Friday, February 27, 2009

Too late! Debt terrorists have gotten to Obama

"In the midst of abundance we preach privation." -Warren Mosler

It's unfortunate that Obama subscribes to the views of the "deficit terrorists," who believe that the government's means are limited. He raises taxes and "scours the budget for savings" in the false belief that spending is somehow constrained by tax revenues or a surplus of on-hand gov't savings.

In the meantime the wealth producing resources and capital (including human capital) of the nation sit idle, raising the likelihood of a permanent decline in America's standard of living relative to the rest of the world.

The true legacy that we leave to our children and grandchildren is not the debt, so long as that debt resulted in a rise in output, employment and wealth. It's the latter that we pass along and exactly the reason why the debt our grandparents ran up during the 1940s left the current generation richer, not poorer.

Upset about gov't efforts to help to the economy? It's written in the Constitution!!

David Rickard, a very astute listener to my (former) radio show, pointed out something from the Constitution:

(from the preamble)

The Constitution of the United States of America

"We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America."

Sustaining the economy is fundamental to "promoting the general welfare." By doing nothing or "leaving it to the market," the government is abrogating one of its fundamental responsibilities as dictated by the Constitution!

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Thursday, February 26, 2009

Obama’s Planned Tax Would Hit Highest Earners Hardest

It's really sad how the "deficit terrorist" mentality has taken hold of all our policy.

Obama's plan to have high earners pay for health care displays a belief that the Federal Government doesn't have the "means" to invest in health care. So it is prepared to extract the means (the government's own money!) from a group of its citizens.

Taking from wealthy people to support universal health care will not only produce fiscal drag (or detract by an equal amount from the positive effects of higher spending in this industry), but it will also create enmity between high income people and those less fortunate. It will fracture society.

It's once again an example of a well meaning idea (universal health care) brought about with terrible policy.

With the passing of each and every day we see policies that will result in the long-term stagnation of our economy: A perpetual living beneath our means. It will ensure a generational decline in the standard of living of the citizens of our nation. This needless loss of wealth and the increased poverty that will accompany it, is the real heritage left to our future generations.

Wednesday, February 25, 2009

Ukraine rating cut to lowest in Europe by S&P; Latvia at junk status

In the past two days Standard & Poor's has cut the sovereign debt ratings on both the Ukraine and Latvia. The latter is now at junk bond levels. So, did interest rates spike?

Not at all.

In fact, rates in both countries are lower than where they were back at the peak of the boom in 2006.

This once again highlights how clueless the ratings agencies are when it comes to the sovereign debt of currency issuing nations. There can never be a payments crisis in countries that spend in their own currency and where this spending is done by the mere crediting of bank accounts.

Is there a foreign exchange risk? Yes, but that is always the case--even in countries that are "fiscally responsible," like Switzerland.

If this doesn't prove that the interest rate is set by the central bank (the gov't) then I don't know what will. It should also be a lesson to all those debt doomsday folks who are waiting for the day when the clueless rating agencies downgrade the U.S. credit rating. That day is coming and when it does it will be trumpeted around the world. The sheep investors will short Treasuries by the droves--and we will be buying them--then taking our profits to retire on our yachts!

Tuesday, February 24, 2009

Japan Considers Stock Buying as Market Slides

Exactly what I said the Fed should be doing here. It would help to boost confidence quickly and be a much more effective transmission mechanism to the real economy. Far better than all these confused solutions to help banks. Bank lending is pro-cyclical anyway, so to the extent that supporting the stock market helps the real economy, that would go a long way toward helping the banks. Japan did this in 2002 and J.P. Morgan and a bunch of bankers and financiers did it in the Panic of 1907. It worked.

Read article here.

Read about the Panic of 1907.

Sunday, February 22, 2009

Soros Says Financial Crisis Marks End of a Free-Market Model

The philosophy of “market-fundamentalism” was now under question as financial markets have proved to be inefficient and affected by biases rather than driven by all the available information, he said.

