U.S. Gov't surpluses and deficits: An historical perspective

The Budget of the United States Gov't publication has historical tables on surpluses and deficits going back to 1789. You can access it here. Please go to page 21 of this publication to view the data.

You will notice that the most powerful periods of economic growth (post Civil War, 1920s and 1942-1946) were preceeded by massive deficit spending that occurred very rapidly.

For the economy to recover now we must see the same, perhaps in order of magnitude far greater than what is currently being proposed.

Fed should target stock prices, not interest rates

This is what I have been saying for some time.

"It is time for a greatly increased role for monetary policy through direct intervention of central banks in world stock markets to prevent bubbles and crashes. Central banks control interest rates by buying and selling securities on the open market.

A logical extension of this idea is to pick an indexed basket of securities: one candidate in the US might be the S&P 500, and to control its price by buying and selling blocks of shares on the open market.

Even the credible announcement that a policy of this kind was being considered should be enough to boost the markets and restore consumer and investor confidence in the real economy." -Prof. Roger Farmer

Read full article here.

Toyota, Facing Crisis, Turns to Founding Family Scion

Akio Toyoda, the grandson of Toyota Motor Corp.’s founder and the company’s next president, will confront a challenge largely unknown to his ancestors: decline.

But Toyoda won't be able to save the day for the company his grandfather founded because with the Japanese government no longer intervening to keep the yen weak and with Japan's markets far more open now than in past decades, Japanese automakers will begin to look eerily similar to Detroit's Big 3.

Without the help of protectionism and subsidies, Toyota, Nissan and Honda will lose their comparative advantage. In the end people will come to realize that the success of Toyota and other Japanese automakers had nothing to do with Detroit's cost structure or lack of competitiveness. It had everything to do with Japanese industrial and export policy.

Read article here.

A rare central banker who understands monetary operations

Former Bank of England policy maker Charles Goodhart says that English Prime Minister Gordon Brown should “sack the U.K. Debt Management Office and refrain from issuing government bonds as a way of bolstering the economy."

“The one single thing that I would like to see, in a sense to get us out of the present problem, would be very simple,” Goodhart told lawmakers on Parliament’s Treasury Committee. “It would be: sack the Debt Management Office and just not issue gilts for quite a long time so that the huge deficit simply comes into the system in the form of increases in liquidity and increases in the money supply.”

(Not issuing securities is functionally the same as keeping a zero interest rate target.)

At least this guy understands that issuing Gilts (or Treasuries, in the case of the U.S.) is not borrowing, but merely a reserve maintenance activity. However, reserve maintenance can be accomplished by paying interest on reserves. There is no need to issue securities at all.

Read full article here.

Bloomberg: Ireland’s Cowen May Call in IMF If Economy Worsens, RTE Says

Later denied by the Irish PM, but scary nonetheless. It's going that way.

U.S. Trade Gap Narrows to 5-Year Low on Import Slump

According to the debt-doomsday crowd we should all feel a lot better now that the trade deficit has been cut in half. So how come things feel a lot worse?

The trade deficit was never a reflection of the health or vitality of the U.S. economy. Rather, it was a function of economic policy engaged in by U.S. trading partners and the fact that the dollar was held as the world's reserve currency. Both were major factors that drove the trade deficit.

Student auctions off virginity to pay for school

Student auctions off virginity for offers of more than $3.7 million!

This is the great United States of America, where kids who can't afford school have to become prostitutes to pay for it. We don't let the government pay because of the deficit! I guess the fiscal conservatives view this as better than running a deficit. Morally repulsive!!

Maybe those who want health care but can't afford should do the same. At least it would be a "free market" solution.

Read full story here.

The $38 Billion Shadow Stimulus

While a new Congress and a new White House debate details of an economic stimulus plan, Social Security recipients are already reaping a $38 billion windfall.

The extra money comes thanks to a quirk in the Social Security Administration's regularly scheduled cost of living adjustment.

Every year, Social Security payments increase along with the Consumer Price Index for Urban Wage Earners and Clerical Workers. The increase is set at whatever the change in inflation was between July and September from one year to the next.

The program that so many hate and call broken, is one of the few things helping to sustain the economy and keeping millions of people from experiencing real economic hardship and depression. If fiscal conservatives get their way the U.S. will privatize Social Security and the results could be disastrous as retirement savings are exposed to the vagaries of the stock market. Remember what happened to Fannie Mae and Freddie Mac once they were privatized.

