Tag Archive | "Repercussions"

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ECB Holds Rate, Euro falls


While Washington continues to embarrass the world’s largest economy, the ECB released a dismal projection for the euro zone economy in 2013. The forecast has the ECB considering an interest rate cut to help countries trim their borrowing costs. Bad economic news in Europe spells big trouble for American business, which ships more products to the region than any other area.

In meetings with the ECB’s Governing Council, President Mario Draghi entertained a discussion about not only paring interest rates but also about cutting the deposit rate. In the end, the ECB took no action but Draghi is holding the door open on both possibilities. The historically low lending rate of 0.75 percent remains in effect. This rate has prevailed for the past five months but has not done much to fuel economic growth.

The ECB reported their projections for the euro zone showing that Gross Domestic Product (GDP) would fall between -0.9 and +0.3 percent in 2013. In a region that definitely needs growth, hopes are dim.

Berenberg Bank spokesperson Holger Schmieding told reporters, “The somewhat downbeat ECB forecasts, the somber tone of the ECB statement and Draghi’s admission that the ECB had a ‘wide discussion’ over many issues including a potential rate cut also keep the door open for a cut in early 2013.”

The euro zone and European Union have watchful eyes on the Fiscal Cliff negotiations, or lack thereof. As an importer and exporter, the US negotiations are making analysts work overtime to figure the repercussions of the US debt negotiations. The euro zone is clearly counting on the world’s largest economy to be running at optimum speed in 2013. A failure to do so would not only put the US in recession but would have the same effect on the euro zone and other economies.

One positive outcome of the ECB meeting was that Draghi indicated that the bank would continue to supply euro zone banks with necessary liquidity through the middle of 2013.

Now that the European Union and the IMF have taken action to help Greece, the ECB will be challenged to navigate through a regional recession. Inflation is expected to rise between 1.1 and 2.1 percent in 2013.

Euro zone interest rates vary greatly in the 17 nations. The ECB hopes that its continued reduced rates will stabilize nationals lending rates and reduce them as much as possible. But, like the US where corporations are sitting on more than $2 trillion in capital reserves, euro zone businesses are hoarding their cash. They remain unconvinced that the region’s debt crisis will settle and are prepared for worst case scenarios.

The euro zone’s most puzzling dilemma is Spain. The country is suffering 25 percent unemployment and is in the midst of national outrage and even threats of secession. The ECB has a new debt relief program called the Outright Monetary Transactions (OMT). Under this mechanism, Spain could receive funding assistance.

However, Prime Minister Mariano Rajoy must apply to the euro zone for assistance. Rajoy has asked Draghi to guarantee that borrowing costs would not increase, a commitment Draghi cannot make. Spain would be the first nation to use the OMT.

In the euro zone, the political dialogue has lessened. In the US, Republicans have walked out of Congress and Washington. Talks appear to be stalled and the fiscal cliff is becoming a little too real for Americans.

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The US Fiscal Cliff – Part II


The US Fiscal Cliff is set to be enacted on December 31, 2012. As portrayed in Part I, the repercussions of the expiration of payroll tax reductions and the Bush Tax cuts combined with automatic budget cuts called sequestration would plunge the US into an immediate, brutal recession. If analysts view this recovery as fragile, there will be no doubts about the crippling repercussions of the Fiscal Cliff.

And, the devastation poses a greater threat to the global economy than the current euro zone debt fiasco. The Fiscal Cliff will sink economies overnight. The crucial element needed to avert the Fiscal Cliff requires a complete reversal of form by the most ineffective Congress in the nation’s history.

The Congress that will need to address the Fiscal Cliff resolution is the same congress that permitted the downgrade of US bonds and was mired in a combative stalemate along party lines that were designed to destroy the reigning US President at the expense of the public in favor of right and left wing special interests.

Yes, there is a need for a formula for disaster that has led to the Fiscal Cliff. There is optimism that a deal will be implemented to avert the Fiscal Cliff, but this optimism would be contrary to the historical performance of this Congress. Regardless of the Presidential race outcome, there is no reason to believe that Congress will be any less divisive after the election. The majority of the Republicans in Congress have signed the Norquist Pledge guaranteeing that they will not agree to any legislation that raises taxes. To moderates and independents, Republican Presidential candidate Mitt Romney’s signature on the Norquist Pledge is not a moderate position. It is a radical move.

