Monday, March 30, 2009

McCain afraid of leaving debt to "future generations," but he's okay with bequeathing poverty

“We still don’t have the transparency and oversight,” McCain said on “Meet the Press.” He said his biggest concern is that the cost of stemming the financial crisis will worsen annual deficits projected to exceed $1 trillion for many years.

“What I am most worried about is laying the debt on future generations of Americans,” he said.

Following his failed run for the presidency, John McCain--The Maverick--has apparently chosen to go back to his Conservative Republican roots and spout the party line, which includes non-sensical statements about debt to future generations.

I have said this many times: There is nothing wrong with our economy. We have all the resources and capital (both real and human) to produce wealth and prosperity. However, because of a belief system supported by people like John McCain, we choose to allow our wealth producing capacity to sit idle. As a result, the standard of living of Americans, both of the current generation and generations to come, will decline vis-a-vis the rest of the world.

In this case the real legacy we leave to our kids and grandkids is not debt, but poverty.

Why "restructuring" the auto industry is bad policy

"We think we can have a successful U.S. auto industry. But it's got to be one that's realistically designed to weather this storm and to emerge -- at the other end -- much more lean, mean and competitive than it currently is," Obama said on CBS' "Face the Nation" broadcast Sunday.

Take a look at the chart below. Vehicle sales in the U.S. are now at their lowest level since 1982, not because the auto industry is "not viable," but because we are experiencing the worst economic contraction since the Great Depression. Judging from his remarks on "60 Minutes," our president doesn't seem to understand that.

If "lean and mean and competitive" are code words for shrinking the domestic auto sector--reducing both physical and human capital and the associated technology--then somebody in the White House ought to look at that graph, because it is telling a very important story. It is saying that at some point down the road when the economy improves and demand picks up, there will be far less domestic capacity to produce vehicles, which will result in more imports, an ageing vehicle stock and higher car prices.

From an Administration that purports to be for the middle class and workers and for reducing "imbalances" (Obama says this all the time) and protecting jobs at home, this is once again astounding.

I believe Obama has good instincts, but his fundamental mistake was to surround himself with advisors that adhere to paradigms that have either outlived their usefulness, or were never "viable" to begin with.

Friday, March 27, 2009

Hey blog readers! Test your knowledge of our financial system. Please take Prof. Scott Fullwiler's exam

Scott Fullwiler is an econ professor who has been on my radio show and who graciously contributes comments to this blog.

To test your knowledge on our monetary system, please take the exam he recently gave to his grad student. Either myself or Scott will "grade" it.


Winter 2009
Case Study 5

The following quotes from rather famous figures or institutions are all completely incorrect regarding the nature of government debt and deficits according to the modern money framework described in class. For this case the task is to explain how the following quotes are incorrect.

As with the previous two cases choose 2-3 points in these quotes contradicting modern money, and explain the refutation of the point in the modern money paradigm.

In the interest of political balance, the quotes here are from a Democrat (President Obama), a Republican (Senator Judd Gregg), and the bi-partisan Congressional Budget Office.

Writing grading criteria are in effect.

Quote 1:
President Obama on 60 minutes

Mar 22 (CBS) —

KROFT: Is there some limit to the amount of money we can spend?


KROFT: Or print trying to solve this crisis?

OBAMA: There is.

KROFT: And are we getting close to it?

OBAMA: The limit is our ability to finance these expenditures through borrowing. And the United States is fortunate that it has the largest, most stable economic and political system around. And so the dollar is still strong because people are still buying treasury bills. They still think that’s the safest investment out there. If we don’t get a handle on this, and also start looking at our long-term deficit projections, at a certain point, people will stop buying those treasury bills.

Quote 2:
March 22, 2009
Gregg: ‘This country will go bankrupt’
Posted: 03:41 PM ET

From CNN Associate Producer Martina Stewart

GOP Sen. Judd Gregg warned Sunday that the country might be headed for a fiscal crash if spending isn’t controlled.

WASHINGTON (CNN) – Even though he was almost a member of the new Obama administration, New Hampshire Republican Judd Gregg Sunday slammed President Obama’s approach to handling the country’s fiscal outlook.

“The practical implications of this is bankruptcy for the United States,” Gregg said of the Obama’s administration’s recently released budget blueprint. “There’s no other way around it. If we maintain the proposals that are in this budget over the ten-year period that this budget covers, this country will go bankrupt. People will not buy our debt, our dollar will become devalued. It is a very severe situation.”

Gregg, known as one of the keenest fiscal minds on Capitol Hill, also told CNN Chief National Correspondent John King that he thought it was “almost unconscionable” for the White House to continue with its planned course on fiscal matters with unprecedented actual and projected budget deficits in the coming years.

“It is as if you were flying an airplane and the gas light came on and it said ‘you 15 minutes of gas left’ and the pilot said ‘we’re not going to worry about that, we’re going to fly for another two hours.’ Well, the plane crashes and our country will crash and we’ll pass on
to our kids a country that’s not affordable.”

Quote 3:
From page 43 of A Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget and Economic Outlook published March 2009 by the Congressional Budget Office (CBO;

“The primary difference between the current projections and the ones published in January is the effect of the American Recovery and Reinvestment Act of 2009. Although ARRA will boost output significantly in the next several years, any short run effects of the stimulus legislation on the business cycle will have dissipated by the end of the projection period. In the latter part of the period, the legislation reduces projected output by roughly 0.1 percent, principally through its influence on capital accumulation.”

“Capital accumulation is affected because the increase in government debt is expected to displace, or “crowd out,” a smaller amount of private capital. That result occurs because the reduction in overall national saving dampens spending on business fixed investment and the construction of housing. Although the size of such displacement is very uncertain, CBO assumes that, in the long run, each dollar of additional federal debt crowds out about a third of a dollar’s worth of private domestic capital (with the remainder of the rise in debt offset by increases in private saving and inflows of foreign capital).”

KB Home Narrows First-Quarter Loss as Orders Rise

March 27 (Bloomberg) -- KB Home, the Los Angeles-based homebuilder for first-time buyers, reported a narrower first- quarter loss and said orders rose even as the housing market deteriorated. The shares rose as much as 5.2 percent.

Housing starts are ridiculously low at 583,000 units annually. (And they were as low as 477,000 units in January!) Never in recent history have they been that low. Even in the recession of 1981-1982 they were almost double that level and they didn't stay down there for long.

With a population of 300m and growing and with family formations rising, the United States may experience a severe housing shortage once the economy gets back on track and credit begins to flow.

Homebuilder stocks are OUTRAGEOUSLY undervalued. Buy them! My favorites: Centex (CTX), Toll Bros (TOL) and pretty much all the rest. Or, you can just buy the S&P Homebuilder SPDR, which trades like a stock. Symbol: XHB.

Obama says automakers need 'drastic changes'

Why? Because they're losing money? So's Toyota, Honda, Nissan, Daimler, Citroen-Peugeot, Renault, Hyundai. Do they all need to make drastic changes too?