Rifts show as Obama urges quick action on stimulus

Democrats such as Budget Committee Chairman Kent Conrad complained openly that many of the incoming administration's proposed tax cuts wouldn't work. Republicans warned against excessive new spending, with both parties signaling the incoming president they intend to place their own stamp on the economic recovery effort.

"Doing things that would have a permanent effect when we face trillion-dollar deficits as far as the eye can see is just unwise," Conrad said.

Ominous developments, but just as I have been predicting.

Weekly jobless claims fall to 467k

In the week ending January 3 claims for weekly unemployment insurance dropped 24k to 467k. This is the lowest level since October 11 and suggests that tomorrow's nonfarm payroll report will not be as bad as expected.

Obama: Good Cop, Bad Cop

Ever since his election victory Obama's been switching back and forth between the roles of the Good Cop and the Bad Cop.

When he plays the Good Cop and talks about the need for massive stimulus without regard for deficits or fiscal prudence the stock market rallies.

But on the days when he plays the Bad Cop and talks about controlling spending and being fiscally responsible, the market tanks.

Today he created the new White House post of "Chief Performance Officer," a term with private sector connotations if there ever was one. That person will be charged with the task of overseeing all areas of federal spending and seeing where there is "waste and inefficiency."

Embodied in this position and indeed, the very concept of this position, is the notion that government should be run like a business--lean, mean and profitable. The problem with this is that it removes from the public sector all counterbalance to the private sector, which is extremely troubling now that the nation is experiencing a severe economic downturn. It is precisely during times like these that the government must "lean against the wind" and not blow with it.

Promoting thrift and efficiency is a good goal for government if the nation's resources, capital and assets are all being fully employed and its citizens are living at their highest potential.

But granting a bureaucrat the power to arbitrarily single out spending programs when the economy suffers from a lack of demand, rather than excess, is like putting an anorexic on a diet.

Today Obama is the Bad Cop. Today the market is down big.

Obama names special watchdog for federal spending

More examples of fiscal conservatives setting the agenda.

Obama creating a new White House post: "Chief Performance Officer."

Definitely sounds like a private sector concept. Embodies the concept of government as a profit seeking enterprise. This is bad.

"President-elect Barack Obama said Wednesday that reforming massive government entitlement programs -- such as Social Security and Medicare -- would be "a central part" of his effort to control federal spending."

With...

Over 3 million unsold cars
Over 5 million unsold homes
10 million people without a job
Only 70 percent industrial capacity use
40 million people without health care, but the services there for them
Half the families in America that can't afford to send their kids to college but the space is there for them

It is IMPOSSIBLE for the government to overspend.

Fiscal vigilance now is like limiting calorie intake for a dying anorexic!

Satyam Chairman: We're Just a Gigantic Fraud, Too

Amazing.

One of India's biggest companies and a darling of investors through the boom. Just another ponzi scheme!

And you probably thought Madoff was an isolated case. Starting to appear like there may be many, many, more like him.

Unreal!

Read article here.

Stimulus aside, Obama vows future budget restraint

Obama balances massive stimulus with talk of long-term budget belt-tightening


As long as fiscal conservatives continue to have a vice grip on economic policy, we will repeat, endlessly, this pattern of several years' recovery followed by slump or crisis because of fiscal drag. Keynes called it, "Running in a state of perpetual, semi slump."

Read story here.

Russia stops all gas supply to Europe via Ukraine

Free market, eh?

Heating oil prices will soar as alternatives sought to replace nat gas for winter heating. This will drive up entire energy complex. Specs to pile on.

Expect the media to miss this story altogether and blame rising energy prices on the Israel-Hamas conflict.

Russian Dispute With Ukraine Worsens, Hitting Europe

Anyone who thinks the oil market is a "free market" is seriously delusional. The two largest producers--OPEC and Russia--have enormous power over prices. Russia's curtailment of gas supplies to a large swath of Europe in the middle of winter is causing a scramble for other heating fuels, like heating oil, and that is driving up the entire energy complex. Speculators add to this buying pressure.

CNN Money: Bonds in 2009: Mass Exodus Ahead?

There has been a feeding frenzy by journalists on the subject of trying to pick a top in bonds. All the wrong analysis. Bonds will fall when the Fed decides it wants rates back up. Not sooner.

