How Yesterday's U.S. Elections Will Impact The Economy, Sequestration, And The Approaching 'Fiscal Cliff'

Election Over, Obama Faces Fresh Challenge With 'Fiscal Cliff' -- Reuters

* Pending tax increases, spending cuts pose problem
* Fate of global markets, economy at stake

WASHINGTON, Nov 7 (Reuters) - Barack Obama won re-election on Tuesday night, but the U.S. president faces a fresh challenge confronting the "fiscal cliff," a mix of tax increases and spending cuts due to extract some $600 billion from the economy barring a deal with Congress.

At stake are two separate issues - individual tax cuts due to expire at year's end and tens of billions of dollars in across-the-board federal spending cuts due to kick in the day after New Year's Day.

Failure to prevent a dive off the cliff could rattle U.S. markets, and push the U.S. economy into a recession, which could have global implications. How Obama fares with a familiar set of challenges - most notably a Republican-controlled House of Representatives - could color his second term.

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More News On How Yesterday's U.S. Elections Will Impact The Economy, Sequestration, And The Approaching 'Fiscal Cliff'

Obama win has U.S. investors staring at fiscal cliff -- Chicago Tribune/Reuters
Up next: the fiscal cliff -- Politico
Now the real battle begins: ‘fiscal cliff’ looms for Obama with Congress deadlocked -- The Independent
Obama back at the wheel as US economy heads for a fiscal cliff -- The Guardian
Economists' advice for Obama: Avoid 'fiscal cliff' -- CBS/AP
U.S. fiscal cliff risks dragging global economy into darkness -- Uri Dadush, Special to CNN
Fiscal Future, Thy Name is Sequester -- Tim Ferguson, Forbes

My Comment: One advantage that President Obama has is that many who voted yesterday still blame President Bush for the bad economy. But .... hard decisions will still need to be made, and I am very pessimistic that they will be done. Throw in Obamacare taxes and other tax increases in the new year .... Bill Gross is right with this prediction.

Update: Oh ... oh .... this is not a good sign that compromises will be reached.

The Start Of "Late Great Depression"?

Robert Shiller - World Economic Forum Annual Meeting 2012 (Wikipedia)

We Are In Age Of ‘Late Great Depression’: Shiller -- CNBC

The world is in a state of “late Great Depression,” well-known economist and author Robert Shiller told CNBC Monday.

The Yale economics professor, who helped devise the Case-Shiller index for housing market trends, and famously called the dotcom bubble of the early 2000s and the housing market bubble later in the decade, told “Squawk Box Europe” that the world is in a “new age of austerity.”

“Our whole economy has been affected by variations in confidence. Central banks are sort of trusted, but the actions they have often affect people’s confidence by appearance rather than substance. We’re not in the most trusting mood now,” Shiller said.

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My Comment: He has a track record of being right .... and he is probably right on this prediction.

The World Economy Is Heading Towards A Black Hole

The World Economy: Be Afraid -- Economist

Unless politicians act more boldly, the world economy will keep heading towards a black hole.

IN DARK days, people naturally seek glimmers of hope. So it was that financial markets, long battered by the ever-worsening euro crisis, rallied early this week amid speculation that Europe’s leaders had been bullied by the rest of the world into at last putting together a “big plan” to save the single currency. Investors ventured out from safe-haven bonds into riskier assets. Stock prices jumped: those of embattled French banks soared by almost 20% in just two days.

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My Comment: A sobering assessment on where we are. Read it all.

Europe's Staggering Youth Unemployment Numbers

Europe's Angry Youth: Flash Points Across the Continent -- Spiegel Online

Violent riots like those that raged through London and Britain this week have rung the alarm bell for politicians. Frustration is also high among young people in other nations across Europe. As the gap between rich and poor widens, the next outbreak could happen in a number of countries.



For four days earlier this week, young people in Britain rioted, marauding through the streets of England's big cities. Prime Minister David Cameron called off his summer holiday in Tuscany to deal with the situation, and members of parliament were recalled from their recess.



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My Comment: The unemployment stats from Spain and Greece are astounding, but with no place to work and/or numerous obstacles to open your business .... this sense of dissatisfaction and rebellion can quickly evolve into the sense of despair and frustration that is felt across the Mediterranean in the Arab world that resulted in the 'Arab Spring'.



Update: Established Democracies Face a Summer of Despair -- New York Times/AP

Is The U.S. FED Responsibile For The Arab Spring Uprisings?

Graph 1. Source: IMF food price index, Bloomberg, Europe Economics

How The Fed Triggered The Arab Spring Uprisings In Two Easy Graphs -- The Telegraph

It is possible to join the dots between the Fed’s second phase of quantitative easing and the revolutions in the Middle East.

