Toyota sees first annual net loss since 1950

Maybe now some will start to realize that Detroit's problems are not unique. Even Toyota is losing money, not because it's not "viable," but because of a weak economy. Fix the economy and you fix the automakers, and the banks, and the credit markets, and the housing market, etc.

Dick Morris Economics: Say Anything and Hope That People Will Believe It

When it comes to economics you have to admire Dick Morris for his consistency; consistency in disregarding the facts and misstating the truth.

In his latest email, "Keynesian Fallacy," Morris claims that very few economists really buy into Keynesian theory anymore. Well, if they're listening to his brand of Keynesianism, he's probably right:

"Keynes felt that people would react automatically to a few dollars in their hands. Consumers would run out and buy new products, and businessmen, seeing the uptick in sales, would rush to open new plants and hire new workers who would, in turn, generate more demand."

That sounds and awful lot like supply-side economics to me.

Actually, Keynes advocated that the government spend money to counter falling output and employment. He wasn't even too particular on what the government spent money on, just that it spent. Putting a "few dollars in people's hands" is more of a supply-side idea.

Morris correctly points out that in bad economic times people tend to save more rather than spend. That was somewhat evident in the tax rebate checks sent out in Q2 2008. While some of the money did go toward consumption, much of it went to savings, which is precisely why the tax cut approach that Morris and others advocate is flawed.

Cutting taxes would raise incomes for some and reduce fiscal drag for sure, but who's to say that households would behave any differently now than last year? If anything, they might be inclined to save even more given how job losses have been accelerating. In contrast, the government has the ability to provide the demand that the economy desperately lacks at this time and it could sustain this demand until people felt confident to start spending on their own.

When analyzing the problems with the banks Morris is almost comical in his theories. (Actually, it would be comical if it weren't for the fact that so many people listen to this guy.) He begins by telling us that the Fed is "holding $1.7 trillion for American banks, more than twice what it had in its 'vaults' at the start of 2008.'"

Vaults?

Yes, the Fed made loans to banks collateralized by assets, which resulted in an increase in reserves in the system. More importantly, the Fed did what it always does: manipulate reserves to achieve its interest rate target, which is currently zero. The only way to get to a zero Fed funds rate is to raise the level of reserves via monetary operations. (Buying securities held by the public.)

While reserves are kept on deposit at the Fed, they are not held in vaults. Reserves are electronic entries, just like the "money" in your checking account. The notion that banks around the country carted wheelbarrows of reserves to the Fed's "vaults" is nothing short of hilarious.

Morris seems frustrated by the fact that the banks didn't "lend [those reserves] out." Any basic textbook on banking will explain in the very first chapter that banks don't use their reserves to make loans. Nor do they lend their capital or their deposits. Banks create loans out of thin air and are not constrained by the amount of reserves they have. This is a privilege granted to them by the government, under strict regulatory supervision.

Furthermore, loans create deposits, which in turn create new reserves. The important thing to remember here is that banks are profit-seeking businesses that will make loans when they see an opportunity to make a profit on those loans. In an economy where workers are losing their jobs and where asset prices and business profits are falling, there's just not a whole lot of opportunity when it comes to lending. To make matters worse, there is an awful lot of risk. In addition to the dearth of opportunity, the other factor that influences lending is demand. And anyone in the banking business will tell you that in a weak economy, loan demand is going to be weak as well. JP Morgan CEO, Jamie Dimon, said just that in comments recently.

In typical fashion Morris concludes his piece the way he always does, by sounding the alarm. He says that once the economy gets back on track we will see hyperinflation because of all the "liquidity" the Fed has pumped in. This is patent nonsense. As conditions improve you can be sure that the Fed will manipulate reserve balances back down to more normal levels as it always does. In fact this has already begun. In the past three weeks reserve balances have dropped by more than 10% ($85 billion). What the Fed giveth, the Fed can also taketh away.

Dick, stick to politics and leave the economics to others.

Rogers Says Russia May Break Up, Mulls Bet Against Ruble

Back on January 22, Jim Rogers said he was going to short the British Pound (see blog post here) because it was going to disappear. The pound had already fallen to multi-decade lows against the dollar and record lows against the euro, but Rogers advised selling.

After hearing that I did what any self-respecting speculator should do: fade a guy who's cold as ice.

I bought the pound against the euro and on that day and I have been cleaning up ever since.

Last September Rogers advised shorting the dollar and shorting U.S. Treasuries. These assets have been the strongest performing assets in the world since then.

