Tuesday, June 30, 2009

The joke's on U.S.!!

I got this email from a blog reader.

Are the Chinese increasing commodity prices by stock piling? They would accomplish several things at one time.

They would be hedging the prices.
They would insure the availability to strategic materials to themselves in times of disruption.
They would have the alternative to holding so many dollars. They can't find a currency that rates any more long term VALUE than the dollar.
They would be gaining favor with less powerful countries they wish to influence without actually loaning or giving them handouts.
They have enough dollar reserves to use them strategically/ politically. More like a weapon?
The U. S. has time left to manage and correct it's global goofs of the last 10 years,but it MUST shake off this self destructive guilt ridden self image. If the U. S. prospers, the WORLD prospers....FACT!!!!

Here's what I wrote back:

Pension funds, hedge funds and other long-only investors are buying commodities and/or futures because they view it as an asset class. The government allows this.

From what I have read China has recently given more money to U.S. hedge funds. This represents some of the Chinese money behind recent price runnups in materials.

What's curious is that pension funds are regulated investments (tax advantaged and, thus we can say, "backed by taxpayers.") So how twisted is this...that by allowing these kinds of investments the government is actually using taxpayer money to push up the prices of gasoline and food...on taxpayers!!!

The whole thing is so convoluted as to be surreal. The only thing is, it's not surreal, it's real!


PS: Notice how the U.S. markets now rally when commodities go up? Didn't used to be that way. We are transforming our nation into an export power, just like our leaders want. We keep the dollar weak, lowering the living standard of Americans (or forcing workers out of good-paying jobs by putting companies like GM and Chrysler into bankruptcy. Those workers will have to take minimum wage jobs just to survive, making them more competitive from a labor cost standpoint.)

And what are we exporting? Technology? High-value-added stuff?


We're pretty much exporting our food and natural resources...in exchange for Chinese money!!!

The joke's on us, BIG TIME!!

The problem with Obama's health care plan

Because Obama views health care as a "cost" (however necessary) as opposed to an investment (to maintain the highest level of productivity of the nation's most important capital stock--its human capital), he is trying to take a market oriented approach where health care is delivered via a competitive environment that will drive costs down.

The problem with this is twofold:

First, as stated above, healthcare is not a cost but a necessary investment in the nation's most important capital stock--its human capital. Zero wealth is created if the human capital of a nation are not healthy and productive. ZERO!!

Second, you can provide the most basic, low-cost kind of care, but you'll get what you paid for, which is, a healthcare system whereby most people get the barest kind of care (or even sub-standard) and then a small percentage who can pay, get ultra high quality care.

This is kinda like what happened to the airlines when they were deregulated. For most people, getting from point A to point B might have gotten a little bit cheaper, but the service became terrible.

For the rich, there was still first class or private jets.

For air travel maybe in the end it doesn't matter much because all you're really trying to do is get from point A to point B anyway. (Though I can remember how nice it was when you could do that AND get the service.)

For health care this stratification could make a huge difference to the long-term productivity of our country. Staying well is fundamental to being able to work and be productive.

While it's true that maybe many of the 43 million Americans who currently don't have health care will get it, will the structure of Obama's health care system cause Americans who currently have health care see the quality of their care erode? If so, then the net gain from such a plan is zero or worse, it could be a loss.

Remember, this is all being driven by an out-of-paradigm belief system that says, we don't have the money to pay for this. Obama himself even stated, "The Government is out of money."

No surprise that he's penny-pinching this whole thing through.

I can't see how we come out better off with that approach.

States brace for shutdowns

That the Obama Administration sits by and allows this to happen is amazing. Who knows how many more jobs will be lost as states grapple with budget problems. Only the Federal Government can provide the funds as states are functionally like you and me: they need the cash before they can spend and pay salaries.

Obama's political strategist, David Axelrod, may have executed the most successful presidential campaign in history in getting his guy elected, however, his advice now (shun further stimulus, embrace fiscal responsibility over growth and employment) are certain to make Obama a one-term president if it keeps up like this.

There is a fiscal "tsunami" developing at the state level and Obama and Axelrod apparently feel as if the best course of action is to "ride it out."

Too bad for the economy. Too bad for us!!

Consumer confidence slides in June

Yes, right when Obama started talking about "fiscal responsibility" and we saw from my daily Treasury reports that they were quietly taking away some of the stimulus (Treasury revenues were surpassing outlays) and the stock markets peaked. Things seem to be reversing now. (See the chart in my post from earlier.) So you should probably be buying into this dip.

And the number one reason why you should invest in China is...

...loan growth!

This chart says it all! Loans are expanding rapidly in China thanks to government policies to stimulate the economy. Meanwhile, loans are shrinking in the U.S. because all policy is weighed down by inapplicable, "taxpayer on the hook," thinking.

Buy my China Special Report for $39.95 and I will give you my top four stock picks, which are up an average of 15% in the past two weeks, while the U.S. market is down.

Japan unemployment rises to 5 1/2-year high

Japan is letting unemployment rise just as we are because of a flawed belief system. Japan is heavily dependent on exports to other Asian nations, particularly China, and as those exports decline, so does Japan's domestic output and employment.

They could act to stimulate consumption, but they don't, nor do we to any great degree. Only China, "gets it," and is doing whatever is necessary to increase domestic spending and investment. Both the U.S. and Japan are ceding economic leadership to China as a result of policies mired in myth and misconception.

Monday, June 29, 2009

"Net spending" is picking up again

Here is a chart of daily outlays minus daily revenues of the Treasury. Outlays are picking up pace once again. That's good news for the economy and the stock market.

Why you now know more than bankers at the Bank for International Settlements

This article appeared online today. My comments can be found below each box.

Central bankers urge move from stimulus to reform
Central bankers urge move from 'staggering' stimulus packages to reform as economy stabilizes
By Bradley S. Klapper, Associated Press Writer
On Monday June 29, 2009, 8:53 am EDT
Buzz up! 0 Print
BASEL, Switzerland (AP) -- The Bank for International Settlements urged governments Monday to move away from "staggering" stimulus packages as the global economy stabilizes and focus instead on reforming the international financial system.

"Staggering" stimulus? Oh really? Global capacity utilization is down to around 69% and tens of millions of people (human capital) are unemployed. If anything the stimulus has been staggeringly weak and ineffective so far. More should be done, not less.

BIS, a key standard-setter for the world economy as the central banks' central bank, said authorities now need to think about the medium-term health of their economies and that means adopting policies that spur critical adjustments, not hinder them.

Let them define or explain how sustaining aggregate demand and employment "hinders" adjustments. They are bankers and ought to understand banking and all things economic in the private sector function "pro-cyclically." In other words, growth cures, it doesn't hinder.

"The public resources devoted to economic stimulus and financial rescue have been staggering, approaching 5 percent of world GDP -- more than anyone would have imagined even a year ago," the Basel-based institution said in its 241-page annual report.

Historically, resources devoted to war have been far greater with little negative consequence. Yet in an economic crisis where people will die or barely live at a subsistence level, 5% is too much for these guys. And, surely, after their little Basel "get together" these guys will retreat to their cushy vacation homes in the south of France.

It conceded that government intervention has helped prevent a worse recession.

Conceded. The truth is hard to swallow for these guys. Cognitive dissonance.

But now that the "sense of free fall has dissipated" with growth possible this year, BIS said governments need to come up with plans to put their economies on a more sustainable footing -- the richer countries should form growth strategies that are based less on debt while the developing nations should not rely on exports as the sole driver of their growth.

Sustainable? Does that mean sustain industrial production at a level that is 30% below its potential? Sustain unemployment in industrialized nations in the area of 8% to 10%?

"Develop policies based less on debt." This is an hilarious statement. All "money" is debt in a world that is not on a gold standard. Is he suggesting we should go back on a gold standard?

"Policies must aid adjustment, not hinder it," the report said. "It means repairing the financial system quickly, persevering until the job of restructuring is complete."

Again, financial system is repaired if output and employment (growth) rises. Only gov't can do this now as the private sector lacks confidence.

BIS added that the balance sheets of many financial institutions have still not been repaired despite big injections of capital from governments, and that further steps may be needed to shore up their finances.

The balance sheet of gov't is the equal but opposite to the balance sheet of the public (banks included). Therefore, the larger the deficits that governments run, the greater the increase in income and savings of the public, BY DEFINITION!! This is an accounting identity and he ought to know it!!

But as soon as growth returns, governments should cut spending and raise taxes to put policy on a stable path, it said.

Yes, apply heavy fiscal drag as soon as growth returns so that we kill off growth! Can you believe this???

Central banks also need to figure out the best way to exit from positions they have taken in the financial crisis to prop up commercial banks as soon as financial markets resume normal operations, the report said.

