Looking over the edge

Monday, July 25, 2011

It looked for a nano-second as though we were ending the week with the US heading towards some sort of a workout on the debt ceiling and the European statement of intent enough to correct the market's near term peripheral vision.

What we hadn't counted on was just how completely and utterly stupid the Republicans could be and the market has swiftly moved from "they couldn't" status to "Jeez, they couldn't, could they????". TMM still cannot believe that they will let the US go over the edge, but they have stood at the rails at the top of some very high buildings in their time and the view down from this one is even more vertigo-inducing. Staring down this is what TMM see.

The year 2040 -

- Daddy, why do we hate the politicians so?

- Good question, son. You see, back in 2011 we had something called the debt ceiling that was not raised by a group of people. They did it for fun and also to engage in some futile meaningless political signalling exercise. This resulted in global confidence in the old USA collapsing and a sudden need for introversion, as we couldn't rely on the rest of the world funding our lifestyles any longer. Of course, this in turn led to massive internal stresses, which boiled over with the commodity rebellions tearing the old land in half. It was only when the Iraqi peacekeepers arrived that order was restored. Shortly thereafter, the head of the CIA took the country over in a coup which proved that those crazy hippie professors like Noam Chomsky were right after all about the black helicopters bringing the end of America. As it turned out, they were more the end of the end and the beginning of something new.

- Wow, Dad, I bet the politicians that caused all that were in big trouble?

- Well of course, son. When it all fell apart it didn't take long for them to realise the game was up and, rather than garnering more votes, their actions had alienated them from the rest of society. Most of them escaped and hid in the woods. A few, like Nancy Pelosi, found sanctuary in the basements and attics of collaborators, but were swiftly rounded up and sent to special labor camps, where they were encouraged to actually contribute to society. You've probably read the Barney Frank Diaries in school?

What followed was the Petraeus regime, which ruled for a decade and resulted in an economic program that would make Pinochet proud and a purge that would, errr, also make Pinochet proud. The US really needed its Pinochet moment, and as you all learn in school and commemorate on Pinochet Petraeus Day, it's not so much the purge, but the need for a government with a strong mandate and technocratic utilitarian leanings that is important. Weirdly, much like Germany in the run up to WW2, a common enemy made for strange bedfellows and "free-lunch" democrats and "tax cuts without spending cuts" republicans rallied around their belief in a free lunch.

However, the Petraeus economic program managed to turn the USA around. It did nothing to impinge on intellectual freedoms, but did mercilessly go after the main causes of the low level of US competitiveness and the budget condition. To deal with healthcare costs Petraeus surprised everyone, including the Brooklyn hipsters, by putting in place bike paths in many metro areas and raising revenues by enacting congestion charging. Aging Tea Party members were forced to get out of their SUVs and do some exercise, while the government nationalized healthcare and proceeded to brutally cram down Pfizer and others.

Petraeus, of course, also knew a thing or two about wars and realized that Defense and Energy policies were one and the same thing. The CAFE fuel economy standards went up as quickly as the US could get out of the Middle East (which, of course, led to the Great Middle Eastern War and the poisoning of the whole region; which is why it is now so lightly populated). It was around that time that Nevada got its name "The Black State" due to it being literally covered with solar panels.

Meanwhile agriculture was handled well by the man in charge, Jeremy Grantham, who restored the US to an incredible agricultural productivity and sustainability just as the rest of the world's agricultural Ponzi scheme unravelled. That is why the population of the US is the same as India today.

- So, Daddy, sounds like it wasn't a bad outcome after all? Shouldn't we thank the politicians of 2011 for behaving like that collection of puppets Grandpa gave you?

- Oh, them? Yes, I see what you mean.

Posted by Polemic at 10:19 AM  


Pretty bad taste on this analogy considering 85 youth politicians were slaughtered in Norway this weekend..

Anonymous said...
11:17 AM  

You know what anon .. we hadn't thought about how that would sound, considering the Norway events.. you are right. we will change it. Apologies.

