Too late! Debt terrorists have gotten to Obama

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

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

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

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

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

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

(from the preamble)

The Constitution of the United States of America

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

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

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Obama’s Planned Tax Would Hit Highest Earners Hardest

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

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

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

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

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

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

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

Not at all.

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

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

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

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

Japan Considers Stock Buying as Market Slides

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

Read article here.

Read about the Panic of 1907.

Spending as stimulus: Fox News

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

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

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

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

Read full story here.

My show on BizRadio is being cancelled!

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

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

Friday, February 27th will be the last show.

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

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

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

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

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

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

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

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

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

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

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

Glenn Beck's Economics Are a Danger to America

My letter to the New York Times.

Glenn Beck’s Economics Are a Danger to Our Country

by Michael Norman

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

PRESIDENT OBAMA INVITES PETER G. PETERSON FOUNDATION LEADERS TO TAKE PART IN WHITE HOUSE “FISCAL RESPONSIBILITY SUMMIT”

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

Listen to audio clip here.

California Senate Approves Budget Fix, Ending Impasse

Fiscal drag from the nation's largest economy.

Read story here.

Euro Advances on Speculation Germany Will Signal Aid for Region

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

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

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

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

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

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

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

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

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

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

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

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




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

Too many assets are not our problem

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

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

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

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

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

The problem is not the supply of things.

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

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

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

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

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

Crime
Poverty
Disease
Ignorance
Pollution
Corruption
Hate
War
Evil
Sadness

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

Reserves continue to fall

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

Chanos Saw Nonpublic Fairfax Research, E-Mails Show

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

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

Read story here.

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

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

Read story here.

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

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

Read story here.

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

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

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

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

European bank bail-out could push EU into crisis

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

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

Read story here.

Just How Right Is Jim Rogers?

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

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

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

Attempts to contact Rogers late Tuesday were unsuccessful.

Read story here.

EU says France's auto bailout may pose problems

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

Read story here.

Democrats Face Calls for Cuts in Talks on Final Stimulus Bill

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

‘Vulture’ Investors Eye Bad Assets, but Warily

This is Geithner's plan. Unreal!!

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

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

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

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

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

Read story here.

Trade deficit falls to six-year low

Be careful what you wish for!

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

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

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

Read full article here.

Bankers to appear before dubious Congress

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

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

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

Letter to the New York Post

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

For Every Dollar Borrowed, There is a Dollar Saved

By Michael Norman

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

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

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

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

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

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

-Michael Norman is an economist and private investor