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Power Point I did for a conference discussion.

Financial Architecture Fundamentals

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Karim writes:

Moving up with crude prices as reluctantly anticipated.

Back towards ‘nuetral’ levels for flat GDP

Orders expanding some from a low base as expected.

This is enough for GDP to muddle through at modest positive levels

Same

This will continue to stagnate as productivity gains will be sufficient to meet output demands

Will move back up from depressed levels

Will move up with prices

This is good for financial markers/bad for obama vision — modest growth with continuing downward pressure on wages

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Harvard AND Oxford Professor, thank you!

Niall Ferguson: No One Has The Faintest Idea When The Economy Will Recover

by Niall Ferguson

May 29 (FT) —He thinks Obama’s economic forecasts are as much of an outlier possibility as another Great Depression. He’s also concerned, as we are, that there’s just not enough money in the world to finance all the borrowing the U.S. and other big countries will be doing over the next few years.

Barron’s: Is the worst over for the global stock markets and the economy?

Ferguson: It may look that way, but appearances can be deceptive. The stock market has actually tracked almost perfectly its downward movements between 1929 and 1931. Now that doesn’t mean that we are going to repeat the Great Depression. I don’t think we will, because the policy responses have been different. It would be excessively optimistic, however, to conclude from a relatively small set of green shoots in the economic data that we are all going to live happily ever after. It is certainly way too early to say the Obama administration is right that the economy is going to grow at 3% next year and 4% in 2011. I find that scenario as implausible as a rerun of the Great Depression…

When will the recovery come?

Nobody has the faintest idea what next year is going to look like. It isn’t clear yet that this is just a common recession. This is probably more like a slight depression. We won’t see a big V-shaped bounce. Much of the consumption growth in the decade up to 2007 was fueled by things like mortgage-equity withdrawal. That game is clearly over. Strip that out, and you are looking at an annual economic-growth rate in the U.S. closer to 1½% to 2% than 4%.

What is your disagreement with New York Times columnist and Princeton professor Paul Krugman about massive government borrowing?

This is one of the most interesting questions of the moment. The view of Keynesians, their Econ. 101 textbooks and the Nobel laureate at Princeton is that the world has an excess of savings over investments and therefore the deficit can be almost any size and it will be financed.

That is the problem with violating ‘Lerner’s Law’ and making the argument in the wrong paradigm. It invariably gets shot down like this:

My sense is that if the U.S. government tries to borrow $1.8 trillion in a year, that is an awful lot of bonds to sell at the same time [as] all the other major governments. It looks to me like a supply-and-demand story, and what tends to happen in those stories, regardless of the macro environment, is that the price of bonds tends to fall. The U.S. 10-year Treasury rate has moved up more than 100 basis points [one percentage point] since January. There is a problem in Britain, where the Bank of England had to protest about fiscal stimulus because it was causing a huge interest-rate problem. It is also happening here.

It is the blind arguing with the blind.

With this attitude it very well may take a world war to generate enough deficit spending to restore output and employment.

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After a fiscal package that may or may not be sufficient to bring down unemployment, the president is now directly telling us that the next move is to dampen aggregate demand by reducing health care spending (and letting tax rates go higher.)

In a sobering holiday interview with C-SPAN, President Obama boldly told Americans: “We are out of money.”

C-SPAN host Steve Scully broke from a meek Washington press corps with probing questions for the new president.

SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?

OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we’ve made on health care so far. This is a consequence of the crisis that we’ve seen and in fact our failure to make some good decisions on health care over the last several decades.

So we’ve got a short-term problem, which is we had to spend a lot of money to salvage our financial system, we had to deal with the auto companies, a huge recession which drains tax revenue at the same time it’s putting more pressure on governments to provide unemployment insurance or make sure that food stamps are available for people who have been laid off.

So we have a short-term problem and we also have a long-term problem. The short-term problem is dwarfed by the long-term problem. And the long-term problem is Medicaid and Medicare. If we don’t reduce long-term health care inflation substantially, we can’t get control of the deficit.

