The Fiscal Cliff

What Fiscal Cliff? Obama Planning Another "Tax Cut" Fiscal Stimulus 

 

Zero Hedge,

28 October, 2012

Since it would appear that QEternity has ostensibly failed in its main goal of pushing the stock market higher (and mortgage rates lower), the White House seems to be scrambling. Obama administration officials have concluded that the economy, while improved (apparently), is still fragile enough to warrant another bout of stimulus. The same old kitchen sink is being thrown at the problem as they are now resorting to the same fiscal stimulus that has also failed time and time again (as we noted here). As WaPo strawmans reports the White House is discussing the idea of a tax cut that it believes will lift American's take-home pay and boost a still-struggling economy (citing people familiar with the administration's thinking).

Once again we expect 'economists' to come up with counter-factual forecasts.

We can't help but get the terrible feeling of deja vu here (paging Christine Romer). Electioneering? for sure; Will we hear "We have a plan"; of course; but in reality for this to make any sense (in the debt-deleveraging balance sheet recession that we find ourselves in), we must wipe from our minds for one moment the looming fiscal cliff (that our politicians seem stuck with irreconcilable differences), the debt-ceiling/deficit/AAA downgrade debate, and the utter failure of linear-Keynesian model forecasts for stimulus effects in the past.

Via Washington Post:

The White House is weighing the idea of a tax cut that it believes would lift Americans’ take-home pay and boost a still-struggling economy, according to people familiar with the administration’s thinking, as the presidential candidates continue battling over whose tax policies would do more for the country.

Obama administration officials have concluded that the economy, while improved, is still fragile enough that it may need another bout of stimulus. The tax cut could replace the payroll tax cut championed by President Obama in 2011 and 2012, which was designed as a buffer against economic shocks such as the financial crisis in Europe and high oil prices. It expires at year’s end.

...

The administration’s work on the proposal comes as each presidential candidate is under intense pressure to demonstrate he has the better tax plan.

...

Any new tax cut would require congressional approval after the election. Administration officials have said in the past that the payroll tax cut should be allowed to expire at the end of the year, and the White House has not said publicly whether it is considering an alternative.

A growing number of voices have been calling on the White House and Congress to extend the payroll tax cut, which has meant about $1,000 in extra take-home pay annually for the average family. These supporters include Harvard professor Lawrence H. Summers, formerly Obama’s top economic adviser, and Rep. Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee.

“If we’re going to look at anything, we should be looking at a payroll tax cut or other measures that have a similar effect,” Van Hollen said in an interview.

The White House declined to confirm whether it is exploring a new policy, with an official saying late Friday only that “there’s no specific new proposal such as this one at this time.”

The payroll tax cut... is considered particularly effective by economists because it shows up in every paycheck.Economists say it may have boosted economic growth each year by about 1 percent, helping create hundreds of thousands of jobs.

...some lawmakers, particularly Democrats, don’t like the idea of using a tax that ordinarily goes to fund Social Security. Any lost revenue as a result of the payroll tax cut has been offset by additional taxpayer money. Still, powerful interest groups such as the AARP have criticized using the payroll tax cut for short-term stimulus.

The administration is looking to replicate the effect of the payroll tax cut without relying on Social Security revenue, sources said. The people familiar with the deliberations declined to be named because the discussions are ongoing.

One option is to have employers reduce how much in federal taxes is withheld from employees’ paychecks, up to a certain amount per year.

This was precisely the type of tax cut provided in the 2009 stimulus bill, which sought to jolt the economy out of recession through $831 billion in increased spending, aid to states and tax cuts.

...

The tax credit was limited to individuals with an adjusted gross income of $95,000 or less and couples with an adjusted gross income of $190,000 or less. Economists say that low- and moderate-income people have the greatest propensity to spend any additional income.

...

Obama is calling on lawmakers to immediately renew the Bush tax cuts for families earning less than $250,000 per year, while allowing the tax cuts for those making more to expire. Republicans refuse to decouple the tax cuts.

Read that again - and we dare you not to laugh! This is Keynesian-based Einsteinian madness at its very best...

One report that apparently has scared the administration into action is the following from the National Association Of Manufacturers - Fiscal Shock.

Fiscal Shock Conclusion:

The inaction and stalemate in Washington will continue to weigh heavily on consumer and business confidence as the year winds down. Even if the Administration and Congress resolve the uncertainty before the end of the year, economic growth already has sustained significant damage. The short-term fiscal contraction set for 2013 will trigger long-run durable losses to GDP, productivity and real income.

