Gov't spending and exports keep Q2 from going into a bigger hole

With the Administration loathe to stimulate consumption with deep tax cuts, the only support to the economy is coming from improving "net exports" and gov't spending in the form of the "automatic stabilizers." (That's transfer payments like unemployment insurance, Medicare, Medicaid, Social Security, etc.)

We can have strongly positive GDP growth if the Administration and Congress took measures to restore people's incomes, like with a big tax cut, but they don't want to because they are afraid of deficits so, we get poorer by the day. But, hey...we got poorer at a slower rate in Q2!

Here are the ugly numbers:

(Q2 vs. Q1, all figures in billions $)
Pers Cons -$33b
Biz Invest -$87b
Net Exports +$47b
Gov't +$35b

Read 'em and weep! (Look at the hit that business investment took!)

There's nothing wrong with our economy, we just choose not to use our capital to create wealth. We're telling the Chinese to do that instead!

U.S. Economy Contracted at 1% Annual Rate in Second Quarter

And we probably would have had a modestly positive quarter were it not for the Administration's paring back of spending in June. Take a look at cumulative net spending in the chart below:



Total receipts in June surpassed total outlays and that sucked demand out of the economy. That's what hurt the stock market in June and that's why we had a negative quarter.

However, look at what is happening in July...strongly positive in net spending. That's why stocks are up and that's why the data is improving. Forget second quarter, stocks will be focusing on the second half and if spending stays elevated, expect the economy to post some positive numbers for the remainder of 2009.

Auto ‘Clunkers’ Offer in Doubt After Going Through $1 Billion

“It is amazing that ‘cash for clunkers’ would be this successful this quickly,” said Stabenow in an e-mailed statement yesterday. “I urge Congress and the administration to provide additional funding.”

What's so amazing about it? When government sustains output, incomes and employment (in the absence of sufficient private sector demand), cars are going to be sold, along with houses, computers, machinery, food and all the other things we need to live or enjoy quality lives.

“This was a very successful program, maybe even too successful,” Senator Charles Schumer, a New York Democrat, said yesterday in a statement. “The program should continue, but perhaps with a tune-up so that we get the most stimulus, conservation and efficiency for the buck.”

Yes, God forbid that, as a nation, we live at our means. It's like Schumer has some guilt complex (along with his colleagues in Congress, the media and most of the American people). It's too successful, so we'd better scale it back and live at a lower standard.

Like Keynes said, the choice is ours: "Live in a constant state of semi-boom, or subsist in a perpetual quasi slump."

Why I think the dollar will rise for a long, long, time....

Here's my new video with a very contrarian forecast on the dollar!

Briefing on the U.S.-China Strategic and Economic Dialogue

David Shear
Director of the Office of China Affairs

Derek Chollet, Deputy Director, Policy Planning, Department of State; Todd Stern, Special Envoy for Climate Change Issues, Department of State; David Loevinger, Senior Coordinator for China, Department of the Treasury

Bureau of Public Affairs

Via Teleconference

Washington, DC

July 27, 2009

Look at what's being said here at the highest levels of U.S./China policymaking. If you don't see that monumental changes are coming--good for China; bad for U.S.--then you are blind!!

"And then there was agreement on both sides that as the economy recovers, and looking past that, it’s very important not only to put in place macroeconomic stimulus, but to put in place structural reforms to rebalance the economy. And on the U.S. side, we talked about how the structure of the U.S. economy has changed, and probably changed fundamentally, how savings are rising, particularly household savings, and the Chinese economy needs to adjust to that and promote homegrown growth, particularly growth that’s led by household consumption." QUESTION: Oh, hi. Thanks. This is for Mr. Loevinger. You mentioned that you had talked with the Chinese about how the U.S. economy is going to change and probably is going to change fundamentally and that they need to adjust their economy. And I’m wondering what their reaction was to that, if they agree or if they have concerns about what the U.S. would like them to do, which obviously would help us as we try to reshape our economy. MR. LOEVINGER: Yeah. I’d say on this point, there was notable agreement that the world has changed and we’re not going back to 2006-2007, and that if China wants to meet its growth targets – and again, we think Chinese growth is good for the U.S., it’s good for U.S. companies, good for U.S. workers – but if China’s going to grow, it’s not going to be able to grow by exporting to the U.S., and as far as we can tell, to the rest of the world. China is going to have to promote more homegrown consumption-led growth. And again, when we went speaker by speaker on the Chinese side, I don’t think anybody disagreed with that assessment. And there was a pretty long discussion about what the Chinese are doing in their fiscal policies, in promoting reform of their state-owned enterprises, in doing some of the same things that we’re doing, like promoting healthcare reform, all with the view to reducing savings and increasing consumption.

We are handing them our wealth and impoverishing ourselves!!!

Save yourself and your family...invest in China because our policymakers are handing them the mantle of economic leadership! They don't even want it...but we are giving it to them!!!

Buy my Special Report on China today! Don't waste another moment. Sign me up now!

The China pundits have it wrong!!

Have you seen the recent headlines on China?

"Simple Math Disproves China's "Staggering" Growth"

"The Chinese government is lying through its teeth"

"Cracks In China Economic Foundation"

"Fears of China Bubble Said to Rise as Funds Surge"

"China Debt Bubble Looming"

These comments display a total lack of understanding about what is happening in China right now and and how its economy is changing...

The China boom is real, it's sustainable and it can make you rich! Read why here.

My Special Report on China will show you exactly what to do to make a fortune going against the pundits!

Loans create reserves!

Got an email from a reader of this blog who sent me the latest Fed study on why banks are holding so much excess reserves. (Get the paper here.)

In this report the economists said this:

"The total level of reserves in the banking system is determined almost entirely by the actions of the central bank and is not affected by private banks’ lending decisions."

They got it backwards and I'll illustrate by using the following example.

A bank enters into a loan not based on its excess reserves, but on whether or not it has a creditworthy borrower and it sees a chance to make a profit.

Let's assume that a bank has only enough to meet its legal reserves. It makes the loan. At that instant it is short reserves. If if does nothing the Fed will automatically credit the bank's reserve account with the required reserves (this functions like an overdraft account). So, the reserves are created from the loan.

However, let's say the bank borrows the needed reserves from the market. If we also assume that other banks are lending, then the borrowing of excess reserves will tend to push up the overnight interest rate to a level above the Fed's target. So, what does the Fed do?? It adds reserves to bring the rate back down to its target.

Therefore, loans create reserves and it is irrelevant whether or not the banking system has $20 billion in excess reserves or $2 trillion. The ability of banks to make loans is independent of that.

Loans create reserves!

Now you know more than the authors!!!

-Mike

U.S. Durable Goods Orders Rise Excluding Cars, Planes

Yes, we're growing again! Buy stocks!!

The data will show a steady stream of improvement, you can mark my words. There are still many skeptics, however, and that gives you a chance to get into stocks when they're still cheap. Buy on dips like yesterday or if we are down today.

Eventually--and perhaps sooner than most people think--we will get job growth coming back. That's when most of the remaining skeptics will throw in the towel (some never will), however, by that time the market will be A LOT higher!!!

Bernanke May Have to Sacrifice Lending Powers or Independence

We are one step closer to the Fed becoming politicized and where Congress is essentially running monetary policy. If this happens the next time there is a financial crisis the carnage will make the latest round look like a Sunday picnic.

In addition, Fed audits--a move pushed by Congressman Ron Paul--is an absolute joke because the Fed is required by law to turn all its profits over to Congress. If the Fed were allowed to hold on to its profits in the form of retained earnings, like any other business can do, it would have the largest capital base of any institution in the world--in the multi trillions.

Ron Paul and the two hundred some-odd lawmakers in the House who are behind this bill simply do not understand this, nor do they understand the potential jeopardy they put the economy into by doing this.

We had one hundred years of panics, bank busts and depressions before we had an independent Fed and that's why Congress created the Fed back in 1913. So unless there is some modern day, JP Morgan and John Rockefeller (both of whom literally acted like a central bank and stopped the Panic of 1907) to come to the aid of the financial system next time around, you'd better get on the phone or shoot an email to
your Congressional representatives and let them know that this is a huge mistake.

Read article here.

By the way...this is one step closer to re-imposing a gold standard. In the event of that, you'd better think about moving to Canada where they don't have these destructive belief systems.

We're growing again!

