Tuesday, August 31, 2010

Voracious and out of control Finance Capitalists: coming to devour the public sector next

Producing nothing of real value, fatally hooked on ever-mounting rates of return, simultaneously divorced from and a parasite on the “real” economy, and with the executive and legislative branches in their pockets, the Lords of Capital are set to devour the entirety of the public sector – while forcing the public to finance the feast. The rallying cry is “austerity,” but the motivation is not, as New York Times columnist Paul Krugman maintains, ideological. Rather, it is hunger.

Finance capital is, at this stage of the system’s decline, incapable of reproducing itself through productive investment, and so must feed on existing producers or on the State. Since Wall Street over the decades has already broken up, consumed and exported much of the U.S. productive economy, that leaves the State and all of its parts. Far from acting as a brake on his vampire friends, Obama leads the charge on corporate hijacking of public education, and signaled in January 2009 that all elements of the safety net, including Social Security, should be “on the table” – which can only mean some form of privatization.

Scary stuff.

Read entire article here. Then, get ready to fight!

JP Morgan closing down commodity prop trading to comply with Volker rule

The company said it will be closing fixed income and equity prop trading next.

It sounds too good to be true, right?

Well it probably is. That's because most of these traders will end up at hedge funds. The only really effective way to end all this speculation is to ban it and I don't see that happening anytime soon.

Here's the story.

Saturday, August 28, 2010

The "Golden Age of Monetary Policy " is...


(Hat Tip to mortgage angel for data)

Somebody needs to tell Fed Chairman Bernanke. From his speech this week in Jackson Hole:

Fiscal policy--including stimulus packages, expansions of the social safety net, and the countercyclical spending and tax policies known collectively as automatic stabilizers--also helped to arrest the global decline. Once demand began to stabilize, firms gained sufficient confidence to increase production and slow the rapid liquidation of inventories that they had begun during the contraction. Expansionary fiscal policies and a powerful inventory cycle, helped by a recovery in international trade and improved financial conditions, fueled a significant pickup in growth.

At best, though, fiscal impetus and the inventory cycle can drive recovery only temporarily......

How's that? If not Fiscal Policy, then how can Monetary Policy help at the 0% bound? The only "tools" he has left rely on the "Quantity Theory" of money (increasing the so-called "Money Supply"), and this theory has been laid bare as another economic fraud in recent events that have seen money "measures" increase asymptotically while output, employment and indeed many prices have fallen.

It's over Mr. Chairman, the 30-year "Golden Age of Monetary Policy" that started when a former Fed raised the Policy Rate to 20% and ushered in a 30 year era where the Fed could consistently reduce policy rates over this time is now at the zero bound and has ended. Fiscal Policy is all we've got now...as Mike has said "somebody has got to spend".

The sooner our policy makers realize this the better.

Thursday, August 26, 2010

Bond market: "Reports of my death have been greatly exaggerated"

If you're like me I'm sure you've been hearing a lot of talk about a bond bubble recently. It's everywhere--on TV, in the news, everywhere. You can't go five minutes without somebody talking about how the bond market is in a bubble and how it's going to burst. That's just for starters, because when they tell you it's going to burst they say that when it does it will make the housing and dot-com bubbles look tame by comparison.

Some of these Cassandras have been shouting their warnings for a long, long time. People like Peter Schiff, Jim Rogers and Marc Faber have been telling us that bonds have nowhere to go but down for years. Meanwhile, the bond market has done nothing but go up. I'm absolutely positive that Rogers, Schiff and Faber wouldn't have any money at all if they followed their own advice. That's why they don't. They've cleverly fashioned lucrative businesses for themselves that keep them far away from the dirty and distasteful chore of having to earn money off their own investment ideas. Rather, they earn money the modern American way: through clever marketing, celebrity, advisory fees, book sales and public appearances. Maybe this is a testament to their business savvy, I don't know, but one thing I do know for sure is that it's certainly a sign of their disingenuousness.