Perhaps. But maybe, Mr. President, the problem lies in a weak economy, which is something you can address.

General Motors is the largest auto seller in China, a country whose car sales exceed those in the United States. That seems to be a pretty good statement of viability.

As far as their U.S. operations are concerned, it seems unbelievable that a liberal president representing the Democratic party, who was elected on promises to help workers and the middle class, believes that part of the "drastic changes" that U.S. automakers need to make include cutting worker compensation!

If you want Detroit to be "viable" the way other nations' automakers are "viable," then support them, just as the others do.

Retail stocks suggest worst is over for consumer spending

The S&P Retail SPDR has definitely turn up. It's a leading indicator and portends better retail sales numbers in the coming months. This is good news for the economy and the markets overall.

Gov't sustaining personal incomes

Personal income for February '09 from just released report:

Change from Jan '09
(all figures in billions $)

Personal income: -$29
Private wages and salaries: -$29.9
Gov't transfer payments: $16
Personal taxes paid: -$18

Private wages and salaries dropped nearly $30 billion as layoffs, job cuts, salary cuts, etc continued to impact.

Government transfer payments (social security, unemployment insurance, health insurance benefits, disability, other) increased by $16 billion.

Personal taxes paid fell by $18 billion.

In other words, while total personal income dropped $29 billion from January to February, without the government's effect, personal income would have fallen by $63 billion!

Personal saving was at $450 billion from $478 billion the month before. Again, without government, saving would have dropped to $416 billion.

Height of absurdity: Gov't seeks help financial execs to sustain its own creation!

After weeks in which the White House was often sharply critical of excesses at financial companies, the president wants to adopt a more collaborative approach.

“We’re reliant upon them to help rebuild our economy,” said senior adviser Valerie Jarrett. “It would be very unnatural if we didn’t engage them and have a direct opportunity to pick their brains and look to the future.”

The comment above is absolutely insane. The very same people who nearly destroyed our economy are being consulted on how to fix it now!

I've said this a million times, if not more: The banking system is a construct of the government. Banks exist in the form they do purely because of government edict. The government "funds" banks by virtue of guarantees on deposits. Banks have lifelines to the Fed to preclude runs. And the government tells banks what assets they can own and those assets are deemed only to be the safest.

Without those conditions, the banking system would look like it did in the 19th century--a totally unregulated universe of money changers and financial intermediaries.

Those 19th century style financial "operators" still exist in the form of investment banks, finance companies and other intermediaries, however, the commercial banking system is, to some degree, a quasi branch of the Federal Governemnt.

The notion that the Federal Government cannot fix its own creation is like saying the Department of Defense would have to hire private mercenaries to "fix" the U.S. Army. It is insane! Yet, this is exactly what is happening.

Rather than allow the intermediaries of the financial sector to go down the tubes as a result of their bad decisions and instead, sustain the banking system in the form it currently exists (which is easy to do), we are doing the exact opposite. The banking sector is being destroyed because our leaders do not understand it is an entity of their own creation, designed to serve a public purpose by extending gov't subsidized credit to the private sector.

In place of a perfectly viable banking system, Tim Geithner is about to resurrect these financial intermediaries who were so destructive to the economy and no one says anything. It is beyond insanity!!

Thursday, March 26, 2009

S&P, Nasdaq, now positive since Obama inauguration, Dow closing in

Both the Nasdaq and the S&P 500 have recovered all of their losses since Obama's inauguration (Nasdaq's up 9%) and the Dow is within a hair of doing the same thing.

Where are all the Conservative critics who were gleefully pointing out day after day that the market did nothing but go down following Obam's swearing in? Dick Morris, where are you? John Boehner, where are you?

Could it be? Will the president's policies, which include higher gov't spending, really starting to work? The markets think so.

Expect the Republicans to start taking a different tack now. They will say, "Yeah, this is temporary, but just wait to see. Obama's policies will bankrupt the nation." (Judd Gregg has already stated this.)

By the way, it took the stock market 22 months to recover after Reagan was elected--20 months longer than the Obama recovery.

Lesson from the New Deal for today

Found this interesting article on Brad DeLong's blog.

Before the Great Depression none of the major industrial powers of the world pursued macroeconomic policies. Instead, they held that that government is best which governs least as far as economic policy was concerned and bound themselves with the golden fetters of the classical gold standard. A balanced budget was necessary to maintain confidence that a country would maintain its gold parity—hence no fiscal policy expansion. Under the gold standard the domestic money supply was
determined by the ebb and flow of gold reserves—hence no, or rather little, conventional monetary policy or quantitative easing. And under the gold standard countries except for Great Britain had very limited powers to support or recapitalize their own banks: when Austria tried in 1931 it found itself faced with an immediate choice of abandoning its banking policy or abandoning the gold standard.

So a New Deal was simply not possible as long as countries remained on the gold standard during the Great Depression—only after the golden fetters were cast off could the government even try to use its monetary, fiscal, and banking policy tools to promote recovery. This constraint gives us as clear evidence as we want that the New Deal—or rather New Deals, for each major industrial country during the Great Depression had its own—mattered for recovery. We know when each of the five major
industrial countries cast off the gold standard. We know how quickly each of them recovered from the Great Depression. There is a perfect rank correlation between how early a country abandoned gold and how rapid and complete its recovery was, as this chart that I have added to from Eichengreen (1992) shows.

Such a perfect rank correlation would happen only one time in 120 if there were really no connection between a country’s adoption of a New Deal and economic recovery from the Great Depression.

Found this interesting comment posted on a blog

This person seems to have it right!

Is the core question, "Can government spending change the rate of economic expansion/contraction?"

If government spending leads to economic expansion and new businesses that otherwise would not exist, then the future tax burden does not entirely fall on the existing businesses. Existing businesses may even pay less taxes in the future because of the contributions of new businesses. Clinton tax rates alone did not produce a surplus. The emergence of new businesses that paid taxes after an economic expansion balanced the budget.

This is another way that Ricardian Equivalence can fail to hold.

Of course, it matters HOW the money is spent. If it money spent on the palaces of Versailles, subsidizing unaffordable McMansions or shoddy construction in the Iraq Rat Hole, then contribution to long term expansion will be minimal. If however, it is invested on things like research and development that led to the internet, improving the health and education of the workforce and eliminating structural barriers to economic progress then the economy can expand. Those who argue for Ricardian Equivalence assume that government is unable to spend money in any way that expands the economy. They can only justify this position by ignoring history that inconveniently contradicts their ideology.

Good ending line!

Is Nouriel Roubini about to go down in flames?

Long time perma-bear, Nouriel Roubini, is predicting that stocks will drop and the government will nationalize the banks. His gloom and doom forecasts over the past two years have made him a household name, but he's always been a bear. (A broken clock is right twice a day; on military time it's right once a day!)

