super committee

Is the Chinese Bullet Train Running Out Of Tracks?

There have been many examples of recent Chinese jitteriness regarding political dissent, and any display of it has prompted a swift response. Examples of these have taken place on the internet where new regulations have been put into effect. On October 26, the Xinhua News Agency published a report, by the Sixth Plenary Session of the 17th CPC Central Committee which stressed the need to strengthen the management of social networks and instant messaging tools. Judging from the language of the communiqu and its policy recommendations, it is safe to assume that the Chinese cyber sphere has grown to unmanageable levels for the vast amount of government censors to handle, and more self-censorship is being demanded. A word of warning was also extended to the executives of social media companies, so they realize that they are not immune to the reach and power of the communist party. this warning is to make sure they understand that their corporate survival and business model will only be guaranteed, by their ability to control, keep track, and allow government censors access to what information gets into the chat rooms. They were even brazen enough to warn members of the foreign media to become more Chinese in their reporting, and practice self-censorship.

What developments have contributed to all of this edginess? Some are external and others are internal. On the external international front there seems to be an anti-china backlash result of its foreign policy and international trade tactics. On the internal domestic front, challenges remain due to its politico-economic schizophrenic system of governing , where it is very clear to the ordinary citizen that the communist ideology, exists in name only.

Parts of the developments that have contributed to the anxiety of the communist party elite include events taking place in the Arab world. an example of these events is that in less than 10 months; it has become harder for the Chinese government to do business, as they seem to keep picking the losing side in every recent conflict. just like their policy regarding the conflict in the Sudan, in the Arab countries the Chinese government has picked dictatorship over democracy, murderers over reformers, and plunderers over nationalists. in the Libyan case they were even willing to support and offer the Khadafy regime arms sales during the last vital signs of a dyeing regime. in Syria they are still supporting a regime that even the Arab league has turned their backs on. nowhere else is this complete disregard for international norms of decency been more clearly displayed than in the case of Iran. in the Iranian case they have not only gone against the rest of the world by supporting an illegitimate regime, but have consistently opposed the future use of sanctions as deterrence to the Iranian nuclear program. in very Machiavellian faction, in order to ensure that they have unfettered access to Iranian and Venezuelan oil, they have made their ‘Big Brother’ electronic surveillance system their ultimate and most recent product for export. in Syria they have managed, and engineered communication eavesdropping equipment that ironically, displays Chinese efficiency in the hunting down of political dissent and any expression of free speech. by putting money over principle, they have once again become virtual accomplices in the last gasps of another dyeing regime on its deathbed.

This system of oppression and electronic network monitoring is in the process of becoming extinct in the rest of the civilized world, and even countries like Myanmar have seen the folly of continuing on this road. it is for this reason that the Chinese central committee has been ridiculed by the rest of the world, by stating that they are members of a select group comprising of countries that share a dubious distinction; political oppression. these countries are China, North Korea, Cuba and Iran in what a micro blog in mainland China refers to mockingly, as the ‘New Four Ancient Civilizations.’ these four countries still restrict Internet access, implementing network controls , and for this reason its new name alludes to the fact that all other countries have accepted modern civilization, but those four remain ‘ancient.’ as growing Chinese technological imports grow more numerous, I would also include Venezuela, as part of this selective group.

On the internal domestic front the situation is reaching crisis levels. During the economic crisis of 2008, while the rest of the world concentrated on boosting internal consumption, China due to its export oriented model and fearing political instability engaged in an unprecedented pre-emptive strike by investing billions of Yuan in state-owned enterprises. these investments promoted state and private spending on fixed investment, creating a situation where fixed investment now accounts for nearly half of China’s growth. Some of this investment has also contributed to a further concentration and consolidation of the domestic sector. Right now Chinese citizens are paying the highest tax rate in the world and instead of transferring wealth from the state to Chinese households, as Premier Wen Jiabao has said is necessary to maintain political stability, the opposite has taken place.

