Saturday, January 31, 2009

How to Watch the Super Bowl for Clues About the Economy

It's all in the ads. Remember, a downturn in the economy is really an adjustment period toward consumption purchases versus capital goods investments, from previous consumption/savings ratio distortions caused by Federal Reserve money manipulation.

NBC is reporting that it has sold the last two of the 67 advertising spots for the Super Bowl, pushing total ad revenue for the event to a record $206 million.

The network said its total of $261 million in ad revenue for all of Super Bowl day also is a record.

I'm not sure how to read this before the actual broadcast of the game. Is this another early sign the worst is over? Or is this another sign the economy is still moving in the direction of consumption versus savings?

The Super Bowl is the premier advertising event with an audience in the U.S. of 100 million viewers, many of whom watch closely during game breaks for the debut of entertaining, big-budget commercials.

Obviously, it's an ideal time to reach the consumer. There's always plenty of beer commercials, but the key is to watch how the other commercials come in. If there are many more immediate consumer satisfaction commercials, then it signals the economy continuing to move in the direction of the consumer. If, on the other hand, there are a significant numbers of big ticket consumer items, such as auto and truck ads, or ads appealing directly to businesses such as Fed Ex ads, biz computer ads, biz consultant ads, then its a very early sign that the Federal Reserve has manipulated the economy back in a direction that will sooner, rather than later, result in improvements of government reported economic data.

I'll be back with a post-game re-cap.

Update: Tim Swanson emails:

Actually, they hit a brick wall in September and were unable to find any outside buyers for 5 minutes worth of ads (10 thirty-second segments) which is a loss of $30 million in revenue. For instance, traditional buyers like GE and FedEx didn't buy any at all, while Monster and CareerBuilder did. NBC has had to revert to the time honored tradition of promoting internal productions such as their spring line-up of tv shows.
For my re-cap, I'll count internal NBC promotions in a separate category as an indication of fear, whereby advertisers aren't willing to spend the money to reach the markets.

So now I am watching three types of ads:

Consumer type ads

Capital goods type ads


Internal NBC ads

Just In Time For the Super Bowl: A Football Analogy

Tyler Cowen refers to the proposed "stimulus" package as a "Hail Mary" football pass. I call it a fumble.

The "Hail Mary" reference implies the offensive team is running a play that has a chance. In fact, the offense has dropped the ball and it is bobbing around on the ground with the likes of Goldman Sachs, the Carlyle Group, the AFL-CIO, the Military-Industrial Complex all diving at it. As for the average American, he was illegally knocked out of the play, is laying out of bounds in pain, but the referees in this game turn out to be "men of delusional integrity" such as Paul Volcker and Colin Powell, who didn't see a thing.

Quick, Mail the Fire Department!

There is a lot wrong with the Obama "Stimulus" Package, mostly because it is simply a transfer of funds from one group to another. And, not much of anything else. But even based on the Keynesian principles upon which the package was designed, it is a bit short in the logic department. Thomas Sowell explains the problem from this angle, based on the CBO's analysis showing only $26bn of Obama's $355bn public works package will be spent this year:
Using long, drawn-out processes to put money into circulation to meet an emergency is like mailing a letter to the fire department to tell them that your house is on fire.
There is a lot of smoke and mirrors to this program, which is not necessarily a bad thing, since it is a bad program, smoke and mirrors, rather than creating actual distortions in the economy is a good thing.

Friday, January 30, 2009

Are Politically Correct Bank Loans Coming?

Will the fact that you are a tree hugging, Spanish-speaking, Afro-Asian, lesbian midget, be more important when you apply for a bank loan, than your income and credit score? That day may be coming. The government is now just trying out its big stick on the banks it provided TARP money to.

President Obama is taking the first micro-management, politically correct swing at the recipients of government money. The first swing is at an easy target, Wall Street bonuses. Says Obama:

We're going to be having conversations as this process moves forward directly with these folks on Wall Street to underscore that they have to start acting in a more responsible fashion if we are to, together, get this economy rolling again.

There will be time for them to make profits, and there will be time for them to get bonuses. Now is not that time.
They always start off with the easy targets. This isn't about micro-managing, this is about outrageous bonuses, they say.

But once you start down that slippery slope of telling banks how to operate, how do you stop, when the next politically correct proposal from a powerful, politically correct, lobby is made?

The head of JPMorgan’s asset management and private banking operations, Jes Staley, understands the danger. During a seminar at the World Economic Forum in Davos, Switzerland, Staley said that bail-outs of Citigroup and Bank of America could distort the market if the US lenders succumb to political pressure when making lending decisions.

He said political interference in the management of those lenders that have turned to the US government for large-scale support was the “biggest risk” facing his bank.

Get that? The economy is a mess, there are bad loans everywhere, and political interference is the biggest risk.

“If the big banks start to be geared for public policy as opposed to economics we may end up competing against institutions that are being run for non-economic purposes,” Mr Staley said . “That is the biggest risk we see out there.”

Public policy loans could ultimately be the death of banking as we know it.

The big money players already know this.

Henry Kravis, founder of Kohlberg Kravis Roberts, said in Davos, according to FT, that private equity groups were already looking for ways to bypass banks when raising capital.

Kravis said those moves could accelerate in the coming year, given the scale of capital that needs to be raised and the difficulties that banks face in using their own balance sheets.

“We have set up a broker-dealer so we can go directly to people who provide capital, people like Fidelity, Templeton, insurance companies, pension funds and sovereign wealth funds,” he said.

And so politically regulated loans will do what regulations always do, work against the entrepreneur and small businessman to the benefit of the power elite who have the money and connections to figure out how to work around the new regulations.

The oligarchy lives.

Jeffrey Tucker, Again

A couple of you have emailed me to point out that Jeffrey Tucker is out with another attack on the rights of individuals and corporations to do as they please with what they produce. (Except, of course for Mises Institute books, specifically Mises: The Last Knight of Liberalism, where Tucker refuses to even discuss why I shouldn't be granted the right to publish the book under his anti-copyright view of the world.)

I didn't miss his piece. The errors in his thinking continue to pile up. In fact, there are so many that only a book will do justice to covering all of them.

I have been thinking about the relationship between the nature of property, property rights and government and have been planning to write a book on the subject, a few years down the road. However, Tucker's aggressive promotion of totalitarian anti-copyright and anti-patent thinking is a subset of property, property rights and government that needs to be addressed now.

Thus, I have decided to put aside a number of other projects to specifically address , in book form, the Kinsella-Tucker fallacies.

I believe the proper libertarian understanding of property rights solves the problem of "intellectual property" protection for, say, even the tough situations, such as, rights for those that first discovered how to start a fire or were the first to use the wheel. And the solution is not open source marketing. I'll cover all this and more.

The book is, for the most part, already "in my head" so it shouldn't take long to put it to paper, just a little bit of additional research. When it is in print, you will be the first to know.

GDP Shows Major Decline

The Bureau of Economic Analysis has announced that real GDP in the fourth quarter of 2008 declined by 3.2%. This number will be revised many times, so nothing should be etched in stone.

Nevertheless, the declines showed expected trends as the capital goods sector headed the decline. Motor vehicle output subtracted 2.04 percentage points from the fourth-quarter change in real GDP after contributing 0.16 of a percentage point to the third-quarter change.

Decreases in equipment and software also showed major declines.Corporate investments in computers, office equipment, machinery and other capital goods fell by an annualized 19.1 percent in the fourth quarter

ALERT: M1 nsa Money Growth Collapses

After growing at annualized rates near 40%, three month M1 nsa money growth numbers (for the week ended Jan 19) climbed at a three month annualized rate of only 3.04%

One week does not make a trend, but we have consistently said that a key datapoint to watch would be M1 money growth, as a slowdown in growth of this number would indicate fear is subsiding--and corporations and individuals are not adding to their cash balances. This may be an early indicator that such may be occurring. It will be very important to watch this number closely in upcoming weeks.

One word of caution, the pre-Christmas period is a period of strong demand for cash, part of the slowdown may be a return to normal non-Christmas cash levels. When the Fed seasonally adjusts its numbers, M1 is growing at a healthy clip of 34%. But even a normal return to non-Christmas cash levels is a sign the flight into cash has stopped.

That said, if this collapsing trend in non-seasonally adjusted M1 continues (while M2 nsa continues to grow at double digit rates), I will be prepared to say the worst is over for the economy, on a short-term basis. Afterall, it is non-seasonally adjusted money that is ultimately working its way through the economy. Money number trends over the next 4 to 6 weeks will be very important to watch. Continued slow M1 growth and continued rapid M2 growth will signal the end of this recession. And, for one week that's what the data is pointing to.

