Friday, May 29, 2009

Watch me on "Cashin In" on the Fox News Channel on Saturday!

I'll be on Cashin' In on the Fox News Channel, Saturday, May 30th, 11:30am ET. Try to catch it if you can. I need you to turn out and watch when I am on. It helps to support our cause, which is economic education without dogma and ideology!Thanks!

Bernanke Bid to Lift Housing Scuttled by Rising Rates

Lots of talk about spiking interest rates and how the Fed has "failed," the return of the "bond market vigilantes," etc.

All of this talk is based on misunderstanding the Fed's motives.

I defer to Warren Mosler on this one, from an email that I received. Please read below:

When risky assets are rallying and ‘flight-to-safety assets’ (i.e. Treasuries) are selling-off they don’t care.

When private borrowing rates (especially mortgages) are selling-off and so are equities, they do care.

In light of the still-fragile state of the economy in general, and housing in particular, question becomes, do they wait until the late June meeting to ramp up security purchases or not if this trend continues?

My guess they will try to signal they will do so in June in upcoming speeches, and if that fails, increase the pace before the meeting.

From last FOMC meeting statement:

As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments.

Also, from recent Kohn speech on P&L sensitivity of Fed purchases:

Holding such a large portfolio of long-term assets does expose the Federal Reserve, and thus the taxpayer, to potential losses as short-term interest rates rise. We could end up financing our holdings of some low-yielding long-term assets with more expensive short-term liabilities or, we might have to sell some of these assets at a loss as long-term rates rise. But in gauging the potential cost to taxpayers associated with future interest rate movements, several considerations are important to keep in mind. First, some of the Treasury and GSE debt that we are acquiring will run off over the next few years without any need for outright sales, as will some of the MBS as individuals sell or refinance their homes. Second, the yield curve currently has a steep upward slope. Accordingly, we are now earning an abnormally high net rate of return by funding our acquisition of long-term assets with almost zero-cost excess reserves--and this relative yield relationship is likely to last for some time. Thus, in judging the potential budget cost over time, any possible future interest-rate-related losses need to be balanced against the current elevated level of our net interest income. Third, our purchases of long-term securities are boosting economic activity and, in the process, increasing government tax receipts relative to what they would have been in the absence of such purchases.6 All in all, although we have now taken more interest rate risk onto our balance sheet than usual (at a time when the private sector wants to avoid this risk), that action may boost, rather than reduce, the cumulative net income of the Treasury.

In other words, if stocks start falling again and the economy remains weak, the bond market vigilantes will get their heads handed to them by the Fed. On the other hand if economic activity picks up and stocks are rising, the Fed will let the bond bears have a field day.

Inflation is a "supply-side" phenomenon

Where I do agree with Laffer is the argument that inflation is a supply-side phenomenon. In other words, if the supply of goods and services (the real assets that we need to live our lives) is abundant (as in Adam Smith's characterization), then there will be no inflation. It has nothing to do with money and certainly nothing to do with the level of reserves in the banking system. On the latter point, a high level of reserves tied to monetary policy that is driving interest rates to zero is deflationary, not inflationary.

The supply-side is where the Obama Administration has made a critical error in judgement, in my opinion. Because they don't understand our monetary system and, therefore, are influenced by erroneous claims such as, "taxpayer on the hook (applicable only under a gold standard). They are implementing policies that will shrink the nation's ability to produce the real assets that we need to live. That will create shortages of supply in everything from vehicles to homes to skilled and educated workers.

This will ensure long-term inflation that is not commodity based.

Oil hits new 6-month high above $65

Economic fundamentals do not justify the recent runnup in the price of oil and gasoline. The speculators are back. Nothing was done to remove the speculative element, suggesting that prices will go much higher at the pump until the public causes a political response. That will come, but for now, expect oil and other commodity prices to keep kiting higher.

Thursday, May 28, 2009

GM to announce 14 plant closures Monday

If you want to get rich, stock up on used cars now!

Shrinking the productive capacity of a nation to produce the real assets that a growing society needs is absolutely insane policy. This will do far more to exacerbate and sustain long-term inflation than the Fed's reserve build, which in fact, has zero direct influence on inflation. No, I take that expansion in reserves tied to a policy of reducing interest rates to near zero is actually deflationary, not inflationary.

But downsizing a nation's ability to produce the real capital that every society needs will ensure shortages and higher prices in the future. That's is like signing a law mandating a lower standard of living for every citizen and future generations of citizens!

Even more outrageous is the fact that Obama and his team seem absolutely determined to sustain the financial sector in its current form--a form that carries inherent volatility and risk--but adds no real value to the economy.

All from a president who promised to "help the working class." It's bizarre!!

If you want to get rich, stock up on used cars now. It'll be the best speculation you ever did.

Robber given $40 for insulin

Americans who believe the governemnt shouldn't fund health care are, perhaps, missing the big picture.

Economies do not exist in the vacuums of space; they exist within societies, which means there are always both intended and unintended consequences to the society from pursuing one policy path or another.

A recent news story talked about a robber who stole money so that he could pay for his life-saving insulin. Read here.

While those opposed to government funding of health see it as bad because it adds to the deficit (and, curiously, they cannot prove that the deficit has resulted or will result in anything "bad" to society), they apparently have no problem with a rising crime rate, which is bound to emanate from a society where a large and growing number of people cannot afford medicine or basic health care.

In the news story nobody got hurt, thankfully. However, the next time this happens the people involved might not be so lucky. Perhaps some innocent bystander is shot and dies. Then our policymakers and Americans opposed to this, will all have a little bit of that blood on their hands.

Wednesday, May 27, 2009

Art Laffer and Stephen Moore: All dogma, all the time!

No economist has ever taken one idea and milked it as far as Art Laffer has with his supply side/low tax theory. Not even Nobel laureate Milton Friedman was able to keep monetarism as much in the mainstream as Laffer has done with supply side economics.

Now don't get me wrong, I am all for low taxes. Like everybody else I hate it when tax time comes and for what it's worth, I think the United States should eliminate the income tax altogether. We don't need it. There are other ways to apply fiscal drag if necessary (although it hasn't been necessary for the past 80 years, even though we continue to get hefty doses of it) and we can impart value to the currency through measures that have nothing to do with taxation.

But for Arthur Laffer, every single economic problem that you can think of can be fixed by just cutting taxes. When it comes to simplicity and marketing, this guy is another Einstein, however, when it comes to serious economic intellect there's about as much there as a Ritz cracker.

In an article that ran in the WSJ (of course) over the weekend, Art Laffer and his sidekick, Stephen Moore of the WSJ Editorial Board, once again make their case for why low taxes are working wonders for states like Florida, Nevada and Texas and why California, New York, New Jersey and Connecticut--states now considering tax hikes on the wealthy to close budget gaps--are on a path to ruin.

As always, I will deconstruct their arguments.

Please read below. Laffer/Moore comments in italics; my comments are in bold.

With states facing nearly $100 billion in combined budget deficits this year, we're seeing more governors than ever proposing the Barack Obama solution to balancing the budget: Soak the rich.

All states with the exception of Vermont have a legal requirement of balancing their budgets, so they are bound by law or statute to do so. There are basically only two ways to balance budgets: raise revenues or spend less. Revenue growth is either achieved through higher taxation or stronger economic growth (output and employment). Taxation is considered bad while growth is considered good, however, achieving a growth rate higher than the national average without running deficits usually means having some comparative advantage causing the state to run a surplus with the rest of the nation. Typically, states do this by implementing policies that suppress wages. That can be achieved by keeping investment in infrastructure and education low, ensuring a less skilled and productive workforce.

Lawmakers in California, Connecticut, Delaware, Illinois, Minnesota, New Jersey, New York and Oregon want to raise income tax rates on the top 1% or 2% or 5% of their citizens. New Illinois Gov. Patrick Quinn wants a 50% increase in the income tax rate on the wealthy because this is the "fair" way to close his state's gaping deficit.

