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Playing the game
From Zero Hedge
http://www.zerohedge.com/news/2013-01-16/here-comes-sequester-and-another-1-cut-2013-gdp
Here Comes The Sequester, And Another 1% Cut
To 2013 GDP
Submitted by Tyler Durden on 01/16/2013 10:50
-0500
Several days ago we showed an analysis that
indicated that the elimination of the payroll tax cut would likely eat into
1.5% of 2013 US GDP and subtract as much as 3.5% of 2013 growth based on one
submodel - a deduction to overall US growth which already puts US GDP
forecasts in borderline recession territory.
We also added the caveat that "no
estimates take into account spending cuts, which may happen, and which will
serve as a double whammy to consumption in addition to already enacted tax
hikes."
Today, we present the flip side to the GDP
calculation, namely what may and likely will happen to US growth once the
pound of flesh is extracted by the GOP in exchange for raising the debt
ceiling, which will eventually be raised even if it means a shutdown in the
government for an indefinite period of time.
The reason: the sequester, whose
implementation most thought would be delayed until well into 2014, is now
starting to loom as the logical counterpoint to the debt ceiling compromise.
And here comes Goldman with the first shot
across the bow on what this quid pro quo would likely mean for US GDP:
"Allowing the sequester to hit would, in
our view, have greater implications for growth than a short-lived government
shutdown, but would not be as severe as a failure to raise the debt limit.
Although Republicans in Congress generally support replacing the defense
portion of the sequester with cuts in other areas, there is much less
Republican support for delaying them without offsetting the increased
spending that would result."
And in bottom line terms:
"Sequestration would reduce the level of
spending authority by $85bn in fiscal year (FY) 2013 and $109bn for
subsequent fiscal years through 2021. The actual effect on spending in
calendar 2013 would be smaller--around $53bn, or 0.3% of GDP--since
reductions in spending authority reduce actual spending with a lag.
The reduction in spending would occur fairly
quickly; the change would be concentrated in Q2 and particularly Q3 and could
weigh on growth by 0.5pp to 1.0pp."
In other words: payroll tax eliminates some
1.5% of 2013 GDP growth; on the other side the sequester cuts another 1%:
that's a total of 2.5%.
So: is the US now almost certainly looking at
a recession when all the fiscal components to "growth" are
eliminated? And what will the Fed do when it is already easing on "full
blast" just to keep US growth barely above 0%?
Of course, don't tell the market, whose only
illogical response to what is an increasingly ugly fundamental picture would
be to... sell vol, and push the ES to new 5 year highs.
Full note from Goldman:
Spending Cuts Under the Sequester: A Question
of When, Not If
Failure to raise the debt ceiling would have
severe economic consequences, but for this reason Congress seems likely to
increase it.
By contrast, a temporary government shutdown
would have a limited effect on growth if it were resolved quickly, and this
lack of severe consequences makes it more likely to occur.
In the middle of these two extremes lie the
spending cuts under sequestration--allowing them to take effect in full could
impose a meaningful drag on growth, but the effect might not be severe enough
to dissuade Congress from allowing it to occur.
Our forecast assumes that $15bn in
sequestration-related spending cuts will take effect in 2013, with the
remainder implemented in 2014 and 2015.
But while we have been assuming that the
sequester will be allowed to take effect eventually, that moment may come
sooner than we had expected, for two reasons: (1) many members of Congress
dislike the sequester, but reversing it amounts to a spending increase, which
would be politically difficult; and (2) the sequester takes effect March 1,
and Congress may not have resolved the two other fiscal issues by that point.
While there is a growing risk that some of
these cuts are allowed to take effect, we suspect that Congress will reverse
at least some of them, potentially replacing them with phased-in savings
elsewhere in the budget. The Dept. of Defense has already announced that it
will have to undertake several disruptive steps, including employee furloughs,
if the cut is implemented on schedule.
Delaying it until the start of the coming
fiscal year would avoid most of this disruption, but would not have that
significant an effect on the 10-year budget projections.
Once again, the White House and congressional
Republicans find themselves with seemingly irreconcilable differences on key
fiscal issues.
