White House Aims to Cut Deficit With TARP Cash

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Analogy-

You own a house with a mtg on it.
You sell your house and give the money to the bank at the closing.
The bank officers have a meeting and decide to use that money to pay off the mtg.

Brilliant!!!!!!!!!!!!!!!!!!!!!!!!!!

White House Aims to Cut Deficit With TARP Cash

By Deborah Solomon and Jonathan Weisman

Nov. 12 (Bloomberg) — The Obama administration, under pressure to show it is serious about tackling the budget deficit, is seizing on an unusual target to showcase fiscal
responsibility: the $700 billion financial rescue.

The administration wants to keep some of the unspent funds available for emergencies, but is considering setting aside a chunk for debt reduction, according to people familiar with the matter.

The funds do not add to the deficit until after they are spent

This is total accounting nonsense.

A remake of the Clinton plan to have a trust fund for the deficit, which never made it past the empty rhetoric stage.

It is also expected to lower the projected long-term cost of the program — the amount it expects to lose — to as little as $200 billion from $341 billion estimated in August.

A $210 billion surplus in TARP funding could be used to reduced the U.S.’s towering national deficit. WSJ’s Deborah Solomon says the move follows criticism of the Obama administration’s approach to debt. The idea is still a matter of debate within the administration and it is unclear how much impact it would have on the nation’s mounting deficit levels. Still, the potential move illustrates how the Obama administration is trying to find any way it can to bring down the deficit, which is turning into a political as well as an economic liability.

The White House is in the early stages of considering what bigger moves it might make for next year’s budget. The Office of Management and Budget has asked all cabinet agencies, except defense and veterans affairs, to prepare two budget proposals for fiscal 2011, which begins Oct 1, 2010. One would freeze spending at current levels. The other would cut spending by 5%.

OMB is also reviewing a host of tax changes. The President’s Economic Recovery Advisory Board will submit tax-policy options by Dec. 5, including simplifying the tax code and revamping the corporate tax code.

White House Chief of Staff Rahm Emanuel is pressing for substantial spending cuts to go with any tax increases to try to avoid the “tax and spend” label that has bedeviled Democrats, according to administration and congressional officials.

The possibility of announcing an exit from Afghanistan with the funds saved to pay down the deficit would be extremely popular short term and contribute to lower GDP and higher levels of unemployment over the medium term.

The administration is constrained in tackling the mounting deficit, since raising taxes or slashing spending could stunt economic growth. Administration officials say the Obama economic team is especially concerned that rapid deficit reduction could hurt the economy.

On the $700 billion Troubled Asset Relief Program, the administration is considering a change that may appear to improve the fiscal situation. Agreeing not to spend a certain amount of TARP money will enable the White House, in its budget projections, to assume less money out the door and, therefore, less debt issued.

This is true, but TARP ‘spending’ on bank capital is regulatory forbearance and not ‘spending’ so it shouldn’t be ‘counted’ as deficit spending in any case.

The move would also reduce the deficit by an unknown amount since a certain level of spending and borrowing is already factored into estimated future deficits.

The Treasury Department said about $210 billion in TARP funds remains unspent, including about $70 billion returned from financial institutions. A further $50 billion is expected to be repaid in the next 12 to 18 months.

Budget experts said committing some TARP funds toward debt reduction could help calm concerns about the size and intent of the program. “I don’t necessarily want them to pull back in a huge way, because there’s a lot of uncertainty, but right now what we’ve got could turn into a $700 billion slush fund” for Congress, said Douglas Elliott, a fellow with the Brookings Institution, a liberal think tank.

The move could buy the Treasury Department time before it hits the so-called debt ceiling, which limits the amount of money the U.S. can borrow. Already, some members of Congress have said they won’t approve an increase in the $12.1 trillion debt cap unless efforts to reduce the deficit are included.

Senate Budget Committee Chairman Kent Conrad, the North Dakota Democrat who is proposing a bipartisan commission, along with Sen. Judd Gregg(R., N.H.), to examine taxes, said he won’t vote for raising the debt limit unless Congress and the administration start talking about cutting spending and increasing taxes.


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Faber on Gold

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He may be right, but for the wrong reason.
Central Banks buying securities and growing their portfolios of financial assets, aka ‘quantitative easing, has nothing to do with inflation or aggregate demand.

