The Fiscal Cliff Explained

 

“Fiscal cliff” is the popular shorthand term used to describe the conundrum that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron’s, over 1,000 government programs – including the defense budget and Medicare are in line for “deep, automatic cuts.”

In dealing with the fiscal cliff, U.S. lawmakers have a choice among three options, none of which are particularly attractive:

They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.

They can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States’ debt will continue to grow.

They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.

Can a Compromise be Reached?

 

The oncoming fiscal cliff is a concern for investors since the highly partisan nature of the current political environment could make a compromise difficult to reach. This problem isn’t new, after all: lawmakers have had over a year to address this issue, but Congress – mired in political gridlock – has largely put off the search for a solution rather than seeking to solve the problem directly. Republicans want to cut spending and avoid raising taxes, while Democrats are looking for a combination of spending cuts and tax increases. Although both parties want to avoid the fiscal cliff, compromise is seen as being difficult to achieve – particularly in an election year. There’s a strong possibility that Congress won’t act until the eleventh hour. Another potential obstacle is that the next Congress won’t be sworn in until January 3, after the deadline.

The most likely outcome is another set of stop-gap measures that would delay a more permanent policy change until 2013 or later. Still, the non-partisan Congressional Budget Office (CBO) estimates that if Congress takes the middle ground – extending the Bush-era tax cuts but cancelling the automatic spending cuts – the result, in the short term, would be modest growth but no major economic hit.

Possible Effects of the Fiscal Cliff

If the current laws slated for 2013 go into effect, the impact on the economy would be dramatic. While the combination of higher taxes and spending cuts would reduce the deficit by an estimated $560 billion, the CBO estimates that the policies set to go into effect would cut gross domestic product (GDP) by four percentage points in 2013, sending the economy into a recession (i.e., negative growth). At the same time, it predicts unemployment would rise by almost a full percentage point, with a loss of about two million jobs. A Wall St. Journal article from May 16, 2012 estimates the following impact in dollar terms: “In all, according to an analysis by J.P. Morgan economist Michael Feroli, $280 billion would be pulled out of the economy by the sunsetting of the Bush tax cuts; $125 billion from the expiration of the Obama payroll-tax holiday; $40 billion from the expiration of emergency unemployment benefits; and $98 billion from Budget Control Act spending cuts. In all, the tax increases and spending cuts make up about 3.5% of GDP, with the Bush tax cuts making up about half of that, according to the J.P. Morgan report.” Amid an already-fragile recovery and elevated unemployment, the economy is not in a position to avoid this type of shock.

The cost of indecision is likely to have an effect on the economy before 2013 even begins. The CBO anticipates that a lack of resolution will cause households and businesses to begin changing their spending in anticipation of the changes, possible reducing GDP before 2012 is even over.

 

Pivotals: SIGNS OF THE TIMES

new car

 

“Italian new car sales plunged in November…Decline of 20.1% Y/Y.”

– Dow Jones, December 4

“The European debt crisis has given way to a new wave of corruption as some of the most hard-hit countries have tumbled in an annual graft-ranking study.”

– Bloomberg, December 5

This is from a watchdog group called Transparency International. Greece fell to 94th place from 80th, ranking worse than Colombia and Liberia. Greece’s “Golden Age of Democracy” was founded not so much on intellectual inspiration, but more upon Athens sitting on one of the richest silver camps in history. Athenians could afford democracy, Spartans could not. The problem recently is that Greece, like any other country, cannot afford interventionist government.

“German industrial production unexpectedly dropped in October.”

– Bloomberg, December 7

The number was down 2.6% from September, which was down 1.3% from August.

“U.K. Manufacturing production fell more than economists forecast in October. Food and alcohol slumped.”

– Bloomberg, December 7

Progress on this great reformation is being made. The legislature in Michigan passed a “Right to Work” bill. This brings the count to 24 states where people can work without being forced to join a union. They can work without being forced to contribute their money to union leaders with an agenda they may find offensive.

RBI leaves key rate unchanged, shifts focus to growth

 

The Reserve Bank of India on Tuesday left the key policy rate unchanged in its mid quarter (December 2012) monetary policy. With this status quo in the policy action, repo rate stood at 8% while reverse repo was at 7%. Cash reserve ratio (CRR) also remained at 4.25%.

RBI’s policy rate changes at a glance

 

Date Reverse Repo Repo  SLR CRR
December 18 7 8  23 4.25(unchanged)
October 30, 2012 7 8  23 4.25 (-25)
September 22, 2012 7 8  23 4.50 (-25)
August 11, 2012 7 8  23 4.75
April 17, 2012 7 (-50) 8 (-50)  24 4.75
March 10, 2012 7.50 8.50  24 4.75 (-75)
January 28, 2012 7.50 8.50  24 5.50 (-50)
October 25, 2011 7.50 (25) 8.50 (25)  24      6
September 16, 2011 7.25 (25) 8.25 (25)  24      6
July 26, 2011 7.00 (50) 8.00 (50)  24      6
June 16, 2011 6.50 (25) 7.50 (25)  24      6
May 03, 2011 6.25 (50) 7.25 (50)  24      6
March 17, 2011 5.75 (25) 6.75 (25)  24      6
January 25, 2011 25  (5.50) 25  (6.50)  24      6

 

 

 

 

 

 

 

 

 

 

 

*The bracketed figures show repo, reverse repo and CRR in percentage term.