Even under the best-case scenario, it will take almost a decade for economic activity and employment to reach the levels they would have reached without a fiscal shock. While the spending cuts and tax increases reduce the federal deficit and debt, the substantial negative consequences of not addressing the end-of-year fiscal crisis before it happens will be devastating.

Fiscal Shock

Japan

America has QE "to infinity"; Japan has "seemless easing"

Seamless Easing; Japan "Falling Behind" in Monetary Stimulus, Complains Economy Minister; Humorous Irony of the Day

 

Mish's Global Economic Analysis,

22 October, 2012

If you are in need of a good laugh today, please note Japan's economy minister bitterly complains "Japan is falling behind on monetary stimulus" while simultaneously pointing out the "risk of another credit-rating downgrade" as if more stimulus would make matters better.

Where do they find they guys? 

Japan's Exports Drop 10.3 Percent

In related news, Japan Exports Tumble 10%, BOJ to Conduct "Seamless" Easing.

 Japan’s exports fell the most since the aftermath of last year’s earthquake as a global slowdown, the yen’s strength and a dispute with China increase the odds of a contraction in the world’s third-largest economy. 

Shipments slid 10.3 percent in September from a year earlier, leaving a trade deficit of 558.6 billion yen ($7 billion), the Finance Ministry said in Tokyo today.

Economy Minister Seiji Maehara pressed the Bank of Japan for more action yesterday, saying the nation is “falling behind” in monetary stimulus and is at risk of another credit-rating downgrade.

“There’s a high chance that Japan’s economy will have two consecutive quarters of contraction through December,” said Yoshimasa Maruyama, chief economist at Itochu Corp. in Tokyo. “The slump in advanced nations is spreading to emerging economies.” 

The decline in shipments, exacerbated by a spat with China over islands in the East China Sea, was the biggest since May last year, when the country was rebuilding supply chains wrecked in the March earthquake and tsunami.

Shipments to China, the nation’s largest export market, slid 14.1 percent from a year earlier. Exports to the European Union fell 21.1 percent, while those to the U.S. rose 0.9 percent. Auto shipments to all markets dropped 14.6 percent.

In a speech in Tokyo today, BOJ Governor Masaaki Shirakawa vowed to conduct “seamless” monetary easing as the Japanese economy is “leveling off.”

"Seamless Easing"

 

Inquiring minds might be wondering "What the hell is seamless easing?" (as opposed to good old-fashioned QE).

It's a good question, and one I cannot answer for sure, but I very much suspect Governor Shirakawa is simply adding superfluous words to make it sound important, so as to appear as if the BOJ is not impotent (which of course it is).

I can however, point out the sheer madness of global competitive currency debasement. In that regard, it's actually a good thing to be "falling behind".

QE3

Central bank money machines fail to spur global economy

NBC News,

10 September, 2012

Economics 101 says a massive dose of easy money is supposed to be a reliable cure for a sluggish economy. For the first time in decades, the prescription isn’t working, to the rising frustration of central bankers in the U.S. and Europe.

Four years and more than $2 trillion after the Federal Reserve opened the money spigots following the financial collapse of 2008, the U.S. economy remains stuck in the mud.

Fed Chairman Ben Bernanke, in a widely-watched speech last month in Jackson Hole, Wyo., defended the central bank’s past decisions to churn out record-breaking volumes of cash -- a process known as “quantitative easing” -- saying the policy had prevented a much more painful recession. Bernanke also left little doubt that more money may be coming, as early as this week’s regular Fed policy meeting. 
 

"It is important to achieve further progress, particularly in the labor market," Bernanke said. "The Federal Reserve will provide additional policy accommodation as needed."

Maintaining steady job growth is half of the Fed’s so-called “dual mandate,” the other being inflation control. Based on Friday's monthly jobs report, showing fewer than 100,000 new hires in August, the Fed has a lot more work to do.

All of which has Wall Street convinced it’s a pretty sure bet that the Fed is about to fire up its money machine once more, forcing cash into the system by buying hundreds of trillions of dollars’ worth of bonds.

“That employment report kind of nailed it,” said Michelle Girard, RBS senior economist. “The Fed laid out the criteria: we need to see a sustained and substantial improvement. And that labor report didn’t show it. So the Fed is going to have to make good on their intentions.”

But roads paved with good intentions don’t always lead to good places. Though investors have bid up stocks on the theory that another massive wave of cash has to go somewhere, there’s widening doubt that another money flood will boost growth or create more jobs.

