Joining the Chorus–Sequestration: Any Fiscal Austerity Now is a Mistake

Everyone with a brain has commented on Sequestration and what should be done instead–some with sound logic and facts and data to support their view. The most recent brought to my attention in a comment by Tom Gallagher, via RenMac, is an analysis of the impact of austerity in Euroland, “Panic-Driven Austerity in the Eurozone and its Implications“.

The best complete article on this topic and what else needs to be fixed in America–actually in Washington–was Fareed Zakaria’s in a recent issue of World Affairs, “Can America Be Fixed–The New Crisis of Democracy.”  It details the ills of the US and spells out some solutions. The solutions were summed up in a sentence in his second paragraph of the 10-page article: “The focus in Washington is on taxing and cutting. It should be on reforming and investing.”  In the same issue, Roger Altman, who would have been my candidate for Treasury Secretary,  wrote a rather optimistic article, “The Fall and Rise of the West.” asserting his view that the West would emerge stronger from this financial crisis. I think Altman is right if Zakaria’s prescriptions are followed. I would highly recommend both of these articles as well as the fall, 2012, issue of the World Policy Journal, which devoted the whole journal to the subject of Democracy. If you only have time for one article it should be Zakaria’s–an elegant and fairly complete synopsis of how we got to this point and what should happen to get us past it. Zakaria provides some very appropriate solutions, which unfortunately require our politicians, and to some extent, we, the people, to act responsibly. Unfortunately, there is no evidence of this happening either from the Administration or Congress or us. And, now that it looks like it will happen, Sequestration is getting a “…it’s not so bad…” rationalization from some who should know better.

I am hoping for a miracle, I guess–just a simple agreement to postpone this nonsense and any short-term series of compromises and truly to focus on a long-term well-vetted plan,with a clear understanding of timing and consequences, that results in “…reforming and investing.” I think the markets, companies and individuals would react well to this. There isn’t much substantive to add to what others have said. I simply urge you to click on the links above to understand a bit more of the madness that is rampant in Washington and its implications.

The Debt Ceiling, Long Term Deficit Reduction and Insanity

Having barely survived the Fiscal Cliff, we now face the prospect of the crazies using the debt ceiling as a second attempt to derail this recovering economy. Everyone acknowledges that we have a growing debt problem which must be solved. That is a long term issue and should be dealt with accordingly, as opposed to immediate austerity in the face of a fragile but growing US economy. Even the IMF has finally concluded that austerity at the wrong time and at the wrong level is not the answer.  Restoring the Payroll Tax is already a mistake. This is not the time to reduce any flows into this economy.  It is time to sit down and develop a long term plan to reduce the rate of debt accumulation via serious review of federal spending across the board, entitlement reform, tax policy and, at the same time, redirection of spending and policy toward areas that will produce long term economic growth and jobs in this country and the world. We know the levers that will produce growth–education, technology, infrastructure, energy independence, immigration.

We do run the risk of waking up one day and finding the global financial markets unwilling to finance the debt we continue to incur.  However, if we develop a serious long-term plan that begins to go into effect well before this administration is out of office, while still maintaining a growth path, the financial markets will likely be very supportive. Companies and individuals just need to know the rules and see an economy with opportunity. While it was a rather optimistic view, the forecast I made in December does provide at least a vision of what could begin to happen this year. Look at how global equity markets, including our own, have reacted to what was a modest resolution of the fiscal cliff. I would predict that if the debt ceiling increase is accompanied by the elements of austerity that the chief crazy, Mitch McConnell, wants to put in place immediately, financial markets will reverse in anticipation of a major slowdown in growth domestically with an impact on global economies as well.

Where are the folks that are prepared to have the discussions in meetings among disparate parties as opposed to fighting their battles in the media? This includes both sides of the aisle as well as the Executive Branch. We have a real opportunity to get this right. Let’s hope we don’t blow it.

The Fiscal Cliff, Long Term Deficit Reduction and Instant Gratification

Well, there was a form of Fiscal Cliff Resolution which appeared to make no one happy except maybe real people who got a little more certainty about how they need to handle their finances.  There seems to be general disappointment that the long term deficit problem was not dealt with.  Let’s state the obvious: the long term deficit problem is just that–a long term problem. Instant gratification is not required–except maybe for the securities markets. The short term problem, even for the securities markets and certainly for the commonweal, is maintaining the pace of a recovery that remains fragile. Why would any leader want to truly deal with a long term problem with a lame-duck Congress, particularly when the incoming Congress is modestly more in his camp? I would posit that he may not even want to deal with the long-term problems with this Congress if he has any belief that the 2014 elections could swing things even more his way as Congress continues to look political as opposed to statesman-like.