However, direct Central Bank purchase of gold do amount to what I call ‘off balance sheet deficit spending’ which does support the price of whatever they buy and can go on indefinitely as a function of political will:

Gold Price Won’t Drop Below $1,000 an Ounce Again, Faber Says

By Zijing Wu

Nov. 11 (Bloomberg) — Gold won’t fall below $1,000 an ounce again after rising 27 percent this year to a record as central banks print money to help fund budget deficits, said Marc Faber, publisher of the Gloom, Boom & Doom report.

The precious metal rose to all-time highs in New York and London today as the dollar weakened. The Dollar Index, a gauge of value against six other currencies, has declined 7.9 percent this year and today fell to a 15-month low. News last week of bullion purchases by the Indian and Sri Lankan governments raised speculation that other countries would follow suit.

“We will not see less than the $1,000 level again,” Faber said at a conference today in London. “Central banks are all the same. They are printers. Gold is maybe cheaper today than in 2001, given the interest rates. You have to own physical gold.”

China will keep buying resources including gold, he said.

“Its demand for commodities will go up and up and up,” he added. “Emerging economies will grow at the fastest pace.”

In contrast, Western countries will be lucky to avoid economic contraction, while the Federal Reserve will maintain interest rates near zero percent, he said.


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Employment

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It is the hangover from the budget surpluses of the late 90’s that drove us to use private sector credit to support demand, first by the dot.com phase of funding impossible business plans, and, after the 2003 proactive deficit policies, the sub prime fraud kicked in with a last burst of private sector credit expansion that pushed it well beyond the limits of the underlying incomes to support it.

The tragedy is how easy it would have been to avoid the entire rise in unemployment, and how easy it is to fix it now:

Payroll tax holiday
Per capita revenue distribution for the states
$8/hr job for anyone willing and able to work

On Wed, Nov 11, 2009 at 12:48 PM, Russell Huntley wrote:

Rosenberg piece … appears he is using Soss’s analysis.

There are serious structural issues undermining the U.S. labour market as
companies continue to adjust their order books, production schedules and
staffing requirements to a semi-permanently impaired credit backdrop. The
bottom line is that the level of credit per unit of GDP is going to be much, much lower in the future than has been the case in the last two decades. While we may be getting close to a bottom in terms of employment, the jobless rate is very likely going to be climbing much further in the future due to the secular dynamics within the labour market that need to be discussed:

• For the first time in at least six decades, private sector employment is
negative on a 10-year basis (first turned negative in August). Hence, the
changes are not merely cyclical or short-term in nature. Many of the jobs
created between the 2001 and 2008 recessions were related either directly
or indirectly to the parabolic extension of credit.

• During this two-year recession, employment has declined a record 8 million.
Even in percent terms, this is a record in the post-WWII experience.

• Looking at the split, there were 11 million full-time jobs lost (usually we see
three million in a garden-variety recession), of which three million were shifted
into part-time work.

• There are now a record 9.3 million Americans working part-time because they
have no choice. In past recessions, that number rarely got much above six
million.

• The workweek was sliced this cycle from 33.8 hours to a record low 33.0
hours — the labour input equivalent is another 2.4 million jobs lost. So when
you count in hours, it’s as if we lost over 10 million jobs this cycle.
Remarkable.

• The number of permanent job losses this cycle (unemployed but not for
temporary purposes) increased by a record 6.2 million. In fact, well over half
of the total unemployment pool of 15.7 million was generated just in this past
recession alone. A record 5.6 million people have been unemployed for at
least six months (this number rarely gets above two million in a normal
downturn) which is nearly a 36% share of the jobless ranks (again, this rarely
gets above 20%). Both the median (18.7 weeks) and average (26.9 weeks)
duration of unemployment have risen to all-time highs.

• The longer it takes for these folks to find employment (and now they can go on the government benefit list for up to two years) the more difficult it is going to be to retrain them in the future when labour demand does begin to pick up. Not only that, but we have a youth unemployment rate now approaching a record 20%. Again, this is going to prove to be very problematic for employers in the future who are going to be looking for skills and experience when the boomers finally do begin to retire.


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Richard Koo: a personal view of the macroeconomy

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I agree, and the deficit of consequence isn’t that high as I think that figure includes the TARP funds
which were a form of regulatory forbearance and not spending.

Unfortunately, elsewhere he falls short in explaining why deficit spending doesn’t have the downside risks the mainstream attributes to it.