Gordon Chang, author of the Coming Collapse of China, said that Beijing authorities have put more money into state-owned enterprises and state-funded infrastructures, which means that private companies get less. he adds that . this investment is impeding China’s social development because as the enterprises get more powerful, they start colluding among themselves, or restricting access to China’s markets. this hurts not only foreign enterprises that are doing business in China; it also hurts the private sector, and the private domestic sector. and this sector has been the thriving force in the Chinese economy for the past three decades. Of the 42 Chinese companies listed in the 2010 edition of the Fortune 500, 39 were state-owned enterprises, and three quarters of China’s 100 largest publicly traded companies are government controlled.

This explosion into fixed assets has resulted in a unprecedented growth in residential and commercial real estate creating a lending bubble that it is starting to resemble those in the western world, but with a lot less transparency. there have been reports in the Hong Kong media that land finance specialists, bank credit institutions, and real estate developers formed economic alliances, where through political coercion, citizens were forcibly removed from their land to make room for housing developments. these were facilitated through the bribing of government officials driving the price of residential and commercial developments into the stratosphere.

Srinivas Thiruvadanthai analyst for the Levy Forecast agency commented on a recent article in Barrons Magazine, on the explosive growth of China’s shadow banking system. in China, he points out, banks are effectively an extension of the government, which in the past has shown a willingness to absorb enormous losses and to manage any necessary credit expansion. the meteoric rise of shadow banking, which includes a hodgepodge of underground types, from loan sharks to informal lenders, represents a significant weakening of Beijing’s grip on the credit machinery. Srinivas goes on, although much of the shadow-banking activity is done via entities that are state-owned, the complex and opaque web of linkages between banks, trusts, underground lenders, property developers, households and real-estate speculators makes it tough for the commanders of the command economy to keep tabs on the condition of the property market. he asserts that this is an ideal set-up for shadow lending to one of these days trigger a real-estate panic with all the dressing: the drying up of mortgage credit, a severe hit to household wealth, and businesses going belly up.

At the social level, there is also ample room for concern for the communist leadership. as the residential and commercial real state bubble starts to deflate, new pressure has been exerted on the regional governments. these regional bureaucrats have become accustomed to high tax revenues, and as these dry up, they are starting to look for new places to tax, and getting creative in obtaining revenue. he Junjiao, a mainland china business enterprise observer, pointed out in an interview that the recent real estate regulations, where the Chinese government has tried to deflate the bubble, have decreased local government land revenue, therefore local governments were recently allowed to issue bonds to bring in revenue. he added that I am very much worried. With such power (the power to issue bonds), he questions what kind of development policies local government are going to implement? and more importantly howthey are going to pay back the money? I really don’t have much confidence.

The issuance of bonds by regional governments without the eye of any ratings agencies to help investors discern fact from fiction is creating another opportunity for a small elite to prey on the rest of the people. this is not only endemic to the bond market, but it is common practice in the Chinese stock market. it has been widely known in China that collusion between officials; businesses as well as insider trading are widespread phenomena in China’s stock market. as recent scandals concerning Chinese stocks trading in the United States show, brilliantly exposed by the Muddy Waters Research group, to invest in Chinese stocks is not for the faint of heart. If you are not willing to travel to china, and make sure that what they say it is true, and it is really there, you can find yourself in a world of hurt.

As Chinese regional governments increase their tax base and find ways to obtain fiscal revenue, ordinary citizens are starting to feel the pinch. according to a Forbes Magazine Survey the Chinese mainland ranked second in a list of countries or regions with the harshest tax regimes in the world, following France. in September 2011, the Ministry of Finance released the latest statistics on China’s fiscal revenue in the first eight months of 2011, which show that about 80% of revenue came from taxes, up 30.9% compared with the same period in 2010. these high tax regimes coupled with a 40-50% drop in real estate prices, and high unemployment worsening as the European and American economies re-enter into recession mode, you have all the necessary ingredients for political instability.