Let's face it, Rogers is as cold as death. Merely fading his calls now will earn you a ton of money. You don't have to watch TV or read economic journals or listen to what's going on in Washington. Just do the opposite of Jim Rogers.

His latest "recommendation" appears today on the Bloomberg website. In a video Rogers says that "Russia will break up and he is thinking about shorting the ruble."

We're in luck! There's actually a ruble futures contract traded on the Chicago Mercantile Exchange. So I think I'm gonna go make some more easy money and buy the ruble!

I used to wonder why anyone would listen to this guy. Now I know: He makes making money easy and fun!

Go make some money today...Fade Jim Rogers!

Watch the video here.

$259 billion of Fed forex swaps coming due in one week

On Friday the 13th, $259 billion of the Fed's "central bank liquidity swaps" (a.k.a. forex swaps) will be need to be settled. (Indicated in the latest Fed weekly statement.) The amount represents more than half of what is outstanding on the Fed's balance sheet at this time.

After settlement we could see a rally in foreign currencies versus the dollar as selling pressure in various currencies abates. However, this is likely to prove temporary because the Fed has indicated it will extend these dollar loans through October 2009.

With foreign central banks and institutions borrowing in dollars, pressure on currencies will remain and the dollar should stay strong.

As an aside, President Obama announced limits today on executive compensation. Any executive that works for a company that receives gov't aid cannot earn more than $500,000 per year. Ironically, the Fed's dollar loans to foreign institutions (banks, auto firms, etc) may very well be going to pay salaries far in excess of the $500,000 that U.S. executives are now allowed to earn. Where is the outcry over this? Where are the clueless reporters and biz show anchors and the hypocritical lawmakers?

Just wondering...

Seven-Year Note Returns as Treasury Plans Record $67 Billion Debt Offering

Treasury should be eliminating security sales altogether and using other means to manage reserves, not increasing the range of its offerings. Total elimination of Treasury sales would finally dispell the harmful but erroneous notion that the government needs to borrow to spend.

Read article here.

Dems lack votes to pass stimulus; will try to cut size to please Repubs

Republican attempts to block the stimulus are apparently working as efforts to pressure centrist Democrats have them pulling their support. According to sources there are not enough votes to pass the bill and Democrats are now scrambling to cut its size to appease Republicans dead set on voting for it. This may not work either. Failure to pass the stimulus will almost certainly result in new lows for stocks.

Read story here.

Spain's government fracturing

A deep economic downturn and very few options is causing political upheaval throughout Europe. Watch Spain, Greece and Italy, all members of the Eurozone and users of the single currency.

Feb. 4 (Bloomberg) -- The government that Spanish Prime Minister Jose Luis Rodriguez Zapatero put together with cash is coming unglued.

The Socialist’s parliamentary alliances are breaking down as the worst recession in half a century makes handouts to regional allies unaffordable. The Catalans have already bolted his coalition; the Basques are threatening to do the same.

Finance Minister Pedro Solbes, embroiled in talks with regions that want to increase their share of the budget, said Jan. 18 he can’t spare more cash after pledging 240 billion euros in stimulus measures to counter the recession.

Spain's budget deficit is 5.8% of GDP--far above the EU limit. (And well above the U.S. deficit, too!)

The economic deterioration in Europe and its impact on the euro may be THE story of 2009.

Read full story here.

I told Bloomberg 3 months ago about Fed forex swaps. Just now getting picked up by the clueless media

Back on November 10th in response to an article on Fed transparency that appeared on the Bloomberg website, I emailed Bob Ivry, one of the authors, and informed him that the real story was the enormous uncollateralized forex swaps that the Fed was conducting.

Here's is the text of my email to Bob Ivry:

"Again, it's not a secret. Under the current regulatory structure, banks can only have certain types of assets on their books and those are listed under the Discount Window list of marginable collateral. In other words, anything on that list can be pledged to the Fed for a loan. Until recently, the Fed has actually been tight, requiring Treasuries, but it has moved to accept more of the regulated collateral on that list, which is how it should be.

Your article injects needless concern over what the Fed is doing and could result in actions that hamper their ability to aid the financial markets.

If you want to do some good why don't you write an article and show that list of collateral and explain the current regulatory structure.

