OMT. Part III

Outright Monetary Transactions (OMTs) were announced on September 6^th, so what is the plan:

1. ECB buying bonds up to a maturity of 1 to 3 years on the secondary market with new Euros
2. Purchases will only occur in countries who request help from the EFSF/ESFSM (and subsequent ESM) bailout funds, which purchase debt on the primary market)
3. Purchases are conditional on reform programme
4. Purchases stop if country no longer needs help or if don’t comply with the agreed to conditions
5. No exact amount of purchases will be outlined and determined by ECB governing council
6. Purchases will be sterilized fully (e.g. buy Spanish bonds with ECB reserves and then sell German bonds, making reserves in system neutral and lowering inflation risk), TBD
7. No yield caps
8. Not senior to other bond holders

Here is what I think the result will be.  This is what I sent internally relatively verbatim on September 6^th, after the announcement:

The plan goal is to save the Euro - preventing runs on countries that investors feel may leave.  In other words, capital flows out of Spanish banks because as yields on Spanish debt rise, which is a result of banks not bidding on Spain's debt due to default concerns, depositors are nervous they will get a devalued Peseta (i.e. the new Spanish currency). 

As of now, the market is on board as yields in the periphery sank.  In fact, Spain's 10-year was under 6 for the first time since May.  It should be noted though that this happened the last two times the ECB announced a bond buying program only for yields to shoot higher.  However, longer-term is another issue. 

The two keys are "unlimited" and "conditions".  The first would appear to be a bazooka, if investors believe the quantity is unlimited then default is off the table and there would be no reason for capital to flee banks.  I think this would hold true, even if you buy longer dated bonds (5 year bonds eventually have a maturity less than 3 years).  Still, conditionality will ultimately decide this thing. 

For instance, say Spain requests EFSF and subsequently is involved OMT on the condition they keep their deficit at 3% GDP and insist on spending cuts.  Such austerity could actually cause the deficit to rise and/or could be politically unpopular as the economy shrinks further.  At which point, Spain can't keep up the conditions, then what?  Maybe it doesn't matter, as Spain will then have leverage - destroying the Euro and hurting the ECB balance sheet (now full of Spanish bonds).  But if it does and the ECB stops the funding once the conditions aren't met, then it could mean the end of the Euro. 

In short, a Euro breakup is off the table (maybe sans Greece) for now, but it’s much of the same – kicking the can down the road.  At least IMO; however, the plan does seem to have more firepower.

OMT. Part II

In my last post I outlined why I think interest rates were rising, absent from that was a discussion on what monetary policy can do to prevent bank runs, help the economy, and assist in keeping public interest rates low:

1. As defaults happen, central banks can lower interest rates (increasing liquidity, interbank lending, etc), engage in asset purchases (e.g. quantitative easing), act as the lender of last resort, etc.  All of these tools help prevent runs on the bank. 
2. Further, expansionary central bank tools should in theory should encourage banks to lend, stimulating the economy.  It also lowers the value of the currency and creates inflation.  The former helps exports and competitiveness, while the latter helps inflate away debt (as opposed to default).
3. A central bank can create money out of thin air.  It can also require banks to bid on Treasury auctions (as in the US).  As a result the central bank can set interest rates on public debt if need be.

The problem in the EU is that each country is not in control of its own currency, they are subject to the ECB.  Thus, while the US can do all the above, Spain for instance is beholden to the ECB.  This is why I believe their interest rates on public debt were rising…

There was no guarantee the ECB will create the reserves if need be to purchase public debt (e.g. the ECB will purchase or will have banks purchase public debt), as a result the government is revenue constrained to what it can procure in tax revenue and what it can finance in the market.  As tax revenues fall, the likelihood of default increases, which in turn causes the market to push up interest rates, and again increases the likelihood of default, so goes the circle…

Again, the contrast here is that the market realizes the Fed can dare it to sell the Treasury bonds.  The Fed has endless reserves to do so in order to keep interest rates where they want to (see QE3).  The countries in the EU can’t create their own reserves and thus are dependent on the ECB to do so.

OMT. Part I

These blog posts eventually lead to the Outright Monetary Transactions (OMTs), which was recently announced by the ECB.

First, I think it’s important to get a refresher on the problems in Europe.  I am going to use Spain as an example. 

