Paul Krugman debunks deficit myths

Krugman is a big name in economics and his debunking of the deficit myth is helpful.

"...the deficit worriers have it all wrong. Under current conditions, there’s no trade-off between what’s good in the short run and what’s good for the long run; strong fiscal expansion would actually enhance the economy’s long-run prospects."

"The idea that tight fiscal policy when the economy is depressed actually reduces private investment isn’t just a hypothetical argument: it’s exactly what happened in two important episodes in history.

The first took place in 1937, when Franklin Roosevelt mistakenly heeded the advice of his own era’s deficit worriers. He sharply reduced government spending, among other things cutting the Works Progress Administration in half, and also raised taxes. The result was a severe recession, and a steep fall in private investment.

The second episode took place 60 years later, in Japan. In 1996-97 the Japanese government tried to balance its budget, cutting spending and raising taxes. And again the recession that followed led to a steep fall in private investment."
Read the article here.

Bernanke comments at Austin Chamber of Commerce

Some of his comments below and my remarks in blue.

"Even if the functioning of financial markets continues to improve, economic conditions will probably remain weak for a time," he said.

Need a large fiscal stimulus to resolve this. Larger tax rebate checks, suspension of the payroll tax, etc. Large and ongoing until the economy improves.

In his speech, Bernanke noted that the bracing impact of the Fed's aggressive rate reductions has been somewhat stymied by the worst credit and financial crises to hit the world economy since the 1930s. Despite lower borrowing costs ordered by the Fed, skittish banks have been reluctant to lend money to people and businesses, a vicious cycle that has seriously hobbled the U.S. economy.

The Great Depression finally ended for the U.S. when spending ramped up dramatically for the war effort. Most of the rest of the world pulled out of the depression before the U.S. because they adhered to a strict, Keynesian policy approach.

"Although further reductions ... are certainly feasible, at this point the scope for using conventional interest rate policies to support the economy is obviously limited," Bernanke said in the speech. The Fed can lower its key rate only so far — to zero — and it's getting ever closer to that threshold.

Bernanke said there are other ways that the Fed might bolster economic activity.

The Fed, for instance, could buy longer-term Treasury or agency securities on the open market in substantial quantities, he said. This might lower rates on these securities, "thus helping to spur aggregate demand," Bernanke said.

Lower long-term rates still may not spur aggregate demand. Sharply higher levels of gov't spending will. A better approach at this point would be if the Fed bought stock index futures to boost the stock market. This would be a very effective transmission mechanism and there would be almost an immediate, positive wealth effect to households. Japan did this in 2002-2004 and it worked, however, the buying was limited to bank shares. Imagine the effect if the Fed put $615 billion into the purchase of S&P futures! Sound crazy? Just remember, that's what they gave to foreign central banks--all in the space of two months!

Yuan Falls Most Since End of Currency Link Before Paulson Visit

The Chinese would be wise not to listen to Paulson. Anyway, he lacks any sort of credibility now with his terrible handling of the crisis (flip flopping on this TARP proposal, letting Lehman fail, not using the money he begged Congress for, etc.)

With a big cut in interest rates and a large stimulus coming, the yuan is likely to fall and the Chinese will be happy to do that because they know it will helping their export industries.

Switzerland Feels Iceland's Pain With Banks Teetering

From a Bloomberg article.

"An isolated European country with an economy geared toward finance and winter sports is no longer a monetary bastion as credit evaporates around the globe. Banks teeter, the once-impregnable currency depreciates and a proudly independent people question whether a centuries-old go-it-alone strategy can survive.

Even Switzerland is wondering if it's immune to the forces ravaging Iceland."

Of course it can go it alone, with the right policies. Switzerland's deficit is a paltry, 1.5% of GDP. This is far to small to stabilize the economy.

What Switzerland needs is a good, old-fashioned, dose of deficit spending, however, the notoriously "hard money" nation will be loathe to do that. That's why the dowturn and the pain will last long.

In addition, false ideas, like this guy saying, "Switzerland can't go it alone," will cause policymakers to believe that they don't have control over their own destiny. That, somehow, it's in the hands of others.

In the U.S. this kind of thinking is pervasive as well and will constrain our ability to help ourselves.

U.S. Treasury Yields Drop to Record Lows on Recession Concern

This totally flies in the face of all those who have been predicting rising interest rates because of the Fed's "printing of money."

