A Republican Response to the 'Republican Response'

President Obama of course gave his State of the Union Speech this past week and it has received alot of attention here at this blog and in the financial media in general.

Right after the SOTU speech the opposition party gives a "response". This year it was given by the newly elected Governor of Virginia, Bob McDonnell. Here is a link to a transcript of that speech.

I'm a registered Republican, and consider myself a Conservative. However, fortunately, through Mike's various media, and those of his professional associates, I have come to what I consider to be a true understanding of modern money, fiscal policy, monetary policy and the role of Treasury Securities. I have to say: None of these operational facts or public accounting identities have anything to do with Conservatism. So with that said, please indulge me here with the following replay of the Republican response, and my 'inner monologue" as I listened to it:

Good evening. I'm Bob McDonnell. Eleven days ago I was honored to be sworn in as the 71st governor of Virginia. (...Great, seems like the GOP picked up a Governorship, heh heh, heh...)

I'm standing in the historic House Chamber of Virginia's Capitol, a building designed by Virginia's second governor, Thomas Jefferson. (...you learn something new every day!..)

It’s not easy to follow the President of the United States. And my twin 18-year old boys have added to the pressure, by giving me exactly ten minutes to finish before they leave to go watch SportsCenter. (...nice, a family man, so was Mark Sanford...let's get to it Bob...)

I'm joined by fellow Virginians to share a Republican perspective on how to best address the challenges facing our nation today. We were encouraged to hear President Obama speak this evening about the need to create jobs. (...Jobs! Yes! that's it!..)

All Americans should have the opportunity to find and keep meaningful work, and the dignity that comes with it. Many of us here, and many of you watching, have family or friends who have lost their jobs. 1 in 10 American workers is unemployed. That is unacceptable. (...Yes! get 'em Bobby! it's output and employment we need to focus on!...)

Here in Virginia we have faced our highest unemployment rate in more than 25 years, and bringing new jobs and more opportunities to our citizens is the top priority of my administration. (..yeah but you can't do it alone, Bob, State's aren't currency issuers, you're gonna need help from Federal fiscal policy...)

Good government policy should spur economic growth, and strengthen the private sector’s ability to create new jobs. We must enact policies that promote entrepreneurship and innovation, so America can better compete with the world. ( ...Well I'm not sure where you're going wth the "competition" remark, but yeah, innovation is good! keep going Bobby boy!...)

What government should not do is pile on more taxation, regulation, and litigation that kill jobs and hurt the middle class. (...Yes!, any tax increase now would be economic suicide!....)

It was Thomas Jefferson who called for "A wise and frugal (...Uh-oh...) Government which shall leave men free to regulate their own pursuits of industry ….and shall not take from the mouth of labor the bread it has earned…" He was right. (...OK! "bread from the mouth of labor"! I see a huge Payroll Tax holiday proposal coming!...)

Today, the federal government is simply trying to do too much. Last year, we were told that massive new federal spending would create more jobs 'immediately' and hold unemployment below 8%. (...Yes! The fiscal transfer via the stimulus is not broad enough and is taking too long to implement! ...This is gonna be grrrreat when he makes a specific proposal for an across the board payroll tax cut!...)

In the past year, over three million Americans have lost their jobs (...terrible!...), yet the Democratic Congress continues deficit spending (Oh-no... not...), adding to the bureaucracy, and increasing the national debt (OH-NO! not....) on our children and grandchildren. (...NNNNNOOOOOOOOOOOOOOO!!!!!!).....

CLICK!

Obama: Cutting deficit as important as job growth

"A sign of progress," Obama said in his weekly radio and Internet address. "But as we work to create jobs, it is critical that we rein in the budget deficits we've been accumulating for far too long."

"Reinstating this law [pay-go] will help get us back on track, ensuring that every time we spend, we find somewhere else to cut," Obama said.

He's got it totally wrong.