1. Countries like Spain ran up large debts earlier in the decade, which was a boom to asset prices and growth. 
2. Thus, as capital began to leave Spain asset prices began to fall.  And so started a negative feedback loop – lower asset prices, capital flees, resulting in lower asset prices, more capital flight, etc.
3. This puts Spanish banks in a bad spot as their assets decrease in value and their funding sources dry up.  This results in a pullback in lending.
4. So back to point 1, growth was also dependent on credit, which is now being taken away.  As a result, growth stalls.  Again this creates another negative feedback loop – lower growth, less lending, resulting in lower growth, thus less lending, etc.
5. The combination of 2 and 4 lead to private defaults and exacerbates the fall in asset prices and growth.  Further, it puts the banks at risk.
6. This also leads to a collapse in tax revenues, a massive increase in stabilizers (i.e. the social safety net), a possible bailout of the financial system, and thus a ballooning of the public deficit to GDP.  This in turn causes interest rates to rise.
7. Rising interest rates create a self-fulfilling prophecy.  Higher interest payments = higher deficit = higher interest rates.  This continues until a breaking point when interest rates are too high and governments default.  
8. Simultaneous to #1, foreign capital is being pulled out of banks (i.e. “a run on the bank”) as the probability of public default rises.  This is because after the default deposits will be in the new local currency, which will be devalued relative to the Euro.
9. Number 8 exacerbates the problem of interest rates rising, as the reserves used to pay off public debt being to dwindle.

If you read the above and thought “this sounds a lot like the US” you would be correct… up until number 6.  So why aren’t we seeing the same sort of interest rate problem as Spain?  The most basic reason is that a key ingredient in the above is missing – monetary policy (the Fed and ECB).  

TARP “An Abysmal Failure”

Those were the words of Neil Barofsky (appointed by Bush, registered Democrat), former special inspector general for TARP, in a recent interview with Yahoo! Finance.  Here is the video:

And here are some key takeaways:

• Banks could dictate terms of their own bailout
• No difference between the Bush administration and the Obama administration
• Most of blame goes to executive branch, and thus Treasury (again both parties)
•  Program was intended to restore lending, help homeowners, but nothing in program to compel the banks to do so 
• Geithner essentially acknowledged that the program was to allow banks to soften the blow and extend the foreclosure process
• Government just looked the other way in the face of misconduct
• Accounting tricks and spin have essentially showed TARP is a gain, but losses were still less than expected
• Further, the above “gain” doesn’t take into account all other bailouts
• It did help prevent financial Armageddon, but did little in the way of helping the broader economy and households, which is the reason why Congress passed TARP in the first place

In hindsight without the world on the brink of returning to a hunter-gatherer society it’s much easier to criticize the program.  It was really scary in the Fall of 2008.  I admit that.  Further, I will concede I don’t think Paulson, Bernanke, Geithner, etc. created this massive wealth transfer out of malice.

Having said that, I think Barofsky is correct – consumers are still over leveraged, unemployment is high, consumption is weak, growth is slow, etc.  While all are improving, none are indicative of a robust economy.  There could have been a better way to handle TARP (e.g. controlled bankruptcy, greater controls) and if there wasn’t, why wasn’t there?

Ultimately I think TARP is another example of treating the symptoms and not the disease.  The banks were in trouble because they made excessive loans to consumers who were leveraged to the gills.  The economy won’t feel any better until the consumers repair their balance sheets.  TARP, monetary easing, and other policies have done little to address that.

HT to Big Picture for alerting me to the video.

Here is Barofsky’s book.

What now with the “Fiscal Cliff?”

So I explained what the fiscal cliff is and why it is bad, but what will ultimately happen?  I have no idea, trying to figure out what a bunch of politicians are going to decide seems like a fool’s game.  Who can predict that?

Still, what we can try and do is estimate probabilities.  Now, I am not a forecaster, but I can give you the good news – the CBO says the forced austerity would probably throw the economy into recession.

Why is this good news?  Well the severity of going over the“fiscal cliff” is severe, so my thought is reason will dictate the discourse and if reason fails there is the insurance that these politicians like to keep their jobs.  I would actually bank more on the latter.   

Further, the two big items are the Bush tax cuts expiring and the “sequester”, there seems like a natural compromise here.  Republicans get the tax cuts, Democrats get to push back the automatic spending cuts.  Maybe the stimulus measures don’t get renewed, but hopefully the Bush tax cuts staying and "sequester" leaving will be enough to keep this 2% growth train moving!