Even better, why don't you talk about the $600 billion in dollar loans that the Fed has given to foreign central banks to be used as loans for banks and other institutions in those respective countries? Those are uncollateralized and non-recourse. Ultimately, there is no U.S. oversight on those loans. It potentially puts the U.S. taxpayer on the hook. It has been totally secretive and it has caused the dollar to weaken, which is an indirect tax on U.S. households in that it reduces purchasing power."

-Mike Norman

My suggestion to Mr. Ivry got no response.

Seems Barrons is now picking up on this--3 months after I sounded the alarm!!

Barrons story here.

Obama Says U.S. Banks Will Have to Write Down Assets

Feb. 2 (Bloomberg) -- President Barack Obama said the U.S. is suffering from a “massive hangover” from years of economic risk-taking and that some banks remain “very vulnerable.”

The extent to which no one understands the problem is astonishing. The president's comments are very frustrating in that he, and his economic team, fail to recognize that banks are hurting because of a weak economy and concomittant lack of demand.

The problem is not that the U.S. is suffering a "massive hangover." The problem is that fiscal drag in 2006 and 2007 triggered off an economic downturn that has been at the heart of the bank problems ever since. Fix the economy via sufficient gov't spending and/or tax cut stimulus and you fix the banks.

Writing down assets is destructive. Forcing the banks to write them down and then injecting capital and wiping out shareholders is outrageously destructive and makes no sense whatsoever.

Policy is utterly confused at this point in time, suggesting that pain will linger until automatic stabilizers support the economy at some level.

Conservative drumbeat against stimulus continues

HOW TO BEAT THE STIMULUS PACKAGE

By DICK MORRIS

Published on DickMorris.com on January 30, 2009

The same way Republicans beat it when Bill Clinton proposed a modest $35 billion stimulus in the teeth of the 1992-1993 recession. The GOP nitpicked each spending item and highlighted midnight basketball courts and swimming pools that were funded in the package. Clinton, for his part, didn't really care what the money was being spent on, he wanted to be sure it was spent to give the economy a boost before he cut spending and raised taxes to balance the budget. So, the president accommodated all of the pet projects of Democratic lawmakers. The resulting publicity made the package radioactive.

Republicans are ideologically opposed to spending, but they never met a tax cut they didn't like, except a payroll tax cut, which would help the vast majority of the nation's wage earners. Republicans view wage earners with contempt.

Republicans should feature each element of the package -- just as they have highlighted the contraception and global warming research -- to show it for the boondoggle that it is.

Time to engage the Hollywood and Madison Avenue imagemakers, who are the natural allies of Democrats, to counter Republican propaganda on this.

The package is losing support almost daily. According to Rasmussen, only 42% of Americans now support it. The key is for the Republicans to attack its specific line items to show how overblown it really is.

And it is terribly important to beat, or at least cut back the stimulus legislation. What we allocate in deficit spending and "refundable" tax cuts (i.e. welfare) today we will pay for in inflation tomorrow.

Not true. Inflation would only be a cause for concern if the economy is running at full capacity, where all of its resources and capital--including human capital--are being used. We are far from that. Inflation has nothing to do with the nominal level of bank reserves in the system and is not, as we often hear, a monetary phenomenon.

In the seven years between 2000 and 2007, the money supply rose from $600 billion to $800 billion. In 2008, alone, it more than doubled from $800 billion to $1.7 trillion! We cannot sustain this level of increase in the money supply without having way too much money chasing way too few goods and services, sending prices up into double digit inflation.

He seems to be confusing the monetary base (Federal Reserve notes, coins and bank reserves) with money supply (M1, M2). Bank reserves, which represent the largest component in the monetary base, are not part of the money supply. Morris doesn't understand this. Furthermore, he doesn't understand that the Fed targets interest rates and it does this by manipulating reserves. To achieve a 0% Fed funds rate, reserves have to be increased significantly and kept high for as long as the Fed wants the 0% rate.

While the economy is in shell shock, at the moment, we face deflation. But once it begins to come back and the dollars come out of hiding, we will find the resulting inflation intractable and very difficult to cure.

This is his opinion and not a fact. It also fails to realize that the sale of Treasuries will bring the level of reserves down. It's already happening. And it fails to understand that the current tax structure automatically produces rising levels of fiscal drag as the economy grows faster, just as it automatically acts as a stabilizer when the economy contracts.

Q4 GDP -3.8%

Quick details below

Q4/ Y-O-Y
GDP -3.80% / 1.30%
Consumption -3.50% /0.30%
Investment -12.30%/ -5.90%
Gov't 1.90% / 2.90%
Net Exports NA / NA

WSJ article on Peter Schiff is out!