Connecticut, New Jersey, New York, California and Illinois are among the wealthiest states in the nation with per capita income far higher than the national average. They rank 1, 2, 6, 11 and 12, respectively. Oregon is 31st in the nation and they're proposing a 2% income tax on residents earning over $250,000. In addition, they are cutting laying off 1700 workers (reducing state income and output) and cutting education and infrastructure spending.

Chad Crowe
Mr. Quinn and other tax-raising governors have been emboldened by recent studies by left-wing groups like the Center for Budget and Policy Priorities that suggest that "tax increases, particularly tax increases on higher-income families, may be the best available option." A recent letter to New York Gov. David Paterson signed by 100 economists advises the Empire State to "raise tax rates for high income families right away."

Either raise taxes or implement policies that reduce income and employment or cut spending on education and infrastructure, leading to long-term losses in productivity and, by definition, the standard of living of the residents of the state.

Here's the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states.

And the evidence that we discovered in our new study for the American Legislative Exchange Council, "Rich States, Poor States," published in March, shows that Americans are more sensitive to high taxes than ever before. The tax differential between low-tax and high-tax states is widening, meaning that a relocation from high-tax California or Ohio, to no-income tax Texas or Tennessee, is all the more financially profitable both in terms of lower tax bills and more job opportunities.

Laffer and Moore fail to mention that ALL of the high tax states rank among the wealthiest in the nation when it comes to per capita income and gross state product. Yes, some will move, but are they saying a wealthy lawyer from New York will move to Tennessee to practice law, where the gross state product is one-fifth that of New York? Come on!

Updating some research from Richard Vedder of Ohio University, we found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

Nevada, Florida and Texas rank 20, 23 and 25 in the nation, respectively, when it comes to per capita income. Florida and Texas both have per capita income below the national average and Nevada is only marginally above. In contrast, California, New Jersey and New York rank among the top in the nation in terms of per capita income and gross state product. The no-tax states may create more jobs, but they tend to be low paying jobs. The only reason they have a no tax policy is because they run surpluses that are mainly the result of trade with the rest of the nation. They are able to do this because of comparative advantage: low wages, few services relative to higher tax states.

Did the greater prosperity in low-tax states happen by chance? Is it coincidence that the two highest tax-rate states in the nation, California and New York, have the biggest fiscal holes to repair? No. Dozens of academic studies -- old and new -- have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses.

Greater prosperity? By what definition? The numbers speak for themselves. All the high tax states that Laffer and Moore mention--Connecticut, New Jersey, New York, California, etc--rank among the top in the nation in terms of per capita income and gross state product. They are merely spouting dogma here. What prosperity does Tennessee have? It ranks 37th in the nation in per capita income.

Martin Feldstein, Harvard economist and former president of the National Bureau of Economic Research, co-authored a famous study in 1998 called "Can State Taxes Redistribute Income?" This should be required reading for today's state legislators. It concludes: "Since individuals can avoid unfavorable taxes by migrating to jurisdictions that offer more favorable tax conditions, a relatively unfavorable tax will cause gross wages to adjust. . . . A more progressive tax thus induces firms to hire fewer high skilled employees and to hire more low skilled employees."

As I said earlier, a skilled lawyer or accountant in New York is not likely to move to Florida because of a tax break that will most likely be completely offset by a concomitant loss in earnings. Perhaps a restaurant or retail worker might move. Moreover, low tax states tend to invest less in education,infrastructure and other services, reducing long-term productivity and competitiveness.

More recently, Barry W. Poulson of the University of Colorado last year examined many factors that explain why some states grew richer than others from 1964 to 2004 and found "a significant negative impact of higher marginal tax rates on state economic growth." In other words, soaking the rich doesn't work. To the contrary, middle-class workers end up taking the hit.

Again, this is dogma. If anything most high tax states are high tax for a reason--they are incredibly lucrative places to live and work. That remains the case today. You don't see Florida, Nevada or Texas anywhere near the top 10 in terms of per capita income. High tax states are richer than low tax states. Laffer could state they're not all he wants, but it's just not true. It's merely his opinion, not fact.

Finally, there is the issue of whether high-income people move away from states that have high income-tax rates. Examining IRS tax return data by state, E.J. McMahon, a fiscal expert at the Manhattan Institute, measured the impact of large income-tax rate increases on the rich ($200,000 income or more) in Connecticut, which raised its tax rate in 2003 to 5% from 4.5%; in New Jersey, which raised its rate in 2004 to 8.97% from 6.35%; and in New York, which raised its tax rate in 2003 to 7.7% from 6.85%. Over the period 2002-2005, in each of these states the "soak the rich" tax hike was followed by a significant reduction in the number of rich people paying taxes in these states relative to the national average. Amazingly, these three states ranked 46th, 49th and 50th among all states in the percentage increase in wealthy tax filers in the years after they tried to soak the rich.

Yes, but Connecticut and New Jersey ranked 8th and 24th in gross state product, which increased 16.4% and 14.5% respectively.

This result was all the more remarkable given that these were years when the stock market boomed and Wall Street gains were in the trillions of dollars. Examining data from a 2008 Princeton study on the New Jersey tax hike on the wealthy, we found that there were 4,000 missing half-millionaires in New Jersey after that tax took effect. New Jersey now has one of the largest budget deficits in the nation.

The stock market was at a major low in 2002 and the Dow did not get back to its 2000 high until 2006. If anything, it was a modest period of market appreciation.

We believe there are three unintended consequences from states raising tax rates on the rich. First, some rich residents sell their homes and leave the state; second, those who stay in the state report less taxable income on their tax returns; and third, some rich people choose not to locate in a high-tax state. Since many rich people also tend to be successful business owners, jobs leave with them or they never arrive in the first place. This is why high income-tax states have such a tough time creating net new jobs for low-income residents and college graduates.

1. Rich residents leave: States with high concentrations of "rich" are often incredibly lucrative places to live (that's why people get rich there) and, therefore, there is a big disincentive to leave. A 1% or 2% increase in the personal tax rate is not likely to get them to go. The biggest factors causing people to go are often social: high or rising crime, poor schools, crumbling infrastructure, lack of services, etc.

2. Possible, but tax "avoidance" is practiced everywhere.

3. Again, the jobs that leave are probably not the high skilled, high paying ones. I don't see too many Wall street bankers moving to Tennessee.

Those who disapprove of tax competition complain that lower state taxes only create a zero-sum competition where states "race to the bottom" and cut services to the poor as taxes fall to zero. They say that tax cutting inevitably means lower quality schools and police protection as lower tax rates mean starvation of public services.

Yes in most cases, by definition.

They're wrong, and New Hampshire is our favorite illustration. The Live Free or Die State has no income or sales tax, yet it has high-quality schools and excellent public services. Students in New Hampshire public schools achieve the fourth-highest test scores in the nation -- even though the state spends about $1,000 a year less per resident on state and local government than the average state and, incredibly, $5,000 less per person than New York. And on the other side of the ledger, California in 2007 had the highest-paid classroom teachers in the nation, and yet the Golden State had the second-lowest test scores.

They even admit that New Hampshire spends less. New Hampshire is an aberration in that it is a low population with a high concentration of excellent universities and secondary schools that maintain high standards for education, generally.

Or consider the fiasco of New Jersey. In the early 1960s, the state had no state income tax and no state sales tax. It was a rapidly growing state attracting people from everywhere and running budget surpluses. Today its income and sales taxes are among the highest in the nation yet it suffers from perpetual deficits and its schools rank among the worst in the nation -- much worse than those in New Hampshire. Most of the massive infusion of tax dollars over the past 40 years has simply enriched the public-employee unions in the Garden State. People are fleeing the state in droves.

New Jersey is far bigger by population, has major urban areas that skew educational levels. However, it still has the the second highest per capita income in the nation and a growing state product. How is that a fiasco?

One last point: States aren't simply competing with each other. As Texas Gov. Rick Perry recently told us, "Our state is competing with Germany, France, Japan and China for business. We'd better have a pro-growth tax system or those American jobs will be out-sourced." Gov. Perry and Texas have the jobs and prosperity model exactly right. Texas created more new jobs in 2008 than all other 49 states combined. And Texas is the only state other than Georgia and North Dakota that is cutting taxes this year.

