As Izzy said recently, ‘deficit’ continues to be a dirty word in the US (despite *those* findings…) which makes this paragraph from Andrew Smithers either raunchy or worrying:
As retained profits of corporate business in Q2 2013 amounted to 2.3% of GDP, it seems likely that they would fall to near zero if the CBO’s forecast for the fiscal deficit were to prove accurate and such a fall is likely to be accompanied by large falls in dividends.
Can you call this a shakedown? Probably not.
Nomura’s Richard Koo is back, suprising us with another note following quickly on his last. But we can see how it happened. Heck, some people are suggesting that the West’s balance sheet recession is over. Read more
Here’s a distinction you tend not to see on the front pages of the sovereign crisis…
Cash-based sovereign accounting: recognising a cost only when cash changes hands. Accrual-based: recognising a cost when it’s incurred in the first place. Read more
God, but Ireland must simply hate Eurostat. The pesky statistics agency keeps forcing it to recognise all of those expenses it would otherwise prefer to ignore.
And the agency is at it again. In a report released Monday Eurostat announced that Ireland was the proud owner of the biggest budget deficit in the euro area in 2011 – a deficit inflated by capital injections into the country’s broken banks. Read more
George Osborne is recruiting international support for his unyielding stance on deficit cutting. In an article published in the FT on Monday, Mr Osborne calls for “hard decisions on spending, entitlements and taxation in countries with large budget deficits”. The article is co-authored with the finance ministers of Australia, Canada, Singapore and South Africa. The FT says the article comes at the same time as two reports, published on Monday, suggest that the UK economy will remain stagnant in the near future. In a survey by the Chartered Institute of Personnel and Development and KPMG, the professional services firm, the balance of employees planning to increase staffing levels has shifted from positive to negative. The Monthly Business Trends Indices published by BDO, an accounting firm, was also gloomy. The report, which is prepared by the Centre for Economics and Business Research and aggregates other business surveys, documents continuing pessimism in both manufacturing and services.
California is preparing for a round of deep cuts in public spending as the state seeks to address a $9.6bn budget deficit with a new financial plan that does not contain any tax increases, reports the FT. The new budget, which includes $650m of cuts in support for the state’s universities, was agreed by Jerry Brown, California’s governor, and the Democrats who control the state legislature. It was struck just days from the start of the state’s new fiscal year. Bloomberg adds that California lawmakers will begin voting today on the budget, which relies on $4bn in newly projected revenue but needs only Democratic votes to pass.
Republicans in the House of Representatives have splintered over plans to reform Medicare, the healthcare programme for the elderly, entering new budget talks in apparent disarray, the FT reports. A month ago, House Republicans proposed dramatic changes to Medicare as part of their 2012 budget, a politically risky blueprint designed to highlight the party’s determination to curb the mounting US debt load. But this week, just as the White House and lawmakers began fresh negotiations on a deal to raise the US debt limit – Republicans sent conflicting messages on whether they would continue to push for Medicare reform. The LA Times says Republicans are acknowledging that their plan to privatise Medicare isn’t moving forward any time soon as talks over how to shrink the federal deficit continue.
Ignore, for a second, Standard & Poor’s warning of political impasse on the US budget, or its talk of contingent liabilities like student loans and the financial system. That’s all short- to medium-term.
Focus instead, on the longer-term — those unfunded obligations. Read more
Republicans in the House of Representatives vowed to present a long-term budget proposal that would cut more than $4,000bn from US deficits over the next decade, exceeding the target set by a bipartisan fiscal commission appointed by Barack Obama, the FT says. With details expected to be released on Tuesday, Paul Ryan, chairman of the House budget committee, said his party’s plan would put the brakes on the growth of Medicare and Medicaid, the two largest government healthcare programmes, while proposing deep cuts and caps to spending. The WSJ says the plan would essentially end Medicare.
The Republican plan to slash government spending by $61bn in 2011 could reduce US economic growth by 1.5 to 2 percentage points in the second and third quarters of the year, a Goldman Sachs economist has warned, the FT says. The note from Alec Phillips, a forecaster based in Washington, was seized in the ongoing US budget fight by Democrats as validating their argument that the legislation approved by the Republican-led House of Representatives last Saturday would do significant damage to the US recovery. ABC News has a copy of the report.
Republican leaders in the House of Representatives are in the early stages of crafting a new short-term bill to fund the US government, congressional aides said, in a sign that they are open to a compromise that would avoid a shutdown of the federal government, according to the FT. On Saturday the House passed an aggressive budget measure for the rest of the fiscal year that includes $61bn in spending cuts, which has been criticised by Democrats and the White House as too draconian. But only a few days later it has emerged that Republican party leaders are preparing a bill that would fund the government for a much shorter period, with fewer spending cuts.
