Someone should ask Niall Fergusun this question...

Niall Ferguson is a journalist who has been writing for years on why America is doomed because of profligate spending and deficits. He is your classic, out of paradigm Chicken Little type, similar to the likes of Schiff, Rogers, et al.

These guys simply don't understand the monetary system and that's why they keep getting it wrong when it comes to debt and deficits. (Rogers keeps shorting Treasuries, for example. He's been doing it for more than a year and a half as the greatest Treasury bull market of all time plays out, simply because Rogers doesn't understand that the Fed sets rates and wants them low.)

In a recent intereview, Ferguson was asked why he thought that U.S. deficit spending would eventually lead to a collapse of the economy. Essentially, this is what he said:

He started off by questioning the very assumption that there was going to be enough global demand for our debt when all is said and done. This presupposes, of course, that it is the sale of debt that supplies the funds needed for the government to deficit spend, when in fact the opposite is true. (Deficit spending supplies the funds to buy the Treasuries, which are merely interest bearing savings accounts of the U.S. Government.) This is a concept that I've explained many times here in this blog and elsewhere, so I am not going to get into it now.

Getting back to Ferguson, he said that up until now the U.S. was able to spend as much as it wanted because it was in the "lucky position of being able to borrow in its own currency."

This is a comment you often hear from the Debt Doomsday crowd, but one that is truly amazing when you realize that it comes from otherwise educated folks. That's because when you think about it, it really makes no sense at all.

Right off the bat it should make you wonder how, or better yet, why, a nation would have any reason to "borrow" its own currency, a currency that Ferguson and the other know-nothings freely admit can only be issued exclusively by the U.S. government and in any quantity?

Hello??? What am I missing here?

To begin with, why would a nation need to borrow something that it has the monopoly power to issue in any quantity?

Second point: How can our "lenders" (China, Japan, etc) even get their hands on that currency without the U.S. Government providing it to them first place? (Typically through some exchange, like when they give us their output, i.e. "real wealth" and we give them that currency.)

If you understand these two simple points then you're left wondering what exactly it is we are "borrowing" and how does the Chinese having dollars or not having dollars have anything to do with the U.S. Government's continued and unquestioned ability to spend in its own currency?

The answer of course, is, none.

Treasury Approaches the "Debt Ceiling"

The Treasury Department is is fast approaching the "debt ceiling" last approved by the Congress at $12.1T earlier this year.

Treasury Direct has a running total of the public debt at the website here. As of this latest accounting, it seems that they are within $100B or so of the last ceiling authorized which has been reported at $12.1T. This is very close as for many individual months in FY 2009, Treasury added more than $100B to the deficit.

Look for Federal discretionary spending to ramp down over the next several weeks or months if the Obama administration determines that a request and authorization to increase the debt ceiling is less politically desirable than the economic benefit additional deficit spending would provide.

The Congress will have to complete the vote to increase this limit soon as OMB is projecting a $1.5T deficit for FY 2010. Expect a lot of political fireworks and demagoguery around this issue while the country continues to suffer.

"There ain't going to be no money for nothing if we pour it all into Afghanistan"

Set aside the atrocious English for a moment as well as the over-arching debate on whether or not our presence in Afghanistan is even worth it, that was House Appropriations Chairman David Obey speaking with ABC News.

His comment highlights--once again--a total lack of understanding of our monetary system by our policy makers. They mistakenly believe the government is either "out of money" (as President Obama said) or very close to being out of money.

Their misunderstanding lies in a belief that taxes fund spending. This is a gold standard concept and is, therefore, inapplicable under the current paradigm where the government credits bank accounts electronically and its "money" floats freely and is non-convertible into any commodity such as gold exchangeable for another currency at a fixed rate of exchange.

Under the current system there is absolutely no constraint to how much crediting of bank accounts the government can do; the only constraint being political. And it is becoming quite clear that our political leaders are about to put limits on how much the government can spend, even though we have 10% of the workforce unemployed and our industrial capacity is being utilized at an anemic, 68% rate.

