Sequestration Is a Gift – Not an Apocalypse

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Everybody sing along…

It's a happy day… Oh happy days. It's a happy day…Oh happy days. When sequestration rules it drives the tears away… Oh happy days!

Apocalypse!

Armageddon!

Those are the words President Obama used to describe what would result from sequestration.

Please, don't make me laugh. The sequester will not only not ruin America, it will in fact start the process of fixing what Congress can't – no, make that won't – fix.

What's the upside?

Our magnificent Founding Fathers were all together in the creation of the United States, but it didn't mean they all loved each other or that they all had the same views about government. They sure didn't. But, those differences were acknowledged and incorporated into the Constitution and sanctified – for the people – in the Bill of Rights.

That's divided government folks. This ain't socialism, though sometimes it feels like it.

And it's that nagging feeling that a slimy, slithering strain of socialism is snaking its way into mainstream politics that keeps me up at night, in case we, the people, are overrun by "them" – the usurpers of republican democracy.

Thank goodness that divided government gave us sequestration.

So, Congress can't get along. That's nothing new. The question is who gets to pander to their constituents. That's nothing new. We have sequestration. So, what? That's nothing new.

We need to cut crap out of the budget – A lot of crap. I'm sorry if that word bothers you… but I'm not allowed to use stronger language. Don't hate me because I'm fed up. You should be, too. Maybe you don't use strong language. Maybe you don't use colloquialisms (you're better then me, I grant you that, for sure) but I'm willing to bet that you're just as mad as I am.

The Republicans want to protect the rich and their tax loopholes – including carried interest. I get that, and I vehemently disagree (and believe me, folks, I enjoy carried interest). The Democrats want us all to share the cost of running a social welfare state to pander to their voting constituents. I get that, and I vehemently disagree.

So, they can't agree on tax increases (oh, wait, wait don't tell me… they did agree on $600 billion in tax increases in January, remember?) and they definitely can't agree on spending cuts. Why are spending cuts so hard? Because, silly, spending is the bread and butter that Congress feeds to their voting constituents – and campaign-backing cronies. Duh!

Sorry, I got carried away. Forget all that stuff. I just had to get it off my chest.

This is really about sequestration and how good it will be for the country.

We need to cut wasteful spending, period. What better way to do it that to take spending cuts out of the hands of Congress and put the task squarely in the hands of the departments and programs that are wasting the money in the first place? They should be tasked with making cuts and laying off unproductive people who do unproductive things. This is great!

The Budget Control Act, passed in August 2011, basically said, "Hey, if this Super Committee we put together can't cut $1.2 trillion from the federal budget over the next ten years (they were shooting for $1.5 trillion, go figure) then, by this law, sequestration will go into place to the tune of $1.2 trillion between January 2013 and October 2121."

Pretty simple, but no one figured we'd get here. Me, personally? I was praying we would.

Here's a brilliant, simple play-by-play I found from Brustein & Manasevit, PLLC, Attorneys at Law:

How Does Sequestration Work?

1. Calculate the total adjusted amount of deficit reduction needed. Though the ultimate amount of the reduction will be $1.2 trillion, this includes both cuts in spending and savings on interest on the national debt as treasury expenditures will be lower. This interest savings is estimated at 18% of the total, leaving us with a deficit reduction target of $984 billion.

2. Divide the remainder by year. The $984 billion is divided evenly among the years over which the cut is to take place (2013 – 2021). This leaves about $109 billion per year.

3. Take this number and divide evenly between defense (Function 050) and non-defense (Function 500) spending – about $54.5 billion each.

4. Remove exempt programs (see below) from the calculation.
   a. Mandatory spending (entitlements and similar benefits) is exempt or limited to specific cuts (e.g. cuts to Medicare are limited to 2%).
   b. There are specific cuts to non-defense discretionary spending for implementation of the Patient Protection and Affordable Care Act (PPACA) and more.

5. In fiscal year 2013, apply the remaining dollar number in equal percentage cuts across the board.

6. In other years, lower the discretionary spending caps (known as 302(b) caps, these are the total amount that each account is allowed, and the total number each appropriations subcommittee is given to work with) by the sequester amount. The lowering of the caps allows the cuts to be distributed by appropriators on a programbyprogram basis, rather than across the board.

