As Goldman Slashes 0.5% From Q4 Growth, How Much More "Government Shutdown" GDP Pain Is There?

Over the past month there has been a sudden shift in the public's attention to the debt ceiling debate and away from the government shutdown, which since it did not result in the Armageddon many had predicted (same as the sequester) has been promptly forgotten. However, the reality is that while government workers are getting a post-facto paid vacation when the government reopens, current consumption is substantially curtailed and furthermore, government appropriation budgets are in limbo and thus unspent (for a prior analysis of how the calendar of government appropriations may favorable impact the late summer economy, read here [8]). Which means with every passing day the US economic output is declining, and once again sellside analyst estimates will (as usual) have to be substantially lowered.
Enter Goldman Sachs, whose Alex Phillips just said that: "If a longer-term resolution can be reached over the coming days, we would expect the downside risk from the fiscal debate to be limited to about 0.5pp in Q4, compared to our current growth forecast of 2.5%." In other words, pro forma for the 14 day government shutdown (and continuing) Goldman has just cut its Q4 GDP forecast from 2.5% to 2.0%. And to think this was the year that Jan Hatzius was desperately praying his optimism (for the 4th year in a row - and who can possibly forget Hatzius boosting its Q4 2010 GDP estimate from 4% to 5.8% [9]- and the same every year since) would finally be rewarded. Sorry Jan: we were right again, you were wrong. Again.
But the bigger issue for the US economy is that with every passing day, another chunk of consumption, i.e., economic growth is being eliminated. How much? Goldman explains:

From October 1-4, we believe the shutdown probably reduced federal compensation by roughly $400mn per day. We would expect the non-compensation aspects of the initial stage of the shutdown to have been very modest. Overall, the first four business days of the shutdown probably reduced growth by 0.16pp.

The shutdown has now lasted a second week, but the incremental effect should be smaller. The Department of Defense has brought most of its employees back to work, leaving 450k federal employees still out of work, and thus reducing the effect on federal compensation to $225mn per day. We would expect a small reduction in services-related consumption as well. After the second week of shutdown, we believe the cumulative reduction in Q4 real GDP growth amounts to 0.28pp (Exhibit 2).

From here the direct effects of shutdown will depend on the flow of federal employees into and out of work, and whether agencies draw down remaining funds which could deepen the spending reduction. As the shutdown entered its second week, a few agencies recalled workers as needs arose. Other agencies have only recently furloughed workers as residual funding for activities ran dry. If the shutdown continues, our impression is that the net effect of this will be that more workers will be furloughed as days go by, but that this is unlikely to change the aggregate effect substantially.

Going forward, the effect that the ongoing debate will have on growth will depend on whether the agreement reached over the coming days is limited to only a short-term extension, or if a longer-term (i.e., through 2014) resolution is achieved. It also of course depends on whether the shutdown is ended over the coming week. As noted earlier, at this stage the duration of the agreement is unclear, but it seems increasingly likely that the shutdown will be ended with the resolution of the debt limit. If a longer-term resolution can be reached over the coming days, we would expect the downside risk from the fiscal debate to be limited to about 0.5pp in Q4, compared to our current growth forecast of 2.5%.

And what if a resolution can not be reached in the coming days, and government remains shut for the foreseeable future? As shown on the chart below, the GDP decline is largely cumulative and linear, and with every passing business week, another 0.2% in Q3 GDP is wiped out.
[10]
In other words, if for some reason government is not reopened for the entire 4th quarter, just the government shutdown alone will push Q4 GDP to 0%, assuming the consensus is accurate in its 2.0% starting estimate. This of course excludes the massive hit on corporate confidence as a result of the lack of major government appropriations, which we believe reduce Q4 GDP by another 0.2% per week however not linearly, but exponentially, and the longer the shutdown continues, the more negative Q4 GDP will be.
Which, perversely, is precisely what the Fed needs. Because while on one hand the lack of economic data will not shock everyone into grasping just how depressed the economy has become, the realization once everything reopens will be precisely the carte blanche Yellen needs for the Fed to continue an Untapered QE well into 2014, and with that preserving the wealth effect for Yellen's superior: the criminal banking syndicate.

U.S. May Join Germany of 1933 in Pantheon of Defaults

Reneging on its debt obligations would make the U.S. the first major Western government to default since Nazi Germany 80 years ago.
Germany unilaterally ceased payments on long-term borrowings on May 6, 1933, three months after Adolf Hitler was installed as Chancellor. The default helped cement Hitler’s power base following years of political instability as the Weimar Republic struggled with its crushing debts.
“These are generally catastrophic economic events,” said Professor Eugene N. White, an economics historian at Rutgers University in New Brunswick, New Jersey. “There is no happy ending.”
The debt reparations piled onto Germany, which in 1913 was the world’s third-biggest economy, sparked the hyperinflation, borrowings and political deadlock that brought the Nazis to power, and the default. It shows how excessive debt has capricious results, such as the civil war and despotism that ravaged Florence after England’s Edward III refused to pay his obligations from the city-state’s banks in 1339, and the Revolution of 1789 that followed the French Crown’s defaults in 1770 and 1788.
Failure by the world’s biggest economy to pay its debt in an interconnected, globalized world risks an array of devastating consequences that could lay waste to stock markets from Brazil to Zurich and bring the $5 trillion market in Treasury-backed loans to a halt. Borrowing costs would soar, the dollar’s role as the world’s reserve currency would be in doubt and the U.S. and world economies would risk plunging into recession -- and potentially depression.