The fact is, there is huge demand for Treasuries simply because actions taken by Treasury and the Fed have caused reserves to balloon by $600 billion. These are the funds being used to buy Treasuries.

U.S. not having to "raise rates to attract capital." A ridiculous statement that displays a monumental lack of understanding of monetary operations. Yet, you hear it stated all the time.

Fed's forex swaps decline by $85.5 billion in the latest week

Foreign exchange holdings of the Fed declined by $85.5 billion in the latest week. I do not know if that is due to some of these swaps being settled, or if the decline is due to mark-to-market losses in forex positions. (Probably the former, as currencies foreign currencies rallied in the week in question.)

Access the full report here.

Volker's remarks from a speech last week at Drew University

Volker's comments and my remarks in blue.

Ex-Fed chief Volcker at Drew: 'There is no magic bullet' for economy
Obama adviser says a plan is needed at start of presidency
by laura bruno • daily record • November 21, 2008

"No magic bullet" comment means that he does not believe in the Keynesian approach that utilizes large doses of government spending to restore aggregate demand.

MADISON -- Former Federal Reserve Chairman Paul Volcker, one of President-elect Barack Obama's top financial advisors, didn't let slip any of his secret advice Thursday when he addressed a room of some 40 Drew University students, professors and trustees.

He did tell them that while it's easy to get cynical and discouraged about public service after nearly a decade in Washington, (he served from 1979 to 1987), he said there is a chance that under Obama some of the excitement that was felt in the 1960's with President John F. Kennedy could see a resurgence.

Kennedy's chief economic advisor was John Kenneth Galbraith--a fervent Keynesian. Quite different from the team that Obama has assembled. There is not one Keynesian on it, so it's weird that Volker does not recognize that distinction.

He also said Obama needs to be prepared with an economic plan on inauguration day or the day after, because with General Motors and the other American auto makers on the brink of bankruptcy, Obama may have his hand forced before he has a chance to make his own choices, Volcker said.

"Forced" to do what? Let them fail? Bail them out? No specifics.

Volcker answered questions posed by former New Jersey Gov. Brendan Byrne, a fellow 1949 Princeton University graduate, who is teaching a course on politics and the media at Drew.

When Byrne asked what options there are for solving the economic crisis, Volcker had a short answer:

"Time," he said. "There is no magic bullet."

Again, this comment displays a complete mistrust of the Keynesian approach. Implies shared suffering and sacrifice by the electorate. A muddling through at best.

Sharing the stage with Volcker was former New Jersey Gov. Thomas Kean.

Volcker joked that his true mission at Drew was to offer Kean the Secretary of Treasury position on behalf of the President-elect.

Volcker has been on the short list of possible candidates for the position.

In dishing about the press, Volcker was kinder than Kean, who said the press acts in a "herd mentality" on a major story and most reporting on a complicated story is not sensible.

On this characterization of the press, Gov Kean is absolutely correct. As an aside, I lived in Jersey when Kean was governor and he was an excellent chief executive!

In contrast, Volcker said today's financial press is far more sophisticated than it was 20 years ago.

Is he joking? I find this remark to be incredible. The financial press is still pretty much clueless; views everything through the paradigm of a gold standard. But then again, so does Volker, so you can see why he lauds them.

"I have a feeling the press hasn't done such a bad job," Volcker said of the media's reporting on the financial crisis. "It's a pretty complicated story to tell."

"Press hasn't done a bad job." Unreal! No understanding of gov't finance, monetary operations, floating exchange rates, promoting the likes of Peter Schiff, Jim Rogers. Little or no perspective when it comes to economic data, deficits, debt, etc. Incessant cheerleading, entrenched ideology. Sheesh, what's Volker smoking?

And Volcker acknowledged that public relations can have a powerful effect on the powers of a new president.

"It's not all p.r., but you have to get it pretty right otherwise you can't do what you want to do."

What is he saying? That the press has more power than the policymakers? More power than the Fed? More power than the Federal Gov't? Should we pander to what the press thinks we should do? Is THAT leadership???

Fiscal conservatism is dead! Long live fiscal conservatism!

Fiscal conservatives are beside themselves with delight as they now have an have an absolute vice grip on policy. They’ve had it for years. The hard money crowd has seen their leader resurrected and installed back in his throne with Volker.

Under this team I am skeptical that we will get the kind of demand stimulus that is needed. Obama's first term will likely fail to achieve its economic goals. As a result, he will be blamed–not because of the fiscal conservative policies of his administration–but simply because he is a Democrat. Thus, you will see the “tax and spend” rote criticisms being hurled at him.