Lok Sabha passes banking bill, companies bill (Updated on 19-12-12 at 6.10 AM)

The Lok Sabha today passed the Banking Bill and the Companies Bill.

 

The Baking Bill was passed after the  government gave in to the BJP’s demand to drop the controversial forward contract bill from the amendment, paving the way for issuance of new licences and consolidation in the sector.

 

Regarding the Companies Bill the government said the aim is to protect interest of employees and small investors while encouraging firms to undertake social welfare voluntarily instead of imposing that through “inspector raj”.

 

Replying to a debate before the bill was passed by a voice vote, Corporate Affairs Minister Sachin Pilot said through this new legislation, the government intends to make India an attractive and safe investment destination.

 

He said special courts would be set up for speedy trials, as an assurance to investors that cases will not linger on.

 

“The new clause (on forward trading) will not be pressed. We will debate the rest of the Bill,” Finance Minister P Chidambaram, Finance Minister, told the Lok Sabha when discussions commenced on the Banking Bill. The introduction of this clause was opposed as it did not form part of the Banking Laws (amendment) Bill 2011 that was referred to the Standing Committee on Finance.

 

The bill aims to draw  foreign investment to the banking sector by increasing shareholders’ voting rights to 26 percent from the existing 10 percent. This is expected to lead to consolidation in the industry as it will increase investor interest in private banks. Secondly,  it will  also encourage foreign banks to expand in India by buying stakes in local banks, as they would  have greater operational control over their management.

 

While defending the case for the bill, Chidambaram also said India needs world-class large banks, thereby making the case for consolidation and expansion even stronger.

 

Chidambaram also said the government plans to infuse Rs 1500 crore into public sector banks to ensure expansion. He said that at least 6,000 new branches will be opened and around 84,000 people will be recruited for the same.

 

“We have to infuse capital in the banks so that they can lend. The funds will be infused by bonus shares and rights issue,” he said.

 

Post the passage of the bill, the Reserve Bank of India can get moving on issuing new  banking licences to private banks. The process for inviting application for setting up new banks could start as early as January 2013.

 

India’s banks are in need of funds to expand operations and meet enhanced capital requirements under Basel-3 norms.

 

RBI had formulated the draft rules for the issue of new bank licenses to private banks in 2011, but held back on their implementation, urging the government to first get the  banking bill approved by Parliament because it said it needed  more powers.

 

However, the minimum capital requirement and guidelines for setting up new banks are still not known. Only those entities that the RBI deems fit and proper will be allowed to set up shop in India. Sources, however, told CNBC-TV18 that preference will be given to non-banking financial corporations as applicants for new licences.

 

The proposed law will also give the RBI the power to inspect the books of banks’ associate companies.

 

Meanwhile, Chidambaram also said that the much-awaited insurance bill and land acquisition bill will not come up during the Winter Session of Parliament.The two have been deferred till the Budget Session.

 

Further clarifying on the Banking Bill,  Chidambaram said the Competition Commission clause in the Banking Bill has been modified which allows the Reserve Bank of India to remain the banking regulator, while the Competition Commission of India (CCI) would regulate mergers and acquisitions. The Finance Minister, however, clarified that the banking sector is not outside the CCI’s purview.

 

The Banking Laws (Amendment) Bill, 2011 will now be taken up for discussion in the Rajya Sabha, the upper house of parliament.

 

 Ficci chief Naina Lal Kidwai welcomed the move and said the government has given a very important signalling by passing the bill as bigger banks are essential for more competition in the banking sector. “There will be many takers for new licences.. banking is a sector that can attract private equity,” she said.

The End of the World – What, Me Worry? (December 21, 2012)

december-21The world will not end on December 21, 2012 or anytime soon. I think the Mayan calendar indicates the end of a very long-term cycle that has a gradual impact upon the world, just as other long-term cycles make significant but gradual changes. Increases and decreases in solar output (a long-term cycle) may create ice ages or droughts that slowly and gradually change the world.

I’m also not worried about the other “end of the world” that we continuously hear about – The Fiscal Cliff. That topic has been worked to death. But the important information is simple:

  • Politicians brought the United States into our current fiscal mess, with the help of The Federal Reserve and bankers.
  • We have entrusted politicians to solve the problem. Really? The same political elite who created the problems will solve them? And what is your current belief structure regarding the Easter Bunny and the Tooth Fairy?
  • We have way too much debt and far too much government spending. The supposed plan is to increase debt forever and without end (sounds like a prayer) and to marginally decrease the rate of increase in spending – and call it a spending cut. If I call a donkey a mosquito, is it really a mosquito, or just a renamed donkey? If I have a debt and spending problem and my plan is to continue spending excessively, should I expect my problem to persist or disappear? If I have a serious drinking problem, should I expect to cure it with vodka?
  • So, the world is not going to end on December 21 or January 1. More of the same will beget more of the same.