"A more effective approach for restarting the economy would be to inject capital directly into the banks and cut minimum capital requirements," Soros said.

Sounds like he's been listening to my radio show and reading my blog! However, I said eliminate capital requirements.

Read full story here.

My show on BizRadio is being cancelled!

After broadcasting for four years (since the inception of BizRadio) and being the longest running host on their air, the show is ending.

This was a business decision by BizRadio and had nothing to do with content. They liked the show and its content, but it did not fit with their business model.

Friday, February 27th will be the last show.

Thanks to everyone who listened. I will continue writing this blog.

Obama Plans to Reduce Budget Deficit to $533 Billion by 2013

This promise shows that absolutely NO lessons of the past have been learned and it also ensures that whatever recovery we get will be short-lived.

President Barack Obama plans to cut the U.S. budget deficit to $533 billion by the end of his first term by increasing taxes on the wealthy and cutting spending for the war in Iraq, according to an administration official.

This means either increasing fiscal drag or not recycling the money spent on Iraq into other, domestic spending needs.

Obama wants to reduce the deficit because he’s concerned that over time, federal borrowing will make it harder for the U.S. economy to grow and create jobs, said the official, speaking on the condition of anonymity.

He has totally bought into the false theory of "loanable funds:" the idea that deficit spending takes away from the ability of the private sector to spend and invest, when in fact by definition, it does the opposite.

Ironically, these were the words of his own Treasury Secretary, Tim Geithner, just 12 days ago:

"We believe that action has to be sustained until recovery is firmly established. In the United States in the 30s, Japan in the 90s, and in other cases around the world, previous crises lasted longer and caused greater damage because governments applied the brakes too early. We cannot make that mistake."
-Treasury Secretary Timothy Geithner, February 10, 2009

Amazing!! Now Obama essentially says he will be applying the brakes as soon as the economy gets rolling again!

I said this long ago after Obama made his selections to his economic team. They are all fiscal conservatives and the deficit terrorists will take charge. This is not change. This is the status quo at the worst possible moment in the nation's history. God help us!!

Friday, February 20, 2009

Glenn Beck's Economics Are a Danger to America

My letter to the New York Times.

Glenn Beck’s Economics Are a Danger to Our Country

by Michael Norman

Last night I watched in shock and amazement as Glenn Beck attempted to educate viewers on the subject of banking and government finance on his Fox News show.

America is suffering through some really difficult times so it’s bad enough when financial journalists, media pundits and mainstream economists plead their own selfish interests when purporting to tell it like it is; but when radio show hosts turned TV commentators start offering their misinformed versions of macroeconomics as fact, that’s downright dangerous.

It wasn’t so much his sophomoric use of animation (Beck was clearly trying to highlight what he perceives as the absurdity of the current situation), inasmuch as the blatant ignorance he displayed in “explaining” the banking system and the activities of the Treasury and the Fed.

Beginning with a scene from the movie, “It’s a Wonderful Life,” Beck attempts to clarify the workings of the banking system for us, or so he believes. This is where all the misinformation begins. Right from the get go, it appears, Beck fails to understand the distinction between George Bailey’s Building and Loan (functionally a financial intermediary) and today’s commercial banks, which do not use customer deposits to make loans. On the contrary, commercial banks create money.

Beck’s explanation of government finance was no less flawed. According to his tutorial the government collects income taxes from all of us then distributes that according to the spending mandates of the Congress (represented by a caricature of Barney Frank). If we’re out of money, so then is the government according to Beck.

While the Federal government does collect taxes, its spending is not limited by the amount of tax revenues it takes in. Nor is it constrained by a need to sell Treasuries. (The latter just functions to maintain reserves at a level consistent with where the Fed wants to keep its interest rate.)

The U.S. Government, along with all governments that issue their own currency and spend in that currency, have no limit on the amount that they can spend. The only constraint is political. Operationally, the spending is done by simply crediting the reserve accounts of commercial bank accounts held at the Fed, resulting in an increase in reserves in the banking system. In other words, spending adds to the monetary base in the form of increased reserves. The sale of Treasury securities functions to manage the level of reserves. In essence, Treasuries are nothing more than interest bearing accounts offered by the Government in exchange for those reserve balances.