Paving the way for even a more extreme version of fiscal conservatism.

Fiscal conservatism is dead! Long live fiscal conservatism!!

P.S. Argentina proposes infrastructure spending equal to 10% of GDP

Obama addresses "recycled" appointees

Obama addressed concerns that many of his economic appointees have been "recycled," meaning they were in the Clinton Administration.

"The American people would be troubled if I selected a treasury secretary or a chairman of the National Economic Council at one of the most critical economic times in our history who had no experience in government whatsoever," Obama said.

You mean like electing a president who has no experience either?

Anyway, isn't that what "change" is supposed to be all about?

Obama to name Volcker to head economic group

Fiscal conservatives everywhere are cheering!

Any chance of a Keynesian response to this crisis is dead.

Obama won't save us...his glow is already fading

Since election day each time Obama spoke the markets responded positively. That was a welcome contrast to the devastatingly negative effects seen after any Hank Paulson or President Bush comments.

However, Obama's press conference today was met with market selling for the first time and probably for good reason. Rather than aggressively reiterating the need for a big stimulus without any conditions or without any regard over deficits, Obama sounded a more cautious tone. He talked about crafting an "efficient and responsible" budget. (Code words for fiscal responsibility.)

He spoke about how his OMB appointee, Peter Orszag and his debuty, Rob Nabors, would be "charged with going through the federal budget “page by page, line by line” to develop a budget that would eliminate waste and increase government efficiency."

Obama also said, “If we are going to make the investments we need, we also have to be willing to shed the spending that we don't need.”

Again, the thinking there seems to suggest that he believes the government is somehow constrained in what it can do. Only by "scouring the budget, line by line," is the way he believes he can come up with the money.

Obama's team is filled with deficit hawks, suggesting that bold and aggressive measures to revive demand will fall far short.

RUSSIAN ANALYST PREDICTS DECLINE AND BREAKUP OF USA

This professor mainly suggests that the cause for the breakup of America is debt. On that score he has it wrong, however, gold standard thinking is pervasive and the one thing that may imede or block our abililty to turn this economic crisis around.

"Millions of citizens there have lost their savings. Prices and unemployment are on the rise. General Motors and Ford are on the verge of collapse, and this means that whole cities will be left without work. Governors are already insistently demanding money from the federal center. Dissatisfaction is growing, and at the moment it is only being held back by the elections and the hope that Obama can work miracles. But by spring, it will be clear that there are no miracles."

He also cited the "vulnerable political setup", "lack of unified national laws", and "divisions among the elite, which have become clear in these crisis conditions."

He predicted that the U.S. will break up into six parts - the Pacific coast, with its growing Chinese population; the South, with its Hispanics; Texas, where independence movements are on the rise; the Atlantic coast, with its distinct and separate mentality; five of the poorer central states with their large Native American populations; and the northern states, where the influence from Canada is strong.


There are large racial, ethnic, religious undertones in the American society that can become a source of tension and strife if economic conditions become very bad. I believe that.

Is Britain Going Bankrupt?

Another ridiculous article by a journalist who doesn't understand floating exchange rates and the difference between currency issuing nations that spend by crediting bank accounts (and Britain is one). There can never be a payments crisis or bankruptcy.

If this guy Ambrose Evans-Pritchard wanted to write about such a possibility he should focus on Germany or any nation within the Eurozone. These countries are no longer currency issuers and are completely constrained by the total amount of savings of their citizens and the nations' ability to borrow. They can go bankrupt. Britain, U.S. Japan, etc. can't!

Christina Romer: Obama's choice for Chair of the Council of Economic Advisors

In case you were wondering. Talking points below taken from Brad DeLong website:

Talking Points on the Designation of Christina D. Romer as the Candidate to Be Nominated to the Senate for the Post of Chair of the Council of Economic Advisers

World-class expert on the Great Depression: if you want to avoid any of the mistakes made during the Great Depression, she is the one to hire.

World-class expert on monetary and fiscal policy: encyclopedic knowledge of their history--since we need a CEA chair who knows more about stabilization policy than about tax or labor or industrial organization policy.

Very good at explaining economics: great similarities between teaching Econ 1 and teaching the White House staff about economics.

Very good at making people believe that relatively complicated ideas about economics are simple facts of nature.