A coordinated initiative by CEOs of some of the country’s largest corporations has taken their demands for Fiscal Cliff resolution to Congressional office doors. Certainly these persons have differing political agendas, but it is clear they believe political compromise is necessary and a deficit reduction plan exceeding the Simpson-Bowles plan must be implemented in some form immediately, even if the long-term plan is extended for a few months while a bipartisan initiative is structured.

The CEO’s call to action demands solutions. Presumably, that means a down payment of the debt and a balanced approach to debt reduction that includes revenue increases and cuts to every sector of the economy including social programs and education grants. Millions of jobs will be lost.

No matter how the Fiscal Cliff solution evolves, it is going to be painful. How the pain is dispensed is the key to any hope of compromise.

CEOs want a solution similar to and greater than the $4.6 trillion Simpson-Bowles Deficit Reduction plan. Balanced and fair distribution of pain is sure to be contested. There is a lack of time and a deadline, two elements this Congress has not dealt with acceptably in the past. CEOs realize there are few reasons for optimism. The political gridlock is atrocious and paralyzing. As bad as it is now, it is likely to be worse after the election and after the new Congress is sworn in.

Republicans will be more conservative and even less moderate. The majority will have signed the Norquist Pledge and the few moderate Republicans are off the ticket in favor of more conservative candidates.

The Federal Reserve reports that US households have shed $880 billion in debt since 2008 during a tough economic recovery. Households have done their fair share. If Washington applied the same commitment, the Fiscal Cliff would have been resolved long ago. However, households do not have to represent the interests of financial backers and run for re-election in 2014.

Radical Solutions

Warren Buffet and others suggested that there were ways to fix the deficit:

Limit Congressional terms to one term.

Support this initiative with dramatic cutbacks to congressional benefit packages and a policy that enforces that every time budget expenditures exceed the budget, replace the Congress with an immediate year-end election.

Make Congress share the pain. Cut salaries, cut their benefits and make Congressmen agree to the health coverage choices their constituents purchase.

Make them reduce their staff and overhead like small businesses.

Cut Congressional pay by 50 percent or more.

Ban lobbyists and tell industry to spend their lobbying allowances on public, transparent policy statements.

Open the closed doors in Washington.

Make Congressman spend half the year in their state offices, with their doors open to constituents.

In other words, throw out professional politicians who go to Washington to profit. Elect candidates who are providing a public service by representing the best interests of their constituents and the nation not their personal best interests. Heck, they will only be there for one five of six-year term and if they misbehave in any way, suspend them and put them in front of a jury of the people, not behind the cloak of the Hill.

Isn’t that what happens when “We the People” run afoul?

This nation needs to go back to the basics. Out with what has come to be called professional politicians and back to public service.

 

 

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Simpson-Bowles-Blankfein Over Ryan-Biden


In the US, there is a tradition of political debates. The US once had memorable debates. For the most part, the current debates are not only disappointing but reveal very little about the candidates or their solutions across a host of challenges..  The media would have us believe that everyone was waiting for another meaningless debate between VP Biden and VP candidate Ryan.

After two debates, viewers should be asking one big question, “What will change and how?” Here, we have two candidates for the Presidency of the US and not one word has been said about the fiscal cliff.

The fiscal cliff is scheduled for January 1, 2013. At that point, the payroll tax reduction will expire. The Bush tax cuts will expire and a series of budget cuts will be automatically triggered. This fiscal cliff will have serious, serious repercussions for the US and the global marketplace.

Vice President Joe Biden squared off against would-be Vice President, Paul Ryan, last night. After three minutes it was clear that this debate, like the debate between Obama and Romney, would be nothing more than name-calling, accusations and denial. Like the first Romney-Obama debate, nothing quantitative was put forth for voters to consider. It is clear that Romney is playing not to lose and that Obama is promising more for less.