Under this paradigm the government, by definition, can never be out of money. Its ability to credit bank accounts is without limit and the only constraint, again, is political. Moreover, only Federal Reserve notes, coins and bank reserves are accepted for the payment of taxes or for the purchase of government securities. The public can only get these funds if the government spends them into existence in the first place. It’s the equivalent of saying, the funds to pay taxes and buy Treasuries comes from government spending itself.

Beck informs us that since the government is out of money (because we the people are out of money), China must come to our rescue by lending to us. Once again this is false. China has accumulated dollar reserves as a consequence of having exported lots of goods to us. The buying of Treasuries does not constitute a “funding” of America as it is often characterized, but simply the desire to exchange those dollar reserves for a U.S. Government interest bearing account called a Treasury.

The most misleading claim by Beck, however, is that China is no longer “lending us money” and therefore, the Fed is the only entity left that can buy Treasuries from the government. This is completely incorrect and is an example of a gross misunderstanding of monetary policy and how the Fed sets interest rates, its primary monetary policy tool.

The Fed sets interest rates by manipulating the level of reserves in the banking system. It does this by buying or selling Treasuries. The Fed recently lowered its overnight lending rate to zero, but it has also been active in lowering rates all along the term structure, which it has the prerogative to do. To accomplish this the Fed has been buying Treasuries from the public, not from the U.S. Treasury. The Feds actions have resulted in an historic increase in reserves in the banking system. The greater the level of reserves, the lower the overnight lending rate will fall and it has fallen—to zero, the Fed’s target.

Ongoing Treasury sales to the public have been acting to reduce those reserve balances, as the public pays for Treasuries with funds that had been already provided by both the Fed’s actions and government spending.

Finally, this claim about “printing money,” is flat out wrong. While government spending necessarily results in an increase in reserves in the banking system as just discussed, reserves are not part of the money supply. Moreover, even if they were part of the money supply (as cash and coins are) they’d constitute only a fraction of what we call “money,”

Most money in a modern economy is credit money created by banks. This means checking accounts and other types of demand deposits, which are created in the banking system and exist as liabilities on bank balance sheets. That is what most of us refer to when we talk about money.

Even with the historic expansion of the monetary base over the past five months, that level, at $1.5 trillion, is just a fraction of the $9.7 trillion of total bank credit. Moreover, bank credit has been shrinking recently, despite the Fed’s best efforts to make it grow.

It is very important to understand these facts and not embrace the misguided and uninformed opinions of media personalities and economists who plead their own selfish interests. Both the Federal Reserve and the Treasury must become more active and effective in providing a better understanding of these basic concepts. Until they do, many Americans, including policymakers, will continue to be guided by misinformation, dogma and false paradigms, which in the long-term, could be permanently damaging to our nation.

Michael Norman is an economist and private investor. He writes a blog at

Thursday, February 19, 2009


God help us. The same group that did not see the current financial crisis is now gaining clout with the Administration and is hell bent of destroying social security and truly plunging our country into poverty if their prescriptions are followed. The group's president, David Walker, was on my show last October admitting that the country "Did Not" face a solvency issue and, that, "Social Security checks wouldn't bounce." Is he lying, then, when he goes around the country stating otherwise?

Listen to audio clip here.

California Senate Approves Budget Fix, Ending Impasse

Fiscal drag from the nation's largest economy.

Read story here.

Euro Advances on Speculation Germany Will Signal Aid for Region

The euro snapped three days of losses against the dollar after Finance Minister Peer Steinbrueck said yesterday Germany would show its “ability to act”

How does Germany act? Germany is like the state of California and cannot simply credit bank accounts.