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Japan’s finance minister pressures BOJ, deflation deepens

"Japan’s finance minister urged the Bank of Japan on Friday to align policy with the deeply indebted government’s efforts to fight deflation, maintaining pressure for possible monetary easing or even government bond purchases."

Looks like, policy-wise, Japan is as clueless as we are here in America. After engaging in quantitative easing for the better part of 15 years without any results, Japan's new Finance Minister is demanding that the Bank of Japan engage in...quantitative easing!

(If it weren't so serious to the world economy and the millions, perhaps billions, who are currently struggling right now it'd be funny.)

The only thing that worked in Japan over the past 20 years had been fiscal policy, but Japan's deficit terrorists (yes, they live there too) killed that off with tax hikes back in 1997 as the market and economy were on the road to recovery.

Sound familiar? It should that's the same script we are following here thanks to the deficit terrorists.

Senate passes pay-go rule on party-line vote

Pay-go forces any new spending to be offset with taxes or spending cuts. Limits the ability of gov't to reduce fiscal drag from here.

What huge increase in gov't spending??

There's an uproar across the nation about a huge expansion of government and how we are becoming a Socialist nation. Yet, when you look at the facts--the numbers--you see that the level of gov't spending relative to GDP is only where it was back in 2002-2003. (See chart below.)


Spending as a percent of GDP has increased by a meager 1.0% in
the past nine years and about 1.4% since 2007!!
Source: Bureau of Economic Analysis

There was no outcry about becoming a Socialist state back then. Now, however, when we have 10% unemployment (17% when you count people who have stopped looking) we're freezing spending and embracing fiscal conservatism. This is going to be disastrous and it will be brought on by nothing more than propaganda and misinformation--a deliberate campaign by deficit terrorists who will be responsible for more hardship and suffering than anything brought about by our enemies abroad.

The stimulus didn't work?

Just reported that the economy grew 5.7% last year, which was the fastest growth since 2003. Most of this came as a result of higher government spending that included programs like Cash for Clunkers, first time homebuyer tax credits etc.

There will be those in the media and conservatives on the right who will continue to say the stimulus didn't work, but that would be revisionism greater than anything ever attempted by a communist state.

True, jobs have not been create on balance, however, that is likely to come very soon.

What does it all mean for the stock market? Probably not that much help at all. The market looks ahead and what it sees, is Obama embracing the fiscal conservative approach, even as the evidence is clear that more of the same--stimulus--would have improved both the economy's fortunes and his own political clout as well.

Volker: Financial innovation adds nothing to the real economy

"...I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy. Maybe you can show me that I am wrong. All I know is that the economy was rising very nicely in the 1950s and 1960s without all of these innovations. Indeed, it was quite good in the 1980s without credit-default swaps and without securitization and without CDOs." -Paul Volker

He's right! In the 1970s we built 2.6 million homes in the United States. Mortgages were issued from plain vanilla commercial banks that held those loans on their books and serviced them. Bankers made little more than a civil servant's salary.

In 2006 at the height of the real estate boom we built 2.6 million homes, same thing, but there was so much intermediation, exotic mortgage products, etc. It didn't add anything to the nation's housing capital stock. It only added risk.

The financial sector garners 40% of the nation's corporate profits, whereas in the 1970s it comprised about 2% of all corporate profits. All that money, for what? Shuffling paper around. Obscene!!

Read all of Volker's comments here.

Senate Approves Increase in Debt Ceiling

Washington Post reports that the Senate has just approved a $1.9T increase in the Federal Debt Ceiling.

The Democratic-controlled Senate has muscled through a plan to allow the government to go a whopping $1.9 trillion deeper in debt. The party-line 60-40 vote was successful only because Republican Sen.-elect Scott Brown has yet to be seated. Sixty votes were required to approve the increase. The measure would lift the debt ceiling to $14.3 trillion. That's about $45,000 for every American.

