Fiscal Cliff

[blackshoe]

Everett Dirksen was reputed to have said "A billion here, a billion there, pretty soon, you're talking real money." Perhaps we should revise his quote by replacing billion with trillion.

Did he say that?

Doesn't matter. He certainly agreed with the sentiment.

[kenberg]

Sidestroke is easier. B-)

 

I haven't found it so. Different strokes for different folks. I always knew that expression would come in handy sometime.

[Winstonm]

Different mudes for different dudes. I was sure I would never need spellcheck.

[kenberg]

I read Robert Samuelson's column regularly. Today he speaks of the limitations of the Fed.

http://www.washingto...91d6_story.html

 

I think Bernanke has often spoken of the limitations of the Fed, but it doesn't seem to take. Maybe a public statement from him, addressed to the President and to members of Congress, is in order. Something like "Dear Idiots: I, your Fed Chairman, am unable to walk on water. Nor can I raise people from the dead nor feed the multitudes with five (or whatever the number was) loaves of bread. I also cannot solve all the financial problems of the country by adjusting interest rates or by QE2,3,4,5 etc. Please get your act together and do something right." Actually I think Bernanke is Jewish so the imagery may not be apt, although so was Jesus. Anyway, I will leave these details to him.

 

I found Samuelson's column interesting and perhaps useful.

[y66]

A ‘fiscal cliff’ deal is near: Here are the details

Posted by Ezra Klein on December 17, 2012 at 3:13 pm

 

http://www.washingtonpost.com/blogs/wonkblog/files/2012/11/wonk1120-1024x686.jpg

Photo: Olivier Douliery — ABACAUSA.com

[mike777]

Y66 thanks for posting.

 

It would be nice if someone in govt could point to some real science and show us how this improves the economy in 2013,

 

:)

[PassedOut]

Thanks for the link. If correct, seems like a reasonable approach for the time being.

[phil_20686]

I read Robert Samuelson's column regularly. Today he speaks of the limitations of the Fed.

http://www.washingto...91d6_story.html

 

I found Samuelson's column interesting and perhaps useful.

 

As long as the Fed controls the monetary base, it can always stimulate demand. The primary limitation of the Fed is the fact that its board members are mostly not moentary economists. Ben Bernanke has done wonders since the crises in bringing them around. Most of them now see things the same way as Bernanke. Enough to bring about seismic change in Fed policy.

 

However, the Fed can still do more. In fact, it has essentially commited itself to doing more. I think I said before that the Fed could expand NGDP and increase demand through unsterilised buying of bonds, and that is what it is now doing. $85bn a month financed directly through the expansion of the monetary base. I expect that number to go up every quarter that inflation does not rise. Which it will not until demand is restored to equilibrium levels.

 

The US is finally on the right monetary course. Respect to Bernanke, he has essentially converted all of the Fed board members to his way of thinking. And he has always thought that NGDP was the correct way to measure the tightness of monetary policy. He said in a BuisnessInsider interview this week that he credits Friedmann for insuring "that I did not allow low interest rates to fool me into believing that money was easy", similarly, he said in 2003 that NGDP was the appropriate macro economic indicator for deciding whether money was tight.

 

 

"Ultimately, it appears, one can check to see if an economy has a stable

monetary background only by looking at macroeconomic indicators such as

nominal GDP growth and inflation." - Bernanke 2003.

 

Compare this with the ongoing catastrophe in the eurozone, where the ECB believes that money is already "easy", and that it cannot do more, while NGDP in the eurozone has grown a total of 3% since 2009, whereas prior to that it grew by over four percent every year. The UK, on the other hand, has just appointed a a central banker who believes that NGDP is the way forward in the current environment, he apparently believes that UK policy has not been stimulative enough.

 

I mean I just don't get it, if you had asked, in 2005, what the effects would be if a central bank decided to crush NGDP, 100% of economists would have told you: plunging demand, reduced competitiveness, falling interest rates.

 

The EU has all those things, and an NGDP which is 19% below its pre 2008 trend, and still falling like a stone, and the ECB thinks it has done enough. Unbelievable.