Bush moved the CEA staff out of the Eisenhower Executive Office Building:

A very bad thing because the CEA staff can no longer look over the shoulders of the White House staff and offer advice.

CDR should demand, as a condition of appointment, that at least her two deputies have offices in the White House complex.

A center-left moderate:
But these are not moderate times. To be moderate now is to be radical. To be radical is to be moderate.

The dollar's rally is over

The Fed has effectively killed it with massive dollar selling of the past two months.

The good news is, they will have a huge profit on their foreign currency position.

The bad news is, it translates into a decline in Americans' purchasing power.

But, hey, at least taxpayers are getting "payback," right?

Maybe they'll divvy up the Fed's trading profit and send us all a check!

Don't hold your breath.

Riots in Iceland as economy darkens

Look at events playing out in Iceland, where an economic collapse is now bringing riots in the streets...violence!

As Americans rail against bailouts and increased government spending; as our leaders preach constraints, sacrifice and shared pain, we impede our ability to get us out of this crisis.

This is no time for fiscal restraint, yet that is what the Obama team is proposing: new spending balanced with new spending cuts. Where is the stimulus? States and local governments face severe cash shortages and looming cutbacks in services.

We risk bringing on a broader and more long-lasting downturn under this sort of approach. Look at Iceland and don't think that America is immune to this type of social diorder and chaos.

Obama promotes fiscal restraint as counterpoint to spending plans

The economy's problems are tied to a large decline in aggregate demand, which means that more demand is needed, not less or the same. While Obama's spending plans are good, his perceived need to balance that out with spending cuts will likely not produce sufficient new demand to turn things around. His appointment of Peter Orszag to OMB was a dead giveaway. Orszag is a deficit hawk as are other members of the Obama economic team. Obama and his team are operating under the notion that the government is fiscally constrained, when in fact it is not. This is gold standard thinking.

Money supply starting to grow more rapidly

M2 (y-o-y % change)

Growth in this aggregate is starting to accelerate. Sign that things may be stabilizing.

Weekly reserves and monetary base update

Reserve balances with Federal Reserve banks

Now up to $634 billion. This is the money that will be used to buy Treasury securities. It has already been put into the banking system as a result of Fed actions and Gov't spending.

Monetary Base

Up by $700 billion since September. Where did this money come from? Answer: Federal reserve credits and gov't spending.

Six Myths about the Big Three

Good article covering some of the misconceptions about the Big 3 automakers on Seeking Alpha.

"Memo to CEOs: Ask for a bailout, and your company will be reduced to a caricature.

Recent congressional hearings on the plight of GM (GM), Ford (F), and Chrysler have illuminated a few important issues - like how the Detroit executives travel when on business. Populist politicians and gotcha journalists delighted at the prospect of rich CEOs riding corporate jets to ask for taxpayer money. There was a little talk about jobs and cars and the foundering economy, too. But you might have missed that part, or gotten confused by a welter of misperceptions that emerged from the spectacle of supplicant CEOs trying last-ditch tactics to save their companies."


As the automakers careen toward bankruptcy, here are some of the myths complicating the debate over the future of the Detroit Three:


Go here.

Did the $600 billion in loans the Fed made to foreign Central Banks go to foreign automakers?

Congress denied our automakers a $25 billion loan despite the prospect of bankruptcy and the massive, negative, economic ramifications of that.

Yet over the past several months the Fed has lent over $600 billion to foreign central banks, including, the ECB, Bank of England, Bank of Japan, Swiss National Bank, Banco Central do Brasil, the Bank of Korea, Banco de Mexico and the Monetary Authority of Singapore.

Here's what the Fed had to say about those loans in its minutes:

"...to address the sizable demand for dollar funding in foreign jurisdictions"

What does this mean?

It means that the Fed gave over $600 billion to foreign CBs and that money will be lent to individual institutions and companies within those respective countries.

Wouldn't it be ironic, then, if some of the recipients of those dollar loans turned out to be foreign automakers like Daimler, BMW, Hundai, Mazda and even Nissan and Toyota?

Could very well be.

There is no U.S. Government regulatory oversight when it comes to how the central banks of other nations dole out OUR money.

Did Congress say anything about this? Of course not.

The most egregious thing is that the Fed did not have to do this. If foreign central banks needed to help companies within their jurisdiction that had dollar liabilities, they could have bought dollars in the open market and supplied those dollar loans directly. Our Fed didn't have to supply them. However, as a consequence of giving those dollar loans the Fed has stopped the dollar's rally. That hurts Americans.