Their message has been finely honed: the United States government is borrowing its way into oblivion and pretty soon there won't be anyone around to buy our debt. We ought to get down on our knees and thank God that all those generous Chinese people buy our bonds because without that we'd be another Zimbabwe. The outrageously flawed analogy to Zimbabwe is one of their favorites and they invoke it often and with great flair! Sometimes they'll even display a real, 100 trillion Zimbabwe note and say that it wouldn't even buy you a 2 cent stick of gum. In the next sentence they'll confidently predict that the dollar is headed for the same fate if the U.S. keeps up this "profligate" spending. You have to admire their showmanship; it's just too bad the comparison to Zimbabwe, Wiemar Germany or Argentina is completely ridiculous.

When I hear people say that the U.S. is broke and that we only exist because of the kindness of the Chinese, I have to ask them a very simple question: What exactly is America borrowing? I mean, seriously, what are we borrowing? Let's be specific here! After all, if you want to solve a problem or understand something complicated you sometimes have to break it down.

So, let me repeat...what are we borrowing?

The answer is, if we're borrowing anything at all (and that's debatable), we're borrowing dollars. Not Chinese yuan or Japanese yen or Euros or Beanie Babies. We're borrowing dollars. Even the "Debt/Doomsday" crowd wouldn't disagree on this one.

Once you accept that dollars are being borrowed, not yuan or yen or Euro, then the next question has to be, where did those dollars come from? Yes, maybe some of those dollars came from China, but where did the Chinese get them from? Ultimately there is only one place where anyone can get dollars from and that is the U.S. Government. The United States is a sovereign currency issuing nation and the monopoly issuer of the dollar. Dollars cannot not be gotten anywhere else; if they are, they're counterfeit.

It follows that in order for anyone to have the dollars to lend us the government had to have spent those dollars into existence in the first place or nobody would have them--period! They can't come from any other place. Moreover, the government must spend more of its dollars than it collects in taxes and fees for the non-government (that's me, you, businesses, states and the rest of the world) to have a surplus of dollars to "lend." There's simply no other way.

It should now be obvious that the money that goes into Treasuries--whether that comes from American citizens or foreigners--is not really a loan at all. A bond is nothing more than a savings account that the government offers to people who hold dollars. That's it. And the money to buy bonds comes from government spending itself (more accurately, deficit spending).

I'd like to bring the Fed into the equation at this point because I started out talking about how this is not a bond bubble and I'll need the Fed to help explain this. (Short sellers, pay attention!)

The Fed's main policy tool is the setting of interest rates. The Fed does this by buying or selling government securities. Yes, those very same bonds, notes and bills that the public holds. When the Fed buys securities it credits the reserve accounts of banks. Reserves are added to the banking system and, voila!, the interest rate goes down. If the Fed wants to raise interest rates it does the opposite: it sells securities and that results in the debiting of reserve accounts and rates go higher.

Throughout this economic crisis the Fed has been bringing interest rates down, in fact, it has brought rates down a lot. The Fed funds rate is currently close to zero and it has been there for quite some time. In order to get the funds rate to zero it has had to be a buyer of securities as per my explanation. Moreover, the Fed recently said that it would start to target longer term rates, so it has begun buying bonds. Remember it is buying bonds from the public. I often hear people say that the Fed is buying bonds from the U.S. Treasury so that the government has the money to spend. That is completely wrong. I explained earlier that the government spends by issuing its own money, which gets spent into the private economy and some of it is held by the public in Treasuries.

The Fed will continue to buy until it reaches the rate of interest that it feels is appropriate and it will maintain that buying as needed to keep the rate there.

This is where the short sellers and bond bubbleheads need to pay very close attention.

The Fed's checkbook is unlimited and it will use that checkbook to any degree necessary to implement its policy. That is why talking about a bubble is simply ludicrous. Bonds are up for one reason: because the Fed continues to guide interest rates lower and it is telling us that they're likely to keep them low for an extended period of time. That means, a lot more bond buying. It also means that no matter how many short sellers there are in the Treasury market no one is going to "break" this market if the Fed does not want it to be broken. Moreover, it doesn't matter if China, Japan, the U.K. the Saudis or anyone else never buys a single bond again; it does not hinder the U.S. Government's ability to spend in its own currency.