Speaker Boehner has insisted that an increase
in the debt limit must be matched with spending cuts of an equal amount (when
measured over ten years), while President Obama reiterated today that he will
not negotiate on any other policy changes in return for the increase.
Settling this disagreement will be harder than
it was in 2011, when the debt limit was increased by $2.1 trillion in return
for $2.1 trillion in spending cuts over ten years. Further budget savings
would need to come mainly from entitlement programs or tax increases, which
are much more controversial.
President Obama is unlikely to accept
entitlement cuts without a second tax increase.
Republicans are therefore looking for a way to
convince the administration that agreeing to entitlement cuts will be better
than what would occur if no agreement is reached.
To be successful, the mechanism Republicans
use to force the issue must have severe enough consequences that the White
House will want to reach an agreement instead, but not so severe that no one
believes it could be allowed to happen.
They have three options to choose from:
A government shutdown -- modest effects but
increasingly likely:
Congress opted in September 2012 to extend
spending authority for six months, until March 27, 2013.
This has been done frequee to Treasury's overall cash flows.
But there still would be two important
consequences:
first, the inability to borrow would force the
Treasury to immediately eliminate the budget deficit, leading to a delay in
payments to federal employees, federal contractors, and beneficiaries of
entitlement programs, among others; second, rating agencies might downgrade
the US rating following a failure to raise the limit in a timely manner.
Even Speaker Boehner has described potential
failure to raise the debt limit as a "financial disaster."
The upshot is that since leaders of both
parties accept the need to raise it and recognize the negative consequences
of a failure to do so, opposing an increase in the debt limit is no longer as
credible a threat as it was in 2011.
A government shutdown -- modest effects but
increasingly likely:
Congress opted in September 2012 to extend
spending authority for six months, until March 27, 2013.
This has been done frequently in recent years
when lawmakers cannot agree on full-year spending levels.
If spending authority is not extended further,
the Obama administration will lose its authority to carry out activities
funded by appropriations and will be forced to shut down non-essential
government operations.
This is not as bad as it nerally
support replacing the defense portion of the sequester with cuts in other
areas, there is much less Republican support for delaying them without
offsetting the increased spending that would result.
Among these three options, the sequester may
present the greatest risk to growth in 2013 because it might actually
happen--unlike a debt-limit induced default which is very unlikely--and
because it would have longer lasting effects, unlike a government shutdown,
which would be reversed quickly.
Sequestration would reduce the level of
spending authority by $85bn in fiscal year (FY) 2013 and $109bn for subsequent
fiscal years through 2021.
The actual effect on spending in calendar 2013
would be smaller--around $53bn, or 0.3% of GDP--since reductions r April 8, 2011 US
Economics Analyst).
Sequester -- meaningful effects and quite
possible: Allowing the sequester to hit would, in our view, have greater
implications for growth than a short-lived government shutdown, but would not
be as severe as a failure to raise the debt limit.
Although Republicans in Congress generally
support replacing the defense portion of the sequester with cuts in other
areas, there is much less Republican support for delaying them without
offsetting the increased spending that would result.
Among these three options, the sequester may
present the greatest risk to growth in 2013 because it might actually
happen--unlike a debt-limit induced default which is very unlikely--and
because it would have longer lasting effects, unlike a government shutdown,
which would be reversed quickly.
Sequestration would reduce the level of
spending authority by $85bn in fiscal year (FY) 2013 and $109bn for subsequent
fiscal years through 2021.
The actual effect on spending in calendar 2013
would be smaller--around $53bn, or 0.3% of GDP--since reductions in spending
authority reduce actual spending with a lag.
The reduction in spending would occur fairly
quickly; the change would be concentrated in Q2 and particularly Q3 and could
weigh on growth by 0.5pp to 1.0pp.
The sequester would weigh on growth mid-year
Unlike the other two issues noted above, the
sequester is not a "cliff."
There would be few spending cuts implemented
in the days immediately following March 1 if Congress allows the sequester to
take effect on schedule.