“Germany is finally waking up to the reality that if they want to preserve that project which is the euro, then they’ll have to open up their own purse strings and help their neighbors,” said Geoffrey Yu, a strategist in London at UBS AG,

Again, how? If anything, it is the Fed supporting their system. Germnay can't. No country in Europe can. The Federal Reserve can do it and has been doing this, however, how far is the Fed prepared to go? How many $trillions?

Wednesday, February 18, 2009

Is the deficit/spending big enough yet to stabilize the economy?

I have frequently pointed out the fact that the deficit in 1932 hit 4% of GDP and that coincided with the stock market bottom during the Depression. Historically, it has taken deficits of about 4% of GDP to stabilize market downturns and the economy. The current deficit so far for FY 2009 (October '08 - January '09 so far) is as follows:

Deficit as a % of nominal GDP: 3.8%
Deficit as a % of real GDP: 4.9%

Historically, gov't spending as a % of GDP needs to go above 21% to have a material impact.

Spending as a % of nominal GDP: 9%
Spending as a % of real GDP: 11.6%

Remember, this data only covers a four month period (Oct '08 - Jan '09), so it seems we are on track to equal or exceed, recent, historical highs in both the deficit as a % of GDP and spending as a % of GDP. We may even come close to the WWII level. Assuming total government outlays hit $4 trillion this year (up from $2.9 trillion), that would be 34% of real GDP. Spending as a percent of GDP in 1943, 1944 and 1945 hit 43.6%, 43.6% and 42.9% respectively.

Gov't Spending Doesn't Work? The Facts Prove Otherwise

Below is a chart from the government's own historical tables on the budget, from 1930 until now. The graph is government spending as a percentage of GDP. Large increases in spending were followed by boom times, while contractions in spending preceeded recessions or market downturns.

Now, the dirty little secret that "supply-siders" will never admit to: that spending under Reagan was the highest in the post WWII period. That, along with tax cuts, put the economy on steroids. However, without the spending (tax cuts alone), there never would have been a "Reagan boom."

Monday, February 16, 2009

Too many assets are not our problem

I have heard intelligent people propose burning down the excess inventory of the housing stock as solutions to the current "problem."

I have heard intelligent people say things like, "There are too many gas stations."

The idea that we could raise our wealth and, thus, standard of living as a nation, by destroying valuable, viable, assets is insane!

The housing stock of a nation whose population is growing is a valuable asset!

It looks like there are too many gas stations only because Americans are driving less, due to job loss and income loss.

The problem is not the supply of things.

The problem is that we do not use all the capital and resources and assets that we have.

As Adam Smith once said, "The wealth of a nation is not only measured by its gold, but by the abundance of its consumables."

There is nothing wrong with our economy. We merely have productive assets and capital that sit idle. The problem is our unwillingness to use all means to engage that capital to produce the wealth that it is capable of producing.

That is a an ideological as well as a psychological constraint. Nothing more.

The only thing that a society can have too much of is:


You can never have too much of the good things. That is the very definition of wealth.

Reserves continue to fall

Reserves are now down $280 billion from their peak back in January.

Friday, February 13, 2009

Chanos Saw Nonpublic Fairfax Research, E-Mails Show

Jim Chanos, a major hedge fund operator, along with Steven Cohen of SAC Capital, another huge hedge guy, shorted the stock of Fairfax Financial Holdings, Ltd on inside information according to court documents reveal.

Now, under Treasury Secretary Geithner's Financial Stability Plan, these guys may very well end up to own large amounts of the nation's bank assets with guarantees from the Gov't (taxpayers) that they won't lose money!

Read story here.

Thursday, February 12, 2009

Fed in Talks to Add Primary Dealers as Sales Rise to Record

The Fed obviously wants to preserve the primary dealer system as evidenced by their desire to add four new firms to the list. However, the real question is, why, then, did they let two fail? The failure of Lehman and Bear Stearns triggered massive financial instability and brought about a systemic shock felt around the world. Was it really worth all that destruction if they desire to preserve the primary dealer system anyway? Keeping Bear and Lehman running and helping to nurse them back to health would have been far, far, less costly than allowing them to go under and then going out and looking for new dealers. It seems really stupid.

