The Faux Debate Over the Farcical Cliff that’s Hurting the Rest of US
Over the last five years our national debt has gone up by $7 trillion with annual budget deficits in excess of $1 trillion every year.Â That means that over the last five years our government has spent $7 trillion more than it had to spend.Â Obviously, some significant percentage of that amount would have to be spending on new stuff… as in, stuff we werenâ€™t spending on before, right?
The latest debate in Washington, however, appears to be over raising taxes on the top 2% of earners, while kicking-the-can on any debate about reducing spending until next year.Â And even so, in light of the $7 trillion number from the prior paragraph, it would seem that proposing $1.5 trillion in total cuts over some undefined long-ass period of time is hardly the answer to anything, right?
I feel exactly like I did 4-5 years ago when I watched then President G.W. Bush sign a completely unfunded bill to build a 700 mile fence along a 2,000 mile border… in order to do nothing about immigration, I suppose. Â
A fence along the border? Â Seriously?
So, now this game of political pocket pool is taking its toll on our already anemic economy and the entirely predictable outcome is surprising economists everywhere.Â Of course, whatâ€™s surprising me is that anyone is surprised by any of this.
Yesterday, the Institute for Supply Management (â€śISMâ€ť) reported that its index of national factory activity fell to 49.5 in November… it was 51.7 the month before… so itâ€™s a 2.2 percent fall.Â And according to a Reuters poll of economists, expectations for November were for that number to come in at 51.3.
The 49.5 number hasnâ€™t been seen since July 2009 when the U.S. economy was widely understood to be essentially on life support following the financial crisis.Â Although somehow today, Iâ€™m guessing, if youâ€™re working in the White House, itâ€™s just a sign of a sluggish and jobless recovery.
Whatever â€śtheyâ€ť want to call it these days, what itâ€™s really called when that number falls below 50, is a â€śreturn to contraction,â€ť and itâ€™s not good news.Â Some are saying that itâ€™s â€śanemic growth,â€ť and others consider it â€śstagnation,â€ť but Christopher Low, chief economist at FTN Financial in New York points out that the number has been hovering near 50 for the past year and that clearly U.S. manufacturing has yet to recover.
As reported by MoneyNews.com…
“Overall, today’s report suggests that the manufacturing sector is likely to remain a weak point in the recovery for a few months yet,” said Jeremy Lawson, an economist at BNP Paribas in a research note.
Yeah, so I guess Jeremy is expecting good things to be happening in a few months?Â Sure… Iâ€™m sure lotâ€™s of stuff will change in a few months of doing more of the same things weâ€™ve been doing for the last five years.Â Nothing has worked so far, but these next few months are going to be absolutely magical.
Maybe heâ€™s counting on a â€śMiracle on 34th Streetâ€ť sort of effect, and Santa is going to win a lawsuit with the help of the U.S. Postal Service, and then leave us his cane in the corner right next to our new economy.
If thatâ€™s the case, he should really let investors on Wall Street know because they all seem to be quite worried about Washington not being able to avert the so-called “fiscal cliff”, which is a series of tax increases and reductions in federal spending that unquestionably would push our economy so much deeper into a recession that our government wouldnâ€™t be able to lie about where we are anymore.
Or, wait… I know… maybe itâ€™s just the impact of Hurricane Sandy… yeah… thatâ€™s the ticket.Â The storm so strong that it wiped out U.S. manufacturing… before it even arrived on shore.Â It wiped out our manufacturing out preemptively.Â Scared it away.Â So, why not?Â Weâ€™d probably buy it if they said it enough times.
But seriously, why do I know itâ€™s not Sandy related?Â Well, how about because itâ€™s the fourth time its contracted like this in the last six months, and that makes arguments about Hurricane Sandy… or arguments that blame the â€śfiscal cliff,â€ť both equally ludicrous.Â Mish Shedlock agrees, it should come as no surprise, and if youâ€™re an economist at heart, you can read his comprehensive take on the subject HERE.
Mish tracks this sort of stat relentlessly, and also points out that export orders have contracted every month for the last SIX MONTHS and the backlog of orders has contracted every month for the last EIGHT MONTHS.Â Mishâ€™s explanation follows…
â€śI propose global QE in the US, China, and Europe has finally played out for all that it’s worth and then some.â€ť
I donâ€™t really know if weâ€™ve reached the end of what the QE can do or not, but I do know that one day soon will be the end for the QE effect… and I know that Mish is a really smart guy.Â He also points out that the ISMâ€™s report also showed what he knew would soon come… that employment in the manufacturersâ€™ segment fell 3.7 percentage points in November over the prior month, and that canâ€™t be good news for a lot of families facing Christmas.
Mish also pointed out that the New York Fedâ€™s Quarterly Report on Household Debt and Credit also came out for November and the trends are unquestionably deflationary. Â According to the report…
â€śAggregate consumer debt fell again in the third quarter, by $74 billion, continuing the nearly four-year downward trend in household debt. Â
Mortgages, the largest component of household debt, continue to drive the decline in overall indebtedness. Mortgage balances shown on consumer credit reports continued to drop, and now stand at $8.03 trillion, a 1.5% decrease from the level in 2012 Q2.Â
Home equity lines of credit (HELOC) balances dropped by $16 billion (2.7%).â€ť
Now, you donâ€™t have to be a genius to figure out that a significant portion of the deleveraging is happening through default, but Mish points out that â€śdeleveraging of credit card and mortgage debt continues.Â The rest is slow, steady debt reduction with reluctance to take on more debt.â€ť
The other thing that Mish makes clear is that the ONLY factor preventing a HUGE PLUNGE in non-mortgage debt is student loans.Â Great.Â The sort of debt that is government guaranteed and canâ€™t be discharged in bankruptcy.Â Were this a Shakespearian tragedy, that would have to be considered aÂ foreboding event.Â According to Mish…
â€śThere is certainly no jump in the demand for credit card, mortgage, auto, or home equity loans.â€ť
Of course, auto sales are still doing okay, although Mish points out that they are still below their peak in 2005. Â Pent up demand caused by the average car being on the road for 11 years in this country, and the fact that we still have sub-prime lending on new cars, pretty much explains why sales are doing better than they would otherwise.Â Once the pent up demand is over, what will our auto industry look like do you suppose?
