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White House Proposes $3.8 Trillion Budget

President Barack Obama’s $3.8 trillion budget for fiscal 2011 raises $2 trillion in taxes, cuts spending on programs with considerable political support and still leaves the nation with $8.5 trillion in additional debt over the next decade.

The budget’s political pain and the difficult choices it poses for fiscal 2011 and beyond underscores the deep fiscal hole the nation finds itself in after a decade of deficits and a deep recession. It will add fuel to the election-year debate over the size and scope of government that Americans want and their willingness to pay for it.

“It tells you we’re in a lot worse shape than advertised,” said David Walker, a former U.S. comptroller, now president of the Peter G. Peterson Foundation.

Mathematically, budget analysts say, the spending and tax plan for the fiscal year that begins in October undermines Mr. Obama’s pledge to close the budget gap without raising taxes on the vast majority of Americans. And that’s assuming that the plan passes intact, which is highly unlikely in an election year marked by public distrust of big government.

Mr. Obama’s budget sets up a conflict Congress must address this year, when President George W. Bush’s 2001 and 2003 cuts to income taxes, capital gains and dividend taxes and estate taxes all expire Jan. 1, 2011. Mr. Obama would extend the cuts for middle- and lower-income Americans, but allow taxes to rise for wealthy families, although not all the way back to the levels under President Bill Clinton.

The president dared Republicans to oppose the spending cuts he proposed. Many Republicans say the budget could be balanced with spending cuts alone. But both sides have declared the bulk of the budget—entitlements and defense—off limits for significant cuts.

“What I will not welcome—what I reject—is the same old grandstanding when the cameras are on, and the same irresponsible budget policies when the cameras are off,” Mr. Obama said. “It’s time to save what we can, spend what we must, and live within our means once again.”

Mr. Obama called for killing the National Aeronautics and Space Administration’s manned mission to the moon, halting the additional production of C-17 military transport planes and Joint Strike Fighter components, and cutting the Army Corps of Engineers budget and agriculture programs.

Some Republicans were quick to cry foul.

“The president’s proposed NASA budget begins the death march for the future of U.S. human space flight,” lamented Sen. Richard Shelby (R., Ala.).

Sen. Saxby Chambliss (R., Ga.) welcomed the president’s decision to “rein in government spending,” but complained the proposed budget “unfairly targets farmers and ranchers to achieve savings and fund Washington-based programs.”

Even with tax increases and spending cuts, Mr. Obama’s budget foresees a record budget deficit of $1.6 trillion this fiscal year sliding down to $706 billion in red ink by 2014, only to begin rising again as the baby-boom generation drives up the costs of Medicare and Social Security. By 2020, the federal debt will have risen to $18.6 trillion, or 77% of GDP, from $7.5 trillion, or 53% of GDP, last year.

Mr. Obama again reiterated his plan to freeze spending on non-security, non-veterans programs, about 17% of the total budget, and he pledged to name a bipartisan fiscal commission entrusted to recommend ways to bring the deficit down in the short term while addressing Social Security, Medicare, Medicaid and tax issues over the long run.

But even with the commission, the White House was cautious, setting a goal of “primary balance” for the budget—equalizing revenues and spending but excluding interest payments on the debt—by 2015. The International Monetary Fund uses the “primary balance” standard for the world’s poorest countries trying to get their fiscal houses in order.

Savings the president once anticipated from winding down the wars of the Bush administration are pushed back to 2012. Mr. Obama’s troop increases in Afghanistan and withdrawal of forces from Iraq—known in the budget as “overseas contingency operations”—will cost $160 billion this year and next, $46 billion more than anticipated last year.

“You’ve got to think bigger,” said Sen. Judd Gregg of New Hampshire, ranking Republican on the Senate Budget Committee. “I do think the American people are ready for much tougher decisions than the Congress is ready for.”

The budget plan calls for nearly $1 trillion in tax increases on upper-income families—largely through allowing Bush tax cuts to expire. Banks, bankers and multinational corporations would face new fees and levies. And oil companies would lose $36 billion in tax breaks.

