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Euro’s Worst to Come as Trichet Fails to Calm Crisis, Top Forecasters Say – The most accurate foreign-exchange strategists say the euro’s worst annual performance since 2005 will extend into next year as the region’s sovereign-debt crisis saps economic growth.  Standard Chartered Plc, the top overall forecaster in the six quarters ended Sept. 30 based on data compiled by Bloomberg, predicted the euro may weaken to less than $1.20 by mid-2011 from about $1.33 today. Westpac Banking Corp., the second most accurate, is “bearish in the short term,” and No. 3 Wells Fargo & Co. cut its outlook at the end of last week.  The 16-nation currency’s first weekly gain against the dollar since Nov. 5 may prove short-lived amid mounting concern that more nations will need rescues. European Central Bank President Jean-Claude Trichet delayed the end of emergency stimulus measures last week and stepped up government-debt purchases as “acute” market tensions drove yields on Spanish and Italian bonds to the highest levels relative to German bunds since the euro started in 1999.

Chart of the day: U.S. taxes – Stephen Culp has another striking chart today. This chart should be ingrained in the mind of anybody who cares about fiscal policy. The main things to note:
  • Federal taxes are the lowest in 60 years, which gives you a pretty good idea of why America’s long-term debt ratios are a big problem. If the taxes reverted to somewhere near their historical mean, the problem would be solved at a stroke.
  • Income taxes, in particular, both personal and corporate, are low and falling. That trend is not sustainable.
  • Employment taxes, by contrast—the regressive bit of the fiscal structure—are bearing a large and increasing share of the brunt. Any time that somebody starts complaining about how the poor don’t pay income tax, point them to this chart. Income taxes are just one part of the pie, and everybody with a job pays employment taxes.
  • There aren’t any wealth taxes, but the closest thing we’ve got—estate and gift taxes—have shrunk to zero, after contributing a non-negligible amount to the public fisc in earlier decades.

If you were structuring a tax code from scratch, it would look nothing like this. But the problem is that tax hikes seem to be politically impossible no matter which party is in power. And since any revamp of the tax code would involve tax hikes somewhere, I fear we’re fiscally doomed.

The Rough Common Ground – I’ve seen two sets of policy proposals coming from the liberal-leaning/progressive groups as alternative visions of how the deficit can be reduced–one by the Institute for America’s Future’s “Citizens’ Commission” (whose members include Dean Baker, Robert Borosage, Robert Kuttner, and Robert Reich) and another by the “Our Fiscal Security” project, a partnership of Demos, the Economic Policy Institute, and the Century Foundation.  I actually like a lot of the policy substance in these more liberal-leaning packages when I muster up my “loving kindness”/yogi heart and am able to see past the deficit-hawk hatred and character assassination. Meanwhile, there have been plenty of critics from the opposite, conservative-leaning side who have been arguing that the bipartisan plans raise taxes too much; just see this critique from the Heritage Foundation or anything that Grover Norquist (or his organization, Americans for Tax Reform) has said.  Of course, Congressman Paul Ryan, the incoming House Budget Committee chairman, has had (well before these commissions’ proposals) his own fiscal sustainability plan that keeps taxes as a share of the economy low enough–below 19 percent–to please these conservative groups and his party’s caucus.

PBGC helped preserve pensions for 360000, as deficit widened in FY 2010 – In the past year, the Pension Benefit Guaranty Corporation (PBGC) took over failed pension plans covering nearly 109,000 workers and retirees, and helped prevent the termination of plans covering about 250,000 others, according to the Agency’s fiscal year 2010 annual report. At the same time, the PBGC’s deficit widened to $23 billion during the fiscal year, an increase from $22 billion in fiscal year 2009. The report also noted that in the 2010 fiscal year the PBGC paid $5.6 billion in benefits to 801,000 retirees whose plans had failed. Nearly 700,000 other participants in those plans will receive benefits when they reach retirement age. The PBGC annual report provides both performance and financial information for fiscal year 2010, which ended September 30, 2010.