This last sentence is interesting. The Post has done the math for us and is perhaps implying that somehow each of us "owes" $45k to present and future holders of Treasury Securities, which is far from the truth.

The debt demagoguery continues unabated in the MSM, but the increase in the ceiling may take some short term constraints off of the rate of Federal spending.

George Soros warns gold is now the 'ultimate bubble'

He must be reading this blog!!

Read Soros' comments here.

My comments on some of the main points of his speech

"To recover the rest, I have proposed a fee on the biggest banks. I know Wall Street isn't keen on this idea, but if these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need."

Who does this hurt? The little guy, of course. Big banks will raise fees to recoup what Obama is taking from them. If you don't like the big banks, Mr. Obama, break them up, like Teddy Roosevelt did with Standard Oil or the railroads or as the government did with ATT. All this does is highlight, once again, that you think the government is out of money, which means you fundamentally don't understand our monetary system.

"Let me repeat: we cut taxes. We cut taxes for 95% of working families."

This was his tax cut for 95% of working families that he promised on the campaign?? What a joke. It equated to about $8 per week, on average, for workers.

"A strong, healthy financial market makes it possible for businesses to access credit and create new jobs. It channels the savings of families into investments that raise incomes."

Profits at the biggest financial institutions have been surging and they have a $trillion in excess reserves, yet it has done nothing to help businesses and individuals access credit. The fact is, you have it backward, Mr. President. A strong economy, that is operating at full output and employment, ensures a strong and healthy financial market.

"But that can only happen if we guard against the same recklessness that nearly brought down our entire economy."

So, are you against financial speculation that is driving up the cost of food and fuel? Will you close the loopholes contained in the current bill that allows big banks to continue to engage in this sort of stuff? No. More empty rhetoric here.

"...we need to export more of our goods. Because the more products we make and sell to other countries, the more jobs we support right here in America. So tonight, we set a new goal: We will double our exports over the next five years, an increase that will support two million jobs in America. To help meet this goal, we're launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security."

What an idea! Let's ship large amounts of our national product to other countries so that foreigners have the benefit of these goods and services. Then American workers can use their newfound earnings to live at subsistence levels in a nation of relative scarcity, where prices are high and growth remains subdued. And just how do you double U.S. exports so quickly, Mr. President? Weaken the dollar? Erect trade barriers? These are the only means to do this, which translates into a decline in the real terms of trade for Americans. This is a gold-standard approach to solving problems that exist in the era of modern money. Totally stupid and harmful to workers.

"But families across the country are tightening their belts and making tough decisions. The federal government should do the same. So tonight, I'm proposing specific steps to pay for the $1 trillion that it took to rescue the economy last year."

That's because families do not issue currency, Mr. President. The Federal Government does. You've been brainwashed by the hard right, fiscally conservative, Austrian economics coterie. Too bad for all of us. With households and now the government pulling back on spending, this won't be a "belt tightening," it'll be a tight noose around the neck.

"Starting in 2011, we are prepared to freeze government spending for three years."

Goes against every principal a first-year college student would learn in "Macro 101."

"I will issue an executive order that will allow us to go forward, because I refuse to pass this problem on to another generation of Americans. And when the vote comes tomorrow, the Senate should restore the pay-as-you-go law that was a big reason why we had record surpluses in the 1990s."

"Pay-go," a deficit reduction commission...why don't you put us on a gold standard while you are at it?

Wondering if Obama wants the dollar to drop significantly

"...we need to export more of our goods. Because the more products we make and sell to other countries, the more jobs we support right here in America. So tonight, we set a new goal: We will double our exports over the next five years, an increase that will support two million jobs in America. To help meet this goal, we're launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security..."

Does this mean a death knell for the dollar? How else does he expect to double exports so quickly?

Very sad for Americans.

So much for stimulus. This speech is a disaster from how I see it.

Some points he made:

"the Senate should convene tomorrow and pass pay-go"

Great! Let's go back on the gold standard while we're at it too!