It would probably take federal agencies
several weeks to put the cuts into effect. Moreover, the law provides federal
agencies 120 days to take "administrative regulations or similar actions
implementing sequestration." So it is possible for Congress to allow the
sequester to be implemented on schedule, but to "turn off" the
sequester a few weeks later without a significant effect on spending.
If the sequester were fully implemented, it
would have very disruptive effects in some areas of the budget, particularly
defense.
In order to fulfill the requirements of the
sequester, the Department of Defense (DoD) would need to reduce spending
authority by around 9% for FY2013. The administration would have little
flexibility in how to implement this cut, so every program, project, and
account would need to be cut by the same amount.
This would mean, for example, furloughing most
civilian DoD employees for a full month before the end of the fiscal year,
and cutting basic activities like healthcare for active-duty military and
aircraft maintenance.
On the non-defense side, the cuts would be
similarly disruptive though the political effects might not be as salient.
Sequestration would be much more disruptive in
2013 than it would be in 2014 and beyond.
Finding savings elsewhere in the budget to
offset that increase in spending would be difficult, particularly if
Republicans insist that the new deficit reduction measures used to replace
the sequester should come entirely from domestic spending like entitlement
programs.
If the budget effects of a delay become prohibitive,
Congress might opt to reduce but not eliminate the sequester for FY2013.
Even if Congress does manage to delay the
onset of the sequester past March 1, the cuts are likely to be implemented
eventually.
As noted above, our forecast assumes that
$15bn of the cuts will be implemented in 2013 (versus $53bn if Congress takes
no further action) with the remainder implemented in 2014he can" on fiscal
restraint but it would also allow a less disruptive and more efficient cut to
be implemented.
However, the cost of a delay could be a
problem.
Delaying the entire sequester until the next
fiscal year starts (October 1, 2013) would increase projected spending over
be implemented. While we have assumed that Congress would
delay part of the sequester until 2014, when it could be implemented with
much less disruption to the military and other federal activities, it is very
possible that some or most of it could take effect earlier than expected, in
2013.
--------------
This is based on the premise that although
neither party likes the sequester, the entitlement spending cuts and tax increases
that would be necessary to replace the sequester over the longer term are
even less popular.
Ultimately, it is only a matter of time before
the sequester will be implemented. While we have assumed that Cong="color: #000099;">---------------
The sequester won't happen - this from the
horse's mouth.
3 months ago
Search for the word "sequester":
http://www.npr.org/2012/10/22/163436694/transcript-3rd-obama-romney-presidential-debate
PRESIDENT OBAMA:
"Bob, I just need to comment on this.
First of all, the sequester is not something
that I proposed.
It's something that Congress has 9;">Top Twelve Defense Sequestration Scare Tactics
by Micah Zenko
August 23, 2012
http://blogs.cfr.org/zenko/2012/08/23/top-twelve-defense-sequestration-scare-tactics/
I suspect that the only promise Obama will
keep is this one:
"After My Election I Have More
Flexibility".
But we know what Obama's promises are worth.
Now as to who proposed the sequester, Obama
seems to have lied about that too:
Obama’s fanciful claim that Congress ‘proposed’
the sequester
http://www.washingtonpost.com/blogs/fact-checker/post/obamas-fanciful-claim-that-congress-proposeproposed.
It will not happen.
The budget that we're talking about is not
reducing our military spending. It's maintaining it."
So we have it from the horse's mouth - the
sequester will not happen. And if it does, Obama lied to the American people.
I suspect that the only promise Obama will
keep is this one:
"After My Election I Have More
Flexibility".
But we know what Obama's promises are worth.
Now as to who proposed the sequester, Obama
seems to have lied about that too:
Obama’s fanciful claim that Congress ‘proposed’
the sequester
http://www.washingtonpost.com/blogs/fact-checker/post/obamas-fanciful-claim-that-congress-proposed-the-sequester/2012/10/25/8651dc6a-1eed-11e2-ba31-3083ca97c314_blog.html
So if the sequester happens and that in turn
sours the economy you will know just whom to blame.
Our president is NOT dealing in good faith.
http://forums.dpreview.com/forums/thread/3349330
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