Sorry to be the pessimist, but even if Congress reopens the government and agrees on lifting the debt ceiling, we’re in for a rocky ride come the new year. Welcome to the year of the groundhog. By Daniel Gross
The budget wars are almost over! Long live the budget wars!
On Monday night the contours of a deal to defuse the ticking fiscal bomb emerged in the Senate. The government would reopen and stay funded through January, and the debt ceiling would be increased to get the nation through February. The Affordable Care Act would remain essentially intact. The two houses of Congress would agree to hold talks about long-term budget deficits. In other words – take two delays and agree to keep arguing over the same topics in the morning.
Tuesday, the House GOP reacted to the emerging deal by throwing its usual fit. But the histrionics in that caucus are simply a prelude to an ultimate cave. In the end, as he always does, Boehner will turn to Democrats and the minority of sane Republicans to pass a crisis-defusing deal. Whether a resolution comes today, Wednesday, or Thursday, it is likely to closely resemble the nascent Senate deal.
The shutdown according to everyone else.
Bondholders, government employees, contractors, and beltway types whose weekends have been ruined by incessant brinksmanship may breathe a sigh of relief. The markets were placid Tuesday morning. But don’t be mistaken. Even if this deal passes, it won’t represent a major breakthrough. And we are likely to get more of the same – government-imposed austerity, uncertainty, excessive focus on short-term deficits, and brinksmanship that kills confidence and harms the real economy.
The great irony of this episode, in which Republicans have engineered a massive crisis in the name of confronting deficits, is that we are living in a Golden Age of Deficit Reduction. The August 2011 debt ceiling stalemate set into a motion a set of actions that would lead to deficit reduction – the Budget Control Act, the sequester, the fiscal cliff resolution. Those measures, combined with continued sustained growth and increasing taxes, have helped pare the deficit.
Low clouds and fog roll across Washington at sunrise on Oct. 15, 2013 as Congress continues to negotiate their way free from the budget standoff that has shutdown many part of the U.S. government for 15 days. (J. David Ake/AP)
When the normally level-headed titans of high finance start to sell off in a frenzy, you know things are bad. Daniel Gross on the debt ceiling's newest freak out.
The Davos crowd – bankers, finance ministers, central bankers, large-asset managers – is generally not prone to panic. These are people who traffic in incremental change, who wear stiffer upper lips to match their bespoke suits, who avoid hyperbole the way they avoid flying coach.
Traders work on the floor of the New York Stock Exchange October 10, 2013. (Richard Drew/AP)
But as the U.S. government remains shut down for a third week, and as America careens toward the debt ceiling, this normally unflappable crowd is starting to sweat. It’s as if they haven’t been paying attention to the absurd pageant of brinksmanship that has been playing out in Washington over the last few years, and are only now waking up to the horror that one house of Congress – and hence a branch of government – is essentially controlled by a group of people who care not a whit for the prerogatives of global bondholders.
Fidelity Investments, among the largest, most-sober asset managers in the world, said it had sold the short-term government bonds held in its money-market mutual funds that were supposed to mature around the debt ceiling cut-off date. In theory, it sounds like a smart move. Who wants to be caught holding the bag if Republicans really decide not to raise the debt ceiling? And since investors tend to treat money-market funds like cash, it makes sense for funds to maintain maximum flexibility. In practice, though, perhaps it was not a particularly smart move. One way or another, the government will pay the interest and principal on the bonds in time. And should the government actually default on those bonds, the evasive maneuver won’t really count for much. The bonds sold account for only a small percentage of the company’s overall U.S. Treasury bond holdings, which are sprinkled liberally throughout other Fidelity mutual funds. And their value would surely plummet in the event of a default.
Over the weekend, there were two big events in the world of global finance: the annual meetings of the International Monetary Fund and the Institute of International Finance. Each featured panels and events at which very high-profile speakers spoke in near-apocalyptic terms about the situation in Washington.
At the IMF confab, one of the most well-attended sessions was a panel on restructuring sovereign debt. (The subtext was that, instead of sussing out how a restructuring of Argentinian or Malaysian debt might look, the world might have to think about what a restructuring of America’s much larger debt might look like.) On Sunday, IMF Managing Director Christine LaGarde appeared on Meet the Press and warned that casting doubt on the credibility of America’s bond offerings could push the global economy into recession for only the second time since World War II. “If there is that degree of disruption, that lack of certainty, that lack of trust in the U.S. signature, it would mean massive disruption the world over,” she said. Jim Hong Kim, the former Dartmouth president who now helms the World Bank, said the global economy is “days away from a very dangerous moment.”
At the IIF annual meeting, a parade of big-shot bankers – guys whose empires are perched on mountains of private- and public-sector debt – sounded the toxins. The relative calm in the markets simply can’t be trusted. “As you get closer to it, the panic will set in and something will happen,” said Jamie Dimon, chief executive officer of J.P. Morgan Chase. “I don’t personally know when that problem starts.” While Dimon didn’t say the bank had been dumping government bonds, its highly paid employees are busy doing the equivalent of filling sandbags and buying bottled water. Dimon said that the bank is “spending huge amounts of time and money and effort to be prepared.”
Bankers, who generally traffic in hard data and soothing bromides, are instead speaking in sound-bites that could be cribbed from an apocalypse-movie trailer. Here’s Jamie Dimon in the Wall Street Journal: a default “would ripple through the global economy in a way you couldn’t possibly understand.” Anshu Jain, the head of Germany’s giant Deutsche Bank, compared a default to a deadly virus – “a rapidly spreading fatal disease.” One gets the impression that were the bond market open today (it’s closed for Columbus Day) bankers would be quietly trying to dump large quantities of short-term bonds.
No one likes a shutdown. But Starbucks CEO Howard Schultz’s petition for a bipartisan solution is just absurd. The GOP made this mess, and the GOP oughtta fix it, writes Daniel Gross.