Right now, we need to deal with the short-term issues of maintaining this recovery. Some of the compromises made to get past the Cliff didn’t do that–the Payroll tax restoration being a big one.  No doubt there will be more compromises to get past the debt ceiling issues. However, I do believe it is becoming more difficult for the majority in the House to continue to hold a gun to this economic recovery. The majority in the Senate and the minority in the House need to do their part as well. In addition, the ratings agencies should also stop looking for instant gratification. The long term deficit problem must get dealt with, including entitlement reform. It will get dealt with because it has to and it can be done. If that takes two years, during which we continue to see a reasonable economic recovery, I don’t think that’s a problem. Maybe  is pays to take another look at what could be happening if we keep eliminating uncertainty and maintain this recovery.

What to Expect in 2013 (and Beyond)–An Optimistic View

This year in early January I posted “What to Expect in 2012 (and Beyond).”  Some of what I expected last year has rolled over into 2013. With more than a month to go before we step into 2013 it is a little risky to make predictions, particularly when much of what is predicted depends on the resolution (or not) of the fiscal cliff. I believe we will reach a resolution and actually take some steps toward overall fiscal reform. That may be the biggest and most important expectation which sets the course for much of what else could occur. Hopefully, op-ed pieces like Steve Rattner’s in the 11/25 Sunday NYTimes will become part of the dialogue in Washington. Keep in mind that the expectations below follow the Byron Wien approach, i.e., my view is a greater than 50% chance of these expectations coming to pass while the conventional wisdom is less than that. Let’s plunge in.

  1. With the resolution of the fiscal cliff and some steps toward overall fiscal reform, big corporations and small businesses step up their plans for 2013 and beyond, affecting hiring and capital spending.  The rest of the US economy joins the housing recovery, producing growth in the US exceeding 3.5% for the year with at least one quarter printing over 4% in spite of the trade deficit expanding.
  2. The US experiences double digit growth in capital spending as delayed plans are finally implemented with resolution of the fiscal cliff.
  3. Unemployment works its way lower by a percentage point. Unfortunately, the number of jobs unfilled increases substantially as the mismatch between skills and needs comes into stark relief.
  4. The new leadership in China, while taking a conservative social stance, takes additional steps to insure a decent recovery in economic growth. The strength of the US economy aids China’s recovery.
  5. While the noise about Greece grows and is joined by more concerns about Spain, Italy and France, Europe continues to muddle through with interesting support from the Middle East and some support from China.
  6. As Moore’s Law marches on, Samsung and others introduce advances in tablets and communications devices which puts pressure on Apple that reflects itself in relative stock performance. Apple does an interesting pivot which changes the landscape for even more robust consumer devices.
  7. The Argentine situation is not contained and has an impact on politics, growth rates and inflation for its neighbors, requiring more attention to South America from the US than we have been willing to give thus far.
  8. As we enter the year end 2013, because of the surprising global growth, there are some unsettling signs of inflation. QE is reduced and expectations for a rise in rates increase.
  9. The US stock market has a good rise in the first half of 2013, but inflation concerns and a possible Fed reaction push markets down in the latter part of the year reversing  some but not all of the earlier gains. Analysts find themselves chasing earnings for much of the year.

The next few expectations are holdovers, with some modifications, from 2012. They may not all come to pass in 2013. None of them were complete in 2012.  But as we move further into the decade, in my view, they will likely happen, and will have an impact on how our future unfolds.

  1. Contrary to a normally quiet year during a transition of leadership, to some extent in reaction to some elements of an “Asian Spring” in the region, China takes several steps in response to a more activist populace upset with corruption, the environment, and some areas of economic stress. Externally, this includes significant acquisitions in other countries as well as the opening of manufacturing and service facilities where there is a receptive government. At home, R&D is accelerated, particularly in alternative energy, space and IT processing. Subsidies for hydrocarbons are reduced and an explicit carbon tax is put in place.
  2. As the US economy grows, corporations find qualified hires difficult to come by.  Enlightened corporations become educational institutions to provide skills and basic knowledge to a work force that has been idle and undereducated by the public systems. Corporations become much more vocal about creating paths to bring illegal immigrants into the US system, expanding visa programs and finding other mechanisms to add talented labor to the domestic pool. The tide shifts significantly on immigration issues. The skill match is aggravated by decisions on the part of some US corporations to bring business operations back into the States. Labor costs are rising elsewhere and the elements of control, rule of law, productivity, available feedstock and relative safety lead to better economics for manufacturing and service locally.
  3. Aside from the continuing concerns about Europe and the ripple effect of the Argentine situation on South America, India becomes a focal point. With the economy not growing adequately to provide jobs, upward mobility and political stability, the leadership looks for diversions and points to its neighbors, China and Pakistan as problems. There are internal confrontations as well. While there is limited impact on the global economy, the uncertainty affects foreign investment and India’s outsourcing businesses.

