I’ll see your PAYGO and raise you a double dip

A key objective raised by President Obama in his state of the union address was to address the ‘fiscal hole’ of the federal government. His rationale was that “like any cash strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t.” he asked Congress to reinstate PAYGO, which reportedly helped the federal government “record surpluses in the 1990s,” and advocated investing in people “without leaving them a mountain of debt.” He closed on this point by saying that it’s just common sense.

Culturally, these ideas resonate with Americans. And for a business or household, budget constraints are a matter of common sense (even though we don’t always adhere to them). But there is no budget constraint on a government that can create money, i.e., non-interest bearing debt, out of thin air. The only meaningful constraint to the level of non-interest bearing debt is inflation, which occurs when a government creates more money than the economy requires, causing its non-interest bearing debt to lose value against most goods and services. Thus, while it may score some political points (thanks to our primary educational system’s lack of a financial and economic curriculum?), it’s absurd for the president to embrace the common sense that households and businesses use in setting budgets. The federal government faces an entirely different kind of budget constraint.

Instead, given the government’s power to create money, common sense would hold that the amount of money supplied to the economy should be equal to the amount of money required by the economy (please note, this simplification is not an attempt to resurrect the policy prescriptions of old school monetarism). Thus, the proper approach to budgets at the federal level is to ask whether there is currently a surfeit or deficit of USDs in our economy. Given the number of private financial commitments that were entered into in the past decade, and dramatic declines in economic activity, it’s difficult to argue that there’s currently a surfeit of dollars. And if recent political rhetoric is any indication, dollars are likely to become scarcer in the years ahead (it would be ironic if, instead of inflation, deflation became the motivating force behind a move away from the USD as global reserve currency).

The president did set forth some positive ideas, such as a zero capital gains tax on small business investment, capital investment incentives for companies of all sizes, and infrastructure investment. Assuming these are financed at least in part by new money creation, they would help to prevent a renewed liquidity crunch. But to the extent that they are “offset” by cuts or freezes elsewhere in the name of closing fiscal gaps and filling in budget holes, or by higher taxes on other activities, the net short term effect on the economy will be nil or worse. And like Japan, we’ll be in for our second lost decade out of two. As we’ve pointed out, leaving future generations without a “mountain of debt” sometimes means leaving them with equivalent (or greater) opportunity costs. We should strive to avoid both of those outcomes. To do so, we have to rethink the cultural common sense that debt is always and everywhere to be avoided.

From an investing standpoint, if vigorous policy actions follow the path being laid out by the rhetoric and “common sense” emanating from so many quarters, then the USD will continue to strengthen, the real economy will stagnate or weaken further, and nominal asset values will fall for all but the highest grade government paper. In that scenario, we would be lucky to tread water and leave only 16% of the country underemployed.

Mr. President, I’ll see your PAYGO and raise you a double dip recession.

RELATED READING (file under confirmation bias): 

We’re well aware that our current view of things puts us shoulder to shoulder with some members of the “loony left”, but the macroeconomics of this stuff are fairly straightforward. Our lonely wing nut sojourn continues, placing us in lockstep with one Mr. Paul Krugman: http://krugman.blogs.nytimes.com/2010/01/26/obama-liquidates-himself/.

The Fed is seeking an exit strategy from its liquidity programs and low interest rate policy. The impact of that exit can be either muted or amplified by Congressional actions. If Congress becomes hawkish, there is no reason for the Fed to do so. If they both begin tightening, it’s hello 1937: http://www.bloomberg.com/apps/news?pid=20601015&sid=aXeUAV7_bz_o

An excellent idea from Warren Mosler — a full payroll tax holiday — that has yet to fall on the radar of federal policymakers: http://moslereconomics.com/2010/01/28/tea-party-plan-for-dems-cut-to-the-front-with-tax-cuts/. Here’s how Mosler describes the cause of poor economic policymaking: “…so-called economic experts have confused themselves and their political masters with contrived explanations for the way the economy works, and their limited vision has limited the range of policy choice. The result has been a monumental economic and social disaster caused by an obvious shortage of aggregate demand. The spending power needed to make mortgage payments, car payments, and do a bit of shopping- all of which would fix the economy and end the financial crisis- just isn’t there.”