The "exit" strategy, again, is growth, which shrinks central bank balance sheets and government debt relative to overall GDP.

BIS, which in recent days hosted the annual meeting of the heads of over 50 national banks including U.S. Federal Reserve Chairman Ben Bernanke and European Central Bank President Jean-Claude Trichet, said stimulus and rescue packages have created "enormous" risks to long-term recovery.

What risks? Since stimulus has been enacted, global markets have been stabilizing. Growth in output and employment--achieved by any means--hardly poses any risk.

If all the money fails to sufficiently restore the health of the banking sector, "the result would be a massive build-up of public debt without a return to robust growth" -- or another risky bubble. Governments must resist the urge to stop their financial reforms prematurely as the first signs of recovery become clearer, the report said.

Banks are agents of the government. The idea that we need to pump more money into them is redundant. Sustain the healthy ones with uncollateralized lending in any quantity from the Fed. Close the insolvent ones. Problem solved! He doesn't see this. Public debt comprises part of the assets held by the public. It is part of the public's wealth, BY DEFINITION! He doesn't see this.

A weak financial sector would also mean that any improvement in the real economy would only be temporary, it added.

A weak financial sector is a CONSEQUENCE of weakness in the real economy, not vice-versa.

At a news conference, BIS General Manager Jaime Caruana stressed that "markets are not yet working normally."

But they could be if more were done. He and his colleagues argue less is more, which is ludicrous and doesn't stand up to the test of fact.

He said governments need to find a way to wind down failed banks. As these are so internationally involved, countries should work together to make the process as orderly as possible.

"Need to find a way?" We've had a way for 70 years! It's called the FDIC. Hello???? You believe these guys get these jobs? Every one of the readers of this blog are now overqualified to work at the Bank for International Settlements!

Explaining why government factors big in private savings

I got this email from a viewer of one of my videos...

Saving is the opposite of consumption, not only in monetary terms, but also in resources and production. Resources and production not consumed are saved. But If Govt doesn't produce anything or acquire resources, how can it supply savings? Govt can only redirect or consume what is already or being produced or acquired by printing, borrowing, taxing, legislating or confiscation. Capitalists have to have previously produced and saved in order to provide capital. They supply savings.

Here's what I wrote back to him...

You can define savings anyway you like, but it doesn't mean it's right. The basic definition of savings is total income minus total outlays. Income is equal to all private wages and salaries, plus net foreign income (what we get in income from abroad) plus Government transfer payments (unemployment insurance, health and social benefits, etc), interest the government pays on its debt minus taxes the government collects. Consumption is the sum total of all that households and businesses consume. The equation looks like this:

P = (Y + NFI + TR + Int -T) - C


P = Private savings
Y = All wages and salaries
TR = Government transfer payments (unemployment insurance, health and social benefits, etc.)
IR = Interest the gov't pays on its debt
T = All taxes collected
C = Total consumption of households and businesses

We can rearrange the equation to look like this:

P + C = (Y + NFI + TR + Int -T)

You can state this as, "Private savings plus consumption equals total income"


P + C = Total income

In the examples above you can see that if the government pays more interest on its debt, increases transfer payments and collects less in taxes, the amount of private savings will rise, all else being equal. Therefore, Three of the five elements of total income, are related to government. And three of the six elements of savings are related to what government does. Another way to say this is, half of all the things that determine the level of private savings are affected by government.

Obama leaves door open to tax on health benefits

Obama believes that "the government is out of money" (his own words) causing him to think that he must levy a tax in order to "pay" for his health care plan. Placing a fiscal drag in the form of a tax--on any income group--when the economy is still so weak is a terrible idea. It clearly shows that he doesn't understand our monetary system and highlights, once again, the awful group of advisers he has around him.

Reports: China loan spree goes to stocks, property

China's government deficit spends, which helps to sustain aggregate demand. There are no cries of "taxpayer on the hook" or idiotic, out-of-paradigm journalistic comments or criticisms. The government also mandates the banks to lend.

Guess what?

Their economy is turning around...fast!

The head of China's central bank said Monday the country's economy was on the mend and expressed confidence that a government target of 8 percent growth this year would be met.

Zhou Xiaochuan, governor of the People's Bank of China, said signs the downturn in the world's third-largest economy was leveling off began to emerge in March.

"We can see that in recent times it is stabilizing and is actually taking a turn for the better," Zhou told reporters in Hong Kong.

Since my China Special Report came out the stocks listed in there are up an average of 12%, whereas the S&P is down 1%. If you buy my China Special Report now for $39.95, I'll throw in the U.S. Fiscal Update for free! Buy now!

Sunday, June 28, 2009

Obama adviser not ready to back a second stimulus

David Axelrod, Obama's political adviser, not ready to back stimulus. Economics has become politicized, making for really bad economics. Axelrod is not only wrong, he's pretty much guaranteeing his guy will lose in the next election, but at tremendous cost to Americans in the interim.

Saturday, June 27, 2009

Hanging out with the Forbes journalists at Fox

I was over at Fox yesterday to do a taping of Cashin' In and I was hanging out in the Green Room talking to the guys from Forbes on Fox. These are a bunch of veteran Forbes' journalists.

We got into talking about the economy and the Fed and I told them about the ECB's $622 repo (liquidity injection) that happened last week. All of them were unaware. When I explained to them what it was their eyes glazed over. They were clueless. Then I said that if the Fed did something like that--inject $600 billlion into the banking system in one day--there'd be a firestorm in the media and lawmakers on Capital Hill would be screaming about "taxpayers on the hook" and wanting the Fed's powers to be reined in while calliing for Bernanke's head at the same time.

I told them that none of this took place in Europe. There were no cries from punidits about "debasing the euro," or "printing money." Peter Schiff and Jim Rogers were conspicuously absent. The euro was not sold down by waves and waves of speculation. News organizations were not suing the ECB.

When the blank stare from one of the Forbes journalists faded he said, "Yes, but the Fed's actions are still going to cause inflation and lots of it."

Ten seconds before the guy was clueless as to what the ECB had done, but now he spoke authoritatively on monetary operations.

I asked him, "How does a rise in reserve balances fuel inflation?"

"Simple," he said. "Too much money chasiing too few goods."

Of course that was Milton Friedman's classic line; a beautiful sound bite...one that has never faded in the minds of monetarists everywhere. (Don't tell them that Uncle Miltie himself didn't even believe that at the end of his life!)

I said, "Well if it's too much money chasing too few goods, wouldn't that money have to at least be spent? And reserves are not spent."

Suddenly the glazed look returned. Then I added, "And please show me the, 'too few goods' because from where I sit we have 13 million people without jobs, 5 million unsold homes, industry that is only running at 68% of capacity, 3 million unsold vehicles, 43 million people without health care even though the services are there for them, half the families in America that can't send their kids to college even though there is the place for them. Where are the too few goods, or the, too few services?"

The one guy was determined to teach me something and said, "We were not running at higher capacity in the 1970s either, but we had inflation then. And it was because we were priinting too much money, just like now."

I informed him that capacity use in the 70s was bumping up near 90% and we had these two other little events called oil embargoes. He said nothing about the oil embargoes, but here's what he said about the capacity use...

"Your data's wrong!"

I kid you not.

For my friend from Forbes Magazine and anyone else who's interested, here's the data: http://research.stlouisfed.org/fred2/data/TCU.txt

Friday, June 26, 2009

More proof that Gov't is the net supplier of private savings

Latest personal income and spending data released

Personal income rose by $173 billion in May from April, however, private wages and salaries fell by $12 billion. So where did the gains come from? Government spending. Gov't transfer payments (social security, medicare, medicaid, disability payments, unemployment insurance, etc) rose by $162 billion. The rest of the gains came from higher interest payments that the government paid, $8 billion.

Private savings went from a record nominal amount of $602 billion in April, to another record nominal amount of $769 billion.

By the way, savings did not come from people spending less as we often are told. Personal consumption declined by only $62 billion from Q1 2008 to Q1 2009, and private wages and salaries declined by $140 billion. Yet savings grew by over $400 billion! There's no way you can lose $140 billion in income and spend $62 billion less and come up with $400 billion in additional savings! No way...mathematically impossible unless the savings just fell out of the sky.

Basically, that's what happened...


If you don't see this by now you're blind!

ECB $622 billion injection: A lesson in reserve accounting

The other day the ECB injected $622 billion into the European banking system.


Yet, there was no outcry in Europe about the ECB "printing money" or that it was, "debasing the euro," claims we so often hear in the U.S. It took the Fed months to expand reserve balances by the amount the ECB did in one day and all we heard were cries of "taxpayer on the hook."