Obama predicts quick approval of econ rescue plan

Wonderful if he delivers, however, I am just wondering if he has spoken to Senator Mitch McConnell (R-KY) yet, or the other Senate Republicans who are prepared to obstruct any quick passage of this stimulus.

It's one thing to have an enthusiastic meeting with your buddies on the same team, like Nancy Pelosi and Harry Reid, however, something tells me that Obama's statement about "quick passage" is more political strategy than anything else. If the stimulus doesn't pass quickly he can always blame it on the Republicans.

Banks’ ‘Catatonic Fear’ Means Consumers Don’t Get TARP Relief

Some banks may have needed more capital but most did not need the Treasury's infusions in order to lend. In fact, all the big banks--Citi, JP Morgan, Bank of America, Wells Fargo--were pretty much forced by the Treasury to take the money. Yet before the, "We're gonna make you an offer you can't refuse," action by the government, lending was not being constrained by an insufficiency of capital.

Rather, lending was and is being hampered by a weak economy, severe job losses and declining asset values.

Those are not things that will be fixed by giving fresh capital to banks. Nor will lending resume in earnest just because interest rates are historically low.

The key is to stimulate demand in the economy and the only way to do that now is via fiscal measures. The government must spend or give money to households and businesses--either directly or thru tax cuts--in order to prime the pump and get the economy moving again. Only then will credit begin to flow anew.

Lending is pro-cyclical. That's why the Fed is calling for a big stimulus

The Fed is beginning to see that interest rates have little bearing on loan creation. The chart below shows how bank loans are growing more slowly now despite the Fed's actions to reduce rates.


Total loans and leases at all commercial banks (y-o-y % change)

Loan creation is a function of the economy. In a weak economy loan demand will be flat to down and the Fed is beginning to understand this. That is why the Fed is calling for a big fiscal stimulus.

Oil rises above $47 as OPEC cutbacks take hold

For all those who believe in a "free market." A cartel ultimately can set prices wherever it wants. By the way, the Russians are now in the process of doing the same thing with gas.

Most disturbing is the fact that Congress did nothing to reign in speculation when it had the chance back in July. Conservative Republicans killed that. Expect the specs to come back in on the long side and push prices back up again. This time, don't expect OPEC to be quick on reversing their output cuts. They may let oil go to $200 first.

Fed Officials Endorse ‘Big Stimulus’ to Battle U.S. Recession

San Francisco Fed President Janet Yellen said yesterday at an economics conference in San Francisco that “it’s worth pulling out all the stops” with an economic recovery package. Charles Evans, president of the Chicago Fed, told the same gathering he believes a “big stimulus is appropriate.”

The markets want one too!

But it makes no difference what Obama, the Fed and the markets want. It's up to Congress and it will not pass in the size sought, nor will it pass anytime soon.

Hobbes was right to reject separation of powers in his definition of legitimate government. The central authority must have control of executive, judicial AND legislative power. Congress is more trouble than it is worth.

Italian Pensions Sapped by Private Funds Bush Backed

"Italy did for retirement financing what President George W. Bush couldn’t do in the U.S.: It privatized part of its social security system. The timing couldn’t have been worse. The global market meltdown has created losses for those who agreed to shift their contributions from a government severance payment plan to private funds meant to yield higher returns."

How ironic. Italy of all places, long known for its entrenched socialism, embraces what many U.S. leaders have been promoting--privatizing social security--and it proves to be a horrific failure.

This won't stop conservatives from trying to foist the same disastrous scheme upon Americans.

Key Democrat: No stimulus by inauguration

“It’s going to be very difficult to get the package put together that early,” House Majority Leader Steny Hoyer of Maryland said. “But we certainly want to see this package passed through the House of Representatives no later than the end of this month, get it over to the Senate, and have it to the president before we break” in mid-February.

Unreal! More people will die. (The crime rate/murder rate is a function of the economy.) Congress has already left people in the lurch for two and a half months, now they are saying, "You'll have to wait longer."

This could bring some renewed weakness to the stock market.

It increasingly looks like Hobbes had it right in his rejection of separation of powers when it comes to governments. Assmeblies, such as the U.S. Congress, does more harm than good.

Mortgage applications hit almost 5-year high: MBA

Good news! The transmission mechanism (via housing) is not completely broken.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended December 19 soared 48.0 percent to 1,245.4, the highest reading since the week ended July 18, 2003, when it reached 1,284.3.