For the record, I love Starbucks. I’ve got a Starbucks card in my wallet. I regularly wow bystanders by brandishing the Starbucks mobile payment app on my iPhone. At home, I start the day by scooping out a couple of heaping tablespoons of Starbucks espresso roast into my Breville machine.
Chairman Howard Schultz of Starbucks. (Junko Kimura/Getty)
But I was a bit dismayed by this morning’s news that Starbucks CEO Howard Schultz is spearheading a nonpartisan drive to jolt Washington into action. On the company’s home page there’s a plea to “our leaders in Washington, D.C.” to come together to reopen the government, pay our debts, and “pass a bipartisan and comprehensive long-term budget deal by the end of the year.”
That isn’t doppio. It’s dopey-yo.
Why is this annoying? Look, it isn’t D.C. leaders who have shut down the government and refuse to open it. It isn’t Washington that is blithely threatening not to meet our collective financial obligations. And it isn’t D.C. leaders who are refusing to enter negotiations about a longer-term budget deal. Rather, it’s Republicans behind all three. The debt-ceiling brinksmanship and government shutdown are pure Republican enterprises. Even professional centrists like Tom Friedman are acknowledging as much.
In the past couple of decades, there have been plenty of bad outcomes that Washington produced that were bipartisan: the Iraq War, the deregulation of the banking sector, letting Alan Greenspan run the Federal Reserve for 19 years. But the shutdown and the debt ceiling brinksmanship isn’t one of those outcomes.
Worse, the events were engineered, from the beginning—transparently and directly—by a group of people who identify themselves in opposition to Starbucks and everything it stands for. Senators Ted Cruz and Mike Lee identify with the Tea Party, not the Coffee Party. It is very common for conservatives to use “latte-sipping” as an epithet. Indeed, the very idea of Starbucks – the fair trade coffee, the emo acoustic music, the effete foreign offerings (vanilla scones? croissants?) – is much more attuned to liberal sensibilities than conservative ones. Starbucks may be a global corporation, and has a presence in every state. But it’s a blue-state company. It’s based in liberal Seattle, and thick in university towns, high-end suburbs and urban areas. According to the company’s store locator, Caspar, Wyoming, has three Starbucks stores. I’m pretty sure there are intersections in Manhattan that have more than that.
The disagreements carry over into policy. Starbucks believes in global warming and climate change; today’s Congressional Republicans, not so much. Last month, Starbucks told customers it would really, really prefer that they don’t bring weapons with them into company stores. Schultz has come out in favor of a higher minimum wage. He’s for same-sex marriage, and told stockholders who disapproved of his company’s stance that they should just sell their shares and move on.
The guys on Wall Street will report to a woman as their boss—but that isn’t what’s truly remarkable. For the first time in a generation an actual Democrat will be in charge of monetary policy.
After months of indecision and the flotation—and puncturing—of a Larry Summers trial balloon, President Obama is set to nominate Janet Yellen to be the next chair of the Federal Reserve.
Janet Yellen speaks at the National Association of Business Economics (NABE) 2013 Economic Policy Conference in Washington, D.C. on March 4, 2013. (Joshua Roberts/Bloomberg, via Getty)
The fact that Yellen,the current vice chair of the nation’s central bank, is a woman isn’t the most remarkable historical fact about her impending appointment. Of course, that is remarkable. For the first time in their careers, the heads of Wall Street’s investment banks and hedge funds will, in effect, be reporting to a woman as their boss. No, the remarkable fact is this: for the first time in a generation, an actual Democrat will be in charge of monetary policy.
At the presidential level, we seem to be in an age of Democratic dominance. Democrats have won the popular vote in five of the last six presidential elections, and seem to hold a structural advantage given the nation’s changing demographics. Democrats have sat in the White House for the 13 of the last 21 years. And yet, when President Clinton and President Obama had the opportunity to name a head of the Federal Reserve, they chose to leave in place the man appointed by their Republican predecessors. Clinton reappointed Reagan appointee Alan Greenspan twice (in 1996 and 2000), and Obama reappointed Bush appointee Ben Bernanke in 2010.
They did so for a couple of reasons. First, the markets like continuity, and dislike abrupt changes. Greenspan was presiding over a broad expansion when he was reappointed. Bernanke was nursing the traumatized economy through a halting recovery when he was re-upped. Also, as is often the case with Pentagon appointments, there’s a presumption (wrong, it turns out) that lifelong Democrats aren’t cut out for the job. To compensate for the party’s perceived historic weakness in a policy area, Democratic presidents have occasionally felt the need to appease the markets, CEOs, and business by installing people in the position who don’t always share their political and economic views.
This is not to say that Bernanke has been working at odds with the Obama administration. Far from it. In fact, the mild-mannered Bernanke has proven to be quite aggressive in using unorthodox tools to spur the economy as it recovered from the financial crisis and has labored under Republican attempts to impose austerity and generally sandbag economic growth. In the absence of any fiscal stimulus (and in the presence of a very large fiscal anti-stimulus), Bernanke has been furiously creating new money to purchase bonds in an effort to keep interest rates low and spur growth. For his sins—the quantitative easing efforts that are continuing—the lifelong Republican has become a hate object among large sections of the GOP base.
In that regard, Yellen, 67, won’t represent much of a departure from Bernanke. But she will bring another dimension to the role, which has nothing to do with her gender. The Federal Reserve famously has a dual mandate. It is supposed to fight inflation while promoting full employment. In recent years, it has done a fabulous job of the first. Despite the carpings you’ll hear from economically illiterate right-wingers, inflation has been, and remains, remarkably muted. On the second, by its own measure, the Fed has fallen down on the job. The official unemployment rate remains at 7.3 percent, while a broader measure of underemployment, which takes into account part-time workers and people who have dropped out of the labor force, stands at 13.7 percent.