 

So to evidence how meaningful fed policy has been, here is a graph of the five year and twenty year spreads between TIPS and normal interest rates. Look how the stock market, the best forward looking indicator there is for the economy, responds every time there is a fed initiative to raise expected inflation. This is an incredible correlation. The markets know more expansionary policy is warranted, and they respond positively to any such moves. So to interest rates, which rise every time the Fed announces it is buying more bonds. The Fed is the only vehicle on earth that can make something cheaper by buying more of it. The magic of central banking.

 

http://research.stlouisfed.org/fred2/graph/fredgraph.png?&id=DFII5_DGS5,DGS20_DFII20,SP500&scale=Left,Left,Left&range=Custom,Custom,Custom&cosd=2005-01-02,2005-10-01,2005-01-02&coed=2012-12-14,2012-12-14,2012-12-17&line_color=%230000ff,%23ff0000,%23006600&link_values=false,false,false&line_style=Solid,Solid,Solid&mark_type=NONE,NONE,NONE&mw=4,4,4&lw=1,1,1&ost=-99999,-99999,-99999&oet=99999,99999,99999&mma=0,0,0&fml=b-a,a-b,a%2F20&fq=Daily,Daily,Daily&fam=avg,avg,avg&fgst=lin,lin,lin&transformation=lin_lin,lin_lin,pc1&vintage_date=2012-12-18_2012-12-18,2012-12-18_2012-12-18,2012-12-18&revision_date=2012-12-18_2012-12-18,2012-12-18_2012-12-18,2012-12-18

 

 

The other thing to note is to note how the five year TIPS spread diverged from the 20 year TIPS spread, the market was forecasting low inflation in the short term, and a return to normal in the long term, which clearly indicated more easing was necessary, as the market was not expecting the Fed to be sufficiently aggressive.

[mike777]

"However, the Fed can still do more. In fact, it has essentially commited itself to doing more. I think I said before that the Fed could expand NGDP and increase demand through unsterilised buying of bonds, and that is what it is now doing. $85bn a month financed directly through the expansion of the monetary base. I expect that number to go up every quarter that inflation does not rise. Which it will not until demand is restored to equilibrium levels"

 

 

Ok thanks

 

If I understand your post the fed should print money or whatever until demand is restored to the equilibrium level.

 

"The primary limitation of the Fed is the fact that its board members are mostly not moentary economists. Ben Bernanke has done wonders since the crises in bringing them around. Most of them now see things the same way as Bernanke. Enough to bring about seismic change in Fed policy"

 

My concern is as you point out the Fed did not understand the risk in the system before 2008.

 

 

When does the fed know demand is at equilibrium level and what does it do then, stop printing or sell bonds?

 

What is the risk and who bears most of that risk if the Fed does not have this knowledge?

[PassedOut]

Compare this with the ongoing catastrophe in the eurozone, where the ECB believes that money is already "easy", and that it cannot do more, while NGDP in the eurozone has grown a total of 3% since 2009, whereas prior to that it grew by over four percent every year. The UK, on the other hand, has just appointed a a central banker who believes that NGDP is the way forward in the current environment, he apparently believes that UK policy has not been stimulative enough.

Interesting related article in today's NYT: God Save the British Economy

 

Posen arrived in London after the acute panic of the financial crisis had given way to the long slog we’re still in. At that point, policy makers around the world were given the task of assessing the damage and devising a plan that would best position the economy to function at normal levels. The United States had already responded with a roughly $800 billion stimulus package. In the spring of 2010, British voters went in another direction. They elected Prime Minister David Cameron, who had promised to reset the economy by severely cutting government spending, which would lead to significant public-sector layoffs. The economy’s only chance to return to long-term growth, Cameron argued, would be a painful, but brief, period of austerity. By shrinking the size of an inefficient government, Cameron explained, the budget would be balanced by 2015 and the private sector could lead the economy to full recovery.

 

Today these two approaches offer a crucial case study and perhaps a breakthrough in an age-old economic argument of austerity versus stimulus. In the past few years, the United States has experienced a steep downturn followed by a steady (though horrendously slow) upturn. The U.S. unemployment rate, which shot up to 10 percent at the end of 2009 from 4.4 percent in mid-2007, has now dropped steadily to 7.7 percent. It might be a frustrating pace, but it’s enough to persuade most economists that a recovery is under way.

