Mish's Global Economic Trend Analysis

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• Incredibly Easy to Balance Budget Without Repealing Obamacare and Without Fiscal Cliff Tax Hikes
• Bank of England Warns of Global Currency Wars
• Question of the Day: What will the unemployment rate look like for the rest of the decade?
• Taxifornia Lessons

Incredibly Easy to Balance Budget Without Repealing Obamacare and Without Fiscal Cliff Tax Hikes Posted: 10 Dec 2012 10:03 PM PST The Wall Street Journal has a nice interactive map that lets you Make Your Own Deficit-Reduction Plan. I balanced the budget easily without doing things that I think need to be done such as eliminating the department of energy, the department of education, slashing military spending by 35%, etc., etc. Increased Revenues Under the category of "revenue increases", I clicked everything except ... Repeal health care coverage Add a government run health care plan Limit ability to sue doctors That raised $480 billion in a manner far better than the tax hikes in the fiscal cliff. Appropriated Spending Cuts Under the category of "cuts to appropriated spending" I clicked everything except ... Allow automatic spending cuts (mutually exclusive with keep spending levels at 2011 levels) Prevent military retirees from signing up for cheapest version of Tricare Increase passenger fees for airport security Finance food and safety inspection with fees on meet and egg processing facilities That reduced appropriated spending by $191 billion Entitlement Spending Cuts Under the category of "cuts to benefits or Entitlements" I clicked everything except ... Repeal expansion of health-care Add government run health-care plan Limit ability to sue doctors That reduced spending by $445 billion. Grand Total $480 billion in increased revenues $191 billion reduction in appropriated spending $445 billion reduction in entitlement spending Pragmatic Approach The grand total above nets $1,116 billion and a projected $14 billion surplus for 2020. I was surprised by how easy this was. It's not that I thought balancing the budget would be difficult, rather I have seen these setups before, and they are typically structured as to require massive, punitive tax hikes. I was pragmatic. Readers know I have no love of Obamacare, but the president does. Pragmatically speaking, repealing Obamacare is simply not an option. Also recall that Republicans wanted to close loopholes instead of raising taxes. So, for the most part, I simply closed loopholes. The compromise (not shown) would have been to raise taxes on those making $1 million or more instead of those making over $250,000. That option, if provided and checked (in addition to everything else I checked) would have made the projected surplus even bigger. Notice I said projected surplus. Future revenue assumptions by the CBO are far too optimistic for that surplus to be valid. However, there is ample room to slash military spending, slash student aid, and eliminate entire unneeded departments. A Bit of Compromise and a Lot of Pragmatism From all the bitching and moaning in Congress, one might think balancing budget would be impossible. Instead, all it takes is a bit of compromise and a lot of pragmatism. Yet, I suppose I may as well ask for world peace because "a bit of compromise and a lot of pragmatism" from this Congress does seem damn near impossible. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com "Wine Country" Economic Conference Hosted By Mish Click on Image to Learn More Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Bank of England Warns of Global Currency Wars Posted: 10 Dec 2012 07:58 PM PST By the time central banks warn about something, the practice has likely been going on for years. Today's case in point is BoE's King warns of growing currency competition The head of the Bank of England warned on Monday that too many countries were trying to weaken their currencies to offset the impact of the slow global economy and the trend could grow next year. "You can see, month by month, the addition to the number of countries who feel that active exchange rate management, always to push their exchange rate down, is growing," Mervyn King said in a speech. CURRENCY WARS The warnings by King, who is set to step down in July, echo those made in October by U.S. Federal Reserve Chairman Ben Bernanke, who delivered a blunt call for certain emerging economies to allow their currencies to rise. The back and forth of monetary stimulus and foreign-exchange intervention has complicated any coordinated efforts to recover from the Great Recession. "It is fair to