A good indicator of growth is tax receipts to the Treasury. Average daily tax receipts for July are now above June. We're growing again! Buy stocks!!!

Concerns about government regulations from a blog reader

Earlier I received this email from a reader of this blog:

"Mike, Over the weekend when I first read about Gov limiting the energy trading I felt it was a positive move. I'm now rethinking that it may not be the best option. We're beginning too many Gov controls in the free enterprise system. Your thoughts?"

Here is what I wrote back:

Gov't controls on activities that provide no real value to the economy are not something to worry about. In my opinion we SHOULD be dis-incentivizing this kind of activity. Too much of our economy and national income comes from paper flipping and/or hoarding of assets. In the long-term this is not productive and it sets us up for a situation down the road where we don't have enough of the real assets that we'll need as a society in order to live quality lives and have a high standard of living.

-Mike

To ease price swings, US may limit energy trading

Regulators weigh limits on energy futures trading as price swings hurt industries, consumers

"I believe we're going to do something," Bart Chilton, one of the four CFTC commissioners, said in a recent interview. "I would be extremely surprised if we don't take some action to set hard limits" on energy futures contracts held by speculators, as well as those in metals.

It's about time! Oil, yes...metals...whatever. What about food??

Read article here.

PBOC quietly letting interest rates rise

The People's Bank of China (China's central bank) has been slowing the rate of growth in reserves and this has been putting modest upward pressure on market interest rates. They might be doing this because of sensitivity to comments that they are creating another "bubble," which is not true, however, it just goes to show that China's policy makers are no less influenced by the "ignorati" as those here in the U.S.

Top US officials seek to reassure Chinese

President Barack Obama put forward his top economic officials on Monday to try to reassure China that the U.S. will not let huge budget deficits or runaway inflation jeopardize the value of Chinese investments here.

Here is an embarrassing example of an Administration that doesn't even understand our own monetary system.

The Treasury is not beholden to China for funds. It spends by crediting bank accounts. It is not borrowing money from China and the portion of China's savings that are held in dollars came about as a result of U.S. deficit spending anyway. That's because, by definition, the deficits of the governmental sector equal surpluses (savings) of the non-governmental sectors, both domestic and foreign.

If the government runs a trillion dollar deficit, the non-governmental sector--domestically and in foreign countries--will have some or all of that trillion dollars added to their income/savings, etc. That's just how it works.

In reality, the best thing the U.S. could do is deficit spend to a far greater degree, in order to ensure that economic output and employment rise to their maximum attainable level, given our available resources and capital. Then we could finally say we were living at our means and China would have absolutely nothing to worry about insofar as its investments in the U.S. were concerned.

However, the Administration looks intent on doing just the opposite. By viewing the deficit is a liability only (and not seeing the other side of the balance sheet, where it is an asset to the non-governmental sector), it will seek ways to reduce spending and thus lower demand and employment. This will put Chinese investments at even greater risk.

What irony!

The very policies the Administration believes will protect China's interests will actually harm them and the very same policies will harm Americans as well.

By acquiescing to China's demands, complaints, whatever, Obama is telling Americans that they must suffer...that they must endure longer periods of sustained, high unemployment and a weak economy, for no good reason.

Simply because he and his advisers do not understand our monetary system.

And the best irony of all is that China itself is deficit spending like mad right now to stimuluate its own economy...and it's working marvelously!!

June new home sales rise 11 percent. I told you last week!!!

Please see my blog post of last Thursday! It predicted this. My report contains 11 of the top building stocks you should own NOW to participate in what could be a housing shortage of a magnitude never seen before.

Get the report.

More evidence of how Wall Street runs our country

As if we needed more...right??

The European Union's efforts to push through tough, new, reform of hedge funds is running into opposition from...the U.S. Government!

This is truly amazing.

Here is Obama, who got elected on the promise to help "workers and the middle class." Yet his Administration is quietly lobbying the Europeans to ease up on their proposed, new, hedge fund rules.

"On Monday the Wall Street Journal reported that the United States is quietly lobbying Europe to change the terms of the directive.

As unemployemtn soars toward 10%, the most liberal Democratic president elected since Lyndon Johnson, labors intensely to protect the interest of the finance capitalist plutocracy.

The stupidity of this comment: "Bond market facing huge supply."

Week after week after week, you hear these TV commentators or other "know-nothing" economists and analysts talk about the "huge supply" of new Treauries that is coming and how that is going to cause interest rates to spike up.

One quick glance at the Treasury's Daily Statement will show you that so far this fiscal year...the Treasury has sold

$7.4 Trillion

of securities and interest rates are

Zero!

We're talking nine months, here, and nearly $8 trillion worth of sales and rates have done nothing but go down. And by the way...that's on top of the

$5.6 trillion they sold last year!

And...you guessed it...rates

have come down!!

When will these ninnies wake up???

The money to buy Treasuries comes from government spending itself and the monetary operations of the Fed! The added reserve balances that come about as a result of government spending or the Fed buying securities (to reduce interest rates) are merely swapped for an interest bearing account of the U.S. Government known as a Treasury. And the government pays interest on those Treasuries the same way it pays for everything else...by crediting bank accounts.

Please pass this along!

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Another completely out-of-paradigm article on China/U.S.

Vitaly Katsenelson is a nice guy, but clueless when it comes to the global monetary system. A blog reader emailed me this article he wrote. My comments appear in italics under his.

> Financial commentators are obsessively debating whether the recent rise in the Chinese stock market means there’s a bubble — and if so, when it’s going to burst. My take? Who cares! What happens to the broader Chinese economy is what we should really be watching. It will have a far-reaching impact on the rest of the world — much more far-reaching than a decline in stocks.

Yes, because the Chinese economy has now become the world's engine of growth!

> Despite everything, the Chinese economy has shown incredible resilience recently. Although its biggest customers — the United States and Europe — are struggling (to say the least) and its exports are down more than 20 percent, China is still spitting out economic growth numbers as if there weren’t a worry in the world. The most recent estimate put annual growth at nearly 8 percent.
> Is the Chinese economy operating in a different economic reality? Will it continue to grow, no matter what the global economy is doing?

Yes, China's economy is growing strongly because the government has undertaken a huge spending stimulus and it mandates banks to lend. In that regard they are doing something different. We passed a spending stimulus, but it was far lower in proportion to GDP than the Chinese stimulus and it was mostly very, modest tax cuts and not spending on goods and services. We are relying more heavily on monetary policy, which can do nothing to jumpstart aggregate demand.

> The answer to both questions is no. China’s fortunes over the past decade are reminiscent of Lucent Technologies in the 1990s. Lucent sold computer equipment to dot-coms. At first, its growth was natural, the result of selling goods to traditional, cash-generating companies. After opportunities with cash-generating customers dried out, it moved to start-ups — and its growth became slightly artificial. These dot-coms were able to buy Lucent’s equipment only by raising money through private equity and equity markets, since their business models didn’t factor in the necessity of cash-flow generation.

This is a laughable comparison and highlights the author's complete lack of understanding of the global monetary system.

> Funds to buy Lucent’s equipment quickly dried up, and its growth should have decelerated or declined. Instead, Lucent offered its own financing to dot-coms by borrowing and lending money on the cheap to finance the purchase of its own equipment. This worked well enough, until it came time to pay back the loans.

The U.S. is not a company and can spend any amount it wants if it spends in its own currency. Lucent's customers did not have the ability to merely credit bank accounts. They, like ever other non-currency-issuing entity, had to have money to pay for Lucent's products.

> The United States, of course, isn’t a dot-com. But a great portion of its growth came from borrowing Chinese money to buy Chinese goods, which means that Chinese growth was dependent on that very same borrowing.

Well, at least he realizes the United Sates isn't a dot-com. Phew!

"It's growth came from borrowing Chinese money..." Oh, really??? So in other words U.S. consumers borrowed Chinese yuan to buy houses, cars and go on vacation trips???

> Now the United States and the rest of the world is retrenching, corporations are slashing their spending, and consumers are closing their pocket books. This means that the consumption of Chinese goods is on the decline. And this is where the dot-com analogy breaks down. Unlike Lucent, China has nuclear weapons. It can print money at will and can simply order its banks to lend. It is a communist command economy, after all. Lucent is now a $2 stock. China won’t go down that easily.

Yes, they understand a market economy and like it very much when it works, but when it doesn't work they have no problem with using fiscal policy to sustain their output and employment. They are not hindered by false beliefs and paradigms.