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Score one for the deficit terrorists
This is one of the largest risks to the recovery:

Geithner Pledges to Cut Deficit Amid Rating Concern

by Robert Schmidt

May 21 (Bloomberg) — Treasury Secretary Timothy Geithner said the Obama administration is committed to reducing the federal budget deficit after concerns rose that the U.S. debt rating may eventually be threatened with a downgrade.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television. He added that the target is reducing the gap to 3 percent of gross domestic product or smaller, from a projected 12.9 percent this year.

The dollar, Treasuries and American stocks slumped today on concern about the U.S. government’s debt rating. Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade.

Geithner, 47, also said that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”

Benchmark 10-year Treasury yields jumped 17 basis points to 3.37 percent at 4:53 p.m. in New York. The Standard & Poor’s 500 Stock Index fell 1.7 percent to 888.33, and the dollar tumbled 0.8 percent to $1.3890 per euro.

Gross’s Warning

Gross said in an interview today on Bloomberg Television that while a U.S. sovereign rating cut is “certainly nothing that’s going to happen overnight,” financial markets are “beginning to anticipate the possibility.”

Britain saw its own AAA rating endangered earlier today when Standard & Poor’s lowered its outlook on the nation’s grade to “negative” from “stable,” citing a debt level approaching 100 percent of U.K. GDP.

It’s “critically important” to bring down the American deficit, Geithner said.

Ten-year Treasury yields have climbed about 1 percentage point so far this year, in part after U.S. economic figures indicated that the worst of the deepest recession in half a century has passed. The yield on 30-year bonds has jumped to 4.31 percent, from 2.68 percent at the beginning of the year.

The Treasury chief said it’s still “possible” that the unemployment rate may reach 10 percent or higher, cautioning that the economic recovery is still in the “early stages.”

‘Very Challenging’

“The important thing to recognize is that growth will stabilize and start to increase first before unemployment peaks and starts to come down,” he said. “These early signs of stability are very important” although “this is still a very challenging period for businesses and families across the United States.”

Initial claims for unemployment insurance fell by 12,000 in the week ended May 16 to 631,000, according to Labor Department statistics released today. Still, the number of workers collecting unemployment checks rose to a record of more than 6.6 million in the week ended May 9.

As of April, the unemployment rate was 8.9 percent, the highest level since 1983. The economy has lost 5.7 million jobs since the recession started in December 2007.

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It’s for real - Obama’s in the deficit terrorist camp, using the communication skills he learned in his rhetoric 101 class.

Obama Says U.S. Long-Term Debt Load ‘Unsustainable’

by Roger Runningen and Hans Nichols

May 14 (Bloomberg) — President Barack Obama, calling current deficitspending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

1. It’s domestic budget surpluses that are unsustainable- they remove savings.
    
2. Interest rates are set by the Fed, not the market or the deficit. Japan’s deficits have been triple ours and their rates lower for decades, for just one (unnecessary) example.
    
3. The US government is not dependent on borrowing from other countries in order to spend.
    

“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

That’s a load of inapplicable rhetoric for the purpose of terrorizing uninformed Americans.

Holders of U.S. debt will eventually “get tired” of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. “It will have a dampening effect on our economy.”

Interest rates are set by the Fed, not by those who elect to buy Treasury securities.

The president pledged to work with Congress to shore up entitlement programs such as Social Security and Medicare and said he was confident that the House and Senate would pass health-care overhaul bills by August.

“Most of what is driving us into debt is health care, so we have to drive down costs,” he said.

Whatever costs he’s got in mind (insurance, drug company markups, etc.) should be minimized in any case.

It’s not about the ‘debt’.

The biggest risk to our economy is the risk of Obama succeeding in enacting measures to reduce the deficit.


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Obama Video from the White House Correspondent’s Dinner

May 9 (C-SPAN)

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Yes, it’s early, but seems he’s serious about his campaign promise to balance the budget.

The economy won’t see the drop in demand until it actually happens.

But valuations can adjust to rising tax rates long before GDP does.

Obama Proposes New Taxes on Dealers, Life Insurance

by Ryan J. Donmoyer

May 11 (Bloomberg) — President Barack Obama proposed raising money to pay for his health-care overhaul by imposing $58 billion in new taxes on securities dealers, life insurance products and Americans with valuable estates.