Here is how Goldman Sachs econ team handicaps it:

1. 35% chance of temporary expiration of growth policies in 2013
2. 40% chance of short-term extension of growth policies with longer-term solution in later 2013
3. 20% chance of extension of growth policies for more than a year
4.  5% chance of “grand bargain” of fiscal and tax reform

The problem with the above (as with Europe) is that temporary measures are just that and create even more uncertainly.  Still, the above paints a 65% chance of outcomes I believe would be intermediately (through Q2 2013 maybe) good for the market, of course absent any exogenous shocks.

At the end of the day, I think the “fiscal cliff” big risk parallels another one of my big risks – Europe.  That is to say, the severity of the situation should yield at least a semi-positive result (I hope).  Still, the risks are large, real, and should be met with caution.  My other big risks are much harder to handicap – war Iran (seems low, but who knows) and a Chinese hard landing (black box).

Why the “Fiscal Cliff” is Bad

I have covered many times why I am against austerity at the present moment.  In fact, it was one of my big risks to economy and market going forward.

The problem with the fiscal cliff and the austerity it will bring – the same problem Ben Bernanke speaks of – is that what picks up that slack?  If GDP is comprised of consumption + investment + net exports + government spending and government spending is cut, which one of the other 3 is going to increase to offset that?

I don’t model GDP, but the bullets below should give you an idea of the growth versus austerity trade off:

• The Congressional Budget Office reckons that the combined effects of the “sequester” and the expiring tax cuts would add up to 3.6% of GDP in fiscal 2013.  (Source 3)
• David Greenlaw of Morgan Stanley, which puts the total effect at almost $700 billion at an annual rate, argues that the calendar-year impact is at around 5% of GDP.  (Source 3)
• David Rosenberg estimates the drag equates to roughly 4% of GDP from reduction of those tax benefits to spending.  (Source 1)
• According to Goldman Sachs, the total of amount of dollars the US government will be taking out of the economy is about $600 billion.  (Source 2)  

Such reductions have happened in the past, but with poor results:

• The last two times, 1960 and 1969, that there was a fiscal retrenchment of the same magnitude both ended in recessions. (Source 1)
• In 1968, when individual, corporate, excise and payroll taxes collectively rose by the equivalent of 3.1% of GDP, mostly to pay for the Vietnam War and to damp down inflation. The next year, the economy fell into recession.  (Source 3)

Now, the flip side would argue that at least we will reduce the budget deficit, but who cares?  At the expense of growth this seems silly.  Further:

• Austerity hasn’t worked for Europe.  Take a look at Spain, where austerity is taking place.  There GDP is falling and unemployment is at 24% and rising.  Further, the benefits austerity should have brought aren’t happening as bond yields are increasing and the deficit is growing.
• Why do we need to cut the deficit now?  Interest rates are low, very low, inflation is tame, and GDP growth is still sluggish.  What exactly is the risk at the present moment?

In the last post I will discuss the probabilities of what will ultimately happen with the “fiscal cliff”.

Source 1 – Lance Roberts and David Rosenberg.

Source 2 – Walter Kurtz and Goldman Sachs.

Source 3 – The Economist. 

What is the “Fiscal Cliff?”

I decided to do this series because a friend of mine asked why Fed Chairman Ben Bernanke was warning Congress about a “fiscal cliff.”  Coincidentally that afternoon I found an article discussing the “fiscal cliff” and its ramifications, so I decided to do some digging.

The “fiscal cliff” refers to the end of many stimulus tax measures (payroll-tax cut, investment tax credit, enhanced unemployment insurance), the Bush tax cuts, and automatic spending cuts called “sequester” at the end of 2012.  It is automatic austerity.  Here is a rundown:

• Tax Increases
• Under status quo at the end of 2012 roughly 42 tax benefits will expire at the end of 2012.  (Source 1)
• The 2001 and 2003 tax cuts are set to expire. This includes tax rates on those making over $250K as well as qualified dividends and in particular the 15% rate on long term capital gains.  (Source 2)
• The Payroll tax cut will expire at the end of 2012, increasing from 4.2% back to 6.2%.  (Source 2)
• The Alternative Minimum Tax (AMT), currently at 28% for those filing jointly with incomes of $74K or greater, will drop down to $45K.  (Source 2)
• Numerous temporary research and development tax benefits to corporations will expire.  (Source 2)
• Spending Cuts
• Automatic, across-the-board cut in domestic and defense spending, called the “sequester”, takes effect, cutting about $100 billion from government spending next year. (Source 3)
• Unemployment benefits for workers who have exhausted the standard 26 weeks of benefits will be phased out. (Source 2)
• At the end of the year the infamous debt limit will hit again, potentially forcing further cuts. (Source 2)

In my next post, I will discuss why this is bad.

