Mish's Global Economic Trend Analysis

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Republicans Likely Blew It Posted: 10 Jul 2011 08:02 PM PDT On Friday, Boehner announced there was a 50-50 chance of a major budget deal. On Saturday the picture changed dramatically as Boehner abandoned efforts to reach comprehensive debt-reduction deal. House Speaker John A. Boehner abandoned efforts Saturday night to cut a far-reaching debt-reduction deal, telling President Obama that a more modest package offers the only politically realistic path to avoiding a default on the mounting national debt. On the eve of a critical White House summit on the debt issue, Boehner (R-Ohio) told Obama that their plan to "go big," in the speaker's words, and forge a compromise that would save more than $4 trillion over the next decade, was crumbling under Obama's insistence on significant new tax revenue. I do not know what "significant" means because on Friday Boehner had agreed to some revenue increasing measures. Sunday Debt Talks Abruptly Abandoned There was supposed to be 5 hours of negotiation today. Instead it made it to the 90 minute mark, at most. MarketWatch reports U.S. debt talks break up early, to resume Monday. A closely watched meeting between congressional leaders and President Barack Obama to resolve the impasse over the U.S. debt ceiling ended Sunday far more quickly than expected, with no immediate word of progress, according to reports. The meeting had been projected to last four or five hours, Reuters reported, but subsequent news accounts said the parties met for between 75 and 90 minutes. Obama Sets 10-Day Deadline, Will Address the Nation Yahooo Finance reports Obama: 'We need to' work out debt deal in 10 days Grasping for a deal on the nation's debt, President Barack Obama and congressional leaders remained divided Sunday over the size and the components of a plan to reduce long term deficits. Saying "we need to" work out an agreement over the next 10 days, the president and lawmakers agreed to meet again Monday. Obama also sought to use the power of his office to sway public opinion, scheduling a news conference for Monday morning, his second one in less than two weeks devoted primarily to the debt talks. Officials familiar with the meeting said Obama pressed the eight House and Senate leaders Sunday evening to continue aiming for a massive $4 trillion deal for reducing the debt. But there appeared to be little appetite for such an ambitious plan and the political price it would require to pass in Congress. Instead, House Speaker John Boehner told the group that a smaller package of about $2 trillion to $2.4 trillion was more realistic. A Democratic official familiar with the session said House Majority Leader Eric Cantor, R-Va., was especially adamant that any deficit reduction package could not contain tax increases and that any new tax revenue would have to be used to pay for other tax benefits. Obama and the congressional leaders met in the Cabinet Room of the White House for the rare Sunday session. Most appeared in casual Sunday clothes, with open-collared shirts underneath blazers. When a reporter asked, "Can you work it out in 10 days, sir?" Obama replied, "We need to." Earlier, White House Chief of Staff Bill Daley said in a television interview that Obama would not "walk away from a tough fight." "Everyone agrees that a number around $4 trillion is the number that will ... make a serious dent in our deficit," he said. Geithner cautioned that a package about half the size of the one Obama prefers would be equally tough to negotiate because it, too, could require hundreds of billions in new tax revenue -- anathema to Republicans. Lawmakers said that previous bipartisan talks, led by Vice President Joe Biden, identified a fraction of cuts that would be needed even for the more modest packages. Even so, Boehner insisted the smaller proposals had more realistic chances of passing. One would call for about $2 trillion in deficit reductions, most accomplished through spending cuts that have been identified but not signed off on by the Biden group. "I believe the best approach may be to focus on producing a smaller measure, based on the cuts identified in the Biden-led negotiations, that still meets our call for spending reforms and cuts greater than the amount of any debt limit increase," Boehner said. Disgusting Turn of Events This turn of events is disgusting. A $2 trillion deal will do absolutely nothing to solve a long-term debt problem. $2 trillion sounds significant but it is a scant $200 billion a year deal, probably back-loaded at that, while the deficit is $1.4 to $1.6 trillion. $4 trillion is barely a down payment. Moreover (and again we do not know the details because they were private), but it has been reported that Obama agreed to substantial Medicare and Social Security changes. This deal fell apart over "significant" revenue raising proposals. Pray tell what is significant? Again, this is a case of not knowing the details, but I do not consider $1 trillion over 10 years, very significant. It is a mere $100 billion a year. I do not like tax hikes, but we are talking peanuts here. Moreover, Obama's proposal on Medicare and Social Security had Nancy Pelosi howling so loudly that Obama held a private meeting with her. Anything that has Pelosi that upset, is probably a good deal. When will there be another chance to rein in Medicare? Once again I am making assumptions because no one has yet revealed what was on the table, but from where I sit, (guessing at proposals), Republicans blew it. How to Tell if the Deal is a Good One I wish to emphasize what I said in Boehner says Chance of Budget Deal in Few Days "Maybe 50-50", NYT says Sides Still Far Apart; How to Tell if the Deal is a Good One Budget Deficit Math The budget deficit is somewhere between $1.4 and $1.6 trillion a year. Cutting $2 trillion over 10 years is not even a down payment for what needs to happen. Heck, $4 trillion is barely a reasonable down payment. I much prefer a $4 trillion deal than a $2 trillion one. Then regardless of what the deal is, I