The eight new proposals, outlined in budget documents released today, are in addition to more than $1 trillion in tax increases over the next decade the president wants to impose beginning in 2011. Those would include higher rates for top earners and restrictions on tax-avoidance techniques commonly used by U.S.-based multinational corporations.

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(email exchange)

This will drive up prices of food and energy longer term.

Still no plan to quickly bring down crude demand to offset declines in supply side incentives.

>   
>   Obama doesn’t buy the idea that US tax credits encourage oil and
>   gas production. His FY-2010 budget would delete eight such tax
>   breaks – start importing Brazilian ethanol.
>   

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(email exchange)

Yes, thanks.

I just saw a replay of the Obama comedy routine of a few days ago.

It wasn’t at all clever or funny, but sarcastic, mean spirited, cheap shots and arrogant self glorification, etc. and delivered as such. The shots against Clinton, Summers, and Biden- who I criticize perhaps more than anyone- were particularly cruel and tasteless, and unthinkable that their ‘boss’ would publicly humiliate them like that unless he intended to fire them. And the hostile undertone was similar to that of his attacks on the Chrysler secured lenders and corporations with legal untaxed offshore earnings.

The progression is getting worse. Wouldn’t surprise me if he starts losing support from some of the more intellectual Democrats before the end of the year.

>   
>   More on the theme of who could have predicted that a mainstream Canadian
>   newspaper could be on this side of the debate ?
>   

Amid the rhetoric, a profound threat to capitalism

by Avner Mandelman

May 9 (Globe and Mail) —

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Didn’t we just hear a speech from our President about the need to strengthen unions?

White House to set GM, Chrysler deadlines: report

Mar 27 (Reuters) — The Obama administration will set a strict deadline for General Motors Corp and Chrysler LLC to reach cost-cutting deals with creditors and their major union even as it extends more aid to the struggling automakers, the New York Times reported on Friday.

The New York Times reported that the White House autos task force was likely to set a deadline of weeks rather than months for GM and Chrysler to reach a deal with creditors and the United Auto Workers. Under the terms of the $17.4 billion in emergency loans approved for the Detroit automakers by the Bush administration in late December, GM and Chrysler need to win concessionary agreements to reduce the amount owed to the United Auto Workers and other creditors. GM and Chrysler have reached agreements in principle to change provisions of their contract with the UAW that would reduce the average hourly cost for production workers, another provision of the loan deal.

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This is what you get from a president who doesn’t understand the monetary system. The strength of the dollar is off point:

Obama Defends Spending Plan, Tempers Criticism of Wall Street

by Julianna Goldman and Kim Chipman

Mar 25 (Bloomberg) — “I don’t believe that there’s a need for a global currency,” Obama, 47, said. “As far as confidence in the U.S. economy or the dollar, I would just point out that the dollar is extraordinarily strong right now.”

The main difficulty with a world currency is how the budget deficit (the only source of net savings of financial assets for that new currency) in that currency is managed. And with a world of leaders who don’t understand how currencies work, the odds of getting that anywhere near right are very long.

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The last thing we need to do is encourage policies that empower billions of foreign consumers to compete with us for scarce real resources and diminish our real terms of trade.

But that’s what happens with an administration that does not understand the monetary system.

Obama seeks ‘Sustained’ Fiscal Stimulus in G-20 Summit Appeal

by Tony Czuczka

Mar 24 (Bloomberg) — President Barack Obama urged fellow Group of 20 leaders to provide a “robust and sustained” fiscal stimulus, saying that “much more” action is needed to fight the global recession.

In an article published today in newspapers including Germany’s Die Welt and the Paris-based International Herald Tribune, Obama also urged increased funding for international lenders and a “common framework” of steps to restore the world economy’s flow of credit.

“Our efforts must begin with swift action to stimulate growth,” Obama said in the article laying out U.S. goals for the G-20 summit in London on April 2. “Other members of the G- 20 have pursued fiscal stimulus as well, and these efforts should be robust and sustained until demand is restored.”