say a recovery of a durable kind is proving elusive," King said in his speech. Fielding questions later, he said he had "great confidence" that the United States will avoid the worst-case effects of the so-called fiscal cliff of automatic tax hikes and spending cuts due to come into force in January. It "will find a way, if not avoiding going over the cliff, then hanging on by the finger tips" on the other side, he said. Elusive Recovery It's fair to say the reason there is no recovery is that central bankers like King and Bernanke think competitive currency debasement will solve economic problems. It won't, and that has been proven time and time again. Moreover, "fiscal cliff" avoidance is nothing more than "currency debasement" under the name "Keynesian stimulus". The irony is King bitches about exchange rate management while encouraging Bernanke to do the same, and doing the same himself. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Question of the Day: What will the unemployment rate look like for the rest of the decade? Posted: 10 Dec 2012 02:16 PM PST Assuming the BLS projections for the labor force until 2020 are correct, what will the unemployment rate look like for the rest of the decade? Background for this question comes from two prior posts. About That "Expected" Drop In Participation Rate Charting Errors in BLS Participation Rate Projections Those posts show just how badly the BLS missed prior projections of the participation rate. Consider this chart of 2006 projections vs. 2012 projections from the second link above. click on chart for sharper image Chart Data Mitra Toossi in November 2006: A new look at long-term labor force projections to 2050 Mitra Toossi in January 2012: Labor force projections to 2020: a more slowly growing workforce I asked Doug Short at Advisor Perspectives to plot the difference as a follow-up to my post About That "Expected" Drop In Participation Rate. Looking Ahead Assuming labor force and participation rate projections made by Toossi in January 2012 are now correct, the determining factor is job growth. Mike Klaczynski at Tableau Software took my idea of plotting BLS projections of the labor force  and created the following interactive map that will project the unemployment rate at various levels of job creation. Notes: Projections from Mitra Toossi's January 2012 report  Labor force projections to 2020: a more slowly growing workforce The chart assumes a steady rise in labor force to the BLS 2020 projection of 164,360. Actual results will not be that uniform. The labor force is a function of overall population and the participation rate.  Specifically, the participation rate is the ratio of the civilian labor force to the total noninstitutionalized civilian population 16 years of age and over.  As shown above, and at the projected labor force growth coupled with a nominal drop in participation rate to 62.5 from the current 63.6, it will take about 100,000 jobs a month between now and 2020 to roughly hold the unemployment rate steady. It will take about 120,000 jobs a month for the rest of the decade to get the unemployment rate under 6%. I had the total noninstitutionalized civilian population and the participation rate displayed in the same graph, but the result did not look as nice. If the participation rate drops further, accompanied by a drop in the labor force, it will take fewer workers to hold the unemployment rate steady. If the participation rate rises, it will take additional jobs to hold the unemployment rate steady. 120,000 jobs a month may not seem like a lot, especially compared to the Clinton years. However, boomer retirements coupled with declining birthrates will make 120,000 jobs a month not so easy to come by, especially as the economy slides into another recession. Indeed, I believe the economy is already in recession and some posted job gains will be revised lower. Moreover, the potential for older workers seek work well past retirement age (not dropping out of the labor force as expected), will also put upward pressure on the unemployment rate in ways not yet visible. