Wednesday, July 27, 2011

Some debt/deficit facts

Okay, this has really gone on long enough. The leadership in Washington has to come to some sort of agreement so we can get back to worrying about Greece, Iran, and faulty bullet trains.

So while all of the politicians are battling over $20 billion here or there (Boehner's latest plan allegedly cuts just $22 billion in spending next year) there will soon be a real impact on our nation's fiscal status.

1) The current thinking is that there is about a 60% chance that the US debt rating is cut from AAA to AA (or lower) even if we get some sort of deal. Why? The main reason is that it appears as though the US has no ability to manage it's finances. Well, you might be saying to yourself - big deal what's 1 little letter?

2) Well, the only other time we "defaulted" (we missed some payments in 1979 due to a clerical error and a dispute with some debt holders) our interest costs rose by 60 basis points. Most believe that a debt downgrade will add roughly 1% to our average interest cost. Well, that doesn't sound too bad, right?

3) WRONG! 1% equates to roughly an extra $100 billion in interest cost for me, you and our kids every year for the forseeable future. So, maybe Boehner is able to magically cut $30 billion in spending or Reid finds $28 billion in cuts, but in the end it won't matter. This comedy of errors in Washington is going to cost us an extra $100 billion in interest costs (maybe a Trillion dollars over the next decade!!) more than wiping out any "savings" from spending cuts.

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People are struggling to explain why the market sold off today. Was it durable goods? The debt debate? Well, yes they both played a role, but the reality is that the computer traders are all using the same methodologies and that can lead to scary moves. No one complains when the computers churn out buy orders for market leaders like LULU (yoga apparel), GMCR (coffee makers) or SODA (at home soda fountains) - seriously these are some of the hottest names in the market - but the computers are also all working with the same sets of technical data and when the market stayed below certain technical thresholds after 2:30, the sellers hit every bid with a vengance.

Any rumor of a debt deal is going to cause an explosive short-term rally, but be very careful in this market because there is a lack of fear in the market today.

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I think the Red states should be careful what they wish for.

It's clear that the biggest calls for reducing Federal spending continue to come from the Red states (principally in the South). However, it's really the blue states that seem to be getting a raw deal.

I'm looking for updated tax data to reflect currect collections, but in 2004 here were the states that took more from the Federal Gov't than they paid in (in paranthesis is the amount of money rec'd for every dollar paid in Federal taxes)....

1. D.C. ($6.17)
2. North Dakota ($2.03)
3. New Mexico ($1.89)
4. Mississippi ($1.84)
5. Alaska ($1.82)
6. West Virginia ($1.74)
7. Montana ($1.64)
8. Alabama ($1.61)
9. South Dakota ($1.59)
10. Arkansas ($1.53)

Indeed, 17 of the 20 (85%) states receiving the most federal spending per dollar of federal taxes paid are Red States.

By contrast the states receiving the least amount of Federal aid for every dollar paid in are principally blue states.

1. New Jersey ($0.62)
2. Connecticut ($0.64)
3. New Hampshire ($0.68)
4. Nevada ($0.73)
5. Illinois ($0.77)
6. Minnesota ($0.77)
7. Colorado ($0.79)
8. Massachusetts ($0.79)
9. California ($0.81)
10. New York ($0.81)

Source: Tax Prof Blog.

Cheers!

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