Existing home sales up the most in 2 1/2 years!

But, as usual, Warren Mosler summed it up best in his comment below:

"Wonderful, we contrive policy to drive up unemployment and foreclose vast numbers of people out of their homes at firesale prices so others can move in with subsidized down payments to buy them."

All because our policymakers don't understand our monetary system.

Wave of Debt Payments Facing U.S. Government

Another incredibly misinformed article, this time from the New York Times. The author displays a complete lack of knowledge of the current monetary system and gets some "help" from the likes of Bill Gross.

WASHINGTON — The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.

But that happy situation, aided by ultralow interest rates, may not last much longer.

The Government spends by crediting bank accounts. There is no constraint to its ability to do so. Interest payments are made the same way that any spending is made--by crediting bank accounts. Moreover, ultralow interest rates were a matter of Fed policy. The Fed brought interest rates down by raising the level of bank reserves in the system, from $8 billion in 2007 to over $1.1 trillion, currently. Those reserves are the funds used to buy Treasuries. There is no financing, per se.

“What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”

I don't know about the squirrel analogy, but I do know that Bill Gross is a nut! Does a bowling alley have to "stash away points" so that it doesn't run out if too many bowlers score too high? The whole notion is ridiculous and is a "gross" display of Bill Gross's lack of understanding on this issue.

Read the entire, misinformed article here.

Obama: Too much debt could fuel double-dip recession

He just doesn't get it. It's exactly the opposite. Deficit spending saved the world's economy from total collapse. Paring back that spending will create the double dip he is talking about.

It's truly amazing how he can say this. We ran up huge debts fighting WWII and the nation prospered like crazy. We cut the debt in 1937 and we went back into a depression.

It's like still saying the world is flat! If you sail too far you'll fall off the edge of the earth.

Goldman Sachs Does God's Will While 49 Million Go Hungry

"The Department of Agriculture reports that 49 million Americans don't have enough food. That's up 13 million over the last year and is highest number ever recorded since the survey began 14 years ago."

And Goldman adds to that obscene statistic by being one of the largest commodity speculators in the world, driving up food costs. Yet, the president and Congress continue to allow that to happen.

The government spent 100 times more on Tarp than it did on food stamps in the past year, even though Tarp was unecessary and could have been completely avoided if the Fed had understood its role to sustain the banking system.

In a country where our leaders believe we are out of money (they don't understand the monetary system), the funds spent on Tarp could have gone for food, health care, basic research and education. Instead it went to save Goldman and other financial intermediaries, allowing them them to continue to engage in speculative activity that adds no value to the economy, but which drives up the cost of food and fuel for everyone.

Lending surges!

In my blog post one week ago I mentioned that lending may be on the rebound as we saw the first increase in 17 weeks.

New data out from the Fed indicates that loan growth advanced sharply for a second week in a row. Total loans and leases surged $83.2 billion in the period 10/28 to 11/4 and is up almost $95 billion over the last two week reporting period.

This is good news for the economy especially since it comes at a time when government spending seems to be thottling back. (I have been covering this in my daily report, Fiscal Trend Digest. To get a free, 30-day trial please email me.)






Up $95 billion!

Obama wants domestic spending cuts in next budget

Recovery to be aborted in 2010.

I am currently accepting clients for managed accounts that will fully take advantage of this oncoming fiscal disaster. Please send me an email if you are interested. Managed account inquiry.

After spending binge, White House says it will focus on deficits

-End of recovery now in sight. Start taking profits into this stock market rally.

-Lessons of the past not learned.

-Deficit Terrorists firmly in control.

-Americans of the current and future generations stand to lose their standard of living vis-a-vis the rest of the world because our leaders (and most Americans) don't understand our financial system.

-Protect yourself: get into a good "short" fund.

Budget Freezes, Spending Cuts Possible Says White House

To follow up Mike's posts above, this is bad news for US GDP growth. From the linked AP/CNBC story:

The Obama administration is alerting domestic agencies to expect their budgets will be frozen or even cut by 5 percent, part of an election-year push to rein in record deficits that threaten the economy and Democrats' political prospects next fall.