On balance, this is a set of optimistic expectations with some trouble spots, as always, diverting our attention. I am optimistic about what can happen, certainly within the US, as long as the crazies in Washington get a bit rational. If not, I will need to spell out a whole new set of expectations. It will be an interesting year.

What to Expect in 2013 (and Beyond)–An Optimistic View

Last year in early January I posted “What to Expect in 2012 (and Beyond).”  Some of what I expected last year has rolled over into 2013. With more than a month to go before we step into 2013 it is a little risky to make predictions, particularly when much of what is predicted depends on the resolution (or not) of the fiscal cliff. I believe we will reach a resolution and actually take some steps toward overall fiscal reform. That may be the biggest and most important expectation which sets the course for much of what else could occur. Hopefully, op-ed pieces like Steve Rattner’s in the 11/25 Sunday NYTimes will become part of the dialogue in Washington. Keep in mind that the expectations below follow the Byron Wien approach, i.e., my view is a greater than 50% chance of these expectations coming to pass while the conventional wisdom is less than that. Let’s plunge in.

  1. With the resolution of the fiscal cliff and some steps toward overall fiscal reform, big corporations and small businesses step up their plans for 2013 and beyond, affecting hiring and capital spending.  The rest of the US economy joins the housing recovery, producing growth in the US exceeding 3.5% for the year with at least one quarter printing over 4% in spite of the trade deficit expanding.
  2. The US experiences double digit growth in capital spending as delayed plans are finally implemented with resolution of the fiscal cliff.
  3. Unemployment works its way lower by a percentage point. Unfortunately, the number of jobs unfilled increases substantially as the mismatch between skills and needs comes into stark relief.
  4. The new leadership in China, while taking a conservative social stance, takes additional steps to insure a decent recovery in economic growth. The strength of the US economy aids China’s recovery.
  5. While the noise about Greece grows and is joined by more concerns about Spain, Italy and France, Europe continues to muddle through with interesting support from the Middle East and some support from China.
  6. As Moore’s Law marches on, Samsung and others introduce advances in tablets and communications devices which puts pressure on Apple that reflects itself in relative stock performance. Apple does an interesting pivot which changes the landscape for even more robust consumer devices.
  7. The Argentine situation is not contained and has an impact on politics, growth rates and inflation for its neighbors, requiring more attention to South America from the US than we have been willing to give thus far.
  8. As we enter the year end 2013, because of the surprising global growth, there are some unsettling signs of inflation. QE is reduced and expectations for a rise in rates increase.
  9. The US stock market has a good rise in the first half of 2013, but inflation concerns and a possible Fed reaction push markets down in the latter part of the year reversing  some but not all of the earlier gains. Analysts find themselves chasing earnings for much of the year.

The next few expectations are holdovers, with some modifications, from 2012. They may not all come to pass in 2013. None of them were complete in 2012.  But as we move further into the decade, in my view, they will likely happen, and will have an impact on how our future unfolds.

  1. Contrary to a normally quiet year during a transition of leadership, to some extent in reaction to some elements of an “Asian Spring” in the region, China takes several steps in response to a more activist populace upset with corruption, the environment, and some areas of economic stress. Externally, this includes significant acquisitions in other countries as well as the opening of manufacturing and service facilities where there is a receptive government. At home, R&D is accelerated, particularly in alternative energy, space and IT processing. Subsidies for hydrocarbons are reduced and an explicit carbon tax is put in place.
  2. As the US economy grows, corporations find qualified hires difficult to come by.  Enlightened corporations become educational institutions to provide skills and basic knowledge to a work force that has been idle and undereducated by the public systems. Corporations become much more vocal about creating paths to bring illegal immigrants into the US system, expanding visa programs and finding other mechanisms to add talented labor to the domestic pool. The tide shifts significantly on immigration issues. The skill match is aggravated by decisions on the part of some US corporations to bring business operations back into the States. Labor costs are rising elsewhere and the elements of control, rule of law, productivity, available feedstock and relative safety lead to better economics for manufacturing and service locally.
  3. Aside from the continuing concerns about Europe and the ripple effect of the Argentine situation on South America, India becomes a focal point. With the economy not growing adequately to provide jobs, upward mobility and political stability, the leadership looks for diversions and points to its neighbors, China and Pakistan as problems. There are internal confrontations as well. While there is limited impact on the global economy, the uncertainty affects foreign investment and India’s outsourcing businesses.

On balance, this is a set of optimistic expectations with some trouble spots, as always, diverting our attention. I am optimistic about what can happen, certainly within the US, as long as the crazies in Washington get a bit rational. If not, I will need to spell out a whole new set of expectations. It will be an interesting year.