UK News — Summer Sales Drive Credit Card Spending

Possible sign of a ‘hand off’ to private sector credit growth as double digit deficit spending replenishes savings and eases debt service and debt service ratios.

Austerity measures will take a bit off growth at some point but probably not drive it anywhere near negative.

UK Headlines:
U.K. House Prices Increased 0.1% in July, Acadametrics Says
UK Summer Sales Drive Credit Card Spending
UK Government Bonds in Demand

UK Summer Sales Drive Credit Card Spending

Aug. 13 (Telegraph) — It might be less than a year since
the end of the worst recession since the 1930s but consumers seem
to have already forgotten the lessons of the credit crisis.

Spending on credit and debit cards rose 9.9pc in July as
consumers ignored fears of a double-dip recession and hit the
high street, according to figures from Barclaycard.

The year-on-year increase was achieved as retailers enticed
shoppers with summer discounts.

“If consumer confidence is taking a hit, it’s not happening
on the high street,” said Stuart Neal of Barclaycard. “If
spending remains at this level compared to last year, 2010 could
prove to be a very good year for retailers.”

July was the third month in a row that the annual growth
rate in sales was above 9pc, according to Barclaycard.

The report said that spending last month was 1.9pc higher
than in June, partly reflecting an earlier start to the summer
sales season.

euro zone issue

I’ve been on the road, and not as close to things as usual, so from what I’ve seen and heard:

Looking at the market prices I’d guess yesterday’s sell off was a euro zone credit response.

The euro dropped a quick 3% and gold went up enough to be up even in dollars.

When Europeans get scared they often run to gold and dollars.

The ECB reportedly bought some Irish paper, indicating concern and also showing they will continue to support national govt funding.

Liquidity is not what it used to be. Sudden violent moves can just as easily be due to relatively small buyers and sellers and not any kind of fundamental shift. It can all reverse just as quickly as it sold off.

I’d key off the euro. It was up a tad last I checked, and stocks were stabilizing.

The fact that q2 earnings were very strong even as Q2 GDP was not so strong is a good sign for stocks.

Congress has extended unemployment benefits, approved 26 billion for the states, and is toying with extending the tax cuts set to expire, all indicating there will not be any serious deficit reduction interference for at least the rest of the year.

Last I checked Federal revenues had bottomed and were starting to rise indicating an underlying positive tone to the economy.

8%+ continuing Federal deficits are a very large tailwind that I expect to keep GDP in positive territory.

Weekly claims are on the high side, but not at double dip levels and continuing claims continue to fall. And the combo of hours worked and new jobs shows ongoing improvement.

Lack of consumer credit expansion (borrow to buy) keeps it all moderate, though poised for expansion as debt to income ratios have continued to fall due to the federal deficits.

Federal deficits have added to net financial assets and incomes of households, allowing them to spend from income and also add to savings, as indicated by firm final demand in the Q2 GDP revisions.

Lastly, Q3 has shown declines in a variety of markets over the last few years making rear view mirror traders more than cautious.

Trade-Q2 GDP


Karim writes:

  • Real trade balance widens from -46bn in May to -54bn in June
  • Exports down 1.3% but imports up 3%
  • Even though civilian aircraft imports up 53% (after -49% prior month), imports up across the board
  • Consumer goods imports up 7.8% and capital goods up 1.2%
  • Even though the import data suggests final demand is holding up well, the final Q2 GDP print wont be pretty
  • Wholesale inventory data yesterday and trade data today were worse than initial BEA estimates for Q2 GDP
  • Headline GDP likely to be revised from initial estimate of 2.4% to somewhere in 1-1.5%. But final private demand may actually be revised up.

Yes, Q2 GDP to be revised down, but it’s been down. Q2 is history. Corporate earnings were based on the actual numbers- sales, costs, profits.

In other words, we know what the S&P were able to earn even with very modest headline GDP growth.

The higher final demand is also at least sustainable.
The relatively large and ongoing fiscal deficit that added that much income and savings to the non govt sectors allowed for the higher final demand AND higher savings.

While the QE from the Fed does nothing beyond causing term rates to be marginally lower than other wise, it does add some support for asset prices via implied discount rates.

As discussed earlier this year, markets are figuring out that the economy is flying without a net. All the Fed can do is alter interest rates which, with each passing day since the recession began, has been shown to not be able to support output and employment, or even prices and lending. (Just like Japan has shown for going on 20 years.)