There have been other sources of discontent, for example shabby building construction, infant formula poisoning outrage, environmental pollution, and so on. but no other subject seems to get to the psyche of the Chinese population as the government instituted, one child policy. there have been reports of organized crime syndicates working with government officials working in sync to remove children from families and selling them to adoption firms working for companies in the West. this in addition to other forms of government abuse has created a lot of friction in the ‘harmonious society’. Liu Kaiming a family activist working for families has said that there is Only one child for every family and severe penalties imposed for unplanned births, these practices go against the natural laws of population growth. many families had their properties confiscated, and their bank deposits forcibly transferred, due to their violating the CCP’s family planning policy. these are all violations of peoples’ basic human rights. in particular, the CCP authorities forced many older women to abort, resulting in a lot of tragedies. Instead, the CCP should work on improving social security, so as to encourage people to plan their children’s births, rather than resorting to brutal means in order to force people not to have more than one child. this one policy seems to go against every human instinct and for this even if not voiced in public, it is the one policy that may be creating a future catastrophe.

Many Chinese are not waiting to see what happens, and they are voting with their feet. there has been an alarming rate in the growth of money leaving China and going into Western banks. there has also been an increase of people wanting to leave China not seen since the days preceeding the transfer of Hong Kong from British hands to the communists. Hong Kong’s Dongxiang Magazine Editor-in-chief Zhang Weiguo mentioned this trend citing public statistics. he said, over 90% of ministry-level officials of the CCP (Chinese Communist Party) have had their children and wives emigrate. even the CCP media itself has reported about cases of corrupt officials using foreign passports to flee the country. mr. Weiguo pointed out that in the past some businessmen thought they could survive in China as long as they flatter the CCP. now they gradually realize that the situation is not good. If they do not leave, they would follow this political system and die together with the CCP. They had to escape from this sinking boat.

A once-in-a-decade transfer of power will be taking place next year, further requiring complete political stability. it is not yet clear that with all of these developments taking place, this political stability can be guaranteed and it may have contributed for the Chinese government to be on edge. an example of this jitteriness is a report of four soldiers leaving their army post. it has been reported that the government treated the four soldiers not as just another AWOL case, but instead as the beginning of a mutiny. outside media sources have reported that the soldiers were on their way to one of the soldier’s hometown, after finding out that his home had been demolished to make room for one of these party-approved developments. Government soldiers intercepted the car carrying the AWOL soldiers and killed three of them, and mortally wounded a fourth. Notwithstanding the entire media blackout regarding the incident, it still made a brief appearance in the cyber sphere. it was reported how after the incident of the four Chinese soldiers fleeing with guns, the local authorities of the Chinese Communist Party (CCP) blocked all relevant information, prohibiting media coverage. the news blackout did not stop netizens from revealing that Yang Fan’s home suffered forced demolition, and that his family members were oppressed by local authorities. it was also clear in every report that indicated that the army had instructions to shoot first and ask questions later. any reporting of the incident was severely suppressed and any mention of it was eliminated from all media sources. it was clear to all media sources that they were preventing any information to reach the rest of China. They even went to the extreme to go to the villages of the dead soldiers and take all of the family members away, so no reporters may be able to reach them, possibly extracting from them what could have been their motivation for going AWOL. as we can see from this incident, the Chinese authorities were in no mood to allow this information to reach the social sites. as I indicated previously the communist elite is on edge, and they seem not to be taking any chances.

Super Committee Punts Setting Up Bears With Great Field Position

U.S. stock futures point to a sharply lower open on Wall St Monday as the congressional supercommittee looks set to announce it was unable to reach a deficit-reduction. Deep differences of opinion over tax and spending reforms made it impossible to strike a compromise, and this defeat will mark another market-negative catalyst from our federal government.

A long impasse over the debt ceiling, in which a faction of representatives started serious default rhetoric, triggered the market’s steep decline in July.

In addition, the situation in Europe is not getting any better. France seems to teeter close to a credit downgrade, with Moody’s explicitly stating that rising interest rates on government debt could impact the country’s AAA rating. Spain has also seen borrowing costs rise sharply, and the new Prime Minister is under pressure to make severe economic reforms.