Senate Talks

Senate leaders of both parties are negotiating to avert a U.S. default after a lapse in borrowing authority takes effect Oct. 17, even as senators block legislation to prevent one and talks between the White House and House Republicans have hit an impasse. Democratic lawmakers said Oct. 12 that the lack of movement may have an effect on financial markets. After Oct. 17, the U.S. will have $30 billion plus incoming revenue and would start missing payments sometime between Oct. 22 and Oct. 31, according to the Congressional Budget Office.

Serial Defaulter

Germany, staggering under the weight of 132 billion gold marks in war reparations and not permitted to export to the victors’ markets, was a serial defaulter from 1922, according to Albrecht Ritschl, a professor of economic history at the London School of Economics. That forced the country to borrow to pay its creditors, in what Ritschl calls a Ponzi scheme.

At the Root of It All

“Reparations were at the heart of the issue in the interwar years,” Ritschl said in a telephone interview. “The big question is why anyone lent a dime to Germany with those hanging over them. The assumption must have been that reparations would eventually go away.”
While a delinquent corporation may go out of business, be broken up, sold to a competitor, or otherwise change its shape, sovereign defaulters are different. Weimar Germany deferred payments, stopped transfers, reformed the currency and wrote down debt, wringing a series of agreements from its creditors before the Nazis repudiated the obligations in 1933.
It took until the 1953 London Debt Agreement to lay to rest the nation’s reparations difficulties, essentially by postponing any payments until after reunification in 1990 of East and West Germany, according to Timothy Guinnane, Professor of Economic History at Yale University in New Haven, Connecticut. The U.S., eager to ensure Germany was a bulwark against communism, pressured creditors to agree to debt relief, according to Guinnane.

‘Economic Strain’

“The U.S. was not being generous or magnanimous in the London Debt Agreement, it rarely is,” Guinnane said in an e-mail. “Rather, it understood that if Germany was forced to repay all the debts it technically owed, it would put the new Federal Republic under intolerable political and economic strain.”
Payments on about 150 million euros ($203 million) of bonds issued to fund reparations ended in October 2003, according to the Associated Press.
After sovereign defaults and before a nation is allowed to borrow again, some sort of repayment is typically made, Carmen Reinhart and Kenneth Rogoff wrote in their 2009 book on sovereign bankruptcies “This Time Is Different.” While Russia’s Bolshevik government refused to pay Tsarist debts, when the country re-entered debt markets it negotiated a token payment on the debt, according to the book.

Germany, France

Germany and France have both defaulted eight times since 1800, according to Reinhart and Rogoff. While Germany was sufficiently big and strategically important to be helped to peaceful prosperity by its creditors, default typically doesn’t end well for smaller nations.
The U.S. has even failed to honor its obligations to the letter in the past. In 1979 it was late making payments on about $122 million of bills, blaming technical difficulties that the Treasury said stemmed from a failure in word processing equipment, Terry Zivney and Richard Marcus wrote in August 1989 in “The Financial Review.”
In 1935, the Supreme Court ruled the federal government was within its rights to reject claims for payment in gold on bonds that gave holders the option to demand the metal. Because the terms of the contract weren’t fully honored, some would argue that was tantamount to a default.
In 1790, the U.S. deferred interest payments on debt assumed by the new federal government until 1801, according to Reinhart and Rogoff.

Court Pursuit

Serial defaulters Argentina and Greece have retained political, if not economic independence. The Latin American nation failed to meet its commitments five times since 1951 and in 2001 gained the record for the largest-ever restructuring, a distinction it held until overtaken by Greece in 2012. Argentina’s bondholders are still pursuing the nation through the courts.
Including 2012, Greece has defaulted six times since 1826, three years before it gained independence, and has spent more than half the years since 1800 in default, according to Reinhart and Rogoff.
The biggest emerging-markets defaults in the past 15 years illustrate the cycle of contagion that typically marks sovereign debt crises.

Russian Restructuring

Russia halted payments on $40 billion of local debt in 1998 after oil, its main export, plunged 42 percent amid a global economic slowdown triggered by the Asian financial crisis. By the time it devalued the ruble and defaulted that August, the government had drained about half its foreign reserves and made an unsuccessful bid to increase the $22.6 billion international aid package it had received.
Russia’s debt restructuring prompted investors to pull out of emerging markets, plunging Argentina into recession. By December 2001, when the South American country halted payments on $95 billion of bonds, the economy had contracted three successive years, cutting into tax revenue and pushing foreign reserves down to almost a six-year low.
Those defaults took place because events had rendered the nations insolvent, something that doesn’t apply to the U.S., said the LSE’s Ritschl.
“The only situation that really parallels the U.S. situation at present is the U.S. situation,” he said. “There’s really no doubt about the solvency of the U.S. Treasury.”

http://www.bloomberg.com/news/print/2013-10-13/u-s-risks-joining-1933-germany-in-pantheon-of-deadbeat-defaults.html