Despite slowed M1, three month annualized M2 nsa is now growing at a remarkable 25.2%.

Thursday, January 29, 2009

Dissing the Dollar in Davos, Russian Style

The Russian's want to ditch the dollar as the world's reserve. On Wednesday in Davos, Prime Minister Vladimir Putin, during a speech, called for efforts to "facilitate the emergence of several reserve currencies."

Given current Fed money printing and the likely collapse of the dollar as a result, Putin's proposal may eventually gain traction internationally. There's already a good bit of de facto movement away from the dollar already.

And, note, while this is all brewing, Obama/Geithner seem to want to hasten the collapse of the dollar by calling on China to stop supporting the dollar! Madness. .

Putin wasn't the only Russian dissing the dollar in Davos. On Thursday German Gref, a former Russian Economics Minister, who is now CEO of Russia's largest bank--state-owned-- Sberbank, proposed during a panel discussion, something of a thigh slapper. In the absence of any serious competitors to the dollar, he advocated international control of U.S. monetary policy.

Since the U.S. seems to want to bring democracy to the world, why shouldn't the international community attempt to bring responsible money management to the Federal Reserve? There's kind of an international poetic justice to this Gref proposal, however, I am not planning on staying up late at night waiting for this to happen.

Zimbabwe Abandons Its Currency

Zimbabweans will be allowed to conduct business in other currencies, alongside the Zimbabwe dollar, in an effort to stem the country's runaway inflation. For all practical purposes this is the end of the Zimbabwean dollar.

The announcement was made by acting Finance Minister Patrick Chinamasa.

Until now only licensed businesses could accept foreign currencies, although it was common practice.

This is a big break for the average impoverished Zimbabwean.

Now I'm wondering, does this make Ben Bernanke the world's top active inflationist?

Why We Watch GDP Instead of GNP, and the Seduction of Power

Tomorrow at 8:30 a.m. the GDP (Gross Domestic Product) number will be reported for fourth quarter of 2008. It will show a major drop.

In the old days, the number that would have been focused on would have been the GNP (Gross National Product), but that changed during the Administration of Bush I. John Crudele explains why that change likely occured:

Skeptics think the administration of George H.W. Bush wanted to make the economy look better for the 1992 election and felt that the more narrowly-defined GDP would be kinder to a debtor nation like ours than the GNP.
Like the concept of "core" inflation, politics was involved.

In both cases, there had to be economists in government who understood the real reasons for the changes, but because of the seductivemess of power they remained silent.

In an earlier post, I quoted Don Boudreaux, the chairman of the economics department at George Mason University, who is mystfied by the suddden support for a Keynesain type stimulus program, when, as Bordeaux puts it, "In the profession, Keynesianism was almost dead until the past few months."

Again, it's the seductiveness of power, most know better. They deny their own knowledge and are too weak or enamored of the power eliite to speak truth to power. As the economy becomes more volatile, because of these political moves, and then reaches a point of a crack up boom, I'm sure God is making a special place in hell for these hypocritcal bastards.

"Keynesianism Was Almost Dead Until the Past Few Months"

MSM and the political power players have been major players in marginalizing the fact that many economists disagree with the notion that a stimulus package is the way to deal with the recession.

Declan McCullagh, a lone maverick at CBS, writes:

An unusual aspect of the recent debate in Washington is the lengths that supporters have gone to marginalize anyone who questions the so-called stimulus plan. Robert Reich, Bill Clinton's labor secretary and member of President Obama's transition team,claims "almost every economist will tell you the stimulus has to be massive." Nobel laureate and New York Times columnist Paul Krugman accuses skeptics of "making totally non-serious arguments." Sen. Chuck Schumer, a New York Democrat, says"economists agree" that doling out large sums to state governments is "effective." Vice President Joe Biden says that "every economist that I've spoken to"
believes the spending package "has to be big." Perhaps the vice president should broaden his social circles. The truth is that, instead of being uniformly in favor of the massive spending bill, which is being championed by congressional Democrats with Obama's support, economists remain divided...

John Cochrane, a finance professor at the University of Chicago's business school, published a detailed paper this week on the topic. He sketches an argument for lower taxes right now - instead of higher spending - while simultaneously whittling down the budget deficit...

Don Boudreaux, the chairman of the economics department at George Mason University pointed out..."Keynesianism was in fact not a good theory,".. referring to the theories of the late economist John Maynard Keynes that encourage government spending. In the profession, Keynesianism was almost dead until the past few months. It was never dead in the popular mind. It's a flat Earth kind of theory. People look out and see the Earth looks flat, so it must be flat. By and large, macroeconomists rejected at least the standard Keynesian line. Now it's back and that's a real mystery."

The Cato Institute, a non-partisan think tank that takes broadly free-market views, was frustrated enough by the conventional wisdom in Washington that it took out a full-page ad on page 11 of the New York Times on Wednesday. The ad, which will also appear in Roll Call magazine and Thursday's Washington Post, is signed by scores of economists and says "we do not believe that more government spending is a way to improve economic performance."

Economist Robert Murphy is writing an entire book on the subject of how government intervention including spending programs made things worse during the Great Depression. His analysis further points to the fact that the same problems are occurring with the current spending and bailout proposals.

Gloom In Davos

The BBC's Robert Preston reports

The gloom here from business leaders, private-equity specialists, hedgies, bankers, management consultants and economists is deep and unrelenting.

They are immensely pessimistic about the economic outlook and about the ability of governments to lessen the pain.

I'd be tempted to come home immediately and climb under the duvet, except for one thing: when the herd is charging in a particular direction, the herd is normally wrong.

So on the basis that the best time to buy (metaphorically speaking) is when everyone else is selling, just maybe we're near the darkest hour for the global. economy.

Right you are Robert, things may turn positive short-term, courtesy of Ben Bernanke and the World Wide Money Printers. Extremely destructive inflation may be down the road, but traditional government collected datapoints may show pseudo recovery by the second half of 2009, until the inflation and crashing dollar kick in and expose the fraud.

Ron Paul On a Roll

One of the best spokesmen for freedom and free markets, Ron Paul, turned it up a notch for Morning Joe.

Wednesday, January 28, 2009

The Myth that Laissez Faire Is Responsible for Our Financial Crisis

George Reisman is among the less than handful of living economists that truly understand in full how the economy works. In his latest column, he dissects the myth that the United States currently has a laissez faire economy.

You can read his full analysis, here.

The Reisman analysis makes you wonder how how the Heritage Foundation is able to give the United States a score of 80.7 (out of 100)on its Freedom Index.

In truth, there isn't a country on the planet that should get a passing grade.

Tarullo Sworn in as Member of the Fed Board of Governors

Daniel K. Tarullo took the oath of office, today, as a member of the Board of Governors of the Federal Reserve System. The oath was administered by Chairman Bernanke in the Board Room.

The Senate earlier this week confirmed Tarullo, a former Clinton administration official.

Before joining the Clinton administration, he served as Chief Counsel for Employment Policy on the staff of Senator Edward M. Kennedy, and practiced law in Washington, D.C. He also worked in the Antitrust Division of the Department of Justice and as Special Assistant to the Undersecretary of Commerce. From 1981 to 1987, Tarullo taught at Harvard Law School.

The vote to confirm Tarullo was 96-1. Only Sen. Jim Bunning, R-Ky., voted against Tarullo.

Senator Bunning's office tells me that when the Senator met with Tarullo, he was unimpressed and that the Senator felt Tarullo was unlikely to break the logjam of group think at the Fed.

This is a very curious nomination by Obama. Tarullo has a stronger background in law than in finance. Word has it that he may be tight with White House advisor Larry Summers, who may be angling for Bernanke's spot. Thus, Tarullo may have been placed to watch Bernanke, rather than the economy. Consider, Tarullo a Summers chess piece.

Fed: We Are Going To Pump Money Until It Floods the System

Following its regualarly scheduled two day meeting on the economy and interest rates, the Fed issued a statement that said:

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.

Bunning Statement On The Hypocrisy Of Treasury Secretary Timothy Geithner

Well, somebody is awake in the Senate.

Senator Jim Bunning (R-KY) today issued a statement in regards to the hiring of a former Goldman Sachs lobbyist to serve as Chief of Staff to Treasury Secretary Timothy Geithner.

