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.

May trade deficit unexpectedly drops to $26B

The trade deficit has been cut in half since 2008, but we are poorer as a nation. (Household net worth down by $13 trillion!)

This is what our leaders want??

There are only two way to gain comparative advantage and become an export-driven economy: lower the standard of living of Americans, via policy, so that we have a labor cost advantage that allows us to sell goods to the foreign sector cheaper than foreigners can sell goods to us.

Or...

Weaken our currency to gain a foreign exchange advantage.

Our leaders and policy makers are doing both! Enjoy the shrinking trade deficit, folks!! You have Jim Rogers, Ron Paul, Peter Schiff and many others among those whom you might want to, ehem...thank.

IRS "Turning Over Every Rock" to Raise Revenue: Obama Targeting Overseas Assets

More dangerous policy set in motion by a destructive belief system. Obama believes the government is out of money, so he has charged the IRS with finding "revenue" anywhere it can. This is causing America to turn against long-standing friends, like Switzerland:

USA to UBS: Hand Over Tax Evaders, Or Else! Swiss Bank's American Assets at Risk

Remember, this is the guy who said when he got elected he was going to make the world like us again!

Media conducts "implicit censorship" when it comes to the stimulus debate

Excellent post by Paul Krugman yesterday on how the media censors opinions in favor of another stimulus even though many of the voices in support are highly respected and even Nobel prize winners.

Read here.

I had a personal experience of this nature yesterday when Fox Business called me to come on air and speak in support of stimulus. The guest before me was against stimulus and so was the guest after me.

Later on, both the anti-stimulus segments appeared on the Fox Business website, but mine was left out.

When I inquired why I was left out, a Fox Business executive said it was just a "snafu."

Retirement Saving: Soon Mandatory?

How to Destroy An Economy 101

"President Obama wants more of us to save for retirement, but does his plan to legislate automatic enrollment add up?"

Someone in the Administration should study Keynes's, "Paradox of Thrift."

Jobless claims drop steeply

To show you how the media distorts the news to a more negative tone, take a look at how this morning's weekly unemployment claims figures were reported. The number dropped to the lowest level since January, which was far below economist's estimates, yet the media questioned the result and called it "skewed," saying it was due to a drop in auto company layoffs.

By the same logic one could rightly say that weekly unemployment claims have been "skewed" to the high side, preciely because of layoffs at auto companies. (Layoffs that should not have occurred!! Obama put the U.S. manufacturers into bankruptcy!!!)

However, as always, the media chose to report it with a skeptical, negative, tone.

Ron Paul is an idiot!!

A bill introduced in the House by Congressman Ron Paul, would require the Fed to be audited. Paul says that the Fed is not transparent because it does not mark its assets to the market. This is such dangerous nonsense.

Paul is such and idiot that he doesn't understand that Fed is required by law to TURN OVER ALL ITS PROFITS TO THE U.S. TREASURY! What business in America has to do that? Over 96 years of operating the Fed's capital would have been HUGE--far bigger than any business in the world--if it were allowed to retain its earnings.

A "true" audit would require that the Treasury return all of the profits earned by the Fed in the past 96 years.

Ron Paul is a dangerous, dangerous, idiot and people who think like him are killing this country. That includes many members of Congress, like Republican Senator Jim DeMint, who supports the audit and said, "allowing the Fed to operate our nation's monetary system in almost complete secrecy leads to abuse, inflation and a lower quality of life."

Ask DeMint to go collect and make public the $trillions in profits the Fed has turned over to the Treasury. What an ass!

Stimulus spending now starting to kick in!

Below is an update of a graph that I have been posting from time to time showing "Net Spending" (5-day average of daily Treasury withdrawals minus deposits). The trend has recently begun to rise, meaning that net transfers to depository institutions from the Treasury are accelerating. From early May thru June this trend had been slowly declining, with a rapid drop in the third week of June. The stock market was clearly affected by this: it killed the rally. While the stock market is currently weak, the significantly higher spending is likely to have a bullish effect on the economy and, hence, the market. So if you are not in or have been getting nervous and thinking of selling, I would advise against it. Now's not the time to sell; it's the time to buy!

