Osama bin Laden, according to CNN, has been killed in a firefight with US forces in Pakistan and his body has been recovered.
Almost a decade ago, bin Laden, in hopes of, according to some reports, inspiring a jihad and bleeding US financial strength, inter alia, directed the attacks on the Twin Towers and Washington D.C.
Now, only his ghost remains. The jihad he hoped to inspire has thus far been thankfully quashed, but the US has been bleeding financially for that decade.
What next?
Aside from a substantial increase in Prez. Obama's political capital, which might deflect the right wing's attempts to dismantle the welfare state, inter alia, (and thus indirectly shift market sentiment, to wit, increase negative sentiment on US bonds) direct effects on market psychology and prices (and eventually the underlying fundamentals), at first blush, include:
1) A temporary (duration dependent on, inter alia, announced US policy changes in the next few days) resurgence in $ assets, and consequent decline in Gold and Silver. A rise in US debt market prices. A decline in oil prices.
2) Increased speculation on oversea troop levels in Afghanistan- will they be brought home, will they be redeployed, will they remain the same?
3) Will the Islamic world, in the event troops remain in Afghanistan or are redeployed either in Iraq or Libya, come to the view that US peacemaking after Osama is colonialism in disguise?
4) Medium term, a status quo military presence in the Islamic world, with a significant cause célèbre removed, will not only continue to negatively impact the US budget, it may also increase Islamic resistance (thus further increasing the price of military action), and reduce foreign willingness to finance what may seem more like colonialism than peacekeeping.
The ball is in the Obama administration's court. Like 9/11, this is a key pivot point.
Much has changed in the US over the past 10 years. Will this opportunity to change course be grasped, as a similar opportunity was grasped in the aftermath of 9/11? Will the story simply fade from media consciousness in a few days- signaling an opportunity squandered (or deftly avoided depending on perspective)? What, if any, will the new course be?
From a financial perspective, this seems to me a wonderful opportunity to begin to significantly reduce military expenditure without losing face at home. US military adventures abroad since 9/11 brought forward the US budget's "day of reckoning" by many years. Either the US buys some time by reducing such expenditure or the financial day of reckoning will continue to creep forward.
Without the goal of bin Laden's capture as cloak of respectability, assuming military deployments continue unchanged, the financial day of reckoning might leap instead of creep forward as foreign demand for US debt and willingness to sell oil "cheaply" dries up further.
Ten years ago the world went to war.
What next?
Full Disclosure: Long Gold
Showing posts with label Budget. Show all posts
Showing posts with label Budget. Show all posts
Sunday, May 01, 2011
Tuesday, February 15, 2011
US Budget: Entitlement Funding Inflection Points
Within a decade there will no longer be additional surplus funds to be used to purchase US bonds which will have to then be sold on the open market. Call it peak SS Trust Funds, although peak trust might be even more apt. Captive Bidding at the auction: How Bond Vigilantism was swamped
A few years ago, I shared my concerns about Social Security and other entitlement program funding (see above and A New Head: Imagine there's no Social Security Fund). Mine was no voice crying in the wilderness (I'm not that clever), but one of a chorus singing to an audience of deaf policy makers (perhaps my off-key voice was disturbing). These underfunded entitlement programs, according to those in charge at the time, wouldn't be an issue for 10 or more years.
While it has only been 3 years and 4 months since I shared my concerns, the underfunding, in my view, is likely to become a big issue, not just amongst TV's talking heads, but in trading rooms around the world, this year- we are near to reaching an entitlement funding inflection point- mainly due to the sharp rise and long duration of unemployment, which will have, I believe, a profound effect on the US bond market.
The inflection point- when the lack of surplus entitlement funds forces the Treasury to fund the entire deficit in the open market- will force bond investors, if they haven't already, to take a fresh look as US Federal finance at the worst time- a look that will include concerns like the following:
The language of the Social Security Trust Fund gives the illusion that it is an investment fund with tradable economic assets that can be held until needed to pay the benefits of future employees. But it is a fund in name only. It holds no real assets. Consequently it does not generate funds to pay future benefits. These so-called trust fund “assets” (essentially US Treasury IOUs) simply reflect the accumulated sum of funds transferred from Social Security over the years to finance other government operations. Former Congressional Budget Office Director June O’Neill
In an earlier post on the topic I argued (facetiously):
If the SS Trust Fund doesn't really exist, the national debt is at least $2T less than the current $9.05T. Under that head, the debt ceiling hasn't been a "real" issue for many years. In the language of my last post, it isn't that a large portion of the Treasury Market is captive, the US National Debt is actually far smaller, by at least $2T, than assumed. If all intergovernmental holdings are essentially fictitious accounting entries, the US Federal Public Sector debt to GDP ratio is actually 37%
While the Trust Fund doesn't exist except as fictitious accounting entries, the liabilities thereof most certainly do (assuming we don't want a replay of recent Egyptian protests here in the US). Just as entitlement surpluses reduced borrowing requirements and kept US bond yields much lower than they would otherwise have been, entitlement deficits will increase borrowing requirements and, I believe, push US bond yields much higher than they would otherwise be.
At this key inflection point, instead of subtracting "intragovernmental holdings" (the euphemism for the fictitious trust fund assets, now totaling some $4.6T) from total debt (leaving a 65% debt to GDP ratio), the total debt figure (nearly 100% of GDP) must be used to perform credible analysis, like calculating interest payments. This may explain the rather curious (to my mind) forecast of entitlement surpluses for many years ahead in the President's Budget. Once the surpluses become deficits the unfunded liabilities previously hidden by cash accounting methods become active just as an option, which wasn't delta hedged- option lingo for net present accounting- becomes active when its strike price is crossed. (a wonderful description of the different accounting methods can be found here)
Call it "Fiscal death, Derivatives-style."