As the Bunning statement notes, this appointment came after Treasury Secretary Geithner imposed new rules restricting contacts with lobbyists at the Treasury Department.

"The hiring of a former Goldman Sachs lobbyist to be Chief of Staff to Treasury Secretary Timothy Geithner sure sends the ‘message of change’ to the American people in the middle of a financial crisis," said Bunning . "On day one, Secretary Geithner confirmed to me why I opposed his nomination to be Treasury Secretary. The appointment of this former Goldman Sachs lobbyist to be Chief of Staff flies in the face of President Obama’s guidelines on ethics. I hope for the sake of the American worker this hypocritical appointment is the only mistake Secretary Geithner makes during his tenure at the Treasury Department."

Senator Warns White House Will 'Create Crisis' and 'Panic' to Push Stimulus

South Carolina’s junior Republican senator, Jim DeMint said yesterday at the Heritage Foundaton that the Obama administration will “create crisis and widespread panic” just like the Bush Administration to get Congress to act expeditiously.

“I’ve been around long enough to know whenever someone tells me I have to make a decision right now, my response is no,” DeMint said. “That clears it up right away and I think more and more the Bush administration and now this administration knows that they’re not going to get a quick reaction out of Congress unless they create crisis and widespread panic. And that’s going to be their M.O. to get Congress to act.”

DeMint said some Republicans now regret they voted for the TARP package.

DeMint criticized the mainstream media for not conveying the message that some congressional Republicans are trying to spread about this package –that it’s filled with big-government wasteful spending projects that will do little to “stimulate” the economy.

"It’s like they’re in a different reality. They’re talking about a bill, that when you look at it, there’s no resemblance to what they’re talking about." DeMint said.

Geithner's "Horrible Advice"

World reaction is starting to pour in regarding new Treasury Secretary Timothy Geithner's comments last week during his confirmation hearing that “Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency. The question is how and when to broach the subject in order to do more good than harm."

At the time, we wrote:

Given the collapse the dollar is likely to experience, talk like this is the equivalent of the captain of the Titanic bitching about a paint job he once saw on a fishing trawler in the South Pacific.
Economists and policy makers are meeting this week in Davos, Switzerland for the annual World Economic Forum, and teeing off on Geithner seemed to be the sport, on the first day of the meetings.

World Bank Chief Economist Justin Lin said that an acceleration in yuan gains would be “bad for China’s growth.” China’s economy is expanding at the slowest rate in seven years.

“Shouting from Washington to Beijing is not going to make a difference,” said South Africa’s Finance Minister Trevor Manuel during a panel discussion in Davos.

But the heavy artillery barrage came from Stephen Roach, Morgan Stanley’s Asia Chairman. “I’ve never seen an economy in recession voluntarily raise their currency. It’s horrible advice,” said Roach, according to Bloomberg's Simon Kennedy reporting from Davos.

Even former Treasury Secretary Robert Rubin, Geithner’s boss in President Bill Clinton’s administration, said in an interview late yesterday in New York that while it’s in the “long-run interest” of the U.S. and China for the yuan to be set by the market, “this is a time to maintain a stable financial relationship with China.”

In short, Geithner's comment shows naivete about how international matters are discussed and handled, and the international financial community knows it. They will use this to their advantage in the future.

Tuesday, January 27, 2009

Geithner's Chief of Staff Was Lobbyist for Goldman Sachs

Imagine my surprise.

The new chief of staff to Treasury Secretary Timothy Geithner was a top lobbyist for Goldman Sachs until last year, reports WSJ.

Mark Patterson left Goldman in April, he was vice president for government relations, and was registered to lobby Congress on legislation including energy tax credits and Indian gaming, according to disclosure forms filed with Congress. Patterson monitored other issues moving through Congress that Goldman never took a position on, including foreclosure-prevention measures and shareholder votes on executive compensation.

Ghetto Discrimination?

Melody Morales says she was rejected for a job at the New York Times Square Hawaiian Tropic Zone , despite her bra size of 34-D --- because she "talks ghetto".

Since this is America, she believes, like advocates of open source book publishing, that she has a right to something she had nothing to do with creating, and is suing.

Morales' lawyer, Derek Smith, said she's seeking $500 a day - or $130,000 a year - for every year she could reasonably be expected to have worked there, plus punitive damages that could potentially total over a million dollars.

"It's their arrogance that gets you," said Smith. "They told her, 'Go ahead, sue. We've got the best lawyers in the world."

Arrogance about their own property, can you imagine?

I get the impression she didn't hire a ghetto speaking lawyer to represent her.

According to Smith's website, "Mr. Smith is fluent in English and French."

Goldman Man Named NY Fed President

Imagine my surprise. The Goldman Sachs octopus has grown another tentacle.

William C. Dudley was named today to serve as President and Chief Executive Officer of the Federal Reserve Bank of New York. His appointment by the Board of Directors of the New York Fed, succeeding Timothy F. Geithner who was sworn in as Secretary of the Treasury yesterday, was approved by the Federal Reserve Board of Governors.

Dudley was executive vice president of the Markets Group at the Federal Reserve Bank of New York. He was also the manager of the System Open Market Account for the Federal Open Market Committee.

Prior to joining the Bank in January 2007, Dudley was a partner and managing director at Goldman, Sachs & Company and served for a decade as the firm’s chief U.S. economist.

“I am honored to have this opportunity to lead an institution of such high quality—its people and their collective commitment to the public good are exemplary,” said Dudley according to a press release issued by the Fed.

Bernanke's Shadow: The Very Curious Consumer Confidence Numbers

The January consumer confidence index fell to 37.7 from an upwardly revised 38.6 in December.

When such areas as consumer "views" on the overall economy are concerned the numbers are decidedly lower. This should not come as a surprise given the gloom promoted by President Obama and MSM. However, the numbers, which are more reflective of specific experiences facing consumers, are starting to tick up.

For example, consumers' view of current conditions worsened slightly in January, with those saying business conditions are "bad" rising to 47.9% from 45.8%. However, the proportion of those saying jobs are "plentiful" rose to 7.2% from 6.5%, while those saying jobs are "hard to get" fell to 41.1% from 41.5%. The percentage of respondents with plans to buy an automobile within six months rose to 5.3% in January from 4.8% in December.

There's still significant fear, especially in housing related sectors. Those with plans to buy a home fell to 2.5% from 2.6%, while those with plans to buy major appliances fell to 23.2% from 27.1%.

But, the optimism in the employment sector may indicate that Bernanke's money printing is resulting in more job offers. Further, the rise in those planning to buy cars is an indication of confidence by those holding jobs.

It's still much too early to call any kind of turn in the economy, but these upticks may truly be reflective of Bernanke's shadow hovering over the economy.

Again, I want to emphasise that because of Fed money printing, a lot of traditional pieces of economic data will turn positive. However, the deeper situation is one of looming inflation, a crashing dollar and much higher interest rates.

Existing Homes Sales Climb, Is More Upside Ahead?

U.S. home sales registered their biggest monthly jump in nearly seven years in December.

The 6.5% rise in sales from November was attributed in part to strong sales of foreclosed homes. The market continues to sop up the junk in the market, and Fed money printing is probably starting to have its impact.

Just ahead, the spring buying season.

My bet is that most of the surprises coming out of the housing markets in coming months will be upside surprises--all because of Bernanke's double digit money printing that will ultimately crash the dollar and create massive inflation.

Behind the "Stimulus" Package There's a Big Time March Toward Socialism

There's a lot to the current "stimulus" package that mimics FDR's "stimulus" packages, and none of it is good. Steve Horwitz explains:

One of the (correct) complaints about the proposed stimulus plan is that it's full of all kinds of programs that would appear to have nothing to do with any accepted economic theory about what sorts of spending could even possibly lead to recovery. The best example of this is the funds for family planning policy that are in the bill...

This isn't just your run-of-the-mill pork. What we are seeing happen right now is that Congress sees this crisis as an opportunity to enact a whole variety of programs that they've wanted to pass for years, especially (but not only) the Democrats who no longer fear a veto, and now finally have the chance. Just as the Patriot Act was a bunch of laws waiting for a political "crisis," so is much of the stimulus package a bunch of programs waiting for an economic "crisis." The current crisis is just a convenient excuse.

But that's not all. Lest we get overwhelmed with nostalgia, we should remember that the exact same thing was true of much of the New Deal. Numerous commentators, from Hughes and Cain's American economic history textbook to authors like Amity Shlaes, have pointed out that a great deal of what FDR did in his first two terms were ideas that had been bouncing around the American left for years, and the Great Depression became the chance to put them into practice. New Deal spending wasn't primarily about economic recovery, it was about transforming the American economy...

