Junk Economics = National Fiscal Suicide

As we would expect, the budgetary "straw man debate" is largely focused on more looting and subsidies for corporatists and plutocrats. Conditions and the "urgency" for last minute deals is perfect for the kind of dynamite-strapped junk economics practiced in America. The result will be national fiscal suicide. Banana Republic Presidente Hopium is on board, so the Republicans are just going through the motions and play acting.  That's what the term "stimulating jobs" is code for:  tax breaks for corporations, who are already paying the lowest percentage of taxes to GDP (1.25%) as far back as I can see, and in reality is a stimulus for Tiffany program.

This  New York Times article is supportive of my  Corporations and Plutocrats Take Holiday as US Heads to fiscal Trainwreck and details levels in the US. This estimated to be 1.2%-1.3% for FY 2011 ending in September.

These racketeers are running out of rope and to borrow a word from Presidente Hopium, who knows the kind of audacity is being planned, and with sub one percent borrowing costs (for the moment) they may try it.  Among the junk economics proposals out there are mortgage equity write downs, which will have to be combined with guarantees for the second lien holders and mortgage fraud forgiveness for the banks. Paul Krugman and other crackpots probably have more wasteful ideas to employ [NY Times: What a Drag, showing rate of change effects].

Ultimately, and despite the attempt to divert away attention from it, the credit agencies have to be looking at FY 2012 (Sept), where the projections are currently forecasting about a $1.1 trillion deficit. You should understand that the FY 2012 is rife with phony assumptions, such as over $2.5 trillion in tax revenues coming from a robust economy, and the end of a number of so-called temporary programs. One example is the 30%  reimburshment cut to physicians under Medicare. There are also presumptions on non-provider reimbursement. The chances of this anti feeding-at-the-trough provision going through is as about as likely as pigs flying, so we will see a large readjustment in the deficit  the general fund is using to fund the excess Medicare and Medicaid spending. If this goes through, then the general fund will balloon out beyond the $1.1 trillion projection. In other words, the cost-cutting measures in Obamacare get gutted, more people come into the system for health care and costs escalate.

There is controversy on how to budget for the housing agencies: CBO says $317 billion, OMB says $130 billion. Both of these were presumed on housing prices stabilizing, which now is problematic.

Another element, not surprisingly, is that under the stimulus, state and local governments were given federal grants equal to one-third of the state budgets. This was used to close budget gaps, cover Medicare spending, expand food stamp programs, and for maintaining bloated workforces and pensions (where contributions were also sometimes kicked down the road). So there may be a state crisis tempting some sort of new bailout that takes the U.S. into the European bailout pattern, with additional costs in the hundreds of billions.

In addition, as a facilitation to maintaining unemployment insurance, the states have utilized a little discussed credit line from the Federal government    The balances are currently $44.2 billion owed by the states. The Federal loans to support the State Unemployment Trust Fund remained interest free through Dec. 31 of last year, but interest began to accrue on Jan. 1, 2011.  The first interest payment  will be due on Sept. 30, 2011. Will the Federal Government defer this, too?  If not, it will be just one more burden on the states.

The FY 2012 budget presumes that the one-year unemployment extension to 99 weeks will go away. If it does, then 6.7 million quasi-permanent unemployed will fall off of benefits, resulting in a hard to imagine amount of distress, disorder and rioting. The cost of the 73-week extension beyond the traditional 26 weeks is $100 billion.

The 2% payroll tax reduction was designed as a one-year stimulus and will automatically expire at the end of 2011. Its extension, the cost of which is $120 billion, is not included in the $1.1 trillion FY 2012 budget. Are they going to roll the dice on this one again?

Then comes the cost of dealing with the last two years of kicking the can down the road with the banks. Even before collateral values began falling again this year, problem commercial loans remain marked too high, conservatively only 20-30% of all commercial losses have been realized and only 25-30% of all residential losses have been realized. Residential second liens have not been written off, and bank capital shortfalls in the U.S. total at least $100 billion. The question then is how much will be needed for FDIC bank closures (currently at negative $1 billion in coverage funds, but with a line of credit to the Gumnut), to cover losses taken on the Fed's portfolio, let alone any new moral hazards disasters coming from the resource, commodity bubbles. It is not hard to visualize the 2012 FY coming in closer to $2 trillion rather than $1 trillion. When that is in sight, the credit downgrades and higher borrowing costs will act like a tsunami wave to take the system down.