Entitlement Funding, Long Term Unemployment and Bond Yields
As noted earlier, the rise and duration of unemployment has brought the "moment of truth" forward by reducing entitlement receipts (unemployment reduces tax receipts) and increasing outlays (formerly employed retirement aged people begin receiving SS). Fiscal Year-to-date, the off-budget surplus is just $25B, a 50% reduction from the same period last year.
The baby boomer rush to retirement has not only begun, it has been accelerated by the employment recession. Moreover, the cap on SS taxes means that an income surge among high earners, which might raise GDP, will do little to raise entitlement receipts. The only solution to that problem is employment, and lots of it.
That solution, however, carries its own fiscal risks. Rising employment means rising consumer demand (especially for gas to drive to work again) and thus, in all likelihood, higher inflation. Higher inflation (the President's Budget forecast assumes inflation remains at or under 2% through 2016) means higher interest charges on the debt stock and increased SS outlays as COLAs rise. This sunny forecast assumes no disruptions in foreign appetite for US debt.
Interestingly we may have reached a "damned if you do and damned if you don't" point with respect to employment data driven bond market reaction. If unemployment remains the same or rises, and trust fund deficits need to be financed from general receipts, bond yields should rise due to increased supply. If unemployment starts to fall as one would expect in a normal recovery, bond yields should rise as inflation pressures increase.
Geez, maybe that's why bond yields have been rising lately?
Full Disclosure: Short US Treasuries
A few years ago, I shared my concerns about Social Security and other entitlement program funding (see above and A New Head: Imagine there's no Social Security Fund). Mine was no voice crying in the wilderness (I'm not that clever), but one of a chorus singing to an audience of deaf policy makers (perhaps my off-key voice was disturbing). These underfunded entitlement programs, according to those in charge at the time, wouldn't be an issue for 10 or more years.
While it has only been 3 years and 4 months since I shared my concerns, the underfunding, in my view, is likely to become a big issue, not just amongst TV's talking heads, but in trading rooms around the world, this year- we are near to reaching an entitlement funding inflection point- mainly due to the sharp rise and long duration of unemployment, which will have, I believe, a profound effect on the US bond market.
The inflection point- when the lack of surplus entitlement funds forces the Treasury to fund the entire deficit in the open market- will force bond investors, if they haven't already, to take a fresh look as US Federal finance at the worst time- a look that will include concerns like the following:
The language of the Social Security Trust Fund gives the illusion that it is an investment fund with tradable economic assets that can be held until needed to pay the benefits of future employees. But it is a fund in name only. It holds no real assets. Consequently it does not generate funds to pay future benefits. These so-called trust fund “assets” (essentially US Treasury IOUs) simply reflect the accumulated sum of funds transferred from Social Security over the years to finance other government operations. Former Congressional Budget Office Director June O’Neill
In an earlier post on the topic I argued (facetiously):
If the SS Trust Fund doesn't really exist, the national debt is at least $2T less than the current $9.05T. Under that head, the debt ceiling hasn't been a "real" issue for many years. In the language of my last post, it isn't that a large portion of the Treasury Market is captive, the US National Debt is actually far smaller, by at least $2T, than assumed. If all intergovernmental holdings are essentially fictitious accounting entries, the US Federal Public Sector debt to GDP ratio is actually 37%
While the Trust Fund doesn't exist except as fictitious accounting entries, the liabilities thereof most certainly do (assuming we don't want a replay of recent Egyptian protests here in the US). Just as entitlement surpluses reduced borrowing requirements and kept US bond yields much lower than they would otherwise have been, entitlement deficits will increase borrowing requirements and, I believe, push US bond yields much higher than they would otherwise be.
At this key inflection point, instead of subtracting "intragovernmental holdings" (the euphemism for the fictitious trust fund assets, now totaling some $4.6T) from total debt (leaving a 65% debt to GDP ratio), the total debt figure (nearly 100% of GDP) must be used to perform credible analysis, like calculating interest payments. This may explain the rather curious (to my mind) forecast of entitlement surpluses for many years ahead in the President's Budget. Once the surpluses become deficits the unfunded liabilities previously hidden by cash accounting methods become active just as an option, which wasn't delta hedged- option lingo for net present accounting- becomes active when its strike price is crossed. (a wonderful description of the different accounting methods can be found here)
Call it "Fiscal death, Derivatives-style."
Entitlement Funding, Long Term Unemployment and Bond Yields
As noted earlier, the rise and duration of unemployment has brought the "moment of truth" forward by reducing entitlement receipts (unemployment reduces tax receipts) and increasing outlays (formerly employed retirement aged people begin receiving SS). Fiscal Year-to-date, the off-budget surplus is just $25B, a 50% reduction from the same period last year.
The baby boomer rush to retirement has not only begun, it has been accelerated by the employment recession. Moreover, the cap on SS taxes means that an income surge among high earners, which might raise GDP, will do little to raise entitlement receipts. The only solution to that problem is employment, and lots of it.
That solution, however, carries its own fiscal risks. Rising employment means rising consumer demand (especially for gas to drive to work again) and thus, in all likelihood, higher inflation. Higher inflation (the President's Budget forecast assumes inflation remains at or under 2% through 2016) means higher interest charges on the debt stock and increased SS outlays as COLAs rise. This sunny forecast assumes no disruptions in foreign appetite for US debt.
Interestingly we may have reached a "damned if you do and damned if you don't" point with respect to employment data driven bond market reaction. If unemployment remains the same or rises, and trust fund deficits need to be financed from general receipts, bond yields should rise due to increased supply. If unemployment starts to fall as one would expect in a normal recovery, bond yields should rise as inflation pressures increase.
Geez, maybe that's why bond yields have been rising lately?
Full Disclosure: Short US Treasuries
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