Category Archives: Employment

david walker okays deficits???!!!

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>   
>   (email exchange)
>   
>   On Thu, Feb 25, 2010 at 12:54 PM, Roger wrote:
>   
>   am I reading this right?
>   
>   he seems to be admitting the difference between “structural” and nominal deficits, but
>   is still fixated on debt/GDP ratios, not to mention national “revenue”
>   
>   nevertheless, some progress is better than none, and ANY sign of movement is a
>   step in the right direction
>   

Agreed!

Looks like a serious chink in the armor of what used to be deficit terrorist #1???!!!

Address jobs now and deficits later

By LAWRENCE MISHEL & DAVID M. WALKER

Feb. 24 (Politico) — President Barack Obama is in a difficult position when it comes to deficits. Today’s high deficits will have to go even higher to help address unemployment. At the same time, many Americans are increasingly concerned about escalating deficits and debt. What’s a president to do?

The answer, from a policy perspective, is not that hard: A focus on jobs now is consistent with addressing our deficit problems ahead.

The difficulty is that many politicians and news organizations often cast deficit debates as a dichotomy: You either care about them or you don’t.

But this is rarely accurate. The fact that the two of us, who have philosophical differences on the proper role of government, find much to agree on about deficits is a testament to the importance of dropping this useless dichotomy and finally talking about deficits in a reasonable way.

As in every economic downturn, federal revenues have fallen steeply because individuals and corporations earn less in a recession. High unemployment also results in higher expenditures for safety net programs, like Medicaid, unemployment benefits and food stamps.

Not surprisingly then, a huge recession can yield a huge deficit. Efforts to put people back to work and help restore the economy, like the recovery package passed last February, can also increase short-term deficits.

Though a concern, most of the recent short-term rise in the deficit is understandable. Furthermore, public spending can help compensate for the fall in private spending, and help stem the pain of substantial job losses.

With more than a fifth of the work force expected to be unemployed or underemployed in 2010, there is an economic and a moral imperative to take action. Persistently high unemployment drives poverty up, makes it harder for families to find decent housing, increases family stress and, ultimately, harms children’s educational achievement. For young workers entering the workforce, the current jobs crisis reduces the amount they will earn over their lifetime.

In deep recessions, businesses tend to make fewer critical investments in research and development that can improve our economy’s productive capacity over the long term. Entrepreneurs usually find credit hard to obtain if they want to start a new business. These factors hurt U.S. global competitiveness and growth potential.

That’s why we agree that job creation must be a short-term priority. Job creation plans must be targeted so we can get the greatest return on investment. They must be timely, creating jobs this year and next. And they must be big enough to substantially fill the enormous jobs hole we’re in. They must also be temporary — affecting the deficit only in the next couple of years, without exacerbating our large and growing structural deficits in later years.

Funding key investment and infrastructure projects to promote economic growth and offering a job creation tax credit are among the policy ideas that meet all these standards. In addition, temporarily renewing extended unemployment benefits can lead to more jobs throughout the economy.
But these problems, and the resulting short-term deficits they cause, should not be confused with the primary deficit challenge facing our nation: structural deficits. These deficits are projected to exist in coming years — even when the country is at peace, even when the economy is growing, even when unemployment falls.

Specifically, the deficit could approach an already unsustainable 6 percent of gross domestic product 10 years from now, and will continue to rise thereafter.

While we address our short-term unemployment challenges, we must also immediately establish a path to address our large, and growing, structural deficits.

The Congressional Budget Office projects that after the economy has returned to full employment, spending will still substantially outstrip revenues. Over time, Medicare and Medicaid will be the key drivers of these structural deficits. This is primarily because these programs’ costs tend to mirror overall cost increases for health care, which have risen much faster than overall economic growth for decades, but also because of demographic changes.

Our nation’s fiscal picture will darken further with the passage of time, especially if interest rates increase.

These structural deficits are too substantial to close the gap without addressing both sides of the ledger: spending and revenues.

In doing so, it is important to distinguish critical and effective programs and tax policies from outdated and ineffective ones.

We must be careful to maintain the type of public investments that can help fuel broad-based economic growth while strengthening the safety net for our most vulnerable populations. And we should take into account growing retirement insecurity as employer pension systems erode and personal savings falter.

People should be able to count on government benefits they are promised. It is, therefore, critical that federal benefit and funding levels be reconciled.

None of this will be easy — not the policy or the politics. It will require hard choices, and an extraordinary process to engage the American people and to make recommendations to the Congress on budget controls, spending cuts and revenue increases.

Getting the deficit under control cannot be accomplished by simply ending “waste, fraud and abuse,” stopping all foreign aid or exiting Iraq and Afghanistan. Substantial progress could be made though by ending the tax cuts of 2001 and 2003, or paying for their extension through spending reductions. In the end, Congress must step up to the plate, not just with hearings, but with votes.

