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From: US GIO [us.gio@jpmorgan.com]
Sent: 7/25/2011 4:33:45 PM
To: Undisclosed recipients:
Subject: Eye on the Market, July 25, 2011
Attachments: image002.png; image004.png; image006.png; image008.png; image021.png; image022.png; image023.png;
image024.png; 07-25-11 - EOTM - White Castle.pdf

Eye on the Market, July 25, 2011 (the attached PDF document is much easier to read)
Topics: US debt ceiling negotiations, a more ambitious European bailout plan (finally), and how large cap growth
stocks and rising corporate profits are patiently waiting for both of them to end

White Castle. Twenty five years ago, I had a friend with a peculiar way of responding to seeing things he didn’t like on
TV: he would throw White Castle hamburgers at the screen. I always thought this was a bad way to waste a good
hamburger, but I had one of those moments the other night when watching news reports on debt ceiling
discussions. Media outlets have referred to President Reagan’s scolding of Congressional Republicans for delaying debt
ceiling increases, and the 18 increases that took place during his Presidency. The implication: reservations about raising
the debt ceiling are as irresponsible now as they were then. This is a disingenuous argument; in the 1980’s, the debt
ceiling being debated was 50% of GDP, and had no bearing on the solvency of the United States. Today, the
proposed increase raises the debt limit twice as high, measured relative to GDP or government revenues. While a default
is a very bad idea (deserving of a White Castle hurling of its own), unconstrained debt growth with no plan to slow it is
bad as well. Some suggest we not worry about debt growth, since demand from foreign central banks and the Federal
Reserve would keep yields in check. That logic is irresponsible at best. Debt limit legislation is a rocky but healthy way
for a democracy to decide whether mega-deficits are in the long-term public interest.

Debt limit debate of the 80's: an entirely different discussion
Percent Multiple
110% 8x
100% 7x
90% Reagan scolds Congressional Republicans for not raising the debt ceiling Debt limit to GDP 6x
80% 5x
70% 4x
60% 3x
50% Debt limit to gov. receipts
40% 2x
30% 1x
20%
1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010
Source: OMB, BEA, J.P. Morgan Private Bank

Over the last few days, the Gang of Six plan, the Reid-McConnell plan and the Obama-Boehner plan have all been
raised up the flagpole and then lowered. By the end of the process, we’re still looking for deficit reduction of $3
trillion+ over 10 years (relative to the CBO Alternative case in which there is no deficit reduction at all). However,
Congress is running short on time, and may have to do a smaller debt ceiling increase/deficit reduction first. For now,
we wait to see the balance of spending cuts and revenue increases will be agreed to. Last week’s Profiles in Courage
piece walked through the history and dynamics of this process, so we won’t repeat that here. Here’s our take on what
has been proposed so far, with the caveat that many plans are not crystal clear what baseline they are using, or what
steps they recommend to get to that baseline first. For example: the Gang of Six state that they used the President’s
budget as a baseline (scored by CBO in March 2011), reduced deficits by $3.7 trillion, and ended up with a 71%
debt/GDP ratio; but they do not explain how they get to the President’s baseline in the first place.

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