There is something striking about the ECB move and, hopefully, educational, for anyone believing that when a central bank injects liquidity that the taxpayers are the ones on the hook. The ECB has no taxing authority, nor is there any Federal Government of Europe that has an over arching taxing capability. Yet, the ECB came up with $622 billion in an instant.

How did they do it?

Simple, by the stroke of a key on a computer. That's all there was to it. A bookeeping entry.

It came and it went without any hullabaloo and there was no rush to sell the euro as would have been the case if the Fed did anything similar. Without question an action of such magnitude by the Fed would have set of a firestorm of criticism in the media and on Capitol Hill, and speculators around the globe would have sold dollars feverishly.

Thursday, June 25, 2009

Bernanke: I Didn't Pressure BofA Into Merrill Merger

Maybe so. But he essentially created a "bank run" on Wachovia, causing it to fail even though it wasn't insolvent. The Fed said that Wachovia didn't have "enough collateral," so it didn't lend it money. This caused a run that forced the bank to be sold to Wells Fargo. Shareholders of Wachovia ought to be outraged. One of the Fed's main responsibilities--and the reason for its creation--was to prevent bank runs.

WSJ Praises ECB's massive liquidity injection

No sign of outrage or charges of "money printing" by the Wall Street Journal, which had been all over the Fed's actions recently.

Basically, the Journal praised the ECB. Here is their article.

Two-faced hypocrites over there at the Journal.

ECB Lends Record $622 Billion in Bid to Ease Crisis

It took the ECB one day to essentially do what it took the Fed months to do, which is, increase reserve balances by $600 billion.

Yet there were no cries from journalists and economists about the ECB "debasing the currency," or taxpayers being "on the hook." Where are all the screams about "printing money?"

No news organizations in Europe filed suit under the Freedom of Information Act or some similar statute, as Bloomberg LLC and others did here.

There were no cries about reigning in the ECB's power or how they were sowing the seeds of hyperinflation.

If this doesn't show you how our belief system is killing our country and how a misinformed media has run amok (THEY need to be reigned in!!), then nothing will. It's why I believe the U.S. will decline in terms of living standard relative to the rest of the world. That decline has already begun.

Read full story here.

Short Selling of S&P 500 Increases for First Time Since March

Nothing was done by Congress to rein in speculation, short selling and other abusive trading practices. Oil prices have more than doubled and gasoline has been rising sharply despite high inventory levels. Now stock short selling is picking up and many firms will be targeted by short sellers just as they were last year. By the looks of things we will need to see the markets and economic conditions get dire enough to finally force some action here. Email your congressional representative and demand that abusive trading practicies and speculation be curtailed!

Wednesday, June 24, 2009

Yahoo! Finance promotes economic misinformation

Charles Wheelan writes a column on Yahoo! Finance called the "Naked Economist." This guy is not only naked, he's clueless. Here is his most recent column. I put my comments below his.

Ben Franklin supposedly said that it's better to skip supper and go to bed hungry than it is to wake up in debt. Ben would be quite disappointed in us. We Americans didn't skip dinner; instead, we opted over the past decade to gorge at the buffet and then charge it.

You skip enough meals and you will become malnourished. There is no reason to pursue a life of privation when you live in a nation of abundance.

We woke up as the world's largest debtor -- so deeply in debt that our global creditors are getting nervous, and rightfully so.

This author doesn't seem to understand that there are two sides to a balance sheet: liabilities AND assets. He forgets the asset side and in so doing, ignores the fact that the U.S. has a hugely positive net worth and that the U.S. economy produces high returns on capital. Donald Trump has huge debts, too, but his assets are greater and that makes him rich. Every savvy businessman knows that you get rich by using OPM (other people's money), yet this guy seems to think that the way to become rich is to be a lender. Benjamin Franklin also said, "Neither a debtor OR LENDER be!" He forgot that one, too!

Here are some economic realities associated with our deepening fiscal hole.

It's bad. As in, $11 trillion bad. That number alone doesn't mean much, at least without context. So here is some context. First, that's roughly $40,000 for every man, woman, and child in the country. Second, our debt is projected to grow to roughly 100 percent of GDP by 2010, meaning that, if we were to devote everything we produce as a nation to paying down debt, it would take us an entire year to pay off what we owe.

Here's some context: People routinely take 15 years or more to pay off a mortgage and he's telling us that the whole entire national debt could be paid off in 10 months. It would take the average household five years to pay off a mortgate if it devoted everything in earned to paying. He's wringing his hands and getting hysterical for a debt that is proportionally, five times smaller. Finally, the $11 trillion that he is talking about is roughly 78% of our GDP. Sound bad? Well, consider the fact that Japan has a debt-to-gdp ratio of 200%! And Japan still pays near-zero on its debt.

Furthermore, the debt of the U.S. government equates to part of the holdings of financial assets of the public, BY DEFINITION! What kind of economist is this guy??

Eating Up the Global Capital Pool

Other countries have become more indebted as a percentage of GDP, but they were small countries, so they sucked up less of the global capital pool. There is only so much money in the world, and we have borrowed a shocking proportion of it. The only other time the U.S. has been so indebted was at the end of World War II.

Yes, and it didn't destroy us. It made us rich! Furthermore, there is no, "sucking up of the global capital pool." That statement is simply, ridiculous!! The U.S. government spends by crediting bank accounts, which ADDS to the global capital pool. The money to buy Treasury securities (which are simply interest bearing accounts of the U.S. government) comes from government spending itself!

Big debt means big interest payments. The Chinese haven't loaned us a trillion dollars because we're good-looking; they've loaned us a trillion dollars because we pay for the privilege of using that capital. Interest payments now make up more than 8 percent of the federal budget -- meaning that nearly one of every 10 of your tax dollars gets you absolutely nothing in return. No schools, no bridges, no domestic wiretaps. That's just the cost of servicing the debt we've run up.

"Big debt means big interst payments." Not if the Fed keeps interest payments low. Interest payments by governmet actually FELL year-over-year even as the deficit has more than doubled. Hello!!!! He can look these numbers up. Moreover, even if the government DID pay more in interest, that comprises part of the income to the private sector, which means it enriches the public; it doesn't impoverish it. He has it completely backwards!!

And we've done nothing terribly productive with all that borrowed money. Debt, after all, is not inherently bad. If you borrow $100,000 to go to medical school, then you've probably done a very smart thing. When you graduate, your earning potential will be higher, enabling you to live better even after you pay off the loans (with interest). In this case, you used borrowed money to invest in something that made you more productive.

Debt incurred in the process of sustaining aggregate demand is good. It's pretty much irrelevant what it is spent on because it "trickles" through the economy in the same fashion that tax cuts for the rich "trickle" through.

Now suppose that you borrowed $100,000 to sustain a lifestyle that you could not otherwise afford: to pay the rent, to buy nice clothes, and to make the payments on your luxury car. When that bill comes due (with interest), you're no more productive than you were when you started borrowing. You borrowed used money for consumption, not investment.

The consumption he's talking about (paying rent, buying clothes, a car) equates to income to homebuilders, auto dealers, clothing stores. Is he saying that these vendors do not DESERVE to earn a living? Then he is making a value judgement about what kind of businesses should exist and what kinds shouldn't. (That's central planning--something he's against.) I guess he believes that we should have a society where there are only medical schools (he deems these "valuable). We can all be naked, without food, shelter and nice things, but we'll have plenty of doctors.

Unfortunately, America's borrowing resembles the latter more than the former. We haven't upgraded our transportation infrastructure or made major investments in alternative energy or financed education for those who could not otherwise afford it.

Yes, there are many worthwhile investments and we can make them anytime we want, but are hindered by a belief system very much in line with what this guy believes. That's precisely why we aren't making these investments!

Stop the Bickering

We need to stop bickering about who got us here. Was it the Bush tax cuts (yes) or the Obama stimulus (yes) or profligate Congressional spending (yes) or voters who continually reward pork more than parsimony (yes)? But analyzing just overcomplicates things. We are deeply in debt because we have routinely spent more than we collect in taxes. That's just a mathematical reality that has become needlessly confounded with politics.

Government exists for the public purpose. The preamble of the Constitution states, "...establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare..." Sustaining output and employment are fundamental to promoting the general welfare and possibly even fundamental to insuring domestic tranquility.

He's again misinformed when it comes to taxes and believes that taxes "fund" the government. If that were true then why does the government only accept payment in its OWN MONEY!. You can't even argue that it is your labor that you are paying to the government, because your labor goes to earn the government's money (at least in part) in order to satisfy whatever tax liability there is. The government can spend whatever it wants if it spends in its own money and is not constrained by tax collections. Taxes are used to regulate demand and impart value to the currency, among other things.