But extensions of the Bush tax cuts for the middle class, along with some new tax cuts in Mr. Obama’s jobs program, would cost the government $284 billion over the next decade.

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Feb

03

2010

China to stay a plodding “ox” in year of the tiger

year of the tiger 2010

After blasting to recovery from the global financial crisis, China will enter next year wrestling with unwelcome expectations for it to shoulder a bigger role in insulating the world economy against more turmoil.

China is set to overtake Japan as the world’s second-biggest economy in 2010, and calls are likely to grow for it to cash in more of its accumulated wealth and influence to address trade imbalances, currency friction and diplomatic disputes.

Yet while some see China as a super-power confidently limbering up for a sprint to the lead, its leaders see it as facing domestic and external risks that demand cautious plodding.

In the traditional Chinese calendar, next year is the year of the tiger. But expect Beijing to keep behaving in economic diplomacy like this year’s talismanic animal, the ox: steady, sometimes frustratingly so for some, and resistant to prodding.

“We don’t want to be treated as a superpower or global leader, but on specific issues, such as international financial reform, China will choose to be more active next year and beyond,” said Chu Shulong, an international relations professor at Tsinghua University in Beijing, who recently led a study of Beijing’s global policy options.

“This ambivalence in Chinese foreign policy will continue for a long time.”

In trade, especially, China is likely to be increasingly on the defensive next year, with its stable exchange rate policy arousing rancor and, potentially, retaliatory tariffs.

China’s trade surplus, which shrank by 30 percent over the past year as global demand shriveled, could ignite diplomatic tensions if it rebounds with faster U.S. and European growth.

“That’s going to fuel real trade tensions, if the trade surplus goes up again,” said Michael Pettis, a senior associate at Carnegie Endowment for International Peace, based in Beijing.

“I don’t see much chance that we’ll be able to avoid that.”

Trade disputes from steel to shoes have already piled up in just the past three months. The pipeline of U.S. complaints alleging unfair Chinese trade practices points to a bigger docket of cases next year, something Beijing fears.

“Trade protectionism will again rear its head, leading to frequent disputes and friction between China and many trade partners,” Liu Youfa, vice-head of the China Institute of International Studies, a think-tank under the Foreign Ministry, wrote this week in Outlook Weekly, a Chinese magazine.

PRIDE AND CONTENTION

China’s worries sit awkwardly with heady pride about its rising stature.

If its recovery stays strong, China “will remain the locomotive of world economic growth,” a commentary in the overseas edition of the official People’s Daily said on Friday.

But critics contend that China’s strength has come at the expense of others. Its share of the overall global trade surplus has nearly doubled this year, even if its own surplus has shrunk — giving ammunition to those who say that its export-friendly policies have robbed other countries of jobs.

When U.S. President Barack Obama visited Beijing in November, Chinese Premier Wen Jiabao tried to reassure him that China was not seeking a trade surplus.

Such words will find few takers in Washington while China keeps the yuan more or less frozen in place against the dollar, as it has done since global financial turmoil deepened in mid-2008.

Beijing risks growing friction with Washington, where prominent senators have asked for an investigation into whether the yuan policy is a form of subsidy that would justify tariffs on Chinese imports.

If China moves on the yuan in 2010, however, it will be for domestic reasons, and Beijing’s main concern will remain protecting jobs by cushioning its battered exporters.

The ruling Communist Party sees stoking employment and income growth as crucial to maintaining control, and market expectations are of only 1.9 percent appreciation in the next 12 months.

“For that reason, we continue to think authorities will move quite slowly on appreciation,” Fitch Ratings analyst James McCormack said. “It’s going to be an on-going issue for policymakers here right through the medium term.”

Those same cautious instincts, however, mean Chinese policy-makers are unlikely to launch fresh rhetorical assaults on the U.S. dollar and Washington’s financial failings that may win public applause but threaten to undermine Beijing’s own vast foreign exchange assets.

