Wednesday Note: S&P Outlook Downgrade Reminds Washington to Do the Right Thing
S&P’s decision to cut its outlook for U.S. government debt from stable to negative—a historic first—sent markets tumbling: On April 18, the Dow Jones Industrial Average and the S&P 500 both recorded their biggest one-day drops in nearly a month (though U.S. Treasurys and the dollar did well). The landmark outlook downgrade reinforces what we have been saying since 2010: The United States is on an unsustainable fiscal path from which it cannot exit without political consensus. The key question is whether the gridlocked U.S. political system can respond in time to avert a bond market revolt.
The rise in public debt following a financial crisis is one of the main mechanisms by which a recovery may be supported in the short term. Typically, this happens via Keynesian consumption-smoothing across economies and income generation through the state’s redistribution of resources between economic sectors, financed by borrowing against future revenues and growth. But the flip side of this short-term recovery may be reduced post-recovery potential and actual growth: The larger public debt portends a future rise in taxes on wealth and/or income, which in turn weighs on growth and thereby on fiscal balance.
Since the precrisis leveraged asset bubble induced above-equilibrium public revenue, corporate profits and household income, wealth and spending, it is logical to expect a general reduction in net wealth, including a rise in net public debt. The capacity of the financial markets and the state to tolerate and manage that rising debt burden or adjust fiscally or structurally to reduce it will be the key to whether the markets buy the fiscal liabilities or sell them en masse.
A bond market revolt is not at all easy to engineer in the United States. There is no safer asset destination on the planet than the United States, which has the third-longest-running system of government in the world, despite being a young nation. Almost no other country’s structure of state—and hence property rights—have survived world and local wars (including defeats), economic depressions and financial and fiscal crises without major dislocations and arbitrary redistributions of wealth through inflation or more direct expropriation. The knee-jerk risk-off wave may well pass as people begin to recognize that this rating move will make little if any difference—and may even improve debt dynamics by cutting bond yields if risk-off persists. Unlike other debtor countries, the United States actually benefits from risk aversion, even domestic risk aversion, through a stronger dollar and lower bond yields, so the market impact will likely be transitory.
The United States has the most manageable fiscal issues of any major advanced economy because federal, state and local revenues as a share of GDP are very low, for cyclical and other reasons. Therefore, fiscal balance can be restored by fiscal adjustment without major economic difficulty in the near term. In the longer term, structural fiscal reform will be needed due to rising Social Security commitments. For the United States, debt sustainability is a function of political constraints. The political center has fractured as a result of the financial crisis, and healing it requires a consensus about the desired size of the state: Should the government bear the low level of responsibility of its 18-19th century libertarian predecessors or should it share the 20th century New Deal or Great Society vision of America?
The current shortage of consensus in Washington about the right balance between public and private responsibilities suggests no real action will be taken to address structural budget issues until at least after the 2013 presidential elections. On the other hand, there are now four potential plans to foster debate in Congress that would reduce the deficit by US$4-5 trillion over the next decade: the original Simpson-Bowles bipartisan proposal, the Republicans’ “Ryan Plan,” President Barack Obama’s new proposal and the impending “Gang of Six” proposal that potentially could have the most bipartisan appeal. So while formal progress will not be made until 2013, an agreement in principle that something will be done by 2013 could coalesce between 2011 and 2012.
