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(email exchange)

Maybe they’re reading my blog???

>   
>   On Mar 13, 2009 at 7:06 am, John wrote:
>   
>   NOYER SAYS RISING DEFICITS MAY INCREASE SAVING BY EUROPEANS
>   
>   Story to follow.
>   

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(email exchange)

>   
>   On Thu, Mar 12, 2009 at 3:31 PM, Tom wrote:
>   
>   Christina Romer gave a speech on Monday at Brookings in which she
>   strongly argued for dollar devaluation as a tool to create economic
>   recovery.
>   

Continues the beggar they neighbor policies that Paulson pushed.

>   
>   This is the sort of thing that provides political cover for Fed Chairman Ben
>   Bernanke to pursue a more aggressive quantitative easing policy.
>   

Yes, of course he doesn’t matter for anything of consequence, but that’s another story.

>   
>   Romer, who is chair of the Council of Economic Advisors, praised FDR’s
>   1933 decision to allow the gold price to float up from $20.63/oz. to
>   $34.85/oz.
>   

Yes, should have floated it entirely.

Back then, the gold standard constrained even the US Treasury from borrowing.

We don’t have that issue, so moving the USD down for that reason is moot.

>   
>   That decision offers a template for what the Fed could do today, she said
>   (italics mine):
>   
>   This monetary expansion [in the wake of the 1933 devaluation] couldn’t
>   lower nominal interest rates because they were already near zero. What it
>   could do was break expectations of deflation.
>   

That pesky, ridiculous, ‘inflation expectations theory’ again!

>   
>   Prices had fallen 25% between 1929 and 1933. People throughout the
>   economy expected this deflation to continue. As a result, the real cost of
>   borrowing and investing was exceedingly high.
>   

Expectations had nothing to do with it. Lack of aggregate demand did. And the Treasury was revenue constrained due to the gold standard.

>   
>   Consumers and businesses wanted to sit on any cash they had because
>   they expected its real purchasing power to increase as prices fell.
>   

Not the reason. When on a gold standard, a rising value of gold is expressed by falling prices for everything else as gold is fixed.

Hence the revaluation upward of the price of gold which was a devaluation of the dollar. (Dollar buys less gold)

>   
>   Devaluation followed by rapid monetary expansion broke this deflationary
>   spiral. Expectations of rapid deflation were replaced by expectations of
>   price stability or even some inflation. This change in
>   expectations brought real interest rates down dramatically.
>   

No, deficit spending supported demand and broke the deflation.

>   
>   The change in the real cost of borrowing and investing appears to have had
>   a beneficial impact on consumer and firm behavior. The first thing that
>   turned around was interest-sensitive spending. For example, car sales
>   surged in the summer of 1933. One sign that lower real interest rates were
>   crucial is that real fixed investment and consumer spending on durables
>   both rose dramatically between 1933 and 1934, while consumer spending
>   on services barely budged.
>   

Must have been something else going on.

>   
>   Romer’s analysis of the Roosevelt devaluation parallels Bernanke’s almost
>   exactly.
>   

Comforting!

>   
>   Bernanke also has written that loose monetary policy was the key to the
>   economic recovery of 1933-34. Further on in her speech, Romer cautions
>   against letting up on stimulative measures too quickly, lest the economy
>   plunge back into recession, such as happened to the U.S. in 1937.
>   

In 1937 there was a new whopping social security tax that was ‘off budget’ and sent the economy into a tailspin as it drained billions of financial assets from the private sector.

Doesn’t anyone in DC know how any of it works?????

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(email exchange)

>   
>   Here are some comments — this was interesting reading, and I do think it
>   makes sense on strictly a macro level (which is obviously what he’s going for).
>   

yes!

>   
>   #1 explanation is interesting, especially regarding the example of parents and
>   children with coupons. I do feel, however, that the author doesn’t give much
>   consideration to the inflationary results of the ‘govt check don’t bounce’ thesis
>   (I’m referencing the debate the author describes at the Australia conference).
>   While it’s probably true, I do think inflation has a material impact (at least at
>   the micro level, which I suppose isn’t really the point of this article).
>   

Right, the point is inflation is the issue, not solvency or sustainability. But critics of deficit spending never even attempt to quantify the inflationary aspect.

