Friday looked like one of the strangest market days yet. Going into the weekend and hours before the wheels fell off the fiscal negotiations, the markets just drifted cluelessly higher on extremely low volume and volatility. The intermediate-term volatility, the VXZ, is now within earshot of breaking to lowest number witnessed back in 2007. The same is true of the 2-year T-Note yield. This goes beyond cognitive dissonance. There is no fear, no worry in this market. It's completely brain dead and comatose. It's ironic given the end-of-the-line ungovernable situation we are witnessing. I have compared it to the last days of the Soviet Union ---- if that system had financial trading markets.------- The best comment I've spotted on the causa proxima of all this was made in the public feedback section of another site. Someone who goes by the name "sbernard" used the term "hubris obliviana." It's such an apt descriptor that I'm going to adopt it as a Winterism. Wrote sbernard:
"The truth is that Wall St suffers from a serious disease called hubris obliviana, fueled by endless government interventions, bailouts, stimulus, and Fed money expansion. One of the 'unexpected' consequences of this monetary heroin in that Wall St has lost all perception of risk. They reflexively have too much unending faith in the power of government to fix all their troubles. Thus, they are setting us all up for even more risk — risk the government can not avert because it is the (weak link)!"
When the talks broke off between Obama and Boehner (the Hopium-Bonehead talks) the aspect that was shocking was just how far apart they were on the critical elements of where the discussion had begun a few months ago- $4 billion over ten years. The spin that has been disseminated was that progress was being made and that a real deal was doable. Keep in mind that the goal post generally set by the credit agencies (and others such as Bowles-Simpson) that constitute a credible start to deficit reduction was $4 trillion over 10 years. I'm not sure why the agencies used a 10-year window because, in reality, the next several years are the most critical. The credit agencies have used language that looks for short- and intermediate-term impacts. The mix of spending cuts to revenue enhancements has been generally set at 3-1 (Bowles-Simpson).
In Presidente Hopium's remarks after the talks fractured, he offered color on his proposal: $1.65 trillion in spending cuts and $1.2 trillion in revenue increases. Apparently the Boehner position was $2.6 trillion in cuts (?) and $800 billion in new revenue. But only $1.2 trillion in discretionary spending was actually agreed upon between the two, plus $250 billion in Medicare adjustments. According to the New Republic, there was a general agreement around benefit cutbacks in Social Security (but not until 2015) and Medicaid, but then the Republicans pushed for more. Most of the conversation about revenue increases centers around closing loopholes and aggressive collections. However, according to GOP leader Bonehead, Obama raised the ante from his previous position of $800 billion to $1.2 trillion. To quote Bonehead, this fresh increase came from taxes on the (completely bogus term) "job creators," otherwise known as plutocrats and kleptocrats. I gave examples of a few of these in my "Tax Avoiders" post. Corporate tax collections as a percent of GDP are running about the historical levels. I'm also wondering if Hopium is pushing the Robert Reich proposal on Social Security to bring the income ceiling up to 90% of all wages paid, versus 84% now.
In other words, Hopium has suddenly gotten word from his progressive base to take a small and very-late-in-the-day stand against the kleptocrats. Of course, Hopium knows full well that this is a no-starter, so for whatever reason the emphasis has shifted to pure politics, not problem solving. Further, the spending cuts he proposed fall far, far short of what is required and is not even acceptable to fiscal conservatives among the Senate Democrats. A cut of $1.65 trillion over 10 years leaves government spending at about 23% of GDP. This is far short of even what the politically expedient and widely criticized plan by GOP Senate leader McCONnel proposes (and flim-flam man Reid endorses), which was $2.5 trillion in spending cuts and $0 in tax increases.
The term "kicking the can down the road" has also become bogus and is another example of hubris obliviana. The various positions I have just described all but guarantee a U.S. credit downgrade and perhaps a series of them. If so, the Government bubble bursts and higher interest costs can be added to the deficit. If some version of hubris obliviana emerges as "the deal," then what fiscal conservatives there are in Congress would have suffered a big political blow. The Tea Party wing might as well commit harikari. In fact, they might be tempted to do so while bringing the Government to a halt in August by blocking the debt ceiling.
As I have been writing and podcasting, FY2012 is the big story. There are a bunch of items scheduled to expire that would constitute austerity. Key among those are the 2% payroll tax reduction, unemployment extensions, Medicare physician reimbursement and proper funding of housing agencies losses. Further, the baseline revenue collection number for FY2012 is far too optimistic. Further the baseline assumes the Bush tax cuts expire at the end of 2012. Unless some tough votes are made on these measures, the deficit for FY2012 and 2013 is set to quickly balloon out of control. About one minute into this interview with Bloomberg, David Stockman attempted to cover this critical aspect but was cut off mid sentence and before the punch line by the clueless interviewer.
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