The Wall Street Journal article on Peter Schiff is out. Go here to read it.

Some excerpts:

Early last year, Richard De Gennaro, a retired Harvard University librarian, put $100,000, about 15% of his assets, into a Euro Pacific account that included Canadian Oil Sands Trust, which focuses on crude-oil projects in Canada, and the India Capital Growth Fund, which holds investments in companies that do business in India.

Both investments took big hits in 2008, compounded by the fact that the Canadian dollar and the Indian rupee fell 18% and 19%, respectively, against the U.S. dollar. The 83-year-old retiree's account is now worth about $37,000, a 63% plunge. Mr. Schiff "goes around saying that he was right," says Mr. De Gennaro. "He was right about one thing and wrong about everything else."

Among investors who turned to Mr. Schiff's firm just as his strategy began to falter, Brian Kullberg, a design engineer in Portland, Ore., says he started to worry about the state of the U.S. economy in early 2008. He put $70,000 into a Euro Pacific account, hoping it would benefit as the U.S. economy and the dollar weakened. By late January 2009, his investment had shrunk to about $25,000.

Most had one thing in common last year: heavy losses. A number of investors said their Euro Pacific portfolios lost 50% or more in 2008, worse than the 38% drop in the Standard & Poor's 500-stock index last year. People familiar with the firm say that hardly any securities recommended by Euro Pacific brokers gained ground in 2008.

Taxpayers are making money. But are they?

Please read the brilliant post from Warren Mosler's website, then see my comments that follow.

"With the Fed balance sheet at just over $2 trillion and an average coupon of maybe 3% that means they are removing about $60 billion a year of interest income from the non government sectors.

So while I do think lower long term rates serves public purpose, I also recognize the need to cut taxes and/or increase other government spending to reverse the restrictive nature of that policy.

This applies to all Fed rate cuts that remove income from the non government sectors."

The record expansion of the Fed's balance, which was driven by the buying of assets, will result in a windfall profit. Warren Mosler estimates that it could be in the neighborhood of $60 billion, which would be about two or three times what the Fed ordinarily earns in one year.

So, isn't this a huge profit for the taxpayers? After all, the Fed is required by law to turn over all of its profits to the U.S. Treasury (with the exception of what it needs to operate).

All the genius media commentators, lawmakers and economists who complained for so long that the Fed's balance sheet expansion represented a huge "risk to taxpayers" are clueless that the Fed is about to make more money than it ever has.

In other words, taxpayers are getting a huge payday. Right?

Wrong!

Here is where the real irony is. By definition, if the Treasury is receiving this money, it is money that would have been paid out to the public. So the $60 billion profit that the Fed made actually represents a net drain of $60 billion in income that would have gone to the public!

Looking out for taxpayer money, in the end, means that taxpayers really lose.

Don't expect anyone but a very small group of economists to understand this.

Robert Rubin Says ‘Mark-to-Market’ has Done ‘Damage’

Another Rubin legacy, "mark-to-market" asset pricing. This should have been eliminated a long time ago. At least he admits now that it was a bad idea. However, how stupid would it be to remove bank assets to an aggregator bank at this point in time?? That's like selling out at the bottom. A year or two from now when the economy is back on track and asset prices are rising once again the banks will have to buy back those very same assets at much higher prices. Dumb!!!

Read full article here.

Immelt Stakes His Legacy on GE’s Ability to Keep Dividend, Aaa

I know it's never going to happen, but Jeff Immelt should be given a medal for standing up for long-time, loyal, shareholders. By not cutting the dividend even though he is under immense pressure from Wall Street and malicious speculators to do so, Immelt is displaying enormous courage and leadership values rarely seen in wimpy corporate execs these days.

In contrast, Pfizer's weasle CEO, Jeffrey Kindle, decided to punish loyal, longtime shareholders by cutting the dividend in half even though the company's balance sheet is far less stressed than that of GE's. He spit in the eye of so many who have stood by Pfizer for so long and nothing but a lame excuse for his actions.

If you are a Pfizer shareholder, as I am, voice your unhappiness with Mr. Kindle.

OPEC Calls for Curbing Speculators, Blames Hedge Funds for Rout

It's sad when Opec has to tell U.S. lawmakers and regulators what correct policy should be regarding speculation, however, "free market fundamentalism" rules policymaking in the U.S.

Jan. 28 (Bloomberg) -- OPEC wants U.S. regulators to curtail oil trading by hedge funds and speculators who helped make last year the most volatile in crude oil trading.