And a Congress and Administration that thinks it’s run out of money and is dependent on borrowing and leaving the bill to our grand children to be able to spend is unlikely to provide meaningful fiscal adjustments to support aggregate demand.

So we muddle through with unthinkably high levels of unemployment and modest GDP growth waiting for an increase in private sector demand to kick in via credit expansion from the usual channels- cars and housing.

The risk to growth is now primarily proactive fiscal consolidation- spending cuts and/or tax hikes- in advance of private sector credit expansion. So far I haven’t seen anything meaningful enough to be of consequence. But the anti deficit rhetoric is certainly there, counterbalanced to some degree by the call for jobs.

So it remains a pretty good equity environment but a very ugly political environment.

more Stockman

On more time on Stockman as this is typical of what’s wrong with mainstream thought:

The Federal Debt Freight Train Is Coming at Mr. Market

By David Stockman

Aug 6 — Nominal GDP has been growing at only $4 billion per month, while new Federal debt has been accumulating at around $100 billion per month.

Federal deficit spending adds income and savings of dollar denominated financial assets to the economy. The fact that this is being done and excess capacity and unemployment is still high shows the economy’s desire to save is even higher, and that additional deficit spending is needed to expedite a return to full employment.

Hence, my proposed full payroll tax (FICA) holiday.

The federal deficit is no longer an abstract long-term problem; it’s a financially critical freight train coming down the track at alarming speed. Here’s a dramatic way to look at it: As of last week’s second-quarter report, nominal GDP was only $100 billion higher than it was back in the third quarter of 2008. So the nominal GDP has been growing at only $4 billion per month, while new Federal debt has been accumulating at around $100 billion per month. Yes, this period represents the worst of the so-called Great Recession — but never in history has the Federal debt grown at a rate of 25x GDP for two years running!

Yes, because because the desire to save (reducing debt ‘counts’ as savings) grown so quickly, due to the financial sector crisis that followed the fraudulent sub prime expansion.

And notice he doesn’t mention anything actually wrong with larger deficits, just continuously uses negative language regarding magnitudes and direction.

Secondly, this time is very different in terms of the business-cycle impact on the budget. During the past three quarters of “recovery” where we’ve had real growth of 5.0%, 3.7%, and 2.4% respectively, nominal GDP growth has only averaged about 4%. This is steeply below the figure for past cycles when we had 7-10% nominal GDP growth due to higher real growth and also much higher inflation. Consequently, nominal GDP — which is the true driver of Federal revenue since they tax our “money” income, not the statistical “real” income confected by the BEA/Commerce Dept — has only grown at $50 billion per month during the last three quarters. So, the Federal debt has still grown at 2x the rate of GDP during what looks to be the strongest phase of the recovery.

Yes, this is because the deficit is still not large enough to offset desires to save by not spending income, and inability and lack of desire of the private sector to go into debt.

For a given size govt, the readily available federal response to get the private sector back to full employment is to cut taxes sufficiently so the private sector can resume sufficient spending out of income rather than via debt expansion.

Public sector expansion will also return us to full employment. It’s a political choice as to whether we want more government or not.

Thirdly, if we’re in a sustained debt deflation (below), it’s extremely probable that the GDP deflator will shrink toward zero and real growth will struggle to make 2-3%. Hence, nominal GDP growth is almost certain to be even slower in the quarters ahead — say 3% or $40 billion per month — than it’s been since last summer.

Agreed this will happen under current circumstances if private sector debt expansion doesn’t take place.

This “realistic” outlook compares to the OMB forecast which assumes double this level of nominal GDP growth — a 6% annualized rate, or about $75 billion per month. At the same time, there’s virtually no chance that unemployment will drop much below 10% in the context of a deflationary “recovery” — meaning that budget costs for unemployment, foods stamps, etc. will remain elevated, not come down by hundreds of billions as currently projected, either.

Also likely without private sector debt expansion. Watch for car sales and housing expansion, which are generally the source of private sector credit expansion.

Consequently, under the current policy baseline and including extension of the Bush tax cuts (at a cost of about $300 billion per year), and with even mildly deflationary economic assumptions, it’s not possible for the baseline deficit to drop much below $1.5 trillion any time before 2015.

Ok, point?

So we have baked into the cake a rather frightening scenario: monthly federal debt growth of upwards of $125 billion, or 3x the likely nominal GDP growth of $40 billion — as far as the eye can see.

The deficit isn’t frightening, it’s the continuing output gap that’s frightening and screams for a larger deficit- tax cut or spending increase, depending on one’s politics.

