Kort Session 5–The Dreaded “Sequester”

BillSequester used as a noun means a general cut in government spending.  In order to get an increase in the debt ceiling, Republicans and Democrats agreed on August 1, 2011 to a sequester of $1.2 billion of discretionary spending (spread over 9 years), if no other more appropriate compromise could be found to cut federal spending.  This was to begin January 1, 2013.  And, of course, they could not find common ground over the next 15 months nor did they have the strength of conviction (or lobbyist support) to let “The Sequester” proceed.  In early January of this year they kicked the can down the road until March 1, 2013.  This has become a topic of media interest and some hype.

Now the real level of cuts will be closer to $980 billion dollars because, for cosmetic purposes, the $1.2 billion included interest savings, ergo, the annual hit to spending would be about $110 billion.  One half of these cuts would be born by the “Military Industrial Complex”, the rest by non-defense discretionary programs.  There would be no cuts to entitlement programs.

Sequester Perspective

At the end of 2012 we had approximately $16 trillion in federal debt, slightly more than 2012 estimated gross domestic product of $15.5 Trillion.  We have not seen a 100% plus number on debt to GDP since World War II.  At any rate our National Debt right now is about equal to one year’s production of goods and services.   This debt number continues to grow.

Getting back to the original GDP number ($15.5 Trillion), if the sequester goes through we really whack GDP by a whopping (not) $110 billion per year.  Hmmm, that is a six tenths of one percent reduction.

  • It is a drop in the bucket
  • If it does go through, according to the pundits, it may take us back to a mild recession.  I’m not so sure as the magnitude of the cuts will be miniscule.
  •  If “The Sequester” is allowed to stand, it might be taken well by the markets as one small step for Congress in the right direction (their inaction actually did something ).
  • Finally another kick of the can could be considered as a potential short term negative.

As March first is quickly approaching, it is important to note that “The Sequester” is not a life and death matter.  Remember the Office of Management and Budget estimates the worse case result of implementation to be a mild recession.  And remember recessions are normal, transient and although economists have predicted many recessions in the past, few have actually happened.

Regarding the media hype last week, former Secretary of the Treasury, Robert Rubin was interviewed on CNBC and launched into a comment on “The Sequester” as being “terrible, terrible policy”.  Now if you want to talk about the “pot calling the kettle black” on the policy front, Mr. Rubin was one of the key boosters for passage of “Gramm, Leach, Bliley” during the Clinton Administration.   You remember “Gramm, et. al.” was the piece of legislation that allowed banks back in the securities business after a sixty-six year prohibition via the Glass, Steagall Act (1933).  This helped set the table for the blow up and near-death experience we had in 2008.

Again, I don’t know how “The Sequester” shakes out, but my guess is the outcome will be far better than Mr. Rubin’s dire assessment.

Finally, I would like to point out that as it pertains to “kortsessions.com”, these are my opinions and not the divine word of the Almighty.  You have to view the posts in the context of your own financial situation.  What I am trying to do is provide food for thought, a counterpoint to a lot of the noise you get from the media and pliticos…no stock tips, asset allocation, strategy or market timing hints.  If I were always right, I’d be super rich instead of financially comfortable.  So as the Romans use to say ”Caveat Emptor”.

Your thoughts, comments and pushbacks are welcome.

The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities.  I may,  from time to time, mention certain securities for illustrative purpose, names where I personally hold positions.  These are not meant to be construed as recommendations to BUY or SELL.  All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.

 

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