SEC Investigation and Mises Institute

EPJ hears the SEC is poking around trading activities of an individual affiliated with the Mises Institute. The Institute itself is not involved.

Because of EPJ, from time to time, I talk to top lawyers that battle the SEC. Sometimes, you can kill these investgations early. (Although, I don't think this one is going to go away easy.) Sometimes, it depends upon who you hire as your lawyer. If I was in this situation, I would pick C. Evan Stewart to make it go away or if I was headed to court. If I wanted to go mano y mano against the punks at the SEC, I would use Steve Best.

If you are looking for a good revolving door man, i.e. former SEC man now in private practice, Bernie Madoff's lawyer isn't a bad choice, Ira Sorkin.

And to the person under investigation (you know who you are), good luck, and KEEP YOUR MOUTH SHUT. STOP MAKING STUPID DEFENSES TO REPORTERS THAT CALL YOU. Get it? Stop the interviews. You may be in very serious trouble, you don't need anything in the papers that the SEC can use against you---they already have enough.

Monday, January 26, 2009

The Crusader Against Intellectual Property....

...continues to split his life between reality and play theories.

He is out today with another screed against intellectual property, but continues to refuse to grant me rights to print the MI copyrighted book, Mises: Last Knight of Liberalism by Guido Jorg Hulsmann.

Jeff Tucker's confusion today is multiple. He seems to believe that there is only one option to all marketing and that is open source. And that somehow, open source is the only free market way.

Of course, in reality, there are many methods to market. You can have open source, licensing and sales of a product. Some methods work better for some products than others. The best way to find out what is the best for each market is to leave everyone in every market to proceed on their own in developing their own products and marketing methods.

A movie theatre owner may believe you have to charge for providing beverages. He may argue in faulty fashion, "This is the only free market way. Let me charge what I want and so must everyone else." He is wrong, it is just one way. On a free market he should be allowed to charge whatever he wants, but it s not the only way. At art gallery owner who chooses to sell art works versus charging for viewing may do the exact opposite of the theatre owner and give away expensive beverage, wine and champagne! The art owner might say "This is the only free market way. To charge for beverage is silly." He is wrong, it is one marketing method.

Jeff Tucker is wrong if he believes open market is the only method to marketing, production and sales, and he continues to prove this in his other world of reality, when he refuses to give me permission to publish Last Knight.

Free markets are about choice, any product that I develop I should have the right to bring it to market in any fashion I choose, on an exclusive basis, on an open source basis, or some method in the middle. Tucker's demand that I publish my work as open source is totalitarian. And, typical of totalitarians, somehow in his mind he has found a loophole where it doesn't apply to projects he is involved with, i.e., The Last Knight.

From Obama to Lobbyist: The Revolving Door Has Already Started

The power elite will get a chance to hire a major player, Matthew Nugen, who helped Obama win the presidency. Dealbook has the details.

Regulation as a Magnet for Corruption

NYT this morning attempts to understand how Bernie Madoff pulled off his $50 billion scam. NYT reports in part:

During the decades that Mr. Madoff built his business, he cast himself as a crusader, protecting the interests of smaller investors and bent on changing the way securities trading was done on Wall Street. To that end, like a burglar who knows the patrol routes of the police and can listen in on their radio scanners, he also actively wooed regulators who monitored his business.

“He once mentioned to me that he spent one-third of his time in Washington in the early 1990s, late 1980s,” says a person who has known Mr. Madoff for years but requested not to be identified because he does not want to be drawn into continuing litigation

“He was smart in understanding very early on that the more involved you were with regulators, you could shape regulation,” this individual adds. “But, if we find out that the Ponzi scheme goes back that far, then he was doing something much smarter. If you’re very close with regulators, they’re not going be looking over your shoulders that much. Very smart.”
Those who get close to regulators are doing it for a reason. The solution to this problem is counter intuitive. It is not more regulation, it is less regulation. There is safety in the dispersion of power and the dispersion of checks and balances, so that there is no center of power that bad guys can corrupt.

Anyone hanging around regulators is doing so to corrupt regulation in their favor.

Major Hit Piece On Peter Schiff

Peter Schiff has been getting some well deserved positive publicity for his very accurate warnings about the economy. Part of the focus on Schiff has been the result of his clever video marketing of his calls juxtaposed against attacks on him by the likes of Ben Stein and Arthur Laffer, who got their calls on the economy wrong. However, when you live above the fold, you are likely to be eventually attacked from above the fold. It's the nature of entertainment, ah excuse me, serious news reporting. The long knives will eventually come out. The first knife directed at Schiff is out. It is wielded by Michael "Mish" Shedlock, and it has drawn blood against Schiff.

In a vicious attack, Mish uses a poor performance by Schiff portfolios over the last year to twist and turn the knife.

Mish writes:

...most of the praise heaped on Schiff is simply unwarranted, and I can prove it.

First, let's start with a look at the claim being made. Peter Schiff concludes many of his articles, books, etc. with the following statement.

Mr. Schiff is one of the few non-biased investment advisers (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly...

I would like to see some proof of that statement. Specifically I would like to see the average returns posted by EuroPacific clients for 2008.

I have talked with many who claim they have invested with Schiff and are down anywhere from 40% to 70% in 2008. There are many other such claims on the internet. They are entirely believable for the simple reason Schiff's investment thesis was flat out wrong.
I think this is a cheap shot.

As Mish should know, one of the toughest things to do when it comes to investing is to get timing exactly right in the short-term. To point to an investment track record over an isolated period of less than a full business cycle is an extreme disservice. Schiff's portfolios are down big over the last year, so what? Warren Buffett's Berkshire Hathaway is down by more than 40% from its 52 week peak. Does this mean Buffett is a clueless investor? Based on Mish's logic used against Schiff, investors should probably be selling short Berkshire Hathaway for the rest of their lives. (Note: Not recommended for the truly sane.)

Further, Mish distorts Schiff's investment philosophy. It just so happens that an EPJ reader sent me, a few weeks back, a clip of Schiff defending himself on his radio show against an irate caller/investor who had lost money investing with Schiff. What stood out about the call was Schiff's defense. It was quite remarkable. He asked the caller who he clearly didn't know, "Are you still getting dividends from the stocks in your portfolio?"

So Schiff had hedged against the possibility that he might be wrong, or early in his investment strategy, by buying dividend paying stocks. Nice move, I thought to myself when I heard this, very nice. Schiff was humble enough in his investment thinking to lock in solid yields in his investments, so that if things went wrong, at least his clients could sit and collect dividends while things turned around. Folks, this is an investment adviser who has his clients interests at heart. Things have gone wrong, short-term, in Schiff portfolios, but his clients have locked in yields that, I'm guessing, were locked in at very high rates.

As for Schiff's overall philosophy of investing in non-dollar denominated foreign stocks, it is sound. It is based on the belief that US monetary policy is out of control and that the government will attempt to print its way out of disaster. This money printing will ultimately lead to major inflation in the US and a crash of the dollar. Thus, high quality foreign stocks are exactly where you want to be.

The poor performance by Schiff portfolios last year was a result of Fed chairman Bernanke being so clueless that he didn't know how to properly, from a technical perspective, inflate the money supply. Money growth stopped all summer, this was a major reason behind dollar strength. Bernanke finally got the money printing mechanics figured out, and his outrageous money printing over the last couple of months will ultimately crash the dollar, and Schiff has his clients perfectly positioned for this.

It is pretty outrageous for Mish to attack Schiff and scare investors who are following Schiff. Schiff's investment philosophy is sound, and will prove very correct. Ultimately, what Mish has done is attack Schiff the way Laffer and Stein did, earlier, (Although Mish is scared enough of Schiff's analytical skills to not go completely against Schiff's call, and, thus, Mish hedges all over the place). But when all is said and done, Mish will sadly look like Laffer and Stein by attacking Schiff.

I'm sure Schiff has downloaded Mish's attack. He'll bide his time and wait for the dollar crash to begin and mash Mish in a marketing piece, just like he did Stein and Laffer.

The "Stimulus" Package: The Mother of All Excuses for Political Spending

WSJ gets it:

The stimulus bill is also a time machine in the sense that it's based on an old, and largely discredited, economic theory. As Harvard economist Robert Barro pointed out on these pages last Thursday, the "stimulus" claim is based on something called the Keynesian "multiplier," which is that each $1 of spending the government "injects" into the economy yields 1.5 times that in greater output. There's little evidence to support this theory, but you have to admire its beauty because it assumes the government can create wealth out of thin air. If it were true, the government should spend $10 trillion and we'd all live in paradise.