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This says it all.

And only days after Bernanke explained how government spends by changing numbers in accounts.

Obama is either ignorant or subversive:

From 60 minutes last night:

Obama on 60 minutes

Mar 22 (CBS) —

KROFT: Is there some limit to the amount of money we can spend?

OBAMA: Yes.

KROFT: Or print trying to solve this crisis?

OBAMA: There is.

KROFT: And are we getting close to it?

OBAMA: The limit is our ability to finance these expenditures through borrowing. And the United States is fortunate that it has the largest, most stable economic and political system around. And so the dollar is still strong because people are still buying treasury bills. They still think that’s the safest investment out there. If we don’t get a handle on this, and also start looking at our long-term deficit projections, at a certain point, people will stop buying those treasury bills.

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>   
>   On Sun, Mar 15, 2009 at 11:40 AM, MAuer wrote:
>   
>   How about adopting the Mosler health care proposals?
>   

Yes!

This is what happens with an administration that does not understand taxes are about managing aggregate demand and distribution, not raising revenue per se.

Someday we may have a president who knows how the monetary system works.

And what about all the economists who know or should know health care should not be a marginal cost of production?

Administration Is Open to Taxing Health Benefits

by Jackie Calmes and Robert Pear

Mar 15 (NYT) — The Obama administration is signaling to Congress that the president could support taxing some employee health benefits, as several influential lawmakers and many economists favor, to help pay for overhauling the health care system.
The proposal is politically problematic for President Obama, however, since it is similar to one he denounced in the presidential campaign as “the largest middle-class tax increase in history.” Most Americans with insurance get it from their employers, and taxing workers for the benefit is opposed by union leaders and some businesses.
In television advertisements last fall, Mr. Obama criticized his Republican rival for the presidency, Senator John McCain of Arizona, for proposing to tax all employer-provided health benefits. The benefits have long been tax-free, regardless of how generous they are or how much an employee earns. The advertisements did not point out that Mr. McCain, in exchange, wanted to give all families a tax credit to subsidize the purchase of coverage.
At the time, even some Obama supporters said privately that he might come to regret his position if he won the election; in effect, they said, he was potentially giving up an important option to help finance his ambitious health care agenda to reduce medical costs and to expand coverage to the 46 million uninsured Americans. Now that Mr. Obama has begun the health debate, several advisers say that while he will not propose changing the tax-free status of employee health benefits, neither will he oppose it if Congress does so.
Mr. Orszag, an economist who has served as director of the Congressional Budget Office, has written favorably of taxing some employer-provided health benefits and using the revenue savings for other health-related incentives. So has another Obama adviser, Jason Furman, the deputy director of the White House National Economic Council.
Also, Mr. Obama’s own idea for raising revenues for health care — limiting the income tax deductions that the most affluent taxpayers claim — has run into opposition not only from Mr. Baucus but also from his counterpart in the House, Representative Charles B. Rangel, Democrat of New York, who is chairman of the Ways and Means Committee.
Those who want to tax benefits in whole or in part make two main arguments. They say the tax exclusion is a generous subsidy that insulates employees from the true costs of health care, leading them to demand more of it and driving up overall costs. Critics also say the policy is unfair because it favors higher-income people. “It’s too regressive,” Mr. Baucus said. “It just skews the system.”
But in a blueprint for health legislation that he issued last November, Mr. Baucus said taking the exclusion on health benefits out of the tax code would go “too far” and “cause widespread disruption in employer-based health benefits.” Mr. Obama has also said he wants to preserve employer-provided coverage. Mr. Baucus, in his paper, cited other options, like taxing benefits above some value, taxing only wealthy employees or both.
Alan V. Reuther, legislative director of the United Automobile Workers, said: “These proposals would represent a tax increase on working families. They would undermine good health care coverage.”
But at the Service Employees International Union, which was an early supporter of Mr. Obama, Dennis Rivera, the coordinator of the union’s health care campaign, said that while his organization was “predisposed not to agree to the taxing of health benefits,” he would wait to pass judgement. The union, Mr. Rivera said, wants to see how any tax changes fit into the overall effort to revamp the health care system. “We need to see the total picture,” he said.

