Mish's Global Economic Trend Analysis

Mitt Romney Proposes $8 Trillion Welfare Program for Defense Contractors; Prepare for Two Wars if Romney Wins
Saudi Arabia Aims to Deliver "Wall of Oil" to US; Oil Minister Says "High Oil Prices Unjustified" ; Highest March Price in History; Republicans Say Obama Not Doing Enough
Highest Price Ever of Gasoline in March; State-by-State Gas Price and Gas Tax Comparison
IMF and ECB Bailouts "Created" Huge Bondholder Losses; More Haircuts Coming Up

Mitt Romney Proposes $8 Trillion Welfare Program for Defense Contractors; Prepare for Two Wars if Romney Wins

Posted: 20 Mar 2012 10:57 PM PDT

I sit back in amazement and watch Republicans self-destruct with ridiculous proposal after ridiculous proposal.

Let's ponder two plans, neither of which is going anywhere, and one of them may very well cost Mitt Romney the election should he win the nomination.

Ryan Plan Revives Deficit Duel

The Wall Street Journal reports Ryan Plan Revives Deficit Duel

Rep. Paul Ryan's budget instantly became the centerpiece of an election-year debate over the size of government on Tuesday, thrusting back into the spotlight a topic—the deficit—that has been largely overlooked by the presidential candidates.

Mr. Ryan (R., Wis.), who heads the House Budget Committee, said his plan would put the U.S. on a sound economic path by spending $5.3 trillion less than Mr. Obama recommends over 10 years, resulting in a budget deficit that would be $3.3 trillion narrower.

Let's pause right there for a second. The deficit is about $1.4 trillion. If the US lapses back into a recession at any time, (something I think is highly likely) it will worsen. Cutting $5.3 trillion over 10 years, is $530 billion a year, still leaving deficit spending at $900 billion a year, not counting the odds of a recession.

Let's continue with a few more snips ...

Congressional budgets by nature lack specifics—those are provided in spending bills that come later—and this one was no different. Still, Mr. Ryan made some things clear. Most dramatically, he proposed repealing Mr. Obama's health law.

The plan also would cut the top tax rates for corporations and individuals to 25% from 35%, creating just two brackets for individuals, 10% and 25%.

Mr. Ryan angered Democrats, and privately frustrated some Republicans, by proposing a $1.028 trillion cap on discretionary spending for next year, a figure that excludes formula-based programs such as Social Security and Medicare. The two parties, after weeks of negotiation, had agreed on a level of $1.047 trillion in a deal in August.

Mr. Ryan said he was taking into account another section of that deal, which requires across-the-board cuts of $97 billion beginning in January, $55 billion of that in defense. Party leaders are planning to negotiate a way to restructure those cuts, probably after the election. Mr. Ryan's plan instead directs six House committees to come up with cuts by May that total a similar amount.

Ryan Reneges on Defense Cuts

Notice that Ryan cannot even stand for a measly $55 billion cut in defense spending instead wanting to cut entitlements. Yes, entitlements should be cut, but so should defense spending.

This proposal is doomed from the get-go. It is both pointless, and weak. All Ryan has proven is that he is a deficit-cutting wimp.

Ron Paul alone wants to balance the budget.

Searching for Sings of Intelligent Thought

The only possible conclusions for Ryan's proposals are: He is brain-dead. He does not want a deal for political reasons.

Although it's frequently hard to see signs of intelligent life from either party in Congress, I will give Ryan the benefit of the doubt, suggesting that he purposely wants to antagonize Democrats for political reasons.

No Deal Coming

A USA Today Editorial states GOP budget hurts prospects for deficit deal.

If anything is obvious from the past several years of budget wrangling, it's that meaningful progress on the federal deficit will require a grand, bipartisan deal of the kind that President Obama and House Speaker John Boehner were negotiating last summer before their talks collapsed.

Democrats will have to give ground on the entitlement programs that are swallowing the federal budget. Republicans will have to compromise on tax revenue.

If that is too tall an order during a presidential election year, the two parties should at least avoid fanning flames that will make future deals harder to achieve.

What's most galling, however, is that the plan would violate the terms of the stopgap budget deal worked out last summer. It would breach the cap on defense spending and take money from other areas. It is hard to imagine a better way to undermine prospects for a broad long-term deficit deal than for one side to go back on its word.

As for Democrats, they need to get their heads out of the sand. The argument that they can simply "protect" Medicare against marauding Republicans does not square with reality. While prudent tax hikes can buy some time, and cuts in other spending might be in order, the biggest threats to the nation's solvency by far are health care and retirement entitlements.