"American families are tightening their belts. We (the government) must do the same."

That's because American families are not curreny issuers, Mr. President. The Federal Gov't is.

"We need to produce more goods and sell them abroad. This is how we will create jobs."

No, this is how we will send more and more of our product to foreigners so they have the benefit, while Americans use their newfound earnings to live meager, subsistence lives. That's what export economies look like.

Obama will prod Congress to enact a second stimulus package and to provide new financial relief for the middle class

Breaking news and very unexpected!

Obama will prod Congress to enact a second stimulus package and to provide new financial relief for the middle class.

This could trigger a market rally depending on how big a package (if he chooses to say anything about the size of the package at all) and how much will be offset by deficit reduction/spending cuts.

If you are short stocks sit tight for now.

More on this later.

Geithner should be fired, investigated. Goldman should be closed, immediately!

Information from the investigation being conducted by the House Oversight and Government Reform Committee reveals that:

The Federal Reserve Bank of New York, then led by now-Treasury Secretary Tim Geithner, purchased a slew of souring assets from the world's biggest banks for 100 cents on the dollar in November 2008. A scathing report by a government watchdog held Geithner responsible for the overpayments.

and...

"The way the AIG bailout was engineered was to specifically benefit Goldman Sachs and its trading partners," said Janet Tavakoli, a Chicago-based derivatives expert and founder of Tavakoli Structured Finance..."

"The $182 billion bailout overall kept AIG alive, and its trading partners, including Goldman Sachs, benefited from the funds made available to the securities lending transactions and other subsequent trading transactions."

We need to put an end to this crony capitalism. Wall Street is corrupt and a parasite on the nation's economy!

Keynes vs. Hayek set to rap. You gotta check this out!

On second thought...

This is funny, but it distorts the Keynesian approach. (Read below.)

In this video Keynes is depicted as healthy, vibrant and full of energy. He parties, gets drunk and then suffers from a hangover. The metaphor being that, government spending is like booze: You feel good for a while, but then suffer the consequences.

A more realistic depiction would have been Keynes on a hospital bed, hooked up to intravenous. Lifesaving medicine was flowing into his body, not booze.

Keynes never advocated government spending and increased aggregate demand for economies that were strong, healthy and running at levels of full output and employment. He argued for those remedies when demand collapses.

Once again another distortion subtly designed to support Friedrich Hayek's out of touch, Austrian school thinking.

Government supported demand is just as "real" as private sector demand

You often hear people say that because the government was providing stimulus to the economy or supporting output then somehow the economic activity related to that is "phony."

Oh really?

Ask those people, then, if the cars produced and sold as a result of "Cash for Clunkers" were phony? Were they really just inflatable copies of cars that you couldn't actually drive?

Of course not.

How about the houses built and sold as a result of government subsidies to the housing market? Were the houses really cardboard cutouts or simple facades with nothing behind them?

Once again the answer is no.

If the goods and services produced as a result of government supported demand are in fact real, then there is no way you can say the economic activity is phony. It's simply not true and it's just a crazy statement that makes no sense at all.

The true wealth of a nation is defined by the total quantity of real assets produced and available for use by its citizens. It makes no difference if they were produced by government or the private sector.

True, government and the private sector might allocate capital differently and the economy could end up looking a little different (less consumer goods, leisure, more infrastructure, education, etc), but government support of output and income is no less real than that of the private sector.

A nice email...

I got a very nice email today. Read below.

"Hello Mr. Norman. I know you’re a busy man but I just felt compelled to let you know that even though your investment services are geared to provide customers with positive returns on investment, for myself, your blog has helped educate a young eager mind about monetary and fiscal policy. I am a 25 yr old treasury repo interdealer broker and your blog has taught me, as well as motivated me, to learn all of the intricacies of the Fed and Treasury than 4 years at Pace University ever did..." Sincerely; Mike Fers

Hopefully, this kid will be making policy one day.