The debate system is a media-driven farce. These are not debates. These are politicians doing what they do best; speaking loudly but never saying anything.

Last week, the consensus was that Romney defeated Obama in their first of three presidential debates.  There were no winners, just losers and those losers are us. If you can tell me how Romney will create tax reform, please send it in.

Obama mistakenly misunderstood his mandate during the first two years when he had the House and the Senate majority. He wasted those years. When gridlock set in, politicians put constituencies to the side while the people who pay political salaries were the losers. As both sides point fingers, there is nothing concrete and nothing responsible coming from either presidential candidate regarding the four internal fiscal crises facing the US. Those four crises are:

  • The Fiscal Cliff
  • The Bush Tax Cuts
  • The national debt
  • Unemployment

Romney says he has a plan.  If so, it must be a secret plan because he never presents facts. Romney appears to think he can win the office without revealing any specifics.

Romney makes bold promises. Lower taxes, fiscal responsibility, reducing the deficit, tighter border controls, cuts to education and increased defense spending and maybe a war or two mixed in with a less efficient healthcare system.

State or federal health insurance plans are expensive. But, it is more expensive to have the uninsured go to an emergency department and receive care. Rather than propose politically motivated solutions, let’s get to the core. If the US is to bring healthcare under control, billions of dollars could be saved every year by controlling the way healthcare providers operate and how they are compensated.

The US medical system, including Medicare, Medicaid and private insurance, is badly broken.  In this system, waste is everywhere. Insurance providers private and public, physicians, hospitals and care givers all know the system is deeply flawed. Before we change how persons will be treated, this country needs policies that dig much deeper into waste and corruption. The cost and availability of health insurance is not the major flaw in the system. The flaw is waste and corruption.

After running against national health during the Republican debates, Romney appears to have had a change of heart. Now, he favors state-sponsored health insurance programs, like he initiated in Massachusetts. Had he mentioned this at the Republican debates, he would not be a presidential candidate. Obama’s position on health insurance is clear.

Romney says he can fix the problems. Our poor educational system, which will suffer further budget hits under Romney, will come together and produce the greatest workforce on the planet. How is that possible?  We will add millions of jobs. How?  We will pay less in taxes and the government will shed jobs and everything will be fine.  How?

Meanwhile, Obama tries to smooth over the failings of the last four years. He identifies Ben Laden’s assassination and Obama-care as his two primary achievements. Granted he had a Republican Party that cared more about ousting Obama than they did their constituents, but it is his job to work on both sides of the aisle.

Romney believes in trickledown economics and Obama believes in trickle-up economics.

Romney says he will be aggressive with foreign diplomacy, especially in the Middle East. Can the US afford more loss of life and the massive, unfunded expenses of another war?

Obama prefers diplomacy and economic sanctions.  Obama’s strategy and strength is diplomacy. He regards economic sanctions as a major deterrent against terrorism.

Romney is a hawk, Obama a dove.        

Yesterday, Lloyd Blankfein, Alan Simpson and Eskine Bowles and CNBS commentator Steve Liesman had a compelling interview with CNBC. These fellows talked facts and reality.

It is clear that the financial markets believe the Simpson-Bowles budget and tax plan is the correct way to go. It is also clear that these very knowledgeable people subscribe to a balanced plan to reduce the country’s debt. Simpson-Bowles details how to handle the four major crises in a quantitative program of relief.

There will be pain and hardship but as the economy grows those difficulties will diminish. The burning question is why neither Romney nor Obama talk specifics the real issues. Obama has been battered by Republicans and can only say what he will try. Romney is afraid to alienate his fragile electorate.

The most terrifying threat to a reasonable American lifestyle does not lie in the Presidential election. Instead, the nation’s remedies rest on the composition of the Congress. Simpson and Bowles correctly identified the Norquist pledge as the major deterrent to an economic recovery. If pledge subscribers dominate the Republican Party, the next President will not have the capability to implement responsible legislation.

The time has come for the candidates to present the public with some specific changes and quantify them. The idea of voting for change verses no change is no on the table. Change is mandatory so can someone say precisely their plan to implement change across the land. Is forthrightness missing from the election experience? Our debates lack candidates that stand up and say what will do. Our debates are really about picking which untruth sounds better. How sad is that?”     