Roubini's continued dire forecasts, in light of new data suggesting that the economy is stabilizing, might suggest that his views are nothing more than an entrenched and inflexible personal belief system, which wants to view the United States and the world's monetary system, as inherently flawed and un-fixable.

Only time will tell, however, I have a hunch that people like Roubini, Meredith Whitney, Schiff, Rogers, et al, will go down in flames with their inflexible and out-of-paradigm analyses of the global economy.

Gov't transfer payments now supporting personal income

From the just-released revision to Q4 GDP, it is very clear that rising government transfer payments are playing a key role in supporting personal income. While personal income grew by $295 billion in 2008 vs. 2007, most of that gain was due to government transfer payments, which increased by $161.5 billion. Private wages and salaries only grew by $103.9 billion. Without government transfer payments personal income would have hardly increased at all, making the recession far worse.

See chart below:

Billionaire Li Ka-shing Says China Will Lead Global Recovery

Billionaire Li Ka-shing, who predicted China’s stock-market bubble would burst in 2007, said the nation will lead a global economic recovery and investors should consider buying shares and real estate.

Yes, this is what I predicted too! But only for the fact that Chinese policymakers are not hindered by destructive belief systems and thinking based on fallacies. If they need stimulus they do it, without incessant debate weighed down by non-applicable ideas such as "taxpayer on the hook" and "legacy of debt to future generations."

Merkel Makes Like Obama With German Stimulus Excluding Europe

Amazing how the media and many analysts just don't seem to understand that Germany's means are limited as the country is now functionally like a state within the United States. Germany cannot credit bank accounts with euros, only the ECB can. If Germany needs to stimulate it must have funds on hand or borrow in capital markets. The U.S. and other sovereign currency issuing nations that spend by simply crediting bank accounts don't have this problem. Their means to sustain output and employment are not limited--only by politics.

As global consumer demand melts away, slowing production lines across Germany, Chancellor Angela Merkel is injecting 82 billion euros ($110 billion) into the economy, the biggest stimulus package in Europe.

But less than 3% of GDP.

Germany’s spending spree came after Merkel exasperated European Union leaders, who wanted her to endorse a collective 200 billion-euro rescue package for the 27-nation trade bloc last November. Instead, she first criticized international stimulus efforts, and her coalition government abandoned three years of fiscal discipline only after domestic demands for action.

Hardly a "spending spree." She couldn't do 200 billion because Germany doesn't have it. Nor does the rest of Europe. Rather than say the truth, she chooses to criticize stimulus efforts, a political move designed to shift blame and skirt around the real issue.

“It’s time now for us to move together and to begin to act,” U.S. Treasury Secretary Timothy Geithner said in Washington on March 11. “Everything we do in the United States will be more effective if we have the world moving with us.”

Add this to the list of things Geithner doesn't comprehend. Under the current structure, the Eurozone is terribly constrained and were it not for the Fed lending hundreds of billions of dollars, they'd be in a freefall. This is incredibly important to understand because the Eurozone is the world's largest economy and it doesn't have the means to save itself! Tim, WAKE UP!!!

Wednesday, March 25, 2009

Fed may face headwinds if banks start repaying TARP funds

Goldman Sachs, JP Morgan and Bank of America are among a growing list of banks that are looking to repay TARP funds. Those three institutions alone received $60 billion in TARP money. Repaying that money would constitute a reserve drain of that magnitude.

Yet the Fed is currently expanding reserves as a result of its new policy of targeting long-term rates lower. Moreover, ongoing sales of securities by the Treasury might mean that the Fed will have to increase the size of its planned, $300 billion purchase of Treasuries.

Rather than state an amount, the Fed simply should have said, "We want long-term rates at X%."

Once again, it's a function of price, not quantity. You'd think they'd know.

Bank of England "failed auction:" Some perspective

Lots of talk today about a "failed" gilt auction in the U.K. and what that might portend for the U.S. Treasury market. Many commentators saying that it's only a matter of time before the U.S. experiences what just happened in the Britain.

However, those making that prediction are ignorant of the facts. Remember, monetary policy is all about price, not quantity. The price is the interest rate. Once a central bank sets an interest rate target it is obligated to sustain a level of reserves that maintains that rate. Remember, too, that the reserves provided by the central bank are the funds used to buy Treasuries or in the case of Britain, gilts.

The Bank of England still mainains a positive interest rate of 0.5%. While this is low, it still requires reserve maintainence to keep it there. On the other hand, the Fed's overnight interest rate is zero and it has been aggressively targeting long-term rates lower as well.

This means that the Fed has been far more aggressive in boosting system reserves or, providing the money to pay for Treasuries. The Bank of England has not.

One glance at the chart below should make it clear.

While the Fed has manipulated reseve balance up by almost 8,000% in the past year, the Bank of England reserve growth has been only about 120% over that course of time and has recently dropped down significantly. If the central bank is not providing the funds to buy gov't securities (or if the British treasury is not providing the funds), then the money to buy gilts will not be there. Thus, the "failed" auction. It's the market's warning to the BOE and the British government that either interest rates must be lowered to zero or more gov't spending must be undertaken.

Durable goods orders suggest economy is stabilizing

These charts say it all. The worst is past, at least for now.

Other indicators like stocks, certain commodity prices, suggest same.

Tuesday, March 24, 2009

Mortage-Refinancing Boom Fuels Surge in Bank Fees to Highest in Nine Years

Bank profits likely to surge and take many by surprise. When will Meredith Whitney catch on??

CNBC's Rick Santelli is clueless when it comes to monetary operations

Just saw CNBC reporter Rick Santelli talking about how strong today's Treasury auction was. He seemed incredulous and almost in shock, saying that the buying mimicked the "flight to quality" days of early this year.

Here is CNBC's top bond guy absolutely clueless to the fact that last week the Fed boosted reserves by $150 billion. How tough do you think it would be to sell $40 billion worth of notes when the Fed already put the money in to buy them?


Another terrific post from Warren Mosler's website.

Another terrific post from Warren Mosler's website.

The Geithner plan is the latest move in what is shaping up to be the largest upward distribution of real wealth in US history.

Its stated purpose is to provide high enough risk adjusted returns to attract ‘private capital’ at a time where risk perceptions are elevated.

This means ‘market forces’ will offer ultra high returns for the investor class and the financial sector in general to attract the desired private sector participation.

High unemployment will ensure real wages remain ‘well anchored’.

This means that as productivity and output increases, those gains in real consumption necessarily flow upward.

As the populist administration ironically moves to support investors and the financial sector at the expense of those working productively for a living.

Senator Judd Gregg says America facing bankruptcy

This guy is totally out of paradigm. We are not on a gold standard. It is functionally impossible for a nation that issues non-convertible currency and spends by crediting bank accounts to go bankrupt.

Judd is an idiot and being purposely alarmist because Conservatives are scared shitless right now that Obama's plan will work. The only thing they have to counter this is by saying, "Yeah, it's working temporarily, but it will eventually bankrupt us."

