Tuesday, November 30, 2010
Monday, November 29, 2010
Thursday, November 25, 2010
John Stossel is out there (I heard him on Fox yesterday) with a story about the experiences of the Puritan colonists who established the basis for our Thanksgiving Holiday here in the US. I think I've heard Rush Limbaugh provide a similar account some years ago on his radio show. This is an excerpt from a recent column Stossel wrote at the link above that parrots the Limbaugh thing.
"So as it well appeared that famine must still ensue the next year also, if not some way prevented," wrote Gov. William Bradford in his diary. The colonists, he said, "began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length after much debate of things, (I) (with the advice of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves. And so assigned to every family a parcel of land."
Then Stossel jumps to the conclusion:
In other words, the people of Plymouth moved from socialism to private farming. The results were dramatic.
I do not agree with his characterization of the apparent re-organization of the small agricultural micro-economy of that time, and certainly not for the reasons he cites. If you read the words of Bradford, he said:
1. "it well appeared that famine must still ensue the next year",
2. (they) "began to think how they might raise as much corn as they could"
This could otherwise be interpreted that something happened to cause a tremendous collapse in agricultural output, and then the colonists wisely came together as a community to put together a game plan to get through this potentially lethal environment.
Systems of integrated agriculture normally involve the growing of feedstocks and husbandry of livestocks and perhaps this system had failed. This could have easily been due to non-organizational or non-distributional reasons such as disease or drought or both. It would be at that point that a rational community would come together and quickly change over to a subsistence type of agriculture when faced with the real possibility of death by starvation. That is, the normal more complicated approach would have to quickly be abandoned in favor of everybody growing a simple crop that would ensure subsistence for the community, here they apparently chose corn as the crop that could provide that sustenance with the highest probability.
Bradford continues: "they should set corn every man for his own particular", "And so assigned to every family a parcel of land". Read these words; this is a very directive course of action, the fathers of the community organized and directed a course of action to ensure survival (oh no! big government!). Additional seed corn was distributed ("they set corn for every man") and tracts of land were assigned for the families to work. There is no disclosure of any assignment of rights to private property, or any distributional issues or the political things that Stossel forces into this.
It seems to me that they were faced with the real prospect of death by famine in some months, and knew that they had to go back to a subsistence type of farming that would lead to the most amount of food in the shortest amount of time with the least risk, and the 'government' of the time directed this. End of story.
Let's continue with the historic account: "This had very good success," Bradford wrote, "for it made all hands very industrious, so as much more corn was planted than otherwise would have been. By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many."
Think about it, to believe the Stossel and Limbaugh account, you have to believe that the Puritans only wanted to eat 'corn on the cob', this is absurd and non-insightful, and their political observations are deceptive.
Again, Happy Thanksgiving to all and let's all be thankful for the daily gifts He truly provides!
Tuesday, November 23, 2010
Thursday, November 18, 2010
Wednesday, November 17, 2010
When the government was bailing out GM there were cries everywhere of "taxpayers on the hook." The reality, however, was exactly the opposite: the government injected cash into the economy, saved GM and many workers' jobs and sustained a vital portion of our industrial capacity, which we use every day to produce the goods that Americans and others consume.
This was in no way "hooking" taxpayers.
Now, GM will go public once again and the U.S. government will sell $13 billion worth of the stock that it holds in the company. (See Matt Franko's previous post.)
Ostensibly, this sale of $13 bln worth of stock represents a "payback" to taxpayers (if you go by their "taxpayer on the hook" logic).
But is it?
The government sells its stock to taxpayers, who fork over the dough and that money goes to Treasury...taken out of the economy for good. That's a payback???
The moral of the story is, when you act like you're putting taxpayers on the hook when you're not, you really DO put taxpayers on the hook!!
"The Obama administration now will sell 412 million of its 912 million shares, raising around $13.6 billion that will help the government get back some of the $50 billion it loaned GM to save the company from ruin last year."If this 13.6B is just returned to the Treasury, it may provide fiscal drag this month, as the average monthly flow of fiscal (which is probably all that is holding everything together) is around $110B/month. This $13.6B would represent a bit above a 10% hit to this flow this month, and may be significant.
Tuesday, November 16, 2010
There’s a little video making the rounds on the Internet called, “Quantitative Easing Explained.” It’s cute, but don’t be fooled by the cuteness because it’s got pretty much everything all wrong. The video has two robot-like cartoon characters talking about quantitative easing and it starts off by saying that quantitative easing is nothing more than the Fed “printing a ton of money.” That’s the first dose of misinformation. Quantitative easing is NOT about printing money; but it IS about adding new reserves to the banking system. Moreover, reserves are not even part of the money supply and when they’re in the banking system they generally just tend to sit there earning some pittance of interest. There’s no “printing of money” going on; this is a huge misstatement.