Prime Minister elect Mariano Rajoy’s center right party scored the country’s biggest election victory in 30 years, with a mandate to pull the troubled economy out of the gutter.

The third strike for the market today came from Chinese Vice Premier Wang Qishan, who warned that the global economy is in dire straits. China has shown reluctance to participate in funding of the European rescue fund, even though it sees economic calamity on the horizon.

This is also a holiday week, which adds to the uncertainty. Trading volume is typically light on a holiday shortened week. A thin tape could contribute to greater market volatility.

In merger news, Pharmasset (VRUS) jumped 86% after Gliead Sciences (GILD) agreed to buy the drug company for $11 billion in cash. Allegheny Corp (Y) also agreed to buy Transatlantic Holdings (TRH) at a 10% premium to its current share price.

TECHNICAL TAKE

Last week was gut check time for the market, and it broke down at the lower end of the wedge pattern. in the markets there is no need to be a hero and blow up an account fighting the wrong side of the trade.  The S&P failed at the 1260 area for the third time in that afternoon and then reversed hard to put the wedge in motion to the downside.This was the same day IBD put the big Picture of the market back in correction!

Depending on style, some traders sold longs while others got aggressively short.  I did not go short except in oil, through the inverse oil ETF (SCO). These are fast markets and dangerous times, with even professional market participants at a loss of  foranswers and solutions.

S&P futures are opening at an area that held multiple times in early October. those not obeying stops last week will probably be hitting out longs today.   Those who are coming in flat can look to see if there is a trade or a buyable set up in the 1187-1195 Area.  Macro longs may try to protect this area, so it’s worth a look. The next support level to watch is the pivot at 1168-1175. Next would be the 10/10 support from 1158-1162.

Super-committee on Stock Slide: “Who? Us?”

By Jonathan Cheng AP

Is today’s stock-market rout more a Europe thing, or more a super-committee thing?

Sen. John Kerry thinks today’s selloff, and the recent market weakness in general, is in large part a product of the political dysfunction on the Potomac, but he’s apparently in the minority. According to Dan Clifton, D.C.-based head of policy research at Strategas Research Partners, many of the super-committee members are taking a “who? me?” approach to the sell-off, hanging the blame on Europe’s continued debt woes.

“I’m not sure there’s unanimity on the market impact of this — a lot of people are quick to blame Europe,” mr. Clifton said. “some super-committee members [including the aforementioned Sen. Kerry] think that their failure to act is a market event, but others don’t think so.”

Of course, anyone accusing the super-committee of sticking their heads in the sand would do well to note that, well, Europe does have a whole lot of its own issues, many of which are perhaps stickier than the U.S.’s. But this perspective on things — that the markets don’t care about a failure by the super-committee to come to a deficit deal — does go some way towards explaining the super-committee’s ability to keep it so Zen while the rest of us flip out.

Super committee about to fail: Is it Obama’s fault?

The not-so-super committee that was supposed to figure out how to reduce federal red ink by at least $1.2 trillion is about to fail in its mission. Republicans refused to allow increases in tax rates, Democrats refused to allow big cuts in entitlement programs, and you can figure out the rest. So, now that the Hindenburg has pretty much crashed and burned, who is to blame? you guessed it: President Obama!

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That’s what Mitt Romney says, anyway. as a Republican hopeful of replacing Mr. Obama in the Oval Office, Mr. Romney has largely ignored his rivals and gone after the incumbent – and the apparent super committee failure has allowed him an opportunity to do what he’s been doing.

“He’s done nothing,” Romney said while campaigning in new Hampshire. “It is another example of failed leadership. He has not taken personal responsibility to get the super committee to find ways to balance the budget and cut spending.”

Politico has the full story on Romney’s criticisms here.

Was it really Obama’s fault? We suppose he could have pressed harder, hovered over the committee’s shoulder, metaphorically speaking, and done little else in recent weeks. but we’ve got a number of other observations about Romney’s claim.

First, Obama’s not actually a member of the panel. And to complain that a president hasn’t forced members of Congress to do something they don’t want to do is kind of like grousing that Obama hasn’t forced a herd of cats of run an obstacle course in record time.