Earlier this year, China’s central bank floated broad ideas to eventually shift from reliance on the dollar as the primary global reserve currency.

Since then, however, policy-makers have gone quiet about those ideas and signaled that the dollar will remain their mainstay for a long time to come.

“China favors international financial system reform, but those reforms revolve around the U.S. dollar and so China wants only gradual changes,” said Chu, the Beijing professor.

“We eventually want to reduce the role of the U.S. dollar, but not so fast that we damage our own assets.”

Dec

19

2009

Citi, Wells Fargo to Repay $45 Billion in Bailout Funds

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Citigroup [C 3.70 -0.25 (-6.33%) ] and Wells Fargo [WFC 25.49 0.08 (+0.31%) ] said they were paying back funds to the U.S. government, in transactions that will end taxpayers’ capital support of the biggest U.S. banks much sooner than had been expected.

Uncle Sam and money

With regulators signing off on the plans, the U.S. government is signaling that it is comfortable removing some of the support it has provided to banks since the failure of Lehman Brothers created pandemonium in financial markets in the fall of 2008.

The banks are hoping to escape some of the added regulatory scrutiny that came with U.S. support. The Obama administration’s pay czar, Kenneth Feinberg, had to sign off on pay for Citigroup’s top 100 employees after the bank received more than $45 billion of capital over three bailouts.

Wells Fargo received only one government capital injection of $25 billion and was subject to fewer restrictions.

Both banks faced pressure to repay the United States after Bank of America[BAC 15.63 --- UNCH (0) ] announced plans to sell more than $18 billion of equity to help repay the $45 billion it received from the government under the Troubled Asset Relief Program, analysts said.

Citi and Wells Fargo became the last big banks to leave TARP.

But the government and the banks that have left TARP are taking a risk. If the economy weakens considerably next year, more bailouts could be necesssary.

Citigroup Chief Executive Vikram Pandit is giving up a government guarantee the bank had against excessive losses on $250 billion of assets. The bank has yet to consistently post real profits from its banking operations.

Banks are evidently concerned about the economy, and have been reducing their loan books and boosting their investments in risk-free securities.

President Barack Obama told top U.S. bankers on Monday that they had to open up the credit spigot for small businesses and start lending again.

Still, many investors now believe the worst is behind the U.S. economy, in part because of extreme efforts by the government and the Federal Reserve to rescue the financial system.

The United States is more optimistic about the outlook for the banking sector as well. The Obama administration’s projected cost to taxpayers for TARP was cut by about $200 billion last week.

Citigroup said it plans to issue $17 billion of common shares and $3.5 billion of securities that convert into shares in three years to help repay $20 billion of capital it received late last year from TARP.

Citigroup’s share offering is expected to be sold on Wednesday.

The government, which owns about 7.7 billion of the bank’s shares worth about $28.5 billion, plans to sell up to $5 billion of Citi shares alongside the bank’s offering.

Wells Fargo plans to sell $10.4 billion of shares, and also raise up to $1.5 billion of equity through asset sales.

Both Citigroup and Wells Fargo are offloading stock to their employees, with Wells selling $1.35 billion to benefit plans instead of contributing cash to them, and Citigroup selling $1.7 billion of common stock to staff pending shareholder approval.

Beyond Wells Fargo’s share sales and asset sales, the bank did not specify how it would fund the rest of its payment to the government.

PAYING THE PRICE TO EXIT

Both banks will enjoy some benefits from exiting TARP. Citigroup will save about $2 billion of interest expense annually by exiting TARP, while Wells Fargo will reduce annual dividend expense by $1.25 billion.

Citigroup will also reduce the government’s say over the bank’s compensation packages beginning in 2010, although the bank cannot pay employees more for 2010 to make up for 2009 pay cuts mandated by Feinberg, a Treasury official said.

But both deals are also bruising for the banks. Citigroup is taking an $8 billion pre-tax loss on the trust preferred purchase, because the securities were recorded on the bank’s books at less than their face amount.