Send him a copy of the 7 deadly innocent frauds draft for comment? (attached)

Richard Koo: a personal view of the macroeconomy

US a mirror image of Japan 15 years ago

In the last two weeks, I made my annual fact-finding mission to
Washington and also spent time in Boston and San Francisco. What I
witnessed was very reminiscent of the situation in Japan 15 years ago:
people were latching on to isolated fragments of good economic news as
evidence of recovery while ignoring the steady deterioration in the real
economy.

In addition to meetings with officials from the Federal Reserve and the
White House, I had the opportunity to talk with various groups at the
Hill including two Congresspersons over lunch.

Although there have been signs of improvement in the real economy,
particularly in production, the problems in the jobs picture are
underscored by the unemployment rate’s rise into double digits.

And on a personal level, the San Francisco bank that my parents
patronized for many years was shut down by the FDIC last Friday. To
prevent panic, the bank opened for business as usual on Saturday under
the name of another lender. This event added a personal dimension to the
crisis for me.

Budget deficit concerns make new fiscal stimulus all but impossible

One issue of particular concern on this trip was that people seem to be
paying little attention to the economic impact of the Obama
administration’s fiscal stimulus and instead are focusing entirely on
the size of the resulting budget deficit.

With the government running a deficit equal to 10% of nominal GDP, more
people are looking at the continued weakness in the economy:
particularly in employment: and drawing the conclusion that the
administration’s policies are ineffective and should be discontinued as
soon as possible. This view is so strong that additional fiscal stimulus
is seen as being almost impossible to implement today.

This pattern mirrors events in Japan 15 years ago. The more the
government draws on fiscal stimulus to avert a crisis, the more
criticism it receives.

People are giving no thought to the economic consequences if the
government had not responded to the $10trn loss in national wealth (in
the form of housing and stock portfolios) with fiscal stimulus. Instead,
they focus entirely on the fact that the economy has yet to improve
despite $787bn in expenditures.

In Japan, fiscal spending succeeded in keeping GDP above bubble-peak
levels despite the loss of Y1,500trn in national wealth, or three years
of GDP, from real estate and stocks alone. But because disaster was
averted, people forgot they were in the midst of a crisis and rushed to
criticize the size of the resulting fiscal deficits.

Their criticism prevented the Japanese government from providing a
steady stream of stimulus. Instead, it was forced to adopt a stop-and-go
policy of intermittent stimulus: each time a spending package expired,
the economy would weaken, forcing the government to quickly implement
the next round of stimulus. That is the main reason why the recession
lasted 15 years. And the mood in Washington today is very similar.

R. Koo


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IEA oil consumption forecast

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A modest rise in consumption for next year means the Saudis/OPEC remain firmly in control of price.

Global oil consumption is likely to average 86.1 million barrels a day in 2010, the IEA said in an Oct. 9 monthly report, raising next year’s forecast for a third consecutive month. The agency expects demand of 84.6 million barrels a day this year. The IEA’s next monthly report will be issued on Nov. 12.

It will be up to members of the Organization of Petroleum Exporting Countries to satisfy the bulk of the world’s increasing need for oil as conventional production in countries outside the group peaks next year, the IEA said.

“Most of the increase in output would need to come from OPEC countries, which hold the bulk of remaining recoverable conventional oil resources,” the agency said in the report.


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China to Re-Export Copper as Stockpiles Mount, Xi’an Maike Says

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Interesting turn of events.

China to Re-Export Copper as Stockpiles Mount, Xi’an Maike Says

Nov. 10 (Bloomberg) — China, the top copper user, holds as much as 350,000 metric tons in duty-free warehouses and the metal may be re-exported as supplies outpace demand, according to Xi’an Maike MetalInternational Group.

“We can hardly find buyers for refined copper,” said Luo Shengzhang, general manager of the copper department at Xi’an Maike. The
company ranks among the country’s three biggest importers, according to the executive. “China’s got to export some copper from now and next year,” Luo said in an interview.

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Copper, used in pipes and wires, has more than doubled in London this year as China’s 4 trillion yuan ($586 billion) stimulus spending,
increased state stockpiling and a lack of scrap material boosted imports to a record. That’s helped to drive Chinese prices below London’s sinceat least July.

Xi’an Maike has had to re-route some bonded copper to London Metal Exchange warehouses in South Korea because the company was unable to find buyers in China, said Luo, who spoke yesterday in Shanghai. The effect of the stimulus package was wearing off and local scrap supply was improving, he said.