India, the IMF’s Poster Child for Capital Flows – It’s always one step forward, two steps back with the IMF moving into a post-Washington Consensus age, it seems. We’ve talked about it becoming kinder and gentler with regard to conditionalities–or maybe not. Today, let’s revisit the tolerance of states implementing capital controls in contravention of the Washington Consensus–or maybe not. IMF Managing Director Dominique Strauss-Kahn seemed to raise more questions than answers in his recent speech in Delhi lauding India’s approach to the subject matter. Unlike a certain even more populous neighbour, India does not actively clamp down on capital inflows (or at least so far). Unlike a certain nominally socialist regime, nor does it try to manage the level of its currency. So, for what it’s worth, this latest iteration of DSK is broadly in the Washington Consensus mould. (Hear that, China?)
The BridgeThe Western elites used the industrial revolution and the fossil fuel heritage to organize the amassment of a vast wealth and power surplus. Their goal was always to steal as much of this surplus as they could, using the wealth and power they amassed to organize themselves to use Peak Oil itself as the ultimate opportunity to steal the rest.  First they used the power to force the Global South to pay the costs of the West’s post-war affluence. Cheap oil and the fact that non-Westerners were providing most of the resources, doing most of the work, and bearing most of the costs, enabled the West to temporarily distribute the fruits of this crime fairly widely among the populace. Out of that we saw the temporary rise of the mass middle class. As the oil crunch began in the 1970s, this middle class was carried further by the exponential debt system. Now that cheap oil and exponential debt are over, the elites intend to clutch at 100% of the deteriorating wealth and power, forcing all the austerity of the end of cheap oil onto the Western peoples, just as they stole all the surplus in the first place. Permanent mass unemployment in itself is an intentional policy goal. It’s part of the winding down of the “growth” economy which will no longer be able to grow, post-Peak Oil.
 
The Jobs Picture – The clarion cries of "recovery" cut painfully through the crisp pre-Christmas air while the now-perpetually unemployed huddle in their tents around the Sacramento delta, and the state AGs slug it out with the foreclosure goons, and not a few mortgage payment drop-outs enjoy luxury living in McMansions with no monthly carrying costs, and the minions of Goldman Sachs (with fellow squids) groom their beaks waiting for the massive chum slick of bonus checks to be dropped by helicopters in this the third holiday season since Wall Street committed suicide by an overdose of Ponzi.    It’s pathetic to hear the wan cry of "recovery" issued by the high priests and tribunes of this land. Do the president and his train of wizards really suppose that all the necessary pieces are in place to re-start the economic dynamics of, say, 2003? A million busboys and lawn service lackeys lining up for half-million dollar liar loans at the Countrywide office? BCA, Citi, and all the other big banks pawning off bundles upon bundles of these worthless obligations to insurance companies, pension funds, foolish endowment fund managers and any other reckless entity desperate for yield? A hyperbolic consumer economy pyramid resting on a base of empty promises to repay?  Sorry. There’s no way the USA can ever "recover" to that lush breeding ground of swindling, fraud, and childish irresponsibility.
Sovereign insolvency and illiquidity – If a country has a debt/GDP ratio of 100%, and is paying 9% interest, and nominal GDP is not rising, then it’s got a solvency problem. It needs to run a budget surplus of 9% of GDP just to stop the debt/GDP ratio rising further. But why would a country ever be paying 9% interest and have 0% nominal GDP growth? By David Beckworth’s simple, crude, but nevertheless useful measure of the tightness of monetary policy — the gap between nominal interest rates and expected nominal GDP growth rate — a gap of 9 percentage points is very tight monetary policy. No country that had control over its own monetary policy would set monetary policy that tight. Ireland has a solvency crisis, but only because it has a liquidity crisis. Ireland does not control its own monetary policy. Money is the most liquid of all assets. If monetary policy were less tight, so the gap between nominal interest rates and nominal GDP growth were 1%, a country with a 100% debt/GDP ratio would only need a budget surplus of 1% of GDP to prevent the debt/GDP ratio from rising. That’s doable. That country is solvent.
 
A deal on the horizon? – RECENT economic data out of America has been pretty decent (with the continuing exception of that from labour markets), but recovery still looks frail.  And while the president’s deficit commission has generated a lot of headlines, the bigger short-term economic threat continues to be the looming end of a number of stimulative programmes. One has already begun to phase out; as of November 30, the federal emergency unemployment benefits programme has expired, which means that a steady stream of jobless workers are now cycling off benefits. Some 2m may stop receiving cheques by the end of the year. Another blow sits just on the horizon. All of the Bush tax cuts will expire at year’s end absent action from Congress. In the short term, this would mean a fiscal adjustment of around 2% of GDP—a sizable impact on an economy as weak as America’s. But it seems a deal may be near on both the tax cuts and unemployment insurance. At the moment, it looks like a compromise deal could be hashed out in which all tax cuts (and not just those for households earning less than $250,000) will be temporarily extended, as will emergency unemployment benefits.
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