This guy is a dangerous guy. He voted against the stimulus and feels okay, I guess, with women becoming prostitutes, strippers and porn actresses to pay the bills because that's better than the government providing support to the economy.

Monday, March 23, 2009

New CBO chief Elmendorf gets it wrong

I got this from Warren Mosler's website.

In case you thought the new head of the CBO understands the way the monetary system works…

> > On Sat, Mar 21, 2009 at 1:37 AM, Scott wrote:> > FYI . . . from page 43 of CBO’s 10-year projections published> today…influence of CBO’s new head Doug Elmendorf (co-author a few> years ago of a widely cited paper on the effects of deficits on interest> rates) is pretty clear . . . .> > ”Capital accumulation is affected because the increase in government> debt is expected to displace, or “crowd out,” a smaller amount of private> capital.>

There is no such thing.

> > That result occurs because the reduction in overall national saving> dampens spending on business fixed investment and the construction of> housing.>
Non-sensical rhetoric. ‘National savings’ as he is using the term is a relic from the gold standard when there were hard supply side constraints on reserves.
> > Although the size of such displacement is very uncertain,>

Yes, in fact it doesn’t exist.

> > CBO assumes that, in the long run, each dollar of additional federal debt> crowds out about a third of a dollar’s worth of private domestic capital> (with the remainder of the rise in debt offset by increases in private> saving and inflows of foreign capital).”>

Ridiculous empty rhetoric from yet another deficit

These were my remarks:


How, then, does he explain the fact that while annual gov’t outlays grew 33-fold from 1946 to 2008 ($90 billion to $3 trillion), corporate consumption of fixed capital grew 125-fold? ($8 billion to $1 trillion.)

Moreover, even with the big expansion in gov’t spending, which by his own definition was supposed to “crowd out” the private sector, there is plenty of idle capacity, meaning that rather than crowding anyone out, more productive assets were created to produce wealth and these assets are available to whomever needs them. It's all there in the numbers. Does he even bother looking at them? Apparently not!

More importantly, why does anyone listen to this guy? How did he get a job like this?

-Mike Norman

Mike Norman blog readers continue to expose out-of-paradigm thinking/policy

A reader of this blog sent me the following email:


You know how you were saying that a big reason it’s so hard to convince people is because of the “pay to the order of” line on the check or the payroll deduction?

I found what seems to be a layman’s guide to the U.S. Budget (2002) at

I half expected part of it to be ‘in paradigm’, at least somewhat.

From page 22 Why a Budget Surplus is Important

Should we worry about the possibility of a return to budget deficits? Deficits increase the Federal debt and, with it, the Government's obligation to pay interest. The more it must pay in interest, the less it has available to spend on education, defense, law enforcement, and other important services,…

Wouldn’t it be impossible to have a productive discussion with the naysayer that would refer to this “.gov” pdf? It’s a effin DOT G-O-V publication for cryin out loud, oh my gosh!

This was my response:

The gov't pays interest the same way it makes payments for everything else: by crediting bank accounts and there is no limit to its ability to do that.

Not having "enough money" to pay for other things like defense, law enforcement, etc is a self-imposed political constraint.

Also, interest paid on debt becomes part of private sector income and private sector savings by definition. So to the extent that higher interest payments increase personal income, then people have more money to pay for education, health care, local law enforcement etc. and that means the Federal Gov't is needed less.

Whoever writes these things should be required to memorize the preamble to the Constitution, particularly the part that states, "...and promote the general welfare.."

You have women out of work getting into porn and becoming strippers to pay bills because the gov't failed in its basic responsibility of promoting the general welfare by sustaining output and employment. The result is crime and human degradation and a generally unhealthy corrosion of society.

I just listened to former Congressman Dick Armey talk about Shumpeter's principal of "creative destruction." I guess society needed more strippers and porn actresses because this is occurring naturally via the "market," and according to Armey the market is always the most efficient allocator of capital (in this case, human capital).

Most of this is happening because of an excessive and irrational focus on, "the money" as opposed to using the money to achieve our potential. There is an overzealous concern about an inflation that might happen sometime in the future, but zero concern for really bad things that are happening right now.

It's irrational.


Sunday, March 22, 2009

More women strip, make porn as economy tanks

Ah, yes, the free market at work!

This is what you get when a misguided belief system doesn't allow the government to support output and employment: Porn, crime and human degradation. People doing whatever they can just to survive. We can all breathe easier, I guess, because at least it's not "socialism," right?

Friday, March 20, 2009

Once again time for Dick Morris's comical economics

This was in the New York Post yesterday. My comments are in blue.

by Dick Morris and Eileen McGann

IN an effort to promote liquidity and boost the economy, the Federal Reserve yesterday announced plans to grow the money supply by another 50 percent to 60 percent. This ignores the profound observation of Gen. George Patton: "You can't push a string."

The Fed is increasing bank reserves, which are not part of the "money supply." The Fed manipulates reserve levels to hit a desired interest rate. In its most recent statement the FOMC indicated it wanted to bring long-term rates down, thus, it will buy long-term Treasuries and that will increase reserve balances.

When the Fed expands the money supply, it doesn't pass out $100 bills on Broadway. It gives lines of credit to banks and other financial intermediaries to generate some money and also buys up Treasury bills in circulation to pump out more cash.

Yes, it buys securities (in this case, long-term Treasuries as per my comment above) because it wants to bring down long-term interest rates. Maybe it SHOULD be handing out $100 bills. It would be far more effective in stimulating aggregate demand, which is what's needed now.

But the money supply has already expanded by 271 percent in the past five months. Why does the Fed expect what hasn't worked to suddenly start working?

Again, bank reserves have expanded. The commonly referred to measure of money supply--M2--has increased about 8-percent in that time period. And currency in circulation hasn't increased at all.

Right now, there is about $800 billion plus currency in circulation sitting in wallets, purses and cash registers around the country. Another $800 billion is sitting in a vault at the Federal Reserve Board, for a total monetary supply of about $1.6 trillion.

The currency is mostly sitting in vaults not in people's wallets. If it wasn't, then the next time you went to the bank to cash a check the teller would say she had no cash--it was all in your friend Dick's wallet!

The $800 billion "sitting in the Federal Reserve Board's vault" (?? Unreal!!) are actually electronic "credits" on accounting spreadsheets.

In a vault? Yes. When Congress voted the TARP program to bail out banks, the banks actually took only a small part of the money. The rest they used to offset losses on their balance sheets while letting the Fed hold onto the money.

In a vault? NO!! (As per my comment above.)

The Gov't gave the banks capital thinking that it would get them to lend. He seems to be suggesting that the banks should be lending their capital, which is not what they do. The problem is that in a weak economy asset prices go down, causing capital ratios to fall, causing banks to need more capital to stay solvent, etc. It's a vicious circle that could have been avoided by removing mark to market accounting rules for banks (but leaving it in place for non-banks), and forcing the Fed lend to banks without limit and without posting collateral if needed to preclude bank runs.