Compete with China? If he's serious and Perry wants Texas to compete with China, there's just one way to do that--implement policies that keep wages low, very low! (Perry should read, "The Wealth of Nations," by Adam Smith!) And Laffer fails to mention that the oil boom was behind Texas's outsized job gains in 2008. Let's see what it looks like in 2009 and 2010.

The Texas economic model makes a whole lot more sense than the New Jersey model, and we hope the politicians in California, Delaware, Illinois, Minnesota and New York realize this before it's too late.

What??? Texas ranks 23rd in the nation in per capita income. New Jersey ranks 2nd, Connecticut ranks 1st, New York ranks 6th. What is he talking about??? Why does a lower state product and lower per capita income be the goal that other states shoot for?

Bottom line: From 1946-1964 the top tax bracket in the United States was 91% and the economy grew at an average annual real rate of 3.6%.

However, from 1981-2009, under Arthur Laffer supply-side economics and where the top tax bracket is currently 35%, the average annual real GDP growth has been 3.0%!!

Arthur Laffer/Stephen Moore: All dogma, all the time!

Monday, May 25, 2009

Another misinformed article about Social Security and Medicare

Fix is hard for Medicare, Social Security finances
Base-closing formula considered for tough vote on fixing Social Security, Medicare finances
Tom Raum, Associated Press Writer
On Sunday May 24, 2009, 11:15 am EDT
Buzz up! Print WASHINGTON (AP) -- There is no easy fix.

Medicare and Social Security will go broke sooner rather than later because of the recession. With millions of baby boomers beginning to leave the work force, the cost of these popular benefit programs threatens to swamp the government in debt in the coming years if nothing is done.

It can no more go broke than the government can "run out of money," which happens every several years when we reach the debt ceiling. Then what happens? Congress raises the debt ceiling and, Voila!, the government is spending again. This notion of insolvency is perhaps the most dangerous flawed belief currently facing our nation. It is a belief so dangerous it could kill us.

Congress and the White House are under increasing pressure to find a solution.

Yes, pressure from ignorant and misguided people, like Pete Peterson and David Walker.

One proposal gaining steam is a creating bipartisan commission to tackle the approaching insolvency of the government's three big "entitlement" programs: Social Security, Medicare and Medicaid.

There is no insolvency. Chief debt propagandist of them all, David Walker, said that on my radio show. Here is the audio clip: Listen.

Everything would be on the table, including tax increases and benefit cuts. The commission would produce a "grand bargain" package of recommendations that Congress could accept or reject in total.

Tax increases would apply "fiscal drag" upon the current generation of workers for a problem that does not exist in the future. That would cause us to produce less of the real assets that we are going to need in the future. In other words, raising taxes to "fix" the problem, actually makes the problem real. Moreover, the notion that the government needs to get money to pay for these investments is a gold standard based idea. We're not on a gold standard.

It's the same process the country has used since 1988 to handle military base closings, where the single take-it-or-leave-it vote provides a measure of political cover to lawmakers.
President Barack Obama has said that action to overhaul Social Security and other guaranteed-benefit programs is critical. But top aides are cool to the commission idea for now, wanting Congress to deal first with the president's ambitious health care and global warming initiatives.

He says it's critical becausae he doesn't understand our monetary system.
The commission idea is being resisted by House Speaker Nancy Pelosi, D-Calif., and some influential committee leaders who see it as an end run around the normal legislative process.

"The fact that the leadership has been opposed to it has been a problem," said Rep. Frank Wolf, R-Va., one of two original authors of the commission bill in the House. Still, Wolf said in an interview, "There's an economic tsunami off the coast and it's ready to wipe us out."

The fact that our leadership is opposed to it is good. It buys us time. There is no "economic tsunami" off the coast, but it figures a Republican says that. They are the leading debt terrorists.
Wolf also introduced the measure in the last Congress but failed to interest either President George W. Bush or then-Treasury Secretary Henry Paulson.

In a letter Friday to Obama, Wolf raised the prospect that the nation's coveted triple-A bond rating, which it has held since 1917, may be jeopardized if Congress doesn't act soon on shoring up Social Security, Medicare and Medicaid.

The AAA rating will be downgraded by the know-nothing rating agencies who are in the wrong paradigm anyway. They gave AAA to subprime junk, but don't understand that there can never be a payments risk with a nation that spends in its own, non-convertible, free-floating currency.

Financial markets were rocked last week when Britain was warned by Standard & Poor's Ratings Service that debts it had incurred in trying to dig out of its economic crisis could result in the loss of its triple-A rating. The threat of a downgrade could signal similar problems for other big economies -- particularly the United States, whose finances has been hit just as hard. The White House said it did not expect the U.S. government's credit rating to be cut.

A stupid move by S&P. They just don't understand. They did it to Japan in 2002.
Wolf joined with Rep. Jim Cooper, D-Tenn., a member of the fiscally conservative Blue Dog Coalition, which has long pushed for a Social Security overhaul. A similar bill is being pushed in the Senate by Sens. Kent Conrad, D-N.D., and Judd Gregg, R-N.H., the chairman and senior Republican on the Senate Budget Committee.

They're clueless, but have huge influence in policy. They led the charge in shrinking our domestic auto industry: a move that consumers will pay handily for down the road.
"We cannot allow this issue to be kicked down the road any further," said Conrad.

We can and we should. Someone should kick some sense into Conrad and his ilk.

A similar proposal is being pushed by Sens. Joseph Lieberman, the Connecticut independent, and Sen. George Voinovich, R-Ohio.

The bills would create a panel to examine the country's fiscal crisis and come up with a plan to bring revenues and expenditures into balance for Social Security, Medicare and Medicaid. Spending on these three programs now totals more than $1 trillion a year, almost one-third of the entire federal budget.

"Bringing revenues and expenditures into balance" simply means reducing the net savings of the non-governmental sector. That's us!

Social Security has often been called the "third rail" of American politics -- so electrically charged that touching it can be life-threatening to political careers.

Let's hope the electricity stays on!
Neither raising payroll taxes on current workers nor cutting benefits for the nation's elderly has much appeal to politicians. That's why it's so hard to put Social Security and Medicare on firmer financial footing.

Even if they don't touch it because touching has no appeal, that's fine. Just don't touch it.
"What's missing here is not ideas, it is political will," said House Majority Leader Steny Hoyer, D-Md., one of a growing number of lawmakers hopping aboard the commission idea. He suggests Congress could begin debating the commission legislation later this year.

No, there are plenty of ideas, they're just all wrong!
Federal overseers said this month that the Medicare fund will be depleted in 2017, just eight years from now and two years earlier than estimated just a year ago. The Social Security trust fund will be exhausted in 2037, four years earlier than predicted a year ago.

"Depleted?" Like when we hit the mandated debt ceiling. Has the government's money been depleted when that happens? No! They just raise the debt ceiling and keep on spending!
People are living longer, which adds to the costs. Some 80 million baby boomers -- born from 1946 to 1964 -- will become eligible for Social Security and Medicare benefits over the next two decades.

All the more reason why we have to focus on growth policies now. We need to assure that we will have sufficient amounts of the real assets that will be demanded by longer-living population. Raising taxes to "pay" for this stuff does the opposite!

Prospects for establishing an entitlement reform commission may not be great now, but should improve once the economy improves and Congress can turn its attention away from bank bailouts and stimulus spending, said David Walker, president of the Peter G. Peterson Foundation. The group, which promotes fiscal responsibility, is a strong supporter of the commission approach.

David Walker is a liar! Listen to him lie on my audio clip! Listen.
He said that while Britain may be ahead of the U.S. in facing a possible credit downgrades, "we may be headed in the same direction unless Washington wakes up and starts making tough decisions."

David Walker is a liar! Listen to him lie on my audio clip! Listen.

A bipartisan commission chaired by Alan Greenspan in 1983 made a set of recommendations -- accepted by Congress and President Ronald Reagan -- to head off a looming crisis in Social Security. It pushed the day of reckoning decades ahead by increasing Social Security taxes, cutting some benefits and raising the age for retirees to start collecting full benefits.