The Democrats' response to Ryan's latest plan was both predictable and troubling. Even before the plan was out, they launched a Medi-scare campaign of letter-writing and robocalls targeting 41 vulnerable Republican incumbents.

But, in an era in which both parties try to pawn off partisanship as patriotism, why let the facts get in the way of a good attack ad? Perhaps after this year's election, when big spending cuts and tax hikes are slated to take effect, the two sides will seriously address the long-term fiscal problems the nation faces. After all, notwithstanding the fantasies of party leaders, a sweeping deficit reduction package enacted on a party-line basis is not going to happen.

Mitt Romney Proposes $8 Trillion Welfare Program for Defense Contractors

As noted above, Ryan's proposal is seriously misguided at best. Unfortunately, Romney's plan is far worse.

Please consider A Lesson in Republican Math: Throwing Money at the Pentagon

If you've been fretting about faltering math education and falling test scores here in the United States, you should be worried based on this campaign season of Republican math. When it comes to the American military, the leading Republican presidential candidates evidently only learned to add and multiply, never subtract or divide.

Despite current Pentagon budgets that have hovered at the highest levels since World War II and 13 years of steady growth, the administration's latest plans would only reduce spending at the Department of Defense by 1.6% in inflation-adjusted dollars over the next five years.

Still, compared to his main Republican opponents, Obama is a T. rex of budget slashers.

After all, despite their stated commitment to reducing the deficit (while cutting taxes on the rich yet more), the Republican contenders are intent on raising Pentagon spending dramatically. Mitt Romney has staked out the "high ground" in the latest round of Republican math with a proposal to set Pentagon spending at 4% of the Gross Domestic Product (GDP). That would, in fact add up to an astonishing $8.3 trillion dollars over the next decade, one-third more than current, already bloated Pentagon plans.

Nathan Hodge of the Wall Street Journal engaged in polite understatement when he described the Romney plan as "the most optimistic forecast U.S. defense manufacturers have heard in months."

In fact, Romney's proposal implies that the Pentagon is essentially an entitlement program that should receive a set share of our total economic resources regardless of what's happening here at home or elsewhere on the planet. In Romney World, the Pentagon's only role would be to engorge itself. If the GDP were to drop, it's unlikely that, as president, he would reduce Pentagon spending accordingly.

Rick Santorum has spent far less time describing his military spending plans, but a remark at a Republican presidential debate in Arizona suggests that he is at least on the same page with Romney.

Mitt Romney at Sea

But let's stick with the Republican frontrunner (or stumbler). What exactly would Romney spend all this money on?

For starters, he's a humongous fan of building big ships, generally the most expensive items in the Pentagon budget. He has pledged to up Navy ship purchases from 9 to 15 per year, a rise of 50%.

Romney is also a major supporter of missile defense — and not just the current $9-$10 billion a year enterprise being funded by the Obama administration, primarily designed to blunt an attack by long-range North Korean missiles that don't exist. Romney wants a "full, multi-layered" system.

That sounds suspiciously like the Ronald Reagan-style fantasy of an "impermeable shield" over the United States against massive nuclear attack that was abandoned in the late 1980s because of its staggering expense and essential impracticality.

If the development of Romney's high-priced version of a missile shield were again on the American agenda, it would be a godsend for big weapons-makers like Boeing, Lockheed Martin, and Raytheon, but would add nothing to the defense of this country. In fact, it stands a reasonable chance of making things worse. Given the overkill represented by the thousands of nuclear warheads in the American arsenal, the prospect of a nuclear missile attack on the United States is essentially nil.

Ensuring a Cost-Overrun Presidency

If you were hoping that, with an eye to fighting yet more disastrous wars in the Greater Middle East like the $3 trillion fiasco in Iraq, the U.S. would raise ever larger armies, then Mitt's your man.

Prepare for Two Wars if Romney Wins

Should Mitt Romney win election this November, prepare for two wars.

War with Iran
Trade War with China

Both would be stupid and both will cost trillions of dollars.

Actually, the sane thing to do is prepare for two wars regardless of who wins. The odds may be lower under Obama, but that is the best one can say.

Republican Self-Destruction

The self-destruction of Republicans is very painful to watch because I am not a Democrat and do not like President Obama in the least.

Unfortunately, some Republican proposals are so out of whack with what needs to happen that independents are highly likely to make a lesser-of-two-evils choice of Obama over whoever the Republican nominee is.