Marshall Auerback writes that “Any kind of spending cuts in the middle of the worst recession since the Great Depression is insane.  What we are beginning to see is the return of Herbert Hoover and the ‘liquidationists.’” http://www.newdeal20.org/?p=7731

Ed Harrison posts an email exchange with Auerback, in which the latter wrote: “What the US government is now in danger of repeating is taking its economy down the fast track to a double-dip recession.  With investment still flat, consumers trying to increase their saving ratio and net exports making a negative contribution to growth – the President and his advisors evidently believe the persistently high unemployment is something the private sector has to deal with.”  http://www.creditwritedowns.com/2010/01/what-president-obama-can-do-to-improve-the-economy.html. As we’ve noted elsewhere, the demographic research of folks like John Geanakoplos, Diane Macunovich, and Ajay Kapur implies that for the next decade, the U.S. private sector is not going to behave as the baby boomer decades have conditioned us to expect. Hence the case for a more activist — and just as importantly, ‘self-financing’ – public sector. ‘Self financing’ today means the Federal Reserve creating the dollars that enable primary dealer banks to absorb Treasury offerings at auction via direct bids.  For that process to continue, the federal government must continue to issue debt, rather than shoveling dirt on the people and institutions that are still near the bottom of our deep ’fiscal hole’.

Jonathan Zasloff writes (TOH Krugman) that “At some point someone must make an argument for government.” http://www.samefacts.com/2010/01/politics-and-leadership/obamas-self-inflicted-lobotomy-proceeds-apace/  Why are Democrats today so afraid to make that argument? Like the health care debacle, could the lessons learned in the Clinton years be ill suited to today? As for the GOP, our take is that by harping on government in all its forms (besides those forms that help favored firms and industries collect their share of rents from the rest of us, of course), Republicans leave the door open to the development of increasingly socialist policies. In fact, if our take on the state of the private sector in the coming decade is accurate, they will practically mandate it.

State unemployment insurance tracker at Pro Publica (TOH Credit Writedowns) shows how critical federal government support currently is for many states: http://projects.propublica.org/unemployment/

George Soros thinks that premature budget tightening could be bearish for gold prices: http://www.telegraph.co.uk/finance/financetopics/davos/7085504/Davos-2010-George-Soros-warns-gold-is-now-the-ultimate-bubble.html. Reminiscent of Jon Nadler’s argument last fall against gold: http://654advisors.com/index.php/blog/2009/11/a-gold-bears-comments/

Finally, in what might be a mirror image of our loney wing nut position, Bill Gross seems to be exhibiting a profound case of anti-Keynesianism: http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/February+2010+Gross+Ring+of+Fire.htm

Obama’s Approval Polarization: Man or Country?

Gallup has an interesting data point showing that President Obama’s “approval polarization” is the highest on record, going back to the Eisenhower administration:

A few thoughts spring to mind.

First, it’s the kind of thing that sounds “bad” at first blush. But is it? The top four polarization ratings belong to Obama, Clinton, W Bush, and Reagan. Is that bad company, as compared to a Johnson, Ford, or Carter?

Second, it appears that there may be a time trend at work in the data. If approval polarization has increased since 1980, then Obama’s approval gap might be more attributable to the U.S. political climate than to the man himself (there are plenty of factors that would lend support to such an argument). And note that of the last five presidencies, the one with the lowest first year polarization was the only one that ended after a single term. Admittedly, that last point’s a stretch, given the small sample size and the fact that the 1992 election occurred in the fourth year of GHWB’s presidency.  But it still supports that argument that this poll finding is more complicated than a first glance might imply.