> The Chinese central bank has a significant advantage over the U.S. Federal Reserve. Chairman Ben Bernanke and his cohort may print a lot of money (and they did), but there’s almost nothing they can do to speed the velocity of money. They simply cannot force banks to lend without nationalizing them (and only the government-sponsored enterprises have been nationalized). They also cannot force corporations and consumers to spend. Since China isn’t a democracy, it doesn’t suffer from these problems.

Yes, the Chinese central bank has an advantage because it does not get hounded by know-nothing lawmakers in Congress and clueless journalists and commentators. Other than that, all central banks in nations that issue non-converitble currency have the same power.

> China’s communist government owns a large part of the money-creation and money-spending apparatus. Money supply therefore shot up 28.5 percent in June. Since it controls the banks, it can force them to lend, which it has also done.

So does the U.S. government. And it can get the banks to lend if it understood that lending is "pro-cyclical" and, therefore, dependent on a decent economy where people have jobs. If the government provided jobs and sustained aggregate demand, the banks would be lending like crazy.

> Finally, China can force government-owned corporate entities to borrow and spend, and spend quickly itself. This isn’t some slow-moving, touchy-feely democracy. If the Chinese government decides to build a highway, it simply draws a straight line on the map. Any obstacle — like a hospital, a school, or a Politburo member’s house — can become a casualty of the greater good. (Okay — maybe not the Politburo member’s house).

The Federal Government can provide jobs and/or sustain demand in order to ensure that our output and employment are maximized, which by definition means we would be creating the maximum amount of wealth and highest standard of living possible given our resources and capital (both physical and human), but it doesn't because of labels like "Socialist." The Chinese aren't worried about being called, Socialist.

> Although China can’t control consumer spending, the consumer is a comparatively small part of its economy. Plus, currency control diminishes the consumer’s buying power. All of this makes the United States’ TARP plans look like child’s play. If China wants to stimulate the economy, it does so — and fast. That’s why the country is producing such robust economic numbers.

The Chinese absolutely can at least influence spending by consumers. The chinese government can pay more in salaries to government workers and it can spend more on social supports so that Chinese consumers don't need to save as much for those things (like retirement, health care, etc.). That's the way it is moving. China is rapidly transforming into a consumption-based economy and they will overtake the U.S. in economic size and clout.

> Why is China doing this? It doesn’t have the kind of social safety net one sees in the developed world, so it needs to keep its economy going at any cost. Millions of people have migrated to its cities, and now they’re hungry and unemployed. People without food or work tend to riot. To keep that from happening, the government is more than willing to artificially stimulate the economy, in the hopes of buying time until the global system stabilizes. It’s literally forcing banks to lend — which will create a huge pile of horrible loans on top of the ones they’ve originated over the last decade.

China had a heavy reliance on exports to the U.S. and its domestic investment was geared toward building the infrastructure for that to happen. However, China just had an abrupt awakening and now realizes that U.S. policy is moving away from that symbiotic relationship, so China is taking the bull by the horns and transforming its economy by way of social spending and investment. This will have a far longer-lasting and more profound effect on China's wealth as a nation and the standard of living of their people. They will surpass the U.S. pretty quickly now. WE are handing it to them.

> But don’t confuse fast growth with sustainable growth. Much of China’s growth over the past decade has come from lending to the United States. The country suffers from real overcapacity. And now growth comes from borrowing — and hundreds of billion-dollar decisions made on the fly don’t inspire a lot of confidence. For example, a nearly completed, 13-story building in Shanghai collapsed in June due to the poor quality of its construction.

Lending to the United States? Lending what...yuan? He doesn't see that the Chinese were merely exchanging non-convertible U.S. dollars--which they accumulated by exporting us real goods and services--for interest bearing U.S. Treasuries. They weren't "lending" us anything.

Their growth now comes from government deficit spending, as it did for most of the history of the United States. A building collapsed, so what? We have accidents here all the time. Remember that bridge that collapsed in Minneapolis a few years ago???

> This growth will result in a huge pile of bad debt — as forced lending is bad lending. The list of negative consequences is very long, but the bottom line is simple: There is no miracle in the Chinese miracle growth, and China will pay a price. The only question is when and how much.

If the debt (which is modern money), leads to growth (which is output, income and employment), then how is it bad debt? For every debt there is a credit; for every liability there is an asset; for every borrower there is a saver. That is called double-entry accounting...something the world has been using for 500 years. I guess Vitaly likes to live in the Dark Ages, still.

> Another casualty of what’s taking place in China is the U.S. interest rate. China sold goods to the United States and received dollars in exchange. If China were to follow the natural order of things, it would have converted those dollars to renminbi (that is, sell dollars and buy renminbi). The dollar would have declined and renminbi would have risen. But this would have made Chinese goods more expensive in dollars — making Chinese products less price-competitive. China would have exported less, and its economy would have grown at a much slower rate.

Yes, China engaged in currency manipulation to sustain comparative advantage. That occurred to the detriment of its own citizens. The Chinese gov't was perfectly happy doing this and Americans got valuable finished goods, cheap. But now WE are telling the Chinese to stop doing this and to sell OUR currency instead. They will achieve better real terms of trade and we will lose out.

> But China chose a different route. Instead of exchanging dollars back into renminbi and thus driving the dollar down and the renminbi up — the natural order of things — China parked its money in the dollar by buying Treasuries. It artificially propped up the dollar. And now, China is sitting on 2.2 trillion of them.

Yes, China had a desire to "net save" in U.S. dollars. That's why they built stuff and sold it to us. We got the stuff and they got a non-convertible currency, which is what they wanted. Then they merely exchanged the currency for interest-bearing accounts known as Treasuries. If China no longer desires to "net save" in dollars the U.S. would need to supply less dollars to them and the world's financial system would have a reduced "float" of dollars in circulation. How would that be bearish??

> Now, China needs to stimulate its economy. It’s facing a very delicate situation indeed: It needs the money internally to finance its continued growth. However, if it were to sell dollar-denominated treasuries, several bad things would happen. Its currency would skyrocket — meaning the loss of its competitive low-cost-producer edge. Or, U.S. interest rates would go up dramatically — not good for its biggest customer, and therefore not good for China.

China spends domestically by crediting bank accounts in its own currency. It doesn't "need" money...what money? Somebody else's money?? Where is this guy getting this stuff?? He is still on a gold standard.

The level of U.S. interest rates is set by the Fed...not the Chinese. If the Fed wants interest rates down it merely raises the level of reserves in the banking system and it has unlimited ability to do that because reserves are merely electronic credits. China doesn't have to buy another Treasury--EVER--and it would have ABSOLUTELY NO BEARING ON U.S. INTEREST RATES!!!

> This is why China is desperately trying to figure out how to withdraw its funds from the dollar without driving it down — not an easy feat.

It's very simple...exchange dollars for goods and services produced in the U.S. is how China "gets rid" of its dollars. Then the U.S. trade deficit turns into a trade surplus with China and China's trade surplus turns into a trade deficit with us. In other words...the Chinese people get richer while Americans get poorer. That's already what is happening. Simple...but not good for us!

> And the U.S. government isn’t helping: It’s printing money and issuing Treasuries at a fast clip, and needs somebody to keep buying them. If China reduces or halts its buying, the United States may be looking at high interest rates, with or without inflation. (The latter scenario is most worrying.)

Again...the government spends by crediting bank accounts. Sheesh...this guy is so confused!! This fiscal year alone the government has "spent" a trillion $ more than it has taken in, and interest rates are at zero!!! Vitaly....Hello!!!!

> All in all, this spells trouble — a big, big Chinese bubble. Identifying such bubbles is a lot easier than timing their collapse. But as we’ve recently learned, you can defy the laws of financial gravity for only so long. Put simply, mean reversion is a bitch. And the longer excesses persist, the harder the financial gravity will bring China’s economy back to Earth.

This is exactly why I AM LONG CHINA. I AM TAKING EASY MONEY FROM GUYS LIKE HIM OR PEOPLE WHO FOLLOW HIM. The only thing to worry about is whether China, unilaterally, puts and end to its stimulus and it could, because Chinese polcymakers are getting sensitive about criticism to its stimulus policies because of guys like him.

I will be on "Cashin' In" on the Fox News Channel Saturday (7/25) at 11:30am ET

Please try to watch this and send your email comments in support.

You'll hear...