The problem is that the money for this spending boom has to come from somewhere, which means it is removed from the private sector as higher taxes or borrowing. For every $1 the government "injects," it must take $1 away from someone else -- either in taxes or by issuing a bond. In either case this leaves $1 less available for private investment or consumption. Mr. Barro wrote about this way back in 1974 in his classic article, "Are Government Bonds Net Wealth?", in the Journal of Political Economy. Larry Summers and Paul Krugman must have missed it...

The spending portion of the stimulus, in short, isn't really about the economy. It's about promoting long-time Democratic policy goals, such as subsidizing health care for the middle class and promoting alternative energy. The "stimulus" is merely the mother of all political excuses to pack as much of this spending agenda as possible into a single bill when Mr. Obama is at his political zenith.

Sunday, January 25, 2009

Here We Go Again

The U.S. economy faces “very difficult” months ahead, requiring quick passage of a stimulus package and a retooled bank rescue plan aimed at reviving lending, said Lawrence Summers, director of the White House’s National Economic Council.

“The next few months are, no question, going to be very, very difficult and it may be longer than that,” said Summers, appearing on NBC’s “Meet the Press.”

Sounds Like US Escalation in Afghanistan Coming

Vice President Joe Biden appeared this morning on CBS' "Face the Nation."

In response to a question from host Bob Schieffer, Biden said, "I hate to say it, but yes, I think...there will be an uptick [in American casualties]. Because as the commander in Afghanistan said, he said, 'Joe, we will get this done, but we're going to be engaging the enemy much more.'"

The Obama administration has "inherited a real mess," Biden said. "We're about to go in and try to essentially reclaim territory that's been effectively lost." The training of Afghan police and military personnel has been problematic, he said. "Some of our allies who have committed to train these troops did not do them well," Biden said.

The Supposed Obama Lobbyist Lockout...

It is just about changing their point of entry and making the process more secretive. AP has the details:

President Barack Obama's ban on earmarks in the $825 billion economic stimulus bill doesn't mean interest groups, lobbyists and lawmakers won't be able to funnel money to pet projects.
They're just working around it — and perhaps inadvertently making the process more secretive...

"'No earmarks' isn't a game-ender," said Peter Buffa, former mayor of Costa Mesa, Calif. "It just means there's a different way of going about making sure the funding is there."

It won't be in legislative language that overtly sets aside money for them. That's the infamous practice known as earmarking, which Obama and Democratic congressional leaders have agreed to nix for the massive stimulus package, expected to come up for a House vote this week.

Instead, the money will be doled out according to arcane formulas spelled out in the bill and in some cases based on the decisions of Obama administration officials, governors and state and local agencies that will choose the projects.


Big Businesses That Started in a Recession

A recession is a period when the structure of the economy is shifting. Thus, it may be an interesting time to start up a business if the economy is, or will be, shifting in the direction of the new product or service a new business plans to provide.

Sarah Caron has put together a list of companies that started during a recession. The list includes (Comments by Caron):

Hyatt Corp. opened its first hotel’s doors at the Los Angeles International Airport during the Eisenhower recession (1957 to 1958).

Burger King Corp., with its flame-broiled burgers, is another recession startup. The company began in 1954 when James McLamore and David Edgerton opened a Burger King restaurant in Miami, Fla. During another recession in 1957, the company introduced its successful signature burger — the Whopper.

IHOP Corp. is another star from the Eisenhower recession. The first restaurant in the now national chain opened its doors July1958 in Toluca Lake, Calif.

The Jim Henson Company was created by famed puppeteer Jim Henson in 1958. Henson's business was responsible for some of the best-known puppet characters of all time including Miss Piggy, Kermit the Frog and Elmo.

FedEx Corp. began operations on April 17, 1973 as Federal Express, a nod to the Federal Reserve, with whom founder Frederick W. Smith had hoped to get a contract. He didn't.

Microsoft Corp. wasn't always the jaw-dropping enterprise it is today. In 1975, when it was created by Harvard University dropout Bill Gates, Microsoft was just a little company in Albuquerque, N.M. It dealt in rudimentary computing languages and began its climb to business stardom with the success of MS-DOS, which was sold and marketed to IBM Corp. and then-IBM clones.

CNN might be a news giant now, but in recession-plagued 1980, it was a little-known station called The Cable Network News.

MTV Networks brought something new and different to the music scene when it debuted in the economic slump of 1981.

Sports Illustrated magazine was launched on August 16, 1954, at the tail-end of a recession.

GE (General Electric Co.) was established in 1876 by famed American inventor Thomas Edison. In the middle of the Panic of 1873, a six-year recession, Edison created one of the best-known inventions of all time — the incandescent light bulb.

Caron's full report is here.


It Appears the Coming Huge Spike in Interest Rates Has Begun

Despite double digit money printing, interest rates on Treasury securities are starting to climb.

From a low of 3.04 % on the Treasury's composite of Treasury securities with maturities greater than 20 years, the composite now stands at 3.53%.

Short-term Treasuries are also starting to climb, from a low of 0.07% on January 9, the 13 week coupon equivalent rate is o.11%.

WSJ reports on the factors behind the rising rates:
The rise in yields has occurred for a number of reasons. Government borrowing needs incurred as part of the response to the current financial market crisis have driven huge increases in borrowing. An $825 billion stimulus plan winding through Congress will almost certainly increase the supply of Treasurys further, and there are supply pressures coming from other markets, as well.

Emblematic of that sea of debt, the Treasury Department said on Thursday it will auction $30 billion in five-year notes, $40 billion in two-year notes and $8 billion in 20-year Treasury Inflation Protected Securities next week. Treasurys reacted to that, along with fears about China’s holdings of government debt, with a sell-off in long-dated issues that saw the benchmark 10-year note yield rise by 0.08 percentage points Thursday to 2.61%. Merrill noted the 10-year yield is half a percentage point higher now than it was in late December.

More supply will be coming, and at a certain point investors will demand even lower prices to absorb it all. The signs are that they have already started to seek those concessions, and there’s little clarity how much higher prices could rise.

WSJ suggests that the spike in rates may cause the Fed to begin to start buying long-term securities and quotes Merrill Lynch economists who believe the same:

Could a recent and steady rise in Treasury yields force the Federal Reserve to start buying in bulk longer-dated government bonds?

Merrill Lynch economists are warning that the answer may be “yes.” Economists David Rosenberg and Drew Matus said in a note to clients that despite the recent rise, yields are still historically low. All the same, Fed officials want those yields to stay down because that should in turn help stimulate overall economic activity... While Fed officials have only indicated it’s something they are mulling, they have nevertheless said that if other existing efforts prove insufficient they could ramp up purchases of longer-dated Treasurys in a bid to broadly lower borrowing costs. They’re already doing something similar with their purchases of agency and mortgage debt, an action that has helped drive a wave of refinancings, even as overall housing activity remains extremely strained.

The Merrill Lynch economists said it’s unclear how much the Fed would need to buy to goose government bond yields back down to the desired levels...

While the Merrill Lynch economists don’t address whether the Fed would have a target level for longer-dated Treasury yields, there’s some evidence that it wouldn’t. In a speech last week, Federal Reserve Bank of Atlanta President Dennis Lockhart welcomed the influence the Fed was having in the mortgage market via its purchases.

But he added “the goal of such a program is not, in my view, to engineer a particular interest rate level.” Lockhart said the Fed is instead interested in seeing a generalized drop in mortgage costs. It’s possible that if the Fed were to buy longer-dated Treasurys, it would operate under the same goals

Bottom line: The Fed is out of control, government spending is out of control, and this is all highly inflationary.

Eliot Spitzer Nails It...

...and I am not talking about his hooker, Ashley Dupree. Spitzer writes:

Although everybody claims to love the market, nobody really likes the rough-and-tumble of competition that produces the essential "creative destruction" of capitalism. At bottom, this abhorrence of competition and change are the common theme that binds together the near death of the American car industry, the collapse of the credit market, the implosion of the housing market, the SEC's disastrous negligence, the Madoff Ponzi scheme, and the other economic catastrophes of recent months.

