First the real stuff, then the Wheelchair Accessible Fiscal Door Sill.
Long-term interest rates rose sharply this week, the 10-year T-note’s 1.93 percent the highest since last April, and mortgages above 3.5 percent, the top since summer.
Three forces are in play: First, December meeting minutes released yesterday suggested the Fed may scale back or end QE4 bond-buying this year; second, hints of a better economy; and third, markets less than thrilled by fiscal substance-abusers.
Fear of Fed reversal is overdone. It is buying $85 billion a month in Treasurys and MBS, a $1 trillion per year pace that was never likely to continue for long.
The Fed’s commitment to a zero percent cost of money stands unchanged, linked to a 6.5 percent unemployment rate (not soon), and that zero percent cash will hold down long-term rates. Nearly every Fed forecast for the economy since 2008 has been wrong on the high side, and the economy is now entering protracted period of fiscal drag.
As always the economy trumps all, and the first week of each month brings the freshest data. December payrolls grew on forecast — 155,000 jobs, but no change in trend.
The ISM manufacturing index in December flipped from just below stall speed at 49.5 to just above, 50.7; and its service-sector twin popped from 54.7 to 56.1. No recession, no acceleration; theories behind either are as suspect as ever since 2009.
The Cliff. The politics of this week’s resolution say a lot.
Imagine if in mid-November the president gathered the usual suspects and said, "We all know we’ve got to rig a miniature deal by New Year’s Day. We have a series of tough collisions ahead, ugly ones, but just this once, nothing at stake but easy horse-trades, how about we let the country think we know what we’re doing, smile a lot, say ‘bi-partisan’ in every other sentence, and carve this baby up by Thanksgiving?"
Our assessment of blame for bad politics is blinded by our biases: Boehner is impossible, or the Tea Pots are to blame, or Reid, or Obama. But how this week’s deal got done requires a lift of the ol’ eye patch.
At all accounts, by the Sunday before New Year’s Day, the only person able to get out of the box was anti-telegenic Sen. Mitch McConnell (R-Ky.), the tough and smart Minority Leader, who picked up the phone to Joe Biden and said, "Can anybody down there cut a deal?" ("Down" is the physical slope of Capitol Hill to the White House.)
Joe Biden has been treated from day one as the Official Fool by the court of Prince Barack. Funny Old Joe. Can’t stop talking, says crazy things, has impossible ideas, like Afghanistan is a bust to be escaped quickly. Cartoon-relic politician. Doesn’t get the transformational importance and infallibility of the Prince.
Within 36 hours and without a public word, Old Joe and McConnell had a deal. The Prince is a professor whose key skill is lecturing established wisdom. He has not progressed as a negotiator, although new opportunities lie immediately ahead in the debt limit and the State of the Union agenda. Also in the choice of a new Treasury secretary. We need someone like Erskine Bowles, but it looks as though we’ll get Jack Lew, current White House chief of staff, another lawyer/professor ignorant of markets.
In the last years’ fiscal arguments, the Right-side Republicans win the prizes for bad manners and stingy vision. However, the Left takes the overall crown for "Who took my cheese?"
Inclusive of this mini-Cliff deal, the 2013 federal deficit will remain about $1 trillion. As is, the deficit will fall by 2015 to $750 billion, but no Fed to buy the bonds. Then by 2017 the inexorable rise to $1.25 trillion in 2022, and $2 trillion and beyond by 2030, Medicare, Medicaid, and Social Security alone consuming all tax revenue in 2035.
If the economy does better, then tax revenue will go up. But this week’s all-tax-no-cut deal already includes a lot of those expectations for new revenue. Can’t jack ’em forever. Whether the economy does better or not, one year soon we’ll pay more to roll over five-year T-notes than today’s 0.75 percent. Each percentage point increase will add $150 billion to each of those future-annual deficit numbers, depending on how much we’ve borrowed by then.
And you, on the Left, think those debt-limit votes are a tiresome sham?