“What central banks everywhere are doing is trying to make sure people are not focused on the world breaking apart,” said Dinakar Singh, CEO of TPG-Axon Capital. “Ultimately I don't think lower rates make that much difference anymore. There aren't that many people left that haven't borrowed money -- companies or people -- but would if rates were lower. “

On top of another massive money drop, the Fed may extend its stated promise to keep interest rates ultra-low further into the future. Some market watchers, and a few Fed policy makers, have expressed concerns those moves could do more harm than good.

Even as low rates have failed to spur growth, they’re penalizing savers. Insurance and pension funds have been hit hard by record low returns needed to fund long-term obligations. And, at some point, the Fed will have to start selling its massive holdings in bonds, forcing rates higher and producing a drag on growth.


Discussions about that "exit strategy," frequent following the Fed's first round of bond-buying, have all but disappeared from recent Fed deliberations.

Europe’s central bank, meanwhile, is also embarking on its second round of bond buying to try to head off a deepening recession. But the ECB's easy money efforts appear to have had even less impact on the eurozone crisis than its American counterpart.

Central bankers there face a different, and thornier, set of problems. So far, they’ve been badly hampered by restrictions on their mandate preventing them from intervening to help bail out specific countries in trouble.

They’ve also been hamstrung by politics, as wealthier northern nations led by Germany have opposed the kind of big-money stimulus pioneered by the Fed.

Further action could be hampered by a German high court ruling expected this week on the constitutionality of a key bailout fund. No matter which way the court rules, central bankers in Germany’s Bundesbank -- along with millions of that country’s voters -- will likely oppose further ECB proposals to flood the continent with money, much of it coming from Germany.

“The Bundesbank is now becoming the voice increasingly of conservative Germany,” said Jim O'Neill, chairman of Goldman Sachs Asset Management. “It’s the early stages of heading toward what ultimately will be some referendum in Germany on a closer euro in which Germany, as part of its DNA has to support the others.”

ECB intervention to drive down interest rates could worsen the crisis by protecting free-spending governments from the financial market punishment needed to enforce tighter budget controls.

“Its massive support may well discourage profligate governments from meeting their fiscal objectives,” said David Rosenberg, chief economist at Gluskin Shiff. ”Italy is already backsliding on this front.”

 

But the measures are much more limited than the massive stimulus undertaken following the 2008 collapse. That spending spree left China with more roads, bridges, airports and rail lines than it needs. Now, as growth has slowed again, inventories of raw materials and finished goods are piling up.

Additional government lending and spending risks igniting another round of the kind of consumer inflation that swept through China in 2010, forcing up food prices and inflating a rapidly expanding real estate bubble.

Chinese consumer price inflation appears to be moving higher again, bumping up to annual rate of 2.0 percent last month from 1.8 percent in July, and is likely to rise above 3 percent early next year, according to Mark Williams, chief Asia economist at Capital Insight.

“This won’t prevent further stimulus if the economy remains very weak, but it does make large policy moves less likely,” he said.

Faced with an ongoing global slowdown, though, central bankers around the world are loathe to do nothing. Despite the limited impact of dumping more money into the economy, even easy-money skeptics at the Fed will likely go along with another round, according to Neal Soss CSFB chief economist.

“Even those who doubt the efficacy of monetary policy under current circumstances may well feel obliged not to disappoint financial markets,” he said. 


“First, do no harm.“

Visit NBCNews.com for breaking news, world news, and news about the economy

Jackson Hole

Fed's Monetary Policy Has Hit Dead End

CNBC,

3 September, 2012

The Federal Reserve will likely embark on its next round of monetary stimulus in two weeks, Bill Gross, Pimco’s co-chief investment officer, told CNBC’s "Street Signs" on Friday. But he said more stimulus won’t do much to improve the country’s job market. 

“What the Fed is targeting in terms of quantitative easing is sustained improvement in employment,” Gross said after Bernanke's much anticipated speech in Jackson Hole on Friday. “Until you see several quarters of perhaps 7 percent unemployment, you will see QE.” 

Gross expects the Fed to act at its September meeting, but may hold off another month if the August employment report is strong. (Read More: Bernanke at Jackson Hole: No More Easing, For Now.)

Earlier in the day, Bill Gross tweeted that Bernanke would "go out with his guns blazing." While more QE3 is a near certainty, it is increasingly impotent, Gross tweeted. 