Reserve Currency Status does not last forever

Skype under investigation in Luxembourg over link to NSA

Skype is being investigated by Luxembourg's data protection commissioner over concerns about its secret involvement with the US National Security Agency (NSA) spy programme Prism, the Guardian has learned.
The Microsoft-owned internet chat company could potentially face criminal and administrative sanctions, including a ban on passing users' communications covertly to the US signals intelliigence agency.
Skype itself is headquartered in the European country, and could also be fined if an investigation concludes that the data sharing is found in violation of the country's data-protection laws.
The Guardian understands that Luxembourg's data-protection commissioner initiated a probe into Skype's privacy policies following revelations in June about its ties to the NSA.
The country's data-protection chief, Gerard Lommel, declined to comment for this story, citing an ongoing investigation. Microsoft also declined to comment on the issue.
Luxembourg has attracted several large corporations, including Amazon and Netflix, due to its tax structure.
Its constitution enshrines the right to privacy and states that secrecy of correspondence is inviolable unless the law provides otherwise. Surveillance of communications in Luxembourg can only occur with judicial approval or by authorisation of a tribunal selected by the prime minister.
However, it is unclear whether Skype's transfer of communications to the NSA have been sanctioned by Luxembourg through a secret legal assistance or data transfer agreement that would not be known to the data protection commissioner at the start of their inquiry.
Microsoft's acquisition of Skype tripled some types of data flow to the NSA, according to top-secret documents seen by the Guardian.
Microsoft bought Skype for $8.5bn (£5.6bn) in 2011.
The US software giant was the first technology group to be brought within the NSA initative known as Prism, a scheme involving some of the internet's biggest consumer companies passing data on targeted users to the US under secret court orders.

Having once been considered a secure chat tool beyond the reach of government eavesdropping, Skype is now facing a backlash in the wake of the Prism revelations.

"The only people who lose are users," says Eric King, head of research at human rights group Privacy International. "Skype promoted itself as a fantastic tool for secure communications around the world, but quickly caved to government pressure and can no longer be trusted to protect user privacy."

http://www.theguardian.com/technology/2013/oct/11/skype-ten-microsoft-nsa 

Image graphic US Debt

Early FX Indications: EURJPY Slide Implies 15 Point Futures Drop At Open

In a world in which only the central banks' balance sheets matter, and everything, when stripped of its product complexity, is simply a derivation of a cheap money carry trade, as can be seen on the chart below showing the correlation between the the ES and the EURJPY which have become interchangeable...

... then the futures open in 4 hours should be interesting following the early weakness in both EURJPY and USDJPY.


The AUDJPY is having an even worse day following Saturday's news of a big export miss in China:

Interesting because the implied 15 point ES drop in futures as of the early indications...

... is hardly the large enough drop that is needed to once again the GOP in either the House or the Senate to scramble and get a deal done, following  the recent two-day epic surge in the market on hopes that deal concerns would no longer be an issue.

Dual crises: Shutdown, debt limit could merge

WASHINGTON (AP) -- Democrats and Republicans regularly warn about the dire consequences of legislation they don't like. Often it's gloom-and-doom partisan hype.

This time, though, people already are feeling the fallout as twin tempests - the partial government shutdown and a potential default on the country's debts - threaten to form a single economic-policy superstorm.

The shutdown began Oct. 1 because a divided Congress couldn't agree on a budget. Thousands of federal workers are furloughed, national parks are closed and many nonessential governmental services are dialed back or put on hold.

The shutdown doesn't directly threaten Social Security, other mandatory benefits or U.S. interest payments on the national debt.

Breaching the debt limit would.

Unless Congress raises that limit soon, the government will run out of the authority to borrow and pay its bills on Thursday, the Treasury Department says.

A default would challenge the U.S. dollar's status as the world's "reserve" currency. More than 60 percent of all foreign country reserves are in U.S. dollars, the prime currency in international trade.

"Without enough money to pay its bills, any of its payments are at risk - including all government spending, mandatory payments, interest on our debts, and payments to U.S. bondholders," the bipartisan Committee for a Responsible Federal Budget said in a recent report.

A look at what you need to know about the two fiscal matters:

---

The debt ceiling is the legal limit to all federal borrowing, an absolute ceiling on the national debt that cannot be breached.

It can be raised.

Since Congress first established a limit in 1917, it has been raised roughly 100 times. Raising the statutory limit does not authorize borrowing for new spending. It only allows the government to keep borrowing to pay existing bills.

The government borrows money mostly by selling Treasury bills, notes and other securities, including U.S. savings bonds. Individuals, mutual funds, corporations and governments worldwide buy the bonds.

Paying interest on these bonds is one of the government's largest single expenses.

In the budget year that ended Sept. 30, the government made $396 billion in interest payments, including payments on bonds held in some government accounts such as the Social Security Trust Fund.

The national debt is the accumulation of annual budget deficits. It first crossed the $1 trillion mark early in the administration of President Ronald Reagan.

It stood at $10.6 trillion when President Barack Obama took office in January 2009 and is $16.7 trillion today - bumping up against the debt limit, which is also $16.7 trillion rounded off.

Recently, the Treasury Department has used complicated accounting maneuvers to keep from technically exceeding the limit. But it's running out of such tricks.

--

There are a couple Hail Mary plays the government could try if the deadlock persists: selling gold from U.S. reserves, selling or leasing government buildings or national parklands and minting special large-denomination coins.

The Obama administration has shown little interest in such steps.