While Bernanke wasn’t exactly indifferent to the poor labor situation, it didn’t appear to keep him up at night. He didn’t use his bully pulpit to urge Congress (or the White House, for that matter) to do much about it. And earlier this year, his Federal Reserve indicated that it would start reducing the amount of its support for the economy even as unemployment remained quite high.
If 1995 is any guide, the government shutdown won’t be too bad, right? Wrong, says Daniel Gross. Ours is a very different economy.
I’m generally an optimist about the resilience of the U.S. economy, its ability to bounce back from shocks and power through disasters, whether they’re imposed by nature, markets, or politics. But today, four years into an expansion that few people saw coming, I’m more pessimistic than many about the impact of the shutdown.
President Barack Obama answers a question during a press conference in the Brady Press Briefing Room at the White House. (Jewel Samad/AFP/Getty)
The predictions have come fast and furious. The shutdown costs $300 million in lost gross domestic product per day, according to IHS Global Insight. Economists surveyed by Bloomberg last week said a one-week shutdown would reduce fourth quarter GDP growth by .1 percent. Macroeconomic Advisers, one of the most sober and best forecasters, said a two-week shutdown could shave .3 percent off the fourth quarter. Neil Irwin at the Washington Post has helpfully aggregated a bunch of Wall Street forecasts that project that a one-month shutdown could reduce fourth-quarter growth by anywhere from .5 percent to 2.0 percent.
That’s a pretty big dispersion.
Market and economic analysts have looked back to the experience of 1995 and 1996 for guidance. The stock market actually rose during those two shutdowns. (Therefore, the suggestion goes, this time won’t be so bad for stocks either.) Paul Ashworth, chief U.S. economist at Capital Economics, told Reuters that “the shutdowns in late 1995 caused Federal spending to contract by 14.2 percent annualized in the fourth quarter, subtracting around 1.0 percent from overall GDP growth.”
It is natural to look back and make comparisons. But investment professionals often note that past performance is no guarantee of future performance. And there’s plenty of reason to be skeptical of the models and forecasts analysts are making, whether they rely on data from 1995 or data from 2011. That’s because the U.S. economy is an extremely dynamic organism. Just as the economy of 1995 looked a hell of a lot different than the economy of 1978, the economy of late 2013 looks a lot different than the U.S. economy of 1995. (I could provide a lot of data to support this claim, but the Bureau of Economic Analysis’s website is shut down.)
"Veep," "Parks and Recreation," and "The West Wing" take on the government shutdown.
Think about it. In 1995, the internet wasn’t really a commercial force, China was still a minor economic power, and the acronym “HELOC” (Home Equity Line of Credit) had yet to enter the vernacular. Many of the forces that define our economic lives simply didn’t exist. I’d argue that many of the big changes in the way America works make the U.S. economy more vulnerable to government-shutdown-induced damages. When you look back over the past 18 years, one of the unavoidable conclusions is that, for a variety of reasons, the federal government is much more involved in the economy than it was. What’s more, the economy is now more dependent on certain sectors that can’t operate at their fullest capacity without the government being entirely open.
Don’t be fooled by the blue ribbon that’s he got, he’s still Benjamin Franklin from the Federal Reserve. Daniel Gross on the $100 bill’s 100th-birthday facelift.
The U.S. government remains shut, crippling a growing range of businesses and gumming up the gears of commerce at home and abroad. Amid all this chaos, however, America is about to launch a new version of one of the government’s most important and valuable products: the $100 bill.
The Federal Reserve this week is rolling out new Benjamins as part of its continuing efforts to stay ahead of cheaters. “The U.S. government basically redesigns Federal Reserve notes to stay ahead of counterfeiting,” said Michael Lambert, associate director at the Federal Reserve. The central bank is constantly redesigning and rethinking the design of every bank note—except the lowly $1 bill. “There’s very little threat to the $1 note,” said Lambert. “There’s also specific legislation that prohibits redesign of the dollar note, because of the burden it would impose on vending machines.”
But for its 100th birthday (the first Federal Reserve $100 note was issued in 1914), the Benjamin is getting a major makeover. You can get a look at it here.
The portrait of Benjamin Franklin won’t be touchéd, or touchéd up. “It is still Benjamin Franklin and still easily recognized,” said Lambert. “And that’s really important to global users, that they recognize the Benjamins as the $100 note.” (Despite Lambert’s momentary lapse, it should be noted that the Fed emphatically does not refer to the $100s as “Benjamins.” Of course, technically, every dollar created in the last several years should be a “Benjamin Bernanke.”)
The new note will have several new important security features. The most noticeable will be a three-dimensional security ribbon, a solid blue vertical stripe on the front of the note woven into the paper just to the right of Franklin’s portrait. “When you tilt the note, you’ll see images of 100s that changes into bells back and forth,” said Lambert. Move the bill from side to side, and the bells will move up and down. The second feature involves a quill and inkwell that will also be featured on the front of the note. “Both the quill and the inkwell are copper until you move the note,” said Lambert. “As you tilt it you’ll see the quill change from copper to green, and the quill will give the appearance that it’s disappearing in to the inkwell and reappear as you tilt it at a 45-degree angle.” Also, the counter—the number 100—in the right hand corner will shift from copper to green.
These new features are layered on top of existing security feature—like images that appear when you hold the note up to the light. Such watermark images are features more generally seen in foreign currencies than American ones. But, as Lambert notes, that’s intentional. “We have security features in the banknote today that resonate with the international community.”
Note Lambert’s repeated references to international users of the $100 bill. This gets to something important and not very well understood. The $100 bill is much more than an instrument of domestic exchange or a handy hook for rap lyrics. The dollar is stable, beloved, and used around the world for commerce and savings. It is also a major global store of value. Around the world, people who may not trust their own currencies, or fear for the safety of their banks, or who just like to have ready cash on hand (regardless of the purpose) tend to keep $100 bills handy. (And if we’re being completely honest, lots of people who engage in illicit activities also use dollars.) The $100 denomination is small enough to be accessible to lots of people and yet big enough not to occupy a lot of space. If you were to try to store your net worth in $1 bills under your mattress, it would create a pretty big lump.