would slash another $2 or $3 trillion over 10 years out of defense spending. Any deal that hits $4 trillion probably will include some small tax hikes. So be it. The ratio of 3-to-1 or 3.5-to-1 budget cuts vs. tax hikes seems like a reasonable compromise to me. Republicans should take the opportunity to slash $8 trillion ($800 billion a year) out of the deficit if Democrats are willing to stick to those ratios I mentioned. How to Tell if the Deal is a Good One The deal will not be a good one if it is all back loaded. Nor will it be a good deal if it cuts less than $4 trillion. We need huge cuts this year and every year forward, not back-loading that may never happen. Slashing $400 billion would have Krugman whining. Slashing $800 billion would have Krugman and the Keynesian clowns howling like mad. In general, the louder Krugman howls, the better the deal it will be. Helping Cities, States, Municipalities Unfortunately, what I proposed above does nothing for states. Cities, states and local governments need relief as well. The way to help cities and states is to kill collective bargaining for public unions and scrap Davis-Bacon. Those two acts will lower costs, spur hiring, and reduce layoffs. Unfortunately, those actions do not appear to be under discussion. Republicans Blew It There are many things Republicans could have asked for in return for tax hikes. Among there are ending collective bargaining and scrapping Davis Bacon. Had they done that, Democrats may have walked out of the talks and not the other way around. Instead, had Democrats agreed to my proposal, cities and states would be far better off and Republicans still would have had reductions in Medicare and Social Security in hand. Thus, Republicans had a no-lose opportunity staring them in the face and kicked it down the drain for ideology that may come back to haunt them. Three-Fourths of a loaf is better than no loaf at all. Unless there is a major turn of events, Republicans blew it. Note: within a few minutes of posting I added the word "likely" to the title. We still do not know how this will end, but I do not like the looks of it now. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

EU Calls Emergency Meeting on Italy; Don't Worry "It's a Coordination, Not a Crisis"; Short Sellers Blamed; Junckeritis Spreads Posted: 10 Jul 2011 09:34 AM PDT In case you missed it, the European debt crisis escalated in Portugal and spread to Italy last week. Here are a few articles if you missed them. Italian Yields Hit 9-Year High, Spreads Record High vs. Germany; Italy's Finance Minister in Rent Scandal Michael Pettis Warns of "Virulent Political Turn Against Euro", Adds Clarification to "Gold's Honest Discipline" ECB Suspends Collateral Rules for Portuguese Debt, Hikes Rates .25; Trichet Says "No" to Selective Default, Market Yawns In response, the EU does what it always does. Blame Short Sellers Declare an Emergency Meeting Deny there is an Emergency Meeting Don't Worry "It's a Coordination, Not a Crisis" Taking an overdone play straight out of the Jean-Claude Juncker "lie when it gets serious" handbook, European Council President says "It's a coordination, not a crisis meeting." That is all you need to know to determine a full blown crisis is underway in Italy. Please consider EU calls emergency meeting as crisis stalks Italy European Council President Herman Van Rompuy has called an emergency meeting of top officials dealing with the euro zone debt crisis for Monday morning, reflecting concern that the crisis could spread to Italy, the region's third largest economy. European Central Bank President Jean-Claude Trichet will attend the meeting along with Jean-Claude Juncker, chairman of the region's finance ministers, European Commission President Jose Manuel Barroso and Olli Rehn, the economic and monetary affairs commissioner, three official sources told Reuters. Van Rompuy's spokesman Dirk De Backer said: "It's a coordination, not a crisis meeting." He added that Italy would not be on the agenda and declined to say what would be discussed. Shares in Italy's biggest bank, Unicredit Spa, fell 7.9 percent on Friday, partly because of worries about the results of stress tests of the health of European banks that will be released on July 15. The leading Italian stock index sank 3.5 percent. The market pressure is due partly to Italy's high sovereign debt and sluggish economy, but also to concern that Prime Minister Silvio Berlusconi may be trying to undermine and even push out Finance Minister Giulio Tremonti, who has promoted deep spending cuts to control the budget deficit. "We can't go on for many more days like Friday," a senior ECB official said. "We're very worried about Italy." Monday's emergency meeting will precede a previously scheduled gathering of the euro zone's 17 finance ministers to discuss how to secure a contribution of private sector investors to the second bailout of Greece, as well as the results of the stress tests of 91 European banks. Italian Emergency "Coordination" Supersedes Emergency "Coordination" in Greece, Portugal, Spain The first thing to do in any crisis, before there is time for further "coordination" is to blame short sellers and speculators for the crisis. True to form, Italy Hurt by 'Irrational Speculation,' Hoyer Tells La Stampa Italy was the victim of "irrational speculation" in the financial markets last week, German Deputy Foreign Minister Werner Hoyer told La Stampa, saying the country can balance the budget by 2014 and its banks are sound. Finance Minister Giulio Tremonti "wants to have a balanced budget in 2014, an ambitious but fair goal," Hoyer told La Stampa. "For this reason, I can't see any excuse for irrational speculation of any kind." Junckeritis Spreads The proclamation from Hoyer that "Italian banks are sound" gives a strong indication of something most knew anyway: "They aren't." Thus, it is all too obvious that Hoyer is inflicted with the highly-contagious Junckeritis virus, now rapidly spreading across the EU. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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