For all the disagreement in Washington, we both know that, like us, there are many who see the critical importance of addressing these challenges. We must accept higher deficits in the short-term in order to put people back to work.

At the same time, we must take immediate steps to agree on a path and a process for reducing the structural deficits that lie ahead.

In a town of division, this is one area where we need a real consensus now.

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Bernanke testimony

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Karim writes:

Generally more upbeat on economic conditions….the ‘2 Es’ remain, but adds high-profile qualifier ‘ALTHOUGH’…watching Q&A

Final Demand
Private final demand does seem to be growing at a moderate pace, buoyed in part by a general improvement in financial conditions. In particular, consumer spending has recently picked up, reflecting gains in real disposable income and household wealth and tentative signs of stabilization in the labor market. Business investment in equipment and software has risen significantly. And international trade–supported by a recovery in the economies of many of our trading partners–is rebounding from its deep contraction of a year ago. However, starts of single-family homes, which rose noticeably this past spring, have recently been roughly flat, and commercial construction is declining sharply, reflecting poor fundamentals and continued difficulty in obtaining financing.

Credit
The improvement in financial markets that began last spring continues. Conditions in short-term funding markets have returned to near pre-crisis levels. Many (mostly larger) firms have been able to issue corporate bonds or new equity and do not seem to be hampered by a lack of credit. In contrast, bank lending continues to contract, reflecting both tightened lending standards and weak demand for credit amid uncertain economic prospects.

Jobs
Some recent indicators suggest the deterioration in the labor market is abating: Job losses have slowed considerably, and the number of full-time jobs in manufacturing rose modestly in January. Initial claims for unemployment insurance have continued to trend lower, and the temporary services industry, often considered a bellwether for the employment outlook, has been expanding steadily since October. Notwithstanding these positive signs, the job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce.

FF Rate
Although the federal funds rate is likely to remain exceptionally low for an extended period, as the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures.

Sequencing
Of course, the sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments.

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Fed’s Lockhard on Reuters

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Latest tsy tips results indicate ‘contained inflation expectations’ as well.

I still have that nagging feeling that the 0 rate policy is highly deflationary and without some supply shock, like a spike in crude prices, prices in general will remain weak.

The weak core CPI and high unemployment rate continues to keep a lot of daylight between current conditions and the Fed’s dual mandate.

And the discount rate hike shows an ongoing lack of understanding of their own monetary arrangements.

Up until a few years ago the discount rate was kept a bit below the fed funds rate, which facilitated easier control of the fed funds rate.

This policy changed in a misguided effort to make the discount rate a ‘penalty’ rate which is a throwback to a fixed fx/gold standard paradigm and is entirely inapplicable with our current non convertible currency and floating fx.

All they’ve done by raising the discount rate is make it a bit more problematic to control the fed funds rate should technicals cause a system wide reserve deficiency.

Putting a penalty rate in for solvent banks (the FDIC is charged with removing insolvent banks) having funding difficulties is a throwback to the long discredited and illogical notion of using the liability side of banking for market discipline.

for more detail click here

Subject: Fed’s Lockhard on Reuters

Front end USTs getting very well bid on the back of these comments…

10:11 19Feb10 RTRS-FED’S LOCKHART –

FED PAYING CLOSE ATTENTION TO INFLATION EXPECATIONS

10:13 19Feb10 RTRS-

FED’S LOCKHART – MARKET BELIEF IN HIGH PROBABILITY OF RATE RISE THIS YEAR “OVERBLOWN”

10:14 19Feb10 RTRS-

FED’S LOCKHART – CURRENT POLICY STANCE MORE LIKELY TO EXTEND INTO NEXT YEAR

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low wage workers hit hardest by the recession

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Fits annecdotally with the macro statistics that showed real GDP up 5.7% in Q4 while unemployment also went up.

Nothing that a full payroll tax holiday in Q3 08 wouldn’t have prevented.

This is not what the administration was hoping for, but it is the result of their policies.

‘No Labor Market Recession For America’s Affluent,’ Low-Wage Workers Hit Hardest: STUDY

By Ryan McCarthy

Feb. 10 (Huffington Post) —It’s truly been a tale of two unemployment crises.

Though the national unemployment rate dipped slightly in January to 9.7 percent, a new study suggests that not only have low-income workers been the hardest hit by the jobs crisis — but, shockingly, there has been “no labor market recession for America’s affluent.”

The study from Andrew Sum, Ishwar Khatiwada and Sheila Palma at Northeastern University’s Center for Labor Market Studies suggests that the unemployment problem is largely a problem for low-wage workers (hat tip to the Curious Capitalist).

From the study:

At the end of calendar year 2009, as the national economy was recovering from the recession of 2007-2009, workers in different segments of the income distribution clearly found themselves in radically different labor market conditions. A true labor market depression faced those in the bottom two deciles of the income distribution, a deep labor market recession prevailed among those in the middle of the distribution, and close to a full employment environment prevailed at the top. There was no labor market recession for America’s affluent.