This blog has identified that FY 2009 GDP was favorably affected by the year over year increase in Federal spending in this post. Last year's increase in "real" Federal spending was equivalent to 4.4% of the previous year's GDP. If the administration makes across-the-board 5% cuts as the idea floated in this article suggests, this year's "G" contribution to GDP will be impacted.

Review: Y = C + I + E + G where

Y = GDP, C = Consumer Spending, I = Investment made by industry, E = Excess of Exports over Imports, G = Government Spending. The component amounts of GDP need to be sustained or grow year over year or GDP will fall (bad!).

FY 2009 real Federal spending came in at about $4T, a 5% cut would mean a $200B reduction for FY2010 or equivalent to negative 1.43% of our $14T GDP. Ironically, this potential $200B reduction would negate the positive effects of the "stimulus" which have been running at about a $200B annual rate.....hello 12% unemployment?

This could be just political posturing by Obama administration officials, one way to tell is to keep watching the daily/weekly/monthly fiscal information released by the Treasury Dept.

Current Status of Fed MBS Purchases

Through November 11, the FRB NY has just surpassed the $1T level with net purchases of Agency MBS. Over $200B of these purchase transactions have yet to settle so the amount recorded in the H.4.1 Report is only at $775B as a factor affecting bank reserves.

The weekly rate at which the NY Fed is purchasing these securities has slowed over the weeks since the Fed announced that this program would be extended into 1st quarter 2010, from $25B per week to lately around $16B per week. The graph below is as of this week.

This is probably the first time that such a focused Fed program has surpassed the $1T level.

White House Aims to Cut Deficit With TARP Cash

As millions flounder in the worst job market in six decades, the White House is planning on using unspent Tarp funds to pay down the deficit.

Rather than use the money to spend on new public works projects or pass along as a tax reduction to try to help restore income to households (households other than the 7-figure Wall Street bonus earning kind), the Administration is paralyzed with fear over a deficit that is only slightly above the Reagan shortfall of 1983.

And to make matters worse, more fiscal austerity is likely coming our way. According to sources, White House Chief of Staff Rahm Emanuel is pressing for substantial spending cuts to go with any tax increases to try to avoid the "tax and spend" label that has bedeviled Democrats, according to administration and congressional officials.

Avoiding labels. That's what is has all come down to as people suffer in the worst economy since the 1930s...avoiding labels.

With a double dose of fiscal austerity--tax increases and spending cuts--coming our way in this president's first (and probably, only) term, we are guaranteed to repeat the mistakes of the past. If these measures are adopted, the a double dip, recession or even depression, is inevitable.

Enjoy the ride in the stock market for a little while longer, however, it's becoming increasingly evident that the Deficit Terrorists have hijacked this Administration and are firmly in control of policy. That's not good news for the outlook going forward.

Will the stock market rally continue?

Here's what I said back on August 14...

Nice prediction if I may say so myself!!

INDIANA CORONER BLAMES HIGH SUICIDE RATE ON RECESSION

The Deficit Terrorists and our misguided policymakers who listen to them and who don't understand our own monetary system have blood on their hands!!

Read article here.

Loan growth returns after 17 week contraction!

SPECIAL UPDATE: LENDING TURNS POSITIVE FOR THE FIRST TIME IN 17 WEEKS!

Although the first six statement days of the month of November continue to show a gross surplus (this is the longest stretch of surplus since I started writing my Fiscal Trend Digest report and collecting the data going back to May), the stock market continues to rally.

Surpluses constitute fiscal drag so, ordinarily, it would be bearish at some point for stocks and the economy all else being equal.

However, households spending out of savings or, an uptick in lending (private sector money creation) can also work to sustain consumption and output.

Until now there has been NO evidence of loan growth, in fact, total loans and leases (reported weekly by the Fed) have been contracting for the past 17 weeks.

IN THE MOST RECENT DATA WE NOW SEE THE FIRST UPTICK IN LOAN CREATION. THIS IS A POSITIVE SIGN. (Please see graphic below.)