Define ‘nonessential.’ From mines to loans to oil fields, businesses across the country say they need federal employees back on the job to keep their work going. By Daniel Gross.
You know the adage. For want of a nail, the shoe was lost, triggering a chain of events that leads to much greater debacles. For want of a nail, ultimately, the kingdom was lost.
Traders work on the floor of the New York Stock Exchange on October 1, 2013 in New York City. (Spencer Platt/Getty Images)
That’s a great lesson in leverage—how the removal of one small, seemingly insignificant item can trigger much larger consequences. It’s also a great metaphor for the way in which the government shutdown is affecting the economy.
Fox News may tell its audience that the shutdown is in fact a “slimdown.” Talking points may hold that the only federal employees furloughed are nonessential—useless, unproductive bureaucrats—so the effect on the private sector will be minimal. If you see the private sector as something that operates largely independent of government—a bunch of heroic entrepreneurs running around and getting things done as bureaucrats, politicians, and regulators try to hold them down—this view makes complete sense.
Of course, the reality is far more complicated. U.S. government spending is equal to 22 percent of gross domestic product. The federal government accounts for a very significant chunk of direct employment and consumption—unemployment benefits, payments to doctors, purchases of vehicles and ammunition for the military, salaries of federal marshals. Which is why analysts say that every week the shutdown lasts reduces quarterly growth in GDP by 0.15 percent.
But that’s really just the beginning. As with the nail in the shoe, the government has a huge amount of leverage. Many parts of the economy are, in fact, highly dependent on the government. The presence of a relatively small group of people allows an awful lot of economic activity to happen; their absence can shut down a great deal of it. This goes way beyond the employees who operate national parks, airports, and ports. Whether they are providing information, credit, licenses, or oversight, small numbers of federal employees have a huge effect on business.
First, information. Economics and stock-market writers have been joking about not knowing what to do with ourselves because the Bureau of Labor Statistics won’t be publishing its much-awaited monthly jobs report Friday morning. But the government controls other vital information necessary for commerce. Fannie Mae and Freddie Mac, which buy almost every mortgage originated in the U.S., are still functioning. They don’t get funding as part of the appropriations process. In fact, they are helping to fund the government. Fannie Mae in September paid a $10.2 billion dividend and Freddie Mac paid a $4.4 billion dividend. But let’s say you’re applying for a loan, and you need a document from the IRS to verify income—you (and your mortgage broker, and your real-estate agent) could be out of luck.
Second, think about credit. Credit is the lubricant that moves the machinery of global commerce. And the government provides a great deal of it—through loans, guarantees, and other programs.
It’s all about taxes, friends. Taxes, and holding on to as much cash as possible, however possible, and whatever the consequences. Daniel Gross on the continuing insanity of the GOP-CEO lovefest.
Are the Republicans finally losing big business?
Lloyd Blankfein has friends in Washington. (Photo Illustration by The Daily Beast)
On Wednesday, a group of Wall Street chief executive officers came to Washington to meet at the White House. At the end of the meeting, Goldman Sachs CEO Lloyd Blankfein obliquely took Republicans to task. “Individual members of our group represent every point on the political spectrum,” Blankfein said. “But the one thing they have in common is: You can litigate these policy issues, you can relitigate these policy issues in a public forum, but they shouldn’t use the threat of causing the U.S. to fail on its obligation to repay debt as a cudgel.”
Wall Street, which has generally been unruffled by the shutdown, is really freaked out about the prospect of a hint of a whiff of an inkling of a debt default. If U.S. government bonds fall sharply in value, institutions like Goldman Sachs would suffer greatly.
In the Washington Post this morning, Zachary Goldfarb wrote that corporate America may be souring on congressional Republicans’ constant brinkmanship and inability to conduct business as usual. In a world where government spending is about 22 percent of gross domestic product, a government shutdown is bad for all sorts of business. As Goldfarb noted, the Washington, D.C.–based U.S. Chamber of Commerce on Monday put out a letter decrying “a government shutdown that will be economically disruptive and create even more uncertainties for the U.S. economy.”
The response of the Senate and House GOP to such urgings has essentially been: whatever, dudes. The mindless shutdown, the refusal to negotiate a budget, the obsession with Obamacare, and the willingness to storm into a debt crisis is making corporate CEOs annoyed, angered, and even anxious. But it’s nowhere near enough for them to come out and do what would be necessary to change the dynamic in Washington.
This has been going on for years. Big business—including the Chamber of Commerce and many major infrastructure companies—has been arguing for the need for more spending and private-public partnerships to improve America’s ailing infrastructure. The congressional GOP has responded with the sequester and budget cuts. Big business has been begging for comprehensive tax reform that will simplify their lives. The congressional GOP won’t countenance any such reform that involves raising net revenues. And so there hasn’t been any action. Big business desperately wants immigration reform, so it can have access to skilled workers (at the high end) and not have to worry about being busted for employing undocumented workers (at the low end). The House GOP says no. And so on. And so on. Most large corporations have either made their peace with—or actively lobbied for—greater protections and respect for the rights of gay Americans. The congressional GOP is anti. Business claims that uncertainty in fiscal policy hinders its ability to make plans and invest. For the past two years, since August 2011, the congressional GOP has actively and vocally embraced a strategy of hostage-taking and brinksmanship.
Travel is a big business, and it just tanked. Daniel Gross on how the shutdown could wreak havoc on a key part of the U.S. economy. (In other news, this selfie stick is a thing.)
On the mall in Washington yesterday morning, World War II vets stormed the shuttered World War II monument. In New York, the Statue of Liberty was closed. The South Dakota state government is trying to keep Mount Rushmore open. Campers in glorious Yosemite have been given 48 hours to get out.
