Rearranging the Deck Chairs on the Titanic

“The people that once bestowed commands, consulships, legions, and all else, now meddle no more and long eagerly for just two things — bread and circuses.” -Decimus Juvenalis, 1st Century BC, Rome 

Just one day after I penned my serious doubts that the FY 2012 (Sept) could hit the projected  $1.1 trillion, comes another desperate barrage straight from the" land of reality is an option":  a payroll tax cut proposal for business.  All this a week after Moodys warned on a downgrade if deficits aren't controlled. Of course another tax cut for the plutocrat class will gain enough support from Republicans to possibly gain passage. In the very short term Wall Street loves a good corporate loot and rallies, incredible!

Obama's role has been as mediator to ensure that the worst policies be pursued: tax cuts for the wealthy and corporate types combined with out of control spending.  The Republicans failure to offset the Bush tax cut extension for their plutocrat buddies, by only achieving token spending cuts also ensures that the worst possible policies are enacted. To say the fiscal crisis end game is in play and that you deserve the Government you elect  is the understatement of the new century.

To give you perspective, let’s pretend some reasonable political approach was crafted to return entitlement spending to the 40 year average within the budget, that being 42%,  versus 44% now.


source: Pimco

This cut would only be $80 billion a year and you’d have dung slung on you every step of the way enacting it. Paul Ryan’s approach, which was criticized for “killing seniors,” will actually increase entitlement spending by $14 billion in FY 2012, mostly because he doesn’t deal with social security. Perhaps believing in some kind of trickle down economics and forgetting the tax cuts, I would add that Ryan is far too optimistic on tax revenues. He like Banana Republic Presidente Hopium  uses $2.23 trillion for FY 2011 and $2.533 trillion for FY 2012. That’s going to be the rub, and I will report that every step of the way as the crisis takes hold. I would characterize Ryan’s approach as little more than just a last-ditch, modest, year-over-year spending rollback of $97 billion for effect, and then hope for a miracle.  Most of the action is in the out years, but the lights will be turned off on the US Government long beforehand.

As far as the FY 2012 budget,  Presidente Hopium is proposing $3.73 trillion versus Ryan’s $3.529 trillion, all to be slugged out a billion at a time going into an election year.   Apparently Hopium will revisit the issue  with new cut proposals involving Medicaid and defense. I suspect more smoke and mirrors, fight em for every billion dollars in cuts.   Oh, and if you are wondering about taxes, those will happen only for the Gente as those provisions are due to expire automatically at the end of the FY:  the 2-point payroll tax cut and expanded unemployment insurance.

My prediction: As the process gets underway, there will be a state budget blowup and I nominate Hopium’s home state of Illinois for front and center [Illinois Maelstrom].  At the same time, federal tax revenues will have a shortfall, resulting in reductions of next years’s  too optimistic projections. Interest costs on existing debt will start spiking, the budget process will fall into disarray. Next the credit agencies will have no choice but to downgrade the debt, and a full-scale fiscal crisis will be underway, with budgetary cuts then made by foreign creditors and the IMF.

Meredith Whitney presents her case about muni debt in a Fortune article that is a well written detail of her points. There is a huge revenue and expenditur­e gap that exists for many states that has been plugged by a Ponzi scheme. Reserves have been used up. Federal stimulus help is going away. From what I heard MW say in the past, this later event was critical and crucial to the timing. It will be the tipping point.  The Charlie Gasparino piece in contrast is just an exercise in ad hominems and not even a very skillful one at that. It does zero to educate or inform the reader.

Ryan's Blueprint for America