One curious aspect of recent events in the Middle East and North Africa is how unwilling most commentators have been to join the dots between the Federal Reserve’s second phase of quantitative easing and these revolutions. I’m less queasy. Of course, all revolutions have many causes, and I don’t mean to belittle the achievements of brave non-violent protesters, desperate self-immolators, or saloon-car rifle-wielders. But, as a trigger and driver of these events, the Fed seems very clearly to have achieved more in the Arab world in six months than the Pentagon achieved in decades.

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My Comment: The last two paragraphs in this report sums up nicely why much of the Arab world is in turmoil ....

.... When food prices rises faster, revolutions become more likely. And in a number of Arab states, food prices are already higher (and more exposed to international commodity price rises) than other states ....

.... The case is clear and simple, but nonetheless powerful for that. QE2 drove up food prices, as we ought to have expected. Rapid food prices rises led to revolutions, as we ought to have expected ....

Indeed.

Fears Of Inflation Are Mounting Around The Globe

Global Price Fears Mount -- Wall Street Journal

As Food, Raw Materials Soar, Europe's Central Bank Head Warns on Inflation

Inflation fears—fueled by spiraling food, oil and raw material prices—are mounting around the globe, prompting the head of the European Central Bank to signal that it could raise interest rates in the future even though some countries have been weakened by the Continent's debt crisis.

In an interview with The Wall Street Journal ahead of this week's annual meeting of the World Economic Forum in Davos, Switzerland, Jean-Claude Trichet warned that inflation pressures in the euro zone must be watched closely, and urged central bankers everywhere to ensure that higher energy and food prices don't gain a foothold in the global economy.

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My Comment: I lived during the inflation period of the late 1970s and early 1980s .... and in Russia when the Soviet Union broke up in the early 1990s .... it is not pretty.

Expect more unrest (like in Tunisia) to hit a large number of countries when this inflationary cycle .... which is coming .... hits us this year and/or next.

Did Russia Try To Destroy The U.S. Economy?

From Foreign Policy Blog:

Via FP contributor Ashby Monk, here's an interesting story from Bloomberg News that hasn't gotten much attention. It seems that Russia tried to use its vast financial holdings and conspire with China to create "economic disruptions" in the United States in 2008. An astonishing scoop, if true.

The source of the tale is Hank Paulson, the former U.S. Treasury secretary whose memoir, On the Brink, is coming out soon.

Says Bloomberg:

The Russians made a “top-level approach” to the Chinese “that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies,” Paulson said, referring to the acronym for government sponsored entities.

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My Comment: Quoting Hank Paulson on this issue is like catching a pyromaniac with an empty gas can and matches and asking him if he was the one who started the fire down the street. As much as we may like to look for a boogey man as the main cause for our problems, the truth is that for the US, many of our economic problems can be traced back directly to the steps of Congress and the White House.

Germany Warned Of Unrest As French Protesters Turn Violent

A protester dressed as Angela Merkel burns fake euro notes, as demonstrators in Berlin sought spending directed toward child care and education. Agence France-Presse/Getty Images

From Deutsche Welle:

In the wake of violent worker protests in France, rhetoric over social unrest in Germany is growing as the economic crisis continues to take its toll.

German presidential candidate Gesine Schwan added her voice to that of top union leader Michael Sommer late on Wednesday, when she warned that the ongoing economic crisis could unleash violent reactions from a distraught population.

"I can well imagine that in two or three months, people's anger will grow considerably," Schwan told the Muenchener Merkur newspaper. That's when some of the government's measures to cushion the blow from the recession - such as filling in the pay gap for people who are forced into shortened work hours - are due to run out.

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My Comment: Like France, the usual groups are trying their best to protect the privileges and benefits that they feel they are entitled to. But also like France .... the same problem is rearing its head. The people who work and pay their taxes cannot sustain the benefits and privileges that the rest of the population feel that they are entitled to. A breaking point is fast approaching.

10 Countries In Deep Trouble

G-20 Protests (Photo from The Huffington Post)

From US News & World Report:

Which countries are most in danger from the global recession?

While the collapsing U.S. housing market may be at the root of the global economic recession, the downturn's effects are being felt hardest overseas. Take Iceland, for instance. Its biggest banks failed, its economy may shrink 10 percent this year, its government fell, its central banker was sacked, the country was bailed out with a $2.1 billion IMF loan, and 7,000 people (in a country of 300,000) took to the streets in protest.

Which countries have the greatest chances of being the next stories of failure? U.S.News looked at some countries that are currently facing severe economic disruption that endangers their standards of living, attractiveness to foreign investors, and political stability. First, we examined what Moody's Investors Service and Standard & Poor's had to say about them. These firms rate the risk of sovereign bonds, securities that finance the debt of a country. Many of the countries we identified have poor bond ratings or ratings under review for a downgrade, showing that these governments are perceived as being at greater risk of defaulting on their debt.

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My Comment:Mexico and Pakistan are probably the two countries that can impact us the most. Mexico .... because they are next door to the U.S., Pakistan, because of Islamic fundamentalism.