Instead, they seem to focus on ‘money supply’ for their inflation forecasting and ‘inflation expectation’ issues, both of which are not causal, but that’s another story.

>   
>   Under #2, I think the rhetoric about do we have to send goods and services back
>   in time to pay for historical debt is a red herring and not applicable (and I’m not
>   surprised the Senator couldn’t really say much about it off-hand while his wife ‘got
>   it’). It’s the debt servicing that people worry about, and that is in current terms
>   (no time machine required). However, the thesis of gov’t checks not bouncing
>   speaks to how the debt can be serviced.
>   

yes, and that distribution is entirely in the hands of the living who are in no case ruled from the grave.

>   
>   Paying off China — to book a Treasury Note sale, the gov’t on its own books would
>   debit cash (for the receipt)

yes, and the Tsy’s account at the Fed is debited. right now we have a self imposed constraint that says the tsy’s balance at the fed can’t be negative.

but that is not an operational constraint, just a self imposed constraint

>   and credit the liability (to book the obligation).

again, via the Fed.

>   The buyer’s accounts mentioned wouldn’t really be booked by the gov’t I don’t think,
>   but I get the point.

the buyer’s funds go to the fed where they are ‘accounted for’ as owning the securities.

>   
>   #3 and #7 go together in what is really being discussed is the use of leverage
>   (spending more than what you have). As long as the discussion stays at the macro
>   level, that’s fine as the gov’t can just keep printing money (again, ignoring any effects
>   of inflation).
>   

and by printing you mean simply ‘spending’ as that’s all there is- changing numbers on bank accounts. using the word ‘printing’ rather than ‘spending’ is used by the mainstream to color thinking in a fixed fx direction that no longer is applicable.

>   
>   But, it is quite a slippery slope to intertwine micro-level examples such as a hybrid car
>   factory and such as once you leave the gov’t level, leverage can have catastrophic
>   results (see the current deleveraging in the economy and how that’s affecting people on
>   a micro level). All this is fine as long as you have no monetary constraints, but for anyone
>   with no access to a US$ printing machine, it falls apart.
>   

Included with my 3 current proposals to reverse the current situation is the govt funding an $8 hr job for anyone willing able to work.

The other two are a full payroll tax holiday and $300 billion to the states on a per capita basis with no strings attached. Together they restore demand, output, and employment.

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(email exchange)

Yes, classic!

>   
>   On Wed, Mar 4, 2009 at 9:32 AM, Joshua wrote:
>   
>   Regardless of our feelings towards deficits and debt, we have to be proud of our
>   knowledgeable politicians…see below…
>   
>   Here’s the transcript: Stunning
>   

HOUSE COMMITTEE ON WAYS AND MEANS

WASHINGTON, D.C.

REP. CHARLES B. RANGEL HOLDS A HEARING ON THE PRESIDENT’S BUDGET

PROPOSAL FOR FISCAL YEAR 2010

MARCH 3, 2009

SPEAKERS:

REP. CHARLES B. RANGEL, D-N.Y.

CHAIRMAN

REP. PETE STARK, D-CALIF.

REP. SANDER M. LEVIN, D-MICH.

REP. JIM MCDERMOTT, D-WASH.

REP. LINDA T. SANCHEZ, D-CALIF.

SANCHEZ: Thank you, Mr. Chairman.

And thank you, Secretary Geithner, for being with us this afternoon. I was absent for part of the hearing, so pardon me if I’m asking questions that have already been answered. But I know that a lot of criticism has been leveled at this budget because of a fear of future debt. That’s what we keep hearing. We can’t burden, you know, future generations. My question to you is a very specific one. Do we really need to balance the budget in order to reduce our future deficit — or our future — pardon me — debt burden, or can we reduce our debt burden while still running deficits, because some people would have you believe that the two must go hand in hand?

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Seems the prospect of euro nations going to the IMF has struck a raw nerve.

No doubt any plan to access ECB funding would include some kind of austerity condition similar to what the IMF would require.

This would weaken aggregate demand in the entire region.