 

The British economy, however, is profoundly stuck. Between fall 2007 and summer 2009, its unemployment rate jumped to 7.9 percent, from 5.2 percent. Yet in the three and a half years since — even despite the stimulus provided by this summer’s Olympic Games — the number has hovered around 7.9. The overall level of economic activity, real G.D.P., is still below where it was five years ago, too. Historically, it’s almost unimaginable for a major economy to be poorer than it was half a decade ago. (By comparison, the United States has a real G.D.P. that is around a half-trillion dollars more than it was in 2007.) Yet austerity’s advocates continue to argue, as Cameron has, that Britain’s economic stagnation shows that the government is still crowding out private-sector investment. This, they say, is proof that austerity is even more essential than was first realized. Once the debts have been paid off and the euro zone solves its political problems, the thinking goes, the British economy will bounce back quickly.

Perhaps reality will make the lessons of these years clear to almost everyone.

[mike777]

Interesting related article in today's NYT: God Save the British Economy

 

 

Perhaps reality will make the lessons of these years clear to almost everyone.

 

 

Thanks for posting.

 

Not sure this settles the debate but I understand you say it has.

 

Keep in mind the other side claims the debt was the problem and pain such as UK and Greece have is the price of the cure.

 

btw the debt numbers dont seem to be mentioned. Has the Uk cut the debt and deficit? Is NGDP up or down?

 

With that said the UK way may be wrong.

 

-----

 

 

The U.S. unemployment rate, which shot up to 10 percent at the end of 2009 from 4.4 percent in mid-2007, has now dropped steadily to 7.7 percent. It might be a frustrating pace, but it’s enough to persuade most economists that a recovery is under way.

 

The British economy, however, is profoundly stuck. Between fall 2007 and summer 2009, its unemployment rate jumped to 7.9 percent, from 5.2 percent. Yet in the three and a half years since — even despite the stimulus provided by this summer’s Olympic Games — the number has hovered around 7.9. The overall level of economic activity, real G.D.P., is still below where it was five years ago, too. Historically, it’s almost unimaginable for a major economy to be poorer than it was half a decade ago. (By comparison, the United States has a real G.D.P. that is around a half-trillion dollars more than it was in 2007.) Yet austerity’s advocates continue to argue, as Cameron has, that Britain’s economic stagnation shows that the government is still crowding out private-sector investment. This, they say, is proof that austerity is even more essential than was first realized. Once the debts have been paid off and the euro zone solves its political problems, the thinking goes, the British economy will bounce back quickly

[mike777]

"...Today these two approaches offer a crucial case study and perhaps a breakthrough in an age-old economic argument of austerity versus stimulus..."

 

Keep in mind the debate is should public debt go down or up compared to GDP. That the debt or yearly deficits are the problem...

 

http://www.tradingeconomics.com/united-kingdom/government-debt-to-gdp

 

This seems to say public debt has gone up a ton compared to 2008, I think.

 

This seems to say GDP is roughly the same as 2008, I think.

 

http://www.tradingeconomics.com/united-kingdom/gross-national-product

 

This says the deficit in 2012 is about 300% more than 2008 deficit.

 

http://www.tradingeconomics.com/united-kingdom/government-budget

[hrothgar]

 

 

Equally significant, Boehner has consistently demonstrated that he can't control his caucus. No matter what he might personally think, he can't deliver votes. Trying to reach an agreement with Boehner will simply waste time.

 

I am guessing that the best option for Obama is to try to cut the leadership out of the loop, and negotiate directly with rank and file house members, and try to get enough of them together to break party unison.

 

 

In a completely unpredictable development, Boehner was unable to rally the House Republicans to support "Plan B" and has fled the capital...

[PassedOut]

In a completely unpredictable development, Boehner was unable to rally the House Republicans to support "Plan B" and has fled the capital...

Fascinating to watch this unfold. You can't make this stuff up...

B-)

[mike777]

The US is finally on the right monetary course. Respect to Bernanke, he has essentially converted all of the Fed board members to his way of thinking. And he has always thought that NGDP was the correct way to measure the tightness of monetary policy. He said in a BuisnessInsider interview this week that he credits Friedmann for insuring "that I did not allow low interest rates to fool me into believing that money was easy", similarly, he said in 2003 that NGDP was the appropriate macro economic indicator for deciding whether money was tight.