Given the strong likelihood Republicans manage to hold the House, a divided Congress and a divided executive-legislative split might easily be the best we can hope for.

I am writing in Ron Paul. The chips will fall, how they fall.

Hopefully Republicans get their act together in 2016 because this was a pathetic performance.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Saudi Arabia Aims to Deliver "Wall of Oil" to US; Oil Minister Says "High Oil Prices Unjustified" ; Highest March Price in History; Republicans Say Obama Not Doing Enough

Posted: 20 Mar 2012 11:47 AM PDT

Wall of Supertankers Heads For US

Brent crude at $125, US Crude at $110, and soaring gasoline prices everywhere have caused quite a stir. See Highest Price Ever of Gasoline in March; State-by-State Gas Price and Gas Tax Comparison for a discussion.

In response to high prices, Saudi Arabia has a plan to send a wall of supertankers to the U.S. to knock down prices and Republicans have attacked President Obama for not doing enough.

Please consider The price that launched a wall of ships

In a matter of days, Saudi Arabia has hired the largest number of super-tankers in years. When the tankers load their cargo in Ras Tanura, the world's largest oil terminal, in the next couple of weeks and start a 40-day voyage towards the US Gulf coast, they will deliver a wall of oil with a single aim: to bring prices down.

"This is the first time in several years for [Saudi Arabia] to hit the market with such volume – and in such a short time frame," says Omar Nokta, a shipping expert at specialist investment bank Dalham Rose & Co.

Last week, Vela, the shipping arm of Saudi Aramco, hired over a few days 11 so-called very large crude oil carriers, each capable of shipping 2m barrels, to deliver to US-based refiners. "In 2011, Vela fixed one VLCC to the US every other month," Mr Nokta says.

The hiring spree was the most public move by the kingdom in a series of efforts aimed at bringing down oil prices from $125 a barrel towards $100. "They want to bring prices down. That is it," says a former Western oil official.

Saudi Oil Minister Says "High Oil Prices Unjustified"

Please consider Naimi calls high oil prices 'unjustified'

Saudi Arabia's powerful oil minister Ali Naimi sought to cool overheating oil markets on Tuesday, saying high oil prices were "unjustified" and that the kingdom could boost its output by as much as 25 per cent if necessary.

Supply was much more robust than it had been in 2008 when crude rose to $147 a barrel, he said.

As the west's nuclear stand-off with Iran escalates, oil prices have rallied this month to a post-2008 peak of $128 a barrel with markets bracing for European Union sanctions on Iranian crude that could knock out a chunk of global supply. Jitters have been fuelled by supply outages in Syria, Yemen and South Sudan.
High quality global journalism requires investment.

Christine Lagarde, managing director of the International Monetary Fund, said on Tuesday that rising energy prices had now overtaken Europe's sovereign debt crisis as the biggest worry for the global economy. Speaking in New Delhi, she said that while the world financial system had strengthened over the past three months, volatile oil prices would have "serious consequences".

But Mr Naimi insisted that supply was "much more firm today than in 2008", the time of the last big oil increase. Saudi Arabia had 2.5m b/d of additional production capacity, which it could bring online if necessary.

Saudi Arabia is likely to be producing about 9.9m b/d of oil in April and exporting roughly 7.5m-8m b/d of that, he said. Asked if the kingdom could ease prices by exporting more oil, he said customers were not asking for additional crude. "We are ready and willing to put more oil on the market, but you need a buyer," he said.

Republicans Say Obama Not Doing Enough

MarketWatch reports Republicans launch new attacks on Obama, Chu over gas prices

Republicans launched fresh attacks on the Obama administration on Tuesday over the soaring price of gasoline, ripping the White House in an election-year bid for the upper hand with consumers.

Testifying before the House Oversight and Government Reform Committee, Energy Secretary Steven Chu was peppered with questions about what the administration has done to bring down gasoline prices, which are now averaging $3.85 a gallon versus $3.55 a gallon a year ago.

Republican presidential candidates Mitt Romney and Newt Gingrich have called for Chu to be fired as gasoline prices climb. On Tuesday, Gingrich released an ad highlighting Chu's September 2008 statement (retracted since he became head of the Energy Department) that he'd like to see gasoline prices at similar levels to Europe's and his support for the Chevrolet Volt.

Gingrich — who competes against Romney, Rick Santorum and Ron Paul on Tuesday in the Illinois Republican primary — has touted a plan to bring gasoline prices down to $2.50 a gallon if elected president. The White House has criticized that plan as unrealistic.