One Response to “Wednesday Note: S&P Outlook Downgrade Reminds Washington to Do the Right Thing”
The Grizzled Fractalist • April 23rd, 2011 at 8:33 pm
The Saturated Macroeconomy’s Mathematically Perfect Predictable Albino Black Swan occurring 26 April 2011The simple math defining the operating self-balancing characteristics of Earth’s Small Macroeconomic Universe.Why did Google began its nonlinear descent 6 days earlier than the Wilshire?The macroeconomy and its integrated debt dependent, asset supply and asset valuation dependent, job and wage interdependent, asset derivative equity, bond, commodity and currency elements is a highly ordered and bounded system.The macroeconomy’s asset valuations conform to highly ordered quantum fractal patterns that confer on the the macroeconomy the characteristics of a hard science.There are only 2 to 3 trading days left in the Wilshire’s 12 August 1982 – 11 October 1990 99/247.5 month x/2.5x fractal.There is an average of 21 trading days per month. The 99 month base fractal represents 2079 trading days: 2158 trading days + 21 trading days integrated from the preceding month. The 2.5x second window has an expected 5197.5 trading days.11-12 April 2011 represented the 247 month conclusion of a 247.5 month and 5187-88th trading day of the predicted maximum 5197.5 day 2.5x second fractal. Monday 25 April 2011 represents the 5196th day with a 1.5 day final window to complete expected historical nonlinearity.Within the final 3 days and after the final saturation day on 25 April 2011 with the Dow expected to have a nonlinear gap to a 3 year high and ending on the the low of the day, the world will see its greatest nonlinear crash of equity and commodity valuation.The Wilshire will have a similar gapped higher minutely opening pattern but will not exceed its 18 February 2011, the secondary high to its predicted 11 October 2007 nominal highThe Macroeconomy’s Quantum Fractal patterns. (From the 2005 Main Page of the Economic Fractalist http://www.economicfractalist.com/ )Both the degree of valuation and the cyclical time course of valuation evolutions appear to conform to range bound near quantum-like units and quantum related Fibonacci numbers. While the absolute degree of valuation is influenced by the absolute interest rate, the percentage or proportionality changes of valuations from highs to lows and lengths of time to decay and intra-cycle nodal points appear to conform to these range bound near quantum units.The ideal growth fractal time sequence is X, 2.5X, 2X and 1.5-1.6X. The first two cycles include a saturation transitional point and decay process in the terminal portion of the cycles. A sudden nonlinear drop in the last 0.5x time period of the 2.5X is the hallmark of a second cycle and characterizes this most recognizable cycle. After the nonlinear gap drop, the third cycle begins. This means that the second cycle can last anywhere in length from 2x to 2.5x. The third cycle 2X is primarily a growth cycle with a lower saturation point and decay process followed by a higher saturation point. The last 1.5-1.6X cycle is primarily a decay cycle interrupted with a mid area growth period. Near ideal fractal cycles can be seen in the trading valuations of many commodities and individual stocks. Most of the cycles are caricatures of the ideal and conform to Gompertz mathematical type saturation and decay curves. 2005′The ideal growth (and decay) fractal time sequence is X, 2.5X, 2X and 1.5-1.6X. ‘Most of the cycles are caricatures of the ideal.”From the Wilshire’s 6 May flash crash: 12/30/24/19 days :: x/2.5x/2x/1.6xFrom the 6 May 2010 flash crash a caricatured 12/30/24/19 day or 82 day four phase x/2.5x/2x/1.6x series can be observed ending on 31 August 2010. The actual nodal lows and highs were 14/27/24/20 days with a low on day 12 of the first fractal, a lower low on day 14 pointing to a lower low second fractal ending on day 27 or 1 July 2010 (or day 29 of a 12/29 fractal) with a higher low on day 30 pointing to the subsequent valuation rise to day 24 of the third fractal and finally to a higher low on day 19 or 31 August 2010 of the fourth fractal.This 6 May 2010 to 31 August 2010 12/30/24/19 day or 82 day four phase growth and decay fractal series serves as the base fractal for maximum growth on 2x: 184 days series occurring on 25 April 2011(Good Friday 