The real problem is this type of fear mongering from Stockman is what prevents the prosperity that’s at hand from happening.

Fourth, the publicly held federal debt will be about $9 trillion at the September fiscal year end, and at the built-in 3x GDP growth rate will reach $12 trillion when the next president is sworn in in January 2013. Adding in state and local debt, we’d be at $15 trillion or a Greek-scale 100% of GDP before the next president picks his or her cabinet. Every reason of prudence says not to tempt the financial gods of the global bond and currency markets with this freight-train scenario: Do something big to close the deficit, and do it now.

Now he brings in the Greek fear mongering.

By acting as if we could be the next Greece, we are well on the road to being the next Japan.

Greece is not the issuer of its own currency, but is analogous to a US state like California. There is no solvency issue for governments that are the issuer of their currency, like the US, UK, and Japan.

Fifth, there’s no possibility in either this world or the next of obtaining the needed $700-$1,000 billion structural deficit reduction by spending cuts alone. We’ve had a rolling referendum since the first Reagan budget plan in 1981, and progressively over these three decades the Republican party has exempted every material component of the budget from cuts, including middle-class entitlements, defense, veterans, education, housing, farm subsidies, and even Amtrack! Like Casey, the GOP has been in the anti-spending batter’s box for 30 years, and has never stopped whiffing the ball. The final proof is that the one GOP spending cut plan with any integrity — the “roadmap” of Congressman Paul Ryan — has the grand sum of 13 co-sponsors, and I dare say half would call in sick if it ever came to a vote. Therefore, tax increases are now needed because it’s too late and too urgent for anything else.

Again, implying there is some benefit to deficit reduction when there is excess capacity and unemployment as far as the eye can see.

Sixth, both the Keynesians and the supply-siders are wrong about the alleged detrimental impact on the business-cycle recovery of a big deficit reduction package — including major tax increases. The reason is that both focus on GDP flows — with Keynsians pointing to a subtraction from consumer “spending” and the supply-siders emphasizing a detriment to output and investment. But under present realities, the problem isn’t the flows; it’s the massive, never-before-seen stock of combined public and private debt that’s depressing the economy, and which overwhelms any “flow” effects from fiscal policy.

No he’s combining public and private debt to enhance the fear mongering and miss another important point.

Specifically, at $52 trillion, credit market debt today is 3.6x GDP, compared to 1.6x GDP when the original supply-side versus Keynesian argument opened up back in 1980. Moreover, this 1980 total economy “leverage ratio” hadn’t fluctuated appreciably for 110 years going back to 1870. So I call it the “golden constant,” and note that had the total economy leverage ratio not gone parabolic after 1980, credit-market debt today would be $22 trillion at the 1.6x ratio. In short, the economy is freighted down with $30 trillion in excess debt; the process of liquidating the household and business portion of this — about $24 trillion — will swamp the normal cyclical recovery mechanisms for years to come. And it’s insane to keep adding the mushrooming public-sector portion of the debt or order to artificially juice the GDP numbers for a few more quarters.

As above, reducing private sector debt (including non residents) is done by the private sector spending less than its income, which can only be accomplished if the public sector spends more than its income.

Finally, in the context of a secular debt deflation, the overwhelming priority is public-sector solvency, not conventional growth.

Notice he has not made the case that there is a solvency issue. It just ‘goes without saying’ when in fact there can be no solvency issue for a govt that issues its own currency.

So policy needs to be geared to long-term balance-sheet repair, not short-term flows.In every sector — household, government, business — the numbers are awful, and far worse than the bullish mainstream seems to recognize. Let me close with one example: At least once a day someone on CNBC talks about the $1.5 trillion in corporate cash on the sidelines, and how healthy the business-sector balance sheet is. Pure baloney. Consult table B 102 of the flow of funds, and you’ll see that corporate-sector cash assets have indeed increased by $279 billion since the December 2007 peak, and now total $1.72 trillion. But non-financial corporate-sector debt according to the same table, has increased by $480 billion and now stands at $7.2 trillion — so that corporate debt net of cash has actually increased by $200 billion during the Great Recession. Stated differently, corporate debt net of cash was $5.3 trillion or 36.7% of GDP at December 2007 and is now $5.5 trillion or 37.6% of GDP. There’s been no deleveraging in the business sector either — especially when its noted that tangible assets have also declined by 20% on a market basis and are flat on a book basis during the same period.

Fact is, ‘savings’ for the economy as a whole (not including govt) has gone up by exactly the amount of the deficit, or someone in the CBO has to stay late and find his math error.