IT SUPPORTS MY VIEW THAT THE NEXT PHASE OF THIS STOCK MARKET RALLY AND ECONOMIC RECOVERY WILL BE LED BY THE PRIVATE SECTOR UNTIL FISCAL DRAG BECOMES HIGH ENOUGH TO HALT THE GROWTH CYCLE. HOWEVER, THIS PHASE SHOULD BE THE MOST DYNAMIC ON THE UPSIDE! COVER ALL SHORTS AND LOOK TO BE LONG AS THIS TREND UNFOLDS!

Wall Street Bonuses Rise as Big 3 May Pay $30 Billion

Goldman Sachs, Morgan Stanley and JP Morgan Chase will pay out up to $30 BILLION in bonuses as the rest of America dangles in the wind, unable to find a job!

Outrage!!

Goldman and Morgan Stanley are speculative intermediaries, which would have failed during the financial meltdown had they not received gov't support.

JP Morgan Chase is a commercial bank that resembles an investment bank/hedge fund because of the repeal of Glass Steagall. They closed my overdraft line of credit, even though it was current and I've had it for 10 years. Shame on you, Jamie Dimon!

GET RID OF THESE PARASITES OF THE FINANCIAL SECTOR!!!!!!!!

10.2% unemployment rate highest in 26 years and they still think the Fed can fix this with low rates!!

The nation's unemployment rate rose to the highest level in 26 years and there is not a word being spoken about additional--and aggressive--stimulus (tax cuts and government spending).

Instead, our President and our policymakers are leaving the job up to the Fed, which has ZERO ability to increase aggregate demand. The Fed can only set interest rates and it has set them at zero, which effectively acts like an income cut to so many people who rely on interest income to live.

The Fed's quantitative easing is not only not helping, it is making the situation worse.

Private-sector led recovery now beginning

In the absence of any private-sector led demand over the past year or so, gauging the economy based on Government money flows was relatively easy because that was the only factor to consider.

But since gov't tends to to "prime the pump" (by restoring non-governmental incomes and savings via spending) over long periods of deficit spending, there comes a time when private sector demand begins to grow on its own.

I think we are reaching that point.

In one sense this makes the job of forecasting the economy a bit more complicated because gov't "involvement" in terms of the percentages of gov't spending, deficits and such, relative to GDP, actually start to shrink. Rather than being the "money pump" that it has been, over time the government becomes more of a siphon as more fiscal drag is applied. (Tax revenues increase in a growing economy faster than the gov't can spend them.)

However, we are nowhere near a level that would concern me at the present time and deficit spending is likely to continue for a while. Moreover, private sector savings are still relatively high and if job growth resumes, private sector wages will rise.

In addition, from a psychological perspective a private-sector led recovery represents a huge potential positive. That's because most people, including our policymakers, are fundamentally opposed to gov't involvement in the economy even if it is there only to sustain output and employment at the most base levels.

On the other hand, demand and employment that is being driven by the private sector would get people excited and they would start to view the recovery as sustainable whereas they saw the government's contribution as unsustainable (even though it could have been sustained for as long as our leaders wanted it to be.)

So if my assessment is correct, we could now get into a "sweet spot" in the market as so many skeptics begin to throw in the towel on their bearish outlooks.

Admittedly, one very important set of supports (the gov't) may begin to ease off, but the private sector's own momentum will take the baton for now, which for most people, will look like a welcome relief.

Enjoy the ride!

More media nonsense about the gov't needing our tax money to fund spending

Here's an article that appeared today online at (where else?) Bloomberg. Bloomberg has, by far, the most economically ignorant journalists in all of journalism and they are the most dangerous because of the fact that Bloomberg is widely considered to be a very serious and respected news outfit.

My comments are in italics.