22 April was a trading holiday. This final growth day is within 1-2 days of the very terminal portion of a maximum 5197.5 :: 2.5x to the 2158 day 12 Aug82 to 11 Oct base.’The ideal growth (and decay) fractal time sequence is X, 2.5X, 2X and 1.5-1.6X. ‘Most of the cycles are caricatures of the ideal.” “A sudden nonlinear drop in the last 0.5x time period of the 2.5X is the hallmark of a second cycle and characterizes this most recognizable cycle. After the nonlinear gap drop, the third cycle begins. This means that the second cycle can last anywhere in length from 2x to 2.5x.”The 6 May 2010 flash crash was itself contained within the third 12 day subfractal of a 31 March 2010 6/15/12/9 day :: x/2.5x/2x/1.5x fractal and was at the 221 day second fractal terminal nonlinear 2x-2.5x end of the 6 March 2009 88/221 day :: x/2.5x fractal with two trading days of the 221 days half trading days. 6 May 2010 was the 208th day of the 221 day second fractal sequence.SYNCHRONIZED SECOND FRACTALS”A sudden nonlinear drop in the last 0.5x time period of the 2.5X is the hallmark of a second cycle and characterizes this most recognizable cycle. After the nonlinear gap drop, the third cycle begins. This means that the second cycle can last anywhere in length from 2x to 2.5x.”As of 24 April 20111695 93/222 years In the terminal 2nd fractal 2x-2.5x window1788 70/153 years In the terminal 2nd fractal 2x-2.5x window1982 99/247 months In the very extreme 2nd fractal 2x-2.5x windowOct 1998 50/103 months In the terminal 2x-2.5x 2nd fractal window10 Oct 2008 185/453 days In the extreme terminal 2nd fractal window6 May 2010 82/163 days (25 April is the 2x 164th day (and expected final high for the DJIA)16 Mar 2011 9.5/18 days 25 April is day 2x or 19 of 9.5/19 days and the expected final high for the DJIA25 April 2011 will be the final high the DJIA, ideally characterized by a minutely opening gap to a nonlinear higher high and ending on the low of the day.Why 18 February 2011 was the final high for the Wilshire?The Fibonacci saturation ratio : 1.618Both the degree of valuation and the cyclical time course of valuation evolutions appear to conform to range bound near quantum-like units and quantum related Fibonacci numbers. While the absolute degree of valuation is influenced by the absolute interest rate, the percentage or proportionality changes of valuations from highs to lows and lengths of time to decay and intra-cycle nodal points appear to conform to these range bound near quantum units.Fibonacci ratios of 0.6 and 1.6 characterize maximum growth and decay in a maximally saturated range bound system. The 4th decay fractal time ratio is ideally 1.6x of the base : x/2.5x/2x/1.6x.The Wilshire is such a saturated system. the nodal of the 52 second week fractal from to 8 July 2009 to 1 July 2010 spanned 247 days. The ideal base fractal x of a 2.5x : 249 day fractal would be 99.6 days. 1.618 x of this base fractal is161.1 days.For the Wilshire 18 February 2011 was the 162th day after the second fractal low on 1 July 2010.The Wilshire represents all US equities. It is supported by the total speculative available wealth. The 1.618x third fractal 100/249/162: x/2.5x/1.6x 18 February 2011 will not be exceeded. The 2x 200 day of the third fractal 100/249/200 lies as the 7th midpoint day between the Wilshire’s 18 February secondary averge high on 6 April 2011 and the expected final secondary high on 25 April 2011.Why did GOOGLE collapse 6 days before the Wilshire’s 26 April collapse?Google’s 10 October 2008′s base fractal of 31/70/84 days was 2-4 days shorter than the Wilshire’s 31/70/86-88 day base fractal.The equity and commodity collapse on 26 April 2011 will be the greatest in historical. Unprecedented nonlinearity can be explained in the simple nonstochastic saturation macroeconomic mathematical quantum fractal models described above and in 2005 The Economic Fractalist.Just like the ordered connectivity among energy particles in physical energy space universe and descriptive mathematical models, there is connectivity between the asset valuation parts of the macroeconomic universe. Time ordered growth and decay and interconnectivity of the macroeconomic system may have analogous time ordered fractal growth and decay and connectivity of subatomic energy particles and larger mass-energy elements in the energy space universe.