One possibility was suggested in 2011 by former President Bill Clinton and more recently by House Democratic leader Nancy Pelosi of California: have Obama raise the ceiling on his own, citing the part of the 14th Amendment that says "the validity of the public debt of the United States, authorized by law ... shall not be questioned."

Obama was asked at a Twitter town hall forum in July whether he would use that amendment as the basis to raise the debt ceiling. "I don't think we should get to the constitutional issue," he tweeted. "Congress has a responsibility to make sure we pay our bills. We've always paid them in the past."

His spokesman Jay Carney has said the administration doesn't believe the amendment gives the president the authority to ignore the debt ceiling.

---

While budget deficits are coming down, the government continues to add to the national debt.

The deficit represents the annual difference between the government's spending and the tax revenues it takes in. Each deficit contributes to the national debt. The last time the government ran an annual surplus was in 2001.

The annual deficit declined to roughly $642 billion for the just-ended budget year, the first time in five years it has dropped below $1 trillion. It was $1.4 trillion when Obama took office in 2009.

Still, the government must borrow 19 cents for every dollar it spends, pushing up the nation's overall debt level.

One reason that keeps increasing: the army of retiring baby boomers leaving the workforce and beginning to collect Medicare and Social Security benefits.

---

Obama and Democratic leaders denounce as a form of blackmail GOP efforts to use the shutdown and debt limit debate to delay or defund Obama's health care law.

Efforts by opposition parties to try to put strings on a president's debt-limit increases have been pretty standard going back at least to President Dwight D. Eisenhower in the 1950s.

"Congress consistently brings the government to the edge of default before facing its responsibility. This brinkmanship threatens the holders of government bonds and those who rely on Social Security and veterans' benefits," Reagan said in a 1987 radio address. He was scolding the Democratic-controlled Congress for seeking to modify or defeat his proposal to raise the debt limit.

He raised the debt ceiling 18 times.

As a senator representing Illinois, Obama voted against President George W. Bush's 2006 increase in the debt limit, calling it a "leadership failure" and "sign that the U.S. government can't pay its own bills."

Bush won that battle.

http://hosted.ap.org/dynamic/stories/U/US_FISCAL_SHOWDOWNS_EXPLAINED?SITE=CAOAK&SECTION=HOME&TEMPLATE=DEFAULT

Goldman: "2013 Is Different: For The Second Time The Expectation Of A Last Minute Deal Was Incorrect"

The main reason for last week's massive market surge on nothing but hope, if no actual deal, is due to the market's now habituated response that no matter what happens in Congress, there will always be a last minute deal. After all this was the pattern with the 2011 government shutdown and debt ceiling deal, and the 2012 fiscal cliff solution: surely enough points to make a pattern. However, as Goldman's Alec Phillips points out, 2013 may be different: "First, Congress allowed sequestration to take effect on March 1, despite the expectation among many observers earlier in the year that the cuts would be pushed off in light of the predicted the negative practical and economic effects that might result. Then, two weeks ago, Congress allowed the government to shut down. For the second time this year, the expectation of a last-minute deal turned out to be incorrect."
More from Goldman:

Since 2011, split control of Congress has led to greater policy uncertainty, but fiscal deadlines always seemed to end with a last-minute resolution. For example, in early 2011, amid a dispute over spending levels and after several short-term extensions of spending authority, Congress nearly allowed spending authority to lapse. This would have resulted in a government shutdown, but it was avoided at the last minute (agreement was reached at 11:15 pm, just short of the midnight deadline). Over the following two years, Congress avoided several possible shutdowns by passing another eight “continuing resolutions” to extend spending authority. The “fiscal cliff” was also averted following a last-minute deal, as was the 2011 debt ceiling debate.

This year has been different. First, Congress allowed sequestration to take effect on March 1, despite the expectation among many observers earlier in the year that the cuts would be pushed off in light of the predicted the negative practical and economic effects that might result. Then, two weeks ago, Congress allowed the government to shut down. For the second time this year, the expectation of a last-minute deal turned out to be incorrect.

After reaching agreement ahead of (or slightly after) so many deadlines over the last couple of years, the failure to address sequestration and the government shutdown could be interpreted to suggest that conventional wisdom that Congress always reaches a last minute agreement is now broken. This interpretation is likely behind the market reaction ahead of the debt limit deadline.

While there is an element of truth to this—some lawmakers have begun to shrug off the warnings of negative consequences from missing fiscal deadlines—we believe the shutdown occurred and the sequester took effect possibly because Republican leaders viewed it as necessary in order to ensure an increase in the debt limit. This is why we have held the view that while the shutdown was a negative development in its own right, it did not imply greater risk to the debt ceiling hike, and might have even reduced the risk. 

So what does this mean for the path ahead? We interpret the events over the last year to mean that while Congress has become increasingly willing to allow more incrementally negative policy outcomes like the shutdown and the sequester, the debt limit still represents a line that Congress is not willing to cross.

Maybe. Then again, if the increasingly prevalent thought that the US can shoulder a prioritization of payments without actually defaulting by satisying interest payments if not non-critical payments that are not supported by incoming tax revenues, the debt ceiling deadline could mean the third time is the hardly the charm when it comes to crossing critical D-Day headlines. Very much to what would be the market's complete shock and horror.

