Friday, October 11, 2013

Supplement to Today's Post

Mark Zandi testified today that the government shutdown is "significantly damaging the economy" Zandi.pdf

In his opinion, a shutdown lasting through October would reduce real GDP by as much as 1.5% in the forth quarter.

Zandi also discusses the negative impacts resulting from prioritization and whether prioritization is even feasible. A very large number of GOP politicians are not concerned about increasing the debt limit, arguing that the treasury can prioritize its payment obligations.

With no increase in the debt limit through November,  a "cataclysmic economic scenario" would unfold that would result in a downturn more severe than the recent recession (pp. 5-7)

Zandi is the chief economist for Moody's Analytics, Chief Economist.

Children should not be allowed to play with flamethrowers and nuclear weapons.

None of the foregoing will have any impact on True Believers who exist in their own reality creations.

In a prior post, I noted that the economy is not on firm ground, and an extended government shutdown could easily cause a recession early next year. It would be foolish to point to the recovery after the shutdown during Clinton's first term to argue that there is nothing to worry about now. (Introduction to Stocks, Bonds & Politics-scroll to first snapshots)


A large red headline in the liberal Huffington Post claimed that the GOP was making a new "ransom" demand involving spending cuts to entitlement programs. That is how Democrats, particularly the liberal ones, view the GOP's negotiating posture. The Democrats agree to cuts in entitlement spending in exchange for the GOP's agreement for a temporary debt limit increase.

In today's post, I outlined some of the proposals that the GOP may make unrelated to Obamacare. The one mentioned in a few news stories, which have not officially been confirmed, is to decrease the income thresholds for increases in the Medicare premium rates. That is not a "spending" cut but a revenue raise.

The most important of the potential demands would be to use the chain weighted CPI rather than CPI to calculate increases in benefits and inflation indexes used in the tax code. The chained weighted CPI calculation would result in a lower inflation number or so many believe. Over a ten year period, the CBO calculated that the change weighted CPI would reduce social security benefits by $127B. For the same reason, the use of that inflation index would increase government revenue. The standard deduction, for example, is increased by CPI. Annual Inflation Adjustments for 2013 This change in the CPI calculation is both a spending reduction and a revenue increase. It would hit the middle class and retirees harder than the GOP's benefactors.

How does this sound to a Democrat President and a senate controlled by Democrats? Based on my analysis, I believe that Obama would give the GOP both the chained weighted CPI and the decreases in threshold income amounts for determining increases in Medicare Part B premiums. However, Harry Reid and most senate Democrats will not do it.

The only way to cut a deal along these lines would be for the GOP to make a major concession of their own. Agreeing to open the government and refraining from blowing up the world economy are not going to viewed by Democrats, or any sane person, as concessions.

I have had a fair amount of experience negotiating with difficult people. In those negotiations, I recall one incidence where I made an offer to give a concession in exchange for one from the other party. So I make a written offer to them: if I give you "x", then you give me "y".  Their reply was to accept the offer to give them "x". I could not help but laugh. It is just such a ridiculous way to negotiate.

I anticipate the GOP's proposal will be along those lines. Obama may have been willing to discuss chained weighted CPI in exchange for some GOP concession. The GOP is now going to argue that the President needs to make the concession desired by the GOP without offering one desired by the President.

The market remains 100% convinced that the two sides will work out a deal. After reviewing the recent developments this afternoon, I am not so confident and consequently continue paring my stock allocation.

When I read an article that has seeds of hope, like this one published in the NYT, I see an outline of a possible agreement involving a Senator Collins, a "GOP moderate" from Maine, or some other GOP senator, but nothing specific about whether Boehner could sell it to his House GOP members. It was the GOP members in the House after all who insisted that any CR had to be conditioned on defunding Obamacare. That precondition did not originate with the Senate Republicans (other than the radical reactionaries Ted Cruz and Mike Lee) or even with Boehner.

"Polls: Ted Cruz, Mike Lee numbers sink"
Stocks, Bonds & Politics: Mike Lee-An Extremist or a True Conservative? (November 2010)

I have largely replaced the income lost by selling low dividend stock ETFs with a few buys today, which I will discuss in the next post.

I am growing weary of writing these posts, so the next one may have to wait for  publication a week from tomorrow. 

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