Fiscal Exam Time!

From Michael Cembalest at JP Morgan, an exam. Part I today, on the U.S. fiscal situation. As he says, no cheating and Google-ing the answers. [-]

1. What might it take to stabilize the US federal debt, and return to a 3% budget deficit in 2015?

1. 2001 Bush tax cuts expire for everyone; agreed-upon cuts to physician Medicare reimbursement get implemented; AMT relief ended; personal exemption phase-outs and itemized deduction haircuts applied as previously agreed
2. Forget about tax hikes and spending cuts, go for growth: achieve 6.5%-7.0% annual nominal growth (without interruption)
3. Eliminate all non-defense discretionary spending
4. Any of the mutually exclusive choices shown above

2. Current US Federal debt held by the public is around $10 trillion.  In a speech Richard Fisher of the Dallas Fed gave in 2008, he estimated the present value of all unfunded entitlement obligations (e.g., the debt of the future) to be:

1. Another $10 trillion
2. A “gazillion
3. Another $99 trillion
4. Same as the maximum damages the recording industry is suing Limewire for, $75 trillion

3. Debt ceiling talks have reportedly broken down again over differences regarding the need for higher taxes.  Partisanship in the House and Senate, measured by the frequency of  legislators only voting for their own party’s bills, is now:

1. High, but not as high as during the Nixon era (recall that Nixon sent his Enemies List to the IRS so they’d be audited)
2. Medium, and considerably lower than during the Great Depression when the gap between rich and poor widened
3. High, but lower than the period following the Civil War, an internal conflict with 6x the casualty rate as WWII
4. Higher than at any time since 1879

4. While the profits boom in the US has been impressive, it is heavily reliant on two things: weak labor markets, and rising non-US demand linked to abnormally low policy rates in the emerging world.  During the 1980’s and 1990’s, post-recessionary profits recovered at 4x the rate of nominal US GDP growth.  In the current recovery, that ratio peaked at:

1. 2x
2. 8x
3. 12x
4. Infinite, since there has been no recovery in nominal GDP

5. During the recession, 75% of all high yield bonds traded below a dollar price of $80. Strong corporate balance sheets and easy Fed policy then contributed to a massive rally in credit.  The percentage of HY bonds now trading below $80 is:

1. 31%
2. 14%
3. 2%
4. 0%, since with interest rates at zero, anything with a coupon must be worth par

6. Household debt, which was 90% of disposable income in the year 2000, peaked at 130% of disposable income in 2007. After the last 3 years of defaults and de-leveraging, this ratio is now:

1. 141%
2. 114%
3. 102%
4. 85%

7. Some suggest a tax holiday for companies repatriating offshore profits (taxing them at 5% instead of 35%).  When a tax holiday was enacted in 2004 (American Jobs Creation Act), the # of jobs created per $1 million of foregone tax revenue was:

1. 50
2. 200
3. 1,000
4. negative; repatriating companies cut jobs in a rising job market & raised dividends

[Update] I have now posted answers here.

Related posts:

1. Growth in a Time of Debt
2. Subprime Crisis Claims California: Fiscal Emergency to be Declared
3. Net Fiscal Stimulus During Great Recession
4. Fiscal Adjustments Ahead Around the World, A Graphical Look
5. Greece: This Time It’s Different This Time