Misery Economic Theater 2011

[wblipp]

Originally Posted by schickel

This graphic is also from the CBPP, but I haven't found the article it is from yet....

What assumptions did the graph creator make about the economic activity that would have happened absent the tax cuts? Typical assumption is a static analysis - everybody would have behaved exactly the same and just paid more taxes.

[garo]

Originally Posted by wblipp

What assumptions did the graph creator make about the economic activity that would have happened absent the tax cuts? Typical assumption is a static analysis - everybody would have behaved exactly the same and just paid more taxes.

True but at the same time it is quite possible that absent these tax cuts the government would have spent some money on sorely needed infrastructure giving a more self-sustaining boost to the economy than the tax cuts for the rich which were anyway spent in buying over-priced houses and gambling on the wall street casino.

[Zeta-Flux]

Originally Posted by garo

True but at the same time it is quite possible that absent these tax cuts the government would have spent some money on sorely needed infrastructure giving a more self-sustaining boost to the economy than the tax cuts for the rich which were anyway spent in buying over-priced houses and gambling on the wall street casino.

I guess anything is possible. But their spending habits haven't really made much sense to me lately.

That said, the article didn't seem too balanced. It placed the blame squarely on Bush policies, when those policies were continued by Obama (while he controlled congress and the senate) and his budget was defeated by, let's see, 97-0.

If Obama didn't want to continue the Bush tax cuts, he could have easily vetoed any extension. But he didn't, and in fact his party supported the extensions.

I'm happy to start paying more taxes IF (and this is a big if) government stops spending like it has.

[Fusion_power]

You might note that the article in question above is a bit dated. The information and analysis appear to be from 2010, in other words, a year old.


It finally happened. It was about time.
S&P lowered the U.S. credit rating to AA+, down one notch from AAA.
http://finance.yahoo.com/news/SampP-...107320979.html

The net impact of this downgrade will be to increase the cost of borrowing money in the credit markets. Sans serious debt reduction plans in the next two years, it will be lowered again. Please note that I said "debt reduction", not "deficit reduction". There has been no talk from Washington from either political party about ways to reduce the debt. They have used smoke and mirrors to reduce the projected deficit. That is somewhat akin to shoveling manure vs smelling manure from a distance. I shouldn't disparage manure, it makes a very good fertilizer. But it still stinks, just like the U.S. debt.

There is one very interesting concept about the U.S. debt. Treasury has pumped several trillion dollars into the economy over the last few years primarily by creating money that was used to purchase U.S. debt obligations. The net result is that the U.S. owes the U.S. treasury. Now what if the U.S. starts paying back the debt? That means they would have to pay back the treasury negating the effect of "quantitative easing". Don't get the idea this will ever happen. Treasury would have to turn around with the money paid back and figure out another way of injecting it into the world economy. Otherwise it would destabilize the currency market and drive the dollar high above other currencies. In other words, IT AIN'T GONNA HAPPEN!

DarJones

[Fusion_power]

Bitcoin, the future of global commerce, or ideal drug money?

(RNN) - Bitcoin, an internet currency that exists independent of banks and countries, was thrust into the mainstream a few weeks ago when Gawker published a story about SilkRoad, a website that sells hard drugs and accepts nothing but Bitcoin in payment.

Much like Amazon, SilkRoad offers a broad array of items for sale and buyers and sellers are ranked by the quality of their products and transactions. But instead of books, MP3s and video games, SilkRoad offers drugs ranging from prescription pills like Adderall, to marijuana and black tar heroin.

But to access the site, you'll need to download TOR; an Internet engine that few people have heard of and even fewer have the technical expertise to configure.

Since SilkRoad's start in February, the site has never taken credit card or PayPal - it only accepts the untraceable online currency called Bitcoins.

One Bitcoin is worth somewhere in the neighborhood of $10 to $12, and the prices fluctuate rapidly, but most customers seem happy to pay a premium for the convenience and privacy of the transactions. The currency rate fluctuates - just like the value of a U.S. dollar.

The world of Bitcoin payment may seem a little hard to figure out, but those surfing the SilkRoad seem to have no problem picking up on it.