Where's the outcry over the $8.6 billion the Fed lost on currency swaps?

There was huge public outcry when the Fed arranged the "bailout" of Bear Stearns. Back in July the Fed created the Maiden Lane Portfolio to assume the $28.8 billion of Bear Stearns' assets. The value of that portfolio as of 11/20 was $26.9 billion. So, over the course of four months the Fed has "lost" about $2 billion based on current, mark-to-market value of the Bear Stearns assets.

Yet in the past week the Fed's foreign currency holdings have lost $8.6 billion in value--more than four times what it lost on the Bear Stearns deal. (View the Fed's weekly statement here.)

At least with Bear Stearns the Fed acted to help an American institution and U.S. financial markets, as opposed to giving money to foreigners.

So, where is the public outcry? Where are the Congressional hearings?

Nothing.

Fed's forex swaps decline by $8.6 billion in the latest week

Total outstanding value of foreign currency on the Fed's balance sheet as of November 20th is $606.4 billion. That is down $8.6 billion from the previous week.

Access the Fed's weekly statement here.

Peter Orszag: Obama's pick for OMB

”Peter Orszag, the head of the Congressional Budget Office, was picked to head Obama’s Office of Management and Budget, a top Democratic source told CNN on Tuesday. Orszag worked at the Clinton White House as special assistant to the president at the National Economic Council and served on the Council of Economic Advisers.”

Orszag has written on the dangers of rising deficits for interest rates, and on the government’s fiscal “gap” into the infinite horizon, to head OMB.

Change we can believe in?

Finger-pointing begins as Senate nixes auto vote

WASHINGTON – A Democratic Congress, unwilling or unable to approve a $25 billion bailout for Detroit's Big Three, appears ready to punt the automakers' fate to a lame-duck Republican president. Caught in the middle of a who-blinks-first standoff are legions of manufacturing firms and auto dealers — and millions of Americans' jobs — after Senate Democrats canceled a showdown vote that had been expected Thursday. President George W. Bush has "no appetite" to act on his own.

Then he oughta force himself to have one.

U.S. auto companies employ nearly a quarter-million workers, and more than 730,000 other people have jobs producing the materials and parts that go into cars. About 1 million on top of that work in dealerships nationwide. If just one of the auto giants were to go belly up, some estimates put U.S. job losses next year as high as 2.5 million.

"If GM is telling us the truth, they go into bankruptcy and you see a cascade like you have never seen," said Sen. George V. Voinovich, R-Ohio, who was working on one rescue plan Wednesday. "If people want to go home and not do anything, I think that they're going to have that on their hands."

The automakers — hobbled by lackluster sales and choked credit — are burning through money at an alarming and accelerating rate: about $18 billion in the last quarter alone. General Motors Corp. has said it could collapse within weeks, and there are indications that Chrysler LLC might not be far behind. Ford Motor Co. has said it could get through the end of 2008, but it's unclear how much longer.

For now, however, with the federal emergency loan plan stalled in the Senate, lawmakers in both parties are engaged in a high-stakes game of chicken, positioning themselves to blame each other for the failure.

Senate Majority Leader Harry Reid, D-Nev., scrapped plans Wednesday for a vote on a bill to carve $25 billion in new auto industry loans out of the $700 billion Wall Street rescue fund.

It's really up to Bush's team to act, he said.

"I don't believe we need the legislation," Reid said. Treasury Secretary Henry Paulson can tap the financial industry bailout money to help auto companies, Reid said, but "he just doesn't want to do it."

Paulson says he "doesn't think that was the intention of the legislation." It's not up to him, it's up to Congress. Who made Paulson God? He should be held in contempt of Congress.

Not our responsibility, countered the White House.

The president is Commander in Chief. Ultimately, if the fate of the nation's economy is at stake, it is his responsibility. He has walked out on the American people.

"If Congress leaves for a two-month vacation without having addressed this important issue ... then the Congress will bear responsibility for anything that happens in the next couple of months during their long vacation," said Dana Perino, the White House press secretary.

The president is ultimately in charge. He can do it by executive order and anyway, it is the Republicans in Congress who are being obstructionist.

She said there was "no appetite" in the administration for using the financial industry bailout money to help auto companies.

"No appetite???" She must be kidding. As the economy prepares to crater that's the lame excuse they come up with???

The White House and congressional Republicans instead called on Democrats to sign on to a GOP plan to divert a $25 billion loan program created by Congress in September — designed to help the companies develop more fuel-efficient vehicles — to meet the auto giants' immediate financial needs.