Goldman, Morgan Stanley Threatened by CFTC Review

"The Commodities Futures Trading Commission will consider greater regulation of oil, gas and other energy markets at hearings this month. It plans to review exemptions to trading limits that since the 1990s allowed Goldman and Morgan to build multibillion-dollar ventures in futures, swaps and over-the- counter markets."

Write your Congressional representative and say that you think it is outrageous that Wall Street firms like Goldman and Morgan Stanley are exempt from position limits when all they do is speculate in the markets. Morgan Stanley is the largest owner of physical heating oil in New England, but it uses this position primarily to conduct financial arbitrage, not deliver fuel to customers. The activities of these Wall Street investment banks, at least when it comes to commodities, adds no real benefit to the economy. Tell your Congressman you want it stopped!

Obama Adviser Says U.S. Should Mull Second Stimulus

The thinking is starting to come around, albeit slowly. There is a growing realization that not enough money was spent quick enough. More must be done. Political pressure is growing on Obama now that unemployment has hit 26-year highs. Hopefully, it could shelve deficit fears for a while. Laura Tyson's remarks suggest this is happening. So do Biden's. On a side note, Biden should get rid of his economic adviser, Jared Bernstein. I had him on my radio show several times and he is a Democrat who is also a "deficit terrorist." Useless!

Oil, Gas Market Speculation May Face Restrictions by U.S. CFTC

U.S. regulators say they may clamp down on oil and gas price speculators by limiting the holdings of energy futures traders, including index and exchange-traded funds.

Finally!! This should have been done last year, however, Republicans scuttled several measures and elections campaigns probably impeded anything new on this front. Now it could happen.

More on the Goldman story...

This is just too good! Here are some more excerpts for your enjoyment:

"But then, something happened. It's hard to say what it was exactly; it might have been the fact that Goldman's co-chairman in the early Nineties, Robert Rubin, followed Bill Clinton to the White House, where he directed the National Economic Council and eventually became Treasury secretary. While the American media fell in love with the story line of a pair of baby-boomer, Sixties-child, Fleetwood Mac yuppies nesting in the White House, it also nursed an undisguised crush on Rubin, who was hyped as without a doubt the smartest person ever to walk the face of the Earth, with Newton, Einstein, Mozart and Kant running far behind. Rubin was the prototypical Goldman banker. He was probably born in a $4,000 suit, he had a face that seemed permanently frozen just short of an apology for being so much smarter than you, and he exuded a Spock-like, emotion-neutral exterior; the only human feeling you could imagine him experiencing was a nightmare about being forced to fly coach. It became almost a national cliché that whatever Rubin thought was best for the economy — a phenomenon that reached its apex in 1999, when Rubin appeared on the cover of Time with his Treasury deputy, Larry Summers, and Fed chief Alan Greenspan under the headline the committee to save the world. And "what Rubin thought," mostly, was that the American economy, and in particular the financial markets, were over-regulated and needed to be set free. During his tenure at Treasury, the Clinton White House made a series of moves that would have drastic consequences for the global economy — beginning with Rubin's complete and total failure to regulate his old firm during its first mad dash for obscene short-term profits."

And this...

After the oil bubble collapsed last fall, there was no new bubble to keep things humming — this time, the money seems to be really gone, like worldwide-depression gone. So the financial safari has moved elsewhere, and the big game in the hunt has become the only remaining pool of dumb, unguarded capital left to feed upon: taxpayer money. Here, in the biggest bailout in history, is where Goldman Sachs really started to flex its muscle. It began in September of last year, when then-Treasury secretary Paulson made a momentous series of decisions. Although he had already engineered a rescue of Bear Stearns a few months before and helped bail out quasi-private lenders Fannie Mae and Freddie Mac, Paulson elected to let Lehman Brothers — one of Goldman's last real competitors — collapse without intervention. ("Goldman's superhero status was left intact," says market analyst Eric Salzman, "and an investment-banking competitor, Lehman, goes away.") The very next day, Paulson greenlighted a massive, $85 billion bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman. Thanks to the rescue effort, the bank ended up getting paid in full for its bad bets: By contrast, retired auto workers awaiting the Chrysler bailout will be lucky to receive 50 cents for every dollar they are owed.