7. If in any future year the caps are broken (if spending bills are passed that go above that limit), automatic, across the board cuts are once again triggered.

It's just that simple.

So what if we have to cut $85 billion in a year? Does anybody think we can't find waste when we take a knife and cut $42.667 billion from the defense budget? Or cut $31.32 billion from non-defense programs? Or cut $11.347 billion of Medicare payments to doctors and hospitals?

The country's wildlife fire management program is $2.501 billion. It's going to get cut by $125 million, that's less than 8%. Come on! What if there are no serious wildfires – we can't save that money? And if there is a serious fire, is the government going to let it burn? Seriously.

The Air Force's aircraft procurement budget is $22.803 billion. It is going to get cut by $1.799 billion, or 8%. Come on! What's the big deal if they don't get to buy a few extra planes from defense contractors (that soak us taxpayers through and through anyway)? Seriously.

The Energy Department's nuclear non-proliferation budget is $2.442 billion. It's going to get cut by $191 million. Come on! What are we paying 2.5 billion for in the first place? To talk about reducing our arsenal? Seriously.

No, it's a happy day. Look at the markets, they're singing my song. Come along and join me. Everybody now… It's a happy day… Oh happy days. It's a happy day…Oh happy days. When sequestration rules it drives the tears away… Oh happy days!

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Leanne Flynn | March 6, 2013

    Thank you for your controlled rage and your attempt to make some of these financial concepts easier to understand in the context of conflict.

  2. Nancy McCoid | March 7, 2013

    Happy day for who???Does it make sense to cut the livelihood of productive American middle class workers 20 percent putting them on the brink of bankruptcy or homelessness since they have had no increase in 3 years and make 30,000 a year? How do you expect them to live on that?? ???

    At the same time you will not touch the golden Medicaid which many have lived on their entire life, or which drug addicts live on. Does it really make sense to take away from a productive member of society who is working and contributing to the community???

    We are not talking of tich people here who are getting fat off of the country. We are talking about every day honest people making a living in the 30000 to 50000 range per year. It is not even considered middle class numbers and yet they can afford to give up 20 percent?????

  3. Nancy McCoid | March 7, 2013

    Can you really feel happy about putting people out of work??? Can you say it is a good thing to take people who are productive members of society they are not asking you to give them money-they are earning it. Does it seem logical to ask someone who as a GS4 only makes 30000 a year to give 20 percent up for 6 months??? These are people who have had no increase for 3 years, and now you want 1/5 of their income??

    How do you expect them to survive at this amount of money? Would you rather have them go on Medicaid and add to the problem of the 39 percent of Americans we all support? I know cuts need to be mad but surely their are ways to cut things without putting people into homelessness.

  4. Billie Jelks-Hood | March 7, 2013

    I disagree with this whole premise, what this country, should be concern about is JOBS,JOBS.
    Austeriety will do nothing to help this deficit.
    What needs the crap cut out of it, all the benefits, that we give the Big Oil Companie. Close all the loop holes for the wealth, that has gotten filty rich, from no wage increase for the poor. Make big companies pay their fair share of taxes, or just
    Taxes, period, because they certainly are not providing any good jobs, except for CEO, with all their manufacturing in China, and other countries. What the USA, will end up being is another third world country. I am sure Shah Gilanoi, is another rich TeaRepublican.

  5. Schwei | March 7, 2013

    Something I do NOT understand. Why is there talk of people losing jobs? We are not cutting a budget, merely reducing the amount by which it grows. What am I missing? My boss tells me the 10% raise I was going to get is going to be cut down to 5%. Isn't it still a raise? Am I fiscally irresponsible if I spent the money BEFORE I got it? I see no reason for people to lose their jobs. NO current money is being reduced. Isn't it just the amount of 'raise' that is being changed? I believe that I agree with the author. (Although the current administration does seem to be trying to make these 'cuts' painful. No White House tours? Really?)
    Just my two cents (adjusted to 1.23 cents for the sequestration).

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