At the New York Times, Bob Herbert delved into the study and noted, “The point here is that those in the lower-income groups are in a much, much deeper hole than the general commentary on the recession would lead people to believe.” Here’s more from Herbert:

The highest group, with household incomes of $150,000 or more, had an unemployment rate during that quarter of 3.2 percent. The next highest, with incomes of $100,000 to 149,999, had an unemployment rate of 4 percent.

Contrast those figures with the unemployment rate of the lowest group, which had annual household incomes of $12,499 or less. The unemployment rate of that group during the fourth quarter of last year was a staggering 30.8 percent. That’s more than five points higher than the overall jobless rate at the height of the Depression.

According to the study, approximately 50 percent of households in the bottom decile of American income distribution are underemployed; in the second lowest decile, 37 percent of households can’t find enough work. The authors write: “These extraordinarily high rates of labor underutilization among these two income groups would have to be classified as symbolic of a True Great Depression.”

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Dallas address

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This is the text of the address I gave at Dallas.

Will be repeating it in a northern Va meeting next weekend.

Still waiting for the video.

Feel free to distribute.

How tea party democrats can run successfully in the primaries

Honesty in government is a core value of the Tea Party movement and the most basic value in any representative democracy. Accordingly, my first proposal is that all candidates for public office be sworn in: ‘I solemnly swear to tell the truth, the whole truth, and nothing but the truth, so help me God.’ As a consequence, any subsequent lies are perjury, and punishable by law.

I am here to discuss how I believe Tea Party Democrats can win in upcoming Democratic primaries. The answer is to emulate and extend the success of the Tea Party movement by getting back to basics. The Democratic party is the party of Jefferson and Jackson. The founders believed that the public voice should be heard. They believed in limited government. And they never kowtowed to special interests or cowered before purveyors of the conventional wisdom. This means Tea Party Democrats should be running against the Obama administration’s policies which are counter to both traditional Democratic values and Tea Party values.

It is the Washington elite that have moved away from the ideals of Jefferson and Jackson with policies that are, at best, regressive, elitist, and destructive to our quality of life. For example, with unemployment rising, real wage growth falling, and GDP now growing at over 5%, who’s getting all that increase in real goods and services?

Not the millions who voted Democratic who are losing their jobs and their homes, and watching wages fall even as their cost of living goes up. All that real wealth being created is instead rising to the top, due to impossible trickle down policies that would have made even Reagan blush.

The large majority of Americans that elected this administration did not do so to enrich the bankers, insurance executives, drug companies, and union leaders at the expense of the rest of us, in a perversion of true core Democratic values. But it’s clearly happening as even a blind man can see. And all because they don’t understand the monetary system, how and why government spends and taxes, and why we don’t owe China anything more than a bank statement.

I will devote most of the rest of my time talking about the economy. In part, that is because it is my area of expertise, given that I have spent most of my adult life in financial markets. But the most important reason is it is in that arena that the Washington elite have failed us the most. The so-called economic experts have confused themselves and their political masters with contrived explanations for the way the economy works. Their limited vision has limited the range of policy choice. And the result has been a monumental economic disaster and human tragedy.

My first proposal for the economy encompasses both the Tea Party and traditional Democratic values of limited government, fiscal responsibility, and reliance on competitive markets. Working through the logic of this proposal will show both how this straightforward government policy can work, and how convoluted is the elite’s understanding of finance.

I believe that the surest engine for full economic recovery is a full payroll tax holiday. Payroll taxes take away over 15% of everyone’s paycheck, from the very first dollar earned. This is big money- about $1 trillion per year. Half comes from the employee and half from the employer. A payroll tax holiday does not give anyone anything. What it does is stop taking away $1 trillion a year from working people struggling to make their payments and stay in their homes, and businesses struggling to survive. A full payroll tax holiday means a husband and wife earning $50,000 a year each will see their combined take home pay go up by over $650 a month, so they can make their mortgage payments and their car payments and maybe even do a little shopping.

This fixes the banks and fixes the economy, from what I call the bottom up. It fixes the banks without giving them anything more than people who can afford to make their payments. That’s all they need to remain viable.

And what all businesses need most to expand output and employment is people with spending money who can buy their products. Without people to buy goods and services, nothing happens. The payroll tax holiday also means there is also a big reduction in expenses for business. With competitive markets this means lower prices, which also helps consumers, helps keep inflation down, helps businesses compete domestically and in world markets to help optimize our real terms of trade, and helps keep the currency stable as the dollar is ultimately worth what it can buy. So with the payroll tax holiday we get a dramatic increase in economic activity, rising employment in good jobs, and better prices. And we’ll see millions of new jobs, because, again, what business needs most is people with money to buy their products. Then they hire and expand.