Voinovich and Sen. Kit Bond, R-Mo., along with Democratic Sen. Carl Levin of Michigan, were at work on that measure Wednesday, trying to placate skeptical Democrats by including a guarantee that the fuel-efficiency loan fund would ultimately be replenished.

"It is the only proposal now being considered that has a chance of actually becoming law," said Republican leader Mitch McConnell of Kentucky.

If an acceptable deal emerges, Reid said it could be passed as part of a measure to extend jobless aid to unemployed workers whose benefits have run out. A vote on that bill is likely on Thursday. Negotiators were discussing a scaled-down aid package of $5 billion to $8 billion to help the automakers survive through year's end.

But there was little sign that Democratic leaders would go along.

"We have to face reality," Reid said.

They are vehemently opposed to letting the car companies tap the fuel-efficiency money — set aside to help switch to vehicles that burn less gasoline — for short-term cash-flow needs.

All of which leaves the Big Three bracing for a bleak winter without government help.

GM CEO Rick Wagoner told a House committee Wednesday that the downfall of his industry would ripple through communities around the nation. Pressed by lawmakers, Wagoner wouldn't say precisely when GM would run out of money without a government lifeline, but he disclosed that the company now was burning through $5 billion a month.

Still, with the $25 billion emergency package, "we think we have a good shot to make it through this," Wagoner said.

Many lawmakers in both parties are now openly discussing whether bankruptcy might be a better option for auto firms they regard as lumbering industrial dinosaurs that have done too little to adjust their products and work forces for the 21st century.

Will make Lehman bankruptcy look like a walk in the park.

The carmakers argue that bankruptcy would devastate their companies, but proponents say it would give them a chance to reorganize and emerge stronger and more competitive.

It's unclear, though, whether Democrats controlling Congress are willing to risk being blamed for letting one of the Big Three — symbols of the nation's once-mighty manufacturing sector — go under.

Bailout-shy lawmakers got an earful from jittery constituents last month when the House let an early version of the Wall Street rescue fail, sending the Dow Jones industrials tumbling and erasing more than a trillion dollars in retirement savings and other investments. Congress took a deep breath and reconsidered, passing the plan a few days later.

Faced with a similar collapse in the auto industry, the Bush administration might yet decide to step in to help the auto companies, or the Federal Reserve could step in — though both have steadfastly refused to do so.

If not, lawmakers have left themselves a contingency plan: Come back to Washington in December for yet another postelection session where they might be able to strike the deal that now seems beyond reach.

Democratic leaders are planning to gather for an economic conference the week of Dec. 8, noted House Majority Leader Steny H. Hoyer, D-Md.

"That is available," Hoyer said this week. "The year has not ended."

Consumer prices drop the most in 61 years

This shows the futility of raising interest rates to address demand driven increases in commodity prices. The Fed's long march to a 5.25% fed funds rate, from 1%, was part of what caused the housing market to peak. The Fed did this because it caved in to pressure that we there was rising inflation, yet, the rise in commodity prices simply were a reflection of a global boom (and speculation--they could have addressed that, but chose not to). Moreover, there was little or no wage inflation throughout the course of the gains in commodities.

Even the ECB has reversed course.

Eventually, commodity prices would have stabilized at some higher plateau and that element of inflation would have abated. Instead, the Fed chose to fight it with higher rates, and support a weak dollar (also caving into concerns about the dollar's exchange value). That's a good part of what burst the bubble.

Ironically, the Fed has had a wonderful opportunity to allow the dollar to rise dramatically, but opted to engage in massive forex swaps that put a cap on the dollar. This selling of the buck by the Fed will turn the dollar's trend down again. It may already be starting.

I.O.U.S.A. Makes Oscar Shortlist For Best Documentary

The propaganda film, I.O.U.S.A has been nominated for an Oscar. This is no surprise.

The film totally miscontrues and distorts the financial position of the United States. It routinely takes things out of context and fails to understand the concept of debt as money in a modern economy or the world under a regime of floating exchange rates.

This is a well-crafted propaganda film designed to scare people, and it has done jus that. Like Al Gore's, "An Inconvenient Truth," this film could launch policy shifts designed to address the so-called "debt timebomb."

If these policy shifts occur (like forced saving and/or transformation of the U.S. economy from a consumer to exporter), it will lead to a substantial decline in the standard of living of all Americans.