Tracy Byrnes say, "Government can't spend all it wants...it's tapped out."
Jonathan Hoenig say, "Cut jobs to save money and that will repair the economy."
John Layfield and Wayne Rogers say, "There are no productive jobs that the government can pay for."

Thanks. We've got to try to get Fox "in paradigm!"

Here's what happens when you operate under an inapplicable paradigm

In September, the American Bankers Association reported that 27% of the nation's 8500 banks held preferred shares in Fannie and Freddie in their investment portfolios; 85% of the affected institutions were community banks, estimated to hold between $10 billion and $20 billion of the GSEs preferred shares.

Citing Midwest Banc Holdings as an example, Lemonides says many community banks "went from being healthy and well capitalized to the brink of insolvency -- not because the loan portfolios went bad but because they owned that preferred stock."

Last year when the government bailed out Fannie Mae and Freddie Mac they also wiped out shareholders. Many of the common shareholders were commercial banks and those preferred shares were part of their capital.

This wiping out of shareholders occurred because of a false belief that any financial help to these agencies put "taxpayers on the hook." There is simply no such "hook."

Under a floating FX/non-convertible currency system, where the government spends by crediting bank accounts, there is no such thing as "taxpayer on the hook." However, our policymakers behave as if it is true, which is somewhat equivalent to behaving as if we are on a gold standard.

So when Fannie and Freddie got that money it was deemed that "someone had to pay" so as to not put taxpayers on the hook.

In the end many banks paid and the cost was huge...it touched off a full-blown banking crisis as a result of wiping out much of the capital of hundeds, if not thousands of banks around the country.

Dumb! Dumb! DUMB!!

China: Time to take some profits?

China's central bank appears to be gradually nudging rates back up in reaction to criticism about excessive lending growth.

“The central bank is using the gradual increase in yields to alert the market to prepare for a tighter policy in the future,” said Liu Jianyan, a fixed-income analyst at First Capital Securities Co. in Shenzhen. “But there won’t be a drastic reversal of previous loose monetary policy.”

Take some profits off the table on strength and look to get back in on a pullback.

Fed bought another $48 billion of Mortgage-Backed Securities in the latest week

Total MBS held now is $537 billion and their goal is to buy up to $1.25 trillion by the end of the year. In the past month the Fed has bought $70 billion of MBS and the 30-year mortgage rate has come down 120 basis points. (Anyone sitll think the Fed doesn't set rates??)

If they meet their target mortgage rates will be a lot lower than where they are today--a lot lower! Think about it...they bought $70 billion MBS and the rate came down by over a percent. What if they bought 10 times that amount!!!

The key question is...whether or not they will actually go ahead with their full, stated, goal. So far they have repeated several times that they were going to do it. We must take them at their word until we hear otherwise.

Here is the Fed's weekly statement.

McD's COO on last year's Q2 Fiscal Stimulus

The AP is reporting some details of McDonald's 2Q operating results tonight: Read article here.

"...Chief Operating Officer Ralph Alvarez said on a conference call with investors that June may have been a difficult month for fast-food operators because chains benefited last year from stimulus checks and a better economy. "We know we had benefit last year from the incentives checks that went out from the government," he said on the call. "And back then, you know, people weren't in saving mode..."

In an equivalent way, the U.S. economy could immediately benefit broadly from a similar tax refund this year. Fiscal policy-makers, please take note.

Are Homebuilders Poised For An Enormous Rally?

Are Homebuilder Stocks Poised For An Enormous Rally? Read why the United Sates may be facing "The Mother of All Housing Shortages" ...Enormous opportunity and the facts are irrefutable! In my latest report I talk about why... ...New housing starts are at critically low levels  ...Demographic trends shaping up to create huge and sustained demand for housing  ...Why no one sees this happening right now  ...How you can profit from this mega trend!  Continue reading...

Another excellent post from UMKC economists

I said it before and I'll say it again...University of Missouri Kansas City has one of the best economics departments in the country. These professors (and even some of the students) routinely give a "schooling" to policy wonks and other academics. They are one of the few university level economic departments in this country that are "in paradigm."

Here is an excerpt below from an excellent post that appeared today...

"...Bernanke pointed out that “as the economy recovers, banks should find more opportunities to lend out their reserves.” The reasoning behind this argument is the so-called multiple deposit creation in which the simple deposit multiplier relates an increase in reserves to an increase in deposits (Bill Mitchell explains it in more details here and here). This is a misconception about banking lending."

:...in the real world, money is endogenously created. Banks do not passively await funds to issue loans. Banks extend loans to creditworthy borrowers to meet the needs of trade. In this process, loans create deposits and deposits create reserves."

Read entire post.

It pays to be an optimist!

The Depression dragged on, lives were ruined and poverty spread all over the land. We have all seen pictures of the soup lines and the myriad dispossessed. If one were to graph what the economy looked like during the Great Depression, including the decade or so leading up to it, it would look like this...



That is a chart of real GDP per capita, which is the same as saying national income per capita. Not a pretty sight, to be sure.

However, if there is one lesson to be learned from the Depression it is this...eventually it went away...it ended...and when it ended the nation resumed its upward path of growth and prosperity.

The chart I gave you above shows you a very limited amount of time and that time, without question, was nasty and brutal.

However...with some perspective we can take a different view of the Great Depression.

Take a look at the chart below. It is a chart of the per capita GDP of the United States since 1790...



Quite a different picture! (Can you find the Great Depression??) Look at the recovery at the end of the 1930s and beyond. Viscious up move!!!

There's a very good lesson here...it pays to be an optimist!

U.S. Stock Futures Advance on Earnings; EBay, Ford, AT&T Climb

Earnings are coming in far better than forecast for most companies in the S&P. This suggests the market is very undervalued.

The current, p/e (using Professor Robert Schiller's data from Yale University. Get his p/e ratios here) is 16.35, which, given the level of the S&P of 954, indicates earnings of $58 per share.

However, earnings have been beating by around 20%, which means this quarter's earnings may be more like $70 per share. Assuming the p/e stays stable at 16.35 we should see at least 1144 on the S&P Index.

However, if we get multiple expansion and rise to a p/e of 19.5 (which I believe is totally accomplishable), that would put the S&P target at 1365, or about 43% higher.

Dow 15,000, Here We Come: Stocks Going to New Highs, Analyst Says

Charles Lemonides, chief investment officer with ValueWorks, says there's plenty of upside left, thanks to improving fundamentals.

"You'll see the market retrace its old high which means I think that over a couple of years you'll see 15,000 on the Dow."

I agree with him...as long as the Administration doesn't commit economic suicide by imposing all sorts of fiscal drag (cutting spending, raising taxes, reducing the deficit).

Even so...enough savings have been pumped into the private sector as a result of deficit spending that even modest efforts to move back toward "fiscal responsibility," shouldn't have that detrimaental an effect. But we first need to see job growth resume.

Obama Open to Bank Fees for Risks

Obama, at a White House news conference last night, said the U.S. may need a mechanism similar to the Federal Deposit Insurance Corp. for firms that engage in “some of these other far-out transactions” that put the financial system at risk.

“So if you guys want to do them, then you’ve got to put something into the kitty make sure that if you screw up, it’s not taxpayer dollars that have to pay for it, but it’s dollars coming out of your profits,” he said.

Isn't this just a very convoluted way of limiting the use of these instruments by essentially imposing a "tax" on firms that want to use these things?

Why not just regulate them or, better yet, re-impose Glass Steagall and don't let banks do these things at all. Non-banks who do them and blow themselves up don't get taxpayer support.

Clean and simple solution.

The Obama Administration is so loath to do away with the current financial system that it will do anything to sustain it even with these "Rube Goldberg" type measures.

In 2008 Volker said that intermediation did little for the real economy over the past 30 years, except increase risk substantially.

(By the way, I've been saying that, too!)

Are Homebuilder Stocks Poised For An Enormous Rally?

Are Homebuilder Stocks Poised For An Enormous Rally? Read why the United Sates may be facing "The Mother of All Housing Shortages" ...Enormous opportunity and the facts are irrefutable! In my latest report I talk about why... ...New housing starts are at critically low levels  ...Demographic trends shaping up to create huge and sustained demand for housing  ...Why no one sees this happening right now  ...How you can profit from this mega trend!  Continue reading...

Here's what Congressman Alan Grayson should ask...

It's good that someone in Congress finally is asking Bernanke about the swap lines. (See prior post and video.)