Then the characters try to purport that deflation is good because it gives people more purchasing power, i.e. it lowers the cost of things and that allows consumers to buy more. Hell, if you listen to these characters you’d get the idea that all policy—monetary and fiscal—should be focused solely on creating massive deflation because everyone would somehow benefit. This is so wrong it’s ridiculous. What the robots ignore is that in a deflation wages are falling, too, so the real cost of goods and services actually rises. Debt becomes harder to service and asset prices fall (in the current reality home prices are falling, which are most household’s largest asset), so wealth falls. Less wealth means less ability to consume. You get poorer!
The characters try to refute the Fed’s claim that things are deflating by pointing out that prices for such things as food, gas, health care, tuition, taxes, subways, stocks and bonds are all rising. They’re trying to make the case that what we are really experiencing now is inflation, not deflation. Yes, some of those things are rising in price, but there are other items on the Consumer Price Index that are still falling, like housing, apparel and recreation. All told, inflation as measured by the CPI is up 1.1% versus last year. That’s not exactly some out of control hyperinflation.
The video then gets into an area where the full ignorance of its creators goes on display, when it starts talking about monetary operations. Monetary operations are mechanism by which the Fed sets rates or conducts quantitative easing. The characters say that the Fed executes QE by “printing money then buying the Treasuries.” In reality, it’s the total reverse: the Fed buys Treasuries by crediting reserve accounts, simple as that. In other words, reserves are a byproduct of asset purchases, in this case, Treasury purchases. There is no creating money and then buying of bonds.
Their confusion doesn’t end there. They say that the Fed could buy the bonds directly from the Treasury, but doesn’t. Instead, they go on to say, it buys from Goldman Sachs. (Goldman is used throughout the video as a metaphor for greedy Wall Street.)
The fact is, if the Fed bought from the Treasury it would have zero effect on reserve balances because the money would go into the Treasury’s account at the Fed rather than into the banking system, where the Fed wants the reserves to go. Therefore, in order for the Fed’s operations to have any chance of success it MUST buy bonds from the public and not the Treasury because it wants reserve credits to go into the banking system. You or I can buy bonds from the Treasury, but that’s a whole different thing. WE are not trying to affect monetary policy, the Fed is.
The video then makes the totally false claim that the Fed pays Goldman Sachs the worst price for the bonds. This is wrong, wrong, wrong. The way the Fed conducts monetary operations is that it will indicate its intentions and it will buy from dealers at the best price/lowest yield offered. What these guys say is all made up. They’re clearly on a propaganda mission here.
Toward the end they say that the Fed’s first quantitative easing program (QE1),conducted last year, was a failure because it didn’t create jobs or stop the housing market crisis. There’s probably some truth to that, however, it did stabilize the commercial paper market and other vital sectors of the capital markets and it probably helped boost stocks, which have climbed 80% since last year. Housing prices have stopped declining pretty much and the private sector has added about 1 million jobs. Much of this was due to the stimulus and automatic stabilizers, but to flat out state that QE1 was a failure, is just wrong.
The Internet is great, there’s a lot of good information out there, however, you have to be careful because it’s loaded with stuff like this: a lot of bad and misleading information that may be cynically designed to promote an agenda or advance someone's personal ideology. This clearly is an example.
Friday, November 12, 2010
This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
— Ben Bernanke, Washington Post op-Ed, Nov 4, 2010,
Emphasis mine. What data is Bernanke looking at? Here is a snip of the chart for the Ten Year Treasury rate for the last year:
Related to QE, Point A is April 2010 when the Fed terminated QE1. Immediately at that point a significant rally in the 10-year bond ensued that lasted into August with rates falling significantly. This rally was stopped cold in August around the Point B when the rumours of a possible QE2 started in earnest via Steve Leisman at CNBC. Since this time Mr. Chairman, rates have certainly NOT fallen, in fact they look like they are potentially ready for an upside breakout.
If the Fed does not specifically target interest rate levels with QE2, can they hope to lower the longer term interest rates by just "buying"? It looks like we will find out starting today.
Thursday, November 11, 2010
Brazil's president, Luiz Inacio Lula da Silva, warned that the world would go "bankrupt" if rich countries cut back on consumption and tried to export their way to prosperity. "There would be no one to buy," he told reporters. "Everybody would like to sell."
He's apparently the only guy there who gets it.
Either that, or he wants Brazil's export boom to continue and is scaring other countries into being buyers.
Here's another unbelievable story from the frontlines.
Yesterday I was at Fox and I bumped into John Ryding of RDQ Economics (that's the name of his firm). Ryding used to be the Chief U.S. economist at Bear Stearns (you may see why Bear fell apart in a moment).
I asked Ryding what he was going to speak about and he replied, "Monetary suicide by the Federal Reserve."
I asked him why he was calling it "monetary suicide?"
He said, "Because that's what the Fed was doing."
Suicide is killing yourself, so I don't quite get how the Fed is comitting suicide, but I digress.
I explained that all the Fed was doing is targeting bond yields lower and the way it does that is by buying bonds. That adds to reserves in the bankng system, which basically just sit there and earn some pittance of interest.
Then he said this...
"I get the part about how the Fed is boosting its balance sheet, but the question is, where are they going to get the offsetting liabilities?"