The anecdotes from government-run parks and tourist states are symbolic, and make for good images of the real-world impact of a government shutdown. (There are certain upsides, of course. The Klan apparently canceled a rally it had planned at Gettysburg.) But they also speak to a larger truth. There’s a certain blitheness of spirit surrounding the impact of the shutdown. Most people at most companies simply showed up for their jobs as usual, and can easily conclude that it won’t matter much. But in some industries, including some really vital American industries, the impact of the government shutdown is immediate—and difficult.
Travel is a very big business in the U.S. I could tell you precisely how large a business it is, but the Bureau of Economic Analysis’s website is closed today. And the section of the Commerce Department’s website that contained very detailed data on tourism is likewise shuttered temporarily. However, the U.S. Travel Organization put out an annual report that estimates the impact of travel generally in the U.S. The report suggests 14.4 million total jobs are supported by travel, or one in every eight in the private sector. For 2013, it forecasts travel spending will be $889.1 billion, up 3.9 percent from $855.4 billion in 2012. New York City alone in 2011 welcomed (or didn’t welcome, as the case may be) 50.9 million tourists.
Of course, most tourists traveling in the U.S. visit sites run by the private sector—like Disney World, or Las Vegas. But federally-run sites are also among the largest attractions. Mount Rushmore gets three million visitors per year. That’s nearly four times the population of South Dakota. Without government entities, the 17.9 million tourists who visited Washington, D.C. in 2011 would have had little reason to go. An estimated 275 million people visit national parks each year. And without other government operations—the State Department, which processes and grants visas, the airports, customs officials—people wouldn’t be able to enter, exit, and move about the country.
At midnight on Tuesday, October 1, the government went dark, and different agencies announced that they were being shuttered.
While many of the jobs tourism supports may be low-paying, it is also a vital export industry. This is an important, little-understood point. When people from abroad come and spend money in the U.S., that’s considered an export. Every time you see a Brazilian at the National Gallery, Swedish backpackers in Yosemite, or Korean tour groups at Kennedy airport, you’re watching exports happen in front of your eyes. By contrast, when Americans spend money as they travel abroad, that’s considered an import. And in an era when the U.S. continually racks up large trade deficits (I’d link to the latest figures, but the site isn’t functioning today), and in which foreigners increasingly have the purchasing power to enjoy America, the ability to attract, process, and entertain tourists is of vital importance.
When they get money, foreigners like to come to America and see what it’s all about. By contrast, Americans are more insular. And so the U.S. runs a significant trade surplus each year. Indeed, the rapid growth in international tourism has been a key factor in bringing down the trade deficit in recent years. In 2011, some 62.3 million international visitors came to the U.S., up 5.6 percent from 2010. According to government figures, U.S. tourism exports have risen from $134.5 billion (a $31.2 billion trade surplus) in 2010, to $152.4 billion in 2011 and $168 billion in 2012. In 2012, the U.S. notched a record $50 billion trade surplus in tourism. For 2013, the U.S. Travel Association projects the number of international visitors will rise to 69.6 million, up from 67 million in 2012.
House Republicans seem to hold the president responsible for the entire national debt—forgetting it was racked up by Republicans and Democrats alike. Daniel Gross explains with a chart.
The debt-limit drama is heating up. By mid-October, the U.S. government will run out of the legal authority to issue new debt. That means it won’t really be able to operate. On cue, the House Republicans have now released their enormous, exorbitant, foolish list of demands in exchange for lifting the debt limit. Obama has refused to negotiate on the topic. House Republicans, by contrast, are begging for him to enter talks. Their theory seems to be that in exchange for giving President Obama something that he wants (but that they don’t want to give), he should give them a bunch of things they want (but that he doesn’t want to give).
It's John Boehner vs. President Obama in the fiscal face-off.
The House Republicans, and, unfortunately, many of my brothers and sisters in the media, misunderstand what is going on here. The debt-limit increase is not something that Congress “gives” President Obama. It’s something the Congress will give President Reagan, and President Bush (I and II), and President Clinton. It’s something they’ll give all the prior Congresses, including ones in which current House GOP leadership served in and ran. And above all, it’s something that Washington gives to the holders of the trillions of dollars of bonds this country has issued over the last 30 years—central banks, financial institutions, companies, and individuals who are legally entitled to interest and principal payments.
The government spends more than it takes in every year, and has done so for the last many decades, under every partisan arrangement imaginable—full Republican control, full Democratic control, Republican presidents with Democrats running Congress, Democratic presidents with Republicans running Congress, etc. (In the late 1990s, there was a brief moment where the government actually made a small profit.) In addition, we fund our biggest and most cherished entitlemen—Social Securit—by issuing bonds as IOUs to the Social Security Trust Funds. Simply by living and breathing, the government’s debt rises each year.
To fund current operations and pay off debt that has been accumulated in years past, the government sells bonds. Some roll over very quickly, but others endure for 10 years, 20 years, or 30 years. The government needs to increase the debt limit so it can raise cash to pay for next year’s operations. But it also needs to raise cash to pay for last year’s, and last decade’s, and last century’s operations. Bonds we issue today are paying for the stimulus package approved by Democrats in 2009. But they’re also paying for the Medicare Prescription drug benefit—an expensive entitlement without a funding mechanism that was rammed through a Republican Congress whose members included Speaker John Boehner and Rep. Paul Ryan, and signed into law by President George W. Bush.