In the meantime, interest and principle will be paid the same way it has always been paid, which is by crediting bank accounts electronically. Changing the numbers. Marking them up. That's how it's always been done and that's the way it will continue to be done.

In the end the "bubble" will burst when the Fed tells us it is going to reverse its policy. In other words, when it says it's going to start raising interest rates again. In the meantime, if you've been thinking about going short because of all this talk about a bubble, save yourself some money and go have a beer instead.

Wednesday, August 25, 2010

Pay-Go: Dems Consider Cuts to Food Stamp Program to "Pay For" Anti-obesity Project

Hat tip HUFFPO.

Excerpt: "The House will soon consider an $8 billion child nutrition bill that's at the center of the first lady's "Let's Move" initiative. Before leaving for the summer recess, the Senate passed a smaller version of the legislation that is paid for by trimming the Supplemental Nutrition Assistance Program, commonly known as food stamps."
Welcome to the surreal world of "pay-go" where the Federal Government constrains itself to find fiscal spending offsets for any new Federal initiatives.

Here, in irony, fiscal balances may be transferred to child nutritional consultants, I suppose, instead of low income families including children who may need income support for food.

This would result in the same sort of macro results for the broad economy, as the fiscal deficit would probably remain unchanged, but it would extend the current Obama Admin. policies of favoring the upper income demographic.

Tuesday, August 24, 2010

Koo Says Maintain Fiscal Stimulus to Avoid Double Dip

Nomura Chief Economist, Richard Koo, has it right!

Governments must maintain fiscal stimulus measures to prevent their economies from sliding back into recession, according to Richard Koo, chief economist at
Nomura Research Institute Ltd. in Tokyo.

“Political momentum all around the world now is to try and reduce budget deficits,” Koo said in a speech in Johannesburg today at a function hosted by Nedbank Group Ltd. “If you try to reduce budget deficits, we’ll enter the double dip.”

“This is no time to cut budget deficits,” said Koo. “This is a different disease -- this is not a normal recession by any stretch of the imagination.”

“The market is saying if you have highways or schools to build, do it now.”

Saturday, August 21, 2010

How do you reduce the national debt and is it desirable?

Let's face it, the only way to lower the national debt is by reducing the non-governmental sector's net financial balance. Why this is desirable I have no idea. Sectoral balances must equate to zero as a matter of accounting. If the gov't runs a deficit of $1 trillion the non-government (domestic plus Rest of World) runs a $1 trillion surplus. It is much more desirable, in my opinion, for the sovereign currency issuer to run a deficit than the private sector. We tried the latter and it didn't work out so well.

Republicans propose tax cuts combined with spending cuts, however, that combination adds no new net financial assets. It merely redistributes income. (You're giving money to some and taking money away from others.) Moreover, taxes do not fund spending under a regime of floating FX/non-convertibility. Taxes merely function to regulate demand.

The idea of raising taxes to "fix" the deficit and/or provide funds for the government to spend ignores the operational realities of the current monetary system where spending is not constrained (only politically, perhaps). Gov't "debt" is an asset of the non-gov't. Reducing gov't debt reduces the non-government's wealth, by definition.

Let's get real about this!

Tuesday, August 17, 2010

China Cuts US Treasury Holdings By Record Amount

So...China is dumping Treasuries.

And guess what???


Where is the Debt/Doomsday crowd?

Where's Schiff, Jim Rogers, Gerald Celente, the clowns at the Heritage and Cato Institutes???? Our Republican and Conservative "leaders" in Congress????

Where are all these guys?

They're nowwhere to be found because they can't explain this. This is a "gut punch" to them. Their whole theory is out the window.

They just don't understand or don't want to understand, that interest rates are set by the Fed...PERIOD!!!

It doesn't matter if the Chinese or anyone else EVER buy another bond. Rates will be set where the Fed wants them. That's how it works.