 

Peter Schiff On The Debt Ceiling Delusions

The popular take on the current debt ceiling stand-off is that the Tea Party wing of the Republican Party has a delusional belief that it can hit the brakes on new debt creation without bringing on an economic catastrophe. While Republicans are indeed kidding themselves if they believe that their actions will not unleash deep economic turmoil, there are much deeper and more significant delusions on the other side of the aisle. Democrats, and the President in particular, believe that continually taking on more debt to pay existing debt is a more responsible course of action. Even worse, they appear to believe that debt accumulation is the equivalent of economic growth.
If Republicans were to inexplicably prevail, and the federal government were to cut spending so that its expenditures matched its tax revenues (a truly radical idea) the country's financial mess would be laid bare. The government would have to weigh the relative costs and benefits of making interest payments on Treasury debt (primarily to foreign creditors) or to trim entitlements promised to U.S. citizens. But those are choices we will have to make sooner or later anyway. In fact we should have dealt with these issues years ago. But generations of mechanistic debt ceiling increases have allowed us to perpetually kick the can down the road. What could possibly be gained by doing it again, particularly if it is done with no commitment to change course?
The Democrats' argument that America needs to pay its bills is just hollow rhetoric. Paying off one's Visa bill with a new and bigger MasterCard bill can't be considered a legitimate payment of debt. At best it is a transfer. But in the government's case, it doesn't even qualify as that. Treasury debt is primarily bought by the Fed, foreign central banks, and major financial institutions. None of that will change with a debt ceiling increase. We will just go to the same people for greater quantities. So it's like paying off your Visa card with a bigger Visa card.
According to modern economists, an elimination of deficit spending will immediately cause a dollar for dollar decrease in GDP. For example, if the government stopped sending food stamp payments to poor people, then grocery stores would lose business, employees would be laid off, and the economy would contract. But this one dimensional view fails to appreciate that the purchasing power of the food stamps had to come from somewhere. The government can't create something from nothing. Taxation transfers purchasing power from people living in the present to other people living in the present. In contrast, borrowing transfers purchasing power from people living in the future to people living in the present. The good news for politicians is that future people don't vote in current elections (and current voters don't seem to appreciate the cost to their future selves of current policy).
The Obama Administration has congratulated itself for turning around the contracting economy that it inherited from President Bush. But even if you take the obscenely low official inflation statistics at face value, we only grew at an anemic 1.075% annual pace from 2009 to 2012 (far below the between 3% and 4% that the U.S. averaged post World War II). Sadly, this growth pales in comparison to the accumulation of new debt that we are borrowing from the future.
U.S. GDP is measured at roughly $15 trillion per year. 2% growth means that each year the GDP is approximately $300 billion larger than the prior year. But in the less than five years since Obama took office, the federal government has added, on average, about $1.3 trillion per year in new debt, a pace that is four times higher than the growth. If the deficit were subtracted from GDP, America would be shown to be stuck in a severe recession that Washington can't acknowledge. But such a reality is more consistent with the dismal job prospects and stagnant incomes experienced by most Americans.
The belief that deficits add to the economy, and that debt can be dealt with in an imaginary future (that never seems to arrive) is the foundation upon which the President can chastise the Republicans as irresponsible suicide bombers. Using this logic, he can argue (with a straight face) that borrowing is the equivalent of paying. That the President can make this delusional argument is not so surprising (no lie too great for the typical politician to attempt). What is alarming is that the media and the public have swallowed it so willingly. As they call for limitless increases in borrowing, Democrats have offered no plan to reduce the current debt and they are unwilling to negotiate with Republicans on that topic. Yet somehow they have been perceived as the party of fiscal responsibility.
While the Republicans have a dismal track record of their own when it comes to budgetary management, it can't be disputed that the minor dip in that rate of increase in spending that resulted from the recent Sequester, happened only because they dug in on the issue. Without the 2011 debt ceiling drama, there is no chance that any spending would have been touched.
Democrats had warned that the $85 billion in sequestration cuts slated for fiscal year 2013 (about 2% of the Federal budget) would be sufficient to bring on economic Armageddon. But guess what? We survived. Recently, Senate Majority Leader Harry Reid continued with such rhetoric by declaring that there are no more cuts to be found anywhere in the $3.8 Trillion dollar federal budget. (Apparently he missed last week's 60 Minutes piece on the spreading epidemic of federal disability fraud.)
We have to acknowledge what even the Republicans haven't fully grasped. We are in such a deep debt hole that there is no solution that does not involve serious economic pain. Tea Party Republicans rightly believe that government spending is a drag on economic growth. As a result, they conclude that immediate spending cuts will help with the "recovery". But they are confusing real economic growth with the delusional expansion created by deficit spending (which is actually damaging the real economy). If they cut the deficit, this phony economy may likely implode and cause widespread distress.
So even though a reduction in government borrowing and spending does help the economy, it won't feel very helpful tomorrow. The more we borrow and spend today, the more we will suffer tomorrow when the bills come due. Ironically, cutting government spending now helps the economy by allowing the economic adjustment to happen sooner rather than later. But this type of long-term thinking is very difficult for politicians to consider.
Unfortunately our debts don't leave us much in the way of choices. We can choose to pay now or try to pay later. But the longer we wait the steeper the bill.

http://www.zerohedge.com/print/480080

Republicans Should Fight or Give Up

October 11, 2013 1:31 PM

The findings of the newly released NBC News/Wall Street Journal poll are simply brutal for congressional Republicans. Not only are they getting the lion's share of the blame for the government shutdown, but President Obama's numbers have actually improved. Worse, Obamacare's numbers are improving, as well.