---

 

 

2008q1 14,273.9

2008q2 14,415.5

2008q3 14,395.1

2008q4 14,081.7

2009q1 13,923.4

2009q2 13,885.4

2009q3 13,952.2

2009q4 14,133.6

2010q1 14,270.3

2010q2 14,413.5

2010q3 14,576.0

2010q4 14,735.9

2011q1 14,814.9

2011q2 15,003.6

2011q3 15,163.2

2011q4 15,321.0

2012q1 15,478.3

2012q2 15,585.6

2012q3 15,811.0

 

 

Ok if these NGdp numbers are correct and they are the only ones i could find...what now?

 

---

 

 

"Which it will not until demand is restored to equilibrium levels."

 

 

Have no idea how to measure this.....are we there yet, if not what is the measure today?

--

 

 

edit

 

similarly, he said in 2003 that NGDP was the appropriate macro economic indicator for deciding whether money was tight.

---

Milton or Ben said this?

 

In any case was this a belief or did they have science to back this up here?

[kenberg]

I am a calm sort of guy. However, if our elected representatives cannot bring themselves to avoid a cliff that they themselves created, I would say that they have to go into a new line of work. Something they can handle. Unskilled labor maybe. These guys work for us and their lack of ability is unacceptable. Unacceptable means that we should not accept it. As one of their employers I accept their resignation effective Jan. 2.

[mike777]

I am a calm sort of guy. However, if our elected representatives cannot bring themselves to avoid a cliff that they themselves created, I would say that they have to go into a new line of work. Something they can handle. Unskilled labor maybe. These guys work for us and their lack of ability is unacceptable. Unacceptable means that we should not accept it. As one of their employers I accept their resignation effective Jan. 2.

 

 

Ken glad you are a calm guy. :)

 

OK for 2013 should we increase taxes, any taxes or reduce taxes, if so why?

 

Ok for 2013 should we try and decrease the planned 1000B deficit spending or increase spending, if so why?

 

 

At the very least one may argue the Democrats won so they carry the day?

 

Keep in mind if they do nothing, there is a plan in place that everyone voted on and was signed into law. :)

[Phil]

I am a calm sort of guy. However, if our elected representatives cannot bring themselves to avoid a cliff that they themselves created, I would say that they have to go into a new line of work. Something they can handle. Unskilled labor maybe. These guys work for us and their lack of ability is unacceptable. Unacceptable means that we should not accept it. As one of their employers I accept their resignation effective Jan. 2.

 

You might have stumbled onto something here. In addition to domestic and military cuts and a tax increase, the cliff triggers a con amendment (we can dream) that immediately sets a special election for all members of congress for the 1st week of March 2013.

 

That would get their attention.

[mike777]

Just for the record here are the cbo economic projections for 2013; take them for what you think they are worth:

 

Below, key highlights from the new CBO report.

 

Economic Outlook for Fiscal 2013 If We Go Over Fiscal Cliff :

Unemployment will rise to 9 percent by Q4 2013

GDP will shrink by 0.5 percent in 2013

The deficit will shrink to $641 billion in fiscal 2013 — roughly 4.0 percent of projected GDP

Inflation will remain low in 2013

 

The CBO also released its alternative scenario for Fiscal 2013 if the fiscal cliff is not hit and spending cuts are not automatically put in place:

Unemployment will fall to 8 percent by Q4 2013

GDP will grow by 1.7 percent in 2013

The deficit will shrink to $1 trillion from $1.1 trillion in 2012

 

 

 

 

http://www.businessinsider.com/cbo-2013-economic-projections-2012-8?op=1

 

----

 

 

So per these economic projections of just 2013 if we dont go off the cliff, unemployment will rise to 8%, and GDP growth will fall to 1.7%.

 

 

edit:

 

and the media loves to quote the cbo except when they dont.

[kenberg]

Ken glad you are a calm guy. :)

 

OK for 2013 should we increase taxes, any taxes or reduce taxes, if so why?

 

Ok for 2013 should we try and decrease the planned 1000B deficit spending or increase spending, if so why?

 

 

At the very least one may argue the Democrats won so they carry the day?

 

Keep in mind if they do nothing, there is a plan in place that everyone voted on and was signed into law. :)

 

I do not expect either John Boehner or Barak Obama to call me to ask for advice. I don't ask them for advice about mathematics. To use a tired sports analogy, a coach is not supposed to run the plays that I think should be run, he is supposed to run the winning plays,.