Canceling securities linked to the government’s asset guarantee will result in another $2.1 billion of pre-tax losses for Citigroup. Those losses eat into the benefit of raising capital.

Wells Fargo’s hit to common shareholders will be $2 billion in the fourth quarter.

Both banks are also diluting shareholders, something Wells Fargo executives had said they wished to minimize or avoid.

To avoid extra dilution, Wells Fargo said it was buying out Prudential Financial Inc’s [PRU 49.45 0.56 (+1.15%) ] stake in a brokerage joint venture for cash instead of its prior plans to use cash and stock. Prudential said last week that deal, which closes in January, will boost its investable funds by about $4 billion.

For Citigroup, the dilution to shareholders from its deal is about 15 percent. That is much higher than the dilution to Bank of America Corp’s shareholders when the bank repaid the government earlier this month.

Citigroup received $45 billion last year under TARP. This year, the government agreed to convert $25 billion of those funds into Citigroup common stock, leaving the United States with a stake of roughly 34 percent in the bank.

Dec

14

2009

Obama in Asia – building block or bow?

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Barack Obama’s first presidential trip to Asia was also his first big step in recasting U.S. ties with a region in flux, and showed this will demand patience and compromise from a superpower used to pushing its weight around.

In a tone-setting speech in Tokyo, Obama cast his nine-day Asia odyssey as a return to full U.S. engagement, but his trip covering Japan, a regional summit in Singapore, China and South Korea also became a tutorial in the disputes and shifting forces standing in his way.

Above all, in China the U.S. President found its Communist Party leaders glad for the prestige of his presence but showing little public sign of yielding over currency friction, human rights or putting greater weight behind efforts to bottle in the nuclear ambitions of North Korea and Iran.

All that could be cast as a failure, and already has been by Obama’s domestic critics and some commentators.

But U.S. summits with China and the rest of Asia have rarely brought instant rewards and are even less likely to now the U.S. has been wounded by financial crisis and Beijing sees itself as an emerging regional gatekeeper.

Whoever is in the White House, Washington’s dealings with Asia in coming years will look less like a clean sprint and more slog through a muddy obstacle course, with plenty of chances to stumble along the way.

“The United States is a big power that became used to having it’s way,” said Liu Jiangyong, a professor of East Asian security affairs at Tsinghua University in Beijing.

“Just by showing that he’ll listen, Obama has won credit that will give the U.S. a boost (in the region),” he said.

“Especially in the next decade, China and the rest of Asia will be going through huge changes, and the United States will have to adjust.

“President Obama’s visit was a start, but even if he’s happy with it, it showed there’s a lot to be done.”

EASING REGIONAL ANXIETIES

Obama did not start entirely from scratch in Asia.

While President George W. Bush was preoccupied with wars in Afghanistan and Iraq, he avoided major discord with China and other Asian powers.

Many of Obama’s key staff on Asian affairs served in the Clinton administration.

“Especially in the wake of the financial crisis, the United States has faced regional anxieties about its future role in Asia,” said Zhu Feng, a professor of international security at Peking University.

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Nov

20

2009

Obama’s Free-Trade Credentials Draw China, APEC Scrutiny

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President Barack Obama flew to Shanghai from an Asia-Pacific summit where leaders questioned his commitment to free trade, endorsed China’s stance on fighting protectionism and declined to back U.S. calls for a stronger yuan.

The 21-member Asia-Pacific Economic Cooperation group, representing 54 percent of the global economy, pledged in a statement yesterday to “refrain from raising new barriers” to investment and trade. They didn’t mention currency distortions, which U.S. companies say give China unfair trade advantages.

Obama is using the trip to redefine the U.S. relationship with Asia from its biggest debtor and largest single buyer of consumer goods to a more balanced partnership that can help bring down a 10.2 percent jobless rate. To do so, he’ll have to convince China’s President Hu Jintao and other leaders that tariffs on Chinese tire and steel don’t portend the future.