Second, if Obama had managed to corral the super committee into an agreement, the odds are it would have been an agreement that Romney wouldn’t support. Obama wants tax hikes on the rich, Romney doesn’t, and so forth and so on.

Third … what was that third point? it was right here. Oops, this is a Rick Perry moment.

However, Romney is not the only GOP candidate who is trying to make political lemonade out of a super committee lemon. new front-runner Newt Gingrich has released an ad that showcases his previous criticism of the whole super-thingy idea.

It includes a clip from a previous debate in which Gingrich says, “I think this super committee is about as dumb an idea as Washington has come up with…. What they ought to do is scrap the committee right now, recognize it’s a dumb idea, go back to regular legislative business, assign every subcommittee the task of finding savings, do it out in the open through regular legislative order, and get rid of this secret phony business.”

Hmm. This is the same regular legislative business in which the annual budget cycle hasn’t actually been finished in years, right? Or all appropriations bills passed. well, maybe it would work this time.

Meanwhile, Ron Paul – who is a front-runner in Iowa – goes mega on his criticism of the deal. He says the problem is that Congress isn’t doing enough. Cutting $1.2 trillion over 10 years is chicken feed, he says. What it really needs to do is cut $1.2 trillion per year.

“This shows how unserious politicians are about our very serious debt problems,” says Representative Paul.

Ouch. Maybe Jon Stewart is right: Paul really is the candidate who creates uncomfortable silences.

Gingrich: Super committee collapse ‘good for America’

NASHUA, N.H. — Republican presidential candidate Newt Gingrich said on Monday that he thinks the collapse of the congressional super committee “is good for America,” and that the country’s debt problem can be solved through the regular work of Congress.

The once-polarizing former speaker of the House also maintained that he would resolve the decades-long problem of political gridlock in Congress.

“I think it’s important to understand it’s not that Washington is inherently gridlocked, it’s that the current players behaving in the current way are inherently gridlocked,” Gingrich said. “It’s partly the president’s fault, it’s partly the Congress’s fault. but it’s a mess.”

Gingrich did not mention that the government shutdown that took place on his watch as speaker in the mid-1990s came after he and President Clinton failed to resolve a budget impasse.

Speaking to a group of about 100 students and supporters at Rivier College, a Catholic institution, Gingrich said that the super committee, charged with resolving the partisan deadlock over ways to reduce the nation’s crippling debt, was destined to fail “because I think it’s exactly wrong.”

The right way to andle the situation, Gingrich said, would be for both parties to “hold a press conference this week and say, ‘We’re going to ask through regular order every subcommittee to find savings. We’re going to do it out in the open. We’re going to it with expert testimony.’ “

Gingrich seemed buoyant after a new USA Today/Gallup poll showed him in a statistical tie for the lead in the GOP primary race with former Massachusetts Gov. Mitt Romney. He said he believed he would be by far the better debater if he wins the right to face off against Obama next year.

“I think, first, is the scale of the solutions that I propose, which are much bigger and much more comprehensive than any other person running for office,” said Gingrich, with his characteristic brimming self-confidence. “The second is the fact that I’ve actually done it. I’m the only person running this year who’s actually helped create a national majority twice … balanced the budget for four straight years at the federal level. nobody else running comes anywhere close to that.”

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As we head into the shortened holiday week, we see the U.S. dollar gain ground this morning after last week’s consolidation from short-term profit-taking. Traders are nervous about the odds of a deadlock in the congressional Super Committee and the very real possibility that U.S. officials will make much meaningful progress toward reducing the massive deficit in any event.

Given these factors, it may seem odd for the U.S. dollar to be the safe haven “risk off” currency, but the U.S. dollar is simply the most liquid and safest currency in the world.

If anything, pressure on the dollar may lift as the euro’s latest embarrassments and new enthusiasm over the U.S. economy create new reasons to buy the greenback.

Additional geopolitical uncertainty is also playing a role in price action early Monday, with the Middle East heating up again over the weekend in Egypt, Syria and Yemen.