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Armageddon 11 Days Away


 No matter how the rhetoric goes, the facts will show that House Speaker John Boehner and Republicans have walked away from the debt ceiling and spending cuts.  The country now has 11 days left before defaulting on the United States debt and a significant drop in the country’s AAA credit rating.

While Boehner and Obama agree on very little, they profess to agree on the importance of not defaulting.  The repercussions of such an action would cause tremors throughout the global economies. 

Unfortunately, Boehner’s caucus contains a minimum of sixty members who seem to feel default is acceptable.  These 60 Tea Party members have left Boehner hanging out to dry and the House Speaker has tried to negotiate in good faith.  But, there is no doubt, the Speaker is fighting for his po9litical life. 

The Tea Party has most likely damaged the Republican Party permanently.  On the other end of the spectrum, it has been reported that in his efforts to meet Boehner halfway, the leftist extremists within the Democratic Party are said to be quietly holding firm in opposition to projected cuts in Medicare, Special Security and Medicaid.

The Grim Reaper

At 5:30p.m. on Friday, Boehner finally returned a call to the President and said that the proposed deal in play was not going to happen.  This meant that after presenting the terms to his Caucus, he could not get enough support.

Boehner suggested that the President had increased the revenue by $800 billion compared to an agreed-upon $1,200 billion.  Boehner’s caucus would not approve such action.  Boehner waited until after the markets closed before delivering his message to the President.  If a resolution is not created over the weekend, equity and bond markets could plummet Monday morning.

Obama immediately took the message to the public in a strong, passionate message pointing the blame squarely and rightfully on the Republican Party.  Minutes later, an exhausted Boehner put together an unbelievable retort.  The President’s theme was that a deal was on the table and as the nation anxiously followed the negotiations Boehner and Eric Cantor walked away and refused phone calls as men in hiding often do.  Had the market been open when Boehner presented his news, there is little doubt that they would have spun lower.

Credit Ratings Lowering the Axe

To make the situation more complicated, credit agencies are unimpressed with the tone in Washington.  Moody’s has already said that a short-term fix will not prevent lower credit ratings.  These ratings agencies want a long-term solution and a debt ceiling increase.   

Despite repeated warnings from the Secretary of the Treasury and the Chairman of the Federal Reserve, there remain Tea Party members who would jeopardize the country, the elderly, the poor and the military personnel in the field.  One presidential candidate, Michele Bachmann, has said the default is acceptable.

If there is a default, it seems like the first wages to be halted should be wages to Congressional members and their staff.  While Congress has pointed to high salaries on Wall Street, Congressional wages continue to escalate along with the best benefit packages in the nation.

If Congress is going to hold the poor and elderly hostage, they also should forego their wages and the government should freeze their war chests.  If they don’t like it, perhaps they will go home and we can get something done.

Alternatives

The Republicans finally passed legislation called Cut, Cap and Balance.  This legislation was sent to the Senate.  Harry Reid described it as the worst piece of legislation that has ever been presented to the Senate and the bill was voted down immediately.

Republicans have walked away from the Biden talks when Cantor disappeared, the bi-partisan Gang of Six plan was rejected, Obama’s $4 trillion dollar long-time package and the McConnell Reid plan of last resort.

In essence, the Republicans are opposed to increasing the taxes on high-earning Americans.  They continually refer to these people as the job creators.  This argument does not hold water.  During President Bush’s presidency, the Bush tax cuts certainly did not create jobs.  When Obama took office, millions of Americans were losing their jobs every month.

Republicans support and, in fact, demand cuts to entitlements for the infirmed, the elderly and the poor.  Obama and the Democrats have pushed for a balanced give and take that would include Medicare, Medicaid and Social Security and either tax increases or plugging loopholes for wealthy individuals and corporations.

At this point, there are other complications crowding the scene.  The first is what effect these default talk may have on foreign investors.  The second complication is creating legislation that will appease the ratings agencies.  The third complication is that if a deal is not struck by Monday morning, the global markets will collapse.

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