Taxman Seeking Cash Means U.S. Filers May Move Income to 2009 Share Business By Margaret Collins Nov. 5 (Bloomberg) -- The U.S. government is spending $787 billion to stimulate the economy, the deficit is $1.4 trillion and Congress is debating costly changes to health care. The taxpayers’ bill to pay for it isn’t far behind. Government spending is not constrained by tax revenues. The government only accepts its own money for taxes anyway, so by definition it must spend it into existence in the first place in order for anyone to be able to get it to satisfy their tax liability. Deficit spending means the gov't spends more of its own money than it takes back from the non-government. It couldn't do this if it first had to collect revenue from somewhere. On a gold standard or fixed exchange rate this could be a problem, but not under a floating FX/non-convertible currency system such as the one we are on. “Something is going to have to be done to raise revenue unless entitlement spending is cut,” said Gerald Prante, senior economist for the Washington-based Tax Foundation. Again, this guy is clueless. Cutting spending means, once again by definition, that less of the Government's money is available to the non-governmental sector, making the payment of taxes more difficult because it reduces incomes and savings of the non-governmental sector. The only way for the government to "save" is for the private sector to "dissave." Federal tax rates may rise in 2011 to as high as 39.6 percent, up from 35 percent, for those earning more than $373,650. The House version of the health reform bill sets an additional 5.4 percent surtax on adjusted gross income for high- income individuals. Long-term capital gains rates may reach 28 percent, from 15 percent today, Prante said. Tax rates will rise because Obama is going to let the Bush tax cuts expire, however, that is not a necessary requirement to "fund" new or existing spending, nor is it wise because it will increase fiscal drag at a time when the economy is, hopefully, recovering. The decision to let tax cuts expire stems from sheer ignorance of our monetary system and nothing more, but Obama displays his ignorance almost every day when he says things like, "the government is out of money." Too bad for us all.

With people like this running things we barely have a chance. God help us all!

Another clueless commentator gives her "explanations" for the recovery

Nina Easton is a conservative commentator. Here is an article that she wrote, which appeared online today. My comments are in italics.

