Mish's Global Economic Trend Analysis

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• Deal or No Deal? ABC Says Tentative Deal to Raise Debt Ceiling Reached; White House Aid Denies Report; Does it Matter?
• Canada GDP Declines .3%, Largest Drop in Two Years - Don't Worry It's "Temporary"; Canadian Apologists Be Warned
• 43 Senate Republicans Sign Letter Opposing Reid’s Plan, Impasse Continues; Exchange with a Reader Over Tax Hikes

Deal or No Deal? ABC Says Tentative Deal to Raise Debt Ceiling Reached; White House Aid Denies Report; Does it Matter? Posted: 30 Jul 2011 09:14 PM PDT I was just getting ready to make a post titled After "Angry Exchange" Reid Postpones Senate Vote on His Plan; Majority Leader Conrad Hints at Raising Revenue Measures; Compromise in the Air. Just before I hit enter on posting, word came that a deal was reached. I will continue with my original post (so that you can see sausage in the making) followed by the a description of the alleged yet White House denied deal. Hints Compromise Amid Feud Talk of compromise is in the air. House Majority Leader Conrad is surprisingly hinting at revenue raising measures. Meanwhile Senator Kyle suggests more progress is being made than it seems, even though Senator Reid postpones a vote on his proposal after an "angry exchange" with Republicans. This negotiation smacks of a "don't blame me" effort from both parties that will put off all hard choices until later. Reid Postpones Vote After Angry Exchange The New York Times reports Hint of Deal as Congress Wrangles Over Debt Crisis After a tense day of Congressional floor fights and angry exchanges, Senator Harry Reid, the majority leader, called off a planned showdown vote set for after midnight, but said he would convene the Senate at noon on Sunday for a vote an hour later. He said he wanted to give the new negotiations a chance to produce a plan to raise the federal debt limit in exchange for spending cuts and the creation of a new Congressional committee that would try to assemble a long-range deficit-cutting proposal. The first indication off a softening of the hard lines that have marked weeks of partisan wrangling over the debt limit came in the afternoon when the two leading Congressional Republicans announced that they had reopened fiscal talks with the White House and expected their last-ditch drive to produce a compromise. Following the House's sharp rejection of a proposal by Mr. Reid to raise the debt limit and cut spending, Senator Mitch McConnell of Kentucky, the Republican leader and a linchpin in efforts to reach a deal, said he and Speaker John A. Boehner were "now fully engaged" in efforts with the White House to find a resolution that would tie an increase in the debt limit to spending cuts and other conditions. The deal they were discussing, this person said, resembled the bill that Mr. Boehner won approval for in the House on Friday more than it did the one that Mr. Reid had proposed. It would immediately raise the debt ceiling by about $1 trillion, accompanied by a similar range of spending cuts, and set up a new bipartisan committee that would work to find deeper cuts in exchange for a second debt limit increase that would extend through the 2012 election. A failure of the new committee to win enactment of its proposal could then set off automatic spending cuts across the board, including to entitlement programs. After Mr. McConnell sounded a hopeful note, Mr. Reid called members of the Senate to the floor to hear him dispute the claims by his Republican counterpart and accuse Republicans of failing to enter into serious negotiations even as the Treasury risked running out of money to pay all its bills after Tuesday. "The speaker and Republican leader should know that merely saying you have an agreement in front of television cameras doesn't make it so," Mr. Reid said after returning from a visit to the White House with Representative Nancy Pelosi of California, the Democratic leader in the House. The Treasury Department calculates that the government will exhaust its ability to borrow money at the end of Tuesday, forcing the government to pay its bills from a dwindling pile of cash. Independent analysts estimate the government has enough money on hand to pay all of its bills for another week, more or less, before it starts missing payments. That sounds like more feud than compromise so let's take a look at the viewpoint on Bloomberg posted roughly three hours later at 10:41. Majority Leader Conrad Hints at Raising Revenue Measures Bloomberg reports Senate Postpones Vote on Reid Debt Plan as Talks Continue "There are negotiations going on at the White House now," Reid said on the Senate floor, and those involved in the talks wanted more time before a vote was held on whether the Senate moved ahead with his measure. A planned 1 a.m. vote was pushed forward 12 hours, to 1 p.m. Reid said the Senate would convene at noon tomorrow. "There are many elements to be finalized and there is still a distance to go before any arrangement can be completed," Reid said of the talks involving Obama and congressional leaders. Reid's plan, which the House symbolically rejected earlier today, would lift the $14.3 