They must be a lot more worried about a default than they are letting on.

>   
>   On Wed, Mar 4, 2009 Dave wrote:
>   
>   Greece just sold Eur7.5bn 10 yr bonds 50bp cheaper on ASW levels from 2 days ago…..
>   
>   ”Euro area members will not default. Without getting into the details, European
>   Commissioner for Economic & Monetary Affairs, Joaquin Almunia, confirms that there
>   exists a solution for euro area member states threatened with default. As our FI strategists
>   pointed out in their 2009 Outlook piece in December, despite the Maastrich Trearty “no
>   bail out” clauses, Article 122 of the EU Treaty allows financing of member states in
>   exceptional circumstances. Almunia doesn’t want to flesh out how this financing would
>   work, but at least he is verifying that a financing facility exists for struggling euro zone
>   members.
>   

Eurozone can bail out members if needed – Almunia

by Jan Strupczewski and Marcin Grajewski

Mar 3 (Reuters) — The euro zone has a way of bailing out its members if they face a crisis before they have to seek IMF help, but this must remain confidential, European Monetary Affairs Commissioner Joaquin Almunia said on Tuesday.

Although no bailout possibility existed under European Union laws for euro zone countries, there was a solution that could be used, Almunia told a seminar.

“If a crisis emerges in one euro area country, there is a solution…

Before visiting the IMF, you can be sure there is a solution and you can be sure that it is not clever to talk in public about this solution,” he said.

“But this solution exists. Don’t fear for this moment — we are equipped intellectually, politically and economically to face this crisis scenario, but by definition these kinds of things should not be explained in public,” he said.

German Finance Minister Peer Steinbrueck said in February that although EU rules said countries should not help each other within the currency area, all members of the bloc would have to help “if it came to a serious situation”.

In the same speech he mentioned Ireland as being in a “very difficult situation”. Other euro zone countries such as Greece have seen their bond spreads over Germany widen, reflecting worries about rising budget deficits and sparking market speculation about the possible break-up of the euro zone.

Almunia reiterated on Tuesday no such option existed. “The probability of this happening is zero. Who is crazy enough to leave the euro area?

Nobody.

How many candidates to join the euro area I know? A number that is bigger than last year,” he said.

German Foreign Minister Frank-Walter Steinmeier also said on Feb. 20 that a process had begun to consider how financially strong euro zone nations could help weaker members, though it was too early to say what measures might be taken.

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(email exchange)

Yes, thanks!

>   
>   On Tue, Mar 3, 2009, Bill wrote:
>   
>   John Adams once wrote in a letter to Thomas Jefferson:
>   
>   ”All the perplexities, confusion and distresses in America arise not from defects in the
>   constitution or confederation, nor from want of honor or virtue, as much from downright
>   ignorance of the nature of coin, credit, and circulation.”
>   

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Thanks, along with the personal income data, and the end of the inventory liquidations through most of December, seems to be early anecdotal evidence of a flattening after year end. Several other series have had minor turns up as well.

(0 GDP growth still means rising unemployment)

>   
>   On Tue, Mar 3, 2009 at 3:41 PM, Russell wrote:
>   

ATA Truck Tonnage Index Rose 3 Percent in January

by Connie Heiss

Feb 27 (ATA Trucking) — From the American Trucking Association: ATA Truck Tonnage Index Rose 3 Percent in January

The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index climbed 3 percent in January 2009, marking only the second month-to-month increase in the last seven months. Still, the gain did little to erase the revised 7.8 percent contraction in December 2008. In January, the seasonally adjusted tonnage index equaled just 104.7 (2000 = 100), its second-lowest level since October 2002. …

Compared with January 2008, the index declined 10.8 percent, which was slightly better than December’s 12.5 percent year-over-year drop.

ATA Chief Economist Bob Costello said that there was no reason to get excited about January’s 3 percent month-to-month improvement. “Tonnage will not fall every month, and just because it rises every now and then doesn’t mean the economy is on the mend,” Costello said. “Furthermore, tonnage is contracting significantly on a year-over-year basis, which is highlighting the current weakness in the freight environment.”

