US Headed for Fiscal Shock

Fed Officials: US Facing ‘Fiscal Cliff’

Two Federal Reserve officials warned Tuesday that the U.S. could be heading for a "fiscal cliff" at year's end if mandated tax increases and spending cuts are implemented

CNBC,

1 May, 2012

Charles Evans of the Chicago Fed called the cliff a "big uncertainty" while Atlanta Fed President Dennis Lockhart said there could be a "financial shock" if markets begin to anticipate that Congress and the White House do little to address this situation.

The expected tax increases and spending cuts were triggered when a congressional "super committee" failed to come up with a way of closing the federal budget deficit.

Both Fed officials spoke during the Milken conference in Los Angeles. Earlier Tuesday, on CNBC, both agreed the slowing U.S. economy is disappointing, but differed on the need for continued stimulus.

"I’d like nothing better than to start raising rates before late 2014 on the strength of a stronger economy," Evans told Squawk on the Street.

Noting there's "tremendous room" for more accommodation, the Chicago Fed chief said that "more liquidity would be helpful. It would ratify the idea that [Fed] policy is going to be accommodative for a very long time to get things going. Look, we might get lucky in the sense that ... the channel opens up and we get a greater lift in the economy."

Rather than keeping rates low until late 2014, Evans thinks the Fed should use "economic triggers" on which to base accommodation such as keeping low rates if the unemployment rate is above 7.5 percent "unless inflation unexpectedly goes up to a very high level, say 3 percent."

Lockhart is more skeptical and also concerned about triggering higher inflation . The Atlanta Fed president said that while the first-quarter GDP and March jobs data were disappointing, "I am a bit reticent to pull the trigger on any action. We have to see how the economy evolves. Pulling a number out of the air is a bit too simplistic."

He added, "There’s only so much we can do to stimulate loan demand, and to change the risk appetite of the financial system or banks, so I’m not sure that more really active stimulus in the form of quantitative easing , for example, would have that much of an effect. But the longer-term costs have to be kept in mind, costs related to inflation expectations, for example."

Both Fed presidents said they know the continued low interest rates are hurting savers.

"We're in a tough situation and the current slow recovery is hurting everybody," said Evans.

Lockhart noted that "we can only have one policy, and that policy is designed to support the recovery. So unfortunately there are winners and losers."

Super Committee's Failure Will Spur Hefty K-12 Cuts Without A Congressional Fix

Huffington Post,

Seventy thousand teaching jobs. More than one billion in Title I grants to disadvantaged school districts. Nearly 900 million in funding for special education students.

All these and more K-12 educational expenditures will be axed smack in the middle of the 2012-2013 school year -- barring an act of Congress that would prevent the automatic, across-the-board cuts set by this summer's debt deal from going into effect, according to the National Education Association.

These cuts became one step closer to reality when the 12-member congressional super committee's admitted Monday that it had failed to reach an agreement on trimming $1.2 trillion from the deficit.

And the triggered cuts will feel all the worse because they'll be widening still-open wounds of state-level cuts. According to the Center on Budget and Policy Priorities, 37 states are providing less funding per-student this year than last. In 17 states, these funding levels are as much as 10 percent lower.

U.S. Secretary of Education Arne Duncan condemned the super committee's failure to deliver.

"Because the super committee failed to live up to its responsibility, education programs that affect young Americans across the country now face across-the-board cuts," Duncan said in a statement Monday.

Joe Gertsema, superintendent of the 2,800-student Yankton, South Dakota school district, expects to feel the pain of the upcoming federal cuts firsthand.

"Our students will be deprived," Gertsema said Wednesday, adding that the programs that would be cut most would scrap special-education programs, tutoring for struggling students and several jobs. "The economy can't handle that very well," he continued.

What's worse, noted Joel Packer, executive director of the Committee for Education Funding, is that the cuts could come in the middle of the school year.

"That would be more disruptive," Packer said Wednesday.

Federal education cuts like these haven't been seen since the Reagan administration, said Jack Jennings, a former Democratic education hill staffer who now heads the Center for Education Policy.

"Reagan had a working control of the House, with the Southern Democrats voting with the Republicans," Jennings recalled.

In 1981, the House Education and Labor committee Jennings worked for was charged with cutting spending.

"Spending for education was frozen for four years," he said Wednesday. "This is the same type of thing. It meant that poor children received fewer services to help them with reading. Children with disabilities received fewer services. There were fewer free lunches available."

According to the National Education Association's projections, the triggered cuts would hurt students who need the most help: School Improvement Grants that help failing schools are slated to lose $41.7 million. Head Start pre-school programs, which would be cut by $589.7 billion, primarily serve low-income families. All Department of Education programs -- except for Pell Grants, which are exempt -- would take a hit.

Based on current Department of Education funding levels, NEA analyst Tom Zembar estimated that sequestration would cut the agency's budget by a total of $3.54 billion.

Zembar used the Congressional Budget Office's estimate of 7.8 percent across-the-board cuts to prepare his projections. That's a relatively conservative number: the National Governors Association predicted 8.8 percent, and the Center on Budget and Policy Priorities found that the cuts could be as great as 9.3 percent.

But the exact figure won't be set until the White House Office of Management and Budget calculates the amount as the cuts triggered by the super committee failure are enforced.

"There is more than a year for Congress to do its job and undertake balanced deficit reduction at least equal to what the Supercommittee was charged to accomplish," Meg Reilly, an OMB spokesperson, said in an email. "In the meantime, government operations for this fiscal year continue as normal. When appropriate, OMB will take necessary steps to ensure that if there is a sequester, the government is prepared for it."