Spencer Rascoff, chief operating officer at Zillow.com, a real estate website based in Seattle, said historically low mortgage rates are a boon for the mortgage industry and to many borrowers, but it remains to be seen if they will have a substantial effect on the housing market.

"The good news is that these refis could help some homeowners avoid expensive resets on adjustable rate mortgages, and in turn prevent some foreclosures," he said on Monday.

Read full article here.

As Oil Sinks, U.S. Officials Plan to Fight Speculation

Let's hope Obama follows through on this.

"...lawmakers are emboldened, seeing both the crude-price collapse and the systemic failure of the credit-derivatives market as reason to push ahead with rules to prevent what they call "excessive speculation" in commodity markets."

This is good...

"Even if speculators only had a small impact [on price], that's not right. Our job is to guard against fraud and abuse," said CFTC Commissioner Bart Chilton, a Democratic appointee. "Congress should act expeditiously to prevent the type of excessive speculation and leveraging we have seen."

But this may represent the real attitude:

"The anti-speculation talk may have subsided in the market slide, but its ugly head is likely to rise again," said Greg Mocek, a former head of enforcement at the Commodity Futures Trading Commission, now a partner at law firm McDermott Will & Emery in Washington.

And Gary Gensler, Obama's CFTC Chairman, is a former Goldman Sachs partner, which makes it hard to imagine he is going to crack down on speculation.

Fed's foreign currency position rises $14 billion in latest week to $642 billion

Over a three month period the Fed's foreign currency holdings have gone from virtually zero to over $600 billion. Foreign currencies now comprise the largest single asset holding on the Fed's balance sheet. This accumulation has gone on virtually unnoticed. No one in the media or in Congress has asked about this.

The accumulation of foreign currencies have been negative for the dollar. These currency holdings also represent loans--in the same magnitude--to foreign central banks that are being used to fund foreign institutions. Neither the Fed nor the Federal Government has any oversight on these loans. Who are they going to? What collateral is being pledged? We know nothing.

It is highly likely that some of this money has gone to foreign automakers like BMW, Daimler, Volkswagon, Nissan, Toyota, Honda, Hyundai, Kia, etc. And for sure a big chunk of this money has gone to foreign banks and financial institutions.

As the debate rages on in America as to whether or not we should help our own businesses, the Fed is quietly lending money to foreign companies in amounts greater than what has already been spent through TARP.

It is an outrage!

The American electorate, and especially American workers who have recently lost their jobs, should be up in arms about this. Instead, we see near-universal-opposition to the token loans (with huge strings attached) that are being given to companies like GM and Chrysler.

Unless we wise up and complain about the right things, we will continue to see policy that is counterproductive and fashioned, by design, to make Americans poorer vis-a-vis the rest of the world.

Fed Loans Guided by Raters Grading Subprime Debt AAA

Fed basing its lending on credit ratings provided by S&P, Moody's, Fitch--the same idiots that said all the toxic subprime stuff was AAA. Amd the same idiots that will ultimately downgrade U.S. sovereign debt.

This is the blind leading the blind. Totally absurd!! God help us!!!

Read full story here.

The fox in charge of the henhouse

Barack Obama nominated Gary Gensler to head up the Commodity Futures Trading Commission.

Gensler is a former partner at Goldman Sachs--one of the biggest futures market speculators in the world--so it is hard to imagine that we will see any real change when it comes to speculative activity in the markets.

Earlier this year another former Goldman partner--Hank Paulson--testified before Congress that "speculation had nothing to do with the rise in the price of oil and other strategic commodities."

Obama again goes for the status quo in his selection of Gensler. Where's the "Change we can believe in???"

Read story here.

Bush Undecided on Auto Plan, Worried About Putting "Good Money After Bad"

Conservative Republican Senators from Tennessee, Alabama, Mississippi, Kentucky, South Carolina and Louisiana appear to be getting to Bush. Following the defeat of the aid package in the Senate the president gave flat-out assurances that he would not let the Big 3 go under.

Now, however, it appears that he is buying the arguments of Senators like Bob Corker (R-TN), when he says that giving help to Detroit is the equivalent of "throwing good money after bad."

These senators are monumental hypocrites and should be exposed as such. Their states receive far more from the Federal Government than they give to Washington, and they use that Federal money to subsidize the foreign automakers that set up shop in their states. Do their constituents benefit? Hardly. They are among the poorest in the nation.