If you're having a "Tea Party" over this Fourth of July weekend, don't forget to rally your friends and colleagues for a revolt against Goldman Sachs' influence on our policy making. Goldman officials and officers should be barred from ever being in high Government posts!

Goldman Sachs: The Great American Bubble Machine

Matt Taibbi on how Goldman Sachs has engineered every major market manipulation since the Great Depression

Read this fascinating story on Goldman Sachs and how they have been behind every major market manipulation.

Here is an excerpt...

"And what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help — there were other players in the physical-commodities market — but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures — agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed."

For its part, Goldman strongly denies these claims.

On a personal note I can tell you this...a few years back I wrote a piece in the New York Post on how Goldman quietly changed the gasoline weighting in its Energy Index--an index that is used as a benchmark for many long-only institutional funds and investors.

I called over to Goldman before writing the story to get the details on the change and the person I spoke to did indeed tell me that the weightings had been altered. My mistake, as you will see, was not getting that person's name.

The resultant change in the makeup of the Index caused a huge spike in gasoline prices and that was the gist of my New York Post article, which ran in the business section as a full-page spread.

The next day Goldman brought tremendous pressure down on the Post and my editor and threatened to sue. My editor brought tremendous pressure down on me and I was barred from ever contributing to the Post again (and I had been a pretty regular contributor).

I am economist and not a journalist, so I guess I violated journalism rule #1, which is, get the names of your sources. In my excitement about the story itself, I didn't do that.

Anyway, the lesson is that Goldman flexed its muscles and the Post not only pulled the story but issued a formal retraction out of fear that Goldman would pursue legal action.

UMKC Economists are in paradigm!

University of Missouri Kansas City teaches economics in-paradigm, something that is a rarity among university economic departments these days. Here is a wonderful article by one of their Associate Professors, Pavlina Tcherneva.

Read and enjoy and please share with others if possible.