What I don’t see is how any self respecting Democrat can allow this tax to stand for a single moment. It is the most regressive, punishing tax we’ve ever had. It starts from the first dollar earned with a cap at $106,800 per year. It’s an utter disgrace to the Democratic party. It should be immediately eliminated. Yet, instead, the Washington Democratic elite are actually discussing increasing it.

Let’s now back up and review how we got to where we are at this moment in time. Headline unemployment is unthinkably high at 10%, and if you count workers who have given up looking for a full time job, it’s over 17%. As you all know, it’s about the financial crisis. The banks got in trouble when their loans went bad. Well, what makes a loan go bad? Only one thing- people who can’t make their payments. If people make their payments, the loans are AAA. If people don’t make their payments the loans are junk and toxic waste. No matter what the security is- a loan, a cmo, cdo, clo, or whatever, it’s all the same. If people are making their loan payments there is no financial crisis. Unfortunately, instead of attacking the problem from the bottom up with a payroll tax holiday, we have an administration that thinks it first needs to fix the financial sector from the top down, before the real economy can improve. This is completely upside down. But the elites believe it, so that’s what they have done to us.

So starting with President Bush, and supported by both Senators McCain and Obama, they funded the financial sector with trillions, while they kept taking away trillions from people working for a living who couldn’t make their payments.

How does that help anyone make their payments, apart from a few bankers? It doesn’t.

What happened for the next year and a half? The banks muddled through, profits and bonuses returned, but unemployment skyrocketed and is still going up, loan delinquencies and defaults and foreclosures skyrocketed and are still going up, and millions of Americans still can’t make their payments and are losing their homes. And a lot of the money the banks are making on federal support is being drained by continuing loan losses. We are getting nowhere as tens of millions of lives are being destroyed by policy makers who simply don’t understand how the monetary system works.

This has been a trickle down policy where nothing has trickled down, because there is no connection between funding the banks, and the incomes of people trying to make their payments. The answer, of course, is instead of giving trillions to the banks, to simply stop taking away trillions from people still working for a living. The government doesn’t even have to give us anything, just stop taking away the trillion dollars a year of payroll taxes with a full payroll tax holiday.

But then there’s the nagging question of ‘how are we going to pay for it? Aren’t we just going to have to borrow more money from China and leave it for our children to pay back? And if it doesn’t work, then where are we, another trillion in debt with nothing to show for it?’
And, in fact the failure to understand that question of ‘how are you going to pay for it’ is exactly what has set the Democratic party, and the nation, on the current path of economic ruin. Therefore, to run successfully against the Democrats who support current policy it is critical you understand what I’m going to say next. This understanding is the basis for achieving our core values of limited government and lower taxes. And what I’m about to tell you is pure, undisputable fact, and not theory or philosophy.

So let me start by examining exactly how government spends at what’s called the operational level. In other words, exactly how does government spend? And this is for the federal government, not the State and local government, who are in much the same position as you and I are. Well, when the federal government spends, it simply changes numbers up in bank accounts. Last May Fed Chairman Bernanke answered Congressman Pelley’s question about where the money comes from that the banks are getting. Bernanke told him the banks have accounts at the Fed and the Fed simply ‘marks them up’- changes the numbers in their bank accounts.

• (PELLEY) Is that tax money that the Fed is spending?
• (BERNANKE) It’s not tax money. The banks have– accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.

The Chairman is exactly right. All government spending is simply a matter of changing numbers upward in our bank accounts. It doesn’t come from anywhere. Just like when you kick a field goal and get 3 points. Where does the stadium get those points? Right, they don’t come from anywhere. It’s just scorekeeping. And that’s exactly how government actually pays for anything.

All it ever does, and ever can do when it spends, is mark up numbers in bank accounts, as the Fed Chairman told us. And with online banking you can actually watch it happen. When a government payment hits your account you can actually watch as the numbers change upward on your computer screen. And notice I’ve never mentioned China or anyone else in this spending process. They are simply not involved. Spending is done by changing numbers higher in our bank accounts. What China does or doesn’t do has nothing to do with this process. Again, this is not some theory or philosophy. It’s simply how it actually works. I’ve been there, I’ve seen it. I grew up on the money desk at Banker’s Trust on Wall St. in the 70’s, and I visit the Fed regularly and discuss monetary operations. I know exactly how it all works.

Now let’s look at how government taxes. And keep in mind what any Congressman will tell you- we have to get money from taxing or borrowing to be able to spend it.
Well, with modern on line banking you can watch what happens when a tax is paid. Suppose you have $5,000 in your bank account and you write a check to the government for $1,000 to pay your taxes. What happens? You can see it on your computer screen. The number 5,000 changes into the number 4,000. The number 5 changes to the number 4. All the government did is change the number in your bank account. They didn’t ‘get’ anything. No gold coins dropped into a box at the Fed. Yes, they account for it, which means they keep track of what they do, but they don’t actually get anything that they give to anyone. The man at the IRS simply changes numbers down in our bank accounts when he collects taxes. And, if you pay your taxes with actual cash, they give you a receipt, and then shred it. How does taking your cash and shredding it pay for anything? It doesn’t. Taxes don’t give the government anything to use to make payments.