 

I do, of course, have general views. Many I have expressed. Basically, I live in this country, I wish it well, I am prepared to accept that I may have to accept some adjustments in benefits such as paying more for medicare coverage. I accept this providing there is an overall plan to put the nation on a sound financial footing, that the wealthy realize that they also live in this country and have a responsibility to see it thrive, and that the plan be based on reasonable expectations of consequences.

 

They are supposed to act, they are supposed to stand up to their base and their financial backers, they are supposed to get it done. I am perfectly willing to admit, in fact I insist, that I am not an economic guru. But at a basic level, economic brilliance is not what we lack nearly as much as courage and responsibility. If I can understand that perhaps I need to be paying more for medicare, it baffles me why a guy making a couple of mil per year cannot understand that just maybe he needs to be paying more in taxes. I suspect he, or most, can understand this as long as he is assured that we do not intend on solving all of our problems totally at his expense. On this, he and I might well find common ground. It's a pity that Mr. Obama, pledged to support my medicare through thick and thin, and the Republicans, pledged to support the rich through thick and thin, cannot put a little more faith in the American public to understand that something must be done.

 

We have a financial deficit. We also have a severe deficit in leadership.

 

No, I will not be outlining the main features of the Berg economic plan. There isn't one. I'm not the President, the Speaker of the House, nor the Majority Leader, or Minority Leader, in the Senate. They need to get this done, and it should not be crap. We don't need a Ph.D. in economics to recognize crap.

 

I never really bought into the "I'm mad as hell and I'm not going to take it any more" scene. It seemed juvenile. But it is reasonable to expect these guys to do their job or else go get a job that they can do.

[y66]

As the nation awaited news — any news! — about what would happen to the nation’s fiscal health, Dr. Ruth Westheimer, the sex therapist, volunteered on Twitter that lawmakers who could not compromise “probably aren’t good lovers.”

[blackshoe]

ROFL! Some people will do anything for attention.

[kenberg]

ROFL! Some people will do anything for attention.

 

Becky continues to be astonished by what I learn from reading BBO threads.

[mike777]

Becky continues to be astonished by what I learn from reading BBO threads.

 

 

Ken we have 2 options:

1) doing nothing

2) doing what you want

 

If your option is better ok.

 

We cannot agree increase taxes..lower taxes

increase spending....decrease

 

you do the math

 

 

 

I understand you want others to do the math. You want others to lead.

 

 

ok ok this is unfair .......feel free to insert other...that is called politics

[kenberg]

Ken we have 2 options:

1) doing nothing

2) doing what you want

 

I have never before been given such stunning power. You are saying that doing what Y66 wants, or what Blalckshoe wants, or perhaps what you want, is not even on the table? It's my way or nothing? Does Obama know this? Should we not call Boehner et all Congreesional leader? Should we just call them electees? Some sort of neutral term indicating we really do not expect much from them? They got elected, now they can putter around and if any crisis comes up they should either do nothing or call Ken Berg for the solution?

 

 

We cannot agree increase taxes..lower taxes

increase spending....decrease

you do the math

[/Quote]

What math?

 

 

I understand you want others to do the math. You want others to lead.

 

ok ok this is unfair .......feel free to insert other...that is called politics

[/Quote]

 

People run for the job of leading the country and then it is unfair to expect them to lead? Why is that? If really they, or you, want me to make all of the decisions they should have given me a call before setting up this stupid fiscal cliff. I'm pretty sure I had nothing good to say about the idea at the time they put it in place..The idea was that they would set something up that was so awful that even Congress would realize it could not be allowed to happen. I do not share this faith.

 

It's not like I have said nothing about the general principles. I am prepared to accept some adjustments in my medicare payments providing it is part of a workable plan where everyone accepts some responsibility for bringing the deficit under control. Medical expenses need to be brought down, but I want good medical care available. Since other places have good care at lesser cost, this does not seem like an unrealistic goal. But even if the costs are brought down, there will be costs. We are lucky enough to live at a time when medical care has made enormous advances, and these advances cost money. I expect to pay my share.

 

I really don't understand your post at all.

 

At a fundamental level, our elected representatives are an embarrassment to the country.

 

One of the lesser known quotes from the Pogo strip: "If I could only write I would write a nasty letter to the Mayor if he could only read".