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Yes, which is interesting as the banks are the Fed’s ‘designated agents’ for lending.

Seems they could figure out how to continue to use them for that purpose, rather than set up a form of an in house shadow infrastructure to do the same thing.

They are in this way over their heads.

>   
>   The Fed’s now trying to bypass the banks and lend directly to the market via third party >   mediums.
>   

>   
>   On Tue, Mar 3 at 11:30 AM, Mauer wrote:
>   
>   This language below was in the last version of TALF also but it sends a big message.
>   
>   ”Can a newly formed investment fund borrow from the TALF?”
>   ”Yes, so long as it satisfies all the eligible borrower requirements set forth above.”
>   
>   By the way, in Shiller’s new book, Animal Spirits he specifically talks about TALF and says >   that it is a very important part of the recovery program.
>   

Sad but true, though I would say fiscal balance can always do the trick.

And the Fed has failed to utilize its member banks for that public purpose.

>   
>   He seems to think that it is incrementally more important than other programs if you think
>   about how much space he devotes to discussing it.
>   
>   I read part of Koo’s book last night.
>   
>   He really gives fiscal policy a big push. Says that Romer, Friedman and Terin are off base
>   because they don’t give fiscal policy enough credit.
>   

Agreed!

>   
>   His charts as to the level of recovery and the tax revenues that the fiscal stimulus created
>   are very important.
>   
>   He should have been consulted by the administration.
>   
>   He is a big fan of FDR’s stimulus and obviously doesn’t think much of those that caused
>   FDR to cut deficit to zero in 1937.
>   
>   He charts indicate that the economy was well on road to recovery before start of war
>   although you need to give lend lease credit for some of that.
>   
>   But that goes back to the fiscal stimulus again as opposed to monetary.
>   

Yes, exactly.

>   
>   ”Problem here is that most of the borrowing demand – but not all- is likely to be distress
>   debt demand as few households are likely to remain convinced they can maintain a deficit
>   spending profile in this type of macro environment.”
>   
>   ”the Fed’s now trying to bypass the banks and lend directly to the market via third party
>   mediums.”
>   

The fed could set up a program for the banks to deal with that with appropriate fed guarantees and ‘profit caps’.

>   
>   On Tue, Mar 3, 2009 at 11:28 AM, Scott wrote:
>   
>   Like just having the Treasury buy conforming mortgages at 4%.
>   
>   Yes, WAY over their heads.
>   

Exactly!

There are all kinds of creative ways to use the banking system to bring down rates and/or increase funding if that’s what they want to do.

>   
>   On Tue, Mar 3, 2009 at 11:58 AM, Pat wrote:
>   
>   So how does the FED get liquidity to investors if the banks and banking regulations require
>   them not to lend given the current state of their balance sheets and capital.???
>   

Change the regulations.

Use Fed guarantees that put the Fed in the same risk position they are currently in anyway.

>   
>   How do you use the current infrastructure without removing the regulatory constraints?
>   

You alter the regulations which are always a work in progress.

>   
>   Simply put the banks don’t have the balance sheet available to lend at the levels they used
>   to.
>   

With Fed guarantees they don’t need balance sheet any more than the Fed does.

>   
>   We have seen estimates on repo balance sheet that has left the street or really just
>   evaporated in excess of $3 trillion. The correlation between market cap (see below) and
>   balance sheet is very high. So when 3+ trillion goes away from repo those securities
>   bought using repo financing get sold/bought for cash (de-levered / liquidated).
>   

Right. Repo only intermediates.

>   
>   The levered bid for securities disappears not to return w/o balance sheet support.
>   

Right.

Banks are levered institutions and should all have unlimited unsecured lines with the fed, as i have been suggesting for a very long time.

>   
>   That levered bid was VERY LARGE particularly for MBS. The repo market is a very large
>   CP conduit where money providers earn short term market rates financing portfolio
>   manager’s long term positions and for a spread a broker dealer was the pipeline between
>   the 2 entities. The pipeline is tiny now (see market cap graph below) and cannot meet
>   the liquidity needs of the larger market.

Right.

Banks can fill in the gap with appropriate Fed support.

Not that I would recommend filling all the gaps!