If you're a small government conservative, that's great. But let's say enough of the tax cuts without corresponding spending cuts. Those aren't tax cuts; they are tax postponements. You've just left the bill for future taxpayers, with interest.

Not at all. Tax cuts restore income and savings to the private sector. what's wrong with that? If gov't reduces fiscal drag to the point where we are using all our available resources and capital--but not beyond--then we are living at our highest level of utility and prosperity. What's wrong with that??

And if you believe that government can and should build a stronger America, terrific. I'm sympathetic: I like early childhood education and the high-speed rail and Army sharpshooters who kill pirates. If you want those things, then pay for them.

Big government or small government, the revenues need to equal the expenditures. It really is that simple.

That simple? Maybe to a simpleton like him, however, over our 220 year history revenues have hardly ever equaled expenditures and when they have, they have preceded major economic downturns, like in the late 1920s, 2000 and most recently, in 2007, when the deficit was less than 1% of GDP and we were fighting 2 wars!

When the Big Bills Come Due

The big bills haven't even come due yet. If the U.S. were a family, we'd be crouched over the kitchen table trying to figure out how to pay the Amex and Visa bills -- and the gigantic Mastercard bill would still be in the mail.

The bills are always coming due. Every single day the government pays interest on debt and even redeems debt. Then guess what? It issues some more. This guy ought to look at the daily Treasury Statement. He's clueless. So far this month the bill came due for $485 billion. That's how much debt was redeemed (gov't paid back principal to holders). So far this fiscal year, $5.2 TRILLION has been redeemed--half of all outstanding debt. Did the world come to an end??

The big bill still in the mail for the United States is for our entitlement programs -- primarily Social Security and Medicare. We've made huge commitments to these programs that are not adequately funded. That Social Security check you're counting on when you turn 65 doesn't show up in the debt figures, but it's still money that we will owe. Lots and lots of money.

This is a joke. Even David Walker--Deficit Terrorist in Chief--admitted on my radio show that there is no solvency issue.

And the Chinese are worried U.S. debt, as they should be. All debtors have creditors; ours are all over the world. The biggest one is the Chinese government, which has been buying up U.S. Treasury bonds with all the vigor and foresight of a 1990s Las Vegas real estate developer.

Chinese are laughing at us as they enact stimulus programs and deficit spend in magnitudes three times as big as what we are doing. They can do that, because they don't have journalists running around shouting nonsensical things such as, "Taxpayer on the hook," or misinformed guys like Whelan who are given platforms to spew their misinformation. It's outrageous.

The Chinese buy Treasuries because that is a safe, interest-bearing way to store the dollar wealth they have accumulated from selling us real goods. It is their desire to "net save" in dollar-denominated financial assets, otherwise they would be saving in another currency or buying goods from us and THEY would be running a trade deficit instead of the other way around. The only way for the Chinese to buy dollar-denominated financial assets is to acquire dollars and the only way they can do that is to sell us merchandise on the cheap.

If we don't honor our bonds, China doesn't get to repossess the White House or the national parks; they don't get to carve their own leaders on Mt. Rushmore. Treasury debt is secured by the "full faith and credit of the U.S. government" -- which won't command much at auction, if it comes to a foreclosure type situation.

No nation that issues debt denominated in its own currency and where that currency is not backed by gold or tied to some fixed exchange rate can EVER default on its debt. He doesn't understand this, but neither do the ratings agencies and many U.S. lawmakers.

Chinese officials aren't worried about bankruptcy because the U.S. has an easier and more insidious option -- we can print our way out of the problem. Our debt is denominated in dollars, and the U.S. government has the authority to print those dollars. We could take a page from the Zimbabwe policy manual and just print money to pay our bills -- thereby debasing the currency, creating inflation, and devaluing the real value of what we owe.

Japan's debt tripled in the past 10 years and it was downgraded by the ratings agencies to the level of Botswana, but it still pays almost zero percent interest on its debt. I hear this Zimbabwe example a lot. Zimbabwe is a corrupt country, run basically by a thug, Robert Mugabe. It has little infrastructure and scant capital. It's economy is one seven-thousandth the size of the United States. Most important, however, is the fact that its debts are denominated in other currencies, primarily in dollars. This comparison is SOOOOO inapplicable it is not even funny. This guy calls himself an economist??? He might as well just say that the whole Apollo mission to moon was staged.

Is that a sensible solution? No, as it imposes the costs of inflation on all of us. I don't know anyone eager to revisit the 1970s (in terms of economic performance or fashion).

Can anyone prove that the amount of entitlement debt that will have to be "covered" by the government actually just crediting bank accounts, will be inflationary? No one has.

Is it a possibility? You bet. In fact, I'm surprised that long-term interest rates haven't climbed more than they have. (When long-term lenders fear inflation, they demand higher interest rates to protect against that contingency.)

Long-term interest rates haven't climbed because the Fed has been setting them lower. No wonder he's, "surprised." He doesn't see the connection.

The solution to all this is straightforward: Spend less than we take in, and use the surplus to pay down debt. At the risk of lapsing into economics jargon, yes, this is going to suck. Think about it: Americans don't like their current tax bills -- which aren't even high enough to pay for our current spending, let alone the bills we've run up from the past. In the future, we will have to pay more and get less.

What he calls a "solution" is a path of economic ruin. By "spending less than it takes in" the government would, in short order, deplete all the private savings and private wealth of the nation. Since government debt (Treasuries) are an asset, by "paying them off" the government effectivley reduces the amount of assets held by the public with no concomittant decrease in the public's liabilities, thus resulting in lower net worth of households. This is his, "solution."

But we've done it before. We paid off the debt accumulated during World War II. In fact, the ensuing decades saw some of the most impressive gains in wealth and productivity in American history. But it will require a radical change from what we're doing now.

Yes, it was the gains in wealth that reduced the size of the debt. The debt didn't go away, it just became smaller relative to the overall economy as the economy grew. That's the real solution: get the economy growing again.

An economic recovery will help. But we can't pretend that will be enough. We need to raise taxes, cut spending, and/or reform our entitlement programs. Probably all three, and in a serious way.

Can't pretend? Is this guy serious? Economic growth is the ONLY way to reduce the deficit without impoverishing the private sector.

Will that dampen economic growth in the short run? Yes. Will it jeopardize important social programs? Yes. Will it compromise our ability to make important public investments? Yes. Does it limit what we can spend on healthcare reform? Yes.

Will it reduce output and incomes? Yes. Will it impoverish more people? Yes. Will it reduce our standard of living relative to the rest of the world? Yes. Will only a small percentage of Americans even have health care if we follow him? Yes.

But as Ben Franklin would have pointed out, we should have thought about that before ordering room service and then charging it to a credit card.

As Ben Franklin said, "Neither a borrower nor LENDER be."

Thursday, June 18, 2009

Protect yourself from a dangerous belief system: Go short Wal-Mart (WMT)

I love Wal-Mart. I think it's not just a great store, great company and great American success story, it was a shining symbol of all the things Adam Smith wrote about in his seminal work, "The Wealth of Nations." Embodied in that work was one idea that completely changed the world. The idea was that the real wealth of a nation was not in its gold or silver, but in the availability and abundance of its consumables and that two nations could trade with each other and both could gain from it.

Prior to Adam Smith the world existed pretty much in a constant state of war, where wealth was "acquired" by taking it (the gold or silver) from someone else who had it.

For over two hundred years--since the writings of Adam Smith--nations that followed his ideas, saw a steady, upward rise in the incomes, prosperity and standard of living of its people.

That may be ending now.

A new belief system has taken over, one that says if someone else gains, it is our loss. We view the products sold at Wal-Mart as things that are bad because they were imported and, thus, produce a merchandise trade deficit. We view China a somehow having pulled a fast one on us.

All that is changing. Our belief system is such that we are going to see policy put in place that will make us the exporters--at a significant loss to our standard of living. It has to be that way by definition. To compete with the Chinese in the production of electronics, toys, machine parts, you name it, we will have to have a labor cost advantage. That's where we are going: stagnant to declining wages and living standards, while China rises up. This is what our policymakers want for us. NO!! THIS IS WHAT WE WANT FOR OURSELVES!!! (That's right. If you don't believe me just listen to the most popular talking heads on radio and television.)

As we transform our economy from one of domestic investment and consumption to export-driven, Wal-Mart will see a steady erosion in its business. There will be no more cheap imported goods. Goods from abroad will become expensive for Americans. And the stuff we produce here, while cheap relative to the rest of the world, will be marked for export and sent abroad for foreigners to enjoy. But we'll get something in return: non-convertible renminbi!

Good bye Wal-Mart. It was a pleasure knowing ye!

Protect yourself and your family from a dangerous belief system: Go short Wal-Mart!