Why didn't the banks want the money? Because they're not about to make loans in this economy. They're more than happy to let the cash sit at the Fed earning them interest. (The Fed decided to start paying interest last November).

Yes, lending is pro-cyclical. Duh!! He finally understands something, yet he constantly argues AGAINST gov't supporting demand in order to jumpstart growth, which would do much more to get credit flowing again.

So now the Fed will, in essence, be creating another trillion of money supply to sit in the vault alongside the $800 billion already there. The new money will remain idle for the same reason the old money has because banks won't make loans in this environment.

The size of the Fed's program might have a nominal value of $1 trillion, but reserves (again, he keeps saying "money supply" when he is referring to reserves) are not likely to grow by that much because the Treasury is selling securities each week and over time most of the added reserves will be swapped for Treasuries. By definition, if the gov't is expected to run a deficit of $1.75 trillion this year, that amount of securities will eventually be sold, or something close to it. So $1.75 trillion of reserves will go away and the public will end up holding $1.75 trillion more in Treasuries, which are an asset and a part of household wealth.

And what of the money that is going out the door to buy Treasury bills? Those selling Treasuries won't run out and spend the money on flat-screen TVs. With higher taxes coming up next year and the economy in the tank, they won't spend it or lend it they'll probably just turn around and buy more T-bills.

The Fed's strategy of lowering interest rates will help some people and some companies. It will put cash in their pockets and some of that cash is likely to be spent on, who knows, flat screen TV's?.

Think of a parking garage filled with cars. The cars' owners leave them in the garage, because it's a bad day with rain and snow and conditions aren't suitable for driving. Similarly, banks and consumers leave their money in the vault at the Fed or in their bank accounts or under the mattress.

When conditions improve, though, all those metaphorical cars will suddenly be taken out for a drive. All at once. And a traffic jam of monumental proportion will ensue.

One problem with that analogy: The GOVERNMENT owns the cars and it can put some or all of them disappear if it sees the roads getting too crowded, thus alleviating any tendency toward a "monumental traffic jam."

When everybody starts spending the money they're now leaving in vaults and mattresses, way too much money will be chasing way too few goods and services. Double-digit inflation will return to America.

There's probably just two things that we will end up having "way too few" of and those are homes (housing starts WAY too low) and oil (OPEC cutting production WAY back). Other than that, we have WAY too much idle industrial capacity, unsold vehicles, workers out of work, citizens without health care and education, poverty, homelessness, etc. The list goes on and on. We also have WAY, WAY, too many people who think like Dick Morris.

Yesterday's Fed action won't help but it will put more money out there that the Fed will have to mop up once the economy, on its own, revives.

Yes, they'll "mop it up," just as he says, which is a total contradiction of his entire piece!

China’s Economy May Be Stabilizing, World Bank Says

"China’s economy is showing “early signs” of stabilizing as government-backed investment counters a slump in exports, the World Bank says."

"Government-influenced investment will surge 26 percent this year and contribute three-quarters of the economic expansion, it said."

"Premier Wen Jiabao said last week that the nation’s 8 percent growth target was “difficult but possible,” adding that the government could add stimulus measures at any time. The spending plan through 2010 includes roads, power grids, pipelines and low-cost housing."

Yes, because there's no Congress and they don't get wrapped up in ridiculous debates about "taxpayers on the hook," or, "the legacy of debt left to our children."

Sadly, China's children will probably have a higher standard of living than the current young generation of Americans because of our poisonous belief system. It's also astonishing when you think about it because it is run by a totalitarian communist regime.

One solution: Buy China stocks and put them away for your kids to inherit.

Larry Kudlow burns a dollar on TV

This could end up to be a great contrarian piece. Even better, maybe it will get Kudlow fired from CNBC. It's illegal to destroy U.S. currency and Kudlow does it on TV! Not smart.

East European Rates to Plunge as Currencies Ignored

"Eastern Europe’s key central banks will cut interest rates to record lows this year, opting to counter the deepest recession since the fall of communism instead of defending weak currencies, Bloomberg surveys show."

They seem to understand the current paradigm of floating exchange rates and its benefits a lot better than the ECB, which still seems to be more concerned about the euro's value than helping to sustain economic output and employment.

While the Eastern European currencies have all been hurt badly relative to the euro, I believe in the long-term they will outperform the euro as growth and stability return to those countries faster. One of the best long-term trades may be shorting the euro against the Czech, Hungarian and Polish currencies.

Thursday, March 19, 2009

Then again, I could be wrong...

The dollar keeps falling sharply making me wonder whether my "Not bearish for the dollar" call that I made yesterday was very insightful. There's a widespread belief that the Fed is "monetizing the debt," which it is not. The concept itself is totally not applicable in floating FX systems where governments spend by crediting bank accounts. Under this paradigm there is no need for a "buyer of last resort."

Moreover, the only thing the really Fed did yeterday was say it was going to bring down long term interest rates and it does this by manipulating reserve balances. In this case it will be buying long-term bonds to bring down long-term rates.

Forex trends have not been about interest rates in the past year and I still don't think that the rate argument applies, however, if enough people believe it or believe in debt monetization and they are itching to sell the dollar, they'll sell. It becomes a self-fulfilling prophecy to a point.

Wednesday, March 18, 2009

10-Year Treasury Yields Fall Most Since 1962

Still think rates are set by the market?

In the words of Nobel Laureate economist, James Tobin, "Interest rates are a parameter set by the central bank." Period!! (My emphasis.)

The Fed said its wants rates down and guess what? They went down--big time!

(Keep shorting Treasuries, Jim Rogers! When you're broke hopefully we won't have to listen to you anymore.)

On a similar note...a central bank has infinite power to weaken its currency. I am not talking about the Fed, whose statement today carries zero implication for the dollar whatsoever. I am talking about the Swiss National Bank's statement last week, where it said that it would intervene to keep the Swiss franc down. Bet against this at your own risk. Go with it and, with patience, you'll make a lot of money!

Fed move NOT bearish for dollar

The dollar has had a huge downward spike following the Fed's announcement that it will buy long-term bonds.

This is reflex selling by market participants who do not understand the ramifications of the Fed's move and I believe this weakness will pass relatively quickly.

The Fed's buying of securities is how it brings interest rates down, in this case, for a specific point along the term structure (longer term interest rates).

It adds to reserves, yes, but that has no impact on the dollar. Reserves are not part of the money supply and this is not printing money.

It is NOT buying bonds from the Treasury or monetizing the debt; it is buying securities from the public.

Interest rate differentials are not the driving force in Forex markets at the moment. If anything, the ECB has yet to catch up when it comes to rate policy, and that is bearish for the euro.

The Swiss National Bank has said it will sell the Swiss franc to counter deflationary forces.