Payrolls


Karim writes:

Not a game changer in my view and doesn’t compel the Fed to change course next week.

Private sector gradually churning out jobs; hours, wages, and diffusion index ok.

  • Private payrolls up 71k after avg of 41k of prior 2mths but well off highs of 200k avg of Feb and Mar
  • UE rate stays at 9.5%
  • Hours up 0.3% and wages up 0.2%
  • Diffusion index up to 55.6 from 55.2
  • Median duration of unemployment down from 25.5 to 22.2
  • U6 measure unch at 16.5%
  • Job growth accelerates in manufacturing and retail; weakens in temp services and leisure/hospitality

Yes, which means it remains a good market for stocks.

High unemployment is good for cost control and helps keep the Fed on hold. And 0 rates remain a deflationary influence as well.

Top line growth is modestly positive growing by productivity increases plus some hours and employment gains.

Earnings trend remains positive with productivity gains, some top line growth, and a loose labor market.

All supported by a federal deficit that still exceeds 8% of gdp.

Tough political environment with most of the real wealth going to the top as unemployment remains near the highs.

China Seen Robbing Consumers With Low Interest Rates

Looks like someone’s catching on to the interest rate channel. And Bloomberg is reporting it.

(Bloomberg never reported it when I communicated with them.)

China Seen Robbing Consumers With Low Interest Rates

Aug 6 (Bloomberg) — Peking University professor Michael
Pettis was discussing declining bank-deposit returns when a
student interrupted with a story about her aunt that may stymie
China’s plan to boost consumer spending.

“To send her son to university in six years it means she
must replace each yuan in lost income with one from her wages,”
the student said, according to Pettis.

The government’s policy of keeping interest rates low to
reduce the burden of soaring municipal debt is costing savers as
much as 1.6 trillion yuan ($236 billion) a year in lost income
on bank deposits, according to Pettis, former head of emerging
markets at Bear Stearns Cos. To make up the shortfall, savers
have to set aside a larger proportion of wages, undermining
China’s efforts to counter slower export growth with consumer
spending at home.

“Consumption is already at a dangerously low level,” said
Pettis, author of the “The Volatility Machine,” a 2001 book
that examines financial crises in emerging markets. “If it
doesn’t begin to rise very quickly, China has a problem because
household consumption will continue to drop as a share of GDP.”

Emphasis on exports and investments have caused domestic
consumption to fall to 35 percent of gross domestic product, the
lowest of any major economy, from 45 percent a decade ago,
Societe Generale AG says.

Pettis isn’t alone in being skeptical about a consumer boom
in China. Yale University finance professor Chen Zhiwu and Huang
Yasheng at the Massachusetts Institute of Technology also
predict constrained consumer spending.

State Controlled

Chen estimates the state controls 70 percent of the
nation’s assets and says most of its profits don’t flow to
consumers. On an inflation-adjusted basis government income
surged more than tenfold in the past 15 years while disposable
urban income increased less than three times, he said.

Pettis said the drag on consumer spending from depressed
deposit rates may help slash China’s annual economic expansion
to between 5 and 7 percent a year through 2020, from an average
of about 10 percent in the past decade.

The Group of 20 nations has urged China to boost domestic
consumer spending to help offset reduced consumption from debt-
strapped consumers in the U.S. and Europe. If Chinese shoppers
fail to take over that mantle as the government’s 4 trillion
yuan in stimulus wanes, then the nation may have to fall back on
exports for growth. That would revive trade disputes with the
U.S., which is battling 9.5 percent unemployment, said Huang.

Trade Tensions

“I do not see how trade tensions can be avoided,” said
Huang, a professor at MIT’s Sloan School of Management in
Cambridge, Massachusetts, and author of “Capitalism with
Chinese Characteristics: Entrepreneurship and the State.”
“Even in the best-case scenario I do not see household
consumption replacing investment as a driver of growth in the
foreseeable future.”

China’s leaders have vowed to boost consumption’s share of
GDP since at least 2006 — so far to no avail. The ratio of
consumption in China’s economy is about half that of the U.S.,
and about 60 percent of both Europe and Japan, according to
Credit Agricole CIB.

China’s past development has created an “irrational
economic structure” and “uncoordinated and unsustainable
development is increasingly apparent,” said Vice Premier Li
Keqiang in a June article in the government-owned Qiu Shi
magazine. Long-term dependence on investment and exports for
growth “will grow the instability of the economy,” he said.

