Austerity nonlinearities

Before the crisis Spain had a tiny deficit as a percent of GDP, much smaller than the US's roughly 10 percent. Spain's initial austerity measures were in the same range as those contemplated or forecast for the US in 2013, a few percentage points.

 

Discount rate dissonance

There has to be a huge cognitive dissonance occurring in investor's minds right now around the issue of hurdle rate. Everyone who ever took a managerial finance course knows that a reasonable discount rate for any Capex project is 10%. Sure, nominal interest rates are zero and real interest rates are negative, but who can really believe this when it comes to capital budgeting? Hence, the concentration on nominal spreads, or as Rosie puts it, "cash flow is king." But everyone knows the dangers of investing in stocks based on dividend yield only. Are investors really aware of the probability of capital loss in real estate investment? What happens when mortgage rates go up by a few hundred basis points?

It is common to talk about uncertainty as the cause of investment insufficiency in a liquidity trap, but the fact remains that capital losses are built into a zero interest rate environment. Last one out is a rotten egg. But it may be a while. Last time we had zero interest rates it lasted well over a decade. We might well have them until the end of this decade, or close to it.

This is really a golden age for privately held firms. They don't have to answer to that green eyed monster, the stock market. For the kleptocratic managements of publicly held corporations, the current environment simply fosters a get rich quick mentality to a greater extent than ever before. Why not take on some low-cost debt and buy back even more stock? Yet another reason that the stock market has become a suckers' game.

Another comment on Modern Monetary Theory

I continue to believe that the attraction of MMT to modern liberals like Jamie Galbraith and Warren Mosler (I consider myself a classical liberal) is that something like the trillion dollar coin enables an end run around the fecally impacted banking system to get an inflation going, when the debt-deflationary forces in the private economy and banking system—in which, it is true to say, all money is debt—are overwhelming even Helicopter Ben’s attempts to get a nice, mild inflation going.

It might work, especially if accompanied by starting (or expanding) a significant war effort, but of course the fundamental problem is the Fed, especially since that great conservative Richard Nixon took us off the gold standard (he also opened the door for that gi

Source:  Rogoff via businessinsider.com

The fact an establishment economist like Rogoff could present such material at the annual economics meetings, and that Krugman and the White House won’t issue non-denial denials that they are taking this seriously, tells me that we are very close to the unraveling of the Bretton Woods II monetary system, and possibly to some fundamental change in the way the Fed operates.  There are rumors of a new monetary system in the works, and the way this is being sent out suggests to me it’s a trial balloon—so that they can come up with “the better idea.”

I just can’t imagine that the better idea will not involve some attempt to accelerate inflation, given the grip of the creditors on the sovereigns, and aggregate inability to clear bad debt out of the system.

Europe is showing the world what austerity looks like, and it ain’t pretty.

Today’s depressing arithmetic

Say you have an income of $96,000, under the payroll tax ceiling.  How much will the 2 percentage point payroll tax increase affect your paycheck?

Your gross monthly income is $8,000.  If your take-home is 65 percent of your gross, a standard assumption, then your take-home pay will be reduced by (0.02*8000)/(0.65*8000) = 0.031 or 3.1 percent.  The dollar reduction in monthly take-home is $160. 

Combine this with a health care premium increasing 6.3 percent (source) and the hit to take-home pay climbs to $200 or more.  Combine this with pay raises that approximately match the actual rate of inflation, and you have a situation where most people’s take home pay is dropping in purchasing power.

I can’t help but believe that when the first pay stubs of the new year arrive, that a considerable amount of belt tightening will ensure.

The 1 percent that runs the country is blissfully unaware of all this, and thinks there is no problem with stiffing the American people year after year.

RIP: The American Republic

Via:  fabiusmaximus.com  This is a site by a bunch of ex-military.  The Republic is dead, long live the Republic!  Worth reading.  Especially critical of Obomba’s recent appointments.  These neo-cons (including Obomba) are so stupid.  With cowardly drone attacks that routinely kill women and children they gain no strategic advantage, and turn an entire country into potential terrorists (e.g., Pakistan).  But the War Machine needs its wars, and if the natives won’t attack by themselves, they need to be provoked.

The Devolution continues, to crest by about the end of the decade. 

We’ve worked through all 5 stages of grief for the Republic. Now, on to The New America!

8 JANUARY 2013

by Fabius Maximus

Summary:  As the Republic dies, its opponents become bolder.  They move from subtly working to undermine it, to outright advocacy of its overthrow.

“We’ve spawned a new race here … We’re a new nationality. We require a new nation.”
— Benjamin Franklin speaking at the Continental Congress, 7 June 1776 (in the film 1776)

Perhaps we’ve become a new race, so that the America-that-once-was no longer suits us.
Perhaps we require a New America.

Contents

1. Five stages of grieving for the Republic
2. A new Republic for a plutocracy
3. A Marine speaks against the Constitution
4. For More Information

[…]

On the other hand, Hegel appears to have some strategic sense (not sure why Fabius Max doesn’t like him).  He opposed the Iraq “war,” and seems to favor getting out of the graveyard of empires as quickly as possible.  Perhaps he could talk the Prez out of being assassin-in-chief.

Via:  www.antiwar.com

If Confirmed, Hagel Likely to Favor Swift Withdrawal From Afghanistan

On Iran and Syria too, Hagel appears reluctant to commit troops

by John Glaser, January 07, 2013

Former Senator Chuck Hagel, nominated on Monday by President Obama to be the next Secretary of Defense, would be “likely to favor a sizable drawdown in Afghanistan, more frugal spending at the Pentagon and extreme caution when contemplating the use of force in places like Iran or Syria,” if confirmed, Reuters reports. […]

Tinder in place

Via: Debka.com

With a buildup of 16 Russian warships carrying thousands of marines on the Syrian coast “to deter the West from deploying ground forces in Syria,” Syrian Bashar Assad could afford to brazen it out in his first public speech in seven months. Speaking at the Damascus opera house, Sunday, Jan. 6, Assad said Syria no longer takes dictation from anyone and called on Syrian citizens to defend the country against “a war fought by only a handful of Syrians and many foreigners.”

He rejected dialogue with the opposition which he referred to as “puppets fabricated by the West.”

 

Economic and Distributional Effects of the Senate Tax Bill

Via: taxfoundation.org (links to study page)

House passed it. Can you say, “Slow is beautiful”?  I am sticking with my forecast that the next NBER-defined recession will [be determined to have] begi[u]n in mid-2013, whenever the NBER gets around to determining it.

A few nuggets: 

• impact on GDP, –1.38 percent;
• effect on deficit, $37.2 billion reduction (on a ~$1000 billion deficit);
• $GDP/delta $Tax , –8.0X

 

Note that the table above obviously doesn’t include the effects of the payroll tax cut expiring.  I have emailed the author and asked him to revise it.