Involving: what the US sequester really means when you start drilling down, how stressed the Fed would be if it underwent its own tests, and continued amazement at the Berlusconi saga.

Good morning

The headlines:

  1. We’re now calling it a “sequester”.

    Link: Getting down on Friday.

    Friday – those automatic spending cuts kick in. The senators are pessimistic about avoiding it; and the  Republicans are blaming Obama and gay marriage in equal measure.

    Whatever – this is a cut of $85 billion in defence and domestic spending. And what does it mean?

    In the grand scheme of things – there is too much drama attached to this. I’ll give an example: have a look at this report on the effect that the sequester would have on Virginia. And Virginia, according to Marketwatch, is expected to have a really tough time of it.

    A quote:

    “Virginia will lose approximately $14 million in funding for primary and secondary education, putting around 190 teacher and aide jobs at risk.”

    Then I did some math. The report makes it clear that we are talking about “this year alone”. So if we assume that all 190 teachers and aides earn the same, then we are talking about $74,000 a year packages. Or $6,000 per month. Which would put these guys in the top 40% of earners. Teachers? And aides?!

    Maybe it’s just me – but earning $6,000 per month as an aide surely sounds high?! And actually, surely a better solution would be to drop 2,300 aides’ salaries by $500 and everyone can stay employed? And stay within that top 40% of income earners band?

    Another classic:

    The Navy has to “cancel the maintenance of 11 ships in Norfolk, defer four projects at Dahlgren, Oceana, and Norfolk, and delay other modernization and demolition projects”.

    You must be joking. How is this calamitous? It’s just standard practice: when you’re short of money, you delay non-essential projects.

    I mean – when you start breaking it down, we’re talking about a few children not joining the Head Start program*, and “up to 2,100” fewer food inspections. Across a population of 314 million people that eat three meals a day?

    I’m sure they’ll survive.

    *whatever that is.

  2. Stress-testing the Fed.

    Link: way stressful!

    Under the same stress tests used by the Fed to test the other banks, there are some awkward results.

    For example, under one scenario (the currently forecast scenario), “if the economy falls in line with consensus forecasts of gradually rising growth, inflation and interest rates”, then the Fed shoud record a loss of $216 billion over the next three years. Under an “adverse scenario” where there’s contraction (see above about “sequesters”) and rising inflation (speak to any Austrian economist), that figure rises to $547 billion.

    Congress pulled Jamie Dimon up for questioning in front of various committees after a $2 billion loss. We’re talking over 100 times that. IF THINGS GO AS PLANNED.

    Luckily: the Fed doesn’t mark its portfolio to market (meaning that it just leaves it at the cost it was purchased at). So we’ll never see those losses coming through. Also: the Fed will never go bankrupt.

    And if that makes no sense to you, you wouldn’t be alone.

  3. South Africa’s budget.

    Link: baited breath.

    The budget is out today. The real news will be tomorrow.

  4. Berlusconi.


    I’m still in awe. The Italians voted for a man that is mostly botox, that is famous for sex parties and tax evasion, and who left the office in disgrace not so long ago. And they didn’t have to vote for him. I mean, if they were really against austerity – then they could have voted for the manslaughtering television comedian.

    What is this madness?

That’s all for now.

Have a good day.