On the ”sounds bad at first blush” phenomenon — my favorite is this line parroted by some cloudy headed thinkers: ”We’re the only species that drinks the milk of another species.” First, it would be nice to have a biologist confirm that nothing similar occurs in the animal kingdom, as symbioses are everywhere, and humans just happen to have the capacity (thumbs, brains, technological innovation) to do it exceptionally well. But second and most important, we’re also the only species that wears shoes, or belts, or underwear, or any other article of clothing (leather or hemp, you decide), drives cars, writes greeting cards, makes phone calls, worships formally, produces electricity, brews coffee, invents movements like veganism, writes and reads weblogs, pierces ears and other body parts, develops organizations like PETA, plays informal and organized sports, demonstrates outside corporations and furriers, goes to college, reads magazines, goes to concerts, buys housewares, hang glides, tells time, uses cell phones, base jumps, etc.  The list is awfully long. So being the only species that “does something” doesn’t mean that that something is necessarily bad. Likewise, it’s not possible to say that Obama’s polarized approval ratings are “good” or “bad” without deeper analysis.

URLs:

http://www.gallup.com/poll/125345/Obama-Approval-Polarized-First-Year-President.aspx

Haggis Strikes a Blow for Trade

The U.S. has announced that it is lifting a two decades long ban on imports of Scottish haggis. Soon we’ll all look like Groundskeeper Willie!

Seriously, it’s nice to hear at least one piece of good news on the trade front. And believe it or not, haggis is very tasty (or quite lovely, when in Glasgow). Here’s Robert Burns’ ode to his national dish, with a handy side-by-side translation, courtesy of the World Burns Club:

URLs:

http://www.sphere.com/health/article/scots-jump-for-joy-as-us-plans-to-lift-haggis-ban/19330199

http://www.worldburnsclub.com/begin/address_to_a_haggis.htm

Volatility? Shocking!

The news flow this week has put equity markets into one of their periodic panics. It’s been almost a year since the last one, so in the long term, this might be healthy. Healthy or not, it’s peculiar how closely these shakeouts have coincided with the political calendar, and judging by available academic research, the market should be better prepared for air pockets like the current one. For example, according to a 1997 study by Lamb et al:

Almost the entire advance in the [stock] market since 1897 corresponds to the periods when Congress is in recess. This is an impressive result, given that Congress is in recess about half as long as in session. Furthermore, average daily returns when Congress is not meeting are almost thirteen times greater than when Congress is in session. Throughout the year, cumulative returns during recess are eight times that experienced while Congress is in session. [emphasis added]

Or this 2006 study by Michael Ferguson and H. Douglas Witte:

We find a strong link between Congressional activity and stock market returns that persists even after controlling for known daily return anomalies. Stock returns are lower and volatility is higher when Congress is in session. This “Congressional Effect” can be quite large—more than 90% of the capital gains over the life of the DJIA have come on days when Congress is out of session. The Effect varies systematically with the public’s opinion of Congress: returns are lower and volatility higher when a relatively unpopular Congress is active. Public opinion appears to play a fundamental role in market prices. This is consistent with a mood-based explanation that sees Congress as ‘depressing’ the average investor. Alternatively, our results can also be reconciled with rational explanations that view Congressional activity as a proxy for regulatory uncertainty or rent-seeking behavior. [emphasis added]

Federal policies have a powerful effect on asset prices, and risk aversion has been very low until this week. With Congress back in town, the President on the war path, and widespread gnashing of teeth and rending of garments over budget deficits and the federal debt, volatility had nowhere to go but up. Our advice? Don’t worry about it (too much). It would be great if our elected leaders inspired more confidence and certainty, but political noise happens — the current bout might even need to happen in order to get satisfactory regulatory reforms enacted. However, we have one of the best (if not the best) political systems for correcting political errors. 

The big question ahead of us is how closely we’ll skirt a 1937 outcome, which shouldn’t be a material risk until 2011-12. The Treasury yield curve will probably provide the best clues. If longer term yields come down considerably in 2010, watch out. 