Not sure?Â Well then, answer this: Do you know anyone thatâ€™s still planning on buying a new car every couple of years?Â Yeah, me either.Â Iâ€™m keeping my Suburban until the wheels come off, and my wife is looking at a Passat TDI… clean diesel, 40 MPH, and will run for 400k or so.Â Iâ€™m not alone in this way of thinking, am I?Â Didnâ€™t think so.
The Farcical Cliff and the Boehner Rule
Congress has been following whatâ€™s being called the â€śBoehner Ruleâ€ť since 2011, which is what led to the $1.2 trillion of automatic cuts that as of now are set to begin in January.Â And I think everyone pretty much agrees that letting them happen would be a bad thing for our limp-along economy.Â But, House Republicans are taking the view that the deficit, which has been over a trill in each of the last so many years, is now a crisis that requires immediate action, so ready, set, go… everybody panic.
Itâ€™s funny, in a shocking and depressing sort of way, that House Republicans didnâ€™t say a word about the pumping of trillions into the financial sector over the last four years, and they certainly donâ€™t see 5.3 million homes in the foreclosure pipeline as any sort of crisis, much less one deserving of any sort of action.Â But the deficit… now… thatâ€™s a crisis we must deal with immediately.Â As in, put the red light on top of the car and turn on the siren, Starsky.
The bond market somehow remains oblivious to all of this, however.Â The national debt has gone from from less than $9 trillion in 2007, to $16 trillion today, all while U.S. borrowing costs have fallen through the floor.Â The yield on the 10-year note went from being over 5 percent in mid-2007… to an all-time record low of 1.379 percent last July.
So, an emergency?Â Well, not so much if youâ€™re following the numbers.Â But really… who really bothers to look at numbers anymore… after all, theyâ€™re so 1995.Â Thereâ€™s no denying the truth of the matter… things here may be bad, but this country is still the safest place to invest your money.Â Weâ€™re the prettiest ugly girl at the prom.
So, now the Republicans are adding the prospect of another debt ceiling not being lifted to the fiscal cliff debate.Â The Obama Administration has bristled at the prospect of another down to the wire political circus, as we wait to see if America will default on its debt and absolute chaos will ensue, saying that Congress should give up its right to control that aspect of things, but I canâ€™t imagine that going very far.
The House GOP, it seems to me, stopped doing things because theyâ€™re good for the country some time ago… like fours ago, to be specific.Â About the same time they started voting in absolutely harmony against anything proposed by the Democrats, as a matter of fact.Â Iâ€™ve said it before, but I can remember a time when Republicans and Democrats, after the election was over, came together to compromise on legislation.Â Seems like quaint notion today, doesnâ€™t it?Â Like something straight out of a Norman Rockwell painting.
I think itâ€™s a simple matter of spender of last resort.
There are only three sources of spending in any economy: consumers, businesses, and government.Â Having just read what I wrote above, American consumers certainly arenâ€™t spending.Â And without consumers spending and with exports declining, American business isnâ€™t spending either.Â Government, it would seem obvious, is the only spender left in the room, and so if government cuts spending, unemployment will rise as will foreclosures and our economy will fall that much further.
A year ago this month, former deputy secretary of the U.S. Treasury, Frank Newman, published a book titled, â€śSix Myths that Hold Back America: And what America can learn from the growth of China’s economy.Â In it Newman argues that Americaâ€™s government isnâ€™t spending enough, and that thatâ€™s precisely what is holding our economy back from recovering.Â According to CNNMoney…
â€śNewman, who recently completed five years as chairman and CEO of China-based Shenzhen Development Bank, says government spending and deficits aren’t anything to fear. He points to China, which in late 2008 embarked on a two-year, $586 billion spending program to try to stave off a recession and keep the Chinese economy growing. But while China trumped its spend and build motto, President Obama’s latest stimulus plan focused more on tax cuts and aid to states.â€ť
And that situation is even worse today than it was in 2011, because the latest plans from the Obama Administration offers nothing for states, while it increases taxes on those earning over $200,000 a year.Â Thatâ€™s it.Â No other cuts, no other anything.Â And the Republicans are screaming their displeasure… not that their plan is any better, but in concert it seems to me that whatâ€™s going on is monumentally irresponsible at the very least, and terrifyingly inept at the other end of that scale.
Understand this, though… Iâ€™m not the least bit worried that the Republicans and the Democrats wonâ€™t come together right before the holidays to forge some ill-conceived, witless, and entirely cowardly compromise that only kicks the proverbial can down the road even further… it is, after all, what they do, and do so well. Â
But itâ€™s long since time to realize that weâ€™ve got an economy that is NOT recovering.Â In fact, even with the trillions weâ€™ve pumped into financial institutions, interest rates at all-time lows, and QE running through the veins of the stock market for the moment, the writing is more than on the wall… weâ€™ve got problems with which weâ€™re not dealing.
It almost seems as if we’ve lost the ability to govern ourselves as we tumble from crisis to crisis waiting for someone else to save the day… tomorrow.
All weâ€™re doing in Washington is playing politics, while throughout the rest of the country we continue to pretend that weâ€™re not in acute fiscal pain.