Pentagon Preps For Economic Warfare

New York Stock Exchange (Photo from Visiting DC)

From The Politico:

The Pentagon sponsored a first-of-its-kind war game last month focused not on bullets and bombs — but on how hostile nations might seek to cripple the U.S. economy, a scenario made all the more real by the global financial crisis.

The two-day event near Ft. Meade, Maryland, had all the earmarks of a regular war game. Participants sat along a V-shaped set of desks beneath an enormous wall of video monitors displaying economic data, according to the accounts of three participants.

“It felt a little bit like Dr. Strangelove,” one person who was at the previously undisclosed exercise told POLITICO.

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My Comment: A fascinating read. But unlike the Politico's assertion that China played the adversary in this war game .... from my perspective, it is the politicians who we elect that are the greatest threat to our economic freedom and prosperity. Hell .... the Chinese are the one's who are buying up our debt (the fools) .... would we do the same if the shoe was on the other foot .... I doubt it.

Tempers Flare As Pain Spreads In Europe

French employees of the German tire maker Continental burned tires at a demonstration in Paris on Wednesday. (Jacques Brinon/The Associated Press)

From The International Herald Tribune:

LONDON: Tempers are flaring across Europe as the economic pain deepens and more people lose their jobs.

Just ask Fred Goodwin, the former chief executive of the ailing Royal Bank of Scotland, whose house and car were vandalized in the early morning on Wednesday. Or Luc Rousselet, the manager of a 3M factory in France, who was barricaded in an office for a second day by workers demanding better severance packages for 110 employees being laid off.

While such instances are scattered so far, the angry mood threatens to overshadow the Group of 20 summit meeting in London next week, where world leaders hope to find approaches to the financial crisis.

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My Comment: The U.S., Canada, and the Far East have so far been immune to this discontent .... but if trends continues it is only expected that this same atmosphere of discontent will hit these regions.

Europe's Economic/Financial Crisis Gets Worse

Chancellor Angela Merkel, of Germany, speaking to the press at the European Union emergency summit at EU headquarters in Brussels on Sunday. (Jock Fistick/Bloomberg News)

Growing Economic Crisis Threatens the Idea of One Europe -- The New York Times

PARIS — The leaders of the European Union gathered Sunday in Brussels in an emergency summit meeting that seemed to highlight the very worries it was designed to calm: that the world economic crisis has unleashed forces threatening to split Europe into rival camps.

An urgent call from Hungary for a large bailout for newer, Eastern members was bluntly rejected by Europe’s strongest economy, Germany, and received little support from other countries. Chancellor Angela Merkel of Germany, facing federal elections in September, said countries must be dealt with on a case-by-case basis.

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More News On Europe's Financial/Economic Crisis

EU says crisis worst in memory, helping new EU states -- Yahoo News/Reuters
Economic crisis threatens the idea of one Europe -- International Herald Tribune
Eastern Europe Stocks, Currencies Tumble as EU Rejects Aid Plan -- Bloomberg
New 'Iron Curtain' threatens to split Europe over economic crisis -- The Telegraph
Ukraine Teeters as Citizens Blame Banks and Government -- New York Times
EU Denies Request For Bailout of E. Europe -- Washington Post
Fiscal 'Iron Curtain' splits Europe -- The Australian
Tough Love For Eastern Europe -- Forbes

My Comment: How can Europe have a unified European Security/Military structure, when they cannot even agree on the basics of managing their finances and money.

US-EU Trade War Looms As Barack Obama Bill Urges 'Buy American'

President Barack Obama's $820 billion stimulus package was passed
by the House of Representatives Photo: AP

From The Telegraph:

The prospect of a trade war between the US and Europe is looming after "Buy American" provisions were added to President Barack Obama's $820 billion (£573 billion) stimulus package.

The EU trade commissioner vowed to fight back after the bill passed in the House of Representatives late on Wednesday included a ban on most purchases of foreign steel and iron used in infrastructure projects.

The Senate's version of the legislation, which will be debated early next week, goes even further, requiring that any projects related to the stimulus use only American-made equipment and goods.

The inclusion of protectionist measures has quickly raised hackles in Europe.

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More News On This Impending Trade War

'Buy American' stimulus alarms US businesses, trade partners -- AFP
'Buy American' - Sparks fly -- CNN
'Buy American' rule in U.S. stimulus bill could cost Canada jobs -- CBC
Aussie plea on US trade restrictions -- Canberra Times
EU signals concern over 'Buy America' measure in U.S. stimulus bill -- International Herald Tribune
Economic nationalism rears its ugly head -- The Economist

My Comment: China and Japan have yet to respond publicly to these measures. This act of protectionism and violation of long lasting trade treaties will significantly undermine U.S. standing in the world community. The economic consequences .... especially if a tit for tat scenario starts .... will significantly prolong and deepen the international recession.