Source 1 – Lance Roberts and David Rosenberg.

Source 2 – Walter Kurtz and Goldman Sachs.

Source 3 – The Economist. 

Deficits and Interest Rates.

The following graph (via Business Insider) shows the yield on the 10 Year Treasury (blue) relative to the Total Public Debt (red):

I point this out now as the calls for reigning in government spending are getting louder.  It seems the primary reason why spending hawks do not want any more monetary stimulus is that it could move interest rates higher.  However, as the graph shows, and as the article points out, there is no connection between spending and interest rates.

I have an idea of why this is happening – deleveraging (see here, here, and here).  Basically as people begin to save more and pay off debt they spend less.  The decrease in spending affects the whole economy as individuals, financial institutions, and companies begin to save and hold cash.  Not wanting to take on risk, the cash is invested in Treasuries.  Thus, lower yields.

I have advocated for more fiscal stimulus numerous times.  While I do think longer-term – after the deleveraging cycle winds down – federal spending needs to be cut down, doing so now would make things worse.  In the words of Richard Koo:

“The insistence that fiscal consolidation is necessary in the longer term is like the doctor who, faced with a patient who has just been admitted to the intensive care ward, repeatedly questions the patient about his ability to afford the treatment. This is both lacking in decency and irresponsible.

If the patient loses heart after learning the cost of the treatment, he may end up spending even longer in the hospital, leading to a larger final bill. Completely ignoring the policy duration effect of fiscal policy and constantly insisting on longer-term fiscal consolidation was what prolonged Japan’s recession.”

Germany Says No!

In my last post I highlighted a recent interview by George Soros where he outlined a solution for the Eurozone’s problems – Eurobonds; however, Germany was against that plan.  Why?

Politically it is unpopular.  German citizens are essentially paying for problems in other members.  To me this seems a bit unfounded as Germany is a creditor nation, meaning they lent the money to the indebted nations in the first place.   

Since Germany lent the money to these countries, a default or financial crisis from a Euro unraveling would certainly have a major adverse impact on the German economy.  It logically follows that the rest of the Eurozone and global economy would also suffer.   As a result, at some point there needs to be a universal solution as the pain will be felt by debtor and creditor nation alike.

Currently indebted nations are cutting back on public spending, experiencing falling wages, and reducing social safety nets.   The markets still aren’t buying that this will solve the crisis – sovereign interest rates are rising and European bank shares are falling.  Further, those nations are experiencing more social unrest as a result of the measures taken to date.  As this builds, so does the geopolitical risk.

Basically the action taken to date appears to be grossly inadequate.

Is the solution Eurobonds?  I don’t know with any certainty; however, the risks associated with a Eurozone collapse are great.  As such, we have to see a discussion of real solutions sooner than later and Eurobonds should be one of the options on the table.  Like most problems there is no magic bullet, and it will require multiple tactics as things evolve.

Soros on Europe

George Soros is arguably the most well known, highly successful macro hedge fund manager around.  In a recent interview he sat down with Der Spiegel to discuss the issues facing the Eurozone, among other things.

I have commented on the main issues before, but Soros outlined why these problems need sorting out as well as some potential solutions.

Essentially he states:

1. A Eurozone breakup would lead to a banking crisis that would spiral out of control. 
2. A European fiscal authority is needed to re-finance indebted members on more reasonable terms. 
3. To do this the authority would issue Eurobonds.
4. These bonds would be backed by the union.
5. Germany, being the largest country with the best credit rating and largest surplus in the EU, is essential to making this work.

In short, the Eurozone acting as a whole would issue bonds to help member nations that are financially under pressure (Greece, Portugal, maybe Italy, etc.).  These bonds would in part be backed by Germany who is the key player in the whole process.

Seems good to me.  The problem?  Germany doesn’t want any part of that quite yet. 

My next post will comment on Germany’s objections, as well my take on what they should do.

1937, or Why I Want More Short-Term Spending

I have mentioned on many occasions that I think the Federal Government should increase stimulus spending in the short-term.

And in my last post I outlined how the Feds tightened monetary policy and decreased spending in 1936 and 1937.  So here are a couple consequences. 

• GDP sank:

•  The unemployment rate went from 9.2 in 1937 to 12.5 in 1938. 

With a quick glance at my previous post, you can see when spending picked up both GDP and unemployment started to look better.  The money supply also increased again.  