Many foreign banks still have huge dollar liquidity needs and, therefore, demand for the dollar is likely to grow, not fade.


My take on the AIG bonuses

I understand why the public is outraged over the bonuses, however, if the government would spend a little more time trying to proactively come up with ways to RESTORE incomes rather than DESTROY incomes, the economy would be a lot better off.

Holding hearings on the $165 million AIG paid to execs under contractual obligations is ridiculous. Taking the money away is even more ridiculous. At this point I don't care who earns income as long as someone earns it (there's a circular flow anyway). At the rate we're going the government will soon destroy all income in the United States under the false idea that taxpayers are on the hook and the gov't has to make a profit.

Let the AIG execs keep their bonuses and let the gov't give its own bonus checks to everyone else!

Another example of the media stating opinion as if it is fact

We see this all the time: people in the media stating their opinion as if it is fact. This is insidious--and dangerous.

Here is another blatant example that appeared today in the New York Post. The column was written by John Crudelle, the Post's business reporter.

(My comments are in blue)


IT used to be that the only two things in life that were certain were taxes and death. Let me add a third certainty to that list: Anything Washington tells you isn't 100 percent true.

He says, "anthing Washington tells you," not, some of the things or a few of the things, but ANYTHING. This is a blatant exaggeration.

Take one of the few pieces of recent good news about the economy: that Americans' personal incomes increased in January even as their rate of saving money skyrocketed to 5 percent - the best in nearly 13 years.

In his belief system a higher savings rate is good news without exception, regardless of how it came about. He states this to you so matter-of-factly as if to suggest you're an idiot if you were to even consider disagreeing.

Please, does anyone really believe these numbers, given there's a recession going on, jobs are being cut and everyone is using every available dollar just to get through the day?

And there it is, that famous line once again! Repeat after me (in a mocking tone, please mimic Jim Rogers' voice or that of an old prospector): "Do you believe those numbers??"

A beautiful example of cognitive dissonance here. When something seems to contradict a person's belief system (like facts) the brain must come up with something to counter this or the person's emotional state will become conflicted and stressed. For most people, like Crudelle or Jim Rogers or Peter Schiff, the easiest way to do this is to cast doubt upon the government data. Thus, the oft' heard remark, "Do you believe those numbers!!"

Well, because I didn't believe the numbers, I did a little research. And I'll let you in on a little secret.

Of course not, because it gives him stress to think his belief system may be wrong.

The folks at the Commerce Department, who put out these rosy statistics, really don't believe them, either.

He's being totally sarcastic and displays very clear annoyance at even the suggestion that something in the news might be positive.

Here's how this "good news" came about.

The sarcasm and the mocking again.

Because of the recession, the US Treasury is estimating that its revenues will be down for the coming year.

Yes, that should be pretty obvious that Gov't receipts will be down.

That's mainly because of lower (or no) capital-gains tax payments, because people will report tax losses in the stock market and, of course, because many folks have lost their jobs and paid less income tax.


If the Treasury is receiving less revenue, the Commerce Department figures this money must still be in taxpayers' pockets.

Those with income are still paying taxes. Those without income or with capital gains losses will pay less. In total the gov't will collect less.

And if it remains in the possession of taxpayers, then people must be saving some (perhaps 5 percent, Commerce figures) and spending some.

Yet did the government ever think that the money isn't reaching people's pockets, and as a result it is neither being spent nor saved?

He's totally leaving out gov't transfer payments to individuals and interest paid, both of which are rising, adding to non-gov't income. This is happening as consumption is falling. A 30-second search on Google would have given him the following accounting identity:

Pvt = (Y + NFI + TR + TI -T) - C


Pvt equals private sector savings
Y equals GDP
NFI equals net foreign income
TR equals gov't transfer payments
TI equals interest paid by gov't
T equals taxes collected by gov't
C equals consumption

With TR and TI rising and T and C falling faster than the decline in GDP, the end result is higher private sector savings. It's just arithmetic. Not that hard.

A source in the Commerce Department chuckled when I asked about these numbers, explaining that these figures "are the very first estimates," which means they are the ones "most subject to revisions."

Again, being very dismissive here and suggesting that the gov't is playing a big joke on us with the numbers and laughing at the same time. Only HE got to the person that let him in on the joke. We should be thankful to him.

And people shouldn't take them very seriously.

Opinion stated as fact. Very bad...very, very, bad.

U.N. panel says world should ditch dollar

What audacity!!

After our Fed ran up a tab of nearly three-quarters of a trillion dollars supporting foreign central banks and institutions, this is the crap that comes out of the U.N.

If Bernanke and the rest of our leaders had any clue they would stop supporting foreign monetary systems with dollar loans, then tell the U.N. and its supporters of a global currency idea to go ahead and try to do it.

It is amazing that this is allowed to go on and that America has to take this kind of abuse and criticism. All because not one of our policymakers understands the monetary system. They get their education from CNBC and out-of-paradigm academics.

Remember...bad thinking is like an infectious disease. If not eradicted it will kill the body.


Another policy warped by "taxpayer on the hook" thinking. The FDIC has the unlimited backing of the Treasury, but it doesn't seem to understand that. The notion that the government's means are limited is now forcing the FDIC to raise fees that banks pay for desposit insurance (essentially like a tax hike on banks) or "find other sources of funding." We are destroying the banking system, which itself is a construct of the gov't, largely because of misguided thinking that is so mired in myth and fallacy that it is astonishing! There is only so much of this that our economy can withstand. We are taking a perfectly good wealth producing system and deconstructing it at every turn for no good reason.

Tuesday, March 17, 2009

Housing starts snapping back from unsustainably low levels. Buy homebuilder stocks!

Housing starts are way too low given the rate of family formations, the growing population and the normal need to replace some of the nation's older housing stock. The level of starts is not just discounting a depression, but nearly the end of the world. This has gone way too far. There is going to be a significant snap back, not to levels seen in 2006, but enough to suggest that homebuilder stocks are incredibly cheap right now.

Meredith Whitney doesn't understand fiscal policy impact

Meredith Whitney was on CNBC this morning and was asked if she thought there was a chance that all the fiscal stimulus might actually work. Her response was, “It’s all hodgepodge. The simpler thing to do would be to find a way to get the small players (small banks) to start lending again. And put limits on credit card fees.”

The Citigroup call made Meredith Whitney famous and perhaps even rich, but her response to that simple question about stimulus and its effect on the economy almost guarantees that she will be very late on calling a turnaround. That will be to the detriment of clients at her newly formed advisory firm. Like so many others, she fails to understand, or marginalizes, the impact of government spending on the economy, which at times can be profound.

Bank stocks are rising again. The economy is stabilizing and growth will return at least up until the point where fiscal policy starts to apply drag. That’s not likely for a while.

Read Warren Mosler’s excellent piece on Meredith Whitney.

Monday, March 16, 2009

Another two-faced phony exposed!