However, Congressman Grayson should ask if any of the money went to foreign automakers. While we were forcing our guys into bankruptcy here, it is quite possible that Toyota, Honda, Citroen-Peugeot, Renault, Fiat, Daimler, Volkswagon and others were getting "loans" from the Fed.

I wrote about it on this blog many times last year.

Read here, here and here.

The Congressman must have been listening to my radio show and reading this blog!

Check out this unbelievable exchange between Congressman Grayson of Florida and Bernanke. It's exactly what I have been talking about for eight months!

Gov't still helped in the rescue of CIT

A lot is being made of how the "private sector" saved financial giant CIT, causing people to question whether the bailouts were necessary at all.

Well...uh...YES!

Where did the private firms find the capital to save CIT?

The answer to the question is simple, it came from record pool of personal savings, put there by deficit spending. (Read how this works, here and watch me explain how it works here.)

Remeber the identity:

I = S

Which means that for every level of investment there is the equal level of savings (and vice versa).

Without the record level of savings supplied by deficit spending, there would not have been enough capital most likely for private investors to take a chance on saving CIT.

Had the government not deficit spent in the amount that it did and we were still dealing with a paltry--or even negative--private savings rate...no private firms would have had the ability to invest in anything.

Summers Urges Banks to Lend More, Says Growth Pace ‘in Doubt’

Larry Summers is supposed to be this "brilliant genius," but I guess he's too smart to understand simple, common sense things like the fact that banks are businesses and need a decent economy where people have jobs, hello!, in order to make loans.

If Summers wants to force banks to make loans then he should recommend nationalization of the banks. Then the government could lend money to whomever it wants, in any quantity, under the guise of it being done through "banks."

That's basically what happens in China and guess what...lending is blowing through the roof.

Summers already believes that the U.S. must become and export nation to grow the economy and "compete" with China, so he might as well go all the way and use the same banking model--nationalized banks.

Bernanke tells Congress Fed has "exit strategy"

Exit strategy?

Someone ought to tell Bernanke that the Fed's only policy tool--indeed, its only function, really--is the setting of interest rates. That's all it does, so any "exit strategy" ostensibly involves raising interesrt rates? I guess that's what Bernanke means.

It just so happens that's what the Fed did from 2005 until 2007, and it caused the real estate market to collapse and it made financing costs far too expensive for companies to continue hiring. In other words, it touched off the downturn.

Why did the Fed raise interest rates?

Because it thought it could "fix" an oil shortage that was driven by strong global demand, tight supply and speculators. (Congress had ther power to deal with the latter, but chose not to.)

So between the Fed wanting to be Johnny on the Spot with higher interest rates as soon as it is feasible and with the Administration planning its own, "exit strategy" (applying fiscal drag--taxes, spending cuts, etc--to bring the deficit down), this recovery has a very shelf life it would appear.

The best thing the Fed and Administration could do would be to use all their tools--monetary and fiscal--to ensure that the economy was running at full output and employment. There's no reason for inflation if we are producing all the goods and services that households and businesses need. And we'd achieve the highest level of prosperity that we could achieve given the physical and humand capital and natural resources of the country.

Instead they're worried about an exit strategy.

"The only bridge to nowhere is the one that you start building and stop halfway across the span." -Mike Norman

I will be on "Cavuto" tonight on Fox Business

Hit time is 6:40pm. Tune in if you can.

Huge gains again in China and Hong Kong today

Mainland China and Hong Kong continue to lead the way for global equities thanks to China's continued stimulus and government spending. I called this rise back in a blog post in March (read here).

Net spending slows again, suggesting rally could be in trouble

Some of the market averages have rallied to recent highs in reaction to ramped-up net spending (Treasury outlays minus Treasury receipts) through the 14th of July. (See chart below.)



However, there is a sharp pullback in net spending underway now and that will likely translate into a renewed market downturn. (See below.)



The Administration seems wary of continued "pump priming." Each time they see the deficit expanding they pull back, however, without job growth or renewed lending (neither of which are happening), government spending is the only way to support aggregate demand. They don't seem to understand that.

As a trader, I would be a seller of stocks here.

Our savings didn't come from saving

Here's my latest video.

China’s Rebound Carries U.S., Asia Toward Recovery

Yes! Exactly as I have been saying for months, now!!!

China is the new, global economic engine and that's because a belief system in the U.S. is driving policy in a direction that is handing China our economic leadership and prosperity.

It's all in my Special Report on China for $39.95 along with top stock recommendations! Don't wait...buy today and get my US Fiscal Update for free!

June housing construction rises, building permits soar

The Commerce Department said Friday that construction of new homes and apartments jumped 3.6 percent last month to a seasonally adjusted annual rate of 582,000 units, from an upwardly revised rate of 562,000 in May.

Housing starts are still WAY too low and homebuilder stocks are incredibly cheap!!!

The S&P homebuilder SPDR (XHB) is up 25% since my March 17th blog post advising buying homebuilder stocks.

These stocks have recently had a correction. You can still buy them on the cheap. Do it!!!

Accelerating tax revenues to Treasury indicates growth picking up

The chart below is very instructive. It shows the percentage increase in daily tax revenues to the Treasury (measured against the first day of the month).



July's revenue flow has been above that of June. This is a sign that things are improving.

With corporate profits coming in above expectations expect higher receipts to flo into the Treasury. This will have the added impact of shrinking the deficit. That is something we don't want to see happen, but it is going to happen.

Even so, the important thing now is that it looks as if all the pump priming by the government and the impact of automatic stabilizers, is starting to work. The private economy is, perhaps, beginning to grow again and if so, it will be self-sustaining at least until fiscal drag from a declining deficit reaches a level where further growth cannot be sustained.

But with personal savings at record (nominal) levels, household balance sheets markedly improved over 2007 and no prospect of higher interest rates anywhere in sight, this rebound can go on for quite some time.

China Debt Auction Demand Falls Short for Third Time

I saw this article on Bloomberg.com and what was curious about it was that there was at least some partial understanding of the dynamics behind why this auction "failed."

“The central bank has apparently started to fine-tune its previously loose monetary policy,” said Dong Dezhi, a Shanghai- based bond analyst with Bank of China Ltd., the country’s third- largest lender. “With higher bill rates it can drain money from banks to curb new loans.”

While China's central bank has not officially increased rates, it apparently has been draining reserves and that's the reason for the weak bill demand. (See chart below.)



Yet this is never the explanation when something of this nature happens in the U.S. When it happens here it is because we are broke.

Yet, apparently, even with its vast hoard of savings China can have failed bill auctions too! Somewhat left out of the analysis, however, was the fact that the only determinant as to whether or not auctions "succeed" or "fail," in China, the U.S. or any other nation that spends in its own currency, is entirely up to the policies of the central bank.

As an aside, this will be the first real test of China's rebound. Rising interest rates in and of themselves cannot kill an economic rebound if demand remains strong. As long as the government continues to spend to sustain demand and with Chinese household savings back at very high levels, this fine tuning of reserves, meant to nudge rates up a bit, should have little more than a fleeting effect on the Chinese market.

Stay tuned...

Fed bought $27 billion of mortgage-backed securities in the week ending Jul 16

That's why mortgage rates fell. Still think the market sets rates??

Here's the link.

Fed causes mortgage rates to fall again

Back on Monday I opined in a blog post that anyone who was in the market for a mortgage should wait because rates are likely to come down.

Well, rates have come down!

The average rate for 30-year fixed mortgages was 5.14 percent this week, down from 5.2 percent last week. Last year at this time, the average rate for a 30-year mortgage averaged 6.26 percent, Freddie Mac said. Falling mortgage rates can spur refinance activity, which increased as rates on 30-year mortgages fell to a record low of 4.78 percent in April.

My forecast was based on the fact that the Fed still had over $800 billion in mortgage-backed securities to buy in order to meet its $1.25 trillion purchase target by the end of the year.

An astute reader of this blog added the following comment that day:

"Mike I have to agree with your call for a near term MBS/Treasury rally (and corresponding better rates)..." "I would not want to be short MBS or treasurys with $200B of new reserves backed-up and ready to flood in any week now."

The Fed added reserves, rates fell. Nothing incredible. What's incredible is that people still think the market sets rates.

By the way...we'll be getting the latest reading on the Fed's weekly acitivity this afternoon at 4:30pm ET. I'll make sure to post it or send me an email and I will email my analysis to you.