Now is it possible the monetary and fiscal contraction were not the cause of the 1938 recession?  Or that maybe only monetary or fiscal policy matters?

Of course; however, given the past fallout from such contractionary policies I don’t believe it is prudent to do either at this moment.  This is especially true since inflation and interest rates are low.  As such, the risk/reward trade-off of cutting back seems heavily skewed toward risk. 

1937, a Primer

In the late 1920’s we had a massive credit bubble collapse, we then loosened the money supply and increased Federal spending to help improve the situation.   In the later part of this decade we had something similar. 

Here is what happened in 1937.

First, the Fed tightened monetary policy.  Starting in 1936 and through 1937 the Fed doubled reserve requirements (the amount of cash a bank must hold relative to its liabilities).  You can see how the money supply dropped here.

Less money = less lending = less borrowing = private sector contraction = recession. 

Now it is possible that if Federal government spends money it can counteract the drop in the private sector, along with an increase in exports (GDP = private consumption + private investment + government spending + net exports).

Did the Federal government spend in 1937?  Nope.  They also raised taxes.  

So to conclude, things were starting to look better later in the 1930’s; however, the Feds tightened monetary policy and decreased spending.  In my next post I will cover the fallout from that and why I think it’s dangerous to follow a similar path now.

The Debt Deal is Done – Yay

I am glad a deal got done, but I am not yet willing to throw a party with magicians and piñatas. 

I will start good news:

• We won’t default, which I viewed as political issue, not a solvency issue.
• The spending cuts won’t be drastic and immediate like Greece.   

And now the bad news:

• The USwas still get downgraded, although I am not sure how bad this actually is for interest rates.
• It showed how poorly we are governed.  I don’t think anyone in Washington came out looking good after this.  Politicians took something simple and necessary and turned it into a school yard name calling contest.
• The deal signifies any future stimulus is probably out of the questions.  As I have mentioned before I think short-term spending is still needed. 

I think how you evaluate the deal depends on your perspective.  If you evaluate it on a possible catastrophe being avoided then it’s a huge success.  However, if you take Armageddon out of the equation as I did (I never thought we would reach that point), the apparent removal of fiscal stimulus from the equation is not a good thing.

Note:  I didn’t mention anything about long-term fiscal health because I couldn't find an objective point of view.  So if you find one feel free to forward it along.

The Debt Ceiling is Stupid II

Raising the debt ceiling should be simple.  We print our own money so in my view we technically can’t default.  Thus, this is NOT a solvency issue.  We pass the debt ceiling increase, create more money, and pay our bills.  

Instead, this is a political issue. The Republicans want cuts in spending in order to raise the debt ceiling.  Fair enough, increased spending and excessive money printing certainly have the potential to be inflationary and cause interest rates to rise. 

However, neither inflation nor interest rates are an issue now and much of the Federal Debt issue seems to by cyclically induced by the financial crisis and “Great Recession”.  This is why I think the spending compromise should focus more on cuts long-term while increasing stimulus spending in the short-term.

So when I take into consideration our current issues with spending (listed above) and the consequences of not passing the debt ceiling, I can’t think a deal won’t get done.  Right now we are witnessing a partisan standoff where next year’s election and appealing to ideologues take precedent over pragmatism at the expense of the American people.

Update: A deal is done and Rome lives another day as our heroes save us from disaster.   

The Debt Ceiling is Stupid

What is the debt ceiling?  It’s a relatively arbitrary limit set by Congress on how much debt the government can issue.  It’s a big deal now because the debt ceiling must be raised in order for the US government to meet its obligations and borrow more funds in the bond market.

If the debt ceiling isn’t raised, some or all of the following will happen:

• Government employees stop getting paid
• Government services are stopped
• Projects go on hold
• Interest payments aren’t made on current debt (US defaults)

The severity of each outcome remains to be seen.  The order in which this would occur is an uncertainty, with the exception of the interest payments on US issued debt. Despite what the press says, this will not lead to an immediate default on US debt, but debt payments would be made at the expense of the government salaries, services, and entitlements. At the very least our debt instruments would be downgraded by the rating agencies, because of the failure to pay and the uncertainty of payment.

Regardless I don’t think anyone could argue this would be a good thing given our current environment.  Any of these would further weaken the already weakening macro data (e.g. unemployment, manufacturing indexes, etc.) and certainly not be good for stocks. Of course if the interest payments aren’t made this could open up a whole new set of problems, mainly rising interest rates caused by a lack of confidence in the United States to pay their obligations.   The 30 day Treasury has long been used as a proxy for the risk-free rate of interest. 