With the Super Committee’s deadline rapidly approaching on November 23, traders can look for one of four outcomes.

• Bipartisan deal above $2 trillion.
• Bipartisan deal on target, cutting $1.2 trillion.
• No deal, $1.2 trillion sequestered in 2013.
• Procrastination, passing the buck back to congressional committees.

If the Super Committee can get its act together, traders could see risk-on currencies such as the AUD/USD benefit. Again, this is the opposite of what we should expect from a strategically dollar-positive development.

However, risk-on currencies such as the AUD/USD should be approached with caution as they will take their cues from the ECB. If the ECB starts to print money, the Aussie dollar could benefit.

If the Super Committee fails to provide the necessary cuts by the deadline, risk off will be the order of the day and the dollar will paradoxically remain in the driver’s seat.

Traders can take advantage of this kind of market shift by selling NZD/USD and, if they are aggressive, get ahead of the news by taking a position today going into the deadline.

Consider selling the NZD/USD at 0.7500 or better with a protective stop order at 0.7650 and target profit price of 0.7125.

Super committee failure threatens key tax breaks

Whatever happens to the U.S. Congress’ deficit-fighting “super committee,” world markets are increasingly concerned about several temporary tax breaks vital to the economy that are set to expire at year-end.

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One is the Obama administration’s payroll tax cut. Another is a “patch” to prevent the alternative minimum tax (AMT) from hitting middle-class taxpayers. Still others include deductions for state and local sales tax and for college tuition.

Corporations are anxious about business credits expiring on Dec. 31, such as one for research and development. in addition, unemployment insurance is a top worry in a sluggish economy that some say could easily tip back into recession.

Here is a brief look at key items and what might happen:

Payroll taxes – which fund the Social Security retirement system – were cut to 4.2 percent for employees at the start of 2011. the rate is due to revert to 6.2 percent at the beginning of 2012 if Congress takes no action.

President Barack Obama’s September jobs package would extend and expand the cut, dropping the rate for employees further to 3.1 percent for 2012.

The rate for employers, which has remained at 6.2 percent this year, would fall to 3.1 percent on the first $5 million in payroll, under the president’s plan, which would also exempt businesses from payroll taxes if they increase their payrolls.

The president’s payroll tax extension would cost $245 billion in forgone government revenues.

RBC Capital Markets estimated that allowing the payroll tax cut to expire at year-end would reduce U.S. gross domestic product growth by 1 percentage point in 2012.

This issue, like others below, could be included in whatever deal comes out of the super committee, though that seems unlikely given the panel’s rapidly dimming outlook.

The payroll tax question also could be dealt with later as part of a catch-all, end-of-year spending bill.

“Failure by Congress to extend the temporary payroll tax cut enacted last December would reduce paychecks starting on Jan. 1, withdrawing needed support from the still-weak economy,” said a recent report from the Center on Budget and Policy Priorities, a Washington think tank.

The tax cut is worth $934 a year to the average worker, the center estimated.

The Super Committee: Less Important Than Meets The Eye – Health Affairs Blog

The effort to cut federal budget deficits resembles nothing so much as the old movie serials in which each week the hero ran a gantlet of perils the last of which threatened imminent death or dismemberment.  Seven days later, the intrepid adventurer would somehow escape unscathed, only to repeat the cycle.

The courageous crusader of the last couple of months has been the so-called ‘super committee,’ the group created by Congress last August to slay the economic menace threatening the economy—budget deficits.  Impelling projected deficits are anticipated increases in the rising cost of health care for the elderly, disabled, and poor through Medicare and Medicaid.

Much of the press seems to regard the success or failure of the super Committee—and the Congressional action that will or will not follow when it agrees or fails to agree on a deficit reduction plan—as ‘the moment of truth,’ the testing time when the leaders of the United States will determine whether it remains a great economic power or falls prey to economic indiscipline.  the test of seriousness, some argue, is the willingness to face up to the ‘unsustainability’ of Medicare and Medicaid in their current forms.