The late Sen. Daniel Patrick Moynihan, a New York Democrat, was co-chairman of a panel created by Bush in 2001 to review Social Security and suggest ways to shore up its finances, including partially privatizing the system.

Bush ignored most of the commission's work but latched onto its call for allowing younger workers to set up personal investment accounts to invest in the stock market and made it part of his 2005 effort -- which failed -- to overhaul the system.

Bush was a lot smarter than people gave him credit!! Bring him back!!!

Friday, May 22, 2009

My comments on deficits

Obama signs bill tightening defense procurement

Obama noted one study which found that roughly $295 billion of taxpayers' money was wasted last year on cost overruns involving 95 defense programs.
He said wasteful defense spending "is unacceptable" at a time when the country is fighting two wars and trying to overcome a deep recession at home.

How can any spending be "wasteful" when you have 12 million people unemployed, 30 percent of our industrial capacity sitting idle, 5 million unsold homes, 3 million unsold cars, 43 million people without health care even though we have the facilities to take care of them, half the families in America unable to send their kids to school despite the fact that there is space for them, crumbling roads, bridges and other vital infrastructure, an electricity grid of a modern nation that sees blackouts every summer?????

Come on!!!!

This talk of wasteful spending is like saying a dying anorexic had too much fat intake today.

This is totally nuts!!!! When will any of our policymakers start using some common sense?? Obama is totally useless at this point.

Then again...

Yesterday I posted a commnet about how we are all going to get rich and retire when the idiot rating agencies downgrade the U.S. credit rating. I told you to wait until all the lemmings sell Treasuries, then we buy and make a mint as the price of those valuable savings accounts go back up. (Just like in the movie, "Trading Places!")

But here's where I could be wrong; where the whole strategy could backfire, terribly. I'm making you aware of this now so that you can protect yourself and put on a "hedge," right now, to earn a little money while waiting for the real fireworks.

If the Fed were to start raising interest rates after a downgrade of the U.S. credit rating, that would be a disastrous outcome. It would fuel unfathomable selling in Treasuries. Let us hope the Fed understands this. Let us pray the Fed understands this.

In the meantime, to protect yourself against such an outcome, buy the TBT. It's the Proshares Trust Inverse Treasury ETF. If Treasuries take a nosedive, this fund will skyrocket. I recommended this several days ago and it has already gained nearly 7%. Do yourself a favor and pick some up for insurance.

Hopefully the Fed will not mess this up, but something tells me there is that possibility.

Finally, don't despair about not getting your Yacht, because if the Fed DOES raise interest rates AND the credit agencies cut the U.S. credit rating, all you need to do is the opposite of what I told you yesterday. You would sell Treasury futures, buy puts and/or load up on that TBT I just told you about!

We'll still all having our yacht parties in the Caribbean somewhere!

What don't they get?? Deficits add to private savings!

This growing "need" to balance the budget risks putting us back into recession. It's exactly the mistake that FDR made when he listened to the advice of his Treasury Secretary at the time, Henry Morgenthau. Balancing the budget in 1936-1938 put the nation back into a deep recession. We're facing an uncanny repeat of history here as Geithner proposes reducing the deficit and Obama seems to be going along with it.

It's all the more stunning that this is happening when you consider Geithner's first public remarks as Treasury Secretary, when he said the failures in the past were due to taking away stimulus too soon.

Anyway, what doesn't he get? I know it's politics, but the Administration is now pandering to an electorate that does not understand this, but is completely capable of understanding it if it were explained to them.

The chart below does a good job of this, I feel.

It shows that high deficits equate to high savings rates and government surpluses result in declining or negative savings rates of the non-governmental sector.

The savings rate was strongly positive all through the high deficit years of the 1970s and 1980s (peaking with the Reagan deficits). Then Clinton balanced the budget and look what happened: Personal savings plummeted to zero! (Thank you, Dick Morris.)

Now the deficit is surging and, guess what? Private savings are surging as well. In fact, they just hit a record.

What's so hard to understand, here????

There is nothing mystical about this. It's just a balance sheet relationship. Whatever's on the government's side of the ledger has the equal but opposite value on the non-governmental side.

If government is to "save" (cut its deficits or run surpluses), the non-governmental sector of the economy (you, me, businesses, etc) MUST supply those savings out of our pockets.

However, when the government "dissaves" (runs deficits), WE ARE THE RECIPIENTS of that amount of dissaving to the penny. The facts show this. Why is it, then, that high level policymakers are just flat out ignoring this fact?? It's gonna kill the recovery and kill this country, eventually.

Thursday, May 21, 2009

Geithner Pledges to Cut Deficit Amid Rating Concern

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term..."

This comment displays Geithner's lack of understanding of our monetary system.

Deficits add to private sector savings by an equivalent amount. That is definitional.

So, when Geithner says, it's "important to bring deficits down to a sustainable level," it's the same as saying private sector savings must be brought down by that very same amount.

Under a floating FX, non-convertible currency system, only the government can be a net supplier of savings. Whatever's on one side of the ledger is exactly what's on the other side, just with a different sign (positive or negative). If the government "net saves" then the private sector sees a concomittant decrease in savings, by definition.

He doesn't understand this. The Administration doesn't understand this. They are pandering to a populace that totally doesn't understand this. In the end, the nation and its citizens will suffer because of a belief system that is horribly flawed.

Belief systems are like infections in the body. If not eradicated they can spread and kill the individual.

U.K. Downgrade makes U.S. downgrade almost a certainty now

The clueless idiots at the ratings agency simply don't understand that countries that spend in their own, non-convertible, free-floating currency can NEVER have a payments problem. Their ability to pay is, by definition, without question. While there may be exchange risk associate with this, their ability to meet all debts and obligations denominated in their currency is iron-clad. (Read Warren Mosler's excellent letter in the previous post.)

However, the clueless jerks at the ratings agencies will go with their inapplicable analysis. (Remember, these are the same guys that rated all the subprime junk, Triple-A!)

The U.K. downgrade now makes it almost a near-certainty that the U.S. will soon lose its AAA credit rating.

When this happens we will all get rich. This is the trade we can all retire from!

Here's how to play it:

When the ratings agencies downgrade the U.S. (it's coming, don't worry) there will be a knee-jerk and, likely, viscious selloff in the Treasury market. (You might even want to play that by buying some, TBT now. That's an inverse Treasury etf.)

However, when the selling subsides,

buy as many treasury futures and call options as you possibly can!

Because the downgrade will have zero impact on the America's ability to pay its debts, just like Japan's downgrade had no impact on Japan's ability to pay its debts. Treasuries will remain highly sought after savings accounts even after the loss of AAA status and they will rally right back to where they were prior to the downgrade.

We can all soon retire on your yachts! GET PREPARED NOW!!!!

Ratings agencies just don't get it!

Please read Warren Mosler's excellent email and letter to David Beers of Standard & Poor's on his downgrade of the U.K.

Hi David- been a long time, seems nothing has changed!

(Seem my 2002 letter to you below)

You downgraded Japan below Botswana, their debt/GDP went to over 150% with annual deficits over 8%, and all with a zero or near zero interest rate policy for over a decade, cds traded up, and 10 year JGB's were continually issued in any size they wanted at the lowest rates in the world.

This is no accident. It's inherent in monetary operations with non convertible currency and floating exchange rates. Your analysis is applicable only to fixed exchange rate regimes regarding defaulting on their conversion clauses.

Do the world a favor, reverse your position, and explain the reason for your current and prior errors, thanks!

All the best,


Flawed Logic Destabilizing the World Financial System

Repeated downgrades of Japan by the ratings agencies due to flawed logic have been destabilizing both Japan and the financial world in general. Their monumental error can be traced to a lack of understanding the operational realities of a Government that issues its own currency. For the Government of Japan, payment in yen, its currency of issue, is a simple matter of crediting a member bank account at the BOJ (Bank of Japan). There is no inherent operational constraint for this process. Simply stated, Government checks (payable in yen) will not bounce. The BOJ has the ABILITY to clear any MOF check for ANY size, simply by adding a credit balance to the member bank account in question. Yes, the BOJ could be UNWILLING to clear ANY check, but that is an entirely different matter than being UNABLE to credit an account. Operationally, concepts of the BOJ not having ‘sufficient funds’ to credit member accounts are functionally inapplicable.