Just like Peter Schiff, who appeared on every media outlet in the world proclaiming that he "called" the real estate bust (but then went on to lose all his clients' money), another phony is exposed.

New York University professor, Nouriel Roubini, a long time perma-bull who recently said he believes this rally is a "dead cat bounce," is actually 100% long stocks for his own account, yet he tells his clients to go short!

These guys are the most despicable sort of humans. They prey on the fears of innocent people while hiding behind a charade of concern, and standing upon a mountain of sanctimony. They are cowards of the worst order.

Read article here.

Ideologues tell you to save, then allow your savings to collapse


How often do we hear ideologues (mostly on the conservative right) tell us that we have to save more as a nation? How many times do we have to hear Larry Kudlow and other infamous “supply-side” propagandists lecture us that we must “incentivize” savings via policy?

There have been two major policies designed to get us to save: government subsidy of home ownership (largest saving vehicle of most households) and tax policy favorable to stock market investing (second biggest asset holding).

In 2008 households lost more than $11 trillion in net worth mostly because those assets collapsed.

And what did those same ideologues have to say?

They scolded us for buying homes. They said let asset prices fall; that the market would sort it all out. They deployed trillions to try to get us to borrow more. And, yes, they told us to save!

Geithner plan will create "AIG-style" compensation gains for some

Public outrage over AIG compensation is understandable, yet Treasury Secretary Tim Geithner’s public-private partnership approach to solving the banking sector’s “toxic asset problem” pretty much guarantees windfall profits to lots of people who are already very, very, wealthy.

Large private equity funds managed by some of the nation’s richest financiers are likely to participate in the Treasury’s plan to purchase assets with government (taxpayer) guarantees against losses. When these assets rise in price they will reap big gains and few among the general public will benefit.

So where is the outrage?

If Geithner insists on “fixing” the banking system using this approach, then the guarantees should be offered only to public and private pension funds and not hedge funds and private equity pools. At least that might help to repair some of the damage done to small investors whose savings, in part, reside in these vehicles.

Friday, March 13, 2009

Another fallacy: Fed "printed too much money from 2001-2008"

We hear this all the time, but it is just not true!

Growth in the monetary base (Federal reserve notes, coins and bank reserves), or the monetary aggregate the Fed has the most direct control over, collapsed to near zero in the period from 2001-2008.

Private sector "money" (credit) was created in the private financial system (banks, intermediaries), while the Fed and the government was limiting the issuance of its own money.

See chart.

Thursday, March 12, 2009

China's Industrial Output Rises 11%

Stimulus plan working. Much bigger than U.S. plan (as a percentage of GDP). No ridiculous debate about "taxpayer on the hook," or, "who will finance the debt?" or, "generational theft."

“There is no doubt that industrial output will continue to recover, boosted by the strong growth in investment and bank loans,” said Lu Zhengwei, a Shanghai-based economist at Industrial Bank Co.

Notice the sharp rebound in loan growth because the government is boosting aggregate demand and not putting onerous conditions on banks to "pay back" a profit to the gov't.

“The export engine has died: China is in a ‘help themselves’ mode, pump-priming like crazy to increase fixed- asset investment and keep retail spending going,” said Joseph Tan, chief Asian economist at Credit Suisse Private Bank in Singapore. “I think they’re going to pull it off.”

Their exports have died because the U.S. has allowed aggregate demand to die as a result of policy here that is opposed to gov't support of aggregate demand. However, China doesn't need us; they are stimulating domestically.

Here's another thing you don't hear from China: statements like, "The whole world has to work together in order to get out of this mess." China is helping itself and not relying on anyone else.

Will we learn from this?

Not likely.

By the way, lower exports to the U.S. will mean significantly less accumulation of U.S. Treasuries. Does this means U.S. interest rates will shoot up as per everyone's fears? Absolutely not!!

Investment advice: Buy China stocks!

Tuesday, March 10, 2009

Oil rises to near $48 as OPEC signals supply cuts

When oil is back up over $100 we will be hearing the usual reason: "supply and demand." However, few will mention the OPEC cartel and its ability to set prices at the margin.

Friday, March 6, 2009

Forcing gov't to "save" may be bad for your health

Another unintended consequence that comes from the misguided belief that government must "save" can be seen in the health care area. Under Obama's new budget there are forced cuts in Medicare spending on MRI's and X-ray procedures. These procedures often help doctors save lives and the cuts in spending fall on the most needy. Again, this is coming from a Democratic President who promised to help the middle class and the most needy.

As a result of reduced payments for these services, companies like GE, Siemans and others, will sell fewer MRI machines and X-Ray devices. That means they will lay off more workers, leading to more income destruction of the private sector, etc.

You would think that it starts to become evident, at some point, that forcing the government to run like a profit seeking enterprise, KILLS private enterprise and the private sector.

On the other hand, if Obama boosted payments for medical services, GE and other companies in the health care sector would sell more machines, hire more workers, incomes would be increased (and more taxes paid) and so on and so forth. Not to mention the fact that healthier people constitute more efficient human capital. A virtuous cycle is created.

So why don't we do it?

False beliefs, misconceptions, deficit fears, etc.

Payrolls declining at fastest pace in 51 years!

You have to go all the way back to 1958 to see an annual percentage drop in payrolls this fast.

Violence in Denmark a microcosm of what could happen here

Safe, secure, Denmark.

That's what you usually think. But times are a changing.

What was once Europe's third safest city is seeing violence spiral out of control.

Crime is a function of the economy. As conditions in the U.S. deteriorate crime is bound to rise and it could get very chaotic and even dangerous.

Only an irrational belief system in this nation keeps us from living in a state of near-Utopia. We will pay dearly for that irrational belief system as the flip-side of "near-Utopia" is crime, poverty, violence, disorder and destructive social unrest.

Loss of Swiss Bank secrecy may hurt the franc

For nearly 400 years Swiss banks have been known for their impenetrable secrecy and those secrecy laws have resulted in $trillion flowing into Switzerland from around the world. That is ending.

It's a major paradigm shift that raises serious questions about the Swiss franc as a safe haven currency. Will it be anywhere near today's current exchange value in five years? My sense is, no. That's why I am shorting the swiss franc.

China sees signs economy might be recovering

"We have seen some positive signs including recovery of export growth," Zhang Ping, the chairman of the country's planning body, the National Development and Reform Commission, said at a news conference. "It really depends on the changing situation to determine whether we need additional investment."

The main point is, they are prepared to put whatever stimulus is necessary and if and when that happens, it will occur without public debate and without self-imposed constraints based on inapplicable paradigms.

This is why you have to invest in China.

Thursday, March 5, 2009

The dangers of running public services for profit

Scary article. Got it from Warren Mosler's blog.

The Proceeds of Crime

"It’s a staggering case; more staggering still that it has scarcely been mentioned on this side of the ocean. Last week two judges in Pennsylvania were convicted of jailing some 2000 children in exchange for bribes from private prison companies.