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Luo’s estimate of the bonded-zone stockpiles compares with 60,000 tons by Macquarie Group Ltd.  in July. It’s also more than triple the
inventory in Shanghai Futures Exchange warehouses, which stood at 104,275 tons as of the week of Nov. 2. A bonded zone holds imported goods before duty has been paid.

                     Copper’s Rally

Three-month copper in London traded today at $6,548 a ton compared with $3,070 at the end of last year. Futures in Shanghai have also more than doubled this year to a high of 51,580 yuan ($7,554) a ton today.

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Still, buying the metal from overseas to sell in the Chinese market has not been profitable since at least July, according to Bloomberg
calculations. Prices in Shanghai were more than 1,300 yuan a ton lower than London yesterday, after accounting for China’s 17 percent value
added tax.

In addition to the bonded-zone stockpiles, China may also hold 150,000 tons in the Shanghai area, including in exchange- monitored
warehouses; 235,000 tons at the State Reserve Bureau, which maintains government holdings; and 200,000 tons with fabricators and private
investors, Luo said.

Refined-copper exports by China were 10,705 tons in September, 70 percent more than a month ago and the highest this year, according to data by the Beijing-based customs office. Refined-copper imports in the first nine months were 2.58 million tons, 165 percent more than a year ago.

Xi’an Maike’s inbound shipments of refined copper may total about 400,000 tons this year, ranking among the top three importers by volume, according to Luo. The country’s imports of refined copper may halve to 1.6 million tons in 2010 from an estimated 3 million tons this year, he said.


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German October Consumer Prices Unexpectedly Decline

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Headlines all negative today.  

Soft prices indicate soft demand.

Weakness and calls for deficit cuts heightens stresses on vulnerable national govt finances.

The eurozone remains the one part of the world with systemic risk built into its institutional structure.  

Highlights:
German October Consumer Prices Unexpectedly Decline
German Investor Confidence Drops in November on Weaker Outlook
Germany to Observe EU Call for Deficit Cuts, Schaeuble Says
French Economic Recovery Probably Strengthened in Third Quarter
Italian Industrial Output Fell More Than Forecast in September
EU to Give Spain Extra Year to Trim Budget Deficit, ABC Reports


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China hopes U.S. keeps deficit to appropriate size

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Translation:  China threatens to liquidate it’s dollars to keep the dollar weak so China can peg to it and increase global exports??? 

China hopes U.S. keeps deficit to appropriate size

(Reuters) – China hopes that the United States will keep its deficit to an appropriate size to ensure basic stability in the U.S. dollar exchange rate, Chinese Premier Wen Jiabao said on Sunday.

“We have seen some signs of recovery in the U.S. economy … I hope that as the largest economy in the world and an issuing country of a major reserve currency, the United States will effectively discharge its responsibilities,” Wen told a news conference in Egypt.

“Most importantly, we hope the United States will keep an appropriate size to its deficit so that there will be basic stability in the exchange rate, and that is conducive to stability and the recovery of the global economy,” he added.

The premier had expressed concern in March that massive U.S. deficit spending and near-zero interest rates would erode the value of China’s huge U.S. bond holdings.

China is the biggest holder of U.S. government debt and has invested an estimated 70 percent of its more than $2 trillion stockpile of foreign exchange reserves, the world’s largest, in dollar assets.

“I follow very closely Chinese holdings of U.S. assets because that constitutes a very important part of our national wealth. Our consistent principle when it comes to foreign exchange reserves is to ensure the safety, liquidity and good value of the reserves,” Wen said.


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Goldman disclosure controversy

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Looks like it all comes down to whether Goldman violated the law by not disclosing what it was obligated to disclose.

There is no question the institutional structure that leads to this type of activity is flawed in that it doesn’t work for public purpose.
In fact, large elements of the financial sector do not serve public purpose.

Much of the financial sector is set up, by law to function as a casino, where each bet necessarily has a long and a short, presumably towards so further public purpose to allow public/private partnerships including banks, pension funds, and insurance companies to participate.

Unfortunately it’s never discussed at this fundamental level in the public debate, which is one of the reasons I’m running for President- to bring that debate back to public purpose- the fundamental behind government and the institutional structure:

How Goldman secretly bet on the U.S. housing crash

By Greg Gordon

WASHINGTON — In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman’s sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation’s premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman’s failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.


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