But in any case investors can buy bank CD’s and banks can invest in short term loans vs securities if the Fed so desires.

Problem is the Fed doesn’t know how to get from here to there.

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(email exchange)

For Europe:

1. The European Parliament or ECB has to be given fiscal authority and give the national governments a check for maybe 1,000 euro per capita to be used for general purposes.
2. This new fiscal authority would also provide deposit insurance for all the euro banks and lend to member banks on an unsecured basis.
3. It would also regulate and supervise the banks.
4. I would have the new fiscal authority fund jobs for anyone willing and able to work at a fixed wage, which, via market forces, would become the minimum wage.

>   
>   On Mon, Feb 16, 2009 at 8:12 AM, Morris wrote:
>   
>   What would you do for Europe? US I hear your solution
>   

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Thanks, who would have thought the Saudi blend would lead the way…

>   
>   On Thu, Feb 12, 2009 at 12:09 PM, David wrote:
>   
>   U.S. CASH CRUDE MARS SOUR RISES
>   $1.00 TO RECORD $8.00 ABOVE WTI – TRADER
>   
>   I believe this is the Saudi sour equivalent here in
>   US.
>   

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Unbelievable…

It strikes me as ironic that both houses found payroll tax cuts the only thing they could agree to drop.

Barack H. Obama made this cut his central promise and it is the most stimulative element in the package.

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(email exchange)

Yes, then, like now, they were afraid of the numbers, and couldn’t see them in context of the size of the economy.

They were also concerned that ongoing deficits were needed to sustain output and employment, just like they are today.

Within a year after that deficit spending on the war shot up to over 20% of GDP and the Depression ended.

My guess is that we need deficits averaging about 4-5% of GDP to sustain output and employment. Some periods, like now, we need more, some, like the late 90′s during that credit boom, we needed far less.

>   
>   On Tue, Feb 10, 2009 at 10:05 AM, Mike wrote:
>   
>   Franklin Roosevelt’s own Treasury secretary, Henry Morgenthau, lamented in
>   an address to Congressional Democrats in May of 1939:
>   
>   ”We have tried spending money. We are spending more than we have ever
>   spent before and it does not work. And I have just one interest, and if I am
>   wrong … somebody else can have my job. I want to see this country
>   prosperous. I want to see people get a job. I want to see people get enough
>   to eat. We have never made good on our promises … I say after eight years
>   of this Administration we have just as much unemployment as when we started
>   … And an enormous debt to boot!”
>   

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“Ten days ago, the IMF cut its world-growth estimate for this year to 0.5 percent, the weakest pace since World War II. Stimulus packages alone won’t succeed in dragging the global economy out of recession unless confidence is restored in the banking system, Strauss-Kahn said today.”

I do not agree.

An ongoing fiscal adjustment alone can easily do the trick.

The banking system is functioning well enough (clearing checks and making only the loans it feels are attractive on a risk adjusted basis) to support a full blown economic boom should the government get the fiscal right.

>   
>   Warren:
>   
>   Have you seen this analysis by the IMF. Tell me that they are clueless. My
>   analysis is that they may be on the money.
>   

IMF Says Advanced Economies Already in Depression

by Angus Whitley and Shamim Adam

Feb 7 (Bloomberg)

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Yes, thanks!

>   
>   W: Here is a quote of Peggy Noonan whose WSJ columns I frequently read. I
>   think she sums up the two parties’ basic positions succinctly. Nowhere does
>   she recognize the reality of Federal spending driving the whole economy. She
>   still sees the US Treasury as a kind of piggy bank that has to be full before
>   you can draw on it for any purpose.
>   
>   ”The national conversation on the economy is frozen, and has been for a
>   while. Republicans say tax cuts, tax cuts, tax cuts. Democrats say spend, new
>   programs, more money. You can’t spend enough for the Democratic base, or
>   cut taxes enough for the Republican. But in a time when all the grown-ups of
>   America know spending is going to bankrupt us and tax cuts without spending
>   cuts is more of the medicine that’s killing us, the same old arguments, which
>   sound less like arguments than compulsive tics, only add to the public sense
>   that no one is in charge.”
>   
>   Uncle D.
>   

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(email exchange)

Think of it this way.