More bad thinking: WSJ Op-Ed, "Why Spending Stimulus Plans Fail"

The Wall Street Journal published this Op-Ed piece today. It is mired with myths and erroneous thinking.

Read article here.

By the way, I will have the author on my radio show tomorrow (Wednesday, November 19, 10:20am Eastern Time). Please feel free to listen by going to www.bizradio.com. You can also call in, toll-free, by dialing, (877) 777-7713.

An excerpt:

"Congressional Democrats are now demanding another economic stimulus package to "inject" as much as $300 billion into the economy. The package will fail -- just like last year's $333 billion in emergency spending and $150 billion in tax rebates failed. There's a simple reason why.

Government stimulus bills are based on the idea that feeding new money into the economy will increase demand, and thus production. But where does government get this money? Congress doesn't have its own stash. Every dollar it injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It's merely redistributed from one group of people to another."

My comments:

The stimulus and spending didn't fail. Last year's $330 billion added 2.4% to GDP and this year's $150 billion in rebates added, at a minimum, 1.7% to GDP.

Government doesn't tax and borrow first and then turn around and spend after the fact. On the contrary, the government spends first (by crediting bank accounts), then collects taxes and sells securities after the spending has already occurred.

Simple deductive reasoning can prove this.

If government first needed to collect money via taxes and through the sale of securites before it could spend, a deficit could never exist. It would be operating under a system of pay-go.

However, deficits do exist. We know that for a fact. And they exist precisely because the government spends more than it recovers in taxes and the sale of securities.

How, then, could that be possible under your scenario, where the government first had to collect "one dollar for every dollar it injected into the economy?" Under that mode of operating there would never be any deficits.

Consider this: In the past two months reserves in the banking system have increased by nearly $600 billion. How did this happen? Under your paradigm the government would have had to collect that money somehow--either through a levy of taxes or the sale of new securities in the amount needed.

However, in looking at the recent, $700 billion bailout, or the rebate checks that were sent out earlier in the year, no new tax levies had been imposed, nor was the total dollar amount of securities sold by Treasury in the period prior to the spending, anywhere near $600 billion (or $150 billion in the case of the rebate checks).

So where did the money come from?

Again, these are credits to the banking system. If you'd like to see an accounting of this simply go to the first line item on the Fed's weekly Statement. It reads: "Reserve Bank Credit.

Furthermore, it is important to understand that if the Fed did indeed collect taxes first, and/or sold bonds, notes and bills to "get this money out of the economy," bank reserves would have decreased by an equivalent amount because the money would actually have been "taken out of the economy" just as you stated. Yet that didn't happen. In fact, as far as I can tell, not a single American taxpayer reported sudden and unanticipated withdrawals from their checking accounts (earmarked to the "U.S. Treasury") prior to that spending.

Last year the government collected $2.5 trillion in total receipts (taxes plus proceeds from the sale of securities), yet it spent $3 trillion. Now, I'm no math genius but just looking at those two figures tells me that somehow the government managed to pump $500 billion more into the economy than it took in. That's the deficit. And that's why the non-governmental sector (you, me, the private sector), is $500 billion richer, not poorer.

Paulson acts unilaterally, against Congress' intent

Who made Hank Paulson God?

Paulson repeatedly stated the actions that HE believed appropriate for the $700 billion bailout, even though Barney Frank pointed out numerous and specific instances in the bill's language where Treasury had been INSTRUCTED BY CONGRESS to spend, as in the case of mortgage relief.

Paulson basically said that he thought that was not appropriate use of the money.

CONGRESS decides what the money is to be used for, NOT PAULSON!

Paulson has hijacked the money for his Wall Street friends and he has even limited the amount that he will distribute. (Just giving relief to the likes of Goldman, Citi, JP Morgan, Morgan Stanley and a handful of others, but far below the $700 billion authorized.)

Who made Paulson God?

He should be held in contempt of Congress!!

Kansas City Fed President Hoenig's comments on the current situation and Fed's actions

Fed `Has Done About as Much as It Can,' Hoenig Says (Update1) 



By Vivien Lou Chen and Craig Torres



Nov. 17 (Bloomberg) -- Federal Reserve Bank of Kansas City President Thomas Hoenig said the central bank has ``done about as much as it can do'' to revive the economy, which has worsened faster than he expected. 