Polemic said...
11:43 AM  

"Too soon."

Any other time the post would've been fitting parody.

I do think there are many politicians who at the very least deserve a good hard shake to wake them up to reality.

Anonymous said...
11:49 AM  

Somebody's income must surely be tied to equities. If you can't see that this is a two party problem, you haven't been looking. Please look back at the Clinton administration. The world probably won't end if more time is taken. Besides, just when are these children going to have a budget that lowers spending if not now? Even Europe is opting for widespread austerity budgets, should not the world's biggest spender do the same?

Anonymous said...
11:56 AM  

Contractionary spending is contractionary. And European governments and officials are f*cking idiots.

But let's ignore that for now.

Instead it should be obvious that the money has already been promised and spent by the government. It's now a question of honoring those pledges and being responsible.

Anonymous said...
12:04 PM  

Loved the "Iraqi peacekeepers"

Anonymous said...
12:05 PM  

But that is the point precisely, Anon@11:56. Why did the very same Congress vote for the budget in the first place? Why choose a potential "weapon of financial mass destruction" (to borrow an expression) as a way of enforcing fiscal discipline? Why first vote in favor of profligacy only to subsequently resort to blackmail as a demonstration of some sort of perverted discipline? And, of course, it's a two-party problem, the GOP is just being more irresponsible about it, in TMM's HO.

Polemic said...
12:06 PM  

Anon@12:04, that's precisely the point (the latter part of your comment).

Polemic said...
12:22 PM  

I think I would prefer a DIA-led coup to a CIA one. Other than that, this is a great Plan B.

Anonymous said...
12:30 PM  

Best in the blogosphere!

Anonymous said...
12:37 PM  

A gallop poll shows a huge 2:1 majority of Americans don't even want the debt ceiling raised but the two biggest parties are still arguing about how to do it.
The problem is that we never hold politicians accountable when it comes time to re-elect them.

Cameron gave an "iron clad pledge" of a referendum for the British people on the Lisbon Treaty if he was elected and then ... I won't forget next time he wants my vote

Nic said...
12:39 PM  

Yeah, Nic, but then the American public is funny that way. They're very concerned about public debt and yet they seem to be adamantly opposed to cuts in entitlement programs. There's a whole lot of data out there on this subject, but ultimately someone needs to enlighten the American public that debt/spending is an inevitable consequence of the budget, rather than a thing in and of itself.

Polemic said...
12:50 PM  

I think the majority of Americans would revise their opinion if they realized that not rising the debt ceiling would mean cutting 40% of the federal spending.

Now that would literally mean pulling the plug on grandmom.

Anonymous said...
12:51 PM  

Anyone been watching this move in USD/TRY? Is this the makings of a run on the currency?

No credibility for CB, rubbish trade balance, huge credit growth...

Minty said...
12:55 PM  

Ah yes the people at the tea party rallies on their medicare scooters.
Also you don't fight wars without raising money to pay for them. It has been that way since the Romans but seems to have been forgotten when Iraq & Afghanistan were invaded. Starting two wars and lowering taxes at the same time is folly.
Cost of wars in Iraq & Afghanistan since 2001? 1.2 trillion as of today.
Source http://costofwar.com/

Nic said...
1:03 PM  

Department of Homeland Security? $43billion per year that didnt't exist 10 years ago

Nic said...
1:09 PM  

The American public is unable to reason abstractly or do arithmetic, so can't likely be relied upon in matters of macroeconomics.

Can't criticize DHS, Nic. Black helicopters gonna get you. Besides it employs lots of people who would otherwise be out bullying, harassing and stealing from the public.

Leftback said...
1:14 PM  

Btw, TMM, I like the view from the tank today. How is morale in the trench this morning?

I really enjoyed the "Over The Top" post and thought the analogy between summer range-bound markets and trench warfare was especially apt.

What is keeping me in my tank for now is the certain knowledge that a very extensive minefield lies out there in No Man's Land. I'd rather see a few of those blown up by the Bomb Squad before venturing out.