From RBC Capital Market’s Michael Cloherty:
As we discussed last week, the Fed is likely to start shrinking its balance sheet by allowing maturing Treasuries to run off as early as the fourth quarter. When the Fed redeems a Treasury, the Fed debits the Treasury’s account at the Fed. The Treasury keeps the majority of its tax collections in bank accounts across the country—when the Fed debits the Treasury account, the Treasury instructs those banks to wire cash to the Treasury account at the Fed, causing the Fed to debit that bank’s reserve account and credit the Treasury account. So, Fed redemptions mean that banks have fewer reserves and the Treasury has less cash.
José Luis Rodríguez Zapatero, Spanish prime minister, has issued a hardline warning to the country’s autonomous regions that they must curb public spending and debt creation so that Spain can recover from its sovereign debt crisis, the FT reports. After decades of government concessions to regional demands, Mr Zapatero said in a Financial Times interview that the central government would strictly enforce deficit limits and act against any region that stepped out of line. “At the end of the day, who is accountable, who is responsible?” he asked. “It’s the central government, isn’t it? And we have to spearhead, lead the way forward with the control of public spending for the autonomous regions. And they have to deliver. They have to fulfil those obligations, because if they don’t, the government will act.”
David Rosenberg’s gone all cartoony.
The Gluskin Sheff analyst seems to have given up on on words and is instead using charts — and Loony Tunes — to illustrate his (very salient) points. Read more
Like its predecessor, the 112th Congress has proven it’s possible to shoot oneself in the foot while putting it in one’s mouth.
House Republicans said in their Pledge to America that: Read more
Surprise! EU members aren’t that good at economic forecasting.
And they’ve only gotten worse in the recent debt crisis. Read more
Whatever happened to UK doom and gloom eh?
Monument Securities’ Marc Ostwald is here to serve on Friday morning — with a hefty dose of good ol’ fashioned British grumpiness — and bond vigilantism. Read more
Here’s a novel solution to the problem of excessive public debt: democracy.
Presenting the idea of vote-sharing bonds, via Hans Gerbach of the ETH in Zurich. Read more
We all know Dick Bove ♥ banks — sometimes to a fault.
But the Rochdale Securities analyst brings up an interesting QE2-related point in his latest note. The Federal Reserve’s first round of quantitative easing, he reckons, failed because it ended up creating a partial liquidity trap, with banks just sitting on all their Fed-given funds instead of lending them. This wasn’t a huge problem of course, as the original QE was more about repairing the financial system than boosting the economy — but it does rather beg the question; what is QE2 all about? Read more
This probably wasn’t what Ireland’s prime minister was going for when he took to the stage to defend the country’s deficit-decimating budget cuts on Wednesday:
There’s a bit of an interesting situation developing in Chinese public finance.
According to analysts at Standard Chartered, based on current trends, the government’s revenues could fall short of expenditures by only CNY300-500bn, rather than the CNY1,050bn expected in the budgeted deficit. Read more
Memo to financial regulators who want to ban or limit CDS:
Fitch Solutions finds that the liquidity of a sovereign’s credit default swap (CDS) is highly correlated with the level of the underlying bond yield. Where sovereign CDS liquidity is high, bond yields tend to fall, thus reducing the cost of funding for sovereigns. Conversely, bond yields increase when liquidity in the CDS market falls off. Liquid CDS markets provide investors with the ability to hedge higher risk debt, thus playing an important factor in driving demand for the underlying cash instruments.
Forget central government debt, what about local?
Out today — a note by Morgan Stanley’s European economics team, led by Daniele Antonucci, discussing ‘non-central government liabilities and budgets.’ Read more
The 2010 US federal deficit was a little under $1,300bn according to Thursday estimates by the Congressional Budget Office, the Associated Press reports. The CBO puts the deficit about $125bn below the $1,420bn record posted for 2009, according to AP. Separately, former Fed chairman Alan Greenspan is quoted by Bloomberg describing the deficit as “scary,” adding the US government needs to cut spending on entitlements.
Wandering around Dublin this Friday? Got a spare few hours and €55? Tired of all the doom and gloom surrounding Ireland’s economy, and proffered on sites such as this one?
Then you might be interested in the below: Read more
Is there enough money in the world to finance US debt?
It’s not an FT Alphaville rhetorical, but a question asked by economist Allan Meltzer last year. We bring it up because it’s also the basis of a new working paper out from the La Follette School of Public Affairs. Read more
Credit Suisse equity strategist Andrew Garthwaite is on hand to answer all your questions about a possible second round of unconventional measures in the US — the possibility of which has provoked a fire-storm of speculation ahead of the Federal Open Market Committee meeting later this Tuesday.
For a start, he doesn’t think a massive bout of renewed QEasing is on its way: Read more