Read story here.

Sarkozy Go-It-Alone Aid Defies Rules, Risks Reprisals

More signs of serious breaks from the EU treaty. France is hardly as bad off economically as Spain, Portugal, Italy and Greece. How long before these countries follow? How long before they are forced to abandon the EU altogether and reissue their own, sovereign currencies?

Read story here.

Wednesday, February 11, 2009

CNBC's Santelli expresses surprise over today's well received Treasury auction

I was just watching CNBC and they cut to "breaking news," which essentially was reporter Rick Santelli expressing surprise over today's better than expected auction of $20 billion in Treasury notes.

It's amazing to me how these people still don't understand that the government's own spending provides the funds to purchase government securities, which is why auctions will pretty much ALWAYS go off without a hitch.

The government spends first (resulting in an increase in reserves available to depository institutions) and collects taxes and sells securities later.

European bank bail-out could push EU into crisis

It is now estimated that European banks have $23 trillion in bad loans. How far is our Fed prepared to go to support them?

The euro is facing a crisis. If you are not short this currency do yourself a favor and open a forex account somewhere and start building a short position. This could make England's move out of the ERM back in 1992 look like a hiccup in comparison.

Read story here.

Just How Right Is Jim Rogers?

Nice piece about just how WRONG Jim Rogers has been. Losing tons of money due to adherence to inapplicable paradigms. Just like I said weeks ago: I've been making a lot of money by fading Rogers' recommendations.

He told viewers back in July that he was bullish on airline stocks, without being specific. "I am buying airlines, the capacity is going down and the demand is still there," he said. The Standard & Poor's airline index has fallen by 47 percent since then.

In October, he boldly warned against the folly of the bond-market rally and claimed short positions in long-term government bonds. Since then, 10-year Treasury yields have fallen by 65 basis points, 30-years yields by 55 basis points -- in the face of record supply announcements from the US government.

Attempts to contact Rogers late Tuesday were unsuccessful.

Read story here.

EU says France's auto bailout may pose problems

France's proposed EUR 9 billion ($11 billion) bailout of automakers Renault and Peugeot-Citroen is only possible thanks to loans that the U.S. Fed provided to Europe. American taxpayers are unwittingly funding France's automakers while Congressional lawmakers and many continue to demand their destruction.

Read story here.

Democrats Face Calls for Cuts in Talks on Final Stimulus Bill

The final stimulus bill will probably end up to be totally inadequate as cuts in spending are being made to appease Republicans and Democratic "centrists." In the words of Paul Krugman, "This is very, very, bad

‘Vulture’ Investors Eye Bad Assets, but Warily

This is Geithner's plan. Unreal!!

"To combat the bust, Washington wants to marshal some of the same financiers who grew rich during the boom: hedge fund managers and corporate buyout specialists."

In their misguided zeal to "protect taxpayers" the government will now seek to enrich the very speculators that not only fueled the bubble, but made fortunes on short selling companies that the government wants to save! This is beyond belief!!

"But Mr. Marks and other investors like him said they were in no hurry to wade into this mess. "

Marks is a major private equity operator and of course he's in no hurry! The guy's not stupid. He knows the longer he waits and acts like he's not interested, the more taxpayer money Geithner will throw at him. This is so convoluted as to be surreal! The government is basically handing over government regulated assets formerly held by banks under the government's own rules and scrutiny, to hedge fund and private equity speculators at pennies on the dollar and giving them taxpayer money to buy the stuff! Eventually, the hedge fund guys will sell all those assets back to the banks (the taxpayers) at a higher price. What is going on here!!!

We need to start a petition to remove Geithner and for that matter, Obama's entire economic team!

Read story here.

Trade deficit falls to six-year low

Be careful what you wish for!

As I have been saying all along, rich countries tend to run trade deficits and capital account surpluses. This is exactly what the U.S. had for many years and it grew not because of our profligacy, but because it was the desire of foreign nations to "net save" in U.S. dollars and achieve full output and employment by selling products to the U.S. even at the expense of the living standards of their own citizens.