Leftback said...
1:26 PM  

USDTRY is in my sell zone. 78.6fib (09high 2010 low) & two equal moves higher from Nov2010 low takes us to 1.7334

Nic said...
1:46 PM  

I don't agree with this post picturing the Republicans as bad guys. Obama is the one playing a dangerous game. He is only converned with kicking the can down the road and getting reelected no matter what. We should praise the Republicans for bringing some common sense to the debate, i.e. you cannot carry on borrowing ever increasingly.

Anonymous said...
2:28 PM  

Well, here's a quiz. Once we raise the debt limit, when do we start lowering spending?

1. In two years
2. In four years
3. In six years
4. Never
5. All of the above

Actually the correct answer, using quantum economics, is 5. All of the above. We will call this the Schrondinger's Cat budget, if it is ever passed.

Anonymous said...
2:29 PM  

Really, I just like the idea of Barney Frank and Nancy Pelosi on the run and John Boehner having to hide in the roof of a tanning salon (actually that would be too obvious).

Nemo Incognito said...
2:46 PM  

Anon@2.28, where were the Republicans with their common sense during the actual budget process? Let me give you an analogy... Let's say you have a terminally ill patient and a group of surgeons that have decided that the right course of action is to operate. So you anaesthesize the guy, cut him open and start doing what needs to be done. Next thing you know, one of the surgeons says "No, I won't do it, 'cause I've always thought it was a bad idea". Is that common sense, in your view?

Polemic said...
2:56 PM  

Actually, Polemic, I am a surgeon, and the analogy you use is not proper. Considering your post the more proper analogy would be the surgeon who sees his patient with cancer and the tumor is enlarging by the week. Yet he still postpones the inevitable surgery.

There will never be a time when there is no pain with decreasing spending in the US. Yet too many want to raise the debt limit because we are up against the wall in regards to time. But this is just another reason to kick the debt can. I for one, am tired of the charade. If extending the debt limit means a larger debt/GDP ratio, then lets have the gunfight now. History would say that raising the debt limit in the past has ALWAYS increased the debt/GDP ratio.

Bruce in Tennessee said...
3:04 PM  

And the debt ratings agencies are not warning of a debt downgrade because of the impending debt limit per se, they are threating a debt downgrade because of the massive debt the US now owns. If the US debt were, say, 5 dollars and we missed our debt limit timetable, do you think there would be any wringing of hands and gnashing of teeth? Of course not in this extreme example. But S&P has already warned us that within 90 days we may get a downgrade if nothing has been done to reduce the debt load. I suspect they mean it.

Bruce in Tennessee said...
3:14 PM  

OK, bruce, how about we combine both analogies...

You have a terminally ill patient who has to have his tumour out or he dies, and a group of surgeons that have decided that the right course of action is to operate. So you anaesthesize the guy, cut him open and start doing what needs to be done. In this example the debt ceiling is the anesthetic. The guy has been open on the table for a while as the surgeons do their work, but the anesthetic is about to run out. So do you
a) apply more and while the patient is under carry on with the operation; or
b) have the anaesthetist (together with the dissenting surgeon) say "sorry guys .. i'm fed up with this, i'm not giving anymore gas, so either you get it done in the next 15 seconds or he's going to wake up in a whole world of pain and probably snuff it out due to the shock".

The point that we're trying to convey is that you have already made a decision about the best course of action. Would vacillating or changing your mind halfway through be a good idea, in your opinion?

Polemic said...
3:32 PM  

Seems a bit off topic now, but back to Nicola ... imo by definition politicans are a shower, but to be fair to Cameron, he performed that particular U-turn 6 months before the election when he withdrew the referendum promise from the manifesto, citing amongst other things the fact that last-stand Klaus, who was the remaining obstacle to ultimate ratification, finally had his arm twisted in the direction of the Lisbon Treaty with a pen superglued between his fingers and thumb.