Abdalla el-Badri, secretary-general of the Organization of Petroleum Exporting Countries, is seeking rules to “limit the level of speculation” by investors who buy oil without planning to use it. Oil surged 46 percent in the first half of 2008 to a record $147.27 only to plunge by the end of the year, prompting OPEC to make its biggest ever supply cuts.

“OPEC has repeatedly called for the need to reduce the role of excessive speculative activity in the market,” el-Badri, who will attend this week’s World Economic Forum in Davos, Switzerland, said in an e-mailed response to questions. “Today, it is impossible to know who is actually buying and selling oil futures.”

While congressional leaders proposed legislation to curtail speculation as rising oil caused gasoline to reach $4 a gallon last summer, regulators at the Commodity Futures Trading Commission are divided over the role of hedge funds in last year’s surge in prices. A series of OPEC supply cuts failed to boost prices as demand weakened in what may be the worst global recession in the postwar era.

“The move above $90 a barrel was driven by financial flows rather than fundamentals” of supply and demand, said Edward Morse, chief economist at Louis Capital Markets in New York. Selling by speculators “helped propel the commodities price downturn, but fundamentals have weighed heavily as well.”

Full article on Bloomberg.

Cato Institute mounts full frontal attack against the stimulus

We may not get it!

“Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policy makers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth. Below you’ll find some recent Cato work on “stimulus” packages.”

Check it out at the link here.

They are extremely well organized and funded. Plus, opposition by Republicans in Congress mounting. And, inexplicably, Obama feels like he has to form a bipartisan consensus on this, despite getting nearly 64 million votes, a mandate, Democratic control of Congress and zero need to appease Republicans.

All we need now is another terror attack on U.S. soil and the folks who voted for Obama will be begging to have Bush back!

Shell Sells Oil Cargoes, Phibro Tanker Leaves Orkney

Jan. 27 (Bloomberg) -- Royal Dutch Shell Plc sold more than 1 million barrels of crude stored off the U.K. and a vessel hired by Citigroup Inc.’s Phibro LLC left its anchorage in Scotland for the U.S. as the incentive to keep oil in tankers disappears.

A sign of increasing demand for physical.

Shell sold two 600,000-barrel cargoes of North Sea Forties crude for delivery in mid-February at Scapa Flow near Scotland’s Orkney Islands to oil trader Vitol Group, the companies said. The oil, already on board the supertanker Oliva, has been anchored off the U.K. coast since at least December, according to Bloomberg vessel tracking data.

Vitol’s back in the game again after trying to run a corner last summer, until the CFTC got wind of it.

With regulatory fervor now all but gone, Vitol will lead the way for other specs and commercials pretending to be commercials, but really speculating.

Read story here.

As layoffs spread Obama seeks to form a bipartisan agreement on stimulus

Forty-thousand new layoffs were announced yesterday yet Obama is wasting time trying to forge a bipartisan consensus on the stimulus. Democrats have the votes to pass the measure now, but the president prefers to dawdle and try to placate resistant Republicans for what kind of long-term political support, I do not know. Meanwhile, American families suffer.

Peter Schiff's Clients Got Hosed This Year, Too

Some facts that should pop the aura surrounding Peter Schiff.

From Clusterstock.com

Sure his on-air sparring makes for some great TV. And his pointed criticism of the stimulus plan is spot on, especially at a time when people believe the answer to our pile of debt is to spend like crazy. But that doesn't mean Peter Schiff has been an amazing steward of his clients' cash.

Michael Shedlock punctures the Schiff aura, saying he's heard from several clients who claim losses of 40%-70% after investing with EuroPacificCapital. How could this be? Hasn't Schiff been bearish during a horrible year for US equities? Yes, but that negative on US equaties was just a part of his overall strategy

Shedlock sums Schiff's complete thesis:

US Equity Markets Will Crash.
US Dollar Will Go To Zero (Hyperinflation).
Decoupling (The rest of the world would be immune to a US slowdown.
Buy foreign equities and commodities and hold them with no exit strategy.


Schiff was correct about point number 1 above. The US equity markets crashed. That was a very good call. Unfortunately, his investment thesis centered on shorting the dollar in a hyperinflation bet, and buying foreign equities rather than shorting US equities.

Furthermore, Schiff made no allowances for being wrong and had no exit strategy whatsoever.

What happened in 2008 was that foreign equities sold off much harder than US equities, and a strengthening US dollar compounded the situation.