He's got to be kidding. There is a lot more the Fed
can do. He just doesn't understand. As an example: from 2002-2004 the Bank of
Japan bought stocks to stabilize the market and it worked. The Fed could do the
same here, even if it were just bank stocks.



``Interest rates are extremely low,'' Hoenig said today in an interview with PBS's Nightly Business Report. ``The fact that we have the recession now is a little bit more than what I had anticipated,'' he said in a transcript of an interview provided by the show prior to a scheduled broadcast tonight. 

Obviously doesn't understand the connection between
the Fed's target rate and its effect on reserves. Until recently, actions
designed to maintain target rate led to "sterilization" of liquidity
injections.



The Fed has tried to mitigate the worst credit crisis in seven decades by reducing the benchmark interest rate to 1 percent and channeling more than $1 trillion in loans to banks and other financial institutions. Some central bank credit has gone to non-banks, such as insurer American International Group Inc., and U.S. automakers are also seeking federal assistance. 

Fed authorized under Section 13 Paragraph 3 of
Federal Reserve Act, to discount loans to anybody against any collateral it
deems satisfactory. That's why we have a Fed and Congress gave it that authority
for this exact purpose.



Policy makers should provide emergency lending programs only to financial institutions that create credit and handle payments, Hoenig said earlier today in a speech in New York. 

Again, there are no limits to whom the Fed can lend
to under the Act.



``The focus should be on protecting the intermediation process and payments mechanism,'' he said. ``I would argue for at least drawing a sharp line between banking and commerce, with our discount window only used to fund institutions and markets that play strictly a financial role.'' 

Protect unregulated intermediaries? The very entities
that got us into this trouble?



President-elect Barack Obama said yesterday the government needs to provide a ``bridge loan'' or other help to auto companies on condition that management, labor and lenders come up with a plan to make the industry ``sustainable.'' 

Obama's policies will work on the demand side.
That's what is currently needed.



``For the auto industry to completely collapse would be a disaster,'' he said in an interview broadcast on CBS News's ``60 Minutes.'' 

Agreed.



Federal Aid 



General Motors Corp., Ford Motor Co. and Chrysler LLC need federal aid before Obama takes office Jan. 20, United Auto Workers President Ron Gettelfinger told reporters on Nov. 15. 



Democratic lawmakers would like to use part of $700 billion in bank rescue money approved this year to help automakers, a move opposed by U.S. Treasury Secretary Henry Paulson and President George W. Bush. An impasse in Congress may put more pressure on the Fed to provide temporary assistance. 

Paulson's not even using all the money. Moreover,
his judgment has been extremely poor: letting Lehman fail, the ill-conceived
bailout and flip-flop. Yet we are to trust him when he says that helping the
automakers is going down the "wrong route?" Bizarre.



Loans and other assistance from the Fed and the Treasury have brought several unintended consequences because the U.S. lacks a framework for aiding troubled non-bank financial institutions, Hoenig said. 

Unintended consequences? Such as?



``Many of the steps taken have raised important issues with regard to moral hazard and the subversion of market discipline, equitable treatment of different institutions and segments of the market, and public interference in credit allocation,'' he said at an Institute of International Bankers conference. 

There's market discipline and there's market
discipline. If he is advocating economic depression as a form of market
discipline that's not the best course of action, it would seem.



Emergency Credit 



Hoenig, Richmond Fed President Jeffrey Lacker and Philadelphia Fed President Charles Plosser have called for a framework limiting emergency central bank credit. 

Again, this goes against the intent of the Federal
Reserve Act. Who gives these Fed governors the power to do this? Only Congress
can. Who made them God all of a sudden? Audacity!



``An expanded role for the discount window may bring central banks more directly into allocating credit as collateral requirements are selectively relaxed, and lending is used to support specific segments of the market,'' Hoenig said. 

All conforming to the letter and spirit of the law.



The Kansas City Fed president said he was ``especially concerned'' that loans to institutions beyond banks put the Fed in the position of ``mixing banking and commerce.'' 

See comment above.



``Such assistance could put public authorities into the process of allocating credit and selecting the winners and losers,'' he said. ``A long-standing concern is that central-bank lending should not be used to prop up insolvent institutions.'' 

What about letting solvent institutions fail, as in
Lehman, Wachovia, etc? The Fed stood by and watched while that happened.



The U.S. Treasury has set aside $250 billion of a $700 billion taxpayer-funded bailout package for direct capital injections into banks. Changes to the program have created ``confusion out there,'' he said.

You can thank Hank Paulson for that.