It was Blair who a few years earlier double-pledged for good measure.

ntwsc said...
3:42 PM  

I would never vote for Blair over Cameron. Farage FTW

Nic said...
3:58 PM  

Dunno about Farage's chances for the world when he's so far failed even to size up to umm, a "stupid, sanctimonious dwarf".

ntwsc said...
4:12 PM  

And as for TRY.. Picked the wrong country again for the summer hols. Greece won't have devalued, will be social strife-ridden and going to be lucky to find airports and taxis running as usual.

Turkey, meanwhile, is seing its currency plummet on its current accout deficit, leading to Basci statement of a free floating curr being good for growth as a self-fulfilling example to its neighbours of how it "should" be done.

Mind you South Western tourist Turkey has been pricing in euros for years and I can hardly see the tourist traps changing that tack soon. Quite the opposite, in fact.

Talking of europe .. Looks like the bandage is coming unwrapped .. BTPs down big time. Slovakians (Souvlakians?) already against the plan. Or maybe a "pay us too, or we won't agree"?

Polemic said...
4:12 PM  


There are those in the US who have suffered greatly from these policies. The elderly are making almost nothing on their cd's, and now are spending their seed corn. Mr. Obama himself voted against a raising of the debt ceiling in 2006 calling it fiscally wrong. Hypocrisy, thy name is politician.

My point is chill, have a beer. This is not TEOTWAWKI, we've been here before for a prolonged time during the Clinton administration. The 10 year is barely up and the DOW has recoved about 2/3 of the opening loss as I type.

My point is both parties are to blame, and now is as good a time as any to get a handle on government spending. Otherwise it is all Greek to me...

Bruce in Tennessee said...
4:52 PM  

Bruce, totally agree they are ALL to blame and great call on the beer. We like beer. And tmm should have known better than to touch on politics. Same problem the mkt is having , being driven by politics- causes stress and division.

... the politicians are the cancer!

Cracking a cold one now... cheers

Polemic said...
5:01 PM  

And Nic, we miss you in the old stomping grounds...and I too am having a brewsky today...thanks for the discussion, P.

Bruce in Tennessee said...
5:11 PM  

Is it too soon for Winehouse jokes?

Nic said...
5:27 PM  

Nic, as for AW's unshockingly sad death at 27 (a la Hendrix, Cobain, Morrison, and Joplin, all at 27 years of age) I'm reminded of your oft quoted: Correlation does not imply causation.

karen said...
7:35 PM  

its pretty ugly in US. amazing.

Anonymous said...
7:53 PM  


Turn off Fox News and get a grip on the facts in this debate. First off, just so that we're clear, I agree that the US has a spending problem, no doubt about it. The overwhelming majority of the fiscal consolidation should (and will) come from spending cuts.

That being said, the US also has a revenue problem. Tax capture as a % of GDP is at the bottom end of a 50-year band. Corporate taxes as a % of GDP are at an all-time low (despite record profits). There is clearly room for tax hikes over a 10-year horizon.

It may be instructive to read some reports on the Tea Party from the time of the mid-term elections. In the process of doing my homework on them, one consistent ideological theme was the flattening the tax code to close the many egregious tax loopholes. I remember this very clearly because it struck me as very sensible policy coming from a camp typified by the media as blind ideologues.

Apparently Obama and the Dems agreed, because when Obama presented Boehner with the details of his Grand Bargain, it contained 83% spending cuts and 17% tax hikes (Boehner had originally positioned at 85% and 15% respectively). The official response? "No tax hikes without offsetting cuts". Talk about negotiating in good faith.

Now in addition, we have Republicans saying "August 2nd is a soft deadline. This happened in the 1990s without significant impact." While we're brushing up on our 1990s political history, perhaps it would behoove the Republicans to review the population's reaction to the government shut-down. I was too young to remember, but the electoral records do not lie. Let's not even begin to consider the difference in the psyche of market participants between then and now, especially when it comes to soveriegn debt.

One final point on the elderly who aren't making sufficient returns on their CDs: Bernanke's policies have nothing to do with Obama.

WellRed said...
8:47 PM  


We miss you too.

Bruce in Tennessee said...
9:17 PM  

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