Go check out the Bureau of the Public Debt, which has a wealth of information. On Feburary 18, 1986, in the middle of Ronald Reagan’s second term, the government sold 30-year bonds, at a yield of 9.25 percent (those were the days!). That issue, CUSIP # 912810DV7, is still trading today. On November 7, 1991, when George H.W. Bush was president, the government issued 30-year bonds at an 8 percent rate. We’ll be paying interest on those until 2021. On August 7, 1997, with President Clinton in the White House and Republicans controlling the House, the government issued $10.37 billion in 30-year bonds paying a 6.375 percent interest rate. In August 2006, with George W. Bush in the White House, the government auctioned $14 billion in 30-year bonds yielding 4.5 percent. In November 2011, the government raised $17.224 billion, selling 30-year bonds at a 3.125 percent interest rate. These bonds were issued to fund the operations of government and the payment of benefits in the 1980s and 1990s—to pay for satellites in the last years of the Cold War, to fund the Gulf War and the Iraq War and the bombing of Serbia, to support a generation of research at the National Institutes of Health, to pay for the medical care of our grandparents. The taxpayers are currently making payments on all those bonds, and the government needs to increase the debt limit so it can continue doing so.
In the corporate world, those who fail to make payments wind up losing ownership in bankruptcy. It’s not quite that way with government debt. When a public entity defaults, or even acts in a way that makes people suspect it might default, the market freaks out. The borrower loses credibility, respect, and the ability to participate in the market in the future. Which is why cities and states work so hard to avoid defaulting on bonds—they’ll gladly stiff suppliers, workers, and citizens long before they’ll stiff bondholders.
Yes, the debt has exploded in recent years, in large part because the government ran successive trillion-dollar deficits during the recession and the early years of the recovery. But as this chart from the Center for Budget and Policy Priorities shows, a great deal of today’s debt can be traced to policies enacted before President Obama arrived.
Tesla Motors may be wildly overvalued, but all the public adulation and attention is forcing bigger manufacturers to play catch-up. Daniel Gross on how cachet has a way of developing into a real business.
Cars can’t fly. But Tesla Motors, the electric sports car manufacturer, continues to defy gravity. Its stock has risen six-fold in the past year, giving it a market capitalization of $22 billion. That’s stunning, especially given that Tesla sells only about 2,000 cars per month and last quarter reported a $70 million profit.
By contrast, GM, which sold more than 275,000 cars in August and earned $1.2 billion in the most recent quarter, has a market capitalization $51.8 billion—about 2.5 times that of Tesla. And Ford, which sold 221,270 cars in August, more than 100 times Tesla’s total, and notched a $2.6 billion profit in the most recent quarter and is valued at $68 billion, about three times what Tesla is worth. Put another way, these companies have more in profits each quarter than Tesla has in revenues.
The astronomical valuation of Tesla could be a sign that investors are shrewdly predicting the future. The stock market, after all, is famously a futures market. Or it could be a sign of the sort of exuberance that frequently infects American investors. Hopped up on momentum and dreams, investors often bid up shares of companies beyond all reasonable valuation.
Tesla’s continuing rise is angering electric car haters, auto dealers (who have sought to keep Tesla’s direct-sales model out of several states), and investors who focus on fundamentals. A hedge fund manager I know hisses the word “Tesla” with the same mixture of fear and annoyance that Jerry Seinfeld used to deploy when he said, “Newman.” Indeed, it’s hard to escape Tesla and its founder, Elon Musk. While others are contracting in Europe’s poor car market, Tesla is expanding. It opened a plant in the Netherlands last month. In the first half of September, Tesla was the leading car seller in all of Norway, with 322 units sold. It’s building out its supercharging network in California. This spring Tesla repaid its loan from the Department of Energy several years early and raised $1 billion in private capital. Earlier this month, the media dutifully covered the news that Musk would drive his family cross-country in a Tesla.
But Tesla’s stock and its vehicles aren’t just driving people to distraction. Tesla, the stock and the phenomenon, is having an impact far beyond the 2,000 cars it sells. Rather, this tiny tail of the car industry is starting to wag the dog. Innovation happens when start-ups get huge—think of Google or Facebook or LinkedIn. But it also happens when giant incumbents decide they want to be part of something new. And that is happening, thanks to the success of Tesla. Larger auto companies, which generally have remained aloof from the electric car industry, are now actively seeking the, um, juice and earnings valuation that Tesla has. And they’re doing it by investing more seriously in electric cars, or in the electrification of gasoline-powered cars.
We see it all the time. Innovation tends to come from the high-end and the fringes, not from the low end and the center of the market. The first cars Henry Ford built cost a fortune for early 19th century Americans. A decade ago, Toyota captured the imagination of the auto marketplace by selling a small number of expensive hybrids. After a while, other car companies rolled out their own versions. They did so not because they believed they could make money and sell lots of hybrids. Rather, these technology companies—and make no mistake, car companies are technology companies—didn’t want to be seen as being left behind. They wanted some of the cachet that came with making and selling hybrids. But cachet has a way of developing into a real business. Toyota still dominates the hybrid market. But Ford is coming on strong, there are dozens of models, and 53,000 hybrids were sold in the U.S. in August. What’s more, hybrid-lite technology is starting to become a standard offering in American-made trucks, SUVs, and cars, and that’s helping to boost the fleet’s mileage and performance. The pressure Toyota exerted forced other automakers to adapt—in a way that benefited consumers and the auto industry as a whole.
Something similar may be happening with Tesla and electric cars. Larger, established companies that want some of what Tesla has—the cool factor, the higher multiple, the public adulation and attention—respond by saying they’ll be part of this exciting new market.
After a decade of research on two continents, BK is rolling out new crinkle-cut fries. Was it all worth it? Daniel Gross tests the goods.
Last week, I was invited to the penthouse suite of the Morgan, a chi-chi boutique hotel in midtown Manhattan. The place was done up with flowers and bright colors, and a gaggle of staffers from Allison Brod Public Relations and style bloggers sat on mod couches. This wasn’t a launch for Tory Burch or BMW. We had been summoned to a product reveal for...Burger King?
Eric Hirschhorn, chief marketing officer for Burger King, North America (sweater, glasses, New York digital media look), started a brief PowerPoint. A lot had changed since Burger King opened its first outlet nearly 60 years in Miami, he said, but the core business was still the same: burgers, fries, and drinks. And yet times are changing. Consumers want choices, including healthier options. They expect higher quality. The solution?
