Well, it’s March 1st and the dreaded sequestration “cuts” are slated to begin, except as I understand it those spending cuts will not actually “bite” until March 27th. If that’s correct, our legislators have until then to arrive at a deal. Then, using their “magic erasers,” they can erase everything back to March 1st and sequestration will be pinned to the great media hype wall just like the “fiscal cliff” and Y2K. As we understand it, sequestration will cut defense spending, domestic discretionary spending, and Medicare reimbursement rates. Plainly, defense companies, Medicare services, certain domestic programs, and anyone with exposure to Washington, D.C. will be negatively impacted. For the record, discretionary spending is all programs that are not considered entitlements. If allowed to commence, sequestration would cut spending equally between national security and discretionary spending by an average of $109 billion per year for the next nine years.
So, the dateline looks like this. March 1 – The Sequester: Large spending cuts are set to begin. About half would be in defense. This is set to subtract 0.7 percentage point from GDP growth this year absent any multiplier effects. However, it’s unclear when the cuts to spending will be made (if they are not postponed again) and exactly what will be cut. March 27 – The Continuing Resolution: Without a real budget (last seen in 2009), federal spending has been authorized through a series of CRs. Most likely, we’ll see another one. May 19 – The Debt Ceiling: Treasury reported that the ceiling was breached on December 31, but (through “extraordinary measures”) the drop dead date was expected to be in the second half of February. There was not enough time for the new Congress to work on a possible budget deal. Lawmakers now have until mid-May to achieve a plan to reduce the deficit over the long term.
Yet amid all the negative sequestration talk, consider what Stanley Druckenmiller said, “If you normalize interest rates to where they were before QE, and use a 5.7% funding cost for this debt, that’s $500 billion a year in interest expense. Because of this the central bank can’t raise rates; it has to keep printing money.” And, as long as rates are low, and liquidity is high, there is slightly less reason to be worried.
“The hype over sequestration is a joke. If you net out Hurricane Sandy you’re talking about a quarter of 1 percent of GDP.” Stan Druckenmiller; American hedge fund manager on CNBC