Breaking news: Federal budget deficit will fall to $1.35T

Yes, I had been predicting this in my daily report, Fiscal Trend Digest, for quite some time.

What is a shame, however, is that they do not realize that the deficit shrunk because of GROWTH and if they were to enact more aggressive growth policies (like tax cuts/more spending) the deficit would disappear and we would have prosperity and jobs for everyone.

Instead they're going in the other direction: spending cuts/higher taxes, which means this improvement in the deficit will disappear quickly.

Watch gold collapse now!

Warren Mosler makes and excellent observation today in his blog.

He notes that there has been, for quite some time, the notion that quantitative easing was "hyperinflationary" and markets had been following that script with the dollar weakening, gold moving higher, oil rebounding, stocks advancing and bond yields rising.

Now, however, the reverse is happening: stocks are falling, the dollar is rising, bond yields are heading lower and gold and oil are selling off.

Mosler sums it up...

"Should market psychology turn to the notion that the Fed has no tools to inflate, and we have a Congress dead set against larger deficits, it can all get very ugly very quickly in the race to the exit from the inflation plays (including steepeners) currently on the books."

It will be very ugly indeed, especially for gold, which, more than any other market, is representative of the "hyperinflation trade."

Get yourself some short Gold ETF. (You can find which ones I recommend in my Outlook 2010 report, on sale for $39.95.)

Is Evan Bayh our real president?

White House economic advisor Austan Goolsbee said yesterday, "Now is not the time to tighten the belt!"

Yet, the president announced that he was going to do just that.

A few days ago Evan Bayh (D-IN) said that the president should enact a spending freeze "right now."

Watch the video:



Has Obama ceded economic policy over to Evan Bayh and a handful of deficit terrorists? It appears so!

Barack Hussein Herbert-Hoover Obama

Cut spending in the middle of the worst recession since the Great Depression? The return of Herbert Hoover and the "liquidationists."

By the way, Obama opposed the idea of a spending freeze during the campaign, when it was proposed by McCain and McCain lost the presidency. Now Obama supports it???

Amazing!

Amazingly stupid!!!

Futures beginning to dive on Obama's proposed spending freeze

It's 10:40pm ET and S&P futures are off 5 points. This comes on the heels of an announcement earlier that Obama plans to propose a spending freeze. In my previous post (and in earlier posts from days and weeks ago) I said that this announcement would crush stocks. It's already starting to happen.

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Obama to propose spending freeze!

Obama Spending Freeze: The President Will Propose Discretionary Three-Year Freeze

I told you it was coming. Here it comes!! We will definitely have a double dip recession and the second leg down could be far more severe than the first with unemployment rising to 15%. Watch stocks get crushed now...absolutely crushed.

Obama endorses deficit task force

Obama is endorsing a deficit task force that will be charged with the job of coming up with suggestions on how to reduce the deficit.

Rather than focus on deficit reduction, which will, without question, mean lower output and higher unemployment for years to come, the president could have simply shown the public and his entourage of deficit hawks this simple chart below, which shows that the deficit is still tiny compared to the 1940s.

Then he could ask his deficit hawk friends why that deficit didn't "bankrupt" the United States? And if they're really up to the challenge he could follow that question with, why did we experience an enormous surge of prosperity following that deficit?

Finally, he could show the public--many of whom are without jobs--a very graphic explanation of why it is necessary to increase the deficit to get us back on the road to prosperity. Duh!!