Peer-to-Peer Loans Offer Investors 12% Return to Bypass Banks

Here's what happens when you sustain the financial sector in its present, largely unregulated form. Now it may be a good thing for consumers, however, down the road it sets up the same kind of potential meltdown--where many of these so-called, "peer-to-peer" loans go bad, ushering in a new period of failures and bankruptcies.

Read here.

If policymakers understood that the banking system is a construct of the government and can easily fulfill the role of providing credit to the private economy, in any quantity, under a regulated structure, we wouldn't have the need for such high-risk types of finance.

China’s Economic Growth Accelerates to 7.9% on Loans

Loans are surging!



I've said this many times, but it should be no surprise at all. China is not hampered by faulty belief systems such as, "Taxpayer on the hook," or erroneous notions about debt and deficits. Government stimulus is providing a significant boost to aggregate demand and the banks are responding by lending aggressively. This would be the way to fix the U.S. economy (which slowly appears to be on the mend), however, we have it all backwards.

Policies in both China and the United States are rapidly moving in the direction of handing China economic supremacy. My Special Report on China explains why this trend will not be reversed. In addition, the report gives you four top China stock picks that over the past month, have outperformed all U.S. stock averages plus gold and oil! If you buy today you get a free, added bonus of my U.S. Fiscal Update, which takes an historical look at debt and deficit trends and puts it all into context and perspecitve.

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Krugman article: Deficits saved the world!

Warren Mosler just emailed this Krugman piece to me and he attached a simple, one-word message: Progress!

I agree with Warren!!

This is an excellent article and I am posting it in its entirety. If you want to go read it at the NY Times website here is the link.

July 15, 2009, 8:54 am Deficits saved the world Jan Hatzius of Goldman Sachs has a new note (no link) responding to claims that government support for the economy is postponing the necessary adjustment. He doesn’t think much of that argument; neither do I. But one passage in particular caught my eye: The private sector financial balance—defined as the difference between private saving and private investment, or equivalently between private income and private spending—has risen from -3.6% of GDP in the 2006Q3 to +5.6% in 2009Q1. This 8.2% of GDP adjustment is already by far the biggest in postwar history and is in fact bigger than the increase seen in the early 1930s. That’s an interesting way to think about what has happened — and it also suggests a startling conclusion: namely, government deficits, mainly the result of automatic stabilizers rather than discretionary policy, are the only thing that has saved us from a second Great Depression. The following figure makes the argument: Here I show the private sector surplus and the public sector deficit, both as functions of GDP; the private sector line is upward-sloping because higher GDP means higher income and more savings, the public-sector line is downward-sloping because higher GDP means higher revenues. In equilibrium the private surplus equals the government deficit (not strictly true for any one country if you add in international capital flows, but think of this as a picture for the world economy). To make the figure cleaner I’ve shown an initial position of balance in both sectors, but this isn’t important. What we’ve had is a sharp increase in the desired private surplus at any given level of GDP, due to a combination of higher personal saving and reduced investment demand. This is shown as an upward shift in the private-surplus curve. In the 1930s the public sector was very small. As a result, GDP basically had to shrink enough to keep the private-sector surplus equal to zero; hence the fall in GDP labeled “Great Depression”. This time around, the fall in GDP didn’t have to be as large, because falling GDP led to rising deficits, which absorbed some of the rise in the private surplus. Hence the smaller fall in GDP labeled “Great Recession.” What Hatzius is saying is that the initial shock — the surge in desired private surplus — was if anything larger this time than it was in the 1930s. This says that absent the absorbing role of budget deficits, we would have had a full Great Depression experience. What we’re actually having is awful, but not that awful — and it’s all because of the rise in deficits. Deficits, in other words, saved the world.

UMKC Economics is an excellent resource!

University of Missouri Kansas City has one of the few in-paradigm economics departments in the country. Their blog is excellent. I strongly advise you to bookmark it and go there often for great articles.

http://neweconomicperspectives.blogspot.com/

You can also become their "friend" by going to my Facebook page http://www.facebook.com/home.php#/mikeydoggy?ref=name. And if you're not already my friend, please send me a friend request.

I like Bob McTeer, but he has this one wrong!

I like former Dallas Fed President Bob McTeer and have always considered him an economist who was "in-paradigm," however, I have to admit that the recent posts on his blog have me worried about where he stands. Take a look at this one:

"A substantial increase in the personal saving rate was announced last Friday to much fanfare. I hate to be a killjoy, but it was all an illusion. The national saving rate is composed of the personal saving rate, the business saving rate, and the government saving rate. The personal saving rate is disposable income minus consumption; government saving is equal to its budget surplus. A budget deficit represents negative saving by the government. What happened in May was that the government increased its budget deficit (increased negative saving), borrowed the money, and paid it to individuals as part of the stimulus package. Since individuals saved less than 100 percent of their higher income, they added less to saving than the government subtracted from it..."

Let's go with that last paragraph where he says, "What happened in May was that the government borrowed money and paid it to individuals..."

Assume for a second that the sequence that he lays out is correct--that the government must first go out and borrow money and then use that money for spending.

Of course we know that this is not correct for we are not on a gold standard or fixed exchange rate and we also know that the government is spending all the time and it spends first, by crediting bank accounts electronically, then sells securities later only to manage the level of reserves in the system. That sustains a desired interest rate. The sale of securities, therefore, is not borrowing per se. (McTeer knows this.)

As far as tax collection is concerned, it functions to impart value to the currency and to manage the level of aggregate demand. Moreover, since we pay taxes in the government's own money (coin, cash or bank reserves), that money must first be spent into existence by the government before we can even pay the taxes. (Think of it like in the game of Monopoly, when we pay tax after landing on "Community Chest" we are merely giving back some of the money that has already distributed by the game.)

However, let's assume for the sake of argument that McTeer is correct when he says the government must first go out and borrow money from someone in order to spend it.

A simple balance sheet analysis shows how Mr. McTeer's analysis is very misleading.

Assume the government has assets of zero and liabilities of zero and assume the public has assets of $1,000 in cash and liabilities are zero (net worth of $1000 or to balance out the right side of the balance sheet, liabilites plus net worth). National net worth (gov't plus the public) is $1,000.

Let's assume now, that the government needs $500 for a stimulus package, so it sells a bond in the amount of $500 to "raise the money."

The private sector parts with $500 in cash to buy the bond. The reserve account of the bank where the public had its money is debited $500 and the government's account at the Fed is credited $500. The government now has an asset of $500 and a liability of $500 (the bond). Its net worth did not change.

The public now has $500 less cash, but it has a bond in the amount of $500, which is an asset, so the public's net worth has not changed either, its asset mixed has just changed. National net worth is still $1,000. (I am leaving out the payment of interest for the sake of simplicity.)

Now watch what happens when the government spends the money. Let's say it spends the $500 on a tax rebate or unemployment insurance payments or infrastructure investment or spending for college tuition or all of the above.

When the government makes that payment, private sector reserve balances are credited $500 and the government's account at the Fed is debited $500. The government once again has a cash balance of zero, but not zero assets. That's because you need to count the new infrastructure or added output of the workers that the government paid or the higher education level of the citizenry because those are all part of the assets of the government and the assets of the nation. These things may be somewhat harder to value because they are often intangible, but let's assume they should be worth at least as much as what the government paid for them. So for the sake of simplicity we can say that the government now has a liability of $500 (the bond) and assets worth at least as much as the $500 in investments it just made. Therefore, we can say that the government still has zero net worth (assets equal to liabilities).

On the other hand, the public's bank account now has its original $500 in cash, a new reserve credit of $500 (that the gov't just spent) and a bond in the amount of $500, which is an asset. The public's net worth has just gone to $1500 from $1,000 and so did the nation's net worth (gov't plus public).

McTeer says that the savings rate is an illusion because the government ran a "negative savings rate" in order for the public to have an increase in savings. However, that is always true by definition. Only the government can be the net provider of savings to the private sector. On the other hand if McTeer wants the government to "save" it has to take in more than it spends, which again, by definition, reduces the savings of the private sector because government must either collect more in taxes than it recycles back, or provide less in spending, which equates to less aggregate demand, lower economic output, lower incomes, reduced wealth, less savings of the public, etc.

Another way to state this is, if the government runs a savings surplus, then the private sector has to run a savings deficit. Does Bob McTeer really think this is better?