That poll caused quite a sensation on Twitter last night, and while it is worse for Republicans than recent readings from the Associated Press's poll, NBC News/Wall Street Journal has a long track record of solid readings. This is not a result to be taken lightly.

Moreover, it makes empirical sense considering the message coming from congressional Republicans in the last week—or perhaps better put the lack of a message. Marc Thiessen of the Washington Post aptly labeled this the "Seinfeld Shutdown," a shutdown about nothing. That is not how it was supposed to be, of course. It was supposed to be a shutdown about Obamacare, but Republican leaders were quickly sidetracked by low-hanging fruit like the closure of the National Mall, Harry Reid's gaffes, and Obama's refusal to negotiate. Tactically, this might have made sense, but strategically it was a terrible move. If the shutdown was supposed to be about Obamacare, then that should have been the only topic Republicans discussed.

Moreover, insofar as Republican leaders have discussed Obamacare, they have done so ineptly, and have repeated Mitt Romney's grievous mistakes from 2012. Looking at the topline numbers on Obamacare, we can see it is very unpopular, but dig a little deeper and only about 30 to 40 percent of people believe that the law will make them worse off. This is a significant failure in political communication by the Republican party. Government agencies like the Congressional Budget Office and the Centers for Medicare and Medicaid Services have warned since 2010—in their dry, technocratic rhetoric—that Obamacare was going to harm middle class families. For weeks now stories have been trickling out about people receiving letters from their insurers notifying them that their rates are being doubled. For over a year we have similarly heard stories about hiring freezes or hours being cut because of Obamacare. And yet despite all this hard data, the public still has not connected the dots. 

The blame belongs not to the Tea Party, not to the Republican grassroots, not to the back-benchers in the House, but to the party's leaders, the ones who have the microphones stuck in their faces every day. They, and only they, have the power to make the case to the American people that Obamacare is such a danger to them that it needs to be gotten rid of as soon as possible. Mitt Romney should have, but did not, get on the television in late October 2012 to warn people that a vote for Obama was a vote to double their premiums, make it harder for grandma to get hospital care, and make it harder for you to make your ends meet because of job cutbacks. Similarly, Republicans should have, but did not, acknowledge that while the shutdown was harming certain sectors of the country, it was far less damaging then the havoc Obamacare is set to wreak on the people.

And so it is that people would rather have the government reopened (largely a symbolic gesture as this shutdown has left vast swaths of the country unaffected) than have Obamacare dismantled (something that will prevent material harm done to millions of middle class people).

Obamacare is not going to defeat itself. If it is going to be taken down, it is up to the Republican party to formulate a coalition of people who have been or will be made worse off because of it. Those people are out there, but Republicans have failed to unite and mobilize them under the party's banner. So long as they continue to fail on this front, Obamacare will remain on the books. It has the benefit of our system's status quo bias, and Democrats have an 80-year track record of capturing interests through the distribution of benefits, transforming them into party clients, and delivering them at the ballot box. 

Republican leaders tend to come from one of two camps. The first is the go-along-to-get-along camp that is happy merely to manage the never-ending growth of government. The second wants to cut back on the size of government, but couches their rhetoric in the hazy, forgotten past of the country's founding; their arguments against the growth of government are always framed in terms of the Constitution, the rights of man, or other abstract concepts that have little impact on the lives of average American.

Ronald Reagan was the only political leader since the New Deal to argue effectively that government should be reduced because it is bad for people in a concrete sense. Yes, he talked about the Founding, and yes he was willing to compromise where it counted. But in his Inaugural Address he said, "Government is not the solution to our problem; government is the problem." For the next quarter century, American liberalism was on the run, so effective was Reagan's framing of the debate.

Republicans who wonder why they have generally failed to win national electoral victories since Reagan should ponder his statement, and how they have failed to expand upon it. Poll after poll indicates that today it is a popular position. People think government is harming them. If Republicans want to win, not just electoral victories, but policy victories, they need to follow the Gipper and explain in real terms how government is harming average Americans and how they will fix those harms. They have failed to do that in general over the last decade, and they have failed to do that in particular with Obamacare. It is a big reason why they only control the House and why Obamacare is still on the books.

And if congressional Republicans are not prepared to begin making that case loud and clear right now, the sooner they capitulate the better. Their only hope of victory in this fight is to convince the public that keeping Obamacare is worse than shutting down the government. If they are not prepared to make that case, then they have no hope of winning.

http://www.weeklystandard.com/print/blogs/republicans-should-fight-or-give_762423.html

US And European Regulators Probing FX Market Rigging

10 weeks ago we warned that the persistent "banging the close" action [7] in FX markets warranted an investigation into market rigging and manipulation. It seems the US, Swiss, UK, and EU regulators have finally woken up:

• *U.S. SAID TO OPEN CRIMINAL PROBE OF CURRENCY MARKET RIGGING
• *SWISS, UK REGULATORS REVIEWING ALLEGED CURRENCY MARKET RIGGING
• *EU ANTITRUST REGULATORS SAID THEY ARE PROBING CURRENCY MARKET

Of course, gold and silver remain highly efficient and "clean" markets...