Some have said that there are scammers on SilkRoad, but most customers seem pleased by the products they receive.

"Three hits and one of my friends (urinated in) his pants. I'm pretty sure it's good," said one customer.

However, Bitcoins aren't only used for illegal drug purchasing through sites like SilkRoad, they can also be used to purchase a variety of items on the Web.

The birth of a currency

Bitcoin is the brainchild of a mysterious cyber guru called Satoshi Nakamoto, who may or may not be an actual person. In a 2009 paper, Satoshi described a "peer-to-peer version of electronic cash" that would allow individuals to send payment directly to each other without going through a financial institution.

The author claimed that timestamps, mathematical functions and other wonders of computer science could allow individuals anywhere in the world to simulate a face-to-face exchange of cash for goods or service. It would eliminate the need for a "trusted third party" – such as a broker, a bank or a government - and the inevitable complications and expenses.

Zachary Lewis, a video game developer from Huntsville, AL, said it was a quick, simple process to download the software enabling him to take Bitcoin in payment for his services.

Bitcoin is something entirely different from any means of exchange that has existed before, he said.

"Thinking of Bitcoins as an alternative to cash is like thinking of euros as an alternative to cash," he said. "Yes, it only exists digitally, but it isn't another form of the dollar like PayPal and credit cards are."

It's a hedge against identity theft in internet commerce, he added.

"The security in place is very strong," he said. "It is much harder for someone to steal your identity, since each user has an encrypted, public-private key pair for each transaction, specific to that transaction."

Not an 'outlaw currency'

Proponents say Bitcoin has multiple advantages over traditional currency.

It is hard to create – so counterfeiting is unlikely if not impossible. It is decentralized and not backed by any commodity, such as gold, whose price could fluctuate. There will not be more than 21 million units at any time, no new units would ever be created, which gives the currency more stability than national currencies.

Before the Gawker story went viral, Bitcoin existed for about two years in near anonymity, developing a foothold in the community of computer geeks, online merchants, libertarians, anarchists, Reiki masters and yes, online drug dealers, who accepted it as payment.

Because of its association with Silk Road, Bitcoin acquired a cachet as an outlaw currency that enables shady dealings.

Some Bitcoin enthusiasts were outraged. Others shrugged, saying anarchy was kind of the whole idea.

One self-described libertarian merchant pointed out that any kind of money can be used for bad things.

"I would ask those that allege Bitcoin is only an outlaw currency how they feel about U.S. dollars being used to buy drugs, murder, child prostitutes and more all over the world every day," said Michael Boyd, who owns and operates BitVapes.com, a website that sells e-cigarettes and accepts Bitcoin.

"Less than 1/2 of 1 percent of Bitcoin users have ever used the 'Silk Road' website," Boyd said via email. "The vast majority of Bitcoin vendors like myself pay our taxes and use Bitcoins to buy everyday, legal items."

Boyd says Bitcoin allows his company to exist because PayPal has been shutting down the accounts of many U.S. merchants who sell e-cigarettes.

"The problem you face with monopolized payment systems, PayPal and credit card companies can shut you down whenever they want," he said. "If they don't like what you are selling due to political pressure, they will not allow you to conduct business."

Authorities want Bitcoin regulated

A few United States senators don't like the fact that the currency can't be regulated and want to see Bitcoin outlawed.

Chuck Schumer (D-New York) and Joe Manchin (D-West Virginia) wrote a letter to U.S. Attorney General Eric Holder in July calling Bitcoin "an untraceable peer-to-peer currency," and "an online method of money laundering."

But keeping governments from being able to regulate the currency is exactly what its creators had in mind. Because it is peer-to-peer, no authority can crack down on middlemen to stop the flow of currency from one source to another.

Jerry Brito of George Mason University, in an interview with reason.tv, painted an example that would keep governments from controlling funds to troublemaking institutions.

"If the U.S. wants to block money from going to Wikileaks, for example, they can go to PayPal, Visa, Mastercards of the world, put pressure on them. With Bitcoin, there is nobody in the middle. You can't go after them there."