Bottom line: Not all doomsayers are going to make money in a bad investment. And you can be extremely sharp and insightful with your analysis, but it doesn't mean your investment theses will pan out. In fact, there's frequently a disconnect between people who call for doom and their actual results

Fed's balance sheet is shrinking

In the latest release of its weekly statement (Jan 22) the Fed's balance sheet is down about $200 billion ($2.1 trillion) from the peak back on January 2 ($2.3 trillion). About $130 billion of that reduction came from the Fed's foreign currency position, which is marked to the market. Are those currency losses? Where are the journalists, lawmakers, economists and other screaming about this? They only scream about help to American businesses and households, I guess. When it comes to losses on loans to foreign entities, nobody says anything.

Debunking Peter Schiff

Below is the letter I sent to the WSJ correcting the Peter Schiff column of last Friday. (I doubt mine will get published, but here it is.)

Debunking Peter Schiff

By Michael Norman

The article by Peter Schiff that appeared the other day in the Opinion section (The World Won't Buy Unlimited U.S. Debt, WSJ January 23, 2009) was so profoundly flawed in macroeconomic understanding that it’s hard to comprehend why the Journal would run such drivel.

It’s bad enough one man’s warped and backward view of economics gets this kind of attention, but what is most disturbing is that much of today’s policy has at its core, the same embrace of the myths and superstitions that drive Mr. Schiff’s view of the world.

According to the latest figures from the Bureau of the Public Debt, the national debt is $10.6 trillion, of which $6.3 trillion is held by the public. Roughly half of that amount is held by foreigners with China, Japan and all Oil Exporters (Saudis as well as others within OPEC) accounting for about $1.4 trillion. That’s about 22 percent of the total U.S. debt held by the public or 13 percent of the overall debt.

What’s important to understand, however, is that the national debt of the United States is small relative to other countries. As a percentage of GDP our debt is smaller than that of France, Germany, Canada, Italy and far, far smaller than that of Japan. And if you were to count only debt that is owed to the public, the U.S. debt would be almost insignificant in relation to much of the rest of the world. Yet this perspective is often not provided or worse, conveniently omitted by propagandists like Mr. Schiff.

Countries like China and Japan have long engaged in policies designed to support their export industries and exports remain an important part of their economies. It is no wonder, therefore, that they have accumulated big dollar reserves. The accumulation of dollars has been a consequence of a determined policy that favors exports as a means of creating jobs and sustaining aggregate demand.

The purchase of Treasury securities by foreign nations that export goods to the U.S. does not constitute the “funding” of America. The U.S. government offers an interest bearing account known as a Treasury security to anyone who wishes to exchange reserves (official or otherwise) for something that pays a higher return.

In the case of oil exporting nations their oil is priced in dollars so they naturally have accumulated dollars as a result of their oil sales. The Saudis or any other producers are free to price their oil in euro, yen or any currency they want. That is irrelevant. What is relevant is the currency they want to save in. If they sell oil in euro but net save in dollars, then nothing changes.

To say that foreigners cannot fund their own domestic spending initiatives or use the money to buy other assets because somehow they are obligated to buy our Treasuries is patently absurd. Countries like Japan and China have the choice to spend and invest domestically or continue supporting export driven growth, as do all sovereign nations. The latter choice has been their desire for decades, for reasons that are as much cultural as anything else. This could change as economic weakness causes them to consider boosting domestic investment in order to provide economic stimulus. Should this happen at the expense of their exports to the United States, then, yes, accumulation of dollar reserves will slow. However, this portends nothing.

What is lost on Mr. Schiff and many others who ponder the question of who is going to continue buying U.S. debt, is the fact that the money to buy Treasuries comes from government spending itself. Payments made by the Treasury, whether they go for the payment of social security, salaries to government employees, bailouts, infrastructure investment or deficit spending, result in an increase in reserves available to depository institutions. When the Treasury sells bills, notes and bonds, they are “paid for” with bank reserves that were put in the banking system as a result of that spending. The sale of Treasuries, therefore, is nothing more than a reserve maintenance operation and does not constitute borrowing, per se. The best way to think of a Treasury security is an interest bearing account offered by the government in exchange for the reserves already put in the banking system as a result of spending.

