Saturday, January 29, 2011

Raising the Debt Ceiling

There will be a vote this spring on raising the debt ceiling. If I am not mistaken the Treasury has maxed-out the current ceiling. After all these years of raising the debt-ceiling, this is probably the first year this will watched as a sporting event. From CNNMoney.com:

Bond experts to Congress: Turn down the volume on the debt ceiling.

Some lawmakers are hoping to use the upcoming vote to raise the cap on federal borrowing as do-or-die time for fiscal responsibility. They say they will only support an increase if Congress goes along with spending cuts.

But bond experts say Congress is engaged in risky business. They say lawmakers should not use the debt ceiling as an artificial deadline for deficit reduction. Instead, lawmakers should focus on crafting a comprehensive long-term plan for fiscal responsibility.

The bond market wants to see a "vision on deficit reduction but not within a politically sensitive time frame," said Jim Vogel, head of interest rate strategies at FTN Financial.

The world's largest bond investor thinks the saber-rattling is ill-advised.

"It's the wrong way to do it. Obviously I'm all for a move to a balanced budget over time. But this is like imposing the death penalty for shoplifting," Bill Gross, founder of PIMCO, told the Associated Press.

Indeed, said William Larkin, fixed income portfolio manager at Cabot Money Management, "Politicians are not always aware of cause and effect. ... You don't want to create a firestorm."

The decision to raise the debt ceiling -- which governs how much the Treasury is allowed to borrow -- is often incorrectly equated with an agreement to spend more money. In fact, the need to raise the debt ceiling reflects prior legislative decisions that both Democrats and Republicans have made to spend more.

The bond experts CNNMoney spoke to still believe the debt limit will be raised eventually.

But the way it's raised matters, they say.

"A debt ceiling fight is going to confuse global investors not accustomed to the sometimes Byzantine fights in Washington," Vogel said.

If the market sees the fight as a temporary phenomenon it shouldn't have a major impact, said Calvin Sullivan, chief strategy officer of fixed-income capital markets at Morgan Keegan & Co.

But if the fight is long and ugly before the ceiling is raised, there could be fallout.


Thursday, January 27, 2011

More State Jobs on the Chopping Block


It looks like more state employees are at risk of losing their jobs. In addition there will be other cost reducing initiatives by some states. When will the same thing start happening to Federal employees and the military? I don't think the issue is if this will happen or should this happen. It is a matter of when it will happen. From CNNMoney.com for the complete article:

There will be lots more state workers joining the unemployment line this year.

Public employees are getting hit hard in the latest round of spending cuts as state officials look to close billion-dollar deficits. Governors across the nation are promising to eliminate thousands of positions and freeze or reduce salaries.

Texas lawmakers are proposing shedding 9,300 jobs, while Georgia's governor said he'd erase 14,000 positions. New York's governor is looking to lay off more than 10,000 workers and freeze salaries. And California's and Nevada's governors are proposing pay cuts of up to 10% and 5%, respectively.

Though state workers have suffered years of furloughs and downsizings, this year could prove to be the toughest yet. Federal stimulus money that kept many on the job is drying up, and some newly elected officials are bent on shrinking the role of the state.

"Many politicians have long talked about reducing the size of the government," said Georgia Gov. Nathan Deal in his State of the State address earlier this month. "My friends, we are doing it."

Public sector jobs were long thought to be more secure during economic downturns. But that's not been the case during the Great Recession. State and local governments have shed 397,000 jobs since August 2008, falling to their lowest level since the late 1980s, according to the Center on Budget and Policy Priorities. . . .


S&P Cut Japan's Credit Rating

S&P reduced the credit rating of Japan. The sovereign debt of Japan stands at about 200% of GDP. In comparison the US public debt is about 96% of GDP. The full story can be found at the Financial Times:

- http://www.ft.com/cms/s/0/095efb70-29f3-11e0-997c-00144feab49a.html#ixzz1CEr9kG5Z

Standard & Poor’s has cut Japan’s sovereign debt rating for the first time since 2002, saying the government lacks a “coherent strategy” for dealing with its soaring state debt.

The cut, which puts S&P’s domestic and foreign ratings for Japan on a par with those of China, underscores concerns about the long-term fiscal prospects of the world’s third-largest economy.

While there are no signs that Japan faces an immediate debt crisis, and government bond yields remain very low by international standards, worries have been growing about the state’s ability to rein in a gross debt burden expected to soar above 200 per cent of gross domestic product this year. . . .

. . . . The cost of insuring Japan’s sovereign debt against default widened 4 basis points to close at 84 basis points in Tokyo, according to Markit. That is still some way off the record of 120 basis points. The downgrade generated fresh concerns in Europe where the spreads on Italian and Belgian sovereign CDS widened, Markit said.

The downgrade means S&P has a lower rating on Japan’s long-term debt than Moody’s, which currently has a rating of Aa2.