McTeer's analysis also ignores the fact that the government actually gets something for its money and, therefore, doesn't really end up with a zero or negative net worth. As I pointed out earlier, the government's spending on such things as education, health care and even unemployment insurance is an asset, even though they are often not looked at that way. A healthy and educated citizenry and a stable society are all part of the assets and capital of a nation, just like modern infrastructure or a strong national defense.

It would seem to me that sustaining output and employment or simply, "promoting the general welfare" (as it says in the Preamble to the Constitution), is as much an asset to the government and the nation as a whole, as having a strong military or roads and bridges over which commerce can flow.

What we musn't forget is that the government exists for the public purpsose; it is not a profit seeking enterprise, and therefore must be evaluated on how it fulfills that public purpose. (How peaceful, prosperous, just and egalitarian is our society?)

McTeer goes on to say that...

"A decline in national saving will necessarily be matched by a decline in national investment if it isn't made up by more saving imported from abroad."

But again he seems to misunderstand that savings are no more "imported" from abroad than they are imported from the U.S. domestic household and business sectors. (By the same reasoning I just used.) Government is the net supplier of savings, not just to the U.S. domestic sector, but in large part to the foreign sector, too. That's because, to the extent that deficit spending adds to U.S. aggregate demand, output, employment and incomes, we are wealthier (by the above example) and are able to consume more from abroad and this is what provides at least some of the foreign sector's savings. WE fund their savings, not the other way around.

On the other hand the U.S. could run budget and trade surpluses just like if we were on a gold standard, but that would reduce our standard of living vis-a-vis the rest of the world--by definition. This is probably why, over the past 220 years, there have been scant few times when we did this. And it's why the United States sits on top of the world when it comes to prosperity and economic output. However, if we listen to misguided views of how things work, this may soon come to an end.

Obama at the All Star Game: "We're out of money."

Was just watching Obama chit-chatting with announcers Tim McCarver and Joe Buck at the All Star Game. When Joe Buck asked Obama if there would be any "bailout" for the National League, which hasn't won in 11 years, Obama replied, "We're out of money." Although it was meant as a joke, it's what he believes when it comes to the government's finances.

This is a very misguided point of view. It effectively is like putting America on a gold standard when we are not on one. And it is the reason behind his new and misguided policy of taxing millionaires to pay for his health care plan. With very little demand in the economy right now, applying fiscal drag in the form of tax--on anybody--is really, really, dumb.

Goldman profit soars on strong trading gains

Trading adds nothing to the real economy. You have incredibly smart people working at Goldman who merely speculate for a living: buy something then flip it for a profit.

The economy would be better served if people like these worked in more productive sectors--science, industry, health care, altnerative energy, etc.

Goldman might have failed if the Federal Government did not help it during the worst days of the financial crisis. Morgan Stanley certainly would have failed.

The fact that our leaders chose to sustain the non-bank intermediaries like Goldman is a testament Wall Street's power and influence.

We don't need them. They add too much volatility and risk to the financial system without any concomitant benefit.

All this country needs is a commercial banking system backed by the Gov't. We had that in teh past and it worked fine. Banks originated loans, serviced them and bankers made a little more than civil servants. People bought houses and cars and businesses were able to get money to expand and grow. Same as now, except without all the risk and speculation.

A nation's power has nothing to do with having a vast, unregulated. financial sector, yet we continue to think so. President Obama is more under the spell of Wall Street than Bush ever was and for that matter, Obama is probably the most pro-Wall Street president in recent memory. Odd, when you think he ran on a platform of helping the working class.

Household net worth probably up by $3 to $4 trillion in Q2

In the past two years (ending Q1 2009) household net worth took a massive hit--down $14 trillion according to data from the Federal Reserve.

Household net worth (market value) Q2 2007: $64.3 trillion
Household net worth (market value) Q1 2009: $50.4 trillion

The public has experienced the largest wealth decline since the Great Depression.

That's the bad news...

The good news is, household net worth probably recovered by $3 to $4 trillion in the second quarter of this year. The reason is, the bounce back in the stock market, which added about $2 trillion and the greater holdings of Treasuries (an asset) by the public. Treasury holdings of the public have increased almost $2 trillion over the past two years.

We still have a long way to go to get back to $64 trillion, however, the recovery of some household wealth is not a bad thing.

If gov't keeps deficit spending (adding assets to the non-governmental sector) and confidence can be bolstered, we could recover a good portion of what we lost in a fairly short order because we still have all the productive physical and human capital of the nation on hand and ready to go.

Geithner again displays his ignorance of our monetary system!

Treasury Secretary Tim Geithner is on a trip to our Gulf "allies" embarrassingly trying to reassure them on the subject of America's finances, when no reassurance is necessary. We don't need these allies, except, perhaps, when it comes to their oil, but we certainly don't need them for their money. In reality, it is our economy that "funds" them, not the other way around.

Anyway, here is a comment he made, which displays once again, how little he understands when it comes to our monetary system:

“...the global economy probably will suffer setbacks during its recovery as nations adapt to a loss of wealth and a surge in public debt."

You'd think someone at Treasury--particularly the Secretary himself--would understand that modern money IS debt. And for every liability (debt) there is an asset. Therefore, government debt is an ASSET to the non-governmental sector, which means it is an asset to you, me, businesses and everyone who is not the government.

The rise in government debt is RESTORING wealth to the public if you assume that the definition of wealth is assets minus liabilities (which it is!) IT IS NOT TAKING AWAY FROM IT!!

This is a basic accounting identity, yet Tim Geithner doesn't understand this.

Moreover, remember the equation:

Pvt = (Y + NFI + TR + IR - T) - C

Where,

Pvt = Private savings
Y = All private wages and salaries
NFI = Net foreign income
TR = Gov't transfer payments
IR = Interest gov't pays on the debt
T = Taxes collected by government
C = Consumption

From this equation (which you would learn in a basic macroecomics class in college. Presumably Geithner took this course at Dartmouth), it is obvious that at least 3 of the six variables that make up private savings are affected by government (TR, IR and T). Actually, you could even say that "Y" is influenced by government because government pays quite a bit of wages and salaries.

In other words, about 70 percent of private savings comes or is influenced by, what the government does. And if it pays salaries, raises transfer payments (unemployment insurance, medicare, medicaid, social security, etc), pays more interest on the debt (like during the Reagan years) and collects less taxes, then private savings most likely go up and by definition, so does investment. (And that creates more wealth!)

Remember... Savings equals Investment (S = I)!

Therefore, increases in government debt that come about as a result of deficit spending make us WEALTHIER by definition, Tim!!

Only if government taxes us more on the mistaken assumption that a) the government doesn't have the money or b) the deficit is bad and taxes must be increased to bring the deficit down, does the private sector lose wealth.

Unfortunatly, Tim Geithner's boss believes both those things.

Meredith Whitney: "I've been a bull all along."

After praising the bank stocks, Meredith tacked the other way, saying unemployment is headed to 13%-15%, implying the economy is headed to the brink of collapse. Can you say, "talking out of both sides of her mouth?"

From www.businessinsider.com.

GOP unifies against any more stimulus spending

Or another way to say this is...

"GOP unifies to permanently lower Americans' standard of living for current and future generations."

Put your money in China, where they are focused on rasing the standard of living of their citizens and investors. Buy my China Report for $39.95 and get better advice than the clients of Meredith Whitney, who probably pay 1000 times more!

Goldman Sachs Gains on Meredith Whitney Upgrade

The stock is up more than 100% since March and Meredith is just now upgrading it to a buy. This is what clients pay her huge money for?

Buy my China Report for $39.95 and get better advice and far more potential appreciation for your stock portfolio!

Geithner to reassure Gulf allies on dollar assets

As Warren Mosler and I have said many times, the money to buy Treasuries (and for that matter, to pay taxes) comes from government spending itself. We don't need our "Gulf Allies," or the Chinese or anyone else.

"The Treasury is not a depository institution, so a payment by the Treasury to the public (for example, a Social Security payment) raises the volume of Federal Reserve balances available to depository institutions." -From the Federal Reserve System Purposes and Functions manual.

Reserve balances are used to "pay" for Treasuries and the sale of Treasuries function solely to support a desired interest rate. It is not borrowing, per se.

Still think the Fed lost control of rate setting?

Before last Fed meeting back in June there were claims that the Fed has lost control of setting interest rates and that the central bank would "say something" in its statement at the meeting to "try" to get rates to move lower.