Washington's inconvenient economic truths By Nina Easton, Washington editor On 10:35 am EST, Monday November 2, 2009 Now that we're officially (if barely) out of the Great Recession, it's time for our nation's elected officials to get down to serious business -- that of taking credit, assigning blame, and calling each other liars. Barely? We're growing at nearly 4% and could be growing a lot faster if more economic stimulus were applied. The $787 billion stimulus package signed by President Obama is the picked-over carcass in the middle, with the White House claiming credit for millions of jobs "saved" and the Republicans accusing Team Obama of playing fantasy foosball with hard economic data. But the stimulus package is mostly beside the point -- at least so far -- which poses an inconvenient political truth for both President Obama and his GOP foes. The real credit for a rebounding economy goes to the Federal Reserve Board -- chaired by a Bush appointee, Ben Bernanke, whose term was just re-upped by Obama. The Fed only sets interest rates; it cannot add to aggregate demand, which is is what has been so lacking. How does she support her claim that the real credit for the rebounding economy goes to the Fed? Some credit for stabilizing the financial system can also be given to a wildly unpopular bank bailout launched by President Bush's Treasury Secretary and endorsed and sustained by President Obama's Treasury Secretary. It could be argued that the bank bailout--in the form it was conducted, i.e. sustaining non-bank intermediaries--was counterproductive. If the Fed had understood its role and lent on an unsecured, unlimited basis to commercial banks, as is their directive, then the "financial system" would have been fine and we would have eliminated a lot of unecessary intermediation. Try making those points to angry voters in next year's midterm elections. No elected Democrat really wants to embrace TARP, no matter how much Tim Geithner has tweaked and re-tweaked the bank rescue program, and no matter how many billions banks have since returned, stapled with interest payments to U.S. taxpayers. Tarp was an extravagant use of taxpayer money. One hundred times what is spent on food stamps, for no good reason. Likewise, Republicans are painfully aware that last summer's "tea party" rebellions had as much to do with public anger over these Wall Street bailouts as they did with opposition to government-run health care. Some economists, like Stanford University's John Taylor, think TARP was an unnecessary disaster. Others, like Allen Sinai, president of Decision Economics, say the government missed an opportunity to drive a real turnaround as we stared into a financial abyss. Yes, there was no change. And Tarp sustained some of the very non-bank, speculative entities that contributed to the crisis. Instead of injecting capital into banks who were unlikely to lend the money back out in such a dismal credit environment, Sinai argues the government should have supported housing prices -- the root of the crisis -- by directly intervening in the mortgage market. That's one idea. How about supporting incomes via payroll tax cuts and giving money to cash-strapped states. In other words, you support the real economy and the banking crisis goes away. Still, most economists credit TARP, followed by Treasury's requirement for the big banks to raise private capital, with stabilizing the financial sector -- a prerequisite to the 3.5% GDP growth for the third quarter that was reported last week. (Even Sinai credits TARP with a small but measurable role in last week's good news.) The decision to force banks to raise capital was an admisssion by our policymakers that they don't understand our own banking system. Banks are already regulated as to their capital adequeacy. Ostensibly the FDIC and controller of the currency was doing that job. Says the American Enterprise Institute's Alex Brill, former chief economist to the House Ways and Means Committee: "There is a lot of fair criticism about how TARP operated. But the banking system is the grease in our economy. As a result of TARP, we're in a much better place today." Even though, as Brill acknowledges, "TARP is scary for a lot of politicians and voters." Banks are functionally agents of the government when it comes to lending and money creation, however, our leaders fail to recognize this. They also fail to recognize that banks make loans based on the ability of those loans to be paid back, which is a function of basic economic conditions. We still have 15 million people unemployed, yet our policymakers are scratching their heads as to why banks are not lending. There is similar disagreement among economists over the impact of the $787 billion stimulus bill that a Democratic Congress passed and President Obama signed last February. Sinai calculates that the tax and income supports, along with aid to states and cities, were responsible for about 40% of the 3.5 GDP growth rate reported last week. (Though Sinai and other economists include in their measurements the Cash for Clunkers program, which clearly caused an uptick in auto manufacturing. But that month-long trade-in program has ended, and wasn't even part of the original Obama stimulus bill.) Yes, income supports via automatic stabilizers, like SS, Medicare and unemployment insurance. NOTHING was done proactively to help incomes rise. In fact, the Fed's zero-interest-rate policy actually has led to a decline in interest income, which is not an insignificant part of national income. Brill argues that Obama's stimulus had very little impact on GDP because very little money is getting out the government door. "The bureaucracy and red tape in these projects is systemic," he says. Agreed. Most of the "spending" went for Tarp (about $400 billion). When you remove Tarp from the deficit, the shortfall is about 7% of GDP, which seems wholly inadequate when you are dealing with the worst downturn since the 1930s. And Stanford's Taylor argues in his blog that the Bureau of Economic Analysis tables released with last week's GDP numbers "make it very clear that the $787 billion stimulus package had virtually nothing to do with the improvement." It had some, but not a lot. And much of the actual spending was in the second year, so the jury is still out on this. What's harder to ignore in this improving economic picture is the role of the Fed, which has effectively bypassed an ailing banking system to pump credit into the economy. The Fed's interventions have been manifold: through the commercial-paper market and short-term loans to banks; through supports for loans to small business, auto buyers, credit-card holders and student-loan borrowers; and through a commitment to buy up $1.25 trillion in loans tied to home mortgages. Despite interest rates being brought down to zero, total bank credit has declined by $400 billion in since last December. This woman has no clue about what she is talking about. Moreover, since hte gov't is a net payer of interest, zero-percent interest rates have resulted in an income cut to many people. "Where you see that is in home sales and housing starts," says Sinai. "The GDP numbers showed a nice increase in residential construction. Also, home prices have bottomed out. That's a secondary effect of the Fed's actions." No. It has to do with the fact that housing construction fell to unsustainably low levels. Of course, Fed monetary policy, which has kept interest rates at effectively zero, has also "had a significant effect on the economy," says Sinai, producing a stock-market rally that caused wealth gains, and boosting investor confidence. And a lower dollar, he notes, has helped exports, which showed a healthy increase in last week's GDP figures. The stock market's gains are felt more by people at the top--the highest income earners--and do little for folks at the bottom or in the middle. Moreover, achieving export growth in a highly competitive global export economy meant reducing the real terms of trade for Americans. Exports are a cost; imports are a benefit. As the economy improves, economists will give a pat on the back to Bernanke -- even as they worry about inflation and what will happen when he takes his foot off the money accelerator. But don't look for 435 House members and 36 U.S. Senators seeking reelection next year to take to applause lines for Bernanke -- or his Federal Reserve Board. The economists are wrong. Bernanke had nothing to do with this recovery if indeed it lasts, becausee the Fed has absolutely zero tools to deal with raising the level of aggregate demand. The effect of TARP, the most widely publicized piece of last year's government response to the financial crisis, was to stir fierce populist sentiment. The Fed, a historically secretive and mistrusted agency, doesn't escape those passions. Libertarian Ron Paul of Texas, who has called for an end to the Fed, introduced a bill to audit the agency's monetary policy-making -- and 308 House members have since signed on. Ron Paul is an idiot and his constitutents are idiots for keeping him in office. This isn't a clean Republican-Democrat divide; it's a grass roots-elite divide. And the Fed's key role in America's economic recovery is one of those truths that just isn't convenient on any campaign trail right now. The Fed has had zero role in this recovery. She's clueless.