Low Rates

Pettis computes the 1.6 trillion yuan in lost returns to
savers by comparing the difference between China’s nominal
deposit and growth rates to those in other emerging markets.
That calculation indicates China’s deposit rates should be at
least 4 percentage points higher, he said.

“The government maintains a cap on deposit rates, which
helps prop up bank profits, but only by spreading the cost to
households in the form of artificially low interest returns,”
said Mark Williams, an economist at Capital Economics Ltd. in
London who worked at the U.K. Treasury as an adviser on China
from 2005 to 2007.

China has left interest rates unchanged since December 2008,
even as countries from Malaysia to Taiwan, South Korea and India
raised them. The central bank sees little need for an imminent
increase, the International Monetary Fund said in a staff report
on July 29 after consultation with the Chinese government.

China’s inflation, near a two-year high of 2.9 percent in
June, is also eroding household savings. That may cause people
to spend less and save more to cover rising costs of healthcare,
pensions and children’s education, said Pettis. The one-year
deposit rate is 2.25 percent.

Lost Returns

In June 2009 savers earned a real return on one-year
deposits of 3.95 percent. That slumped to a negative 0.65
percent in June this year, indicating lost returns to savers of
1.8 trillion yuan annually compared with a year earlier. Pettis
estimates China’s household deposits account for 60 percent of
total deposits, or about 40 trillion yuan.

Chinese investors have few appealing options. Capital
controls inhibit citizens from investing overseas. A crackdown
on property speculation may cause property prices to fall as
much as 30 percent in the next 12 months, according to Barclays
Capital. The Shanghai Composite Index, up 0.1 percent as of the
11:30 a.m. local time break in trading, has slumped about 20
percent this year.

Pettis said the 3.06 percentage-point spread between
deposit and lending rates that is set by the central bank will
help banks pay for potential bad loans after an 18-month lending
boom that was almost as big as the U.K.’s gross domestic product.

Bad Loans

“Evidence is mounting that the lending spree not only has
created bad loans but is now constraining monetary policy,”
said Huang.

Concern about potential losses in the financial system may
deepen after China’s banking regulator decided to conduct stress
tests of the nation’s lenders. The tests include a worst-case
scenario of property prices falling as much as 60 percent in
cities where they have risen significantly, a person with
knowledge of the matter said.

Banks could be saddled with bad loans of more than $400
billion, said Jim Walker, chief economist at Hong Kong-based
Asianomics Ltd.

Some economists argue that surging retail-sales figures and
rising wages show China’s shift to greater consumer spending is
on track. Dariusz Kowalczyk at Credit Agricole CIB in Hong Kong
estimates consumption will account for 47 percent of GDP within
10 years.

Retail sales rose 18 percent in the first half of 2010 to
7.3 trillion yuan. Citigroup Inc. says wages in the unskilled
labor market may double over the next five years.

Middle Class

“Disposable income levels are growing, the middle class is
growing and urbanization is alive and strong,” said Andy Mantel,
Hong Kong-based managing director of Pacific Sun Investment
Management Ltd.’s consumer-focused Mantou Fund, which invests
mainly in Greater China equities. “That would be positive for
the next five to 10 years.”

Mantou’s holdings include companies like Fujian-based fruit
and vegetable producer China Green (Holdings) Ltd. whose new
drinks line is “higher quality than has been available on the
market,” said Mantel. “People these days are willing to pay a
bit extra for better products.”

Hong Kong-based Nomura Holdings Inc. analyst Emma Liu
expects China Green’s stock to rise more than 20 percent over
the next year to HK$10.8 ($1.4).

Investor’s Picks

Rising rural incomes prompted Shanghai-based River Fund
Management to buy shares this year in Qingdao-based Qingdao
Haier Co. Ltd. and Zhuhai-based Gree Electric Appliances Inc.,
two of China’s biggest makers of air conditioners.

“People nowadays are not only replacing their old air-
conditioners, but upgrading from low-end to high-end ones,”
said fund manager Zhang Ling. “This will continue over the next
10 years.”

Driven by government subsidies for consumer products
including cars and refrigerators, retail sales rose 16 percent
in 2009 after adjusting for consumer price changes, the most
since 1986.

China supplanted the U.S. as the world’s largest auto
market last year as vehicle sales jumped 46 percent. Households
borrowed 2.5 trillion yuan, almost four times more than a year
earlier.

Even as sales rise, the hope that China was at “a turning
point” for the role of consumer spending in the economy may
have been premature, said Nicholas Lardy, a senior fellow at the
Peterson Institute for International Economics in Washington.