The fact that the U.S. trade deficit is shrinking rapidly is not something to cheer, but a reflection of the fact that our policies are making us poorer and by corollary, making the rest of the world poorer as well.

Blame this on fiscal conservatives and policy that is driven by a gold standard mentaility. The idea that we can only prosper if others lose. It's terribly destructive and an idea the world basically got away from 200 years ago.

Read full article here.

Bankers to appear before dubious Congress

One of these bank bosses ought to set these lawmakers straight once and for all by saying, "Banks don't lend their reserves or their capital so the money you gave us is not for making loans according to the government's own rules! If you want it to be that way then change the rules or eliminate the banking system entirely and have the government lend to every household and business in the country. In addition, loans are a function of demand, which is collapsing. So if you want to see more lending, then you'd better figure out a better way to boost the economy."

They won't say that because they'll lose their jobs.

The closest anyone will come to saying that is Jamie Dimon, CEO of JP Morgan.

Tuesday, February 10, 2009

Letter to the New York Post

Here's the letter I emailed to the Post in response to an article in their Opinion section.

For Every Dollar Borrowed, There is a Dollar Saved

By Michael Norman

In Paul Weinstein's column, "Next, Cut Spending or Debt Will Doom Our Future," (NY Post, 2/10/2009) it's at least nice to see that he acknowledges the need for a stimulus in the face of a frightening decline in output and employment. However, his comments on restoring order to America's fiscal house shows exactly why fiscal stimulus in the U.S. during the 1930s and throughout Japan's "Lost Decade of the 1990s" didn't work. In each of those examples the goal to restore fiscal discipline eventually undercut any stimulus that was applied. In his remarks today Treasury Secretary Geithner made note of this when he said, "previous crises lasted longer and caused greater damage because governments applied the brakes too early. We cannot make that mistake." The secretary is right.

Whether Mr. Weinstein likes it or not (and he apparently doesn't), government spending and investment is a component of GDP and a pretty significant one at that. The $2.9 trillion that the government spent in 2008 is nearly twice the level of private non-residential business investment that occurred. The notion that you can pare down government spending and have that lost output magically and fully replaced by the private sector is wishful thinking at best. Unless, of course, Mr. Weinstein is suggesting that we as a nation accept a lower standard of living: in essence, become poorer vis-a-vis the rest of the world.

The notion that government spending "crowds out" the private sector is a fallacy. Government spending has gone from $92 billion annually in 1946 to over $3 trillion currently, yet total industrial capacity utilization has dropped to 74 percent from 90 percent and the unemployment rate has climbed from 1.2 percent to nearly 8.0 percent in that time. In other words, despite a thirty-three fold increase in government spending, much of the nation's wealth producing capacity remains unused. Where, is the crowding out?

Nor do you see any evidence of crowding out in interest rates: U.S. Government bond yields are at historic lows, yet according to Mr. Weinstein's claims, we should be seeing record high interest rates due to record spending.

Mr. Weinstein's concerns over debt display a complete lack of understanding of double entry accounting, an accounting system that pretty much the whole world adopted about 500 years ago because it's superior to the single entry version. By definition, for every dollar borrowed there is a dollar saved and for every new liability created there is also a new asset. To focus exclusively on the liability side of the balance sheet is to miss half the picture.

The "greatest generation" may or may not have understood this, but it is a moot point. The debts they ran up to fight the war also went to producing factories, plants, equipment, training, educational facilities, infrastructure and many of the real assets that became part of the wealth of the current generation. The deficits came down not because they our grandparents "whittled it away," but because the spending created the real assets that produced wealth far in excess of whatever debt was created.

-Michael Norman is an economist and private investor

Banks as mere utilities? What a wonderful concept

In a letter to the Financial Times, this guy hits the nail on the head!

Sir, You quote a senior banker as saying that with Barack Obama’s executive salary cap “we will return to being mere utilities, taking deposits and lending out money for minuscule fees” (“GE chief attacks remuneration cap”, February 6).