So the absolute fact of the matter is, the government never has nor doesn’t have dollars. It taxes by changing numbers down, but doesn’t get anything. It spends by changing numbers up and doesn’t use up anything. Government can’t ‘run out of money’ like our President has repeated many times. There isn’t anything to run out of. It’s just data entry, it’s score keeping. And it has nothing to do with China, which I’ll get to shortly.

So why then does the government tax at all? To control our spending power, which economists call aggregate demand. If the government didn’t tax us at all and let us spend all the money we earn, and government spent all the money it wanted to spend, the result would be a lot of inflation, caused by more spending then there are real goods and services for sale. Too much spending power chasing too few goods and services is a sure way to drive up prices. So the purpose of taxes is to regulate the economy. If the economy is too hot, taxes can be raised to cool it down. If the economy is too cold, as it obviously is today, taxes should be cut to warm it up back to operating temperature.

Taxes are like the thermostat. When it gets too hot or too cold you adjust it. It’s not about collecting revenues, there is no such thing, government never has nor doesn’t have any dollars, it just changes numbers up and down in our bank accounts. It’s all about looking at the economy and deciding whether it’s too hot or too cold, and then making an adjustment.

So, given all this, just what does ‘fiscal responsibility’ mean?
Fiscal responsibility means not overtaxing us to the point we are at today with record unemployment. And Fiscal Responsibility means not spending so much or taxing so little that the economy ‘overheats’ and inflation becomes a problem. That’s what fiscal responsibility means. That’s all it means. The government is responsible for getting the economy right, and the monetary system, including taxation, is a tool for that job.
Taxation is a tool to get the economy right.

So where does China and borrowing come into the picture? To be a successful Tea Party Democrat you will have to understand this and be able to explain it.
So first, how does China get its dollars? It sells things to us and gets paid for them.

And where does China keep its dollars? In a bank account at the Federal Reserve Bank which they call a reserve account. It’s nothing more than a checking account with a fancy name. And why does China buy Treasury securities? To earn a bit more interest.

And what is a Treasury security? It is nothing more than a savings account at the Federal Reserve Bank with a fancy name. And just like any other savings account at any other bank, with a Treasury security you give the Federal Reserve Bank money, and you get it back plus interest. So when China buys a Treasury security, what happens? The Fed moves their funds- the money they earned from selling things to us- from their checking account at the Fed to their savings account at the Fed.

And what happens when those Treasury securities- savings accounts- come due? How do we pay off China? The Fed just moves the funds from China’s savings account at the Fed back to their checking account at the Fed, and makes the number a little higher to include the interest. That’s it. Debt paid. And our children will continue to do this just like our fathers did before us. None of this involves what we call government spending. When government spends to buy something or pay someone else, it just ‘marks up’- as Chairman Bernanke put it- numbers in bank accounts. China’s bank accounts at the Fed are not involved. So why is this administration kowtowing to China on everything from Korea to human rights? And why do we go over there, thinking they are our government’s bankers, worried about getting their money to spend on everything from health care to Afghanistan, when there is no such thing as the US government getting money to spend? Why? There is only one reason. This administration does not understand the monetary system. They reason the Democrats are against a payroll tax holiday is because they think they need those actual revenues to support their spending.

So yes, we are grossly overtaxed and that’s what’s causing the sky high unemployment and the failed economy, as well as the ongoing banking crisis. And fiscal responsibility means setting taxes at the right level to sustain our spending power- not to hot and not too cold, but just right for optimal output and employment and price stability, and a return to prosperity.

And this brings up the next question, which is how to determine the right size of government. First, tax revenues don’t tell us anything about that. Taxing is just changing numbers down. It doesn’t give us anything to spend. Spending is changing numbers up; there is no numerical limit to spending.

So how do we decide how much government we want if the money doesn’t tell us anything? We do it on a very practical level. For example, when it comes to the military we need to ask ourselves, how many soldiers do we need to defend ourselves? How many planes, boats, tanks, and missiles do we need? The more we need, the more people we take who could be in the private sector producing real private sector goods and services, including doctors and nurses, teachers and teaching assistants, scientists and engineers, etc. etc. The military also uses up real resources like oil and steel. That’s the real cost of the military- how many people and resources it takes away from productive private sector activity.

What is the right size for the legal system? That depends on how long you want to wait for a court date, or for a decision. If the process is too slow, we may need more people working there, or we may need better technology. And again, the more people in government, the fewer there are to work in the private sector.

Once we have decided on the ‘right size’ of government, and pay for it by changing numbers up in people’s bank accounts when government spends, we have to decide the right amount to tax to keep the economy not too hot and not too cold, but just right. My educated guess would be, in a normal economy, to start with taxes that are less then spending by about 5% of GDP, if history is any guide. If I’m wrong taxes can either be lowered or raised to get it right. And when government spends more than it taxes- when it changes numbers up more than it changes down- we call that difference the budget deficit.