Should the Fed be audited?

Yesterday a reader of my blog sent me an email asking my opinion as to whether or not the Fed should be audited. As many of you know, people like Ron Paul are pushing for a Fed audit. My response to the email is below.

It's a dumb idea being pushed by people who are completely ignorant of our monetary system. Here are several reasons why it is stupid. 1. One of the Fed's main monetary policy tools is the setting of interest rates. It does this by manipulating the level of reserves in the banking system. Any audit that would constrain the Fed's ability to add to reserves would serverly hamper its ability to conduct monetary policy and that would be bad for the economy. 2. Under a free floating non-convertible currency system such as the one we currently have there is never an issue of "solvency," and solvency, ostensibly, is what the audit woiuld seek to determine. A currency issuing nation and its central bank "spend" by crediting bank accounts and there is no constraint on the ability to do this because there is no "backing" for the currency as would be the case under a gold standard or fixed exchange rate. Conducting an audit for solvency in a monetary regime where there can never be a solvency issue is nonsensical. 3. Last but not least: The Fed is required by law to turn over all its profits to the U.S. Treasury. No business in America and probably no business in the entire world is under such a confiscatory directive. If the Fed were allowed to keep its profits in the form of retained earnings--as nearly all businesses do--then its capital over the past 96 years would have grown into the tens of trillions. The question of solvency would be moot. -Mike

Half of U.S. kids will get food stamps!

This is a sad, sad, commentary on how a belief system is killing the greatest economic power the world has ever seen. America is dying...becoming impoverished as a result of ignorance and superstition.

Because our president, our policymakers, the media and most of the American electorate do not understand our monetary system (they think we're out of money), we are not able to make the investment necessary to sustain jobs and output and the creation of wealth. So kids go hungry.

And if the government does try to do anything of the sort, there is an outcry over meaningless deficits, while half the children in America literally have to beg for food handouts.

What is even more outrageous is that the government spent 100 times more on Tarp last year to bail out firms like Goldman Sachs than it did on food stamps! (That's right! Total food stamp outlays were $4 billion, while spending on Tarp was $400 billion!!)

The Deficit Terrorists who rule our policy with the ignorance are wrong when they say that we are passing along a legacy of debt to our children and grandkids. The REAL heritage we are leaving them is poverty...and for no good reason!

We have all the means at our disposal to create wealth and prosperity for the current and future generations, but we choose not to do it because of silly labels and a belief system that is completely mired in ignorance and fallacy.

Like I have said in the past...dangerous belief systems are like infections in a body. If they are not eradicated they will kill the body. We are killing the body America.

(Read food stamp article here.)

Ford is viable, Goldman Sachs is not!

