The Back Alley Archives

Good Lord.

"Never waste a crisis" certainly applies to this "budget."

Have we become subprime as a nation? It appears that way. $1.3 trillion is somewhere around 10% of GDP and is almost certainly understated (it always is), which means you and I should expect the deficit for next fiscal year to top $2 trillion in red ink - or a roughly 20% increase in the national debt.

IF the world will let us borrow that much from them and IF we do not garner ourselves a sovereign downgrade as a consequence of this gambit - a bet I'm not so sure I'd be willing to take.

To put that in perspective this is somewhere in the neighborhood of the entirety of the FX reserves of China and Japan, plus a few other nations (depending on how far "over" we wind up.)

I thought I read somewhere that China and Japan, however, were having their own recessions (or worse.) Has anyone in this country thought about the possibility that these nations might need their reserves for their own people?

Apparently not.

There's another $250 billion in that figure for a "future" financial rescue program; taking that back out, however, still leaves the government spending more than 30% above its income level.

We are in this mess precisely because a significant number of individuals in this country managed their personal finances in exactly this sort of irresponsible fashion. Always spending more than they make, they then turned to credit cards and, when those were exhausted, they tapped the ATM embedded in the wall of their house to keep the merry-go-round spinning.

As a nation we have learned nothing, and it appears that only when the rest of the world forces us to live within our means (probably about the time they conclude that they need their resources for their own people instead of our profligate money-burning exercises) that we will repent and begin to truly heal as a nation.

For today Uncle Sam has chosen to answer the question "Cash or Credit?" with one word: CHINA!

(Now we know what Hillary was doing over there, eh?)

The largest Asian central banks have gone on record that they are curbing their purchases of US debt. And they are also diversifying their huge reserves, steadily moving away from the dollar. The risks have simply become too many and too serious.

The overarching assumption behind the stimulus is that a rise in US household savings (linked to the fall in US household wealth) will create a pool of domestic savings that will flow, given the ongoing contraction in private investment, into the Treasury market. The rise in private savings and fall in private investment will allow the US government to borrow more even as the US economy as whole borrows less from the rest of the world. The key to the Treasuries rally in 2008 was the surge in private demand, not the strengthening of official demand. My guess is that the Treasury market will be driven by developments in the US – not developments in China – in 2009.

If the US issues $1700b of marketable Treasuries in 2009, China would need to buy around $250 billion to maintain a 15% share of the total market.

That isn’t at all implausible if capital outflows from China subside. Let’s say other central banks buy another $200 billion (which implies a further reduction in central banks’ share of the outstanding stock of Treasuries in the market). Custodial holdings of Treasuries over at the New York Fed have continued to creep up in the first two months of 2009, even as overall global reserve growth remains subdued. The resulting $450 billion in total central bank purchases would be the second highest level of demand for US treasuries from foreign central banks on record. But the math only works if private investors snap up $1250 billion of Treasuries, or a little more than they bought in 2008.

Funny how items show up in spending bills without any notice -- like an earmark for a president who promised not to seek any.

President Obama, who took a no-earmark pledge on the campaign trail, is listed as one of dozens of cosponsors of a $7.7 million set-aside in the fiscal 2009 omnibus spending bill passed by the House on Wednesday.

But not for long.

On Thursday, Rob Blumenthal, a spokesman for the Senate Appropriations Committee said the one earmark in the bill that carries Obama's name will be edited. The committee will attribute that earmark to other senators on the list of that provision's supporters, but not Obama.

No changes are expected to the earmarks requested by other lawmakers who ended up in top jobs in the Obama administration months after they sought set-asides for special projects in the bills that became the omnibus (HR 1105).

The catchall bill is an accumulation of leftovers from 2008 -- spending measures that weren't enacted before the 110th Congress expired. It's moving through Congress now because a temporary extension of funds to run the government will run out after March 6.

Obama's name jumped out on a list of many earmark cosponsors because he and his staff have been so emphatic about his no-earmark stance.

...

LMMFAO. At best, Obama is continually showing himself and his team to be amateurish. At worst, well, he's a run of the mill politician in a country with absurdly low standards because we've been fucked over repeatedly for generations.

Talk to folks in the know, don't believe what the idiocracy tells you. The folks in the know are the ones pulling the biggest levers. Public opinion is largely manipulated and few americans have any clue about what's going on. Plus, Obama is still in his honeymoon period as far as trust goes, IMO. It takes time for trust to erode and he's already set the process in motion.

The cost of government financing right now is extremely low, and Treasury has shifted an unprecedented amount of funding to the short end of the curve, compressing duration downward massively.

What happens when the yield curve shifts upward, especially on the short end?

Funding costs explode, that's what.

This is a catch-22 that makes the "deficits don't matter" claim idiotic, and those who run this argument during recessionary conditions (as they always do) dramatically (and in this case catastrophically) incorrect.

Given the average duration outstanding by Treasury, should we see the yield curve shift upward that "benign" 4.2% assumption under "robust" growth would almost certainly more than double, and this assumes that a destructive yield-increase spiral does not initiate due to (very valid) concerns about the United States being able to service the debt.

The idea that we can continually grow GDP at a compound 4.2% rate is exactly the sort of magical thinking that got us in this mess in the first place. Such a rate can only be sustained (for a while) through fraud-laced credit creation - a bubble that those with capital will not allow to be restarted, as they simply won't fund it.

Amaterish?  No that was the previous regime of incompetent fools.

And opinion polls would say otherwise when it comes to who the American People trust to fix the economy.

Wealthy donors on the outside of the political process probably should not be able to just call up the President and get their way -- but the frustration I'm hearing from a great number of these types of donors -- types who are not only wealthy and helped finance much of the Democratic Party's victory in November but who are also smart and connected -- is that they are not getting through where it counts. The policy options they are proposing aren't getting into the basket of proposals that Obama is considering.

In other words, some feel that Obama is not getting a full range of choices on the economy and is being provided a narrow band of views that fit the preconceived biases of Larry Summers and Tim Geithner.

One of the fatal mistakes of the Bush administration in the build up to the Iraq War was the tight constriction of choices and views that Bush's advisors allowed him to see.

Let's hope that the Obama team isn't making the same mistake on the economy.