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC is a state registered investment advisor. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy nor a solicitation to sell any security, or to engage in any investment strategy. 

URLs:

http://www.unf.edu/~rlamb/Docs/FinServRev.pdf

http://www.fma.org/Orlando/Papers/Congress_and_the_Stock_Market.pdf

Bookstaber: ‘Controlled Burn’

Rick Bookstaber put forth an interesting argument about easing debt burdens on the public and private sectors through “controlled burn” inflation. If creditors aren’t willing to take large enough haircuts, that’s pretty much what you have to do to get aggregate credit burdens to a more manageable or desirable level.

There are a lot of misperceptions around this issue. FDR allegedly devalued the dollar c. 1934 by repegging it to gold at $35, instead of the $20 that prevailed before WWI. But if you look at the historical data, the USD was powerfully deflationary in the years leading up that action. And at best, the repegging only stemmed the rate of deflation. It did not create any inflation at all. In fact, the more closely we look at the data, the more closely aligned we become with folks who argue that the New Deal didn’t go far enough.  Paul Krugman’s warning in 2008 is looking fairly prescient:

…Barack Obama should learn from F.D.R.’s failures as well as from his achievements: the truth is that the New Deal wasn’t as successful in the short run as it was in the long run. And the reason for F.D.R.’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious.

[I would add that other FDR actions were too bullheaded and hasty, errors that Obama also risks repeating.]

During the recent crisis and recession, plenty of pundits argued that USD devaluation would be the order of the day. We saw some risk of that, but not as much as those who pointed repeatedly to the Federal Reserve’s unprecedented balance sheet expansion of 2008-2009, or the federal government’s enlarged deficits. That’s because those factors are meaningless if the private sector is not taken into account (i.e., the effects of monetary policy and public and private sector borrowing are not independent). If there’s intensive deleveraging and a rising desire for saving in the private sector, then expansive actions by the central bank and federal government are merely going to absorb some slack. Ony if they absorb more slack than exists will there be any risk of inflation.

Unfortunately, of late, the messages coming out of almost all political quarters is that the slack in the real economy is going to increase — and that means higher deflationary risk, and conversely to Bookstaber’s argument, rising real credit burdens. That, in turn, will lead to credit after shocks and rising unemployment. Granted, to the extent that people’s nominal income stays the same, real incomes rise in a deflationary environment, so this would be good news for pensioners, savers, and highly valued employees. But we shouldn’t overlook the real opportunity costs that deflation implies.

We see a threat of increasing slack because there’s a rising chorus of fiscal hawkishness all around us. Today, Rep. Chris Van Hollen, chairman of the Democratic caucus, told a CNBC interviewer that the government ”need[s] to get every penny back” from TARP. Yesterday, Republican Rep. Jeb Hensarling said that the election of Scott Brown was a sign that voters cared about debt and deficits (to be fair, he did mention lowering capital gains and payroll taxes, but debt and deficits seemed to be on the top of his mind). Today, a CNBC commentator referred to “your [taxpayers'] money” leading into a report on pending transportation spending. Policymakers are treading the line between semi-sensibility and madness.

First, Congress and the Administration should look forward. That requires changing the regulatory framework in a way that will prevent excessive systemic fragility in the future, and that’s the direction that Obama laid out in his remarks yesterday, with Paul Volcker, who imposed a massive deflationary contraction as Fed chairman in the early 1980s,  smiling in the background. But all else equal, this will lower overall credit capacity, and demanding full repayment of TARP will will make it worse. In order to avoid a double dip, the federal government has to act as the borrower of last resort, i.e., run larger deficits. To us, that’s the real problem with the path being laid out by Obama and Democratic leaders — taking with one hand, and not giving with the other, means economic contraction, all else equal.

Second, debt and deficit hawkishness could not be more untimely. We should pay serious attention to where and how public expenditures are directed, but we need to be honest about the need for significant deficit financed expenditures. Looking at underlying demographic structure, we probably shouldn’t concern ourselves with lowering the federal debt until the end of this coming decade.