Consider the examples of the SEC and GM, which would appear to have nothing to do with each other. The traditional critiques of the SEC have been that it was underfunded and didn't have up-to-date laws needed to regulate sophisticated financial transactions in evolving markets. That's not accurate. The SEC is a gargantuan bureaucracy of 3,500 employees and a budget of $900 million—vast compared with the offices that actually did ferret out fraud in the marketplace. And the general investigative powers of the SEC are so broad that it needs no additional statutory power to delve into virtually any market activity that it suspects is improper, fraudulent, or deceptive. After each business scandal (Enron, Wall Street analysts, Madoff …), the SEC claims a need for more money and statutory power, yet those don't help. The SEC has all the money and people and laws it needs. For ideological reasons, it just didn't want to do its job, and on the rare occasions when it did, it didn't know how.

GM's excuses—that its UAW contract and health care costs make it too top heavy to compete—are partially true but ignore a simple reality: These are the self-inflicted wounds of a company that chose a path of least resistance rather than confront the need for dynamism and innovation. GM and its brethren forged a partnership with the UAW that avoided difficult choices on legacy costs, because the world seemed to permit it. Similarly, they opposed meaningful reform in health care. While this approach may have been tolerable in the '50s and '60s, it made no sense over the past 30 years. The auto industry preferred protection to competition. And when it had to compete, it wasn't up to the task...
Of course, in the end, Spitzer being Spitzer, can't be faithful to his free market theme and jumps in bed with the whore institutions that don't do honest work:

We must rebuild these two institutions. If we don't infuse them with a culture of change and love of competition, they will fail once again. The SEC should go out and hire some of the young, recently laid-off traders from hedge funds and investment banks. They need work, and better than any group of lawyers or agent-investigators, they know what trading patterns and practices to examine and where to drop subpoenas to find the skeletons. The SEC should welcome the creative tension that results from having state regulators or other federal agencies such as the CFTC on the beat. And GM should use government funding for green technology to truly transform itself: It should build the infrastructure for plug-in technology that will be the next iteration of "gas stations."
Disgusting. The government agencies, the SEC and CFTC, should be abolished. GM should be allowed to sink or swim. That's what free markets are about.The problems at SEC and CFTC are not the personnel at the agencies, but their designated task of controlling markets. As Hayek warned, the evil will always circle such agencies--and not for the good.

Sabrina Roberts With the Big Question

...and NYC party reporter Matt Harvey was there to record it:

Broke bankers and struggling models mobbed the rooftop of the Empire Hotel last night for the latest installment of Fashion Meets Finance...

The party was billed as a return to the halcyon excesses of 2007, and enough unemployed finance types fished the necessary change from their couch to pony up for a bottle of Absolut. Liz, a 20-something fashionista in a low-cut black cocktail dress, eyed them skeptically and said, 'just look at all the douches in those seats. They're all so broke.' A line-up of seven models was in the DJ booth nodding to anemic dance music. One of them, Sabrina Roberts, a six-foot Afro-Chinese stunner wearing a tiny creme-brulee-colored dress-told me she wasn't giving up on finance dudes. 'One, they're more interesting; and two, can you imagine if everyone was in fashion?' I asked her if she had ever thought of dating so-called normal people. She twirled around, took a sip from her champagne flute and asked happily, 'How do normal people pay for champagne?'

FREE Park Dae-sung: Econoblogger Jailed for Getting It Right

WaPo tells the story:

As a financial blogger named Minerva, Park Dae-sung was the dark prophet of market decline in South Korea.

In this education-obsessed country, where academic credentials are often taken as a measure of human value, he was also something of an idiot savant. He had no degree in economics. He had no professional experience in finance. He was not a wealthy investor.

He had been a so-so student who studied communications at a so-so junior college in a backwater town south of Seoul. Thirty-one years old and single, he spent much of his time alone in his room. As his father noted, "He can't even get a job."

But he knew a global economic smack-down when he saw one.

Minerva saw it coming last fall, far earlier and with far more acuity than the South Korean government, which his blog has humiliated and angered.

Besides getting mad, the government got even. In a move widely perceived by the public as a chilling echo of the 1970s, when a military dictatorship ruled South Korea, the government detained Park this month, invoking a seldom-used telecommunications law that charges him with harming the public by spreading "false rumors."

Yet Minerva (no one knew him as Park until police raided his house Jan. 7) made his reputation by spreading rumors that turned out to be all too true.

He predicted the collapse of Lehman Brothers five days before it happened. He predicted a sharp decline in the value of South Korea's currency a few days before the won imploded against the dollar.

By the time he was taken away from his computer in handcuffs, he was a cyber-sensation. His blog had garnered more than 40 million page views (there are 48 million people in this well-wired country). He was lionized in the South Korean news media as the "online oracle" and the "Internet president of the economy."

Although Park has told authorities he is Minerva, claims have emerged here that Minerva might be a few people. Several economic and financial experts have said they wrote online postings under the name. Prosecutors, though, have declined to investigate, saying they have irrefutable electronic evidence that Minerva is Park.

Before police sniffed him out in his bedroom, then-Finance Minister Kang Man-soo publicly demanded that Minerva step out of the shadows for a "face-to-face, down-to-earth talk" with him. (Kang was fired this week, another victim of the lousy economy.)

While Minerva was forecasting doom, government officials spent much of the early autumn inaccurately forecasting moderate market disruption and continued growth. They groused a lot about unpatriotic market speculators.

President Lee Myung-bak, whom Minerva's blog mocked and insulted, warned in early October that currency traders must stop "greedily pursuing private interests" when their nation is in trouble...

Park is expected to face trial within a month or two. He has told his attorney, Park Chan-jong, that he is bewildered by his sudden celebrity and frightened by the prospect of imprisonment.

"I feel quite lost right now," his attorney quoted Park as saying. "It is scary that I can only talk to you with my handcuffs on."
Did I mention President Lee Myung-bak is an idiot?

Hey bloggers, let's support this guy, you may be right about the economy someday,also.


Barack Obama's First Blunder

Well that didn't take long.

On his first full day in office, President Barack Obama created an order that has unknown long-term consequences. Obama pledged to freeze the salaries of about 120 staffers in the White House, those that make more than $100,000 per year.

I am certainly not one to object to reductions in government spending, especially when it comes to the salaries of top dogs in the White House, but as a move by President Obama this move has to be classified as a blunder.

It strikes of naivete or, possibly, a freakish demonstration of power. As for the order having any impact on the economy, puhleeze. WaPo cranked out the numbers on this one:

Based on a 2.8 percent annual cost-of-living and merit increase (the average by the White House over the past five years, according to Froomkin's numbers), staffers making $172,200 will miss out on a raise of about $4,822 next year. Those earning $102,000 will miss out on about $2,856 extra.
The total reduction in pay out is, according to WaPo, roughly $443,000. That's minuscule in the whole scheme of things. Making the order even more bizarre is the fact that Obama appears to be a Keynesian when it comes to economics. Keyensians believe that you try to get more money into people's hands to stimulate the economy, not less, during a recession. The freeze does the opposite. Further, most price freezes occur when inflation is heating up, not during a deflation! A price freeze is bad economics during an inflationary period, but during a recession, for a Keynesian, it is worse. It is shutting off the heat in the middle of winter. Thus, from the way Obama views the economy, a price freeze is about as dumb an economic move as you can get.

With the US headed for a $900 billion budget deficit, 443k doesn't even amount to a rounding error. But, to a specific wage earner, who was scheduled to receive an additional $2,000 to $4,000 a year, and who may have been counting on it to help send a child to college, it is not happy news.

It probably can be argued that it was a message to set some kind of tone, but what kind of message, if Obama really wants people to spend? And, there are plenty of other ways to send a message rather than freeze the salaries of those close to you.

It will impact 120 people. Is that a large enough group that it will change 1 or 2 from friend to foe? I think so. You can mess with a lot of things, but not with people's paychecks. The media is all over the White House like a pack of crazed sex starved dogs. They are looking for leaks any way they can find them. This past week I had a conversation with one of President Obama's Kenyan relatives. She told me the media was breaking into her email account.

The media is super-aggressive, if there is a disgruntled White House worker, the media will eventually figure out who it is. Here's the list of those with frozen paychecks. (The one's on the list with a salary of $100,000 and up are the ones whose salaries Obama has frozen.). Did Obama create a disgruntled employee from this group that will leak some negative news at just the wrong time? My bet is yes.

This, of course, raises the question, is Obama naive, or even scarier, some kind of oddball power freak just letting the staff know who is in charge?

Either way, it's an Obama blunder, with no upside for him.

Saturday, January 24, 2009

Latest Money Supply Numbers

Three month M1 nsa annualized money supply growth stands at 30.9%, as of this week. Three month M2 nsa annualized stands at 15.6%.

