Unintended Consequences

Unintended Consequences – Correct me if I’m wrong, but I seem to remember that one of the reasons for QE2 was to lower rates on the longer end of the US yield curve. Clearly, that has not happened? Today we look at come of the unintended consequences of monetary policy, turn our eyes briefly to consumer debt, and wonder about deflating incomes.Look at the chart below. The yield on ten-year US bonds has been rising since the beginning of QE2. But it is not just US bonds; European and UK bonds are moving up as well. This has also meant that mortgage rates in the US are up almost a half percent in the last few months. That certainly has not helped housing prices or sales, as it makes housing less affordable. But it is not just the US and UK. Look at what is happening to German bonds, supposedly the safest in Europe. They are up about as much as their counterparts. And then we look at Japan and we see the same phenomenon. Japanese real rates going up? Really? What is up with that?


Moody’s may shift U.S. rating outlook on tax package –  (Reuters) – Moody’s warned on Monday that it could move a step closer to cutting the U.S. Aaa rating if President Barack Obama’s tax and unemployment benefit package becomes law.The plan agreed to by President Barack Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said. A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months. For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasuries, which currently rank as among the world’s safest investments. "From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth," Moody’s analyst Steven Hess said in a report sent late on Sunday. After Obama announced his plan, Treasury prices fell sharply in volatile trade last week and yields have hit a six-month high, in part due to concerns over the effect the package will have on government debt levels.


The Federal Budget’s Future In 2011 Looks Grim – My last Roll Call column for this year predicts what’s ahead for the federal budget in 2011.  The full column is below, but the short answer is…nothing good, especially if your expectations were raised in recent weeks by commission reports, election results, and promises to do better. My seven main predictions are:
  1. Gridlock supreme all year long on anything having to do with spending, revenues, deficit, and debt
  2. No legislated reductions in the deficit
  3. Bowles-Simpson quickly fades into oblivion
  4. No fiscal 2012 budget resolution
  5. Earmarks will thrive
  6. Government contractors will have far more influence than anyone has ever imagined
  7. Wall Street is going to be surprised by #s 1-6

As Senate Sets Up to Pass Tax Cut Bill, House Blows Hot Air – After an 83-15 vote on the motion to proceed in the Senate, final passage could apparently come as soon as today. Tom Coburn, who voted no, isn’t typically willing to cede all the post-cloture time to speed things along, and he could hold out until Friday if he so chose, but the indications are that he won’t. In case you were wondering how serious he was about stopping the bill. The real problem comes in the more partisan House, where Democrats are doing a lot of jawing about changing the bill. Mitch McConnell laid down a familiar marker by saying that the House can’t change one word of the bill or the deal’s off. This is what’s known as “bipartisan compromise.”  If the House Democratic Leadership decides to make partisan changes, they will ensure that every American taxpayer will see a job-killing tax hike on January 1st,” McConnell said in the statement. McConnell may not have the support of his own party in the House. Republicans in the grassroots have become more strident against the bill in recent days, and noted weather vane Mitt Romney has an op-ed today where he slams the bill, mostly because it doesn’t make the Bush tax cuts permanent and because it adds to the deficit (yeah, I don’t get it either).


Romney: Tax deal, bad deal – Death and taxes, it is said, are life’s only two certainties. But in the wake of President Obama’s tax compromise with congressional Republicans, only death retains the status of certainty: The future for taxes has been left up in the air. And uncertainty is not a friend of investment, growth and job creation. The deal has several key features. It reduces payroll taxes, extends unemployment benefits and keeps current tax rates intact. So far, so good. But intermixed with the benefits are considerable costs of consequence. Given the unambiguous message that the American people sent to Washington in November, it is difficult to understand how our political leaders could have reached such a disappointing agreement. The new, more conservative Congress should reach a better solution. The deal keeps current tax rates from rising to pre-Bush era levels for two years. But in 2013, unless Congress acts again, rates will increase dramatically.

Tax Cut Deal Wildly Popular – ABC News and the Washington Post have the first poll out about public reaction to the Obama tax cut deal. ABC created a colorful chart of the results, so I’ll link to them: Support for the overall package was extremely high: 68% among Democrats and Independents and 75% among Republicans. But the breakdown in the chart above ought to give all of us lefties pause. It’s great to see that extending unemployment benefits polled higher than any other element of the plan, but not so great that bonus tax cuts for the rich polled considerably higher than cutting payroll taxes. Obviously wording can be an issue in polls like this, and it’s notable that the tax cut question didn’t provide a choice of supporting only the broad cuts but not the additional cuts for the rich, and also notable that the estate tax question didn’t mention that estates under $3.5 million would be tax free in any case. On the other hand, the tax cut question specifically called out "wealthy people" and the estate tax question specifically mentioned an exemption of $5 million. So it’s not as if people didn’t have some idea of just whose taxes were being cut here.

Wall Street Set For Best Two Years Ever, Thanks To Bailout – Two agonizing years for the U.S. economy have been some of the best years on record for Wall Street. After first receiving billions in taxpayer aid, and now ultracheap funding from the Federal Reserve, Wall Street banks are on track to wrap up two of their best years ever. Even if the current quarter only matches the third in revenue, this year will be the second best ever for Wall Street, capping a two-year winning streak fueled by government dollars, Bloomberg reports. With more than $100 billion in their pockets from the Troubled Asset Relief Program, which offered them hundreds of billions more, the five biggest investment banks — Goldman Sachs, JPMorgan, Bank of America, Citigroup and Morgan Stanley — have seen their revenue this year climb to $93.7 billion. "This is a once-in-a-lifetime opportunity for most of these banks, and I think they’ve recognized it as that," finance professor Charles Geisst told Bloomberg.

The Payroll Tax Cut Versus Making Work Pay, in One Chart – Nancy Altman of Social Security Works has created a chart that shows just how imbalanced this tax cut deal is because of the use of the payroll tax cut. What I didn’t remember, until I saw this chart from Nancy Altman, is that the Making Work Pay Tax cuts phase out at high income levels. It starts phasing out at income of $75,000 or more, and phases out completely at $95,000 or more. So those tax cuts were really concentrated on lower levels of income. Almost the opposite is true with the payroll tax cut. While it does phase out above $106,800, it increases as a percentage of income all the way up to that. So while everyone gets the same percentage-of-income benefit on the first $106,800, as a real dollar amount it’s much higher for those at high incomes. And at low incomes, it doesn’t benefit the worker at the same rate as making work pay.

U.S. Posts $150.4 Billion November Budget Deficit – —The U.S. government ran its 26th straight monthly budget deficit in November amid wrangling over a package that would extend big tax cuts to Americans trying to recover from recession.  The Treasury Department, in its regular budget monthly statement, said the government spent $150.4 billion than it collected in the second month of fiscal 2011.  Economists surveyed by Dow Jones Newswires had expected a shortfall of $126.5 billion. November is traditionally a month for deficits.  The Treasury report, detailing the government’s spending programs, prompted an economic research firm, Macroeconomic Advisers, to lift its forecast for economic growth from October through December by four-tenths of a percentage point, to 2.7%.

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