Mary Kusler, the NEA's manager of federal advocacy, said Wednesday that the cuts will feel worse because they come on top of several hundred thousand teachers being laid off. She added that while the sequestration will be tough, it's not the worst case scenario for K-12 spending.

"We're very concerned about the sequester but we didn't want to be in a position where a deal was made just for the sake of having one," Kusler said.

The NEA is still lobbying Congress for a way to avoid the triggered cuts, according to Kusler.

"The clock is ticking," she said. "We have a year to encourage Congress to come up with a balanced deal that puts significant revenue on the table while not harming the children who need the most assistance."

Whatever happens, Jennings said that a negative impact -- class sizes will get bigger, services will be eliminated, and teachers will be laid off -- is inevitable.

He said, "Education will get swept up in any financial disaster as part of this larger situation."

Grover Norquist hails victory after supercommittee deal fails

Democrats blame Republican lobbyist for scuppering Congressional supercommittee on national deficit

the Guardian, 

22 November, 2011

One of the most powerful figures in Washington, Republican lobbyist Grover Norquist, headed off on holiday on Tuesday, leaving behind a trail of economic and political chaos while happily looking ahead to the next, even bigger battle: the 2012 elections.

Norquist, who has over the last two decades helped turn the Republicans into the party of no taxation, is blamed by the Democrats for single-handedly scuppering the Congressional supercommittee on the national deficit on Monday. Its collapse threw markets in the US and Europe into fresh turmoil, and reduced even further the standing of Congress among voters.

But Norquist was unconcerned. He was in a celebratory mood as, luggage and family packed into the car, he set off from Washington to Florida for the Thanksgiving break. With one victory behind him, he is already thinking about the 2012 White House and Congressional elections.

He expects the Republicans to take the White House but if they do not, there is a Plan B. He is confident they will take control of the Senate and, with both the House and Senate in Republican hands, he predicted Obama's second term would be a dead duck.

For article GO HERE

Super Complacency Means Printing Will Commence Post-Election

Zero Hedge,

Submitted by Vincent Lanci of FMX Connect

We believe that the Super Commitee’s lack of action portends for inaction by our government until the 2012 election is concluded. We also believe, that no matter who wins the printing presses are gearing up.

Super Duper Committee Needed

The United States is in a morass of political indecision that is hampering our ability to let the right idea bubble to the surface. Yesterday’s failure of the much vaunted SuperCommittee to do anything, a structure empowered to do what is needed to solve the deadlock, has underlined the effect of political indecision as the primary  driver behind why we are where we are today. As crazy and inappropriate as it was to downgrade the U.S. partially on the basis of political gridlock…. It was true.

Hippies with Brains

Those “Occupy” people out there are right; it is the politicians themselves and the prioritizing of their job retention over their responsibility to their constituents that is preventing the right decision to be made. We do not claim to know what the right decision is, but we do expect them to know. All we can do is offer a decision tree to readers of what we think will happen and why it will occur in this fashion.

What Happens Next

There are two scenarios we are looking at though a political prism. Our conclusions are digital. First of all and of major importance , we believe it is in the GOPs interest to have the economy be in its worst shape possible going into the election. It is their method to be the party of no to Obama’s ideas. And it is their method to be the party of “tax cuts” to actual suggestions. This is essentially what came out of the Super Committee. The GOP wanted tax cuts, the Dems did not. Thus deadlock continues.

Therefore nothing will happen until post election. And post election, the dollar will get decimated. Post election will create an environment wherein risk assets rise again. There will be Good Inflation (Stocks, Stocks, and more Stocks) and bad inflation (oil, gold and grains). Wall Street wins as fees from the never ending asset ping pong makes investors migrate their holdings from one class to another. Remember those Golden Crumbs that fall off the bonds when they are sold, from Bonfire of the Vanities?

The FMX Economic-Politic Answer Key for 2012

From the above you can see, it is not in the GOP’s best interest to agree to anything that doesn’t include their most cherished ideal: a reduction in Taxes. It enhances their chance of victory in 2012. It is not in the Dem’s interest to agree to Tax Cuts on principle and as a de-motivator for its voting base.

Nothing will get done. We will continue to kick the can up an increasingly taller hill, is a Sisyphean effort to fix the problem. Meanwhile the Europeans are playing shell games with their own debt. And it is this which jeopardizes our decision tree analysis and the conclusion to buy ‘risk on” assets as we come closer to election time.

Europe as Spoil Sport

Right now, European situation can be described as Germany (Printing, NEIN!), versus the rest of Europe (Printing OUI!). Currently the deflationary/sovereign issues plaguing the Euro have given Bernanke an opportunity to open a window to print more Dollars as the Fed lends to Euro banks. So while Euroland fights it out, Ben takes the opportunity to get ahead in the currency race to the bottom.

It would seem based on the fight, that the answer is print or not print. We think Germany is playing brinksmanship and will print. But we are concerned with a scenario talked about but not given enough attention; the removal of countries from the Euro. Every country that leaves the Euro is deflationary. The bigger the economy expelled, the stronger the Euro gets. This happens while simultaneously the country expelled experiences inflation or even hyperinflation on the Scale that Argentina experienced 12 years ago. So because of a redrawing of nationalistic boundaries, Germany cannot sell anything to its weaker sisters, due to a combination of its own currencies strength, and the expelled country’s lack of purchasing power due to rampant currency debasement.

This nightmare messes up our pretty little decision tree, but it is possible. The U.S. would be dragged into a global deflationary spiral, where more and more money is printed, but less and less is spent.

You would see ever tighter economic ties between Russia and Germany, and the U.K with the U.S. as the Asia becomes a wild card of domestic issues.

We’re buying physical assets on dips and selling stocks on rallies, essentially the Rogers position at levels far worse than his, but we believe having a long way to go. Gold is among those assets