1. Treasury spends $1 trillion by making deposits to bank accounts at the Fed. The spending adds $1 trillion of income and $1 trillion of new balances (not new balance shoes) that in the first instance are excess reserves at the fed.
2. Treasury offers treasury securities for sale at auction. The purchase of those securities reduces the new, excess balances at the Fed, and replaces them with treasury securities, which are in fact nothing more than different accounts at the Fed. So operationally the Fed debits bank accounts on its books and credits securities accounts on its books.
3. Again, the result is $1 trillion of new income and $1 trillion of new treasury securities held by the non government sectors.

Deficit spending adds exactly that much to our savings. The idea that ‘it has to come from somewhere’ and ‘borrowing removes savings’ are inapplicable with non convertibility currency/ floating FX policy.

If you count the new treasury securities as ‘money supply’ then it adds to money supply. If you don’t it doesn’t. Government spending is counted as GDP.

>   
>   On Feb 6, wrote:
>   
>   Question- Treasury needs to raise a trillion dollars to fund shortfall- so they
>   sell a trillion dollars of treasuries which Fed reserve bank buys and puts on its
>   balance sheet- what is the effect on economy? Money supply?
>   

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Dear Donna:

I have long been a fighter against wasteful spending in Washington and long an advocate for a balanced budget — that will never change.

Glad he lost, no deficit is a lot worse than any of the current proposals, even though they fall far short of my proposals:
 
• Full payroll tax holiday with Tsy making the payments for us.
• $300 billion to the states on a per capita basis with no strings attached.
• $8 job funding for anyone willing and able to work.
• Allow the Fed to lend unsecrured to it’s member banks (demanding collateral is redundant and disruptive with current FDIC arrangements).
• Implement a strategy to immediately reduce gasoline consumption.
• This reverses the current slide, and gives Congress time to implement their specific
  proposals in an orderly manner.

I realize we face extraordinary challenges with our economy today, but that is not an excuse for more irresponsibly from Washington. I hope you will join me in saying no to this stimulus package as it currently exists by signing this petition.

Sincerely,

John McCain
Chair, Country First PAC

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(email exchange)

They’ve all forgotten imports are a real benefit, exports a real cost, so they are afraid that imports will go up if you make a fiscal adjustment unilaterally.

In fact, it’s the best of all worlds to do it unilaterally and let the imports flood in.

To paraphrase Nixon (?):

‘They are all half baked Keynesians now’.

>   
>   On Mon, Feb 2, 2009 at 9:53 PM, MAuer wrote:
>   
>   Any thoughts on this?
>   
>   Subject: Niall Ferguson in the FT
>   
>   Today’s born-again Keynesians seem to have forgotten that their prescription
>   of a deficit-financed fiscal stimulus stood the best chance of working in a more
>   or less closed economy. But this is a globalised world, where uncoordinated
>   profligacy by national governments is more likely to generate bond market
>   and currency market volatility than a return to growth.
>   

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Outlook:

One month into 2009 – a new president installed in office – yet no more clarity. In fact more questions than answers.

After criticizing Hoover in the 1932 election for running deficits (sound familiar?), President Franklin Roosevelt tried diligently for six years to balance the budget and resuscitate the economy at the same time. It did not work. Then, willing to try anything after more than five years of failure, FDR said in one of his fireside chats in 1938, “We suffer primarily from a failure of consumer demand because of a lack of buying power. Therefore it is up to [the government] to create an economic upturn” by making “additions to the purchasing power of the nation.” This reluctant realization alone was not enough to pull the U.S. economy from the depths of the Great Depression. It took entry into World War II to drive deficit spending high enough such that GDP more than doubled in five years as unemployment declined from an estimated 18% to roughly 1%.

