, those 70 to 80 votes must come from Democrats. In April, 81 of them voted for the budget deal compromise with President Obama, but House Democrats are going to be less eager to vote to raise the debt limit than they were to pass a funding bill, irrational though that may be. So if you’re trying to figure our whether John Boehner is going to be able to pass legislation raising the debt limit, the first two questions to ask are how many Republican votes he can deliver, and what will Democrats who vote to raise the debt limit demand in return for their votes?

But let’s say it’s not the McConnell/Reid plan, just for the sake of argument. Let’s say all deals have been swept off the table because (and repeat after me) no Republican will vote for a revenue increase. Assuming there are still some reasonable Republicans in Congress, it’s not unfathomable to think they’ll vote with the Democratic caucus (who should unanimously agree to a clean debt ceiling vote) to raise it with no strings attached. We then turn to the Senate, where the Maine twins and Scott Brown have signalled that default is not an option for them. That should overcome the filibuster and send a clean bill to the President.

Ratings Agencies Exercise Their Grip

Problem solved, right? Yes, and no. Ratings agencies have now moved the goalposts so that non-default and a raised ceiling aren’t enough. No, the only thing that will stop them from downgrading US Treasuries is the “grand deal.”

MS Bellows at Alternet argues that this pressure from ratings agencies provides the impetus for Obama and Congress to strike the ‘grand deal’:

Late Thursday, the credit-rating agency Standard & Poor’s released a statement announcing that merely raising the debt ceiling will not be enough to prevent a downgrade of the United States’ credit rating for the first time in seventy years, potentially causing the interest rate on both government and private debt to skyrocket and destabilizing the entire economy. Remarkably, the statement also prescribed the specific numbers and conditions that would allow the U.S. to avoid such a catastrophe: to ensure a stable credit rating, any deal between Obama and the Republicans must reduce debt by $4 trillion, should include some “mix” of spending cuts and tax increases, and must involve concessions by both sides (a strong hint that the G.O.P. must consider closing tax loopholes, as well as a repudiation of Eric Cantor’s assertion that merely attending negotiations is the only concession the GOP intends to make).

Moody’s has now threatened the same thing, but with an extension to 5 states likely to have their municipal bond ratings dropped due to cuts in Federal assistance to states; namely Maryland, New Mexico, Tennessee, South Carolina and Virginia.

These pronouncements can be read two ways. Bellows argues that they should be read by Republicans to quit playing games and come to a deal. That’s certainly one way to look at it, but as I read more, I’m developing a more cynical view.

I find it hard to believe that Moodys, S&P and other ratings agencies have suddenly become such huge fans of this administration’s policies to the extent that they’re willing to leverage Republicans to make a deal that includes tax hikes. Given their role in the 2008 meltdown and the hand-smacking they received in Dodd-Frank and the public, I don’t really think they are suddenly anxious to bolster the administration in this matter. They have the same conflict of interest identified in last year’s Senate Finance Committee report:

The report calls for radical reforms to the industry that are authorized in last year’s Dodd-Frank financial reform law, but may not be realized. Dodd-Frank did little to change what some say is an inherent conflict of interest in credit raters’ business model, in which the raters are paid by the companies whose products they rate. … Senate investigators concluded that had Moody’s and S&P heeded their own warnings, they might have issued more conservative ratings for the securities linked to shoddy mortgages. “The problem, however, was that neither company had a financial incentive to assign tougher credit ratings to the very securities that for a short while increased their revenues, boosted their stock prices, and expanded their executive compensation,” the report said. An August 2006 email reveals the frustration that at least one S&P employee felt about the dependence of his employer on the issuers of structured finance products, going so far as to describe the rating agencies as having “a kind of Stockholm syndrome” — the phenomenon in which a captive begins to identify with the captor.

In fact, Congress found them to be responsible for triggering the crisis.

In one of the most stark condemnations of the credit rating agencies, a Senate investigations panel said the agencies continued to give top ratings to mortgage-backed securities months after the housing market started to collapse.

The agencies then unleashed on the financial system a flood of downgrades in July 2007, the panel said.

“Perhaps more than any other single event, the sudden mass downgrades of (residential mortgage-backed securities) and (collateralized debt obligation) ratings were the immediate trigger for the financial crisis,” the staff for Senators Carl Levin and Tom Coburn wrote in their report.

And here we are again, with agencies threatening to downgrade the full faith and credit of the United States unless this country bows to their demands. In some contexts, this might be considered blackmail.

But let’s not forget the hedge funds. Never forget the hedge funds.

Hedge Funds, Europe, and the Bargain Basement

From an article in Bloomberg News earlier this month:

Now that an immediate Greek default has been avoided, investors are looking for ways to play continued distress among countries including Italy, the euro-area’s third-largest economy, and Spain, its fourth. The extra yield investors demand to hold Portugal’s 10-year bonds over German bunds surged 212 basis points yesterday to a euro-era record 1013 basis points after Moody’s cut its credit rating four levels to Ba2, below investment grade.

The yield on Italy’s 10-year bond reached the highest in almost three years, while the spread over German bunds for Spain’s 10-year bond rose to 267 basis points, compared with 208 basis points a year earlier. A basis point is 0.01 percentage point.

One area where Finch has been trading is the debt of mobile-phone companies, whose ability to repay bonds and loans could be diminished by austerity-triggered economic slowdowns. If such companies were downgraded, the market would be flooded with junk bonds, causing prices to fall.