But what does worry me are the actions that we, the supposedly most intelligent species on the planet, have made over the past several hundred years. Actions have consequences. Consider these actions:

Creation of Fractional Reserve Banking: This allows bankers to create money “from thin air” and loan it to businesses, individuals, and governments and collect the interest on that created money. The result is that debt increases, additional interest must be paid, and the financial services portion of the economy increases at the expense of the manufacturing economy. The paper shufflers won, and the manufacturers of useful and valuable products lost.

Creation of Central Banks: Central banks, not the free market, currently control the money supply and interest rates, enable politicians to spend excessively and government to expand more rapidly than the productive economy. Consequently, the economy becomes overburdened with debt, interest payments, and government regulations. What could go wrong?

Corporate control over the government and regulatory process: If a business owns many politicians, it can purchase the legislation and regulation it desires. The US tax code is an estimated 70,000 pages of legislation and regulations, as purchased by wealthy and powerful special interests. Intelligent action or payoff action?

Demonetization of gold and the use of unbacked paper money: When paper money is not backed by gold (silver, oil, etc.), then the total quantity of money in circulation can increase almost without limit. Hence, the purchasing value of the money decreases and prices rise. Consumer price inflation is guaranteed.

Politicians, bureaucrats, and bankers control markets and make decisions that should be left to free markets. Another writer likened that process to handing a Stradivarius to a gorilla. Freer markets do a better job of managing the economy, money supply, interest rates, prices, and production. How do we know? Ask the survivors of the hyperinflations in the last century.

The world will not end on December 21, 2012 or anytime soon. I think the Mayan calendar indicates the end of a very long-term cycle that has a gradual impact upon the world, just as other long-term cycles make significant but gradual changes. Increases and decreases in solar output (a long-term cycle) may create ice ages or droughts that slowly and gradually change the world.

I’m also not worried about the other “end of the world” that we continuously hear about – The Fiscal Cliff. That topic has been worked to death. But the important information is simple:

  • Politicians brought the United States into our current fiscal mess, with the help of The Federal Reserve and bankers.
  • We have entrusted politicians to solve the problem. Really? The same political elite who created the problems will solve them? And what is your current belief structure regarding the Easter Bunny and the Tooth Fairy?
  • We have way too much debt and far too much government spending. The supposed plan is to increase debt forever and without end (sounds like a prayer) and to marginally decrease the rate of increase in spending – and call it a spending cut. If I call a donkey a mosquito, is it really a mosquito, or just a renamed donkey? If I have a debt and spending problem and my plan is to continue spending excessively, should I expect my problem to persist or disappear? If I have a serious drinking problem, should I expect to cure it with vodka?
  • So, the world is not going to end on December 21 or January 1. More of the same will beget more of the same.

But what does worry me are the actions that we, the supposedly most intelligent species on the planet, have made over the past several hundred years. Actions have consequences. Consider these actions:

Creation of Fractional Reserve Banking: This allows bankers to create money “from thin air” and loan it to businesses, individuals, and governments and collect the interest on that created money. The result is that debt increases, additional interest must be paid, and the financial services portion of the economy increases at the expense of the manufacturing economy. The paper shufflers won, and the manufacturers of useful and valuable products lost.

Creation of Central Banks: Central banks, not the free market, currently control the money supply and interest rates, enable politicians to spend excessively and government to expand more rapidly than the productive economy. Consequently, the economy becomes overburdened with debt, interest payments, and government regulations. What could go wrong?

Corporate control over the government and regulatory process: If a business owns many politicians, it can purchase the legislation and regulation it desires. The US tax code is an estimated 70,000 pages of legislation and regulations, as purchased by wealthy and powerful special interests. Intelligent action or payoff action?

Demonetization of gold and the use of unbacked paper money: When paper money is not backed by gold (silver, oil, etc.), then the total quantity of money in circulation can increase almost without limit. Hence, the purchasing value of the money decreases and prices rise. Consumer price inflation is guaranteed.

Politicians, bureaucrats, and bankers control markets and make decisions that should be left to free markets. Another writer likened that process to handing a Stradivarius to a gorilla. Freer markets do a better job of managing the economy, money supply, interest rates, prices, and production. How do we know? Ask the survivors of the hyperinflations in the last century.

Automation (Robots) Coming to China

Automation and technology have wrecked havoc on labor markets the past 10-20 years, especially those in the developed West.  Yes there are exceptions such as Canada and Australia who have resource rich environments (i.e. North Dakota) but for most economies these massive shifts have changed the landscape fundamentally, and will continue to do so.   On the other hand, China has been the largest beneficiary of the shift in globalization but thus far has had little incentive for automation due to (relatively) low labor costs.  But that has been changing of late with wage pressure rising – so now automation appears to be coming to China as well.  Of course the balancing act of keeping enough work for hundreds of millions versus remaining competitive in cost structure is going to be one tough act for that country.   But more broadly speaking it points to continued pressure globally on labor.

chinarobots

And More…

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