Hedge Funds’ ‘Dangerous Opponent’ Rasmussen Pushes EU Crackdown

The U.S. is falling behind "Socialist" Europe in every area. Europe is not only performing better than the U.S. when it comes to unemployment and output, but it is taking the lead in reigning in speculation by launching a crackdown on hedge funds and other unregulated investment vehicles.

We elect the most liberal president ever in our history and what does he do? He puts Wall Streeters up and down throughout his Administration and bends over backwards to sustain a financial system, which in its current form, nearly destroyed our economy.

Then he forces GM and Chrysler into bankruptcy, carelessly eliminating a significant amount of America's industrial capacity and its ability to produce the real assets our society needs. This brilliant strategy, brought to you by an inapplicable belief ("taxpayers on the hook"), ends up costing tens of thousands of workers their jobs.

All from a Democrat that promised to "help the working class and create jobs."

It's almost incomprehensible!

And now, for his piece de resistance...he seeks to curtail the Fed's emergency lending powers--powers that kept us from going into a full blown depresssion and what keeps the Fed out of the political realm--but he will allow hedge funds and speculation to go on, unabated.

This is the most convoluted, irrational, set of policies EVER in the history of this country and it is dangerous beyond imagination. Deadly for us and our standard of living.

World Bank's upgrade of Chinese economy sends Shanghai Index to an 11-month high

More evidence of what I have been forecasting!

China is being turned into the world's economic engine, not because it was China's desire, but because U.S. policy is ceding that position to the People's Republic. Get my Special Report on China and you will understand completely and fully why this tectonic shift cannot be stopped and why we are handing China the mantle of economic leadership! It includes four of my best China stock picks, which are all traded on regulated U.S. exchanges as American Depository Receipts. In addition, if you buy my report now ($39.95) you will get my U.S. Fiscal Update absolutely free. This report includes plenty of charts and graphs that show deficits and U.S. debt and spending in perspective and what the historical consequences of such periods were.

Wednesday, June 17, 2009

Calif. Aid Request Spurned By U.S.

The Obama administration has turned back pleas for emergency aid from one of the biggest remaining threats to the economy -- the state of California.

Top state officials have gone hat in hand to the administration, armed with dire warnings of a fast-approaching "fiscal meltdown" caused by a budget shortfall. Concern has grown inside the White House in recent weeks as California's fiscal condition has worsened, leading to high-level administration meetings. But federal officials are worried that a bailout of California would set off a cascade of demands from other states.

California should secede from the Union, there'd be a short war and then the state would be eligible for reparations.

Seriously, though, how dumb do you have to be to let the world's 10th largest economy (and the largest state economy within our nation) to go into fiscal meltdown??? But that's what Obama is prepared to do!!!

California could also start issuing its own currency. It's economy is big enough and the state has enough employees to ensure that those notes would be of value to vendors and other suppliers of services.

Fed Weighs Using FOMC Statement to Damp Rate-Rise Speculation

What a joke the Fed has become.

If Bernanke wanted rates to come down he has the power to do that. There aren't enough speculators in the entire world who can fight a central bank's desire to keep rates at zero! He doesn't understand that???

Now the Fed is going to issue a "statement." Gee, I wonder what it's going to say..."You bad speculators better quit it, or, or...we'll have to issue another statement."

Meanwhile the market is stalling out and that probably means the economy is as well. What a joke. Same as last year with Lehman. We were improving then they let Lehman fail.

This entire Administration, plus the Fed: Just a bunch of people with a deep, deep, fear of success and a belief that we have sinned as a nation; that prosperity is a sin...and we must atone for our sins.

Obama's economic policies embrace the worst elements of both the Democrats and the Republicans

Obama is not a Democrat when it comes to his economic policies. Nor is he a Republican. He is worse than both because he has embraced the worst elements of each party.

From the Democrats he takes the bad idea of income distribution supported achieved by taxation, but he leaves out broad spending, which would help to support aggregate demand and create jobs.

From the Republican side he takes the bad and inapplicable idea of fiscal conservatism and "hard money." These ideas are based on a gold standard, which we are no longer on. But then he leaves out tax cuts--even payroll tax cuts--which would have helped the working class.

This guy is the worst. His advisors are the worst. His cabinet is the worst. If he lasts more than one term and if our economy is not in ruins by 2012, it'll be a miracle!

How big is YOUR trade deficit?

In this video I debunk some of the nonsense about big trade deficits.

China’s Sovereign Wealth Fund Aims to Invest in Hedge Funds

The Chinese don't need to beat us militarily. (They know they can't, anyway.) They're smarter than that. They'll just pour billions into hedge funds knowing that these opportunistic money-hungry speculators will run rampant in the "free market," unregulated U.S. economy and blow it up for good next time.

Obama Sees 10% Unemployment Rate

What a let down. This comes from a guy who promised to create 2 million new jobs!

Obama has been kidnapped by the deficit terrorists and is loathe to have the government sustain output and employment--the things that create long term wealth and prosperity--out of fear of rising deficits.

We are dead. The U.S. economy is finished. Invest in China.

Obama to Limit Fed Lending Power, Grant Systemic Role

"...would force the central bank to get written approval from the Treasury secretary before using the authority"

End game. It's over. Don't see much good in the future for the U.S. unfortunately. Invest in China if you want to get rich. (Check out my Special Report on China.)

Obama has "caved" to the Austrians and the "hard money" crowd. Wait till you see the financial panics we are going to have now.

Read story here.

Tuesday, June 16, 2009

Goldman's O'Neill Sees Potential `Correction' as Stimulus Is Rolled Back

Yes, I have had the same worry--that irrational deficit concerns would lead to a paring back of the stimulus. However, Obama recently said he was going to "speed up" spending over the summer in order to stimulate job growth.

I'm taking a calculated guess here, but I say that they will not roll back stimulus if they do not see job growth. Job growth is the key to sustaining political "capital" and more than anything else, that's what the president's political handlers are focused on doing, sustaining or adding to their political capital.

However, they may view deficit reduction and "fiscal responsibility" as earning them more political capital. It's a hard call. I am going with the job growth and the president's statements, but I could turn out to be wrong. So far, the numbers say the government's money pump is pumping in, not out.

Europe bashing? It may be time to think again.

Conservatives like Rush Limbaugh, Sean Hannity and Dick Morris scream that Obama is turning us into another "Europe," which is a euphemism for socialism. Leave the label aside for a second and consider that the European Union has a lower unemployment rate than the U.S. (Theirs is 8.6% and ours is 9.4%.)

How could this be? After all, didn't the U.S. have its vaunted system of "labor flexibility" and, therefore, could respond more quickly to adverse economic trends?

Seems that it hasn't been working.

Moreover, EU GDP fell by less than the U.S. so our capitalistic model really comes out looking pretty bad relative to the performance in Europe.

I forgot to mention that Europeans enjoy free health care, education, paid leisure time and a standard of living equal to ours. They also have lower crime rates in general, live in democracies and are free to travel anywhere they please.

Let's see...all of the above, plus better relative economic performance?

If that's Socialism, honest conservatives should have a hard time making it look all that bad. The problem is, they don't, which is proof they are nothing more than dogmatic ideologues.

So when they say they are looking out for you, they're not! They're looking out for themselves and their own agendas, which mostly means being able to make big bucks from TV and radio ratings or selling advice. This necessitates keeping their audience--YOU--"dumbed down."

Is that help? I call it contempt.

Gov't "net stimulus" rises again

What I call, "net stimulus," which I define as the daily amount of spending by the government, minus the amount of revenue it is taking in, is rising.

A positive reading indicates that the government is spending more than it is taking in, which is a good thing because by definition that is adding to the income and savigs of the private sector. Rising income and savings eventually equate to greater wealth of the private sector.

The graph below looks at a 5-day average of "net stimulus" superimposed against a chart of the S&P Index close. The way to use this is if net stimulus is falling or negative, you want to be defensive as a stock trader (sell into rallies) on the idea that the government's "wealth pump" is sucking wealth out.

On the other hand, if net stimulus is positive and rising, then you want to be bullish on stocks and buy dips, the idea being, the pump is pumping in income and savings and that will lead to greater wealth and higher stock prices.

The most powerful man in the world said, “The U.S. Government is out of money.”

A Dangerous Belief System At Work

One shocking example of how widespread this fallacy-ridden belief system has become can be seen in a statement made recently by President Obama, who claimed that the United States Government was, “out of money.” Such a claim is impossible for a nation that spends in its own, non-convertible, free-floating currency, but that did not stop the highest elected official in America and the most powerful man on earth from asserting that it was true!

read on...