‘More Unbalanced’

The economy is “still becoming slightly more unbalanced”
toward investment, said Glenn Maguire, chief Asia Pacific
economist at Societe Generale in Hong Kong. “Until consumption
grows faster than fixed-asset investment for a sustained period,
the economy will remain unbalanced.”

Urban fixed-asset investment surged 25.5 percent in the
first half to 9.8 trillion yuan. Another 29.6 trillion yuan is
needed to finish outstanding fixed-asset projects, said Sun
Mingchun, an economist with Nomura Holdings Inc. in Hong Kong.

To achieve sustained rebalancing, China should allow a
stronger currency that boosts household purchasing power,
improve pension and healthcare coverage and gradually allow
markets to determine interest rates, the IMF report said.

“I never believed the hype that China was turning the
corner on rebalancing growth toward consumption,” said Huang.
“The main political agenda is not to let GDP growth slip and
that means continued investment growth.”

Stockman’s ‘Four Deformations of the Apocalypse’

Four Deformations of the Apocalypse

By David Stockman

July 31 (NYT) — If there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.

Yet another ‘expert’ with fear mongering with ‘the US is the next Greece’ nonsense. So much for whatever positives may be left of his legacy.

More fundamentally, Mr. McConnell’s stand puts the lie to the Republican pretense that its new monetarist and supply-side doctrines are rooted in its traditional financial philosophy. Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too. But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.

At least they are practical enough to add to aggregate demand when needed.
Does anyone think there is an excess of demand that calls for a tax hike?
Any call for a tax hike on ‘fairness’ should be ‘paid for’ with at least an offsetting tax cut somewhere.

This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. More specifically, the new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one. The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. Now, since we have lived beyond our means as a nation for nearly 40 years, our cumulative current-account deficit — the combined shortfall on our trade in goods, services and income — has reached nearly $8 trillion. That’s borrowed prosperity on an epic scale.

That’s been adding to our real terms of trade and standard of living on an epic scale, and, ironically, the rest of the world is fighting to continue it while we are pressing to end it. Go figure!

It is also an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves. Just let the free market set currency exchange rates, he said, and trade deficits will self-correct.

He was right. It continuously self corrects to reflect rest of world savings desires of $US financial assets.

It may be true that governments, because they intervene in foreign exchange markets, have never completely allowed their currencies to float freely. But that does not absolve Friedman’s $8 trillion error. Once relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors.

Yes, to our advantage!

In fact, since chronic current-account deficits result from a nation spending more than it earns, stringent domestic belt-tightening is the only cure.

Leave it to Dave to promote a cure for prosperity.

When the dollar was tied to fixed exchange rates, politicians were willing to administer the needed castor oil, because the alternative was to make up for the trade shortfall by paying out reserves, and this would cause immediate economic pain — from high interest rates, for example. But now there is no discipline, only global monetary chaos as foreign central banks run their own printing presses at ever faster speeds to sop up the tidal wave of dollars coming from the Federal Reserve.

It’s not from the Fed, Dave, it’s from the Treasury deficit spending and private deficit spending.

The second unhappy change in the American economy has been the extraordinary growth of our public debt. In 1970 it was just 40 percent of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970. This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.

Public sector deficits = non govt savings of those financial assets. And the unemployment rate and inflation rate are telling us federal deficits are too small to provide the savings demanded by the rest of us.

In 1981, traditional Republicans supported tax cuts, matched by spending cuts, to offset the way inflation was pushing many taxpayers into higher brackets and to spur investment. The Reagan administration’s hastily prepared fiscal blueprint, however, was no match for the primordial forces — the welfare state and the warfare state — that drive the federal spending machine. Soon, the neocons were pushing the military budget skyward. And the Republicans on Capitol Hill who were supposed to cut spending exempted from the knife most of the domestic budget — entitlements, farm subsidies, education, water projects. But in the end it was a new cadre of ideological tax-cutters who killed the Republicans’ fiscal religion.

And over the next 10 years inflation came down from over 12% to 3%, even with all the deficit spending because savings desires were even higher, and continue to grow geometrically due to tax advantaged pension contributions, etc.