A Message to President Obama: Stop Priming the Pump, Hire the Unemployed Today at 1:20pm by Pavlina R. Tcherneva Many have called President Obama’s stimulus plan a return to Keynesian policy. Some of us who like reading Keynes professionally or for leisure have already been scratching our heads. I have wondered in particular whether the plan isn’t set up to work in a manner completely backwards from what Keynes himself had in mind when he advocated economic stabilization by government. There are two things to remember about Keynes’s fiscal policy proposals: 1) government spending was always linked to the goal of full employment (the absence of both cyclical and structural unemployment) and 2) to achieve macro-stability and full employment, the government had to employ the unemployed directly into public works. By contrast, most modern economists believe that 1) there is some natural level of unemployment that includes the structurally unemployed, which governments cannot generally tackle, and that 2) public employment is an inefficient use of public resources. So, when the government is called to action, the economic profession has replaced Keynes’s “fiscal policy via public works” with a “leaky bucket pump-priming mechanism.” How is the latter policy supposed to work? Instead of employing the unemployed directly, the idea is to generate large enough government expenditures to produce a level of economic growth that would, in turn, gradually reduce unemployment. For example, the government could spend money on various private sector contracts, stimulate different private industries, offer investment subsidies and tax cuts, and increase unemployment insurance payments, in hope that it will boost GDP sufficiently to reduce unemployment to desired levels. This is essentially the underlying logic behind President Obama’s stimulus package. But it is also a bit of a gamble. Not all of these injections will be effective because the fiscal stimulus enters the economy through “a leaky bucket”. Some of the money will be lost in transit (because of administrative costs, for example) and much of it will have no direct job creation effects (e.g. the tax cut component of the recovery act). Nevertheless, despite this leaky bucket, the theory goes, sooner or later, large enough government expenditures will produce the kind of growth that would reduce unemployment. What is the appropriate rate of growth? Some economists argue that it is 3%. This number comes from the famous Okun’s law (named economist Arthur Okun), which states that a 1% increase in unemployment would reduce GDP growth by approximately 3%. Okun cautioned that the GDP-unemployment link is very weak, but the relationship has been flipped and used as a policy guide to support various broad-based pro-growth policies. In other words, as long as government spending generates 3% of growth in actual GDP, it would manage to reduce unemployment by 1%. Not only is this a small and unimpressive effect, but it is also empirically dubious. Academics-turned-policy-makers already see what a gamble it is to rely on a certain rate of growth to reduce unemployment. President Obama’s Chair of the Council of Economic Advisers, Christina Romer, recently reported that we may have to stomach rising unemployment well into next year, even as the economy recovers or until it hits 2.5% growth rate. This is quite a reversal from her original projections that unemployment will start declining after the third quarter of this year. By contrast, former Labor Secretary Robert Reich has argued that more like 4.5% of growth may be necessary to reduce unemployment. The truth is that no one really knows how fast GDP needs to grow and how large government spending needs to be in order to bring the unemployment rate down. To a large degree, this is because we don’t know how leaky the bucket is. Will indebted households save or spend their tax cuts? Will the unemployed spend much of their unemployment insurance on mortgage payments? How long would layoffs and other cost-cutting measures last before private firms fix their own balance sheets and start hiring? How large a government injection into the private sector is necessary to improve profit expectations and employment conditions? All of this is rather uncertain, which is why Keynes, never had any “leaky bucket” or “pump priming” idea in mind. For him “the real problem fundamental yet essentially simple…[is] to provide employment for everyone” (Keynes 1980, 267) and the most bang for the buck from fiscal policy would be achieved via direct job creation. This he called “on the spot” employment via public works. As I have argued elsewhere, it is useful to think of Keynesian fiscal policy, not as aggregate demand management, but as labor demand management. Yes, Keynes believed that priming the pump would prevent severe depressions, but it couldn’t be counted on to bring the economy to full employment. This is in part because it tends to push prices and erode income distribution once the economy begins to recover. To dodge these problems, in all circumstances, government spending had to be targeted to the unemployed themselves. He urged that when the government couldn’t take the worker to the contract, it should bring the contract to the worker. Commentators often call this a policy of “make work” but Keynes didn’t advocate digging holes, burying jars with money and digging them out, or any other similarly worthless projects. The key was to marry the two goals: to employ the unemployed directly and to make sure that they do useful things. Once they are put to work on a particular project, Keynes argued, “there can be only one object in the economy, namely to substitute some other, better, and wiser piece of expenditure for it” (Keynes 1982, 146). We might as well ask a very basic question: is there really a shortage of useful things to do? If we insist on calling ourselves Keynesians again, and more importantly, if President Obama’s plan for economic stabilization should generate rapid reduction in unemployment, it would help to set fiscal policy straight. Instead of relying on “leaky fiscal buckets” we could return to “labor demand management” a la Keynes that provides immediate employment opportunities to the unemployed via bold and creative public works projects, which generate useful output and services for all.

Key Senate Democrats trim cost of health care bill

In an economy where 13 million people are out of work and where industry is running at less than 70% of capacity, Congress is looking to spend less. There is a collapse in demand and only the Federal Government can restore this. Spending on something as vital as health care would at least provide demand in the health sector. They don't udnerstand this. They are paralyzed by "cost" and see nothing in terms of investment or stimulating demand.

It is also amazing that this is being led by Senate Democrats. The Dems idiotically cling to conservative Republican "fiscal responsibility" playbook. That is what is killing us!!