Well, it went one better. Here's what is said in the statment:

"...the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn."

On June 24 reserve balances, Fed Treasury holdings and interest rates looked like this:

Reserve balances on 6/24: $692 billion
Treasuries held as of 6/24: $647 billion
10-year Treasury interest rate on June 24: 3.72%

On July 8, it looked like this

Reserve balances as of 7/8: $751 billion
Treasuries held as of 7/8: $669 billion
Yield on 10-year Treas: 3.3%

Fed said it would buy Treasuries. Fed bought Treasuries. Interest rates on Treasuries came down. Case closed.

By the way, notice in that statement the Fed also said it would buy mortgage-backed securities. It hasn't done so yet, but it will. So if you are shopping for a mortgage, wait!! Mortgage rates will come down.

"Interest rates are a parameter set by the central bank, period!" -Economist James Tobin

Is Calfornia initiating a new secession from the union?

According to the San Diego Union-Tribune, Republicans and Democrats alike embraced legislation last Friday that would make California IOUs legal tender for all taxes, fees and other payments owed to the state.
http://www3.signonsandiego.com/stories/2009/jul/08/bill-would-allow-ious-be-used-pay-state/?california&zIndex=128426
The legislation is below:

AMENDED IN ASSEMBLY JULY 1, 2009
AMENDED IN ASSEMBLY JUNE 29, 2009
AMENDED IN ASSEMBLY MAY 14, 2009
california legislature—2009–10 regular session
ASSEMBLY BILL No. 1506
Introduced by Assembly Member Anderson
(Coauthors: Assembly Members Adams, Bill Berryhill, Tom
Berryhill, Duvall, Fletcher, Gaines, Garrick, Hagman, Harkey,
Jeffries, Knight, Logue, Miller, Nestande, Niello, Nielsen, Silva,
Smyth, Audra Strickland, Tran, and Villines)
February 27, 2009
An act to add Section 17203.6 to the Government Code, relating to
state funds, and declaring the urgency thereof, to take effect
immediately.
legislative counsel’s digest
AB 1506, as amended, Anderson. State funds: registered warrants.
Existing law prescribes procedures for the issuance of registered
warrants and provides that a registered warrant is acceptable and may
be used as security for the performance of any public or private trust
or obligation.
This bill would require a state agency to accept, from any person or
entity, a registered warrant or other similar evidence of indebtedness
issued by the Controller endorsed by that payee, at full face value, for
the payment of any obligations owed by that payee to that state agency.
This bill would declare that it is to take effect immediately as an
urgency statute.
Effectively, California is using its IOUs to create a currency. If this bill passes it would allow California to deficit spend just like the Federal Government and with the IOU's acceptable as payment of state taxes, it instantly imparts value to them. In effect, what you have is a state of the union creating a sovereign currency right under the noses of Treasury, Fed. They are stumbling their way into it, and as they do so, some of the true nature of contemporary money is being revealed. It will be viewed as a stop gap measure at first, and then could very well become entrenched as states realize they have a way to escape balanced budget requirements.

Contrary to most conventional economic thought, whereby people think we pay taxes to create revenue, in fact, it works the other way around under a fiat currency system. The government doesn't need money to spend, but in fact uses tax to manipulate aggregate demand, not raise funds to "pay" for government. The tax is what gives the currency its value insofar as taxes function to create the demand for federal expenditures of fiat money, not to raise revenue per se. Value has been given to the money by requiring it to be used to fulfil a tax obligation, but the money is already in existence, not "created" by the revenue.

Most significantly, the Federal government retains this monopoly under our existing monetary arrangements. If California is successful here in allowing its IOUs to pay tax, it has profound constitutional ramifications. It certainly means considerably less muni bond issuance in the first instance, if the proposal passes constitutional muster.
It will be interesting to see what the exchange rate is between California IOU and US currency - the IOUs do offer a yield, so should be less than par by design. I wonder if NY is next.

This is like some sort of return to the 13 colonies with all kinds of ersatz currency floating about.. It's hard to believe the Rubinite wing of the Democrats will just let it be, given the threat it represents to Wall Street's prevailing economic interests, but it is an understandable response to a federal government which continues to champion the interests of the rentier class above the vast majority of Americans by emphasising "fiscal sustainability" and destroying aggregate demand in the process.

There are political benefits for Obama to rid himself of the shackles of conventional (and wrongheaded) economic thinking: If the Federal government allows this proposal of the state of California to go unchallenged, it would relieve the President of a major political quandary, which is, does he help California and then open himself to aid requests from other states? (Which his advisor, David Axelrod doesn't want), or, does he let California go and lose 56 electoral votes in the next election? By allowing them to "solve" their own problem in the manner proposed by the legislation he avoids the quandary. And given that, from a money paradigm at least, he and his team probably don't know how destabilizing (to the current system) this is, they just might let them do it until the import is fully understood.

It is true that this legislation represents a profound break from all federal laws. It is almost bound to incur some sort of constitutional challenge, representing as it does, a profound threat to the Federal government's currency monopoly powers. But this is another instance where Obama's inattentiveness to the ramifications of the states' respective fiscal crises has come back to haunt him. This situation would not have arisen had Obama embraced a simple revenue sharing plan with the states (so that the states' respective fiscal policies would be working in harmony with his proposals, rather than mitigating the impact of the Federal fiscal stimulus), as recommended by any number of prominent economists, such as James K. Galbraith of the University of Texas.
It will be interesting to see how this plays out. As California goes, will the nation follow? Will we ultimately be confronted with the spectacle of "President Schwarzenegger" trying to legalize the drug output of the Emerald Triangle so he can tax it, thereby enabling us to shut the borders on the rest of this mess? Arnold always wanted to be President, but Constitution would need to be changed. Maybe this is his path to President of the 8th largest nation?

Proposed California bill would allow IOUs to be used to pay state taxes

If this bill passes it would, in the words of Warren Mosler, "be profound." (Read here.)

Indeed, it would allow California to deficit spend just like the Federal Gov't and with the IOU's acceptable as payment of state taxes, it instantly imparts value to them.

It will also end, almost immediately, California's budget problems.

Yes, profound! And the first step toward secession??

When other states see how wonderfully this works, they will do it too!

Interesting...Europe went to a single currency...America might now be going to 50 differetn currencies!! All because our policy makers in the Federal Government don't understand our monetary system!!

Obama’s Jobless Safety Net Torn by Rebecca Alvarez

How ironic...

Obama is one of the most liberal presidents elected in the post WWII era yet he is doing far more to destroy social safety nets put in place during the Great Depression than any Republican.

It all stems from a lack of understanding of our monetary system.

This will ensure that future generations live at a lower standard of living than the current generation--the first time that has happened since the Depression. And it all could have been avoided!

Unless he starts to understand our monetary system or gets himself some new advisers who do, Obama is a one-term president.

Read article here.

Obama rejects 2nd stimulus: Give recovery time

As many as 650,000 workers may exhaust even their extended benefits within three months, said Maurice Emsellem, policy co- director for the National Employment Law Project, a nonprofit advocacy group headquartered in New York."

And Obama asks us to wait two years!!

Guess the Europeans got to him. Too bad he doesn't realize European countries can't stimuluate anymore because they are functionally like states within the United States. They do not issue currency and spend by crediting bank accounts.

The plan "was not designed to work in four months," Obama said. "It was designed to work over two years."

What a shame...for a guy who pledged to help Americans he is really telling us all to go suffer for another two years or more. By then it is quite possible that we will have permanently lost some level of our standard of living. Terrible, terrible, shame. All because he and his advisors don't understand our monetary system.

Administration, policymakers, are resigned to impotence

Tim Geithner said this the other day:

"Unemployment is an inescapable element of a recession..."

The fact is, Tim, it's NOT!

During the New Deal one of the reasons why unemployment came down was because the government GAVE JOBS to anyone who wanted to work. They were jobs in construction, education, social services, even artists and writers!

That Geithner and many of our leaders and policymakers believe that we just have to accept a high level of unemployment and pray that somehow, miraculously, it will just go away is an admission of sheer impotence!

Surely there is enough productive work that needs to get done in this country that we don't need to sit here with 13 million people out of work. It's completely unreasonable and unwarranted, however, until somebody in power understands that, we WILL sit here with vast numbers of unemployed and Obama will see his approval ratings start to tank.