Yes. Burger King’s new offering, rolling out Tuesday, is crinkle-cut fries—slightly thicker than the usual fare. They’re made from the same potatoes, fried in the same oil, and processed on the same equipment as traditional Burger King fries. But get this: they’re much lighter. On a gram per gram comparison, Burger King says the “Satisfries” have 40 percent less fat and 30 percent fewer calories “than the leading French fries.” (Read: McDonald’s.) “Change in French fries over time has been about shape,” said Hirschhorn. “This is real innovation.”
Burger King has a bunch of challenges. The typical American consumer isn’t getting much of a raise, so the capacity of core consumers to eat out more isn’t rising. Competition is intense. And powerful figures in our society—from First Lady Michelle Obama to New York Mayor Michael Bloomberg—are effectively urging kids and adults to consume less fast food.
The solution Burger King has taken is not to retire existing products, or to branch out into super-healthy offering (quinoa burgers, anyone?), but to offer consumers a choice with incremental but significant improvements. Comparisons aren’t particularly easy. Burger King says that based on a 70-gram serving, the “Satisfries” would have 6.3 grams of fat and 150.5 calories. Here is the McDonald’s menu nutrition information. By my calculations, based on McDonald’s data, a 70-gram serving of McDonald’s fries would have 227 calories and 11.4 grams of fat. So the numbers do seem to add up.
Washington is in an uproar over Friday’s House vote to defund Obamacare, threatening a default. So where should you put your money? In government bonds, of course. Daniel Gross explains why.
Washington is about to get insane again. Immense disruptions lurk. Only a few legislative days before government agencies run out of money. The new fiscal year is poised to start October 1, and there’s no mechanism for funding the government. Friday morning, the House GOP passed a law that continues to fund the government through the end of December—but only if the Senate and President Obama agree to defund implementation of the Affordable Care Act. Worse, in less than a month the Treasury Department will run out of authority to issue new debt. And House Republicans say they’ll only increase the debt limit if (wait for it!) Obama agrees to delay implementation of the Affordable Care Act.
United States Capitol in Washington, D.C., September 19, 2013. (J. Scott Applewhite/AP)
So the U.S. government is about to run out of money and may announce its unwillingness to meet legal debt obligations. What should you do with your money in the face of such impending calamity? Why, buy U.S. government bonds, of course.
The U.S government bond market, $12 trillion deep, is the most liquid, safe, and vital of all global financial markets. Savers, central banks, companies, and institutions around the world stash short- and long-term savings in government bonds. In theory, playing havoc with the government’s finance and creditworthiness should be the equivalent of throwing toxic chemicals into the pool. Everybody would run for their lives.
But both the stock and bond markets have been—and remain—generally complacent. That’s in part because other Washington-based activity, like the Federal Reserve’s announcement this week that it would continue its aggressive bond-buying activity, matters much more to markets than anything Congress can do. Political nuttiness is just one of many factors that affects the trajectory of financial markets.
Indeed, investors have learned to ignore the lunacy and approach D.C. grandstanding with a certain amount of cynicism. “We’ve cried wolf with the debt-ceiling problem in August 2011 and the fiscal cliff back in January,” said Gregory Valliere, chief political strategist at Potomac Research Group. “These things always seem to get resolved, even though it’s messy.” The shutdown is a far less daunting threat than the debt ceiling, which is still several weeks away—i.e., several lifetimes in today’s Wall Street of high-frequency trading. “But even then, the idea that we’d default on the debt is still very unlikely,” Valliere added. The prospect of the U.S. not paying its bonds is so loony, so scary, and so unthinkable that markets are refusing to countenance its possibility.
Given this mentality, not only is it perfectly safe to keep buying government bonds, it may make financial sense. Government shutdowns, fiscal restraint, and manufactured crises are generally bad news for stocks and good news for bonds. Should the sequester continue, or if Obama agrees to more budget cuts as a condition for increasing the debt limit, the American economy would slow. U.S. companies that depend to various degrees on government contracts, subsidies, and indirect payments—defense contractors like Lockheed-Martin, technology firms like IBM and Cisco, contractors like Booz Allen Hamilton—would have to reduce their forecasts. That’s bad for a particular group of stocks.
But the repeated fiscal clashes also have been bad news for stocks generally. For the last couple of years, the U.S. government has been a source of immense fiscal restraint, removing cash and consuming power from the economy through higher taxes and lower spending. The more it continues, the more it weighs on the ability of companies to hire and consumers to spend. That’s bad news for stocks, for the economies of foreign countries whose factories feed the American consumer (hello, China!), and for commodities. All things considered, lower levels of U.S. economic activity tend to lead to lower demand for grains, steel, and oil. And what do investors do when the economy is slowing? They buy government bonds.
The SEC has issued a rule that forces companies to reveal how much their CEOs make compared to their employees. That’ll be fun to see, writes Daniel Gross, but it won’t change anything.
Who says class warfare is dead? Or that the Obama administration consistently sells out the left?
On Wednesday, the Securities and Exchange Commission announced a new rule that had long been sought by labor activists, do-gooders, and progressives. Publicly traded companies are already required to disclose, in exquisite detail, the compensation of their CEOs and other top executives in annual reports and proxy statements. Now, however, they’ll be forced to disclose more information about the compensation of rank-and-file employees—and then express the relationship between the two as a mathematical ratio. The rule, “required under the Dodd-Frank Act” and passed by a partisan 3-2 majority, “would require public companies to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees.”
The insane, obscene, yawning difference between the pay of workers and bosses has long been used as a cudgel by labor groups. Shareholder activists have proposed initiatives at companies such as Walmart (where the ratio is 1,034:1) to force them to disclose the ratio. Bloomberg did its own calculation this spring, and determined the ratio at companies in the Standard & Poor’s 500 is about 240:1.