Obama has said that there's little that can be done from Washington in the short term to lower gasoline prices and that there's no "silver bullet" to bring them down in a global market.

Warmongering Fools

Obama is essentially correct when he says "no silver bullet" on energy prices. Moreover, Gingrich is a fool if he really believes he can bring prices down that low without other devastating consequences such as a massive recession and 13% unemployment.

Finally, the leading Republican warmongers are angling for war with Iran, something sure to send oil prices to new highs should it happen. With $trillion deficits as far as the eye can see, the last thing the US needs to do is start another idiotic war, one likely to cause a supply shock sending gasoline prices over $5 if not much higher.

If you want a good reason for high gas prices, you can blame six things

Fed policies - The Fed and its supporters in both political parties are to blame
Fractional Reserve Lending - The Fed is to blame
US Policy in the Mideast - Republicans other than Ron Paul will make matters worse
Deficit spending - both political parties are to blame
Warmongering - both political parties are to blame
Peak Oil

Drill Baby Drill is an inane response to those fundamental problems.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Highest Price Ever of Gasoline in March; State-by-State Gas Price and Gas Tax Comparison

Posted: 20 Mar 2012 10:28 AM PDT

Highest Gas Price Recorded in March

An ABC consumer report shows Highest Gas Price Recorded in March

The average price of a gallon of regular is now $3.87, the highest recorded price in March. The average price is up nearly 4 cents from a week ago, and over 30 cents from a year ago, according to the Department of Energy, as more drivers face gas prices of $4 a gallon or more across the country.

Last week, the average gas price was $3.83 a gallon, the previous record according to data going back to 1990.

The West Coast was once again the most expensive region with an average gas price of $4.23, up almost 2 cents from last week, with an increase of over 37 cents from a year ago.

The least expensive was the Rocky Mountain region with $3.62 a gallon. That region had the highest increase from last week, 14 cents, while the average price there climbed almost 24 cents from a year ago.

State-by-State Gas Price Comparison

The AAA Fuel Gage Report by the American Automobile Association tracks gasoline national averages including state-by state comparisons.

Site is updated daily. Map above shows prices as of March 20, 2012.

Gasoline Taxes State-by-State

Diesel Fuel Taxes State-by-State

The above maps by the American Petroleum Institute.

In what should be no surprise, the highest gas price states are in general the states with the highest gasoline taxes.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

IMF and ECB Bailouts "Created" Huge Bondholder Losses; More Haircuts Coming Up

Posted: 20 Mar 2012 12:59 AM PDT

It's hard to have too much sympathy for those buying Greek bonds. Then again, one should always want a fair market, not a rigged one in which certain players can never lose.

Please consider the question How much did the IMF, ECB and EU bailouts harm Greek bondholders?

The Greek CDS auction results are in, and the implied recovery rate on the Greek bond swap is 21.5 percent – so a 78.5 percent loss. What isn't widely appreciated is that most of this loss was created by the bailouts. That is of course true in the sense that the Greek bailouts have delayed the process of adjustment in Greece, so it continued on an unsustainable path for longer meaning its eventual defaults are larger.

And no one thinks the new situation is really sustainable – new Greek bonds are pricing in of order a 75 per cent further write-down. But that's not what I'm referring to here. I mean something much simpler: because Greece was bailed out with loans from the IMF, ECB and EU that have been treated as senior to the bonds of the private sector (i.e. any losses were to be experienced first by the private sector – all loans to the IMF, ECB and EU were to be repaid with a higher priority than loans to the private sector), that meant that the losses to those Greek private sector bondholders that ended up taking losses were much greater.

The bailouts mean that those bondholders that eventually take losses take a 75 per cent loss rather than a 33 per cent loss – they are badly harmed by the bailout process. Anyone with bonds in another eurozone state in receipt of bailouts had better beware. Portugal, anyone?

More Haircuts Coming Up

The market is already predicting another 75% collapse in Greek bonds. Ultimately any fools that threw money at Greece (without CDS protection) will lose every cent, except of course the idiots who insisted on the bailouts in the first place: the ECB and IMF.

Portugal is now in the batter's box and Spain is on deck. Both will fail, just as Greece did. The only thing that remains to be seen is how much money the ECB throws at those problems before both blow up in the ECB's face.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Home Refinance Calculator

Tuesday, March 20, 2012

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

No comments:

Post a Comment