“The challenge Obama is facing is that the influence of the U.S. is rapidly waning and that he has little credibility” on trade issues, said Marc Faber, who manages about $300 million in Asian shares at Hong Kong-based Marc Faber Ltd. “Obama talked about free trade, but recently the U.S. slapped tariffs on Chinese-made tire imports.”

Obama needs to show the same commitment to free trade as his predecessor, George W. Bush, Malaysian Prime Minister Najib Razak said during a Nov. 13 panel discussion in Singapore. Mexican President Felipe Calderon suggested the U.S. has become more protectionist and less engaged internationally since the Sept. 11 terror attacks.

Protectionist Acts

Hu said at the APEC meeting in Singapore that China hadn’t foreseen the number of protectionist measures that would occur this year. A U.S. trade commission on Nov. 6 ruled that Chinese glossy paper and phosphates are harming domestic producers. A day earlier, the U.S. imposed preliminary duties on some Chinese steel-pipe imports.

The lack of an APEC commitment to ending currency controls by China, the region’s biggest economy without a floating exchange rate, signals that most of the members won’t join the U.S. in pressing for a stronger yuan.

A senior Obama administration official, who spoke on condition of anonymity, said it would be misreading the APEC communiqué to conclude that it represented a loss for the U.S. because it required the agreement of all parties.

Dollar Peg

China has kept its currency at about 6.83 per dollar since July 2008. Central banks in Asia accelerated dollar purchases this year to stem gains in their currencies that made exports less competitive than those from China. Indonesia’s rupiah jumped 11 percent against the yuan in the past six months, the Korean won climbed 9.2 percent and the Indian rupee rose almost 7 percent.

“China’s got big issues of its own and certainly doesn’t want to move on the currency, and it’s concerned about some protectionist rumblings from the United States,” said Stephen Roach, chairman of Morgan Stanley Asia in Hong Kong. “There’s no major breakthrough on any of these large global issues.”

Ceding Influence

The U.S. has ceded economic influence to China in Asia, in a region that contains sea lanes vital to world commerce, as well as coal, oil and precious metals.

China’s share of trade with the Association of Southeast Asian Nations rose to 10.5 percent from 2 percent since 1993 as that of the U.S. slipped to 12 percent from 17 percent, Asean statistics show. Obama co-chaired an Asean summit yesterday, the first time a U.S. president had met with the bloc.

Obama expressed interest in joining the four-member Trans- Pacific Strategic Economic Partnership Agreement, known as the TPP. The current signatories — Singapore, New Zealand, Brunei and Chile — have a combined gross domestic product that is almost 30 times smaller than the U.S. economy.

“Trade can be win-win. Obama’s condition to engage with the TPP is to ensure it can create jobs for the U.S.,” said Simon Tay, chairman of the Singapore Institute of International Affairs. “Even showing his interest has taken considerable political courage.”

Saving, Spending

APEC leaders agreed on the need to rebalance a global economy that had become too reliant on U.S. consumers for growth. The recovery will lead to a realignment for the U.S. economy, which will mean “saving more and spending less”, Obama said Nov. 14 in Tokyo at the start of his Asian tour.

Victor Fung, chairman of Li & Fung Ltd., the biggest supplier of clothes and toys to Wal-Mart Stores Inc., said it’s unrealistic to expect China’s $4.3 trillion economy to suddenly compensate for a drop in U.S. demand.

“In the U.S. you have about $10 trillion of demand and basically we’ve lost about $1 trillion” during the financial crisis, he said.

China’s growing influence in Asia doesn’t necessarily come at the expense of the U.S., Obama said in his Tokyo speech. The U.S. will continue to approach its relationship with China based on American interests, he said.

That statement illustrates a wrong approach by the U.S. in engaging China, said Morgan Stanley’s Roach.

“Is that really the way to look at China?” Roach said. “When you engage a powerful nation, if you want something from them, you need to give something back.”

Nov

18

2009

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