As we noted 2 months ago... [7]
"Banging the close," is hardly a new 'event' but the ubiquity with which it is occurring around 4pm GMT (when major FX market benchmarks known as 'WM/Reuters rates' are set) is prompting authorities to investigate potential abuse of these benchmarks by the major banks. From Libor to ISDAFix and from base-and-precious metals to energy markets, adding the largest markets in the world - foreign exchange - to the banks' pernicious manipulations does not seem like a stretch. Critically, benchmark providers base daily valuations of indexes spanning different currencies on the 4 p.m. WM/Reuters rates (which in turn drives derivative settlements and triggers).
[8]
Stunningly, the same pattern - a sudden surge minutes before 4pm in London on the last trading day of the month, followed by a quick reversal - occurred 31% of the time across 14 FX pairs over 2 years, according to data compiled by Bloomberg [9]. For the most frequently traded pairs, such as EURUSD, it happened about half the time! U.S. regulators have sanctioned firms for banging the close in other markets; we await the results of the current probe...

Via Bloomberg,
The U.S. Justice Department has opened a criminal investigation of possible manipulation of the $5.3 trillion-a-day foreign exchange market, a person familiar with the matter said. The Federal Bureau of Investigation, which is also looking into alleged rigging of interest rates associated with the London interbank offered rate, or Libor, is in the early stages of its currency market probe, said the person, who asked not to be identified because the inquiry is confidential.
...
The U.S. investigation comes as the U.K. Financial Conduct Authority said in June it was reviewing potential manipulation of exchange rates. That month, allegations that dealers at banks pooled information through instant messages and used client orders to move benchmark currency rates were reported by Bloomberg News. Regulators are probing the alleged abuse of financial benchmarks used in markets from oil to interest rate swaps by the firms that play a central role in setting them.
...
European Union antitrust regulators are examining the possible manipulation of currency rates, following a Swiss probe into whether banks colluded to manipulate the $5.3 trillion-a-day foreign exchange market. Joaquin Almunia, the EU’s competition commissioner, said he learned in the last few days of activities that “could mean violation of competition rules around the possible manipulation of types of exchange rates,” according to a live chat on the EU’s website Oct. 7. ?

http://www.zerohedge.com/print/480057

Is red state America seceding?

In the last decade of the 20th century, as the Soviet Empire disintegrated, so, too, did that prison house of nations, the USSR.
Out of the decomposing carcass came Russia, Belarus, Ukraine, Lithuania, Latvia, Estonia and Moldova, all in Europe; Georgia, Armenia and Azerbaijan in the Caucasus; and Tajikistan, Uzbekistan, Turkmenistan, Kyrgyzstan and Kazakhstan in Central Asia.
Transnistria then broke free of Moldova, and Abkhazia and South Ossetia fought free of Georgia.
Yugoslavia dissolved far more violently into the nations of Serbia, Slovenia, Croatia, Bosnia, Montenegro, Macedonia and Kosovo.
The Slovaks seceded from Czechoslovakia. Yet a Europe that plunged straight to war after the last breakup of Czechoslovakia in 1938 and 1939 this time only yawned. Let them go, all agreed.
The spirit of secession, the desire of peoples to sever ties to nations to which they have belonged for generations, sometimes for centuries, and to seek out their own kind, is a spreading phenomenon.
Scotland is moving toward a referendum on independence from England, three centuries after the Acts of Union. Catalonia pushes to be free of Madrid. Milanese and Venetians see themselves as a European people apart from Sicilians, Neapolitans and Romans.
Dutch-speaking Flanders wants to cut loose of French-speaking Wallonia in Belgium. Francophone Quebec, with immigrants from Asia and the Third World tilting the balance in favor of union, appears to have lost its historic moment to secede from Canada.
What are the forces pulling nations apart? Ethnicity, culture, history and language – but now also economics. And separatist and secessionist movements are cropping up here in the United States.
While many red state Americans are moving away from blue state America, seeking kindred souls among whom to live, those who love where they live but not those who rule them are seeking to secede.
The five counties of western Maryland – Garrett, Allegany, Washington, Frederick and Carroll, which have more in common with West Virginia and wish to be rid of Baltimore and free of Annapolis, are talking secession.
The issues driving secession in Maryland are gun control, high taxes, energy policy, homosexual marriage and immigration.
Order Pat Buchanan’s brilliant and prescient books at WND’s Superstore.
Scott Strzelczyk, who lives in the town of Windsor in Carroll County and leads the Western Maryland Initiative, argues: “If you have a long list of grievances, and it’s been going on for decades, and you can’t get it resolved, ultimately [secession] is what you have to do.”
And there is precedent. Four of our 50 states – Maine, Vermont, Kentucky, West Virginia – were born out of other states.
Ten northern counties of Colorado are this November holding non-binding referenda to prepare a future secession from Denver and the creation of America’s 51st state.
Nine of the 10 Colorado counties talking secession and a new state, writes Reid Wilson of the Washington Post – Cheyenne, Kit Carson, Logan, Morgan, Phillips, Sedgwick, Washington, Weld and Yuma – all gave more than 62 percent of their votes to Mitt Romney. Five of these 10 counties gave Romney more than 75 percent of their vote.
Their issues with the Denver legislature: A new gun control law that triggered a voter recall of two Democratic state senators, state restrictions on oil exploration and the Colorado legislature’s party-line vote in support of gay marriage.

http://www.wnd.com/2013/10/is-red-state-america-seceding/print/

China and ECB sign $57bn currency swap deal

China and the European Central Bank have signed a currency swap agreement worth 350bn yuan ($57bn; £36bn), state-owned Xinhua news agency has said.

