notes on the week ended Sept 24th

if you thought the resolution of the debt ceiling impasse put threats to shut down the government behind us, you’re out of luck…it kinda snuck up on me, too, because i forgot the fiscal year ends on sept 30th, and a new budget for the new fiscal year has yet to be considered…so in much the same pattern as they budgeted half of last year, when the government was funded in 7 separate fits & starts, they planned to pass another continuing resolution to fund the government under the same budget as last years until Nov 18th, when the fiscal merry-go-round would take another spin…but the trouble facing congress with a straight up continuing resolution now is that FEMA, the disaster relief agency, has run out of money; the agency has already held up thousands of longer-term rebuilding projects — ie, repairs to sewer systems, roads and bridges in spring flood & tornado ravaged areas — to provide immediate relief to those flooded out by hurricane Irene & tropical storm Lee, and they’ll be totally out of money next weeknormally, disaster relief funding is added to the budget automatically as needed; however, this time the tea party contingent demanded offsetting spending cuts, which they want to take out of a loan program to help car companies build fuel-efficient vehicles & other energy funding, in order to approve adding an estimated $3.65 billion (less than the $6.9B requested) of needed funds to the disaster relief agency…a package was put together by boehner & cantor in the house, & on the first go round 48 republicans joined  the democrats in defeating it (some because they wanted more disaster aid for their districts, some cause they wanted larger cuts)…a second try with deeper cuts finally passed the House on friday, but its been called “dead on arrival” in the democratically controlled senate…oh, did i mention that congress is planning on going on recess this coming week to celebrate the jewish new year?

as promised, obama revealed his “Plan for Economic Growth and Deficit Reduction” on monday; also titled “Living Within our Means and Investing in our Future” (80pp PDF), there seemed to be some confusion as to what it actually was, as it was variously reported as a $4 trillion debt reduction plan, a debt reduction plan with $3 trillion in savings, and $1.5 trillion of new taxes…with different figures quoted in the press release & by the president in his speech, the confusion is understandable, as depending on what budget baseline is used, the bottom line results can be different; for instance, this white house plan claims a trillion of savings over 10 years from the winding down of the wars in the middle east, and claims a deficit reduction for the tax that would be imposed on those making over $250,000 when that part of the bush/obama tax cuts expire; most budget wonks would consider current law, & the expiration of the bush/obama cuts, to be included in the baseline, so to extend the tax cuts for those earning less than $250K would be scored as increasing the deficit…the plan did leave out the previously floated increase in the Medicare eligibility age, & although it claims it can cut $320B in “waste, fraud & abuse” from medicare & medicaid, it doesnt mention social security…the centerpiece of the plan, and the only thing that’s really new, goes by the name of the “Buffett Rule” which will limit tax deductions to 28% and raise rates on capital gains for millionaires so that they pay taxes at the same rate as the rest of us; the conservative tax foundation ran four sample tax returns with adjusted gross incomes from $240K to $10 million as they would change under the rule, so in looking at those, you can get an idea how much the limit on deductions raise taxes of those in the high income brackets…what you have to understand, though, is that this is not really a budget proposal that will pass congress, its a campaign document; obama is taking a populist “tax the rich” stand, which he’ll likely be using in speeches from now till next november as he tries to paint the republicans as defending lower taxes for the wealthy…so with the silly season upon us, it’s hard to imagine any that any fiscal policy will be forthcoming that could make a serious dent in unemployment or the deteriorating condition of the social safety net in the foreseeable future…

so we’re left with hoping something beneficial will come from monetary policy, and it was the Fed’s decision during their two day FOMC meeting to swap $400 billion of short term treasury notes for longer term bonds, dubbed “operation twist” that was the major economic news of the week…this wont be an expansion of the Fed’s holdings, or another round of “quantitative easing” as some who believe in the effectiveness of monetary policy were hoping for, rather, the intention is that by buying Treasuries with maturities of 6 to 30 years they will lower interest rates for all those long durations, and especially for mortgages; indeed, it was likely anticipation of this well-telegraphed action that was the likely cause of the record low mortgage rates we’ve seen over the past few weeks… actually, it was what preceded & followed the meeting that was more newsworthy; first, there was an attempt by the republican leadership to dissuade the Fed from taking any action, as just before the meeting was to get under way a letter was sent to bernanke by mcconnell, boehner, kyl & cantor which basically stated that the Fed should take no further action to lower long-term interest rates or otherwise stimulate the economy; this was widely panned as an attempt to politicize the Fed & interpreted on the left as a ploy to keep the economy lousy through the election…then, one word in the Fed’s press release following the FOMC meeting was widely interpreted as the cause for the 600 point selloff in the stock market; significant, as in “there are significant downside risks to the economic outlook”; now far be it from me to guess why the market moves one way or the other, but if investors had been seeing the economic outlook through rose colored glasses until the Fed threw cold water on them, we’re in a world of hurt…

there are some possible downsides to the Fed’s “operation twist”; the most obvious is that retirees and pension funds will be stuck with low returns on fixed-income investments for the foreseeable future; there’s already been talk of many older workers forced to work past normal retirement age because expected returns on their savings hasnt materialized, and ive seen estimates that pension funds, most of which at still operating with funding assuming a 7% or 8% annual return, are underfunded by over a trillion to as much as 3 trillion dollarsretail banking with also take a hit with a flat yield curve, as the differential between what banks charge for loans and their cost of borrowing will shrink (not missed by the market, as banks stocks were hit worse than other sectors); some more subtle contrary suggestions are that negative real interest rates may actually reduce consumption as people save more to achieve their personal goals, and the possibility that companies will borrow defensively & sit on more cash due to the low negative carry of doing so with a flat yield curve…

there werent many economic reports this week that i normally follow, but to quickly mention the few that were announced; existing home sales were up 7.7% in august from july on a seasonably adjusted basis, which was better than expected; new home starts were down 5% in august for july on that same basis, and first time claims for unemployment at 423,000 were down from last week’s revised upward number, leaving the 4 week average virtually flat at 421,000…the IMF was out with its latest edition of its “World Economic Outlook” and US growth was forecast to be below 2% through 2012, and the growth forecast for the rest of the world was slashed as well...the links on my GGO blog should cover the other news pretty well, with environmental, energy & european news links following those to what ive introduced here & other domestic economic stories…

the above is my weekly commentary that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me

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