What a wonderful concept. We will then be able to expect reliable banking services as we expect reliable electricity, gas and water, without being pressed into a range of exotic financial services that will send us and the nation into bankruptcy.

Schoolboys and girls will no longer be enticed into becoming traders and bank executives as a quick path to riches; some of them may be encouraged to become scientists or engineers with a mission to develop solutions to the country's and the world's technological problems. They can aspire to become Bill Gates after they have invented some product or service that adds a new dimensions to our lives.

Andrew Blelloch,
Princeton Junction, NJ, US

Treasury's confusion on the role of banks

Among Geithner's remarks today was this one:

"We believe that access to public support is a privilege, not a right. When our government provides support to banks, it is not for the benefit of banks, it is for the businesses and families who depend on banks... and for the benefit of the country. Government support must come with strong conditions to protect the tax payer and with transparency that allows the American people to see the impact of those investments."

Which begs the question: If the money the gov't gives to banks is for businesses and families, then why doesn't the gov't just give that money directly and do away with the banking system altogether? Seems Geithner doesn't understand the role of the banking system or how it functions. Banks don't lend their reserves, capaital or deposits.

PM Erdogan says Turkey to make ideal decision on IMF agreement

Turkey appears to be wisely walking away from an IMF loan deal that would require strict fiscal discipline and a balanced budget, even as economic conditions continue to deteriorate.

(Read story here.

Turkey should repudiate the remaining IMF debt and stimulate aggressively--something the government can do as Turkey is a currency issuing nation.

While it is not likely that Turkey will walk away from its remaining debt to the IMF, it indicated that it is prepared to "go its own way."

This is bullish for the Turkish lira, which has fallen sharply in the past six months. I like shorting the euro and buying the lira (short EUR/TRY). The eurozone has no fiscal independence now since member nations that use the euro are no longer currency issuers.

Senate passes stimulus bill but stock market selloff puts it in danger

The Senate passed its version of the stimulus by a narrow margin, however, detractors of the stimulus are likey to point to the stock market selloff as "proof" that investors think the stimulus is a bad idea. Expect opposition to grow, even among Democratic House members.

Bloomberg journalists distort the truth

Bloomberg journalists distort the truth

On November 10, 2008 the following story appeared on the Bloomberg website:

Fed Defies Transparency Aim in Refusal to Disclose

The article was written by Bob Ivry and Mark Pittman of Bloomberg. In the story these claims were made:

"The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral."

“The collateral is not being adequately disclosed, and that's a big problem,'' said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co.,"

"The Fed's collateral “absolutely should be made public,'' said Mark Cuban, an activist investor, the owner of the Dallas Mavericks professional basketball team and the creator of the Web site, which focuses on the secrecy shrouding the Fed's moves. "

It also said that Bloomberg was suing the Fed under the Freedom of Information Act.

In an email exchange that day between myself and Bob Ivry I stated:

“The Fed is not limiting transparency in its actions. All this information is publicly available. The list can be found at the Fed’s Discount Window of Marginable Collateral.

“All this information is publicly available. Your research and assertions are incorrect and misleading and you should publish a retraction with the proper information.”

In another email exchange between Mr. Ivry and myself that occurred yesterday, Ivry admits:

“The types of assets aren't hidden. Their value is.”

“…do you trust the government web site to tell you what's going on? I don't”

In the first sentence he admits all along that the assets pledged as collateral “aren’t hidden,” directly contradicting what was stated in the Nov 10 story.

In the second sentence he states his opinion, which is that he doesn’t trust the government to tell the truth.

Therefore the story was based on Mr. Ivry’s opinion about what the government discloses and what it doesn’t disclose; yet that was never indicated. Instead it is written to suggest that the Fed is deliberately keeping information from the public, which it is not, as Mr. Ivry himself admits.

Stimulus May Fail to Revive U.S. Growth Without Recovery in Banking System

As usual, the media and pundits have it backward. Lending is pro-cyclical (as is the health of the banking system in general). The stimulus will help the bank rescue plan to succeed, not the other way around.