Axelrod refuses to rule out tax increases to deal with deficit

Washington (CNN) - President Barack Obama's senior adviser on Sunday refused to rule out tax increases as part of a solution to the nation's growing deficit. Speaking on CNN's "State of the Union," David Axelrod said Obama supported having Congress set up a bipartisan commission that would come up with a plan to reduce the deficit. "We want to sit down in a constructive way and approach this problem," Axelrod said. He wouldn't speculate about possible solutions, saying, "Let's see what a bipartisan effort to deal with these deficits will produce." "Whatever the appropriate approach is, the president will be straight up with the nation," Axelrod said. Asked about the possibility of tax increases, Axelrod said: "If anybody has a plan to do this without raising any taxes on anybody, upper income or below, they should come forward with it because nobody wants to raise taxes." During the 2008 election campaign, Obama repeatedly promised he would not raise taxes on those making less than $250,000 a year.

If Obama has any chance at all for a second term, Axelrod must go along with Geithner and Summers. That is clear.

And, by the way, I HAVE A PLAN FOR CUTTING THE DEFICIT WITHOUT RAISING TAXES! Yes, me...I have a plan. It's called GROWTH!

If the deficit grows by $1 trillion as the government spent more on consumption, investment and employing people, we'd get at least $2 trillion in additional GDP (conventionally accepted ratio) and that would mean the deficit FELL as a percentage of GDP!

Don't blame Volker, blame Scott Brown

The media has been blaming the "Volker proposals" as the reason behind the market selloff. However, the market began selling off on Wednesday, which was a day before the news broke that Obama intended to go with Volker's restrictions on the banks.

So what happened Wednesday that made it a game changer?

Simple. It was the day after the Massachusetts special election, in which Republican challenger Scott Brown emerged victorious.

Brown's victory changed the balance of power in Congress in an instant. It anointed those who see deficit deficit reduction as being second only in importance to national security, in a position to make it happen.

In his victory speech Tuesday night, Brown even threw in the now-obligatory yet completely idiotic and inapplicable comment, "We can't keep leaving all this debt to our kids and grand kids," line.

The very next day the Dow tumbled 122 points and has been heading south ever since.

And if you don't believe me that the market is worried about deficit reduction, then pay close attention to the direction of stocks following President Obama's State of the Union speech next Wednesday (Jan 27). In that speech he is expected to propose some very austere deficit cutting measures, which will absolutely crush stocks.

If I were you and if you have money in the market, or are disposed to making some, I would aggressively be short stocks at the close of business Wednesday.

We are about to repeat the terrible mistakes of 1937, when FDR was conned into balancing the budget, sending the nation back into a mini depression. It took a world war to finally boost spending sufficiently to get us out.

Obama will follow Clinton's playbook after his '94 defeat

An article in today's Wall Street Journal talked about Clinton's comeback after the Democrats were trounced in the 1994 elections. I believe, without doubt, that this will become Obama's playbook for the rest of his term. That's bad for the economy, here's why:

"...Famously, of course, he [Clinton] left behind efforts to overhaul health care. Then, in 1995, Mr. Clinton went against his party's orthodoxy by embracing a plan to balance the federal budget. And in 1996, he moved against Democratic orthodoxy again, by embracing a plan for wholesale changes to the welfare system."

A technology boom at the time masked the real destructiveness of the budget balancing, which ultimately led to a collapse in private savings. (By definition, if the gov't runs a surplus, the private sector must run a fiscal deficit.) However, Obama has no technology boom. In fact, he has nothing supporting this economy with the EXCEPTION of gov't spending and he's about to cut that!

Bernanke vote shakier as more Democrats defect

If Bernanke fails to win confirmation for a second term it would probably signal the end of the policy of Quantitative Easing, which Bernanke has championed. Mny lawmakers feel he has contributed to the "debasement" of the currency and is sowing the seeds for future hyperinflation. (All nonsense, but they see it through the prism of their beliefs.) Hence, Bernake's departure would almost certainly be very bullish for the dollar.

Wall Street Bonuses exceed the GDP of 13 states!

The $64 billion in Wall Street bonuses that will be paid out this year exceeds the gross state product of 13 states that have a combined population of 13.5 million people!

Source: Bureau of Economic Analysis

Where are our priorities!!