As a point of logic, the concept of ABILITY to pay being inherently revenue constrained is not applicable to the issuer of a currency. Any such constraints are necessarily self-imposed (including various ‘no overdraft’ legislation in some countries for the Treasury at the Central Bank). The issuer can always make payment of its currency by crediting the appropriate account or by issuing actual paper currency if demanded by the counter party.

An extreme example is Russia in August 1998. The ruble was convertible into $US at the Russian Central Bank at the rate of 6.45 rubles per $US. The Russian government, desirous of maintaining this fixed exchange rate policy, was limited in its WILLINGNESS to pay by its holdings of $US reserves, since even at very high interest rates holders of rubles desired to exchange them for $US at the Russian Central Bank. Facing declining $US reserves, and unable to obtain additional reserves in international markets, convertibility was suspended around mid August, and the Russian Central Bank has no choice but to allow the ruble to float.

All throughout this process, the Russian Government had the ABILITY to pay in rubles. However, due to its choice of fixing the exchange rate at level above ‘market levels’ it was not, in mid August, WILLING to make payments in rubles. In fact, even after floating the ruble, when payment could have been made without losing reserves, the Russian Government, which included the Treasury and Central Bank, continued to be UNWILLING to make payments in rubles when due, both domestically and internationally. It defaulted on ruble payment BY CHOICE, as it always possessed the ABILITY to pay simply by crediting the appropriate accounts with rubles at the Central Bank.

Why Russia made this choice is the subject of much debate. However, there is no debate over the fact that Russia had the ABILITY to meet its notional ruble obligations but was UNWILLING to pay and instead CHOSE to default.

Note that even Turkey, with lira debt in quadrillions, interest rates in the neighborhood of 100%, annual currency depreciation in the neighborhood of 50%, little ‘faith’ in government, and only inflation keeping the debt to gdp ratio from rising, has never missed a lira payment and never had a lira ‘funding crisis.’ Turkey has had problems with its $US debt, but not with its ability to spend lira. Government spending of lira is limited only by the desire to purchase what happens to be offered for sale. It is not and cannot be ‘revenue constrained.’ Operationally, Turkey has the same unlimited ABILITY to pay in its own currency as does Japan, the US, or any other issuer of its own currency.

The Turkish example, and many others, makes it quite obvious that ABILITY to pay in local currency is, in practice as well as in theory, unlimited. ‘Deteriorating debt ratios’ and the like do not inhibit a sovereign’s ABILITY to pay in its currency of issue.

So why have the ratings agencies implied that default risk for holders of Japan’s yen denominated debt has increased to the point of deserving a downgrade? Do they understand that ABILITY to pay is beyond question, and therefore are basing their downgrade on the premise that Japan may at some point be UNWILLING to pay? If so, they have never mentioned that in their country reports.

A few years back, due to political disputes, the US Congress decided to default on US Government debt. The only reason the US Government did not default was because Treasury Secretary Robert Rubin was able to make payment from an account balance undisclosed to Congress. The US Government clearly showed an UNWILLINGNESS to pay that Japan has NEVER shown or even hinted at. Furthermore, again unlike Japan, the US continues this behavior just about every time the self imposed US ‘debt ceiling’ is about to be breached. And yet the ratings agencies have never even considered downgrading the US on WILLINGNESS to pay.

Therefore, one can only conclude 1) Japan has been downgraded on ABILITY to pay, and 2) The logic of the ratings agencies is flawed. In a world where currently there are serious ‘real’ financial problems to address, the ratings agencies have introduced a ‘contrived’ financial problem of substantial magnitude, as many regulations regarding the holdings of securities specify ratings assigned by the leading ratings agencies. Governments have chosen to rely on the ratings agencies for credit analysis, and downgrades often compel banks, insurance companies, pension plans, and other publicly regulated institutions to liquidate the securities in question.

Japan’s yen denominated debt qualifies for a AAA rating. ABILITY to pay is beyond question. WILLINGNESS to pay has never been questioned, even by the agencies engaged in recent downgrades. The destabilizing downgrades are the result of flawed logic.

Warren B. Mosler
250 Australian Ave. So.
West Palm Beach, Florida 33401
(561)655-4900 (561)818-4039

Please support Warren Mosler's bid for the presidency in 2012 by contributing at

Tuesday, May 19, 2009

Another misleading and misinformed article by some widely followed blogger

Some blog site named, "Zero Hedge" (should be named, Zero Brains) had a piece about rising deficits and how the government was going to have to "monetize the debt." (Buy its own bonds.)

This doesn't happen in a floating FX, non-convertible currency world simply because the gov't spends by crediting bank accounts, meaning the "money" is always there to buy the bonds and the sale of bonds is merely to manage reserves and support an interest rate.

Here's the article if you care to read it. Tax Revenues Tanking.

I posted the following comment on Zero Brains' blogsite:

The Federal Gov't spends by crediting bank accounts and that spending adds to the level of reserves in the banking system. Those reserves are then swapped for an interest bearing account known as a Treasury. There is no "monetizing of the deficit." Deficits add to the level of savings of the non-governmental sector as indicated in this basic accounting identity from macroeconomics:

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

NFI=Net foreign income
T=Taxes collected
TI=Interest paid on the debt
TR=Transfer payments made by gov't

As you can see from the above equation, the greater the deficit becomes (as a result of higher transfer payments, falling tax revenues and interest paid), the higher the level of private savings.

This is why private savings are currently at or near record levels! Gov't spending is the cause.

Your conclusions are completely misinformed.

U.S. Housing Starts Dropped to Record Low 458,000 Pace in April

Get ready for the mother of all housing shortages. This is a miserly number of homes in a population of 300m and growing.

Buy homebuilder stocks if they are down today!

Monday, May 18, 2009

Dick Morris: When the truth doesn't fit your story, make the "truth" up

Political pundit Dick Morris is at it again. In his latest missive entitled, "When Will Obama Own the Recession," he writes:

"The signs of a negative economic reaction to Obama's program are already quite visible. Interest rates on ten year Treasury bills have risen by 50% since January in anticipation of the coming bout with inflation. Capital has been diverted wholesale from new businesses into channels that do the economy no good. The treasury's debt is soaking up funds. So is the sale of toxic assets from banks. The demands for capital set in motion by Obama's spending spree and his bank bailout plans are already blocking investment in economic growth."

But is he saying anything that is real?

"The signs of a negative economic reaction to Obama's program are already quite visible. Interest rates on ten year Treasury bills have risen by 50% since January."

Yeah, 10-year yields are at whopping, 3%, big deal! And the stock market's up 12.5%. That's good, but he "forgets" to mention it.

"Capital has been diverted wholesale from new businesses into channels that do the economy no good."

Oh really? Such as? The fact is, many companies in some of the hardest hit industries are feeling the most confident they have felt in a long time.

"The treasury's debt is soaking up funds."

Soaking up funds?? What is he talking about??? Private savings are at record highs!!! Government spending is PROVIDING funds. That's a basic accounting identity!

"The demands for capital set in motion by Obama's spending spree and his bank bailout plans are already blocking investment in economic growth."

Is that your opinion, Dick, or is it a fact? If it is your opinion you should state so. If it is a fact, then prove it! I'll save you some time--you won't be able to prove it, because it's not true. It's just the same, tired, old, Dick Morris propaganda!

Friday, May 15, 2009

My email to Terry Keenan of Fox News

Terry did a great job hosting the show today, and she alluded to the real issue when it comes to Social Security and insolvency, somethig no other television anchors understand. I sent her an email:


Under a non-convertible, floating FX regime, nations can spend any amount they want. Spending is not constrained by tax revenues or even the sale of securities. (The latter functions simply to maintain reserves at a level that supports a desired interest rate. It is not "borrowing," per se.)

Every few years we "run out of money" and Congress has to raise the debt ceiling. So they raise the debt ceiling and, guess what? We have money to spend again! It's all by decree.