They are both down from the week before, when M1 stood at 73.2% and M2 stood at 19.3%, but even at these slowed rates the growth rates are extremely inflationary.

Geithner Will Head Plunge Protection Team

Oh joy, John Crudele reminds us all that, as Treasury Secretary, Timothy Geithner will also head the The President's Working Group on Financial Markets, aka, the Plunge Protecton Team.

A "Bullshit" Response from Jeffrey Tucker

This is the toughest post I have ever had to sit down to write. It involves top personnel at an institute that, overall, I respect very much, the Mises Institute. In an email, I was warned by a friend:

So anyway, just letting you know that you will forever be "that freaking guy who was trying to embarrass us on copyrights when we lose money on that side of the business and put the books online for free?!"
So let me set things straight from the start, my intentions in this post are purely academic in nature, outside of very specific comments directed at Jeffrey Tucker for his extremely rude and crude comment to me, I am continuing this debate for academic purposes.

I consider the Mises Institute to be the number one, bar none, economic educational institute in the world. No other organization has ever done as much to correct falsehoods in the world of economics. I would imagine that from time to time they have had to stand up against powerful forces when they have taken stands on principle. Because of them a large body of Austrian and libertarian scholars are beginning to infiltrate academia and business. The institute overall is doing heroic things. It is in my will.

I consider the founder of MI, Lew Rockwell, to be an entrepreneurial genius when it comes to understanding how to market Austrian economic and libertarian ideas. When I observe others who have launched various projects that have not reached their original goals and contrast this with the success of everything Rockwell launches, e.g. the Mises Institute,, his involvement with the Ron Paul campaign and his latest venture, podcasts, it is obvious to me that Austrian economics and liberty have a much, much greater worldwide audience because of the talents of Rockwell. I urge some biographer to chronicle the life of Rockwell so that future generations of Austrians and libertarians in general have an understanding of the superior marketing, management, wisdom and skills of this great man.

Murray Rothbard has left us with many remarkable writings from which we can learn many things. But as great as his writings are, he did not leave this earth before he clearly hooked up his star with Rockwell and for that we should be as truly grateful as we are for his writings.

All this said, I have a bone to pick with one theory coming out of the Mises Institute. I consider the theory absurd and dangerous, and I have, indeed, started picking at that bone. The theory seems to have been launched by Stephan Kinsella and is clearly being advanced by Mises Institute editorial vice president of, Jeffrey Tucker. The core of the theory is that "intellectual property" is not property and thus no one has the right to exclusive use of it, not even the original creator of the work. My initial public drive-by sniper shot at the theory occurred in my post, Stephan Kinsella versus Barack Obama On Copyright Protection. Just having a little fun at the expense of the anti-intellectual property crusader who bars anyone from profiting from his work.

I believe the relationship between property and government is greatly misunderstood, even by libertarians, and I am in the very early stages of putting a book together on the topic. I believe a number of errors Kinsella makes are based on this misunderstanding of property and government, but a full treatment of this will have to wait for the book. However, I have been carefully observing Kinsella's commentary, and indeed had planned to, over-time, turn up the heat a bit and highlight, here at EPJ, some of my disagreements with Kinsella.

This brings us to this past week when an article by Kinsella water carrier, Tucker, appeared at LRC in the top slot, Authors: Beware of Copyright. The article appeared under perfect storm conditions for me. It was a slow news day as far as I was concerned, and I was having trouble finding anything in the news to comment about for EPJ. Plus, I had some time on my hands, and there, seemingly growing in size, was the Tucker article which I found quite amusing, given that some of Mises publishing tactics had been made public and seemed to be the types that Tucker, I thought incorrectly, was warning about. Thus, I wrote my piece, Mises Institute: Do As They Say, Not As They Do?

Now since writing this piece, I have learned that some believe that I was charging MI with being hypocritical, by saying one thing and doing another. I can see how this interpretation can occur given the title to my post, but please be assured that I was not making such a charge.Under Rockwell at MI that doesn't happen. My view was simply that Tucker was blind to what was going on around him, and, again, I found it amusing. It was very easy for me to believe that Tucker was clueless on what he was saying since he seems to be as clueless on the entire topic of intellectual property.

So what is Tucker's stance on IP? Let's see what he has to say. In a review of against intellectual property, he writes (my emphasis):

...if you are like most people, you figure that copyrights and patents are consistent with the justice that comes from giving the innovator his due. In principle they seem fine, even if the law might be in need of reform...

That changed in 2001 with the publication of Stephan Kinsella's article and now monograph "Against Intellectual Property." He made a strongly theoretical argument that ideas are not scarce, do not require rationing, are not diminished by their dissemination, and so cannot really be called property. All IP is unjust, he wrote. It is inconsistent with libertarian ethics and contrary to a free market. He favors the complete repeal of all intellectual-property laws...

Kinsella's article continued to haunt me personally. It took about six years or so, but I finally worked through all the theoretical problems and came to embrace his view...

It is not just a matter of deciding what you believe from a theoretical or political perspective. It is not just a matter of thinking that "pirates" are not really violating moral law...To fully absorb what these authors say changes the way you look at technology....IP is a form of exploitation and expropriation that is gravely dangerous for civilization itself.

Thus, among other absurdities, Tucker now appears to believe that it is not morally wrong to illegally download music! and that:

...people like James Watt, Eli Whitney, and the Wright Brothers are not heroes of innovation, as legend has it, but rent-seeking mercantilists who dramatically set back the cause of technological development. These people spent vast resources prohibiting third parties from improving "their" product and making it available at a cheaper price. Instead of promoting innovation and profitability, they actually stopped it, even at the cost of their own business dreams.
Note his quotes around "their". Eli Whitney invents the cotton gin and sets back technology? The Wright brothers invent the plane and set back flying?

Tucker confuses monopoly here, which again is too much to get into in this post, other than to note it that if I create something and hide it in a closet, and agree to let you see it, only if you agree not to tell anyone what you see,to me this is a contract between two people and fine. Apparently not for Tucker. To him it is being a "rent-seeking mercantilist". He wants you, once you see it, to, if you so choose, open it to the world. Tucker doesn't realize it but he is attacking the sacredness of contract,and replacing it with a commie "for the common good" view , i.e., how it will benefit society.

You can apply this thinking to any product, work etc. and you do indeed have communism.

But, the fact of the matter, is Tucker, aside from his theoretical musings, doesn't really believe in what he is expounding. I sent him this email to put him to the test:

from Robert Wenzel
date Thu, Jan 22, 2009 at 6:54 PM
subject Publication Permissions

Dear Mr. Tucker,

I continue to be fascinated by your views on copyright. After reviewing a number of your writings, I get the sense that, like Stephan Kinsella, you believe that writings should not be classified as "intellectual property" and others should not be prevented from copying works in full.

You write, for example,

So I say to all authors: please look at your contracts. Don't sign your life away. Publish on the condition of Creative Commons. Claim your rights back as a creator and an author.

How does this work? You have to copyright your work if only to prevent others from claiming copyright and thereby binding all other living persons, including you, from publishing it. Once you claim copyright, add that it is published under the Creative Common License 3.0. This rids your manuscript or song or painting of copyright's provision of doom: the requirement that only one institution can control it.

In other words, it makes your creation part of the free market. It can be posted, recorded, shown, photographed, celebrated by one and all forever. Isn't this why you create in the first place? Isn't this what drove you to write, paint, photograph, sing, or whatever? You want to make a difference. You want credit for your work. This permits it.

Old-fashioned copyright is nothing but a form of modern tyranny in the digital age. It has no future. Bail out of this wicked institution and make sure that your work has a future too.

I would like to test just how much you and the Mises Institute believe this. I note for example that MI hold rights to Mises: The Last Knight of Liberalism. I hereby respectfully request that you grant me the publishing rights to this book that you believe I would have if there were no copyright laws.


Robert Wenzel

Tucker responded:

from Jeffrey Tucker
to Robert Wenzel
date Thu, Jan 22, 2009 at 8:27 PM
subject Re: Publication Permissions

you want to publish Last Knight? Seriously?

My response:

from Robert Wenzel
to Jeffrey Tucker
date Thu, Jan 22, 2009 at 8:53 PM
subject Re: Publication Permissions


Tucker, back to me:

from Jeffrey Tucker
to Robert Wenzel
date Thu, Jan 22, 2009 at 11:22 PM
subject Re: Publication Permissions


Ah, so much for free use of intellectual property by everyone.