Ford is "viable." So was GM and Chrysler, if profits are the gauge, yet the Obama Administration forced the latter two into bankruptcy and would have done the same to Ford had Ford opted for more gov't assistance.

On the other hand, companies like Goldman Sachs and many other non-bank intermediaries, received billions in gov't aid via Tarp and other programs, basically without question.

Ford is a company that produces some of the vital real assets that people need in a modern economy: vehicles. Goldman Sachs, on the other hand, is nothing more than a giant hedge fund engaged in speculative activity that contributes very little real value to the economy.

Ford creates while Goldman merely distributes.

Yet despite this vital process of creation, which defines the very wealth of a nation, Ford's market capitalization is roughly one-fourth that of Goldman Sachs and similar comparisons can be made between Ford (and I am guessing, GM and Chrysler) and other financial intermediaries, which are nothing more than speculative entities.

While Ford and GM and Chrysler are involved in the creation of goods and services that form part of the stock of the assets and capital of our nation, the Goldman Sachs' of the world merely shift money around, for huge personal gain, without adding to the benefit of all. I ask you, is there "work" so essential?

Vehicles and other machinery ARE essential if one desires to have a modern economy.

But is the business of the finance capitalists really necessary to the point that they have been sustained with hundreds of billions of dollars...money that could have gone to companies engaged in creative and productive investment and innovation?

The answer is, "No!"

But that's exactly what our leaders did.

Go figure.

Goldman: Excess reserves do not matter!

Below is an email I just received from Warren Mosler, which contains a very good explanation by a Goldman Sachs executive on why excess reserves in the banking system DO NOT portend incipient inflation.

From: Francesco Cafagna Managing Director Goldman, Sachs & Co. Vice Chair - SIFMA Funding Division Executive Committee 1. Do excess reserves really matter and does the FED really need to drain them? The short answer is: I don't think so. The total amount of reserves currently in the banking system is the sum of all Required Reserves (including a certain amount that banks hold for precautionary reasons) and Excess Reserves. The FED HAS to provide the banking system with the amount of Required Reserves it needs otherwise rates spike higher (potentially to infinity if the discount window or other forms of “marginal lending facilities” did not exist): the amount required is the result of banks’ individual credit decisions (how many loans they make) and the FED’s job is to estimate that amount and provide it to the system. But the FED does not control this number. When it comes to Excess Reserves, lots of people worry about the potential long-term inflationary impact they may have. The truth is that they don’t matter because they bear no weight in banks’ credit decisions (how many new loans they make). They simply appear on banks’ balance sheets as an Asset that gets “invested” every night in the form of a deposit that they leave at the FED and on which they currently get a 25bps remuneration. If the FED decided to drain excess reserves via Reverse Repo the impact on the system as a whole would be zero because the system as a whole is “self contained”. To understand this let’s think of the most extreme case: the FED drains all excess reserves via one giant Overnight Reverse Repo executed with all the banks in the banking system. At a macro level all that’s happened is that each bank has changed its Excess Reserve asset (which is effectively an O/N asset) into and O/N Reverse Repo and the two are virtually identical. Another way to think of this is that Excess Reserves are ALREADY being drained every night because banks leave them on their account at the FED every night. The only thing that will change is the liquidity profile of banks IF the FED decided to execute Reverse Repos longer than 1 day: in that case a 1-day assets (excess reserve) would be transformed into a longer asset (Reverse Repo longer than 1 day). Whilst this may affect individual institutions, the system as a whole is unaffected because this amount “extra cash” in the system (excess reserves) is NOT being used for anything. It just sits at the FED every night. So effectively it’s being “drained” already every night. So all this talk about excess reserves and their potential inflationary impact seems misplaced: they are just irrelevant and the FED simply does not need to drain them because they are “self-drained” every night anyway. Happy to discuss live if people have specific questions. Hope this helps Frankie

Finally!! Someone from mainstream economics (and Wall Street: Goldman Sachs, no less) that understands what is going on! We have a chance!!

Please distribute to your friends and colleagues!

-Mike