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!
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 program‐by‐program 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!
Related Articles and News:
- Money Morning:
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- Money Morning:
The Great Rotation Makes Stocks a Generational Buy
- Money Morning:
What Does the Sequestration Mean for Investors?
- Money Morning:
The Sequestration Follies: How Washington Outsmarted Itself
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
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