He said Bitcoin serves a real need in a global society that values freedom, and something will always fill that need. Some means of exchanging value for value will emerge, he said, that will circumvent authority and control.

"Whether Bitcoin succeeds is neither here nor there," he said. "If not Bitcoin, it's going to be something else that doesn't have a central intermediary that can either print money or be shut down."

http://www.waff.com/story/15209359/b...r-internet-fad

There is something about this that resonates as the wave of the future. Many sci-fi books over the years have speculated about some "money-metal" or similar scheme that allows anonymous exchange, can't be counterfeited, and is not govt regulated. What would it be like if the U.S. dollar's position as the defacto world currency were replaced with something like bitcoin?

I'm curious, is there a bitcoin bank? as in a place that issues bitcoin? If so, how is it set up to operate?

DarJones

[ewmayer]

I have to say, I was impressed by S&P laying down clear deficit-reduction targets last month as a requirement for them to maintain their AAA rating on US debt, and sticking to their guns now that the debt-ceiling-raise 'agreement' promises to fall far short of their stated minimum targets. I think fears of another market-panic due to the downgrade are overblown, partly because I believe the markets have already braced themselves for such an event, and in second part because only one of the "Big Three" downgraded the US so far - Moody's and Fitch have affirmed their previous ratings of "AAA with negative outlook." Will be interesting to see what Mr. Market says on Monday, though.

European FinMins are holding emergency talks this weekend, here is Mish's prediction about those goings-on:

Euro-Area Central Banks to Hold Crisis Call; G-7 Officials to Discuss Coordinated Action; Ratings of UK, France in Jeopardy; Meeting Agenda

In "secret" meetings (that everyone knows about) Euro-Area Central Banks to Hold Crisis Call

Euro-region central bank governors will hold emergency talks tomorrow aimed at stopping Spain and Italy from becoming the next victims of the sovereign debt crisis and limiting the market fallout from the first U.S. rating downgrade in history.

The central bank heads will hold a conference call at 6 p.m. Paris time, said a euro-area central bank official who declined to be identified because the talks are confidential. An spokesman for the European Central Bank declined to comment.
...
Summary of Meeting Agenda

Few details have been released on the "secret" meetings but I have a list of agenda items in advance.

1. How to kick the can down the road
2. How to make it look like we are not kicking the can down the road
3. How to get Germany to agree to kick the can down the road
4. How to silence Germany if Germany refuses to kick the can down the road

Barry Ritholtz, who like me is still disgusted at the extent to which the ratings agencies disgraced themselves during the great housing bubble by engaging in what can only be characterized as epidemic mortgage-securitization fraud, is loath to cut S&P much slack as a result of their call on US debt, and poses 10 Questions About S&P Downgrade

1. The change in trajectory of US debt was in service of Banks: It began with TARP, and continued with every other bailout/stimulus/economic plan. What was S&P’s role in creating that crisis?

2. How will non-US investors (Private and Central Banks) view the downgrade?

3. What is S&P’s methodology of rating sovereigns beyond Probability of Default? How does this differ from other rating agencies?

4. What does the downgrade do to US currency — is that the true impact of the credit downgrade?

5. Will borrowing costs likely increase for the US? What about consumers?

6. Will the downgrade of US spill over to other agencies, states, municipalities?

7. Will private sector holders of US Treasuries — insurers, pension, foundations, etc. — be downgraded as well?

8. Why did the rating agency not wait until the special committee / debt ceiling deal was completed later this year?

9. The Rating Agencies were downgraded by Dodd-Frank, with all regulatory and legal references to be removed. Was S&P’s move retaliatory?

10. How will US markets open on Monday in response to the downgrade?

[Prime95]

Originally Posted by ewmayer

Barry R also has a similar personal-travel indicator as George does around here: George going on a vacation correlates much more than random chance would predict with a new M-prime being found

Actually, I think it is an indicator that I take too many vacations. Speaking of which, I'll be on vacation for the next three weeks. Happy M-prime hunting.