“If you crimp peoples’ spending, you’ll find that phone calls are surprisingly discretionary,” Finch said.

I included that quote about phone calls because it gives you a tiny glimpse into what these cynical, sick sons of b*tches think about people.

Today, we have news that Greece has been brought back from the brink. Maybe. I say maybe because the Great Credit Ratings Agency Gods have not blessed the deal yet:

“The fact that the EU has thrown everything including the kitchen sink into this is very comforting for investors and unless the rating agencies say this is not enough for Greece to avoid a default, the euro should hold onto its gains,” said Kathy Lien, director of currency research at GFT in New York.

Still, hedge fund managers are on the hunt for the best ways to make a few bucks on the backs of suffering everyday people with their tool of choice. Surely you remember it from the 2008 days: Credit default swaps. Well, credit default swaps and higher interest rates, anyway.

Desert Beacon:

If we think Wall Street hasn’t noticed what’s going on then we haven’t been paying attention, traders have picked up on the possibility of a default:

“The possibility has not gone unnoticed. Trading in credit-default swaps (CDSs) on Treasury securities has picked up and the price of protection against default, as measured by the CDS spread, has risen (see chart). One-year protection is now almost as expensive as five-year protection. This is more often seen in distressed markets where investors are pricing in an imminent default than with otherwise healthy borrowers with long-term problems.” [The Economist]

Those playing at the tables in the Wall Street Casino are busy hedging either direction. Either way, “polite” or “impolite,” they’ll earn their commissions. But, what happens if the default isn’t “polite?”


All this might be an amusing exercise in semantics were it not for the fact that toying with the nation’s credit rating, and possibly defaulting on its bond holders, has some obvious and painful ramifications, not matter how lightly a politician might describe it:

  1. The cost of short term borrowing increases.
  2. Commodity prices, including oil, increase as investors move to “safe haven” investments. This could easily place more inflationary pressure on industrial nations like China and Brazil.
  3. The cost of consumer credit increases, including mortgage rates, student loans, automobile loans, and credit cards.
  4. The cost of credit default swaps on corporate bonds would increase making private sector borrowing more expensive. This would obviously curtail corporate expansion and thus further restrict JOB growth.
  5. Pension funds and other entities which are required by law to purchase only AAA rated bonds would be hurt.
  6. and the people making some real money out of this mess are those who will get their commissions for selling derivatives based on U.S. Treasuries no matter what happens.

On the last item, she forgot to mention the oligarchs making some real money out of this mess who will see their hedge fund values rise exponentially, after having liquidated their government bonds. Not only that, but those same investors are sitting on the sidelines with a whole lot of cash in their pockets to pick up a few bargains along the way.

Oligarchy’s Role

Jeffrey A. Winters’ book “Oligarchy” offers a dark analysis of the United States as oligarchy.

Oligarchy, defined:

Regardless of political context or historical period, oligarchs are defined consistently as actors who claim or own concentrated personal wealth and are uniquely empowered by it. They are a social and political byproduct of extreme material stratification in societies, and stuck stratification is inherently conflictual: oligarchs desire to keep their fortunes while others threaten to take it. Oligarchy refers to the politics of defending wealth — a challenge for oligarchs that varies widely according to a range of factors….

How the capital markets play to oligarchs’ goals:

The good news for oligarchs is that “in developed capital markets, governments have learnt the lessons of level playing fields, regulatory certainty, and the sanctity of property rights.

Those quotes inside my quote, by the way, are from a 2005 Citibank report.

The tension between oligarchs and the state (pp 213-214):

At the center of civil oligarchy in the United States is the expression of material power by oligarchs to defend their incomes against taxation. The politics of income defense unfolds on many levels. Oligarchs seek to drive down their “nominal” or “marginal” tax rates, which are the highly visible published percentages everyone pays in their tax brackets. They also benefit from pushing down the bottom threshhold of the highest bracket. This shifts the tax burden downward to a far more numerous stratum of citizens who are well off — known in the wealth management business as the “mass affluent” — but who lack the material power resources oligarchs can deploy for income defense. As important as these policy objectives may be, by far the most intensive use of these power resources is to widen the spread between the published tax rates for oligarchs and what they actually pay.


The other component is the nitty-gritty political battles and legwork of making and keeping the tax system sufficiently porous so that there is complexity and uncertainty.

And that right there, my friends, is why there will be no grand deal, and why our bonds will likely be downgraded even with a clean debt ceiling increase, and why in the end, the best we can hope for with this Congress in office is no change at all. Despite the complicated case I’ve laid out here, it really comes down to this message: the haves want to keep and take from the have-nots to consolidate power, and there are at least 90 representatives in the House who are working hard on their behalf to achieve those goals.

Bonus Quote:

Oligarchs are those rich enough to convert their money into the professional firepower needed to defend their wealth and incomes.


…they can set in motion armies of actors – whether thugs, militias, demonstrators, or income-defense professionals – based on remuneration rather than ideological commitments…Oligarchs issue directives to be followed as commands, and the actors being paid to carrying out those orders do so even if their own political interests are not served.

Oval Office Gulf Disaster Speech: Ask not what your country can do for you, but…

I am a proud member of the JFK generation, who grew up with this as my mantra:

Ask not what your country can do for you – ask what you can do for your country.

Following on my previous post, because I am as human as the next, I am now going to tell you why *I* should have written President Obama’s Oval Office speech.

In a nutshell, because he didn’t ask me to do anything.