Monday, June 15, 2009

Obama officials outline financial reforms

Every time I think they're about to blow it, royally, they come up with something good. I know that "free market fundamentalists," who nearly destroyed our economy, will be calling this the end of capitalism, however, I am not of the camp who things regulating a totally unregulated financial sector is a bad thing.

Some points I like:

Reduced reliance on credit-rating agencies will also be proposed, said the piece.

This is excellent news! Rating agencies have way too much influence and they are completely out-of-paradigm anyway, causing their pronouncements to be that much more destructive. There should be ZERO need for reliance on them, as far as I am concerned, but even if we get reduced reliance, that is a good thing.

"All derivative contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse," according to the op-ed piece.

Hopefully this will mean more oversight of speculative activity in sensitive materials, like oil and food. They didn't explicitly mention ending or putting limits on speculative activity or altogether banning pension funds and other passive, "long-only" investors from owning commodities, but at least this is a step in the right direction. Have you noticed how the clueless media is now calling the doubling in oil prices a "demand-driven" phenomenon? Yeah, demand for futures contracts. There's 13 million people out of work and the media's telling us that equates to more oil and gasoline demand?? It's speculation and it's the Saudis setting prices higher.

Here's how I feel (and I am just echoing the words of Warren Mosler, here):

Back in 1972, 2.6 million homes were built in this country and if you wanted a mortgage you went to your commercial bank for it. The bank originated the loan and serviced it. Bankers made salaries not much higher than civil servants and Americans bought homes, cars, appliances, took vacation trips and pretty much had and did all the things we have and do today.

Fast forward to 2006--the peak of the housing boom--and a time when the financial sector looked entirely different. Bank loans comprised only about 25% of all credit. Rather, credit flowed from unregulated intermediaries that dealt in risky, unstable, and hard to understand instruments.

Well, guess what? We built the same amount of homes (but our population is now 300 million, not 200 million like in '72), sold slightly more vehicles (whoopee!), but only used 80% of our industrial capacity compared to 86% back in the early 70's.

Why do we need the financial sector in its current form?

Answer: WE DON'T!!

Whether or not the Obama Administration understands that or not, I don't know. (Actually, I doubt it.) However, they are moving in the right direction.

"The financial sector is more trouble than it is worth." -Warren Mosler

P.S. Oh yeah, one more thing: In 2006 the financial sector earned 40% of all corporate profits in America, compared to single-digit percentages back in the 70's. That's way too much money to a sector that contributes nothing of real value to the economy. Get rid of it! Just keep the banks.

Sunday, June 14, 2009

U.S. policy pushing China to economic supremacy. How you can profit...

I believe China now offers an unparalleled opportunity for investors who are interested in sustained and long-lasting investment returns that are likely to outperform markets in the U.S. and elsewhere.

What I see as the driving force behind the long-term bullish trend for the Chinese economy and stock markets are important policy shifts in the United States that are just now getting underway.

read on...

Saturday, June 13, 2009

G-8 officials turn to IMF over stimulus withdrawal

Financial officials from the Group of Eight industrialized nations are expected to agree Saturday to ask the International Monetary Fund to investigate ways to unwind hefty stimulus packages amid early signs of a global economic recovery.

Can you believe this!!!! This is the endgame, right here. They will pull the stimulus because they are so ignorant and that will send us right back into another crash and deep economic recession.

And finance officials in the G-8 are so clueless that they are asking the IMF how to figure out how to essentially kill the global recovery. Of course the IMF will be happy to oblige and provide ways.

Invest in China!!!! They're not part of the G-8 and that country will be the next global economic superpower. It will happen rapidly now!!!

Friday, June 12, 2009

Fed to Keep Lid on Bond Buys

Reserves are functionally one-day Treasury securities, but the Fed doesn't seem to understand this and thinks that reserve balances drive inflation.

Nor does the Fed seem to understand that if it wants to target interest rates lower, it has the power, but that requires keeping reserve balances at a level that sustains the low rate. It is giving up on its rate target because of fear among certain FOMC members that this creates inflation?? Unreal!!

Japan has had zero or near-zero interest rates for 12 years and there is no inflation.

Does the Fed actually believe their inflation targeting efforts of the past two years was a success? Is it trying to do that again? My God, it's a big part of what created the housing collapse! By raising rates from 1% to 5.25% the Fed made it impossible for many people to stay in their homes. And did the Fed think that by doing that it was going to lead to more oil discoveries?

This destructive belief system is spiraling dangerously out of control.

How banks create money

Thursday, June 11, 2009

China’s New Lending Doubles, Helping to Fuel Economic Recovery

Because they are not hindered by idiotic and inapplicable beliefs such as, "taxpayer on the hook." We are. Our beliefs ensure that China will soon overtake us as the world's number one economic superpower.

China's May trade plunges but investment up

If you STILL think stimulus doesn't work!

China's investment surged in May as the government poured money into its economic stimulus, helping to offset an unexpectedly sharp drop in trade, and economists said the world's third-largest economy was improving.

Spending on factories and other fixed assets soared 32.9 percent in the first five months of the year, the National Bureau of Statistics said. Merrill Lynch said that translated into growth in May of up to 38 percent.

"Domestic activity has picked up, thanks to the government stimulus spending," said economist David Cohen of Action Economics in Singapore.

Art Laffer on how banks lend money

In an otherwise terribly misleading and misinformed piece in the Wall Street Journal the other day, economist Arthur Laffer explained in an excellent fashion how banks create loans. Here it is below:

"The way a bank or the banking system makes new loans is conceptually pretty simple. Banks find an entity that they believe to be credit-worthy that also wants a loan, and in exchange for the new company’s IOU (i.e., loan) the bank opens up a checking account for the customer. For the bank’s sake, the hope is that the interest paid by the borrower more than makes up for the cost and risk of the loan."

So for anyone who still thinks that banks take your deposits and lend that money out or, lend their reserves, please re-read.

Furthermore, as bank credit comprises 90% of all of what we call the "money supply," if you still think that the Fed "prints money," let that go as well. Money is created in the banking system and the Fed only has marginal influence on that process insofar as it is the interest rate setter and, thus, the semi-regulator of bank profits, which should not be surprising because banks are agents of the Fed anyway.

Art's explanation of how loans are created also highlights another extremely important point, which is the fact that nearly all money emanates from a desire on the part of some private entity (an individual, a business) to issue and I.O.U. (a debt).

Thus, all "money" is really debt!

Gov't is the net supplier of savings

Wednesday, June 10, 2009

My email to Warren Mosler, detailing my macro outlook


The good news is the deficit has already boosted non-governmentals savings to a record, $620 billion and that is only likely to grow larger by the time their spending reductions turn that trend. And of course, I = S, so we're in good shape for now.

Your original advice to me, when we had dinner in New York was, "Buy S&P futures and go play golf for a year." That was probably correct. I followed it. (Unfortunately, not in the size that I would have liked because of limited funds, but better than nothing. And, oh yeah, I am not a golfer, so I'm doing other things to keep me from watching stocks!)

Where I think you are wrong is China. I see China as having no choice in the matter. Even if they secretly desire to sustain exports they will have to relinquish this policy because it clashes with U.S. goals that now appear to be set in stone. It is becoming increasingly clear that the U.S. will not support a long-term commitment to sustaining output and employment if it means enlarging the "twin deficits." Moreover, policymakers on both sides of the aisle here in the States are terrified of the (inapplicable) fear that China will not keep buying our debt. They are also terrified of (clueless) rating agencies downgrading our AAA credit rating.

As such, there is a major long-term shift underway as I see it, where the U.S. comes to rely more heavily on an export-driven, "fiscally responsible" course that, by design, keeps income down and comparative advantage up (via a weaker currency vis-a-vis the renminbi at least). The Chinese will see a gradual, yet sustained erosion in exports to the America and, therefore, will be forced to rely on greater levels of domestic investment to support demand and employment whether they like it or now.

We are, in essence, handing them the mantle of global economic leadership because of our out-of-paradigm and destructive belief system. This is terrible for the citizens of this country and de-facto passes along to future generations of this nation a lower standard of living. But smart investors can "hedge" by investing in China now. China is where the U.S. was at the end of WWII, which means that fortunes will be made by those who buy and hold in what will be, as Boone Pickens likes to say, "the greatest transfer of wealth in the history of the world." (But he says it for the wrong reason!)

Other than that, everything's hunky dory!


You think economic stimulus doesn't work?

Warren Mosler just emailed this to me.

China Car Sales Jump ‘Beyond Imagination,’ Bring Wait
China economy poised for 'sustainable' growth

China's consumer prices fall for 4th month

China Still Faces Net Capital Inflow Pressure, Market News Says
China’s Property Sales Surge, Add to Recovery Signs
China Should Prepare to Counter Stagflation, Researchers Say
China’s Industrial Output Climbed 8.9% in May, Ming Pao Says

Perfect record for Bloomberg journalists getting it wrong again!