Through the 1984 election, the old guard earnestly tried to control the deficit, rolling back about 40 percent of the original Reagan tax cuts. But when, in the following years, the Federal Reserve chairman, Paul Volcker, finally crushed inflation,

Volcker did not crush inflation. If anything, his high rates added to business costs and unearned income long after inflation turned down due to positive supply shocks in the energy markets, helped by the dereg of natural gas in 1978 that did the lion’s share of cutting the demand for crude for electricity generation.

enabling a solid economic rebound, the new tax-cutters not only claimed victory for their supply-side strategy but hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts. By fiscal year 2009, the tax-cutters had reduced federal revenues to 15 percent of gross domestic product, lower than they had been since the 1940s. Then, after rarely vetoing a budget bill and engaging in two unfinanced foreign military adventures, George W. Bush surrendered on domestic spending cuts, too — signing into law $420 billion in non-defense appropriations, a 65 percent gain from the $260 billion he had inherited eight years earlier. Republicans thus joined the Democrats in a shameless embrace of a free-lunch fiscal policy.

Not my first choice for Federal spending, but certainly did the trick of turning the economy in 2003.

The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector. Here, Republicans have been oblivious to the grave danger of flooding financial markets with freely printed money and, at the same time, removing traditional restrictions on leverage and speculation. As a result, the combined assets of conventional banks and the so-called shadow banking system (including investment banks and finance companies) grew from a mere $500 billion in 1970 to $30 trillion by September 2008.

The real problem with the financial sector is that it preys on the real economy with both a massive brain drain and a drain of other real resources as well.

But the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. They could never have survived, much less thrived, if their deposits had not been government-guaranteed and if they hadn’t been able to obtain virtually free money from the Fed’s discount window to cover their bad bets.

They didn’t get free money to cover their bad debts. All losses were deducted from shareholder value. Some banks lost all shareholder funds and were liquidated or sold (with the FDIC realizing losses after the shareholders were wiped out)
Functionally, tarp was regulatory forbearance, not a federal expenditure.

The fourth destructive change has been the hollowing out of the larger American economy. Having lived beyond our means for decades by borrowing heavily from abroad, we have steadily sent jobs and production offshore. In the past decade, the number of high-value jobs in goods production and in service categories like trade, transportation, information technology and the professions has shrunk by 12 percent, to 68 million from 77 million. The only reason we have not experienced a severe reduction in nonfarm payrolls since 2000 is that there has been a gain in low-paying, often part-time positions in places like bars, hotels and nursing homes.

Not true. The trade deficit is an enormous benefit. For a given size govt, it allows for lower taxes/higher deficits so Americans can have enough spending power to buy both all we can produce at full employment plus whatever the rest of the world wants to sell us. In 1999/2000, unemployment fell below 3.8%, even as the trade deficit soared to $380 billion.

It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans — paid mainly from the Wall Street casino — received two-thirds of the gain in national income, while the bottom 90 percent — mainly dependent on Main Street’s shrinking economy — got only 12 percent. This growing wealth gap is not the market’s fault. It’s the decaying fruit of bad economic policy.

Agreed!!! However this has nothing to do with the rest of what he’s been droning on about. In fact, higher deficits are usually result in stronger economies which are associated with lower income inequality.

The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing — as suggested by last week’s news that the national economy grew at an anemic annual rate of 2.4 percent in the second quarter. Under these circumstances, it’s a pity that the modern Republican Party offers the American people an irrelevant platform of recycled Keynesianism when the old approach — balanced budgets, sound money and financial discipline — is needed more than ever.

No, we need a full payroll tax holiday, $500 per capita revenue sharing for the states, and an $8 transition job for anyone willing and able to work.

David Stockman, a director of the Office of Management and Budget under President Ronald Reagan, is working on a book about the financial crisis.

Latest Press Release

Warren Mosler Applauds the Senate for Passing Urgently Needed State
Funding and Urges the House to do Same


Independent candidate for Christopher Dodd’s CT Senate seat and economist specializing in monetary operations urges swift passage of aid to avoid job losses and fiscal distress


Waterbury, CT – August 5, 2010 – Warren Mosler, Independent candidate for Christopher Dodd’s Connecticut Senate seat and economist specializing in monetary operations today applauded members of the U.S. Senate for moving critical State Funding forward and urges members of the House to support this effort to alleviate the strain on state budgets when they reconvene next week. The Senate’s plan would allocate $16.1 billion for Medicaid and an additional $10 billion to help avert teacher layoffs. One of Mosler’s proposals to fix the economy is an unrestricted Federal distribution of $500 per capita to each state government to help them cope with the shortfalls created by the recession. “While this bill falls substantially short of my proposal, it is a step forward. That the U.S. Senate had previously failed to pass such a critical bill because it would add to the deficit only makes it clear that many lawmakers do not know how the U.S. monetary system works,” Mosler asserted. “Destroying even more jobs by forcing states to lay off teachers and raise taxes is the last thing they should be doing in this economy. Unfortunately, Congress acts as if we were still hamstrung by the gold standard.”