In practice, any sovereign currency-issuing nation whose money is not backed by gold or subject to some fixed exchange rate can spend all it wants. A nation that spends in its own currency, as the United States does, can never be said to be borrowing. The government could, if it wanted, eliminate all sales of Treasuries without any impact on its ability to spend and invest. Recently some economists have even been suggesting this because it would allow greater flexibility in dealing with the economic crisis. Instead of using Treasury sales to manage reserves the Fed could pay interest on reserve balances—something that it has recently started to do.

When Mr. Schiff states that “the problem is not that America will have difficulty getting enough from abroad to maintain our GDP,” but that scarce credit makes it “inevitable that GDP will fall,” he displays a complete lack of understanding of what constitutes GDP. In any basic textbook of economics you will find GDP indicated as follows:

GDP = C + I + G + NE

Where C equals personal consumption, I equals business investment, G equals government spending and investment and NE equal to net exports (exports minus imports). While it may be true that consumption is currently suffering due to scarce credit, a sufficient boost in government spending could offset that, causing overall GDP to rise.

This is why Nobel Laureate, Paul Krugman, along with many other respected economists, argue for a large fiscal stimulus. They correctly understand that government spending is an important component of GDP and something that can be increased quickly in order to bring output back up.

Furthermore, the United States does not, uniquely, have the ability to pull itself out of the mire simply because of the dollar’s status as the world’s reserve currency. Any country that spends in its own currency and where spending by government results in the increase in base money in the banking system can do the same. Severe austerity happens only in cases where countries are on a gold standard or under a fixed exchange rate regime. These arrangements have been disastrous in the past and it’s the reason why most of the world operates under a floating exchange rate, non-convertible currency system.

President Obama called for sacrifice yet Americans have already sacrificed, enormously. Eleven million people have lost their jobs and many more likely will. We are a nation where 43 million people are without health care but the services are there for them. Half the families in this country can’t afford to send their children to college when there is the space. Many retirees have seen the value of their savings cut in half. We have three million unsold cars, five million unsold homes and nearly thirty percent of our industrial capacity sits idle.

In short, many of the wealth producing assets of this nation are sitting idle for no good reason. In this regard Americans have sacrificed a lot and continue to sacrifice because of politics and policy weighed down by the same backward thinking as that of Mr. Schiff’s.

It is one thing to ask people to sacrifice in times of plenty or when war demands the ultimate sacrifice in defense of our nation. However, it is morally reprehensible to sit by and allow a nation’s citizens to suffer as much as they have when the means to end the suffering lies in our hands. There is no excuse for this. We are a nation of great abundance and plenty, but we choose deprivation because of a belief in myths and false dogmas.

Michael Norman is an economist and private investor.

Obama Woos Republicans on Stimulus, Seeking Longer-Term Support

This is another example of Obama's weak leadership by consensus. He won the election by a huge margin; Democrats control Congress. He has a mandate. Yet he prefers to build bipartisan support when he doesn't need it and when the Republicans' policies were totally repudiated by the voters.

Any "support" he garners from Republicans now will be fleeting. They will abandon him and blame him, first chance they get. It is a huge political mistake and it makes Americans suffer longer for no reason, particularly all those who voted for him. This is hard to understand. It can only be explained as insecurity on his part, which is a dangerous thing for the country. Other world leaders who are not America's friends might pick up on this and try to test how far he is willing to go.

Read article here.

Geithner Warning on Yuan May Renew U.S.-China Tension

"Timothy Geithner’s warning that President Barack Obama believes China is “manipulating” its currency..."

Here we go again!

This is terrible policy and a continuation of what the last administration was doing. No change whatsoever.

The U.S. believes that the solution to our "problem" lies in making America an export-driven economy like China, however, only way to accomplish this--to gain comparative advantage--is to bash our currency down relative to China's currency. Ultimately this results in a lower standard of living for Americans vis-a-vis the Chinese. It's gold standard thinking, but we are not on a gold standard anymore. Someone in Washington ought to wake up and recognize that.

Read article here.

France’s AAA Rating May Be Under Stress as Debt Rises, ING Says

The extra yield investors demand to hold 10-year French bonds instead of the benchmark German bunds widened to 57 basis points on Jan. 21, the most since the euro’s debut a decade ago. The average yield spread in the past 10 years was 8 basis points.

France is no longer a currency issuing nation, meaning that the government can no longer spend by simply crediting bank accounts. If the government needs money it must borrow--either from the savings of its citizens, or those of foreigners. This means the debt is a real problem and must somehow be financed. That is not the case of countries like the U.S. or Japan or Britain or any other sovereign currency issuer that can spend by merely crediting bank accounts. In these cases there is never a risk of a payments crisis, but in France there is. That risk is also present in the other Eurozone members.