trillion debt limit by $2.4 trillion. Conrad, a North Dakota Democrat who is chairman of the Senate Budget Committee, said a few bipartisan groups of senators have drafted three alternative plans to supplement a proposal offered by Reid. The Republican-run House today defeated Reid's plan. The alternative plans include possible new revenue as part of their formula for cutting the federal deficit, according to Conrad. Republican leaders have said from the start of negotiations that a net increase in tax revenue is unacceptable. "All three involve the possibility of revenue," Conrad said. McConnell wasn't among the Republicans involved in the alternative bipartisan plans, according to Conrad. White House, Republicans Strike Tentative Deal To Raise Debt Ceiling What follows now is breaking news of a deal. Please consider White House, Republicans Strike Tentative Deal To Raise Debt Ceiling ABC News' Jonathan Karl reports: ABC News has learned that Republicans and the White House have struck a tenative deal to raise the debt ceiling before the Aug. 2 deadline. It's not done yet, but here is the framework of the tentative deal they have worked out, according to a source familiar with the negotiations: Debt ceiling increase of up to $2.8 trillion Spending cuts of roughly $1 trillion Vote on the Balanced Budget Amendment Special committee to recommend cuts of $1.8 trillion (or whatever it takes to add up to the total of the debt ceiling increase) Committee must make recommendations before Thanksgiving recess If Congress does not approve those cuts by late December, automatic across-the-board cuts go into effect, including cuts to Defense and Medicare. A senior White House aide pushed back against the idea that a deal was struck. "Talks continue, but there is no deal to report," the aide said. Deal or No Deal? Even if there is a deal, it is no bargain to anyone. A vote on a balance budget will not pass so why bother other than for political finger-pointing purposes? $1 trillion in presumably back-loaded spending cuts is a farce. The special committee will not accomplish a thing. Even if by some miracle it achieves another $1.8 trillion in spending cuts, that still only brings the total to a lousy $2.8 trillion, or $280 billion a year in a $1.4 trillion deficit. This is not even a reasonable down payment on what needs to happen. 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.

Canada GDP Declines .3%, Largest Drop in Two Years - Don't Worry It's "Temporary"; Canadian Apologists Be Warned Posted: 30 Jul 2011 01:59 PM PDT Lost in the US deficit battles and the pathetic US GDP statistics comes yet another surprise: Canada's Economy Shrank 0.3% in May Posting the Largest Drop in Two Years Canada's gross domestic product fell in May by the most in two years due to temporary disruptions in the mining and oil and gas sector, government data showed. Output fell 0.3 percent in May to C$1.26 trillion ($1.32 trillion) on a seasonally adjusted basis, after being little changed in April and gaining 0.3 percent in March, Statistics Canada said today in Ottawa. Economists in a Bloomberg survey forecast the economy would grow 0.1 percent, based on the median of 24 responses. The Bank of Canada said July 20 the economy's growth probably slowed to 1.5 percent in the second quarter of this year, its slowest pace since the country emerged from recession in 2009, because of "supply disruptions" related to the earthquake and tsunami in Japan, slowing government spending and the impact of higher food and energy prices. Governor Mark Carney has kept the central bank's benchmark policy rate at 1 percent since September. "The weakness is slightly over-stated" in May because of temporary factors, said David Tulk, chief Canada macro strategist at TD Securities, though the numbers highlight how expansion in the second quarter has been a "lost cause." Canadian Apologists Be Warned Canadian apologists say weakness is overstated and temporary. I say it's understated because few realize what is happening and how serious this is. Global stimulus has faded. It's gone. Kaput. And that stimulus was the only thing holding this global economy together. Strip out government spending, QE madness in the US, and unsustainable credit growth in China and you have a flatline global economy at best. It's Not Temporary Headline be damned, it's not temporary. Europe is now in austerity-mode, US cities and states are cutting back, the odds of more fiscal stimulus in the US are roughly zero, the US might (and should) lose its AAA rating, Australia is a basket case on the bursting of its property bubble, Canada has the second or third largest property bubble next to China and Australia, the bond market is targeting Italy and Spain, Brazilian defaults are soaring, China is overheating and needs to slow, yet the average economist is looking for a robust second-half. Go figure. In aggregate, economists are the most optimistic group on the planet. For a look at the US GDP situation, please consider US GDP on Verge of Contraction in 1st Quarter, Mere 1.3% Annual Rate 2nd Quarter; Summary of Massive Revisions; Second-Half Recovery Nonsense 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.