Read story here.

Ford, Centex Would Be Winners Under U.S. Senate Stimulus Bill

Tax credits to buy cars, homes. Definitely positive for companies in those industries. Centex is one of the picks of the Mike Norman BizRadio Stimulus Portfolio!

Read story here.

Schwarzenegger sues to furlough more Calif workers

Not sure how the Senate Republicans and other "centrists" in Congress feel that this is good for the economy. They stripped the stimulus bill of virtually all aid to states. California is the 11th largest economy on earth. California should secede, have a short war and get reparations.

Read full story here.

Monday, February 9, 2009

Ed Balls: minister fears rise of fascism amid economic gloom

Severe economic crises have the power to trigger extreme political movements. Ed Balls is Britain's Children and Schools Secretary. In a speech over the weekend he predicted that the economic downturn in Britain--which has become the worst in 100 years--raised the prospect of a return to the Far Right politics of the 1930s and the rise of Facism. (Read article here.)

While perhaps not facing a rise in Fascism, the United States may see other forms of extreme political movements develop. The risk is that Obama's economic recovery plan fails and from that failure a militant brand of "free market fundamentalism" emerges. This could be accompanied by a return to a gold standard, which would bring on economic and social chaos never before seen. The probability of this happening is increased by appeasing centrists and limiting the size of the stimulus.

How to fix the banks and the financial sector

My plan:

a) Eliminate mark-to-market asset pricing for all commercial banks
b) The Fed should lend open-ended, without limit and uncollateralized to all commercial banks as needed
c) FDIC guarantees all deposits, without limit
d) Eliminate all gov't help to non-bank intermediaries and let most fail

Result: Commercial banks resume role as credit conduit between gov't and private sector. Non-bank intermediaries go away along with real economy's dependence on this structure.

Deficit may not get as big as expected with gov't receiving big new income flows

All the worries about $2 trillion budget deficits may be overblown. With the government now receiving big new income flows as a result of buying assets, the deficit may not get anywhere near projections. Taxpayers are making money, in the abstract, but losing income in reality. Sad, very sad, that no one seems to understand this. We continue to hurt ourselves.

Reserve decline may not be Fed's doing

Falling reserve balances (see previous post) may be the result of companies paying back Federal monies and/or interest payments by the private sector to the gov't (reverse flow as govt' usually a net payer of interest). Shrinking reserve balances is a sign of an "income drain" on the private sector all due to this concept of trying to "look out for taxpayers."

Remember, interest paid by gov't is an element of private sector savings. If that is going negative or shrinking because the "gov't is looking out for taxpayers," then the gov't is actually robbing taxpayers of income. This is completely lost on the financial media and most folks in Washington.

Falling reserve balances represent a de-facto tightening of monetary policy. Look at gold today, it's down $26, most likely in reaction to what has been happening. This is a potentially dangerous development for credit markets and the economy unless the gov't moves quickly to restore lost income either via higher spending or tax cuts. If this income drain persists we could see a new and very rapid period of economic deterioration.

Sunday, February 8, 2009

Reserve balances down $200 billion from peak

For all those alarmists like Dick Morris who worry about hyperinflation because the Fed has been "pumping massive liquidity" into the system, they should have a look at reserve balances. In the past month reserves have declined by 25% (over $200 billion), indicating that the Fed is actively working to bring them down. Ongoing Treasury sales will sustain this process.

In addition, President Obama's executive compensation cap may unwittingly add to the contraction in reserve balances as companies that don't want to come under this restriction scramble to pay back government funds. This flow of funds, from the private sector to the Fed will result in downward pressure on reserves. This could complicate monetary policy as the Fed may not want reserves to fall that fast given the weak economy and still-fragile credit markets.

Friday, February 6, 2009

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.

Thursday, February 5, 2009

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.'"


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.

Wednesday, February 4, 2009

$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.

Monday, February 2, 2009

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.