US Deficit Fixes Needed ‘Fairly Soon,’ CBO’s Elmendorf Says – The U.S. needs to cut its budget deficit soon through changes in spending and tax policies to reduce the risk of a fiscal crisis, according to the head of the nonpartisan Congressional Budget Office. Changes to U.S. fiscal policy “need to be large, need to affect programs that are popular and tax payments that people make, and it will need to be enacted fairly soon,” Douglas Elmendorf, director of the congressional office that estimates the impact of legislation on the federal budget, said today. Elmendorf joins economists and policy makers such as Federal Reserve Chairman Ben S. Bernanke in warning about risks to the economy from annual budget deficits running at near 10 percent of gross domestic product for the third year in a row. “If we do not change our course we will let our past crush our future in a very fundamental budgetary sense,”
Yellen Speech May Offer `Proxy’ For Plan to Unwind Fed’s Asset Purchases – Federal Reserve Vice Chairman Janet Yellen presented a possible timeline of about seven years before the Fed’s balance sheet is restored to normal levels, while saying the central bank’s asset purchases will end up creating 3 million jobs by 2012. Yellen, speaking in Denver on Jan. 8, referred to a model created by Fed economists that assumes the central bank will complete its second round of large-scale Treasuries purchases within a year. The Fed’s balance sheet would stay “elevated” for two years before returning to a normal size over five years, she said, alluding to the economists’ research.
ECB gives Portugal temporary lifeline, traders say – The European Central Bank threw Portugal a temporary lifeline on Monday by buying up its bonds, traders said, as market and peer pressure mounted for Lisbon to seek an international bailout soon. A senior euro zone source told Reuters on Sunday that Germany, France and other euro zone countries were pushing Portugal to seek an EU-IMF assistance program, following Greece and Ireland, in a bid to prevent contagion spreading to much larger Spain, the fourth biggest economy in the euro area. The Reuters report drew official denials from German Chancellor Angela Merkel on down, but economists and market analysts said it was only a question of time before Lisbon too would need a rescue.
FTAlphaville: Casualties of the currency war – That’s a Nomura chart showing the Brazilian government as the biggest ‘loser’ of the currency war. You know the war we’re talking about: Brazil was the first and loudest to declare it in 2010. Oops. As Nomura remind, that war’s been about emerging markets trying to prevent capital inflows from putting a rocket under a) inflation b) their currencies, now that US quantitative easing has restarted a worldwide hunt for yield. It’s taken central bank policies to an odd, ‘post-modern’ place compared to the traditional tools they use. The problem that we can now thank Brazil for discovering is that it’s become difficult to manage a) and b) simultaneously, especially with generally surging commodity prices worldwide. The chart above brings together changes in inflation before and after quantitative easing was signalled, changes in inflation forecasts, both nominal and real exchange rate changes, and changes in central bank policy rate forecasts and one-year swap rates.
Beyond the Eternal Food Fight –Almost every time global prices surge and the media and public reach out to analysts for meaning, a decades-long food fight resumes. The latest price surge is clearcut, bringing food costs up to or past peaks reached in 2008. With populations and appetites growing, with climate changing, Is this the edge of the cliff or just another bump in a long, climbing road? The combatants:
Christie May Cut Medicaid as $10.5 Billion New Jersey Budget Deficit Looms – New Jersey Governor Chris Christie gives his first State of the State speech tomorrow after saying he may cut Medicaid and employee benefits to eliminate a $10.5 billion budget deficit in the second-wealthiest U.S. state. Christie, who took office a year ago, said he’ll tell lawmakers in his address that New Jersey remains in a financial crisis and they need to maintain fiscal controls as employment and revenue recover slowly from the longest recession since the 1930s. The Medicaid program “is one of the things we’re going to have to look at,” Christie said in a Jan. 4 interview. The 48-year-old chief executive joined 28 other Republican governors asking President Barack Obama and congressional leaders last week for permission to reduce Medicaid outlays below federally prescribed levels. New Jersey budgeted $3.1 billion for Medicaid in the fiscal year ending June 30 and was scheduled to receive $1.1 billion in federal stimulus funding, according to the Treasury Department.