Most commentators think this is going to happen and the market, while volatile, doesn’t appear to be signifying the debt ceiling won’t be raised.  That said, Congress seems to be full of idiots/ideologues so anything is possible and the longer it goes on the more uncertainty there will be in the market.

Why the US Doesn’t Have the Same Issues as the Eurozone

As a follow up to my previous post on the Eurozone, I will now attempt to explain is why the US is different than the Eurozone.  Again, I am going to use a very basic example:

1. Country US and Country Emerging have different currencies.
2. Country US and Country Emerging borrow at different rates given that they have independent central banks and their currencies fluctuate freely in the market. 
3. Country US borrows money from Country Emerging; however, it borrows in its own currency.  This makes Country US’s currency depreciate in value.
4. Country Emerging wakes up one day and realizes this is lunacy and stops funding to Country US’s private sector.  This presents a problem, as Country US’s growth is dependent on this funding.
5. Given Country US has a different currency than Country Emerging they print money and inflate/devalue their currency, increase competitiveness, and boost exports, which reduce the debt burden and help growth.
6. To further ease the slowdown, Country US’s government spends money in order to keep growth from plummeting.  Given they print their own currency and have debt denominated in their own currency, they are not dependent on Country Emerging to fund their government.  Thus, they can continue to borrow.
7. As a result, Country US has the ability to increase government spending, helping the economy grow or at least hamper the slowdown.

The Eurozone Problem – A Three Minute Lesson

This is an incredibly difficult topic to understand. Cullen Roche presents it succinctly here; however, for this post I am going to use a very basic example and really simplify this complicated issue down:

1. Country ABC and Country XYZ have the same currency, but broadly speaking, Country XYZ is a more risky place to invest. 
2. Given that they share the same currency and central bank, when things are good Country XYZ can borrow at the same low interest rate as Country ABC. 
3. Because Country XYZ is more risky, the private sector takes on more debt (if you should be borrowing at 7% and you can borrow at 2%, you borrow more), which is often lent to them by Country ABC.
4. Country ABC wakes up one day and realizes this is lunacy and stops funding to Country XYZ’s private sector.  This presents a problem as Country XYZ’s growth is dependent on this funding.
5. Given Country XYZ shares the same currency as Country ABC they can’t inflate/devalue their currency, increase competitiveness, and boost exports, which would reduce the debt burden and help growth.
6. As a result Country XYZ must have the government spend money in order to keep growth from plummeting.  However, given they don’t print their own currency they are dependent on Country ABC to fund their government.
7. Country ABC won’t fund Country XYZ’s government given the massive drop off in growth and high debt burden.
8. Country XYZ has to cut government spending, reducing growth further and creating a vicious cycle.
9. Country XYZ may have to leave the currency, devalue, default, and suffer a lot of pain before ultimately recovering or…
10. Continue to cut spending, stay in the currency, and have a drawn out stage of low/negative growth.

In my next post I will compare and contrast the Eurozone with the US.  Here’s a hint: while we have our own problems, at least we don’t have these.

Spending? Yes Please

Bill Gross is one of the best bond managers around, so it’s always comforting when someone as astute as Gross is on the same page as you.  In a prospectus for his clients (via TPM), Gross said:

“Solutions from policymakers on the right or left, however, seem focused almost exclusively on rectifying or reducing our budget deficit as a panacea… Both, however, somewhat mystifyingly, believe that balancing the budget will magically produce 20 million jobs over the next 10 years.”

In a previous post I highlighted my concern with spending cuts in regard to the market.  Broadly speaking, with the consumer being over leveraged and unemployment still high, where is the incentive for the private sector to invest? 

My concern is that if government doesn’t continue to spend the private sector can’t and won’t pick up the slack.  Further, if the government stops spending, how does that help the economy now?  I have difficulty finding the logic in that argument. 

Gross has a solution:

“Government must step up to the plate, as it should have in early 2009. An infrastructure bank to fund badly needed reconstruction projects is a commonly accepted idea, despite the limitations of the original "shovel-ready" stimulus program in 2009."

That seems good to me – put people to work, build critical stuff we need, employee people to do it, stimulus is pumped directly into where we need it, and the infusion gets the economy to the point where it is self-reinforcing.

Quick point, fiscal stimulus – cash injected to directly into the economy – is different than QE – where cash goes to fuel speculation.  I vote for the former and against the latter.