This time it's Caroline Baum. Check out the piece she wrote entitled, ‘Legacy of Debt’ Gives Fiscal Stimulus Bad Name.

This is the email I sent her:

Are the current generation of Americans poorer than the generation who ran up the debt to fight WWII? That debt was far larger in proportion than the current debt, yet we are NOT poorer. Moreover, the top tax rate from 1946 to 1964 was 91%, then it dropped to 77%, which is still more than twice the current rate, yet the economy grew faster than it did following the Reagan tax cuts of the 1980s.

What you don't seem to understand is, to the extent that government spending adds to output and employment that leads to the creation of the real assets that will be used by future generations. That is known as wealth! This is precisely why our grandparents' "legacy of debt" did not bring us down to a lower standard of living.

Yours is just another example of misinformed journalism, which serves only to propagate economic myth and fallacy. That is the real danger to our heirs.

-Mike Norman

Gov't doesn't need its TARP money back!

Tuesday, June 9, 2009

Treasury "net spending" slowing down

The blue line on the chart above shows the 5-day average of total Treasury deposits (recepits) minus withdrawals (expenditures), something that I call, "net spending." A declining blue line indicates that net spending is falling. Not only has it been falling, but it has been running negative for nearly the past three weeks, suggesting that deficit hawks at Treasury are firmly in control and are quietly "siphoning off" stimulus and private savings (taking in more than they are recycling back).

The pink line is the S&P 500 close. A policy of negative net spending will make it harder for the stock market and the economy to rise and improve, respectively. That's not to say they can't (there are record private savings of $620 billion, so plenty of fuel to run on), however, it will take a sustained upward trend in confidence. The government is quietly shifting the burden of recovery to the private sector because of sensitivity over deficits. It can work because as I said there are sufficient private savings to power it, however, as I said, the rally now has limits by definition.

Monday, June 8, 2009

Obama, facing high unemployment, defends stimulus

This is good news for the markets and investors. Obama, facing pressure that job creation is not happening, is (hopefully) shelving spending cut plans for now in favor of stimulating the economy further. He needs to see job creation or his approval ratings and political "capital" will erode.

Roubini Scoffs at Green Shoots, Sees Dangerous Complacency

Roubini is the worst kind of ideologue. Most ideologues will just stick to their guns even if that ideology is caving in around them. They will rationalize a million different reasons why the truth is not the truth. This makes them easy to spot...and avoid!

But guys like Roubini are more dangerous because they'll attempt to "go the other way" from time to time to make it look as if they really care about those whom they are advising. They'll say, "Things are starting to get better" or, "Now's the time to get back in the market," even though they are loathe to admit it. Any advice they give you that runs against their belief system (which, in the case of Roubini is an extreme, anti-America bias) is just plain, phony. And worst of all, they'll revert back to their bearish views in an instant, proclaiming that they never really were bullish in the first place.

This flip-flopping not only kills people who are following their advice, it also lends a false air of maturity and wisdom to their advice when in fact there is none.

Be wary of these chameleons. They can inflct lots of damage on unsuspecting investors who choose to follow their ideologies and listen to their dogma.

Friday, June 5, 2009

The dollar is soaring!

Up to 98 vs. yen
Up to 1.4 vs. euro

Here lies the fallacy that stimulus is bad for the dollar!

If stimulus results in an improvement in the labor market, that should be good for the dollar and it is!

Those who say stimulus is bad for the dollar WANT to be BEARISH on the dollar all the time, no matter what!

Dollar bears are ideologues. They don't understand the monetary system! They WANT to be BEARISH on the dollar no matter what the facts are!

Dollar bears don't understand...

Dollar bears don't understand ouble entry accounting.
Dollar bears don't understand for every debit there is a credit.
Dollar bears don't understand for every liability there is an asset.
Dollar bears don't understand for every borrrower there is a saver.
Dollar bears don't understand for every dollar of the trade deficit there is a dollar of capital account surplus.

This is the beginning of what could be a secular advance in the dollar. If I am right, gold is going down significantly.

Gold at $400, anyone?

The benefits of not having to explain things to Congress

(Thanks to Warren Mosler for pointing out the ECB story!)

The philosopher Thomas Hobbes once said that societies are a natural consequence of man's desire to avoid life in the "jungle state." (Hobbes defined jungle state as a constant state of war.)

In other words, human beings give up some of their freedoms to exist under some authority in order to ensure security, establish the rule of law and to avoid a constant state of warfare.

He also said that "assemblies" (like Congress) are destabilizing and ultimately fail and rule eventually goes to a single authority. (A monarchy, for example.)

In the realm of economics we have a microcosm of Hobbes' theory when it comes to the behavior and pronouncements of central banks.

In one corner we have the Federal Reserve, which has to answer to Congress.

The Fed has been under pressure to "explain" its actions recently and as a result of this scrutiny, by many members of Congress who know absolutely nothing, operationally, about the Fed, Bernanke and other Fed officials have used some pretty bizarre language. They use the term "printing money" to appease the views of the uniformed. They struggle to explain their "exit strategy" out of fear that Congressional leaders will deem it inadqueate or otherwise ineffective. They talk about deficits raising interest rates when they know full well that the Fed sets interest rates and could keep them at zero for as long as it wanted.

We see that most of the time the "Fedspeak" is about placating Congress. (Alan Greenspan was a master at saying nothing, but getting Congress to agree. He coined the term. A veritable Einstein!!)

In the other corner we have the ECB, which is totally independent and does not have to answer to any political body and certainly not to an idiot-laden assembly like Congress.

Look at how simply and eloquently Jean Claude Trichet spoke about the ECB's "exit strategy" for what he called, recent, non-conventional measures. (Quantitative easing.)

By concentrating its non-standard policy measures on the supply of unlimited liquidity to banks, the ECB has ensured it has “an in-built exit strategy,” Trichet said in a speech in Warsaw today. “That is, when tensions in financial markets ease, banks will automatically seek less credit from the ECB.

This will be a decisive element in ensuring a non-inflationary recovery.”

Essentially, what Trichet says is that the private sector itself will be the determinant as to when and by how much the policy is reduced. The ECB just plays a passive role and the whole thing fixes itself.

He is absolutely right!

Now, can you imagine the outcry in the U.S. Congress and in the American media if Bernanke said that? If he said, "We'll just let the banking system decide when enough is enough."

Congress would go nuts! The know-nothing media would go nuts! Dick Morris would go nuts!

Yet, it's EXACTLY what the Fed has been doing and it's EXACTLY why the Fed's balance sheet topped out six months ago.

Has there been any mention of the latter in the media? No! Only lawsuits by the news organizations against the Fed!!

And most Americans accept this because just going along with it is a lot easier than putting in the effort to learn the truth and the facts.

Thursday, June 4, 2009

Pimco's Gross: Maybe Obama Should RAISE Taxes

Comments on this article from Warren Mosler (below):



(Warren calls Bill Gross "The Great Marketer." A well-deserved moniker due to the success, in size, of his Pimco fund and to his high standing in the media.)

I had Gross on my radio show once and he did not understand the distinction between a sovereign, currency-issuing nation and an individual or a family in terms of finance. He equated them as the same.

AP source: GM studying more temporary shutdowns

If you need a new car you'd better go buy one now! If you want to make money as a speculator forget gold and oil and foreign exchange, go buy some cheap, used cars and park them in your garage. In six months or a little more you'll be selling those cars for three times what you paid for them.

This is all going to happen because of the terribly destructive "solution" to what "ails" the U.S. auto industry. Forced downsizing of an industry that produces some of the most necessary real assets in a growing population (a growing world population) is just, plain, stupid.

The fact that the Administration is also doing this at a time when the industry itself has cut back significantly on production shows how ignorant they are of economic reality and how deeply they are held by a destructive belief system. ("Taxpayer on the hook.")

More than anything the Fed has done in setting interest rates (raising the level of reserves in the banking system), the destruction or elimination of productive capacity in key industries that supply some of the most important real assets to our economy ensures: a)lower productivity in the future, b) higher real inflation in the future, c) a lower standard of living in the future.

This is the real way that taxpayers will be put "on the hook."

Sustaining GM and Chrysler (and the jobs of the workers who labored for them) at the bottom of an economic cycle at a time when the government itself was working hard to buoy the economy would have made all the sense in the world. That's precisely why it didn't happen!

Goldman Raises Year-End Crude Forecast by 31% to $85

Yes, and Goldman will be one of the big reason it gets there, or higher, as it buys futures for its own account and pushes speculative behavior on the part of its clients. Nothing has changed. The financial crisis taught our policy makers nothing. Oil prices will have to go much higher before evoking a political response.