Nonsense!  the debate on when and how to lower projected federal deficits is genuinely important.  so are efforts to rein in growth of health care spending.  the idea that this is the moment when future deficits will, can, or, indeed, should be closed is a delusion.  so is the idea that growth of public health care spending can be slowed materially without reform of the whole health care system.  But there is one genuinely serious matter at stake in the current deficit discussions.  That crucial issue is whether any fiscal reform program Congress adopts uses tax increases to achieve at least half of the program’s deficit reduction.  without such tax increases, Medicare, Medicaid, and the subsidies of the Affordable Care Act—indeed, the whole social safety net—cannot long survive.

Deficit Cuts should Begin only after Economic Growth Recovers

First, cutting deficits at some point is vital.  Debt cannot indefinitely grow  faster than the nation’s economy without catastrophic consequences.  But it would be genuinely stupid to cut spending or raise taxes significantly before the economy is advancing robustly and unemployment has been significantly reduced.  When nearly 14 million people are unemployed—almost 6 million for more than six months—and an additional 8 million people have withdrawn from the labor force because job prospects are so poor, it is downright perverse to be talking primarily of cutting government spending—which will surely lower demand and put more people out of work—rather than about spending increases and tax cuts that will spur demand and put people to work.

Deficit Cuts Of $1.2 Trillion Would only make A Small Dent In the Long-Term Debt Problem

Second, there is little chance that Congress can agree now on measures sufficient to solve the long-term deficit challenge facing the nation; and there is absolutely no chance that the super committee can end the debate.

The committee’s minimum assignment—to cut deficits by $1.2 trillion over the next decade—is clear.  If legislation is not enacted to lower federal budget deficits by at least $1.2 trillion over the next decade, spending will be cut automatically by enough to reach that target.  If triggered, the automatic cuts will come half from national defense and half from domestic programs other than Social Security, Medicaid, and other programs for the poor.  the automatic cuts to Medicare would come only from payments only to providers and could not exceed 2 percent—roughly $11 billion in 2013.

Current reports suggest that the committee will fail to meet this minimum target.  whether it will deadlock completely or agree on smaller cuts remains unclear.  But even if it fulfilled its basic assignment, the deficit reduction job would remain mostly undone.

If current projections are correct, national debt in ten years will be 90 percent of national income and rising.  That is the projection that is triggering so much angst today   Suppose the automatic cuts of $1.2 trillion over ten years take effect when scheduled in 2013.  even with those cuts, current information indicates that projections in 2013 will anticipate national debt equal to 90 percent of national income ten years later.  In other words, cutting the deficit by $1.2 trillion over the next decade will delay for just two years the return of fiscal conditions the same as those that are now causing so much concern.  There is nothing magical about 90 percent, of course.  Countries can get in trouble with creditors when debt is smaller.  They may retain lenders’ confidence when debt is much larger.

Future deficits are projected to grow mostly because anticipated increases in health care spending—even with the deficit-reducing effects of the Affordable Care Act—are so large.  it will take spending cuts or tax increases sufficient to cut deficits $4-5 trillion, not just $1.2 trillion, to prevent growth of national debt from greatly outpacing national income.

Debate Over Deficits will Continue Regardless Of the Super Committee’s Results

The deficit reduction debate will not end, whatever the super committee may or may not recommend and however Congress responds to those recommendations.  If the sequester is triggered, it now appears that there will be a strong move to suspend it.  as it will not take effect until 2013, Congress will have plenty of time to undo it.

Within the next few weeks, Congress will once again have to decide whether to permit scheduled fee cuts for physicians under Medicare—now set to be about 27 percent—to take effect at the start of next year.  That will be an occasion for yet more debate on how to revamp the Medicare payment system.

More generally, a 2013 effective date for spending cuts means that Congress may revisit any budget changes Congress may enact in response to recommendations of the Super Committee.  One chance will come late in 2012 or early in 2013 when government debt exceeds the ceiling enacted last August.  During the last negotiation over the debt ceiling, Republicans successfully used the threat of default to extract major budget concessions from the administration.  One can have little doubt that they will use it again, reopening any fiscal issues not previously resolved to their liking.