[davieddy]

Originally Posted by xilman

However, my wife and I have been taking financial advice over the last couple of years because we are an age when significant amounts of cash have been arriving. Specifically, my father died a couple of years ago...
Paul

When my father died in 1994 I didn't need financial advice to succeed
in blowing the inheritance within a year or so.
Then again, I had got divorced a year or so previously, and was thus
unencumbered by nagging, my house, beloved children and most of my nest egg.

David

[Fusion_power]

"Markets will rise and fall, but this is the United States of America. No matter what some agency may say, we have always been and always will be a triple-A country," Obama said.

Maybe I'm getting pessimistic but it seems to me that this is more of a political argument than a financial disagreement.

DarJones

[ewmayer]

So much for my speculation that the markets might have already "baked in" the possibility of a U.S. credit downgrade...Read one of those investor psychology pieces over the weekend - Not bad, but I find it interesting that these "most investors are not nearly as rational as they would like to believe" pieces seem to mainly crop up during bear markets. In other words, lots of stuff about "panic selling", but never a peep about "panic buying". I didn`t see much noise in the MSFM in the past year about "Are investors being rational in driving markets back within range of their late-2007 housing-bubble-peak highs despite the weakest economic recovery in living memory and global worries about sky-high consumer and sovereign debt levels?"

-------------------------

Back in April of this year when S&P first put US debt on credit watch with "negative outlook", Tim Geithner immediately took to the airwaves proclaiming there was "no risk" of a downgrade:

`No risk` the US will lose its top credit rating, says Treasury`s Geithner

There is no chance that the U.S. will lose its top credit rating, Geithner said, forcefully disputing the notion that S&P or other ratings services might downgrade U.S. bonds from their current AAA rating.

"No risk of that, no risk," Geithner said on the Fox Business Network.

"Washington is a hard place to read. And it`s hard for people to look past the political rhetoric and try to understand whether the leadership of Washington is going to take the tough steps necessary to get ahead of this problem," the Treasury secretary explained. "I think the prospects for a bipartisan agreement are better than they`ve been in a long period of time. Of course, we have to turn that into action."

My Comment: In the wake of this embarrassment, Treasury officials have derided S&P for allegedly "making a $2 Trillion mistake" (presumably Treasury relies on much-more-accurate long-term budget forecasts such as these by the CBO and Geithner said that S&P`s decision to downgrade showed "really terrible judgment". Rest of the world, to T-Sec Geithner, in unison: "Treasury Secretary Geithner showed `really terrible hubris` in publicly proclaiming that there was `no risk` of a U.S. debt downgrade this past April, despite S&P`s very clear warnings and criteria for maintaining their AAA rating, which fiscal targets were nowhere near the targets agreed upon by congress as part of its framework agreement for raising the debt ceiling."

-------------------

Postscript on Bob`s question about how much of the current US federal debt can be attributed to the Bush-era tax cuts: Wikipedia`s page on the US Federal Budget has a nice breakdown based on a Pew Center report released in April of this year:

Both economic conditions and policy decisions significantly worsened the debt outlook since 2001, when large surpluses were forecast for the following decade by the CBO. The Pew Center reported in April 2011 the cause of a $12.7 trillion shift in the debt situation, from a 2001 CBO forecast of $2.3 trillion cumulative surplus by 2011 versus the estimated $10.4 trillion public debt in 2011. The major drivers were:

Revenue declines due to two recessions, separate from the Bush tax cuts of 2001 and 2003: 28%
Defense spending increases: 15%
The Bush Tax cuts (EGTRRA-2001 and JGTRRA-2003): 13%
Increases in net interest: 11%
Other non-defense spending: 10%
Other tax cuts: 8%
Obama Stimulus: 6%
Medicare Part D: 2%
Other reasons: 7%[2]

Lots of great analysis on that page - Are budget deficits driven by a "revenue problem" or a "spending problem"? Could tax increases suffice to balance the budget? Can the U.S. grow its way out of the debt problem if the economy is plied with enough Republican-supported tax cuts? That sort of thing. And I found this quote in the "Describing the budgetary challenge" section quite insightful:

Fareed Zakaria said in February 2010: "But, in one sense, Washington is delivering to the American people exactly what they seem to want. In poll after poll, we find that the public is generally opposed to any new taxes, but we also discover that the public will immediately punish anyone who proposes spending cuts in any middle class program which are the ones where the money is in the federal budget. Now, there is only one way to square this circle short of magic, and that is to borrow money, and that is what we have done for decades now at the local, state and federal level...So, the next time you accuse Washington of being irresponsible, save some of that blame for yourself and your friends."