You debt clowns, just go away...PLEASE!!

Sunday, August 15, 2010

Russia does another round of its own, "Cash for Clunkers" because it was a huge success!

Russia understands that it's first "Cash for Clunkers" program was a huge success, boosting sales and production. So they're doing another!

What do we do here in America? NOTHING! We just criticize it for having been a failure, even though sales shot up 60% and industrial production jumped!

Thursday, August 12, 2010

Show Me the Money!

The Fed's quarterly Z.1 Flow of Funds report is is a very interesting report that among other things provides a 'snapshot' of the Household (B.100) and non-Financial Corporate (B.102)Sectors balance sheets.

Here is a link to the Balance Sheet reports from September 30, 2008, just before the Great Financial Crash, and here is a link to the most recent report from 30 March, 2010.

I suggest that you open each of these reports in separate browser tabs and you can just click back and forth between them and compare the balance sheet assets and the composition of both of the above mentioned sectors from back then until currently.

We always hear from the mainstream about how the Government is "borrowing money" from the "private sector" to fund its "spending". Over the time span between the publication of these 2 reports we are told to believe that the Government has "borrowed" almost 3 Trillion dollars!

Cue 'The Prospector': They're borrowin' from our grandchildren! Spendin'!

Well if this is so, how could both of these sectors have increased their bank account balances over this time of supposed record "borrowing" by the Treasury?

Sector:...........................2008 Bank Accounts..................2010 Bank Accounts

B.100 Line 9...................................$7,598.........................................$7,651

B.102 Lines 8,9,10..........................$1,250........................................$1,445

The Fed here shows how the bank account balances of both the Household and non-Financial Corporate Sectors has grown by a combined $298B since the Government has supposedly gone on a mad "borrowing" spree. If this is so, who did they "borrow" the money from? Who took the $3 Trillion out of their bank accounts and "loaned" it to them? (And don't tell me "the banks"! LOL!) BTW, both sectors total holdings of Financial Assets have also net increased over the same time period, you can see.

As Tom Cruise's "Jerry Maguire" character famously shouted: 'Shoooow meee the moneeey!'

Wednesday, August 11, 2010

Tuesday, August 10, 2010

Journalists pretending to be experts in monetary policy

Here are some of the things I heard on Fox today.

In one instance a guest who is a regular on Fox and sometime anchor said of the Fed's decision today:

"What the Fed does is buy bonds from banks, which puts more money in the banking system in the hopes that the banks will then lend that money out."

This is a totally misinformed view of monetary operations, the Fed, rate setting and banking, among other things.

The Fed buys securities largely from the public, not the banks. Those purchases result in the addition of reserves to the banking system. The Fed adds reserves when it wants to bring interest rates down--usually the overnight rate, however, the Fed has the prerogative of setting rates all along the term structure, so buying bonds means they are targeting long-term rates lower.

It is NOT to give more money to banks so that they can lend it out. That's ridiculous.

Banks do not make loans with their reserves. Loans are merely accounting entries on the books of the banks and the very creation of a loan also creates reserves. This means banks are NEVER lending constrained due to reserves. Banks have the same ability to lend whether there is $1 dollar of excess reserves in the system or $1 trillion. THE SAME!

The guy totally didn't know what he was talking about, but how would anyone watching that know? He's seen as a guy on TV talking, so people think he must know what he's talking about.

In another instance a host said, "The Fed perhaps is buying bonds to show approval of the Government's fiscal policy and because of that it has decided to give the government some more funding."

This is wrong, wrong, wrong!

However, it is thought to be true because it plays into the widely held belief that the Fed "monetizes the government's debt."

Again, the Fed buys or sells securities to manipulate the level of reserves in the banking system. That's the mechanism by which it sets interest rates, which is the Fed's only real function--that and regulatory oversight.