The real debate we should be having in this country (and the one you alluded to in your comment about the currency) is whether or not the crediting of bank accounts to keep the checks from bouncing at some point down the road, will lead to a collapse in the foreign exchange value of the dollar or some kind of runaway inflation. And if so, do we care?

That is the real debate, but it is never discussed.

I personally know some accountants at the CBO and I have asked them why they keep talking about "insolvency" when under the current structure that is impossible.

They say it's because they have to consider the political risk (that Congress WON'T raise the debt ceiling or authorize that the checks get paid). The point is, we CAN do it to ourselves, but it would be like national suicide.

I had former Comptroller General David Walker on my radio show last October. I asked him if the nation is facing insolvency and he said, "No!" (The audio clip can be heard on my website,

So why is Walker going around spending millions telling everyone otherwise? He is a cynical, manipulative, propagandist and a very dangerous guy. If we follow his prescriptions to "fix" SS, we will have a legacy of widespread poverty to hand down to our kids and grandkids.

Good show!

-Mike Norman

All of you please support Terry as she is one of the most thoughtful and best Fox achors. Tell her she is doing a great job and that having me on is helping to foster real economic education and debunk myths and fallacies. Her email is, Thanks.

I will be on Fox News tomorrow at 11:30am ET

Please tune in to "Cashin' In" on the Fox News Channel, Saturday, May 16, 11:30am ET. I will be discussing health care, the SS insolvency issue and Obama's plans to limit compensation in the financial sector.

It is very important that you all tune in. If they see my appearances are helping their shows and ratings, I will be back more and that helps us to spread the word about wrong-paradigm-economics and how to get into right-paradigm-economics.

Tell everyone you know to watch!

Together we can make a difference!!


Thursday, May 14, 2009

Another one who just doesn't get it: Nouriel Roubini

Some more crazy economics. This time from Nouriel Roubini. His comments in gray. My comments follow his.

Op-Ed Contributor: China’s Heart of Gold (May 14, 2009) Print Version of Op-Art (May 14, 2009)

Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.

Geopolitical muscle is also a requirement for a reserve currency. At the end of WWII the U.S. had it in spades. Britain lost it. This was a major factor in the pound ceding reserve currency status to the dollar.

Budget and trade deficits are a REQUIREMENT for a country's currency to be a reserve currency. A nation whose currency is a reserve currency, by definition, must supply exactly the amount of currency that foreigners want to hold or risk harming the integrity of the global financial system. Running trade and budget surpluses would be disruptive and eventually drive people to other currencies.

He is so confused here it is unreal. There are no "foreign creditors." What there is, are people who desire to hold dollars and the only way they can do that is by running trade surpluses with the the U.S. The dollars that they get in return are then held on account in the form of a Treasury, which is a financial asset. This does not constitute lending.

Foreigners' desire to hold dollars is a voluntary choice, but it is a choice that foreigners want so badly that they are willing to accept a lower standard of living to do. Exporting to the U.S. necessitates comparative advantage, which is usually achieved through suppression of wages and/or currency manipulation. Both reduce living standards.

But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi.

Britain, Japan and Switzerland have not shown any interest in running budget and trade deficits sufficiently large enough to sustain their currencies as reserve currencies. Indeed, Japan and Switzerland run trade surpluses. Not gonna work.

China is a creditor country with large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth. And it is already taking steps toward challenging the supremacy of the dollar. Beijing has called for a new international reserve currency in the form of the International Monetary Fund’s special drawing rights (a basket of dollars, euros, pounds and yen). China will soon want to see its own currency included in the basket, as well as the renminbi used as a means of payment in bilateral trade.

Right. China runs trade surpluses, so no way can the renmimbi can be the reserve currency. That's like saying the reserve currency will be moon rocks. But who can get their hands on moon rocks? No one. Roubini doesn't understand this simple concept.

At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. China has already flexed its muscle by setting up currency swaps with several countries (including Argentina, Belarus and Indonesia) and by letting institutions in Hong Kong issue bonds denominated in renminbi, a first step toward creating a deep domestic and international market for its currency.

And run huge and sustained trade deficits! Hello!!!

If China and other countries were to diversify their reserve holdings away from the dollar — and they eventually will — the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports.

Most of the major industrial countries have interest rates at or near zero now. They ALL "borrow" cheaply, but their currencies are not reserve currencies. He doesn't see that?? And we have low interest rates because the Fed put them there, just as other central banks did. Interest rates are a parameter set by the central bank.

If China and other countries were to diversify their reserve holdings away from the dollar — and they eventually will — the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports.

The Chinese gov't spends the way the U.S. gov't does: by crediting bank accounts. Their hoard of dollars is not in any way a consequence of "financing" the U.S. I've been all through that. It is their desire to net save in dollars. They could net save in baby seals if they wanted to, but they'd have to export to the Eskimos at the North Pole to get the seals. The Eskimos would have a trade deficit with the Chinese (they'd get cars, clothes, computers, toys and all sorts of stuff and the Chinese would get baby seals because that is what they wanted as their desired unit of saving).

This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable. A system where the dollar was the major global currency allowed us to prolong reckless borrowing.

Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.

If the dollar's position is not secure it is because U.S. policymakers think like we have to become an export powerhouse like China to solve our "problems." This can only be done by gaining comparative advantage, which means suppressing wages and weakening our currency. We are doing it to ourselves

Wednesday, May 13, 2009

Buy stocks on this weakness from the poor retail sales number

Investors are all over the market today selling on this morning's weaker than expected retail sales report. However, smart investors should be buying.


Because about 40% of the time retail sales are down in April versus the prior month. That's because tax collections leave people with less disposable income.

See chart.

On the flip side of that, however, is the fact that about 70% of the time retail sales in May are up versus April.

So, take some easy money from investors who are selling today and BUY STOCKS!! Best advice of all: BUY RETAILERS!! If you want to make it easy on yourself just buy the Retail Holders Trust (RTH)

Teaching a nobel economist a few things

Am I so cocky as to think I can teach a Nobel laureate economist a few things about economics?

Yes, when that Nobel laureate distorts his economics with the pleadings of his own self-interest.

Joseph Stiglitz is a brilliant guy and I met him recently at a conference here in New York, however, his economic views are often skewed by his own political views, which knock his economic views out of paradigm.

Here is an example below.

May 13 (Bloomberg) -- China may emerge as “a winner” from the global financial crisis because of its high savings rate and strong policy response, Nobel Prize-winning economist Joseph Stiglitz said.

Fiscal response is not constrained by savings. That is a gold-standard concept. He ought to know this. And he ought to know a very basic accounting identity, which is:
I = S

Which means that for any level of savings there is that same level of investment. It doesn't say that investment flows from savings. In fact, Keynes postulated that it flows the other way around. It was the "animal spirits" of entrepreneurs that drove investment and that is what supplied savings.

“China’s government has taken very rapid action to address the crisis,” Stiglitz said at a forum in Beijing today. High savings rates may help Asian economies “weather the financial crisis,” he said.

Again, investment by a government whose monetary system is not based upon a gold standard is not constrained by savings. Anyway, who is the net supplier of savings to the Chinese? It is the U.S. and more precisely, the Federal Gov't, whose deficit spending supplies most of the world's net savings.

The Shanghai Composite Index has climbed 46 percent this year on optimism that surging lending and a 4 trillion yuan ($586 billion) stimulus package will drive a rebound in the world’s third-biggest economy. Weaker industrial-output growth in April, reported today, highlighted the central bank’s view that the recovery is not yet solid.

Yes, what China did is enact stimluus far more aggressively than the U.S. That is why I said, "buy China," back in March.

“The fiscal strength of the Chinese government means it can deploy resources quickly,” said Jing Ulrich, Hong Kong- based chairwoman of China equities at JPMorgan Chase & Co. “This year, China has a pretty good chance to achieve its economic goals.”