The Fed is likely to adopt an open-ended quantitative easing  program without any specific targets as to which assets it will buy, how much and for how long. That type of program “will allow the Fed to move in a fashion that pleases most of the governors,” Gross said. 

While the Pimco founder said the Federal Reserve  and other central bankers believe QE will assist economic growth, he isn’t convinced it will do much to improve the labor market. 

“Monetary policy has reached a dead end,” Gross said. “Once you get down to zero percent on interest rates, there’s not much left to stimulate.” 

That said, the company's mantra is “Don’t fight the Fed, but be afraid of the consequences, or lack of consequences, going forward,” Gross added

Gold Prices

Gold Set For Best Year Since 2010 As Stimulus Bets Increase

Gold is poised to climb the most in two years as prospects for additional economic stimulus by governments from the U.S. to China stoke demand for the precious metal as a bet against inflation, a survey showed.

Bloomberg,

27 August, 2012

Bullion for immediate delivery may reach $1,800 an ounce by the year-end, extending gains this year to 15 percent, according to the median forecast in the Bloomberg survey of 15 traders and analysts at a conference in Hyderabad in South India on Aug. 25. That would be the most since a 30 percent surge in 2010, data compiled by Bloomberg show.

Gold is set for a 12th year of gains as the European sovereign-debt crisis boosts haven demand amid speculation of further policy easing by central banks, including the U.S. Federal Reserve, which may be considering a third round of so- called quantitative easing, or QE3. Investment holdings have expanded to a record on demand for a hedge against inflation.

“The euro zone has been quiet of late, but that doesn’t mean the problems have disappeared,” said Jeffrey Rhodes, global head of precious metals at INTL FCStone Inc. (INTL), who expects gold to rally to $1,975 by year-end. “The U.S. economy has been sluggish and there is a growing belief that there is going to be QE3 soon. This anticipation is driving the market.”

Fed Chairman Ben S. Bernanke said last week there’s “scope for further action” from the U.S. central bank. He is scheduled to speak later this week at the Fed’s annual symposium in Jackson Hole, Wyoming. China’s Premier Wen Jiabao has urged additional steps to support exports and help meet economic targets as evidence mounts the slowdown is deepening.

Europe Strains

Gold for immediate delivery rose as much as 0.4 percent to $1,676.90 an ounce today, the highest since April 13, and was little changed at $1,670.60 an ounce at 4:42 p.m. in Mumbai. Prices gained 3.4 percent last week, the most since the week ended Jan. 27. Spot gold reached a record $1,921.15 on Sept. 6.

“Europe’s financial situation is straining at the seams and with no fix forthcoming, demand for safe havens is likely to remain strong,” said Bimal Das, director at ScotiaMocatta, the metals trading unit of Bank of Nova Scotia.

The European leaders are preparing for a critical month in the three-year-old crisis that will involve the formulation of a European Central Bank bond-buying plan, a progress report by Greece’s international creditors and a looming German court decision on bailout funding on Sept. 12.

“More cash is coming into the market from investors,” said Philip Klapwijk, the global head of metals analytics at Thomson Reuters GFMS Ltd. “We expect there to be QE3 by September and gold will move substantially higher. The ETF demand has picked up and will continue to grow as prices rise.”

Soros, Paulson

Holdings in gold-backed exchange-traded products, or ETPs, rose 0.1 percent to 2,448.64 metric tons on Aug. 24, data tracked by Bloomberg show. Billionaire investors George Soros and John Paulson increased their stakes in the SPDR Gold Trust (GLD), the biggest gold-backed ETP, in the second quarter, U.S. Securities and Exchange Commission filings showed Aug. 14.

Central banks will purchase close to 500 tons this year after becoming net buyers in 2009, according to the producer- funded World Gold Council. Central banks added 254.2 tons to their holdings in the first half, according to the council, as countries from Russia to South Korea added to reserves.

“There is official interest in gold and central banks are buying, from Russia to Korea,” said Jeremy East, global head of metals trading at Standard Chartered Plc. “Central bank purchases are not driven by price but by asset allocation.”

Losing Steam

Gold may “lose steam quickly” if the market is disappointed by a lack of action to stimulate economies, Barclays Plc said in an e-mailed report today. “For gold to extend its gains, it needs to continue to draw wider investor support in light of the fragile physical market,” analysts including Suki Cooper said in the report.