The theory behind this seems to be that CEOs will have a sense of shame, or self-consciousness, about the disclosures, that the sunlight shining on the complicated web of executive compensation will force CEOs to either cut their own pay or raise the pay of employees. That somehow forcing companies to publish a benchmark will yoke public pressure and competitive instincts to bring the ratio down, thus reducing inequality, boosting the consumption power of workers, and putting a dent in global emissions to boot.
As a journalist, and an advocate of higher wages, I’m generally in favor of this. It’ll be great fun. It’s a great rhetorical gesture, like when President Obama calls for an increase in the minimum wage or rails half-heartedly against fat cats. But it won’t do much good or change anything. In fact, it seems like the rule’s boosters really misunderstand CEO and one percent psychology.
They’re not ashamed. Everybody knows that CEOs make way more than workers. That’s the point of being a CEO. And in general, they simply don’t care. If they did care about the disparities between top earners and their workers, they’d do something about it—like raise wages. But they haven’t. Any way you look at it, corporate America has been very stingy. The Census Bureau reported this week that median household family income was $51,017 in 2012, down from 2011—and, adjusted for inflation, below what the typical household made in 1999. A McDonald’s employee earning $8.25 an hour would have to work one million hours to earn what the company’s CEO makes in a year. Since 2009, the top one percent of earners have taken home 95 percent of the nation’s income gains.
These facts extremely well-known; they’re discussed in prominent media outlets. The data can be complicated at times. But it’s unclear to me that simplifying the stark divergence of fortune between the rich and everybody else in a simple ratio disclosed in SEC filings will change much.
Chairman Ben Bernanke announced Wednesday that the Fed will continue buying bonds and mortgage-backed securities, effectively warning Republicans that their insistence on austerity is keeping him from backing off.
On Wednesday afternoon, Ben Bernanke channeled Miley Cyrus. When it comes to having the central bank conjure up cash out of thin air to buy bonds and mortgage-backed securities in an effort to boost the economy, he effectively said: “And we can’t stop. And we won’t stop.”
Federal Reserve chairman Ben Bernanke, speaking at a news conference, is seen on a television screen on the floor of the New York Stock Exchange on September 18, 2013, in New York City. (Spencer Platt/Getty)
In response, stock traders began twerking en masse. Quantitative easing, the program of buying bonds and mortgage-backed securities, has been a boon to stocks. Why? It’s keeping interest rates down and pushing people into higher-yielding instruments like stocks. The prospect of any tapering, or reduction, in the rate of purchases would push interest rates up and make stocks less appealing. Bernanke said he’d provide the fuel for the party for at least a few more months. Stocks jumped by about 1 percent after the announcement.
While not a change in policy, this marked a change in posture. In June, Bernanke and the Fed had implied they would start to reduce the pace of bond purchases in the fall and set the Fed on a path to phasing out the purchases altogether over the course of a year. But the Fed said at the time that it would depend “on the evolution of the economic outlook.” It had to see evidence that inflation would be rising and jobs would continue to be added.
But that hadn’t happened. Here’s the Fed’s the statement. While things have continued to muddle along, the Fed had not yet seen enough improvement, especially in the labor market, to start tapering. (“The economic data do not yet provide sufficient confirmation of its baseline outlook to warrant such reduction.”) Earlier this month, the Bureau of Labor Statistics reported that the economy produced only 169,000 jobs in August, and revised down the total jobs created in June and July by 74,000.
Not everybody is thrilled by the Fed’s actions. Corporations have gorged on cheap debt, but many CEOs say they’d like to see the Fed remove its artificial support. On CNBC Wednesday morning, Goldman Sachs CEO Lloyd Blankfein called for the Fed to start tapering. And hard money types—libertarians, gold bugs, inflationphobes, many Republicans—have wanted the Fed to stop doing what it’s doing. Bernanke had words for these folks, too, though they were characteristically indirect. Essentially, he said, “You’re part of the problem.”
Buying bonds is one form of stimulus, but it’s a really ineffective one, especially when interest rates are low. Higher wages—employing more people for more hours for more pay—are an incredibly powerful form of stimulus. Americans, particularly those at the bottom and the middle rungs of the income ladder, tend to spend almost everything they make every two weeks. More money flowing into payroll systems translates pretty quickly into more money flowing into the economy. But that’s not happening, or it’s not happening fast enough. Between August 2012 and August 2013, average weekly earnings of private-sector employees rose just 1.7 percent—even though companies have epic amounts of cash on their books and have been making very significant profits. There were 3.7 million job openings in the U.S. at the end of July, but companies are in no rush to fill them. In June, Bernanke had said that the tapering could start only once gains in the labor market seemed persistent and safe. On Wednesday he said that he hadn’t seen enough improvement. If CEOs want him to stop stimulating the economy, Bernanke suggested, they’d have to start stimulating the economy themselves.
Bernanke also had a message for Congress: stop being such jerks and fund the budget, get rid of the sequester, and raise the debt limit. He didn’t put it quite so simply. But it is easy to read between the lines. The modern Fed has always seen its job as counteracting the contractionary activities taking place in the economy. If companies are cutting jobs, the Fed cuts interest rates. On Wednesday, Bernanke said the Fed would have to continue its bond-buying activities because the economy faced headwinds. Among the headwinds Bernanke cited were “tighter financial conditions,” i.e., higher interest and mortgage rates. That one is partially on the Fed chief. Interest rates on the 10-year bond started spiking this spring and summer after the Fed said it might curtail its bond purchases.
With an Ohio Walmart hosting a holiday food drive for its own workers, The Daily Beast's Michael Tomasky criticizes the notoriously stingy company for not paying them more.
Milk could hit $8 a gallon if there’s no breakthrough in Farm Bill negotiations, and it won’t just be dairy products spiking in price -- cookies and most other food would also be hit.