Again, any country that is not on a gold standard or fixed exchange rate can deploy resources quickly in any amount that it wants. The only "constraint" is a potential weakening of the foreign exchange value of its currency. The amount it spends or invests has nothing to do with national savings. Furthermore, the faster and more aggressively it deploys resources, the faster private savings increase. Look at the U.S., where personal savings went from virtually nothing last year to $470 billion today, all because of government deficit spending. It is imposssible for the private sector to save in the aggregate. Personal saving by an individual equates to a loss of savings for the vendors and firms that rely on that individual's consumption. The net change in saving is zero. This is Keynes' classic, "Paradox of Thrift." Only gov't can supply net savings by deficit spending, just as government is the only entity that can supply the currency with which to buy bonds or pay taxes.

China is battling a global recession that dragged economic growth to 6.1 percent in the first quarter, the slowest pace in almost a decade.
The world economy may “bottom soon” after declining at a slower rate, Stiglitz said.

It already has.

Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Jean-Claude Trichet are among policy makers who have signaled the recession may be easing. Former Federal Reserve Chairman Alan Greenspan said this week that the decline in the U.S. housing market may be bottoming and it’s “very easy to see” financial markets continuing to improve.

“We are at the end of the beginning, rather than the beginning of the end,” Stiglitz said. “The global economy may be declining at a slower rate and we may see a bottom soon, but it doesn’t mean a full recovery.”

We are at the beginning of the beginning!

The moral of this post is that no matter how smart people are, once they let the facts get distorted by their own personal belief systems or self-interest, ANYONE is capbable of teaching them a thing or two. So, don't ever be afraid to speak up and correct someone--no matter how smart or important--when you hear them replacing dogma for fact.

Tuesday, May 12, 2009

Is the military functioning as a social services agency?

Distressed economy helping to boost new enlistments, military recruiters say.

"...recruiters say that the distressed economy is helping boost their numbers, but they also credit educational benefits and marketing as the reason they are seeing more troops signing up."

More people are enlisting in the military because they cannot find jobs or because they merely want an education or health care. This might be causing the army to meet its recrutiment goals, but I think it's a sad commentary about how our nation deals with unemployment and the lack of basic social services.

We have the means to provide jobs, health care and education to our citizens that don't have them, however, we don't, because we view that as bad or socialistic or adding to the deficit.

Instead, many in need join military.

This puts huge new bureaucratic and financial burdens on the Department of Defense, because along with its primary role of protecting the nation, it now has to function as a social services agency.

It's unfair to professional soldiers, sailors, marines and airmen who have chosen the military for their career and want to be among people with the same goals, aspirations and dedicition and who take on the risks associated with military service proudly and voluntarily.

However, it is supremely unjust to people who just need a job or want healthcare or desire an education yet have no other alternative than to obtain these things through military serivce. Some might even end up dying because they simply wanted a college degree.

I find this morally reprehensible and as the great nation we are, we should be above that.

It's also the height of hypocrisy because the money is being spent anyway, but because it is going through the military and thus, classified as "defense spending," we are okay with that. (Even if some people have to die.)

It would be far better and more effective to simply remove this burden from the military and sustain the spending through the Departments of Labor, Health and Human Services and Eduction, but we don't.

As a result, some child's parent might needlessly die because all they wanted was health care for their kid.

Will rising oil prices choke off the recovery?

Crude oil is now breaching $60 per barrel. The question is, will rising prices choke off the recovery? Someone posed this question to me in an email earlier this morning. Here was my response:

Rising oil prices did not tank the stock market. In July 2008, when oil hit $150, the Dow was at 11,500 and while it was down from the peak in August '07, much of that decline was being driven by a financial sector collapse.

On the contrary, the stock market really hit the skids when commodity prices started falling.

The United States is a large oil producing country so rising oil prices tend to spur capital investment (you guys in Texas know that very, very, well) and that investment flows back into the economy.

I do not think that oil at $60 or even $80 poses a threat to the recovery or the stock market rally. In fact I would even welcome it on the basis that it suggests demand is improving and that's a sign the economy is getting stronger. Moreover, from a psychological standpoint, at least, higher oil prices provide a "Wall of Worry" for the market to climb.

The only thing that can kill this rally would be the government "taking away" the stimulus, by shifting toward budget balance. I don't see that happening this year or even next. Perhaps in 2011, when the next presidential campaign cycle gets underway.


Obama Beats Buffett With Stock Market Advice

Obama said stocks were a bargain back in March. Wall Street and other famous investors were skeptical. It's not that hard when you have your hands on the controls. Obama only realizes this to a small degree. If he had a better understanding of our monetary system and a new team, he could put the market up to record highs, solving "problems" such as future entitlement liabilities and allowing Americans to live at their full potential, something we haven't done for 80 years. Unfortunately what we'll probably get is a muted, but welcome, rally in stocks and a still-unacceptably-high level of unemployment and idle capital. Squandered potential and the real legacy we leave to our kids.

Poll results are in!!

On a poll that I had running for the past week I asked the question:

Are most people you talk to...

More optimistic on the economy
Not optimistic but less negative
Still negative
Deeply pessimistic

33 people voted and this was the breakdown:

Of the respondents 46% said the people they talk to are still negative, 21% said they were not optimistic, but less negative and 15% said people were deeply pessimistic. Only 18% said they were more optimistic.

Departure of Merrill Lynch chief economist is good news for B of A shareholders!

David Rosenberg, former Chief Economist at Merrill Lynch is leaving the firm (good news for B of A shareholders now that B of A owns Merrill). Here was his parting outlook and my comments are below the shaded sections.

Market likely to peak the end of the week [Friday]. Just as the clock is winding down on my tenure at Merrill Lynch, the equity market is winding up with an impressive near-40% rally in just nine weeks. For those that were still long the equity market back at the March 9 lows, a good ‘devil’s advocate’ exercise would be to ask yourself the question whether you would have taken the opportunity, if the offer had been presented, to have sold out your position with a 40% premium at the time. What do you think you would have said back then, as fears of financial Armageddon were setting in? We haven’t conducted a poll, but we are sure at least 90% of the longs at that point would have screamed “hit the bid!”

Operative stateent: He "hasn't" conducted a poll. So it's just his opinion what investor sentiment is. According to my poll on, most people are still negative.

Are we at risk of missing the turn? Fast forward to today, and within two months optimism seems to have yet again replaced fear. Are we at risk of missing the turn? What if this is the real deal — a
new bull market? This is the question that economists, strategists and market analysts must answer.

Optimism "seems" to have replaced fear. Again, not a scientific analysis. Has he read any of the articles on Seeking Alpha recently?

Risk is much higher now than it was 18 weeks ago.

Yes, according to his "feelings."

The nine-week S&P 500 surge from 666 at the March lows to 920 as of yesterday has all but retraced the prior nine-week decline from the 2009 peak of 945 on January 6 to the lows on March 9. We believe it is appropriate to put the last nine weeks in the perspective of the previous nine weeks.

No mention of massive global stimulus. You have to go back to WWII to see these kind of deficits.

To the casual observer, it really looks like nothing at all has happened this year, with the market relatively unchanged.

He just said everyone was now optimistic!

But something very big has happened because the risk in the market, in our view, is much higher than it was the last time we were close to current market prices back in early January, for the simple reason that we believe professional investors have covered their shorts, lifted their hedges and lowered their cash positions in favor of being long the market.

Yes, that almost too simplistic an explanation. This guy was chief economist at Merrill. Professional traders are very short-term oriented. Ask yourself, is Warren Buffett selling out his stocks? NO!!

Employment, output, income, sales still in a downtrend.

But moderating on the downside, clearly. And some things are turning up. He is "talking his book," here.

Considering what transpired from an economic standpoint, the decline in the first nine weeks of the year was rather appropriate in the midst of the worst three-quarter performance the economy has turned in roughly 70 years. The rally of the past nine weeks appears to be rooted in green shoots.

Again, no mention of fiscal stimulus on a massive scale and globally!

While it may be the case that the pace of economic decline is no longer as negative as it was at the peak of the post-Lehman credit contraction, the reality is that employment, output, organic personal income and retail sales are still in a fundamental downtrend.

Once again, not giving any credence to either a slowing in the rate of decline or, outright improvement in many data series. Moreover, the economic data are inherently lagging. He should know that. Pleading his selfish interest!

Need to see an improvement in the first derivative.