The 2012 elections may well shift the balance of political power.  under some scenarios, the changes could be vast.  If Republicans win the Senate (probable) and the presidency (possible), legislation could be enacted to replace Medicare with vouchers, to convert Medicaid to a block grant, and to repeal or substantially amend the Affordable Care Act.  If president Obama is reelected and Democrats retain control of the Senate, it is possible that efforts would be made to roll back any spending cuts that cut seriously into safety-net programs.  Either way, no decision on spending that isn’t implemented until 2013 can be regarded as final.

Failure To Include Tax Increases as well as Spending Cuts Would Doom the Social Safety Net

As stated above, there is, however, one core principle at stake in the current debate.  Given the size of the deficit cutting measures that will be required to prevent a debt explosion, simple arithmetic imposes a hard dilemma.  unless half or more of future deficit reduction comes from tax increases, the spending cuts required to stabilize the ratio of debt to national income will eventually be so large that it will be impossible to sustain Social Security, Medicare, Medicaid, and the premium subsidies of the Affordable Care Act.  In the debate on raising the debt ceiling, Democrats agreed to a deficit-reduction program consisting exclusively of spending cuts.  If that approach becomes entrenched, preserving major social insurance and social welfare legislation of the 2oth century will become mathematically impossible.

In plain language, the most important issue for health care policy is not whether one or another of the various changes listed in the Budget Options book of the Congressional Budget office is enacted.  it is whether Congress recognizes that tax increases must be a major part of any deficit reduction program.  from the standpoint of preserving the social safety net, it would be better if the super committee deadlocked than if it reported a deficit reduction program relying exclusively or principally on spending cuts.

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This entry was posted on Saturday, November 19th, 2011 at 11:48 am and is filed under All Categories, Health Reform, Medicaid, Medicare, Policy, Politics, Spending. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

The super committee escape hatch

Rep. Chris Van Hollen is a member of the 12-person super committee.

NEW YORK (CNNMoney) — The super committee is in the middle of a frantic scramble to agree on a debt reduction package of at least $1.2 trillion.

The deadline is Wednesday.

If the 12-member committee fails, it will go down as one more ill-fated attempt by lawmakers to bridge the ideological divide between Democrats and Republicans on fiscal issues.

But other than that, not much is going to happen. at least not right away.

The "automatic" budget cuts that were supposed to deter super-committee members from punting won’t actually kick in until 2013. and that gives Congress more than 13 months to modify the law.

There will be tremendous pressure to do so.

The cuts would slash $1.2 trillion in defense and nondefense spending. Exempt from the cuts: Social Security and programs for low-income people, such as Medicaid. Medicare cuts, meanwhile, would be limited.

Top officials at the Pentagon have already laid out in explicit detail the ways in which military readiness and capabilities would be damaged if the $600 billion in defense cuts go through. and Democrats will be very reluctant to let cuts to Medicare and other nondefense program go into effect.

"The Congress is not bound by this," Sen. John McCain said last month. "It’s something we passed. We can reverse it."

Of course, there is still a chance the committee will be able to reach the $1.2 trillion mark. A slim chance.

"It does look grim," said David Kendall, a senior fellow at the centrist think tank Third way. "I’m in the optimism business, and it still looks terrible out there."

Even less likely is a "go big" deal that tackles the big drivers of future debt — entitlements and health care.

If all they do is $1.2 trillion, that means U.S. debt would continue to grow faster than the economy.

And fiscal hawks worry that the committee, unable to agree on substantive issues, will instead populate the plan with small-fry spending cuts and a variety of "fake" savings

But kicking the can down the road on entitlements is still better than total failure, Kendall said.

"I don’t think a smaller deal is necessarily a failure," Kendall said. "It clears the underbrush of minor issues. and that leaves no other choice than to deal with big issues."

And that, Kendall said, would be progress.

"It may seem like kissing your sister," he said. "But it’s really a first dance." 

First Published: November 18, 2011: 2:42 PM ET