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Obama Says Investors Can Be Fully Confident in US

by Kim Chipman and Alan Bjerga

Mar 14 (Bloomberg) — President Barack Obama said investors can have “absolute confidence” in Treasury bills as he sought to assuage China’s concern about the safety of its holdings of U.S. debt.

“Not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the U.S.,” Obama said today at a press conference in Washington after meeting Brazilian President Luiz Inacio Lula da Silva.

Sounds a lot like all the other CEOs just before they defaulted.

This is embarrassing. Maybe some day we will have a president who can give the right answer-

The US government makes payment in dollars by crediting accounts at its Federal Reserve Bank.

This process is not inherently constrained by revenues.

The notion of solvency is inapplicable.

Chinese Premier Wen Jiabao, whose country is the single largest overseas owner of U.S. government debt, said two days ago that he was “worried” about holdings of Treasuries and wanted assurances that the investment is safe.

Take him to the Fed and show him how the debits and credits work.

The U.S. is counting on overseas purchases of its debt to finance Obama’s $787 billion package intended to help pull the world’s biggest economy out of a recession.

Federal spending is in no case inherently revenue constrained.

This kind of unanswered rhetoric perpetuates the myths that diminish our real standard of living.

Obama noted today that investment flows into the U.S. are rising. Total net purchases of long-term equities, notes and bonds increased to $34.8 billion in December, compared with net selling of $25.6 billion in November, according to a Treasury Department report last month.

This has nothing to do with solvency. Maybe some day we’ll get a president who understands that.

“I think it’s a recognition that the stability not only of our economic system but also our political system is extraordinary,” Obama said.

The main reason foreign governments accumulate USD financial assets is to keep their own real wages and standard of living down to drive exports to the US.

That’s a ‘good thing’ for us that Obama also doesn’t understand.

He said the private sector has helped make the country the world’s “most dynamic economy.”

OK, whatever ‘dynamic’ means in this context.

Lula, who presides over the world’s 10th-biggest economy, said he’s concerned that investor “flight” toward the relative safety of U.S. securities will mean there’s less money to invest in emerging economies.

He’s just ignorant about how the monetary system works.

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Obama’s safety net: the teleprompter

by Carol E. Lee

March 5 (Politico)

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Just what we need- one more subtraction from aggregate demand and yet more tax advantaged funds for managers to play with.

Clearly he believes that “we need savings to have funds for investment” and has at best forgotten the implications of the paradox of thrift:

Obama seeks ‘Automatic Pensions’, Labor Enforcement

by Holly Rosenkrantz

Feb 26 (Bloomberg) — The budget “lays the groundwork for future establishment of a system of automatic workplace pensions, to operate alongside Social Security, that is expected to dramatically increase” retirement and personal savings, Obama’s Office of Management and Budget said in its outline, without giving details on the costs.

The plan would force employers that don’t offer retirement plans to enroll employees in a “direct-deposit IRA account,” with the option for workers themselves to opt out. Currently, 75 million working Americans, or about half the workforce, lacks employer-based retirement plans, according to the administration.

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Obama vs. Mosler- The Tale of the Tape

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I was hoping not to be reading this:

Obama aims to halve deficit by 2013

by Ross Colvin

Feb 22 (Reuters) — Obama wants to slash the ballooning deficit in half by 2013, U.S. officials said Saturday, after massively increasing public spending to stem the worst economic crisis in decades.

The president will outline his ambitious goal when he hosts a summit at the White House Monday on fiscal responsibility and later in the week when his administration presents a summary of its first budget, for the 2010 fiscal year.

“We can’t generate sustained growth without getting our deficits under control,” Obama said in his weekly radio address in which he also announced immediate implementation of tax cuts for 95 percent of Americans as part of the effort to stimulate the economy.

And he may succeed by letting the top tax rates rise in 2010. This would raise taxes for people with relatively low propensities to consume, until the strong economy again drives the budget into surplus and thereby causes the next crash.

If he first allows the budget deficit to get large enough to add the savings that will support the subsequent Obamaboom that brings the deficit down.

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