And when government changes more numbers changed up than down, the economy has exactly that many more dollars in it, which adds exactly that much to the savings of the economy. In fact, in US National Income Accounting, as taught in economics 101, the government deficit equals the total savings of financial assets in the rest of the economy, to the penny. Yes, deficits add to our monetary savings, to the penny. And everyone I’ve talked to in the Congressional Budget Office knows it. And it’s just common sense as well that if government changes numbers up in our bank accounts more than it changes them down, we have exactly that many more dollars.

Let me add one more thing about the size of government. It makes no sense to me to grow the size of the government just because the economy is too cold, if we already have the right sized government. And if we don’t have the right sized government we should immediately get it right, and then adjust taxes if the economy is too hot or too cold.
With this grasp of the fundamentals of taxing, spending, and the size of government, a Tea Party Democrat is well armed to take on the Democratic establishment that’s overtaxing us, driving up unemployment to today’s record levels, destroying our economy and standard of living, and arbitrarily growing government as well.

Conclusions:

Tea Party Democrats have a unique opportunity to be a part of history and overturn the ideas the current administration is employing that are, at best, regressive, elitist, and destructive to our quality of life.

With unemployment rising, real wage growth falling, and GDP now growing at about 4%, who’s getting that increased GDP? Not the millions who voted Democratic who are losing their jobs and their homes, and watching their wages fall. That real wealth being created is instead rising to the top, due to the Obama administration’s impossible trickle down policies. This administration was not elected to enrich the bankers, insurance executives, drug companies, and union leaders at the expense of the rest of us, in a perversion of true core Democratic values. But it’s clearly happening, and all because they don’t understand the monetary system, the don’t understand how and why government spends and taxes, and the don’t understand why we don’t owe China anything more than a bank statement.

The door is wide open for an enlightened, populist Democrat to lead the way to a new era of unsurpassed national prosperity.


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NACM’s Credit Managers’ Index Economic Report for January 2010

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Agreed. Makes for a good stock environment.

And unemployment could even fall towards 8% which would be considered a victory
due to our absurdly low expectations.

Critical Manufacturing Improvements Lead Credit Managers’ Index Jump in January

Columbia, Maryland: February 1, 2010—The latest data is starting to turn in a decidedly positive direction; GDP numbers are the best in over a year and a half, suggesting that the recession is in clear retreat. After a mild recovery in the third quarter, numbers jumped 5.8% in the fourth. The bulk of this growth is attributed to manufacturers starting to replenish inventories, mostly since the beginning of December. This shift in strategy is reflected in the Credit Managers’ Index (CMI) numbers as well. “The jump in manufacturing was stark and unexpected and, since the decline registered in the last iteration of the index, there has been a major leap in some critical areas,” said Chris Kuehl, Ph.D., economist for the National Association of Credit Management (NACM). “The combined CMI saw a jump from 52.9 to 55.1, which is impressive enough, but the real movement came from the manufacturing side,” he said. Reinforcing the message coming from the economy as a whole, the manufacturing sector jumped from 52.1 to 55.1, reversing the trend from the December index when the sector stagnated and slipped in terms of positive factors.

There was an improved atmosphere in both manufacturing and service sectors resulting with the most activity in the combined index’s favorable factors, specifically sales and new credit applications. Sales in the combined index jumped from 56.7 to 60.7, marking the first time this figure has been above 60 in 18 months. There was also progress in new credit applications—a jump from 54.2 to 57—signaling movement in the credit sector despite ongoing issues in the financial community. One of the biggest leaps came from dollar collections, which sported readings in the 40s just nine months ago and is now at 61.3. The same pattern can be seen in amount of credit extended, now standing at 58.8 after sitting in the 40s just five months ago.

“The past pattern in the index suggests that this is developing into a classic recession exit,” said Kuehl. “The deterioration of inventory and the dramatic reduction in capacity utilization meant that any spark of demand would propel business out of this predicament and, as in past recessions, the months following the end of these strategies would show substantial growth. The trillion-dollar question is whether this growth surge can be maintained throughout the rest of the year.”

Thus far, these are the highest numbers seen in the index since February 2009 when the initial impetus of the recession was broken. Since then, growth has been even, but not dramatic. That trend of slow growth is likely to return, but the suggestion from this month’s data is that there will be pretty substantial gains for the bulk of the first quarter.

The service sector was not as dramatic as the manufacturing sector, but there was growth. The same factors seemed to be at work—increased sales and expanded availability of money. In both sectors there has been some improvement in terms of the number of accounts placed for collection and the number of disputes, and there has been a fairly steady decline in the number of bankruptcies as well. All in all, the CMI numbers of the last few months signal that business is attempting to catch up and position itself for the growth that has now finally arrived.