Gold imports by India, the biggest buyer, may decline by 250 tons to 350 tons this year as record prices in rupees cut into demand, East said. Consumption rose to a record 963.1 tons last year, driving bullion imports to the highest ever at 958 tons, according to the gold council.

“The Indian currency has weakened and could weaken further, so demand may not come in,” East said. The Indian rupee declined to a record of 57.3275 per dollar on June 22, making imports costlier.

Bullion for October delivery gained as much as 0.5 percent to an all-time high of 31,091 rupees ($559) per 10 grams on the Multi Commodity Exchange of India Ltd. today. Prices have climbed 13 percent this year.

GFMS is owned by Thomson Reuters Corp. and Bloomberg competes with Thomson Reuters in selling financial and legal information and trading systems.

China: a 'confidence booster'

China announces £800bn stimulus to boost confidence

China has announced a total of 8 trillion yuan (£800bn) of "stimulus projects" to try to boost confidence in an economy that appears to be cooling faster than expected.

The Telegraph,

26 August, 2012

One Chinese province after another has stepped forward over the last fortnight to announce their plans, in what appears to be a propaganda effort to reassure the public that the economy is still on track.

Meanwhile, Wen Jiabao, the Chinese premier, promised over the weekend that the Chinese government would intensify its efforts to boost the economy in the second half of the year.

On a visit to Guangdong, the heartland of China's export industry, Mr Wen warned that "there will still be a lot of problems and uncertainties in exports going forward. The third quarter is a crucial period".

Analysts said the government could now steer the value of the yuan lower, after a gain of 4.7pc last year against the dollar. Further export tax rebates could also be used to bail out manufacturers.

China's export sector is suffering from anaemic demand from Europe and the United States. In the first seven months, exports rose 7.8pc, while imports rose 6.4pc, leaving China in danger of missing its 10pc target for trade growth this year. July's exports grew at the lowest pace since 2009 and there are reports of factory workers leaving and returning to their home provinces for the first time since the financial crisis.

The Telegraph has travelled to the south of China over recent days to witness a slowdown in the coastal economy and in the export sector, and also to areas which are flourishing with new investment, and where the local economy is booming. The picture appears mixed. China, geographically almost the same size as the Eurozone, appears to be struggling in some areas and flourishing in others. A new inland corridor, running from Liaoning in the north to Guizhou in the south, through cities such as Wuhan and Changsha, is booming.

In response, Guangdong has unveiled 177 "core projects" worth 1 trillion yuan, joining a long list of local governments to announce "stimulus" plans. The huge cities of Chongqing and Tianjin, meanwhile, both said they would spend 1.5 trillion yuan, while Guizhou, one of China's poorest provinces, has said it will spend 3 trillion yuan on eco-tourism and creating a series of national parks.

The central government, meanwhile, said it would spend to plough 2.4 trillion yuan into reducing carbon emissions and energy conservation programmes over the next three years, and has already set aside 26bn yuan in subsidies to encourage consumers to switch to low-energy appliances.

The role call of announcements may be a signal that after half a year of fine-tuning monetary policy, the government is preparing to take more drastic measures.

While the Communist party had pencilled in slower growth of 7.5pc for this year, in order to restructure and rebalance the economy, there are indications that China may suffer, or may already have suffered, a "hard landing", where growth would fall to below 7pc.

"A hard landing in China would look like the fourth quarter of 2008 and the first quarter of 2009 when exports collapsed, factories had no orders and migrant workers were laid off by the tens of millions," says Wang Tao, an economist at UBS.

Mr Wen said many "negative factors" would continue "to affect stable economic operations in the second half" and that the difficulties of boosting growth are "still relatively large".

"Facing the current difficulties, we have to improve the operating environment for companies and enhance the corporate confidence," he said.

Many of the new stimulus projects appear to simply be restatements of existing commitments, and there was no indication of how they will be funded.

However, economists at Barclays Capital said that, unlike the boom in infrastructure spending after the financial crisis, the projects are aimed at boosting China's technological capabilities and its domestic consumption.

"These plans should have a reasonable 'quality control'," they said, in a note, adding that whether or not the plans were new or old, bringing them forward would be "helpful in offsetting the headwinds from external demand deceleration".

Several economists remain confident that China will continue its blistering growth for several years to come. Justin Yifu Lin, the former chief economist at the World Bank, predicted that the Chinese economy would continue its high growth rate for "another 20 to 30 years".

Mr Wen also said that, despite the problems, China's "economic fundamentals have not changed". He added: "We have a lot of good conditions and optimistic factors that will help stabilise growth".