----------------------

Decade of Stimulus Yields Nothing But Mountain of Debt; What to Do About It?

Is there any kind of stimulus the US did not try in the last 10 years?

1. We had 1% interest rates from Greenspan fueling housing.
2. We had wars from Bush and Obama fueling defense industry employment.
3. We had two rounds of Quantitative easing from the Fed.
4. We had cash-for-clunkers.
5. We had two housing tax credit packages.
6. We had an $800 billion stimulus package from Congress for "shovel-ready" projects.
7. We had stimulus kickbacks to states.
8. We had HAMP (Home Affordable Mortgage Program).
9. We had bank bailouts out the wazoo to stimulate lending.
10. We had Small Business lending programs.
11. We had central bank liquidity swaps.
12. We had Maiden Lane, Maiden Lane II, and Maiden Lane III
13. We had Single Tranche Repurchase agreements
14. We had the Citi Asset Guarantee
15. We had TALF, TARP, TAF, CPFF, TSLF, MMIFF, TLGP, AMLF, PPIP, and PDCF
16. We had so many programs the Fed must have run out of letters because they were not given an acronym.

That is a partial list. Other than bailing out bondholders what exactly do we have to show for any of it? The one-word answer is "debt".

Decade of Stimulus Yields Nothing But Debt

Bloomberg's Caroline Baum wrote an excellent article on this theme. It was so good I asked if I could reproduce it in entirety.

With permission please consider Decade of Stimulus Yields Nothing but Debt: Caroline Baum

When George W. Bush took up residence in the White House in January 2001, total U.S. debt stood at $5.95 trillion. Last week it was $14.3 trillion, with $2.4 trillion freshly authorized by Congress Tuesday.

Ten years and $8.35 trillion later, what do we have to show for this decade of deficit spending? A glut of unoccupied homes, unemployment exceeding 9 percent, a stalled economy and a huge mountain of debt. Real gross domestic product growth averaged 1.6 percent from the first quarter of 2001 through the second quarter of 2011.

It doesn’t sound like a very good trade-off. And now Keynesians are whining about discretionary spending cuts of $21 billion next year? That’s one-half of one percent. And it qualifies as a “cut” only in the fanciful world of government accounting.

My Comment: Full text of Baum`s piece is worth a read, but among her and Mish`s suggestions, one omission I found glaring: How about downsizing the federal government to, say, roughly year-2000 levels? (That is, by roughly half, as the above-linked Wikipage on the US Budget details). Of course that would involve goring just about everyone`s sacred cows: We would need to slash defense spending, healthcare spending, raise eligibility ages for Social Security and Medicare, and so on. Wewould also need to stop warmongering and acting as the world's policeman, and would need to radically roll back the huge state security apparatus that has steadily grown since the 9/11/2001 attacks. On the revenue side - and note that this needed because even if the "draconian" downsizing of government spending (and government in general) were made sufficient to balance the current fiscal equation, the concomitant reduction in GDP would negatively impact tax revenues - government workers may be economic parasites, but they pay taxes - and of course it not sufficient long-term to merely current current-year budgets: One needs to run a primary surplus for at least a decade to actually make a dent in the accumulated debt. So on the revenue side, one must let the Bush-era tax cuts on the wealthy expire, close the gaping loopholes in corporate taxation, and in general radically reform and simplify the entire tax code.

So there is the overall prescription for the painful, long-term medicine we must take - Not that I have any confidence whatsoever that even modest parts of the overall prescription will actually be undertaken. Not voluntarily, at least.

[Zeta-Flux]

Dear ewmayer,

In that table, what are the "other tax cuts" that account for 8%? That nearly equals the Bush tax cuts.