The government does not need the Fed to buy its bonds (nor anybody else, for that matter) to get money to pay for whatever it needs if it is paying in its own currency. Moreover, the bonds purchased from the public by the Fed HAVE ALREADY BEEN BOUGHT by the public with money provided by government spending itself. Only by spending more than it takes in can the government provide the public with the funds to purchase bonds, or pay taxes for that matter.

Again, rididculously misinformed, but stated with authority as if it were absolute fact.

What is the economy?

I bet if you asked most people what the economy was they wouldn’t be able to really define it. They’d say it’s “business” or the work we do or making money. It’s certainly all those things, but it’s really more.

Very simply, the economy can be defined as the sum total of everything that we produce here in America. That’s what we call GDP or, “Gross Domestic Product.”

There are four components to GDP. They are:

1. Personal consumption (C): That’s everything that individuals spend money on. It’s also the biggest component, comprising about 70% of GDP or, $10.3 trillion.

2. Business investment (I): That’s everything that businesses spend money on. That comprises about 13% of GDP or, about $1.8 trillion.

3. Net Exports (NE): That’s the sum of exports minus imports. This number is pretty much always negative because we pretty much always run a trade deficit (imports being larger than exports). At the current time net exports subtract about $520 billion from GDP or -4%.

4. Government (G): This is everything the government spends money on. That comprises about 21% of GDP or, $3 trillion.

(Add them all together and they all add up to 100%)

Now that you know the four components or “ingredients,” you should understand that the economy can be expressed as a simple arithmetic equation that looks like this

GDP = C + I + G –NE

Where C equals consumption, I equals business investment, G equals government, and NE equals net exports (which is almost always negative as I said).

Once you see how simple this is, you can see how you can manipulate the equation to come up with any desired outcome.

Here’s an example.

Suppose C=3, I=2, G=1, NE=-1

Plugging those variables into the equation we get:

GDP = 3 +2 + 1 -1

Therefore, GDP = 5.

Changing any one of the variables or all of the variables changes the outcome.

So if government spending goes up, rather than get all excited and worried about it, just plug the new number into the equation and see what happens.

If government spending (G) goes from +1 to +2 and the rest of the equation stays the same, we get:

GDP = 3 + 2 +2 -1

Therefore, GDP = 6.

In other words, GDP has grown, it’s gotten bigger. That’s good for stocks!

Why is this important?

Because in the present environment government spending is the easiest variable to change. The others are lot tougher. (How do you expect people to consume more when they don’t have jobs, for example?) On the other hand the government really has no constraint to how much it can spend because it spends in its own money (the U.S. dollar and the gov’t is the monopoly issuer of its own currency) and spending is done by merely electronically crediting bank accounts.

Is there a risk to doing this? Yes. The risk is that spending without constraint will use up all the available capital (both physical and human capital) of the nation. Think of it like pushing your car past the “red line” on the tachometer. However, we are nowhere near that at the present time. We have millions of people (human capital) out of work and industry operating at only 70% of its capacity. In other words, we have a lot of capital not being used.

Hopefully, when you explain this to your friends and colleagues it will take some of the fear or misunderstanding out of the whole thing and it will help them see that there are opportunities when others may look at this as risk. It should also show that the way out of our mess is quite easy.

Monday, August 9, 2010

Blue states must be doing something right!

Republicans are fond of complaining of big government, high taxes and deficits and most of the blue states (Democratic states) represent the antithesis of the Republican economic ideal. Yet when comparing the actual economic performance of the red states versus the blue states we see that Republican pleadings leave a lot to be desired.

That's because the economic performance of the blue states come out on top by a large margin. Of the top 10 richest states ranked according to per capita GDP, nine were blue states. The average per capita GDP in those states exceeded the national average by 22%.

In contrast, of the 10 poorest states seven were red states, where the averge per capita GDP fell below the national average by 25%.

In total, the average per capita GDP of the red states fell below the national average by 11%, while average per capita GDP of the blue states exceeded the national average by 1.0%.

These results are even more striking when you take into consideration the fact that the red states on average received more Federal transfer payments than the blue states. Without that Federal support the red states would have scored much worse. And, similarly, without the net transfers paid by the blue states, their incomes would have been higher.