Manufacturing Sector

A pattern appears each time there is a recession and, in this downturn, that pattern has been as visible as it was during the recessions of the early 1970s and 1980s. The strategy employed by most companies in the face of financial strain is to reduce costs to the barest of minimums, which involves slashing the workforce, postponing or eliminating capital expenditures and reducing inventory to the lowest possible level. The CMI’s figures on capacity utilization reflect this strategy as they have fallen to levels not seen since the depths of the 1980s double-dip recession. The strategy for retailers was as extreme as it has ever been—betting that the consumer would grab whatever they could find during the holiday season—and the effort seemed to work, as the retailers managed to pull off a decent December in spite of the limited offerings. On the manufacturing side, this inventory reduction was extreme and extended such that by the end of the year supply was dangerously low, especially if one wanted to hang onto market share when recovery arrived.

“For two months, the CMI told a story. The number of disputes fell, dollars out for collection declined and so did almost all the factors that indicated debt was going unpaid,” said Kuehl. He further commented that the process of catching up on that debt was the first step toward returning inventory levels, and companies that needed to buy raw materials for production had to get current with their creditors, a process that began in earnest in November and in some cases as early as October. By December, the purchasing had officially started. The evidence of this recovery was noticeable in other sectors as well. The first transportation sector that would see gains when factories started back up was rail and, sure enough, freight volumes started to climb in the rail sector in November and have been climbing steadily ever since.

It is far too early to assert that manufacturing has finally escaped the ravages of this recession, but the first stage is underway. The boost provided by the need to replenish inventory has already helped to stabilize some of the metals prices and has resulted in renewed activity in everything from transportation to warehousing. The next step in the recovery will be for consumer demand to draw down this newly-established inventory and necessitate its replacement. This has yet to develop, but there are some hopeful signs. For the moment, the good news lies in the future, reflected in the manufacturing index by jumps in sales as well as amount of credit extended.

Service Sector

There was less dramatic movement in the service sector, but progress was registered nonetheless. The increase in sales was notable, although not as significant as in manufacturing this month. What is good to see is the index has crested above 60 in both new credit applications and dollar collections. Kuehl noted that it was only four or five months ago that both of these factors had readings in the 40s and, a year ago, new credit applications was in the 30s. The credit squeeze has certainly not ended, but there is more available now than there has been for almost 18 months. The system has not returned to the profligate ways of the last decade, but that is likely a good thing. The old-school thinking that used to dominate the banks and financial institutions seems to have made a bit of a comeback, which is now freeing up credit for those that are traditionally creditworthy.

“Unfortunately, the most noteworthy aspect of the service numbers was that the negative factors did not shrink as much as hoped, only letting the combined index of unfavorable factors drop from 52 to 51.9—a very small decline, and not the strong positive trend seen in manufacturing,” said Kuehl. The prime reason for this slowdown seems to be more accounts placed for collection than last month, attributable to the fact that many retail operations did not manage to escape the Christmas season unscathed. This pattern occurs every year as the holiday shopping season is make-or-break for retail and there are always casualties of consumer tastes and preferences. Still, more retailers went into this year’s season weaker than in the past and some did not make it, and these troubled accounts will likely add to the number of bankruptcies in months to come.

January 2010 vs. January 2009

The contrast between January 2009 and January 2010 is stark and the distance between the two is likely as broad as it will be for some time. It was a year ago that the recession reached its deepest point and the index showed numbers buried in the 40s. Now the index has climbed into solid expansion territory and is well into the mid 50s. It is not likely that this trajectory will be maintained indefinitely as there are still questions about how fast consumers will start to draw down new inventory, but there is also not much that would suggest a major decline at this point.

About the National Association of Credit Management

The National Association of Credit Management (NACM), headquartered in Columbia, Maryland, supports approximately 19,000 business credit and financial professionals worldwide with premier industry services, tools and information. NACM and its network of Affiliated Associations are the leading resource for credit and financial management information and education, delivering products and services, which improve the management of business credit and accounts receivable. NACM’s collective voice has influenced legislative results concerning commercial business and trade credit to our nation’s policy makers for more than 100 years, and continues to play an active part in legislative issues pertaining to business credit and corporate bankruptcy.

This report, complete with tables and graphs, and the CMI archives may be viewed at http://web.nacm.org/cmi/cmi.asp.


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ISM/PMI

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Karim writes:

Shocker is employment component of Chicago PMI
->up from 47.6 to 59.8; was at 38.1 in October.

ISM employment component has been above 50 for the past 3mths but hasn’t translated into real job gwth.

Full Chicago details:



Jan Dec
Activity 61.5 58.7
Prices paid 66.2 55.6
Production 66.6 64.2
New Orders 66.4 64.4
Order backlogs 54.3 52.0
Inventories 48.7 38.6
Employment 59.8 47.6

  • Final Michigan Survey up to 74.4 from 72.8 prelim and 72.5 in Dec
  • 5-10yr inflation expectations up to 2.9% from 2.8%


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the President’s speech and markets

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The speech made it clear there has been a shift to ‘fiscal responsibility’ with plans to pay back the 2 trillion in new debt, all well down the road. The spending freeze will pay half of it over time, and the rest from less specified sources that included tax increases for people making over 250,000, banks, etc. The health care plan is also supposed to reduce the deficit and paygo may be back.