43 Senate Republicans Sign Letter Opposing Reid’s Plan, Impasse Continues; Exchange with a Reader Over Tax Hikes Posted: 30 Jul 2011 11:13 AM PDT The impasse continues. Bloomberg reports Senate Republicans Will Reject Reid's Debt Plan. Senate Republicans will block Majority Leader Harry Reid's debt-limit plan this weekend, Minority Leader Mitch McConnell said as a partisan impasse over deficit reduction continued days before a threatened default. Reid's bill "will not pass," McConnell said today as the Senate resumed debate on the measure. He said 43 Senate Republicans signed a letter opposing Reid's plan. Reid, a Nevada Democrat, who offered modifications to a Democratic plan that he said are designed to attract Republican support, has accused Republican leaders of rebuffing his efforts to negotiate. Reid said when he attempted to engage McConnell, a Kentucky Republican, in talks, "we had no one to negotiate with." The majority leader plans a 3 p.m. news conference today. Shortly after the Senate rejected Boehner's plan, the House scheduled a preemptive vote for today on Reid's proposal -- planning to defeat it even before the Senate takes it up. The House, back in session, plans to vote at about 2 or 2:30 p.m. The Senate plans a procedural vote on Reid's plan at about 1 a.m. tomorrow. A Senate vote on the plan then could be held at about 7 a.m. on Aug. 1, allowing the measure to return to the House before the Aug. 2 deadline. The new plan would yield debt savings of $2.2 trillion -- about the same as the total borrowing authority extended -- and call on a 12-member bipartisan congressional committee to draft legislation to lower the deficit to 3 percent or less of gross domestic product. Senator Scott Brown, a Massachusetts Republican, said his staff has been working with Reid's to put "more teeth" in the joint committee plan. Senator Lisa Murkowski, an Alaska Republican, said "absolutist" lawmakers aligned with the Tea Party have put the U.S. "on the brink." "If we don't come to an agreement, we could lose our country's AAA credit rating, not because we didn't have the capacity to pay our bills -- we do -- but because we didn't have a AAA political system to match our AAA credit rating," Obama said earlier yesterday at the White House. Senate Budget Committee Chairman Kent Conrad expressed confidence that lawmakers will head off a default. Once again, and as recently noted in Great Divide; Boehner Rams Through Bill that Senate Quickly Rejects; Obama's Idle Threats and Fear Mongering the idea of a default is complete silliness. Nonetheless, expect both parties and president Obama to crow when a gaseous plan is passed that will allegedly have "saved the US from default" Fear Mongering Caroline Baum repeated my message on Friday in Obama, Geithner May Regret Threats of Default Instead of dangling the default threat every chance they get, Obama and Geithner should be telling the world that the U.S. has every intention, and the resources, to meet its debt obligations. They should shout it from the rooftops, put a banner on the Treasury Direct website, and use the Sunday talk shows to reassure investors, not frighten them. Toothless Details Senator Scott Brown wants to put "more teeth" in the joint committee plan. One tooth would suffice because the plan is currently toothless. Guaranteed Vote is Meaningless This whole idea of McConnell's about abdicating responsibility to a "powerful" committed with a "guaranteed" vote on proposals is of course ridiculous. Look at the rejection of Reid's plans in the Senate and House, and the Rejection of the Boehner's plan in the Senate. Look at the whining of Nancy Pelosi about cuts to Medicare and Medicaid, and Social Security. So what does the "guaranteed vote" do but put lipstick on a turkey? The "Gang-of-Six" put together a $4 trillion proposal that was a down payment on attacking the deficit and that could not pass. Somehow a "Gang-of-Twelve" is going to do better. Please be serious. The more people you put into a mix, the harder it will be to get an agreement. Even if by some miracle an agreement from the "Gang-of-Twelve" is reached, you still have a hurdle of passing the "guaranteed vote" in the House and Senate. This "Gang-of-Twelve" idea is nothing but a plan to put off doing anything about the deficit until after the election. Republicans and Democrats will both have wimped out if that is the "solution". Exchange with Reader "Grant" Reader "Grant" responded to my post, and we had the following exchange. Grant: Why you take Obama at his word when he says he was willing to make "hard choices" continues to elude me, especially given his track record of reneging on pretty much every campaign promise he made (wars, transparency, civil liberties, indefinite detentions, etc.) still mystifies me. Mish: Nowhere did I say the Democrats would have accepted. Indeed I think and have stated several times before they wouldn't. However, the offer would put Republicans in a No-Lose situation. Would Democrats have gone along? If not, Obama and the Democrats would have been seen as the deal-killers, not Republicans. If the Democrats accepted, it would have been well worth it. Republicans win if the deal was accepted, they win if the deal was rejected. Grant: Except this scenario already played out. Who got the blame? Not Obama. Not the Democrats. Boehner and the GOP did. Mish: And why is that Grant? The answer is Republicans would not accept any tax hikes. My deal allowed them. Some Things Far More Important than Trivial Tax Hikes Some things are far more important than concession on closing a few loopholes to get $1 trillion in tax hikes. President Obama repeatedly said he was willing to make "hard choices". Republicans could easily have put him to the test. My proposal was to challenge Obama to accept the tax hikes he asked for on a 3-1 ratio of cuts-to-to hikes in return for these three things Republicans want. Scrapping Davis Bacon Ending collective bargaining of public unions National right-to-work legislation I would gladly trade $1 trillion in tax hikes for those badly needed measures. Would Democrats have accepted? Probably not but one never knows unless one tries. However, either way the Republicans would have won. Had Obama backed down it would have been his fault. Had he accepted the bargain would have well worth it. 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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