Today we find ourselves in a similar situation. The surpluses of the late 1990′s withdrew financial assets from the U.S. economy that were temporarily replaced from 2001-2007 by loose lending standards, house price appreciation, and mortgage equity withdrawal. When house prices began to roll over near the end of 2006, the U.S. economy needed a budget deficit that was large enough to offset the cumulative deleterious effects of the late 1990′s surpluses. This of course did not happen, and the situation has deteriorated as the diminution in aggregate demand has cycled in a vicious feedback loop with weaker economic data, a weaker banking system, and rising unemployment.
We had very high hopes for the Obama stimulus plan, and we still very much hope that it will work; but we are concerned that it is neither large enough nor swift enough to offset the contractionary forces we are facing.

From an economic perspective, it is not important if the stimulus occurs through additional spending or cutting taxes, it just needs to happen quickly. The recently-passed version of the stimulus seems short on rapid infrastructure spending and tax cuts, and long on pet projects and politically-driven initiatives. We recognize that many interested parties who view themselves as “conservative” are frustrated by what they view as fiscal incontinence by Washington. We agree that pet projects and deferred earmarking add viscosity to the stimulus effort, but nonetheless the spending and/or tax breaks need(s) to occur. Only the U.S. government has the balance sheet to offset the contractionary forces we are facing. We are fortunate that automatic stabilizers, such as lower tax revenues and expanding transfer payments, are more difficult for Washington to manipulate. It will be quite interesting to see the final shape and efficacy of the stimulus package. Our fingers are crossed that the stimulus in its final form plus the automatic stabilizers will foster aggregate demand large enough to break the back of this contraction. Equity markets will be watching closely.

Thank you for your continued support. I am always available to discuss our performance and portfolio.

Best regards,
Josh Davis

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We’ll see if the SNB can borrow all the USD it needs without the Fed on an ongoing basis.

External debt like this is the stuff of most government financial blowups.

Low crude prices and falling US import demand are keeping USD ‘hard to get’ for the rest of the world that somehow got caught short USD, probably by funding USD assets that have declined in price.

Separately, attached is a graph of personal income that of course doesn’t ‘prove’ anything about the macro effect interest rates being the opposite of what CBs think it is.

Fed cuts have reduced government payments of interest to the non government sectors that remain net savers.

Fed ‘quantitative easing’ has also removed interest income from the non government sectors.

To paraphrase from a source I can’t recall where it was better stated, any more victories like these and we’ll be ruined.

>   
>   On Mon, Feb 2, 2009 at 9:20 AM, Mauer wrote:
>   
>   What do you make of this?
>   
>   BN 13:02 *SNB SAYS BILLS TO FINANCE TO UBS TOXIC ASSET FUND
>   1) BN 13:02 *SNB SAYS BILLS TO FINANCE TO UBS TOXIC ASSET FUND
>   2) BN 13:02 *SNB BILLS TO HAVE MATURITY OF LESS THAN YEAR
>   3) BN 13:02 *SNB TO ISSUE BILLS TO FINANCE LOAN TO SNB STABFUND
>   4) BN 13:02 *SNB SAYS DOLLAR BILLS ARE NEW MONETARY POLICY
>   INSTRUMENT
>   5) BN 13:00 *SNB TO ISSUE DOLLAR-DENOMINATED SNB BILLS

Thanks!

Didn’t know that- much appreciated!

>   
>   On Mon, Feb 2, 2009 at 10:56 AM, J A wrote:
>   
>   Warren,
>   
>   You know that there is a classic paper by Ferguson and Epstein who provide
>   archival evidence that it was the banks that convinced the Fed to reverse its
>   quantitative easing and low interest rate policy because it was driving them
>   bankrupt. All their commercial loans had defaulted and the only income
>   learning assets they had were Treasury securities, so the lower rates went the
>   lower their income and in the end they were having trouble covering operating
>   costs, so they convinced the Fed to raise rates. Much like Greenspan giving the
>   banks the yield curve to ride to generate income after the 1989-90 real estate
>   bust.
>   

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(email exchange)

I’d just give a total of $300 billion to all the states on a per capita basis in which case fiscal responsibility isn’t applicable.

>   
>   Morris wrote:
>   
>   Why didn’t I think of this???
>   
>   Subject states to the same rules as corporations.
>   
>   Why isn’t there moral hazard to this upcoming bailout??? Why should fiscally
>   responsible states pay for this??? Is this any worse than John Thain???
>   

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