And no additional fiscal relaxation of consequence apart from the current jobs bill working its way through congress.

The jobs initiatives mentioned were minor.

And rather than come up with a way for congressman inherently uncooperative due to the current institutional structure, there was simply a call for them to somehow act in the public interest.

So it looks like the economy is on its own for the most part, with an agonizingly slow and irregular recovery, and neither side coming up with substantially better ideas.

This isn’t a bad environment for stocks, as there’s nothing to suggest negative earnings shocks, and productivity gains can keep supporting at least modest earnings growth, and high unemployment helps keep down costs, and helps keep interest rates low which helps valuations.

The announced export push would be a negative for our standard of living and real terms of trade, but pretty good for stocks as well.

And clearly there’s nothing more the Fed can do, as it’s becoming increasingly clear the moves they have already made have had no positive impact on aggregate demand. They have only restored ‘market functioning.’

Removing some of their liquidity measures does mean there’s again a chance the pressures will appear in libor settings if something starts shaking the tree.

Like Greece, or Iran, or something like that.

Each time the President speaks I’m hoping for some meaningful new ideas but have yet to hear any.

But, again, not a bad environment for stocks, and interest rate forwards continue to look reasonably cheap as well, particularly as concerns about QE and 0 rates as causes of inflation subside.


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Tea Party Plan for Dems- Cut to the Front with Tax Cuts

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Tea Party Plan for Democrats — Cut to the Front with Tax Cuts

At Saturday’s Tea Party conference in Dallas I’ll be outlining how Tea Party Democrats can run against Obama administration policies that are counter to both Tea Party and traditional Democratic values. It is the Washington elite that have moved away from the ideals of Jefferson and Jackson with policies that are, at best, regressive, elitist, and destructive to our quality of life. And who’s benefiting? Not the millions who voted Democratic who are losing their jobs and their homes. And with GDP now moving higher while unemployment rises, all that additional wealth is flowing up to the top. This Democratic President and Congress was not elected to enrich the bankers, insurance executives, drug companies, and union leaders at the expense of the rest of us, in a perversion of true core Democratic values. Unfortunately, the so-called economic experts have confused themselves and their political masters with contrived explanations for the way the economy works, and their limited vision has limited the range of policy choice. The result has been a monumental economic and social disaster caused by an obvious shortage of aggregate demand. The spending power needed to make mortgage payments, car payments, and do a bit of shopping- all of which would fix the economy and end the financial crisis- just isn’t there.

The answer is a full payroll tax holiday, where the US Treasury would make all FICA payments for both employees and employers that regressively remove 15% of every pay check from dollar one up to $106,800 of income. The take home pay of a husband and wife with a combined income of $100,000 per year would increase by over $650 a month, and quickly restore output and employment. Rather than funding the banks from the top down with an improbable trickle down theory that would have made Reagan blush, this tax cut restores the incomes necessary to support all economic activity from the bottom up. Instead of funding the financial sector with $trillions, the payroll tax holiday instead simply stops taking $trillions away from people working for a living.

Unfortunately, the Democratic elite has been not only against this kind of tax cut, even though it is a tax so regressive that no self respecting Democrat should tolerate for a single moment, because they think the Federal Government has to actually get revenue to be able to spend. However, that anachronistic gold standard reality has long been replace by our current, non convertible currency regime and floating exchange rate policy. Chairman Bernanke told Congressman Pelley exactly how the Federal Government spends today last May:

(PELLEY) Is that tax money that the Fed is spending?
(BERNANKE) It’s not tax money. The banks have– accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.

Our govt has only one way to spend- they ‘mark up’ numbers in bank accounts. The funds don’t ‘come from’ anywhere any more than the 6 points for a touchdown posted on scoreboard at a football game ‘come from’ anywhere. Nor does govt. get anything when it taxes- the IRS just changes numbers down in our bank accounts.

The fact is, the US Government never has nor doesn’t have dollars. It’s the scorekeeper for the dollar. It just changes numbers in bank accounts.

So why tax? To regulate aggregate demand. Taxation is the thermostat. When the economy is too hot, raise taxes to cool it down. When it’s too cold, like it surely is today, a payroll tax holiday will warm it back up to operating temperature.

The Democratic elite have it wrong and their wrongheaded ways are doing serious damage to the US economy and the people struggling under their failed economic agenda. And their latest moves towards what they call ‘fiscal responsibility’ will only cut demand further and make things worse.

Tea Party Democrats can lead the way towards true fiscal responsibility, which means setting taxes at the right level needed to sustain output and employment. And today that means a full payroll tax holiday.


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