Vincent Farrell on the Budget Games

It’s all a farce when even the Austerians don’t have much appetite for cutting anything at all.  And when the IMF calls us profligate…well, it just doesn’t get any better than that.

I really liked Vincent Farrell’s take on the games both Obama’s White House and Paul Ryan’s Congress are playing with the budget numbers.  Not only are most of the “cuts” really just a return of un-spendable funds, but the deal itself gets us nowhere between now and at least 2016 in terms of rising debt loads.

Thanks to Vince for allowing me to reprint:

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I guess these guys can’t help themselves

Vincent Farrell

Chief Investment Officer

Soleil Securities Corporation

The Grand Old Party made a big deal about their budget cuts in pushing through a ‘compromise’ bill for this year’s much delayed budget. It gets voted on tomorrow and a lot of Republican back benchers are squawking that they won’t sign. An editorial in Wednesday’s Wall Street Journal gives insight as to why. Half the cuts are illusory. First, the definition being used for “cuts” aren’t cuts, but decreases in the rate of spending for the most part. Then some of the cuts are counting money that wouldn’t have been spent anyway. The Journal says the whopper is “…declaring $6.2 billion in savings by not spending money left over from the 2010 census.” The money was not spent on the census; the only project it could be spent on. So we saved it once by not spending it and we’re saving it again by not spending what we are not allowed to spend! Another $4.9 billion is ‘saved’ by not spending money in a Justice Department Crime Victims Fund that wouldn’t have been spent. The paper figures the real “cuts” (and define the word “cuts” very carefully) is about half of the advertised number. Dick Cheney, and I don’t know for sure if he played Darth Vader in the Star Wars movies, taught us deficits don’t matter. With the Republican’s using a very innovative definition of the word ‘cuts’, coupled with their lack of candor and transparency, I’m afraid they won’t qualify for Jedi status anytime soon. But then again, neither will Nancy “just pass the health care bill and then we’ll see what’s in it” Pelosi.

It’s never comfortable to be dressed down in public, but the International Monetary Fund (IMF) felt the need to spank big daddy, USA, in the public square. And the USA is by far the largest contributor to the IMF. But independence prevailed and the IMF said the US lacks “a credible strategy” to “stabilize its mounting public debt”. They went on to say the debt problems of the US “pose a small but growing significant risk of a new global economic crisis.” Well, what is it? Is it small or significant? It can’t be both so I’ll opt for significant risk.

The G20 members pledged to half their deficits by 2013. Japan opted out, and if the economists at the IMF are correct, the US would be the only country beside Japan with rising public debt in 2016. The braniacs that do the bean counting say the US has outlined less than half of the tax increases and spending cuts necessary to bring its debt down in the medium term (whatever that is – I would guess 5 to 7 years). Even Paul Ryan’s draconian plan of cuts would achieve only “primary balance” by 2015. That’s without interest costs. Figure we have total debt of some $14 trillion now (although for some purposes the inter-government debt is not figured. But it is still interest bearing debt. An example would be the government borrowing the excess from the Social Security fund like it did for years.) and the average interest cost is just under 3%. That’s, what, $450 billion a year in interest costs? But don’t count that? Ryan’s plan doesn’t see a balance as you and I think of balance until 2040.

It’s good the Finns don’t get to vote on us. They are going to the polls and there is a good chance the ‘True Finns’ party will control enough votes that the Finnish government could shoot the whole European rescue plan to pieces. The Party vows to veto any increase in Finland’s contribution to the short term European Financial Stability Fund (EFSF) or the longer term focused European Stability Mechanism (ESM). Rescue loans have to be unanimously agreed to by all members and Finland could hold up the idea of expanding the fund’s lending capacity. So what happens to Spain if they have trouble?

The advance read on the President’s budget plan is program cuts and tax increases will be structured in a 3:1 ratio. His objective will be $4 trillion in deficit reduction in 12 years. It goes without saying that such a plan would be DOA if presented to the Tea Party.

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Smart, funny, sad stuff.

Source:

Soleil Securities