What do you suppose he'll say if Q2 GDP comes in positive? He'll rationalize it away. Cognitive dissonance!!

We have evidence that the consumer, after a first-quarter up-tick that was front- loaded into January, is relapsing in the current quarter despite the tax relief (didn’t we see this movie last year?).

Last year the consumer was not sitting on a record savings hoard. We're at $455 billion! Meanwhile, consumer confidence data has been picking up!!

Not until improvement in the second derivative morphs into improvement in the first derivative with respect to the important economic data will it really be safe to declare what we are seeing as something more than a bear market rally, as impressive as it has been.

"Second derivative," "first derivative," wanting to impress you with his calculus. Sheesh, what nonsense.

This is a bear market rally that may have run its course.

States this emphatically, as if it is a known fact. It's merely his opinion.

The investing public is still holding tightly to their long-term resolve, but much of the buying power at the institutional level seems to have largely run its course, in our view.

At least this time he says, "In his view."

That leaves us with the opinion, as tenuous as it seems in the face of this market melt-up, that this is indeed a bear market rally and one that may well have run its course.

Now he seems to hedge a bit on that, "run its course," statement. He's not as sure as before. (Perhaps he's short, and hoping!)

We have “round-tripped” from the beginning of the year and there is real excitement in the air about how these last nine weeks represent evidence that the economy will begin expanding sometime in the second half of the year.

No mention of fiscal and its undeniable impact. He's "wishing" his forecast and talking too much like a trader. (e.g. "round-tripped")

Growth pickup will likely prove transitory.

Why transitory?

While it is likely that headline GDP will improve as inventory withdrawal subsides and fiscal policy stimulus kicks in, our view is that whatever growth pickup we will see will prove to be as transitory as it was in 2002, when under similar conditions the market ultimately succumbed to a very disappointing limping post-recession recovery.

Finally mentions the stimulus, however, he compares it to 2002. It is soooo much larger that there is no comparison! In 2003 the deficit hit 4.8% of GDP and we took off. In 1983 the deficit under Reagan hit 6.8% of GDP. We're about to hit 14% this year. That's like 1942, not 2002!!!

So yes, there may well be some improvement in the GDP data, but it is based largely on transitory factors.

Grudgingly accepts that an uptick in GDP is coming, but why transitory? Is the government suddenly going to take it all back?

We strongly believe it is premature to totally rule out the end of the vicious cycle of real estate deflation – residential and now commercial – that we have been experiencing since 2007.

But can we rule out some of it? Most of it? After all, markets tend to look ahead.

Balance sheet compression in the household sector will continue to pressure the personal savings rate higher at the expense of discretionary consumer spending. This is a secular development, meaning that we expect it will last several more years.

Again, seeking to impress with fancy, flowery terms. (Balance sheet compression.) Has he looked at private savings recently? Historic high! Does he understand that the deficit equals, exactly, the amount of new assets that households will own? That's $1.8 trillion this year alone. Not too shabby.

Chances of a re-test of the March lows are non-trivial.

"Non-trivial??" Jeez.

To reiterate, it seems to us likely that the risk in the market is actually higher today than it was back at the same price points in early January...

Because professional traders have covered their shorts?

...and we say that with all deference to the stress tests (which given the less-than-dire economic scenarios, along with the changes to mark-to-market accounting, were destined to reveal healthy results).

Cynically pleading his selfish interest. "Talking his book."

While the consensus seems gripped with the burden of trying to decide if there is too much risk to be out of the market, we actually still believe that the chances of a re-test of the March lows are non-trivial, especially if the widely touted second-half economic rebound fails to materialize...

There's that "non-trivial" again!

The data flow is less relevant this cycle than in the past.

Is he saying that if the data improves investors and the market won't react? Nonsense!! Is he advising people to just ignore the data? I detect an acute case of cognitive dissonance!

This was not a manufacturing inventory cycle, which makes the data flow less relevant than in the past. Real estate values are still deflating and the unemployment rate is still climbing; these are critical variables in determining the willingness of lenders to extend credit. And as we just saw in the Fed’s Senior Loan Officer Survey, while there may be a ‘thaw’ in the financial markets, banks are still maintaining tight guidelines. In fact, the weekly Fed data are now flagging the most intense declines in bank lending to households and businesses ever recorded.

Yes, and the Fed was telling us in August and September 2007 that the subprime "problem" would not spread.

You read this and you understand why Merrill has so much problems.

Monday, May 11, 2009

Typical out of paradigm rant

Posted by Warren Mosler, new "guest blogger" on Mike Norman Economics!

Mosler critiques an excerpt from a recent, John Mauldin piece. (Mauldin is severely out of paradigm. I don't read his stuff at all anymore!)


Where do we find the money?

Obviously, governments may buy a portion of these bonds themselves, but they cannot afford more than a fraction of the total unless they want to challenge Mugabe as the ultimate master of illusion.

Neither should investors hold out for sovereign wealth funds to do the dirty work. As is clear from chart 9, the total amount of wealth accumulated in these funds is pocket money when compared to the projected bond issuance over the next few years.

Hence it comes down to the price at which governments can attract sufficient demand from people like you and me. 


One of two things may happen. Either this crisis will ignite such a bout of deflation that investors will happily own government bonds yielding 2-3% or the deflation scare goes away ultimately, the global economy recovers and bond investors demand much higher yields for taking sovereign risk.


I am not yet sure which scenario will prevail, but I do know that both are quite bad for equities longer term. Take your profits!


Niels C. Jensen



White House: Budget deficit to top $1.8 trillion

In the past year $11 trillion of household wealth has been wiped out. Therefore, it is a good thing that the deficit will reach $1.8 trillion this year. Another way to think about it is that the government is providing $1.8 trillion in financial assets to the household sector. Still a long way from recouping the entire, $11 trillion, but nothing to sneeze at, to be sure.

Definition: Deficits add to private sector net savings in the form of financial assets (Treasuries).

Private savings accounting identity:

Pvt = (GDP + NFI - T + TR + INT) - C

GDP = Gross domestic product
NFI = Net foreign income
T = Taxes paid to the government
TR = Transfer payments from the government
INT = Interest paid on the government debt

As you can see, three of the imputs that determine private savings are all related to the government: T, TR and INT.

The deficit effectively increases both TR and INT. Deficits mean higher transfer payments are occurring (or at least above the amount of revenues taken in) and intrest paid by the government increases as well. The latter occurs even if interest rates are low, due to the fact that the amount of Treasuries held by the public increases. For example, 10% of 1 million is the same as 0.1% of 1 billion.

Unfortunately the president doesn't understand that the level of private savings could be increased further if taxes were cut. He is actually pushing to increase taxes because he is operating under the false notion that taxes are need to "fund the deficit." This is erroneous and it displays a fundamental lack of understanding of our monetary system.

U.S. Stocks Retreat From Four-Month High on Earnings Valuations

Earnings are a moving target. Valuing the market using trailing earnings makes the market look overvalued.

Using forward earnings is a way to try to get around that, however, I have not seen any economic forecasts that fully take into account the huge amount of fiscal stimulus that we have seen applied globally. Even economists that acknowledge the stimulus and factor it into their forecasts, tend to downplay its impact.

Therefore, just as earnings surprised on the downside throughout the entire market slide, so are they likely to exceed on the upside. You have to go back to 1942-1945 to see this level of stimulus and there is no forecast that I have seen that frames the forward outlook in this manner.

I'll be on "Bulls & Bears" on the Fox Business Network this afternoon!

Tune in at 4pm ET on the Fox Business Network to watch me on the show, "Bulls & Bears."

Friday, May 8, 2009

Dow headed back to 11,000

From credit spreads to emerging market currencies many signs are popping up, which suggest that the "cardiac arrest" the global markets experienced after the failure of Lehman last September, has come and gone.

One by one, asset prices are returning to their pre-Lehman levels and there's no reason why stocks should not do the same.

The Dow closed at 11,421 on Friday, September 12. That Sunday Lehman collapsed and by the close of trading on Monday, September 15, the Dow was lower by over 500 points.

With conditions normalizing I see no reason why the Dow cannot regain that 11,400 level.

Enjoy the ride!