From the president who promised to save jobs...

Today’s report showed factory payrolls fell by 136,000 after decreasing 156,000 the prior month. Economists forecast a drop of 150,000. The drop included a decline of 26,500 jobs in auto manufacturing and parts industries.

It is almost incomprehensible that this guy ran on a promise to save jobs, then he puts GM and Chrysler into bankruptcy. On the other hand, Wall Street firms (apart from banks) got hundreds of billions $!

States without budgets as key deadline passes

States race to keep governments running as California governor declares fiscal emergency

And Obama runs surpluses! A TOTAL economic disaster in the making!!

Gov't ran a surplus in June. That's why market stalled.

Looks like the gov't ran a surplus in June. That's why the market stalled. Here are the figures from the Daily Treasury Statement.

All Figures in millions $
Deposits Withdrawals
1-Jun 128,434 78,862
2-Jun 6,323 11,152
3-Jun 9,962 32,280
4-Jun 194,196 193,904
5-Jun 6,646 10,531
8-Jun 11,215 10,482
9-Jun 3,924 10,774
10-Jun 9,403 20,170
11-Jun 130,916 137,932
12-Jun 14,153 17,025
15-Jun 113,296 58,780
16-Jun 16,723 9,741
17-Jun 80,170 64,031
18-Jun 98,506 109,155
19-Jun 13,915 11,995
22-Jun 17,569 10,012
23-Jun 6,377 12,198
24-Jun 9,164 56,098
25-Jun 96,922 106,164
26-Jun 8,005 18,526
29-Jun 16,433 13,096
30-Jun 120,464 66,979

Total 1,112,716 1,059,887

Surplus of $52.8 billion for the month.

President and his political advisors are deathly afraid of the deficit and will scuttle the recovery trying to bring the deficit down.

And to think he's doing this as state finances collapse!!

Chinese stock market settles at highest level in over a year!

The Shanghai Composite (SSEC) is now at the highest level since June 11, 2008 and 80% above its lows of November 2008. Going to go much higher. Buy my Special Report on China and see my top four Chinese stock picks! Report is $39.95. Buy now!

California to issue I.O.U's

SAN FRANCISCO (Reuters) – California prepared on Tuesday to resort to issuing IOUs as the giant but cash-strapped U.S. state struggled to approve a new budget in time for the new fiscal year that begins on Wednesday.

The IOUs, which are notes promising payment to vendors and local agencies, or shutting down some public services, are among measures that California and other states may have to rely on as they contend with staggering budget gaps caused by the U.S. recession.

The Obama Administration is letting California--a state with a $1.8 trillion Gross State Product--plunge headlong into a fiscal nightmare that will also turn out to be a nightmare for the national economy.

This has to be a monumental game of political "chicken," because only an absolute imbecile would risk losing California's rich cache of 56 electoral votes.

Obama's chief political adviser, David Axelrod, might be an imbecile when it comes to the economy (no new stimulus, raise taxes to pay for health care, become a fiscal conservative and try to reduce the deficit when 13 million people are out of work), but he is not stupid enough to risk losing California's electoral votes.

I can only believe that this brinksmanship is to teach Arnold a lesson. If you recall, Schwarzenneger backed McCain. Axelrod wants the "Governator" to feel as much pain as possible before coming to the state's rescue. Unless of course Axelrod think's he's figured out a way to win without California in 2012. If so, it could be a grave miscalculation, both for his guy, Obama, and for the nation's economy in the meantime.

Here's what Arnold can do, and I've said this before: Declare himself President of California and secede from the Union. Then he can issue his own currency (which is what these I.O.U's are, effectively). After that, there'd be a short war and California would be brought back into the U.S. and war reparations would be paid to the state. (Possibly far more than what the state was asking for anyway.)

Arnold would have to go to jail, but hey!...he'd go down as a martyr and savior of the national economy!!