I hereby publicly request Jeffrey Tucker apologize for his rude, crude response to my attempt to further intellectual debate.

And, I further request that Tucker and the Mises Institute immediately either:

A. grant me publishing rights to Mises: The Last Knight of Liberalism or

B. stop promoting the idiotic nonsense that there is no such thing as intellectual property rights.

To refuse to grant me rights (and please know, I am researching what other books MI may hold copyrights to and will be requesting that publishing rights for these also be granted me, e.g. Rothbard writings, Rockwell writings) and to continue to publish that there is no such thing as intellectual property rights is, as of the time of this post, hypocritical, and not just the misguided thinking of the very rude Tucker.

Friday, January 23, 2009

Why Did the Credit Default Market Grow So Large?

It was because of the damn econometricians and their faulty equations, again. This time they assumed risk = 0. Michael Lewis explains:

...What really happened was that traders on Wall Street have the risk on their books measured by their bosses, by an abstruse formula called Value at Risk. And if you're a trader on Wall Street you will be paid more if your VaR is lower -- if you are supposedly taking less risk for any given level of profit that you generate. The firm will reward you for that.

Well, one way to lower your Value at Risk as a trader is to sell a lot of credit default insurance because the VaR formula doesn't count it as risk. Because it's so unlikely to happen, the formula doesn't grab it. The formula thinks you're doing business that is essentially riskless. And the formula is screwed up. So this encouraged traders to sell lots and lots of default insurance because, while they get a small premium for it, it doesn't matter to them because the firm is essentially saying, "Do it, because we're not going to regard this risk you're taking as actual risk."

It's insane. That market is huge as a result...

The 2009 Budget Deficit Mess and China

The Council on Foreign Relations house economist, Brad Setser, has crunched the numbers on China's purchases of Treasury securities and has come up with this data:

1) China has bought — according to the US TIC data — about $150 billion of Treasuries over the last three months of data. Annualized that is $600 billion, a huge sum. That data only runs through November. However, ongoing growth in the Fed’s custodial accounts implies that this basic pattern continued in December (data/ graphs can be found here)

2) The surge in China’s Treasury purchases has come even as China’s reserve growth has slowed. It consequently reflects a reallocation of China’s portfolio towards the safety of the Treasury market more than a surge in Chinese demand for dollars — and it may also reflect a decision by China’s reserve managers to shift funds out of the hands of private fund managers after Lehman (a decision that has had the effect of increasing reported Chinese purchases of US assets).

3) Once the shift in China’s portfolio toward safety ends, the pace of China’s purchases of Treasuries is likely to fall. It is hard to sustain a $600b annual increase in your holdings of Treasuries if your reserves aren’t growing. Hot money outflows will bring China’s savings into the global market, but in a less direct and harder to track way.

4) The Treasury has increased its issuance even faster than China has increased its purchases. The US is consequently selling more Treasuries to everyone, not just to China. The increase in China’s holdings of Treasuries consequently accounts for a significantly smaller share of the net increase in the supply of marketable Treasuries than in the past (Data here)

He also warns about the 2009 deficit:

One thing though is quite clear but strikes many as counter-intuitive: the large US fiscal deficit in 2009 will need to be financed primarily from domestic sources not from China. Let me put it this way. China currently has — in my judgment — about $900 billion of Treasuries. That is a truly staggering sum. But China also didn’t buy them all in a year. The US will need to sell more than $900 billion of Treasuries to cover its 2009 budget deficit. And China isn’t going to double its Treasury holdings in 2009 …
Thus, a number of conclusions can be made from this data. First, given the HUGE deficit financing that the US will conduct in 2009, it is truly bizarre that the Obama Administration wants to pressure China into providing less support for the dollar, i.e., They want China to buy less Treasury securities than they would without the pressure.

Second, much of the Treasury securities that have been absorbed in the second half of 2008, have been the result of a flight to safety. Once the markets calm down, the flight to safety will be reversed. Thus, not only will the Treasury market have to deal with newly issued Treasury securities as a result of a $900 billion deficit, but with the liquidation into the market of hundreds of billions of Treasury securities purchased in the second half of 2008.Can you say higher interest rates and inflation in the same sentence?

There is no way that so many Treasury securities will be able to be absorbed into the market at anywhere near current rates. Thus, we are likely to see a combination of rising interest rates and huge Federal Reserve purchases of Treasury securities. It will all be very inflationary.

The only sane option is for the United States government to declare bankruptcy. Super-inflation or bankruptcy, those are the only options folks. The empire is crashing. Talk of larger "stimulus" packages, and "we will worry about the deficit later", is insanity. The deficit is not going to wait. Be ready.

Mankiw On the Decision Making Apparatus at the White House

Greg Mankiw is tougher on a Joe Biden statement than even I would be. I'd dissmiss it as Biden just blowing smoke. But, Mankiw has worked for an occupant of the White House before, and I haven't, so maybe he sees something I don't. Here's Mankiw:

In a TV interview last month, Vice President Joe Biden said

Every economist, as I've said, from conservative to liberal, acknowledges that direct government spending on a direct program now is the best way to infuse economic growth and create jobs.

That statement is clearly false.

As I have documented on this blog in recent weeks, skeptics about a spending stimulus include quite a few well-known economists, such as (in alphabetical
order)Alberto Alesina, Robert Barro, Gary Becker, John Cochrane,Eugene Fama, Robert Lucas, GregMankiw, Kevin Murphy, Thomas Sargent, Harald Uhlig, and Luigi Zingales--and I am sure there many others as well. Regardless of whether one agrees with them or not on the merits of the case, it is hard to dispute that this list is pretty impressive, as judged by the standard objective criteria by which economists judge one another. If any university managed to hire all of them, it would immediately have a top ranked economics department.

So what is one to make of the vice president's statement? As a logical matter, I can think of only four possibilities:

Biden knew what he was saying was false.

Biden was saying what he believed to be true and somehow got this incorrect idea in his head without talking about the issue with the very talented team of economists working for the new administration.

Biden talked to his economic advisers about the issue, and they purposefully misled him into thinking that there was a consensus among economists, even though there isn't.

Biden's advisers were themselves mistaken. They expected an overwhelming consensus of support for their fiscal plans and were surprised at the number of prominent economists on the opposite side the issue.

I have no idea which of these hypotheses is correct. I suspect it is either the first or last. But any one of them should make us uneasy about how well the new administration's economic decision making apparatus is working.

Pronounce Paul Krugman's Name Wrong and This Is What You Get

President Obama mispronounced Paul Krugman's name on national television, in a possible deliberate dis. Now it's Krugman's turn:

Like anyone who pays attention to business and financial news, I am in a state of high economic anxiety. Like everyone of good will, I hoped that President Obama’s Inaugural Address would offer some reassurance, that it would suggest that the new administration has this thing covered.

But it was not to be. I ended Tuesday less confident about the direction of economic policy than I was in the morning.

Just to be clear, there wasn’t anything glaringly wrong with the wishes that the speechwriters had come up with something more inspiring than a call for an “era of responsibility” — which, not to put too fine a point on it, was the same thing former President George W. Bush called for eight years ago.
And, there's more:

But my real problem with the speech, on matters economic, was its conventionality. In response to an unprecedented economic crisis — or, more accurately, a crisis whose only real precedent is the Great Depression — Mr. Obama did what people in Washington do when they want to sound serious: he spoke, more or less in the abstract, of the need to make hard choices and stand up to special interests.

That’s not enough. In fact, it’s not even right.

Thus, in his speech Mr. Obama attributed the economic crisis in part to “our collective failure to make hard choices and prepare the nation for a new age” — but I have no idea what he meant. This is, first and foremost, a crisis brought on by a runaway financial industry. And if we failed to rein in that industry, it wasn’t because Americans “collectively” refused to make hard choices; the American public had no idea what was going on... 
When Krugman's pissed, he actually gets some stuff right. Krugman pissed at the president. I 'm lovin' it. This could be an interesting four to eight years. 

Behind Obama's Tough Stance on China's Weak Yuan Policy

The explanation is buried in paragraph 7 of NYT's coverage of the possible policy shift:
The more aggressive position will be popular with organized labor in the United States, a major supporter of Mr. Obama’s presidential campaign, and with many manufacturers who say China is purposely keeping its currency devalued against the dollar and leaving American exports at competitive disadvantage against lower-priced Chinese goods.
Of course, demanding a weak dollar policy, from the country that has been absorbing billions of US debt,is a bit weak in the logic department.