Warren Mosler, based upon his 37 years of successful banking and finance experience and with the support of many highly regarded economists, states that it is an operational fact (not theory) that today’s Federal spending is not constrained by revenue and, therefore, “pay as you go” is unnecessary and completely misses the point. Any government with its own non-convertible currency with a floating exchange rate that spends and borrows strictly in its own currency cannot become insolvent. “Everyone in Fed operations knows that Congress and the administration have it wrong. As Chairman Bernanke publicly stated, all Federal spending is done simply by marking up numbers in bank accounts with its computer” As Mosler explains, “The government can’t run out of money. It doesn’t get anything real when it taxes and doesn’t give anything real when it spends. There is no gold coin that goes into a bucket at the Fed when you are taxed and the government doesn’t hammer a gold coin into its computer when it spends. The US can’t possibly be the next Greece, because that nation no longer issues its own currency while the U.S. still does.” The people of Connecticut and the people of the United States deserve to have a voice of true knowledge and experience shaping the debate about our economic future, not the ill-informed voices of partisan, ideological bickering that have gotten us to where we are today. Warren’s in-depth knowledge of even the most minute aspects of the economy and monetary system make him uniquely qualified to provide the guidance and leadership needed to fix the economy so that it again creates well paid private sector jobs for anyone willing and able to work.

About Warren Mosler
Warren is running as an Independent. His populist economic message calls for a full payroll tax (FICA) holiday so that people working for a living can afford to buy the goods and services they produce, limiting government to the provision of public infrastructure, utilizing competitive market forces to achieve economic objectives, and restoring constitutional government and personal responsibility. He has also pledged never to vote for cuts in Social Security payments or benefits. Warren was born and raised in Manchester, Conn., where his father worked in a small insurance office and his mother as a night-shift nurse. He graduated from the University of Connecticut in 1971 with a degree in economics and, after years of hard work, started his own investment firm in 1982. For the last twenty years, Warren has also been deeply involved in the academic community, publishing numerous articles in economic journals, newspapers and periodicals, and giving presentations at conferences around the globe. Mosler’s new book “The 7 Deadly Innocent Frauds of Economic Policy” lays out a clear guide in, layman’s terms, to how the monetary system really works and exposes some of the most commonly held misconceptions. He is also the founder of Mosler Automotive, which builds the Mosler MT900, the world’s top performance car that also gets 30 mpg at legal highway speeds.

Learn more at www.moslerforsenate.com.


National Media Contact:
Will Thompson
(267) 221-6056
will@hedgefundpr.net

Connecticut Media Contact:
Erin Bronner
(818) 992-4353
ebronner@jmprpublicrelations.com

State of the Hedge Fund Industry Conference – Sept 14 – NYC


State of the Hedge Fund Industry

September 14, 2010, 1pm-5pm followed by cocktail reception

New York City

Join us as distinguished experts from the hedge fund industry speak candidly about the biggest issues affecting managers today. Speakers will discuss challenges and opportunities in a post-financial crisis world, including the new—more difficult—capital raising environment; what smaller firms can do to ‘institutionalize’ themselves; and how seeding firms are playing a important role as the fund of funds model wavers. Other topics include regulatory reform and what it means for hedge funds, and a discussion about where alpha can be found going forward.

Co-hosted by FINalternatives

Agenda

1:00 – 1:30 Registration

1:30 – 2:00 State of the Industry, State of the Markets

2:10 – 3:00 Panel One: Growing Your Assets

JOHN SEIGENTHALER, CEO-NY, Seigenthaler Public Relations (former NBC News Anchor) – Moderator

ALAN GLATT, Managing Partner, Protocol Capital Management

ANTHONY SCARAMUCCI, Managing Partner, SkyBridge Capital

DANIEL SOLOMON, President and COO, Lyford Group International

3:00 – 3:30 Coffee Break

3:30 – 4:20 Panel Two: Post-Crisis: Challenges And Opportunities

SIMON FLUDGATE, Partner, Aksia

Additional Speakers to be announced

4:30 – 5:00 Keynote Speaker

WARREN MOSLER, Founder and Principal, III Offshore Advisors

5:00 – 6:30 Cocktail Reception