I suspect much (but not all) of the GOP’s new spending cut proposals and the beginning of political season will end up as ungovernable, destabilizing rhetoric. Even so, this approach has key elements that illustrate in spades that the days of continual stimulus and backing up the Gumnut truck to fill the trough are numbered. Federal supports in key areas are being scaled back. The battleground areas for the Republican legislators are spelled out primarily as repeal of the FMAP Medicaid increase totaling $16 billion, and repeal of the remaining stimulus of $45 billion.
These are programs that run out and sunset this fiscal year, so the real message is that they won’t be extended (referred to as the “ARRA or stimulus cliff”). The wild card would be some paring back in the current fiscal year. Also because Republicans won’t cut defense (a mistake) this will result in an immediate crisis at the state level particularly in education and in human services for the growing deluge of poor, coupled with public safety cutbacks and prison releases. Throw in nasty food and energy inflation and the prospects for a long hot summer look quite likely.
The other big ticket GOP item is the actual privatization of Freddie Mac and Fannie Mae. Again this aspect is rhetoric up to a point. Funding issues for these agencies to receive additional bailouts from Congress would have to be characterized as problematic, at least without a serious crisis. Another area being targeted is a payroll freeze for all government workers combined with a work force reduction.
These moves are worth paying attention to not because they seriously deal with out of control deficits, but because they remove government supports at the margin, especially for the states. President Hopium’s program used bloated government work forces for economic stabilization purposes. Thus if these Republican proposals even half stick to the wall, the economic effect will be pronounced and immediate. At this stage, government spending needs to be sustained and possibly even increased to maintain the artificial economy. There is still a high expectation for more bailouts in the investment community. Throw a curve-ball at those elements and we get a Wile E Coyote outcome. This is not a judgment on proper policy, as it is too late for that, but just the facts as they are in the field.
Proving that bailing out international banksters and bondholders is not at all politically popular, Ireland’s ruling government dissolved this week. More and more, the term “haircut” is being heard. Haircuts involve removing Gumnut supports and allowing financial interests to take the hit. This is not just isolated to Ireland and Greece, and could rapidly become epidemic. The same formula will apply in the US given the players and the politics.
I am surprised that so little attention is being given to the continued high overnight SHIBOR lending rate in China. Although this is being described as a liquidity issue, and the dog ate the homework excuse of seasonal factors such as Chinese New Years, to me this is a sign of a massive, unsustainable Ponzi scheme in serious stress.
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