I kid you not; that is what he said.
I sat there, stunned.
I said, "You mean reserve credits?"
He said, "Yeah."
I told him that reserve credit are just created with a touch on the Fed's computer. Those are credits to the banking system that are called, reserves.
He seemed completely at a loss to understand this.
So here's a guy who many know and who is considered to be one of the top Wall Street economists yet he shows himself to be glaringly uneducated when it comes to the Fed and monetary operations. "Where will they get the liabilities to offset their asset purchases???"
I kid you not, that's what he said.
You can't make this stuff up.
Do you wonder, anymore, why we're in such trouble?
Wednesday, November 10, 2010
Looks like the 'deflation' in home prices is setting up to provide some nice values. Now if we could only get our policymakers to implement full employment policies so households had the incomes to be able to finance and enjoy them.
Thursday, November 4, 2010
I saw Schiff at a conference today at the NYSE. He started screaming at me and shouting obscenities. Many people were standing around stunned. He called me a "fucking bastard!" LOL!!! It was classic. He turned so red and couldn't stop screaming!!! Said I am on a campaign to distort his record.
Wednesday, November 3, 2010
I went to Fox yesterday and who do I bump into? None other than David Walker, former Comptroller General of the U.S. and now the president of the Pete Peterson Foundation. Walker is the leader of Deficit Terrorist Nation and he has been on a mission, backed with Peterson’s money, to scare the daylights out of the citizens of this country and our political leadership into believing that Social Security is insolvent and that the nation itself faces bankruptcy unless we reign in runaway spending and the deficits that are accruing.
Back in 2008 I had Walker on as a guest on my radio show on Biz Radio and I got him to admit that there is no solvency issue and that the checks were never going to bounce. As far as I know, I was the only one who has ever gotten him to say that publicly. (I have often asked Neil Cavuto to pose that question to Walker the times when he is on his show and I have personally given Neil the audio clip of that interview, but he hasn’t done it.)
Anyway, when I went into the green room and saw him sitting there, I walked right up to him and introduced myself and asked if he recalled that exchange we had back in 2008. He actually said that he did. So I asked him why he continues to go around saying that social security is facing insolvency.
He said to me that he doesn’t say that.
I questioned him as to what would happen if those deficits were not closed as per his warnings and if the government just kept writing checks. He said that interest rates would rise. Note: he didn’t say we’d go bankrupt; just that interest rates would rise. I asked why he thought interest rates would rise if the Fed sets rates? He said the Fed only sets short term rates, but not “market rates.” I asked him if he was aware that the Fed has been guiding long term rates lower by buying bonds. I tried to explain to him that the Fed could set rates anywhere along the curve, by exactly the same manner of operations that it uses to set short rates. He seemed confused and not fully understanding that the Fed could keep rates low for however long it wanted. Then I brought up the example of Japan, where debt was far higher than in the U.S. and where rates have been virtually at zero for two decades.
He said Japan has no “foreign debt.” I say neither do we, because our “foreign debt” is our own debt—in dollars. Same exact thing as Japan. He had a hard time with that.
Then I asked him if he truly believed that a nation that issues its own currency and where its debts were denominated in that currency could go bankrupt? He responded, “No, that can’t happen.”
Then I followed up by trying to make him see that Social Security or Medicare or any obligation of the government doesn’t face solvency risk by that same logic.
So I asked him why he keeps saying it’s going broke?
He says he doesn’t say that. He said that he never says it’s insolvent. (Which is bullshit, because he does say that!)
I told him about what Greenspan said back in 2005 during Congressional testimony, when he was asked that very question, about Social Security solvency. Greenspan said that the Federal Gov’t can pay any amount of money to whomever it wants, but the real issue was whether or not the real assets were going to be there for people to consume. In other words, would we end up having inflation.
Walker seemed to understand this. Then I said that if we were going to have a realistic dialog and discussion about Social Security, we should not frame it in context of risk of insolvency, but rather, whether or not the crediting of bank accounts (issuing checks) was going to lead to inflation down the road. I said that no real examination of that potentiality was ever done. He agreed.
I said that since he is the voice of deficit reduction and fiscal responsibility, he should refrain from using words like bankruptcy and insolvency and reframe the discussion so that people start talking about the real issue; which is whether or not there is a risk of inflation if the government keeps writing checks.
He agreed and said that he won’t talk about solvency. HE SAID HE WASN’T GOING TO TALK ABOUT INSOLVENCY! He also agreed with me that it’s not about interest rates!
In the end he said it’s about inflation and the value of the currency. (I’m not even sure it is about the value of the currency, but I gave him that one!)
So in the end, David Walker, Deficit Terrorist in Chief, basically agreed on all points espoused by the MMT community. He said to me he would characterize it in that way. He said I should ask Neil Cavuto to ask him that question. (I promptly sent an email off to Neil.)
Then he walked out to the studio to do an interview with Fox Anchors David Asman and Liz Claman. Not more than two minutes into this interview, he was talking about restoring SOLVENCY to Social Security.
What a disingenuous, lying, douche bag!