Such agreements mean the central banks can exchange currencies and firms can settle trade in local currencies rather than in US dollars.
The deal is one of the largest for China as it looks to build a more international role for the yuan.
It will last for three years and can be extended if both parties agree.
China's currency, the yuan, is also referred to as renminbi.

Ensuring stability
Foreign exchange swaps such as these mean two countries agree to swap, or borrow, each other's currency at an agreed rate.
In doing so, the parties involved avoid swings in exchange rates. They can also be less reliant on the US dollar for bilateral trade and some business deals.
China's central bank has now signed currency swap deals amounting to some 2.2 trillion yuan with 22 countries and regions, according to Xinhua.
"The new arrangement will provide more liquidity to the renminbi market in the euro area, promote overseas use of the yuan, and help facilitate trade and investment," Xinhua reported China's central bank as saying in a statement.
The European Central Bank said: "The swap arrangement has been established in the context of rapidly growing bilateral trade and investment between the euro area and China, as well as the need to ensure the stability of financial markets."
Europe's central bank also said the deal would reassure eurozone banks of the continuous provision of Chinese yuan.

http://www.bbc.co.uk/news/business-24486685

The Biggest Banking Disconnect Since Lehman Hits A New Record

As regular readers know, the biggest (and most important) disconnect in the US banking system [10]is the divergence between commercial bank loans, which most recently amounted to $7.32 trillion, a decrease of $9 billion for the week, and are at the same the same level when Lehman filed for bankruptcy having not grown at all in all of 2013 (blue line below), and their conventionally matched liability: deposits, which increased by $60 billion in the past week to $9.63 trillion, an all time high. The spread between these two key monetary components - at least in a non-centrally planned world - which also happen to determine the velocity of money in circulation (as traditionally it is private banks that create money not the Fed as a result of loan demand) is now at a record $2.3 trillion.
Which, of course, also happens to be the amount of reserves [11]the Fed has injected into the system (i.e., how much the Fed's balance sheet has expanded) since the great experiment to bailout the US financial system started in September 2008, in which Ben Bernanke, and soon Janet Yellen, stepped in as the sole source of credit money. The only difference is that while the Fed is actively pumping bank deposits courtesy of the fungibility of reserves, loan are unchanged.
For those who still don't understand the identity between Fed reserves and bank deposits, here is Manmohan Singh with the simplest explanation on the topic [12]:

When central banks buy securities, one of the immediate effects is to increase bank deposits, which adds to M2 (in the U.S., practically the Fed has bought from nonbanks, not banks). Whether banks maintain those added deposits as deposits, or convert them into other liabilities (or, by calling in loans, reducing or moderating the growth of their balance sheets), is an open question.

Actually it's not. As the JPM London Whale episode taught us, it is the excess deposits on bank balance sheets courtesy of the Fed, that serve as collateral for marginable derivatives (IG9, HY9, ES, etc) which then can and are used by banks to chase risk higher, often with leverage that runs into the orders of magnitude. In other words, as the chart below shows, in the past week, the Fed injected a net $69 billion in risk-ramping power on the commercial bank balance sheets, and, more importantly, since the failure of Lehman, this amount is a record $2.308 trillion.
[13]
So for those confused where the money comes from to ramp equities ever higher on a daily basis for the duration of QE, and why the S&P correlates (and "causates") exquisitely with the Fed's balance sheet, now you know. More impotantly: don't expect banks to lend out much if any real new loans as long as they can generate far greater and far less riskier returns simply by chasing risk in the capital markets.

10 Disturbing Facts About "Exceptional" America

1. 65% of Americans say news organizations focus on unimportant stories [4] rather than on important ones (28%).

[4]

 

2. More express concern over civil liberties [5] (47%) than protection from terrorism (35%) for the first time in Pew Research Center polling.

[5]

 

3. 3% of Americans still connect to the internet at home via a dial-up connection [6].

[6]

4. During the first two years of the nation’s economic recovery, the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4% [7].

[7]

 

5. For the first time in more than four decades of polling on the issue, a majority (52%) of Americans favor legalizing the use of marijuana [8].

[8]

6. 15% of American adults do not use the internet or email [9].

[9]

7. 56% of U.S. adults say they would not want to undergo medical treatments to slow the aging process and live to be 120 or more [10], but roughly two-thirds (68%) think that most other people would. 

[10]

 

 

8. In 23 of 39 nations surveyed, a majority or plurality of the people say China either already has replaced or eventually will replace the U.S. as the top superpower [11].

[11]

 

9. One-in-ten (7.7 million) children were living with a grandparent [12] in 2011. Approximately 3 million of these children were being cared for primarily by that grandparent.

[12]

10. In 2012, 36% of the nation’s young adults ages 18 to 31—the so-called Millennial generation—were living in their parents’ home [13].

[13]

 

Via Pew Research [14]