Wednesday, June 3, 2009

Bernanke: start work now to curb US budget deficit

Does Bernanke believe that non-governmental (private sector) savings are too high? Wasn't he complaining a couple of years ago that they were too low and we were too dependent on "foreign savings??"

Well, saying, "The government should start to curb the deficit," is the EXACT same thing as saying that the government should take away private sector savings, because that's what it is!

Whatever's on the government side of the ledger is the equal-but-opposite on the private sector side. The fact that Bernanke doesn't realize this is astonishing!

(Go see my chart a few posts back.)


I hope you enjoyed this market rally over the past three months because if the Administration follows Bernanke's advice--and it's likely that they will-kiss the rally goodbye and say, "Hello," to new lows in the market sometime later this year or next year.

Bernanke warns on deficits as Treasury rates rise: Part II

Bernanke also doesn't seem to understand that it is the Fed that sets interest rates! How amazing is this???

If Bernanke wanted the long bond yield at zero, tomorrow, it would be a done deal. He just needs to understand that.

Under its authority the Fed has unlimited ability to credit reserve accounts in the banking system. In other words, it has unlimited ability to buy--Treasuries, mortgage backed securities, stocks, anything.

So bringing rates down is not only a "no-brainer" for the Fed or any other central bank of a government that issues non-convertible free-floating currency, it is what central banks do, naturally.

In contrast, raising rates is a lot tougher for the Fed because it needs something to sell and it doesn't issue its own securities. (Although that is currently under consideration.)

That's why central banks usually like when rates are rising on their own, as long as economic conditions are stable or improving.

Bernanke warns on deficits as Treasury rates rise

"Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance," Bernanke said in testimony prepared for delivery to the House of Representatives' Budget Committee.

"Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth," he said.

Add Bernanke to the list of people who don't understand our monetary system.

This is truly amazing when you think about it!

Rather than expressing concern as to whether or not the nation is fully utilizing its resources and capital (both physical capital and human capital) to maximize wealth and prosperity (basic microeconomics here, folks!), Bernanke gets all wrapped up in the nominal level of debt.

There is no mention of the fact that for every liability (debt) there is an asset (credit) and for every borrower there is a saver. That's only an accounting principle that has been in practice for 500 years!

Nor is there any understanding that most credit is created in the private sector to facilitate the consumption of goods and services--the very thing that defines the economy--and if the growth in credit is slower than the overall accumulation of the real assets that we need to live, then by definition we have rising prosperity. We are getting rich!

To the extent that gov't debt both adds to private sector savings (by definition, again!) and fosters a trend toward the full utilization of the nation's capital, but not beyond, then there is absolutely nothing to worry about. In fact, it is something to cheer.

We're dead with the likes of Bernanke's stinkin' thinkin'.

Monday, June 1, 2009

Irrefutable: Gov't deficits add to private savings

How can anyone sit here and say that this isn't true?? This chart shows unequivocally how record deficits have created record private savings. This is absolutely irrefutable. Our leaders and academics are operating under a completely irrational belief system.

Send this graph to your Congressional representative today!!!

Gov't transfer payments added over $250 billion to personal income in the past year!

Our leaders and some of the most educated academics still say that government spending absorbs private savings despite "black and white," absolute, unequivocal proof that the opposite is true.

In today's personal income report the numbers were starkly clear: Government transfer payments (for Social Security, disability, medicare, medicaid and unemployment insurance) added $254 billion to personal income in the past year. In contrast, private wages and salaries DECLINED by $154 billion!

And personal savings in April reached a record of $620 billion!

Only government can be a net supplier of savings!!!

How can our leaders be so blind to the truth?? This nation's belief system is killing us!!

Some thoughts

Just some thoughts I had this morning...

If we ever enact a balanced budget amendment, take yourself and your family and move to Canada or China.

Obama believes the U.S. has "run out of money." Scary. Our president doesn't understand our own monetary system. Even George Bush understood this.

Any country that spends in its own currency, where that currency is not backed by gold or bound by some fixed exchange can NEVER run out of money!

We are ceding our position as the world's largest economy to China because of stupid policies that are based on myth and fallacy.

The demise of GM was not due to putting workers' interests over the company and shareholders. It was precisely the opposite!

The easiest way to lower "debt" (if that's what you want to do) is to sustain full output and employment.

If the private sector can't sustain full output and employment for whatever reason, then gov't should!

Here in America we mock the Europeans as being, "socialist." Did anyone notice that Europe's economy is larger than ours and adding size?

By definition, those Socialist Europeans are richer than us! And they have free health care, education, 6-weeks paid vacations, new cars, movies, theater, culture and all the consumer items that we have. Not bad for a bunch of commies!

Our leadership is destroying America's real terms of trade because of irrational sensitivity to perceived "imbalances."

We care more about the Chinese standard of living than our own, apparently!

For every debit there is a credit. For every liability there is an asset. For every borrower there is a saver. This is all definitional. It's double entry accounting! Did anyone in Obama's administration take an accounting course? Has any Republican taken one? Has any Democrat taken one?

We could be next!

Over the weekend the German parliament voted in something quite close to a balanced budget amendment. Germany is constrained in its ability to deficit spend because by adopting the euro is has functionally become like a state within the United States and can only spend by having savings on hand first.

Nations that issue their own currency that is not backed by gold or bound to some fixed exchange rate do not have this problem. Spending is merely a keystroke on a computer.

However, don't expect lawmakers in the United States to understand that distinction. The risk that we see something similar here--a balanced budget amendment--is growing rapidly. If that happens, take your family and move to Canada or China. Jim Rogers may have gotten that one (the move) completely right!

Read article below:

Berlin vote heralds big spending cuts
By Bertrand Benoit in Berlin

Published: May 29 2009 14:00 Last updated: May 29 2009 18:50

The next German government is almost certain to crack down on spending and drastically raise taxes after the lower house of parliament yesterday adopted measures that come close to banning budget deficits beyond 2016.

The controversial constitutional amendment, part of a reform of federal institutions, will prohibit Germany’s 16 regional governments from running fiscal deficits and limit the structural deficit of the federal government to 0.35 per cent of gross domestic product.

The amendment still requires approval by a two-thirds majority of the upper house of parliament which represents the regions. The vote is scheduled to take place on July 12 and is expected to be approved.

The most sweeping reform of public finances in 40 years was an “economic policy decision of historic proportions”, Peer Steinbrück, finance minister, told parliament shortly before MPs endorsed the amendment with the required two-thirds majority.

The vote underlines Berlin’s determination quickly to plug the holes that the economic crisis, two fiscal stimulus packages and a €500bn ($706bn, £437bn) rescue operation for German banks are expected to blow in the public coffers this year and next.

In 2009 alone, legislators from the ruling coalition expect the federal budget to show a deficit of more than €80bn, twice the current all-time record of €40bn reached in 1996 as Germany was absorbing the formidable costs of its reunification.

This figure does not include the deficit of the social security system, which is expected to rocket too, as unemployment rises to an expected 5m next year.

The constitutional amendment, popularly known as the “debt brake”, allows a degree of flexibility in tough economic times, just as it encourages governments to build cash reserves in good times.

Yet economists have warned the new rules could force the next government to implement a ruthless fiscal crackdown as soon as it takes office after the general election of September 27 if it is serous about hitting the 2016 deficit target.

“Given the massive fiscal expansion we are currently seeing, the ‘debt brake’ will lead to a significant tightening of fiscal policy in the coming years,” Dirk Schumacher, economist at Goldman Sachs, wrote in a note.

In a separate assessment, the Cologne-based IfW economic institute said the federal government would need to save €10bn a year until 2015 through a mixture of tax rises and spending cuts.

Klaus Zimmermann, president of the DIW economic institute in Berlin, said the next government might have to increase value added tax by six points to 25 per cent. This would be the biggest tax rise in German history.

The “debt brake” could complicate Angela Merkel’s re-election bid. Under pressure from parts of her Christian Democratic Union, the chancellor recently pledged to cut taxes if returned to office in September, though she pointedly failed to put a date on her promise.

The Free Democratic party, the CDU’s traditional ally, has made hefty income tax cuts a key condition for forming a coalition with Ms Merkel’s party should the two jointly obtain more than 50 per cent of the votes.

The debate has cut a deep rift within the CDU, which was threatening to deepen further yesterday as opponents of tax cuts seized on the constitutional change to back their arguments.

Günther Oettinger, the CDU state premier of Baden Wurttemberg, said “promises of broad tax cuts are unrealistic… First we must overcome the crisis, then we need more robust growth, and when we finally get more tax revenues, we should use them to repay debt, finance core state activities and for limited, very targeted tax cuts.”