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Taxifornia Lessons Posted: 10 Dec 2012 08:04 AM PST California revenue is up from a year ago. Unfortunately, California revenue is not up as much as expected, while spending is up way more than expected. Please consider California Finances in November 2012 by state controller John Chiang. November's tax receipts fell 10.8% short of expectations contained in the 2012-2013 State Budget, although they were above the year-ago level. Total revenues year to date are now 2.6% less than anticipated at this time, with shortfalls among all of the major sources. Expenditures are 4.9% above estimates contained in the Budget, with assistance to local governments driving the overage. Total revenues were $806.8 million below projections in November, with corporate taxes accounting for a significant amount of this divergence. Compared with a year ago, total revenues year to date were up by 2.5%, with an impressive gain in income taxes offset-ting shortfalls in the other revenue sources. The difference between actual and estimated numbers is larger on the spending side. For the first five months of the fiscal year spanning July through November, actual disbursements exceeded projections by $2.2 billion, or 4.9%. Education and health care accounted for the majority of the difference. Here are a couple tables I put together from the report. Fiscal Year 2012-2013 Revenue To-Date Revenue Source Actual Jul-Nov Revenues Estimates Miss Percentage Miss Personal Income Tax $18,905.90 $19,023.00 -$117.10 -0.615570625 Retail Sales and Use Tax $7,921.50 $7,989.00 -$67.40 -0.844911754 Other Revenues $1,710.40 $1,889.20 -$178.80 -9.464323523 Total General Fund Revenue $29,665.80 $30,468.20 -$802.40 -2.633565488 Non-Revenue $1,667.60 $1,373.30 $294.30 21.4301318 Total General Fund Receipts $31,333.40 $31,841.50 -$508.00 -1.595716282 Fiscal Year 2012-2013 Spending To-Date Recipient Actual Jul -Nov Disbursements Estimate Miss Percentage Miss Local Assistance $36,249.30 $33,701.70 $2,547.6 7.559262589 State Operations $10,146.70 $10,638.30 -$491.60 -4.621039076 Other $225.30 $117.20 $108.1 92.23549488 Total Disbursements $46,621.30 $44,457.10 $2,164.2 4.868063819 Spending Problem, Not Revenue Problem Here are a couple images from the report showing want any rational person knew anyway: California has a spending problem, not a revenue problem. November 2012 vs. November 2011 Key Revenue Facts Total Revenue is up $608.3 million from a year ago. Unfortunately, total revenue is down $806.8 million vs. expectations. Income tax is up $367.0 million from a year ago. Unfortunately, income tax is down $842.5 million vs. expectations. Corporate taxes are down 160.1% from a year ago and $187.8 million vs. expectations.  Sales taxes are the only bright spot, up $386.1 million from a year ago. Yet, sales taxes are only up $99.0 million from expectations. Corporate taxes are skewed by early payment in November. However, the overall bottom line shows rampant optimism. And that is just the revenue side. Bottom Line Fiscal year-to-date, in spite of healthy growth in revenues, California revenue came in 2.63% lower than expected. Fiscal year-to-date, California managed to spend 4.87% more than budgeted. Total receipts were down a mere 1.60% only because non-revenues were 21.43% greater than expected. 6.46% in the Hole Taking into consideration the jump in non-revenue, California is 6.46 in the hole, for July through November. Fear-Mongering and Tax Hikes Is this a spending problem or a revenue problem? The answer should be clear, but thanks to fear-mongering by governor Jerry Brown, fear-mongering by teachers' unions, fear-mongering by police and fire unions (and fear-mongering by every other public union in the state), California voters were stupid enough to pass Proposition 30. The proposition hikes California's sales tax to 7.5% from 7.25%, a 3.45% percentage increase over current law. It also "temporarily" hikes income taxes for seven years, on four high-income tax brackets for taxpayers with taxable incomes exceeding $250,000, $300,000, $500,000 and $1,000,000. The top income bracket in California is now 13.3% tax rate on taxable income over $1,000,000--a percentage increase of 29.13% over current "millionaires tax" policy of 10.3%. Proposition 30 Will Backfire I confidently predict Proposition 30 will backfire. Indeed,  proposition 30 will be the final straw prompting many millionaires to exit the state. I expect some major businesses will follow as well. Expect More Hikes in Taxifornia A US recession started this summer or is on the way now (take your pick). Either way, since California could not bring in enough revenue in 2011, it will fail to do so in 2012, even with those monstrous tax hikes. Expect unions to ask for still more tax hikes because tax hikes and unions go hand-in-hand. Good luck with that Taxifornia. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com "Wine Country" Economic Conference Hosted By Mish Click on Image to Learn More Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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