Is it time to buy the British Pound?

The British pound has been falling since November 2007 and recently hit a 23 year low against the dollar. Is it time to buy?

Two contrarian indicators suggest that there may be an opportunity to play the pound from the long side.

First, as I mentioned in a post yesterday, Jim Rogers, who is cold as ice when it comes to his forecasts (shorting Treasuries, shorting the dollar, commodities, etc) recommended selling the pound the other day. Back in my days when I was a floor trader one popular trading tactic the savvy traders used to employ was "fading" traders in the pit who were on a cold streak. No one is colder than Rogers at this point in time, so it's probably a good idea to do the opposite of what he says.

The second contrarian indicator is Fox Business, which ran a story on its air yesterday about the weakness in the pound (see clip here). When Fox Business starts focusing on a theme, it's probably close to being over.

You can buy the pound via an ETF. That is the CurrencyShares British Pound Sterling Trust (FXB).

Here's why mainstream economics lives in the wrong paradigm

Excerpts from a story that appeared in the Chicago Tribune.

John Cochrane, a professor at the University of Chicago Booth School of Business, says that among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is "taught only for its fallacies."

Like revisionism in history. The "Holocaust didn't exist," etc.

New York University economist Thomas Sargent agrees: "The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research."

Nobel Laureate Gary Becker says any benefits will be modest at best.

For the government to finance infrastructure spending or tax cuts, it has to borrow money. The money is thus unavailable for private investment or consumption. Right now, companies and individuals are having trouble getting credit, which is a big reason for the downturn. But if the government borrows more, they will have an even harder time finding lenders. So the effort could be self-defeating.

That's a Nobel Laureate who doesn't understand that in a world of floating exchange rates/non-convertible currency, currency issuing governments spend by crediting bank accounts and the spending occurs BEFORE the sale of securities and the collection of taxes. Thus, gov't deficit spending ADDS to the net worth of the public in the form of higher holdings of Treasuries (which are assets), without any effect on the net financial position prior to that spending. Translation: it takes nothing away from the public's holdings of cash or other assets. Nor does it inhibit in any way the public's ability to invest their savings. If anything it adds to it because the government is a net payer of interest, meaning that the extent interest payments add to overall income, savings should be higher and, therefore, investment.

Remember, as stated in the Fed's manual: "A payment by the Treasury adds to the amount of reserves available to depository institutions." This dynamic is clearly stated right there and says, unequivocally, that spending by the Treasury ADDS to the money of the private sector.

Jim Rogers, desperate, turns his negative prognostications on the U.K.

After issuing numerous misguided sell signals on U.S. Treasuries and the dollar in the past four months, Jim Rogers is now turning bearish on the U.K. instead. (Perhaps hoping that it will work out better than his other ill-timed sell signals.)

Why anyone still listens to this guy is beyond me, however, he remains a media favorite especially over at Bloomberg.

In an interview today Rogers says, "the U.K. is finished" and he would "sell the pound." (Nevermind that the pound has already plunged to a 10-year low against the dollar and a record low against the euro.)

Rogers' rationale for predicting an end to the U.K? "The country is running out of oil so now they will have nothing to sell." (I kid you not, those were his exact words!)

Most investors, with the exception of the nimblest, have already been buried by his commodity predictions. Anyone left with any money after following his advice ought to be given a medal. Perhaps a Purple Heart.

Read interview here.

"There are no shortcuts or quick fixes to this crisis"

That quote, from President Barack Obama, appears on the OMB website. Disappointing to say the least. Perhaps the reason why Obama is so cautious is because his OMB chief, Peter Orszag--a noted fiscal conservative and deficit hawk--is pictured sitting right next to him. Orszag's concern over deficits is probably what keeps his boss from being more optimistic. It's discouraging.

More Americans Joining Military as Jobs Dwindle

I've long argued that the military is functioning to provide more and more of the social services, education, health care and jobs of this nation. We allow this because as a nation we are not comfortable with direct government funding of things things. We see deficits, or we view it as socialism, however, when it occurs in this stealth fashion--via the military--we are okay with that. It's a terribly inefficient way to go about providing these basic needs of society and it should be morally reprehensible to us that some young people will go to war and die when all they really wanted was an education, health care and a job. It's also not fair to the many professional soldiers, sailors, marines and airmen who dedicate their lives to a military career.

Read full article here.