Saturday, August 7, 2010

Christina Romer out as Chair of CEA

Late this week Christina Romer resigned as Chair of the President's Council of Economic Advisers. She was reported as a key architect of last year's record fiscal stimulus plan and was a deficit dove.

The Washington Post has a story here. The choice of replacement made by the Obama Administration may again be revealing in trying to discern the direction of future fiscal policy. The last key position to be filled, former Clinton Administration fiscal surplus steward Jacob Lew as head of the OMB, was "score one" for the deficit hawks.

Tuesday, August 3, 2010

Jim Rogers: The next big bubble is the bond market!

Jim Rogers is hilarious; an absolute clown!

He's been saying people should short bonds for three years now. If he's followed his own advice he clearly must be broke by now, but the worst thing about guys like him is that they're cowards. They don't risk their money; they give their crappy, ill-conceived advice to others, causing many people to lose...a lot!

Rogers has been saying that bonds are a bubble for so long. He is clueless about the monetary system and simply doesn't understand that interest rates are a parameter set by the central bank.

I have no idea why the media gives time to guys like Rogers, Schiff, Marc Faber and all these loonies.

Monday, August 2, 2010

From Marx to Goldman Sachs: The Fictions of Fictitious Capital

Thanks to Tom Hickey who often posts comments on this blog.

"...today’s economy is burdened with property and financial claims that Marx and other critics deemed “fictitious” – a proliferation of financial overhead in the form of interest and dividends, fees and commissions, exorbitant management salaries, bonuses and stock options, and “capital” gains (mainly debt-leveraged land-price gains). And to cap matters, new financial modes of exploiting labor have been innovated, headed by pension-fund capitalism and privatization of Social Security. As economic planning has passed from government to the financial sector, the alternative to public price regulation and progressive taxation is debt peonage."

Read entire article here.

What's is Conservatism and what's wrong with it?

Great piece.

"Life under aristocratic domination is horrible. The United States is blessed to have little notion of what this horror is like. Europe, for example, staggered under the weight of its aristocracies for thousands of years. European aristocracies are in decline, and Europe certainly has its democratic heroes and its own dawning varieties of civilized life, and yet the psychology and institutions that the aristocracies left behind continue to make European societies rigid and blunt Europeans' minds with layers of internalized oppression. People come to America to get away from all of that. Conservatism is as alien here as it could possibly be. Only through the most comprehensive campaign of deception in human history has it managed to establish its very tentative control of the country's major political institutions. Conservatism until very recently was quite open about the fact that it is incompatible with the modern world. That is right. The modern world is a good place, and it will win."

Read full article here.

Layoffs to gut East St. Louis police force, criminals run wild!

The Federal Gov't has abrogated its responsibility to "promote the general welfare" by forcing states into austerity. This is exactly the same as the Federal Government not securing our borders and we've seen the reaction on the part of Arizona, which is taking matters into its own hands. How much longer before states start issuing their own currencies to combat the money "tyranny" being imposed by the Feds? It will result in the fraying of the Republic!

Communities cannot be expected to live under these conditions without anarchy erupting into the streets very soon all across the land. It's already starting as we can see in St. Louis.

Read full article here.

Resistance against the Deficit Commission recommendations grow

This is from Washington Post opinion writer, Matt Miller:

In little-noticed remarks a few weeks ago, Bowles suggested that the long-term goal the commission should adopt for federal spending should be 21 percent of gross domestic product. This sounds like a bookkeeping matter. But Bowles' goal would end progressive ambition, ratify America's declining competitiveness and bury the American dream.

Why? For starters, federal spending under Ronald Reagan averaged 22 percent of GDP. Under Bowles's view, therefore, the outer limits of the Democratic Party's 21st-century aspirations would be to run government at a size smaller than did a 20th-century conservative icon.

The Deficit Commission is a sham. It is opaque and being run by a group of demogogues who want to dismantle social supports and much of the public sector for the private gain of a few. They should be opposed aggressively.

Read full article here.