Mark Ciavarella and Michael Conahan sent children to jail for offences so trivial that some of them weren’t even crimes. A 15 year-old called Hillary Transue got three months for creating a spoof web page ridiculing her school’s assistant principal. Mr Ciavarella sent Shane Bly, then 13, to boot camp for trespassing in a vacant building. He gave a 14 year-old, Jamie Quinn, 11 months in prison for slapping a friend during an argument, after the friend slapped her. The judges were paid $2.6 million by companies belonging to the Mid Atlantic Youth Services Corp for helping to fill its jails(1,2,3). This is what happens when public services are run for profit."

Read full article here.

The Bloomberg idiots are at it again!

The idiot journalists at Bloomberg are at it again! Mark Pittman is totally clueless and has admitted to me that he knows the Fed's accepted collateral list is public information, yet he continues to write these inflammatory stories.

"Bloomberg News, a unit of New York-based Bloomberg LP, on May 21 asked the Fed to provide data on collateral posted from April 4 to May 20. The central bank said June 19 that it needed until July 3 to search documents and determine whether it would make them public. Bloomberg didn’t receive a formal response that would let it file an appeal within the legal time limit."

Hey, Bloomberg idiots, the list is here:

Read one of my earlier posts exposing this Bloomberg journalist for the liar that he is. Bloomberg journalists distort the truth.

Please email these jerks ( and tell them that they are idiots and propagating misinformation and ruining our country.

Also, email the Fed and tell them that you know the collateral list is publicly posted and that the Bloomberg idiots are, well, idiots.

Wednesday, March 4, 2009

China to ‘Significantly Increase’ Spending to Revive Growth

Buy China stocks!!

China is not burdened by idiot lawmakers, journalists and self-interested economists. What the government decides, gets done. There's no, "taxpayer on the hook" debate and, "who's gonna buy our debt?" questions asked. No cries of deficits or moral hazard.

China will lead the global economy out of recession.

The U.S. has ceded its role as global economic engine because of a terribly destructive belief system.

Buy China stocks. Buy all you can. There's not a single China stock that you shouldn't buy. Go into debt buying China stocks. You'll become rich.

'Bad Bank' Funding Plan Starts to Get Fleshed Out

This plan is amazing in how warped the fundamental "logic" is.

Pension funds--which are pools of the public's money and a significant part of its wealth--are being asked to "save" a banking system that exists entirely because government policy created it. (Guaranteed deposits, lifeline to Fed, regulated assets, etc.)

This fundamental lack of understanding has already led, or contributed to, the destruction of over $7 trillion of household wealth. Yet Geithner is now asking people to use what's left of those remaining savings to secure a system that the government built, and which it has the means to sustain on its own.

He says he will offer "guarantees" against losses. Isn’t that the same thing as saying the government will just keep the banks functioning in the capacity they were created for: acting as agents of the gov’t to provide credit to the private economy?? Seriously, what is this bizarre plea for private funds?

It's bad enough that Geithner is asking people to put their life savings into supporting a creation of the government that the government itself could sustain without any negative impact to the public. But when he gives profit guarantees to billionaires--many of whom were part of this problem or had been instrumental in targeting these very institutions for demise—the whole thing become incomprehensible, especially when one considers that this is a Democratic president and administration purportedly fighting for the middle class!

Toyota U.S. Sales Plunge Record 40% as Slump Widens

Is Toyota "viable?"

After all, their sales are plunging. Doesn't that mean they are not making the cars consumers want to buy? And all those sales declines are resulting in operating losses.

So, again, the question is, "Is Toyota 'viable?'"

These questions sound silly to most people because most people--including U.S. lawmakers--would consider Toyota a model of "viability." Yet this exposes the double standard that exists in America.

Ford, GM and Chrysler are just as viable as their Japanese counterparts if one looks at it objectively. Perhaps they are even more "viable."

Whereas U.S. automakers have always had to operate in a market environment unfettered by subsidies or official policy designed to sustain their exports and protect their local markets, Toyota and other Japanese and Korean automakers have had the benefit of closed markets, direct subsidies and use of currency manipulation to protect, nurture and sustain these companies for decades.

Yet despite all this, GM remained the world's largest automaker until recently. Ford and Chrysler have also ranked among the largest and when times were good and consumers were buying cars, Detroit's Big 3 were highly profitable.

Now, however, conditions are terrible and even Toyota is having trouble. Do we hear cries from Japan about their "viability?" Of course not.

It is ignorance, selfish interest and fundamentalist ideology in America that will eventually lead to bankruptcy for GM, Ford and Chrysler, which will mean that more of America's productive, wealth producing capital will be destroyed for no reason.

We are handing other nations our prosperity, for no reason save for sheer ignorance. This is the true legacy of what we will leave our children--a lower standard of living and far greater poverty. We are actually giving away their inheritance to the rest of the world and our policymakers, the talking heads and most Americans seem perfectly okay with that.

Tuesday, March 3, 2009

EU has solutions in case of euro state default

Oh, really?

Hard to see what that could be unless they have ammended the Maastricht Treaty to give the ECB the ability to bail out failing institutions. At present it is precluded from doing that. And while that might help prevent bank runs, it certainly doesn't address collapsing economic output and rising unemployment, at least not directly.

The collapse in demand can only be countered by massive fiscal stimulus and as the nations of the Eurozone no longer have the ability to spend by simply crediting bank accounts without limit, some new, integrated regulatory scheme, like that which is being discussed, will hardly be sufficient.

Hidden Pension Fiasco May Foment Another $1 Trillion Bailout

"Public pensions in the U.S. had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30 percent less than that, at $2 trillion.

With stock market losses this year, public pensions in the U.S. are now underfunded by more than $1 trillion."

Seems more and more obvious that targeting stock prices, rather than the LIBOR rate, would have been a much more effective policy for the Fed to pursue. It is incomprehensible that no one seems to see that.

Boosting stock prices would result in an immediate bounce in confidence, income and wealth for many households.

Japan and other nations are considering doing it. In the Panic of 1907 J.P. Morgan instructed bankers to do this and the crisis ended rather quickly.

Monday, March 2, 2009

‘Leave it to Beaver’ Savings Lifts U.S. Bond Holdings

"What if the Chinese don't buy our debt?"

Then Americans will. Or someone else. That worry has always been unfounded because the money to buy gov't securities comes from government spending itself.

Americans are lifting their purchases of government securities to levels not seen in decades according to this story:

U.S. government debt is gaining favor with a group of investors who lowered their exposure to Treasuries in nine of the past 11 years -- American citizens.

Merrill Lynch & Co. says U.S. bonds owned by individuals likely will account for 2 percent of households’ financial assets by 2013, up from 0.2 percent now. That level hasn’t been hit since the months following the Sept. 11, 2001, terror attacks, Federal Reserve data show. Americans’ direct purchases will rival the $1 trillion foreigners probably will buy in the next five years, Merrill predicts.

Read here.