Finally, the dollar is ”our money” in the sense that we use it to pay our tax liabilities to a government that has monopoly power to create it. Better yet, it creates it out of thin air (yes, if that power is abused or misused, it can lead to inflation, even hyperinflation, but the risk of such an outcome right now is very, very low). If fiscal policy does indeed swing in a more hawkish direction, then there’s going to be a surfeit of monetary units. And the more we taxpayers or our elected representatives grab for ”our money”, the worse it’s going to get. This ‘chartalist’ view is also somewhat complicated by the fact that our money creation process is controlled by the quasi-public Federal Reserve system. That means that the federal government can only issue interest bearing debt to finance its deficits. It sells those securities to primary dealer banks at auction. And the primary dealers rely on the Federal Reserve system to create the monetary units (the non-interest bearing debt of the U.S. government) that are used to purchase its interest bearing debt.

Keeping those last three sentences in mind, consider that:

• The President intends to tighten the tax and regulatory collars on the banks
• Fed Chairman Bernanke’s confirmation by the Senate is now in serious doubt
• Government spending and investment are especially critical in this recession (see here and here)
• Policymakers are clearly signalling that they’re going to get serious about “fiscal responsibility” 

The clear implication is that USDs are more likely to increase in value. So while Rick Bookstaber is right about the ability of inflation to lower existing debt burdens, it looks to us like we’re headed in the opposite direction, at least for now. The consequences will be discouraging to just about everybody.

URLs:

http://rick.bookstaber.com/2010/01/controlled-burn-inflation.html

http://www.aei.org/article/26390

http://www.nytimes.com/2008/11/10/opinion/10krugman.html

http://research.stlouisfed.com/recession/gdpdata.html

http://research.stlouisfed.com/recession/indicators.html

Dollar Strength & Foreign Credit

We came across an interesting piece on the relationship between the USD and commercial credit activity outside the U.S., as shown in the chart below. The implication, based on a quick and dirty visual analysis, is that if USD strengthening continues (the red line, which is plotted inversely), then foreign commercial paper (the blue line) is likely to contract. In other words, a dearer dollar could spell trouble for foreign economies, and that would have negative implications for economic activity, commodities, and risky assets abroad, all else equal.

This piece of evidence, combined with our strong dollar call yesterday, raises some fascinating possibilities. A rush to the USD was not on many strategists’ radar in 2009, or even to this point in 2010. Judging by markets’ performance today and yesterday, we could be seeing a significant break from those views. Then again, we might just be seeing the first notable stock market correction since last year; a USD squeeze might also be a short lived phenomenon.

We see too many moving parts to make a firm call either way. The markets continue to face the spectre of tightening federal purse strings and a ‘less easy’ Federal Reserve in 2010, and as of this week, they are now sitting in the middle of the open conflict that has broken out between the administration and the financial industry.  

We also see complexities in that battle that make it hard to come down on either side. We offered criticism of Obama’s initial remarks on the financial assets tax, though we later qualified it, and some of his remarks today were spot on. And while government policies and institutions certainly set up incentives to greed and stupidity, the actions embodying greed and stupidity (and the massive trading of rents that did little or nothing — arguably less – for economic welfare) were taken by individuals and organizations in the financial industry. And yet the overall tone of hawkishness from policymakers has negative implications for everyone, regardless of what street they make a living on.

There’s also a little noted irony in the apparent desire of some Democrats to constrain the size and activities of the financial sector. If Ajay Kapur’s research is on the mark, the sector is going to be shrinking in the years ahead regardless of regulatory changes, due to the shrinking ratio of middle aged adults.  A more interesting thing to speculate on, given the continuing centrality of the USD in the global economy, is how well those faster growing regions of the world will cope with tigher global liquidity. 

[UPDATE 1/21/2010 - In a CNBC interview moments ago, House Financial Services Commitee chairman Barney Frank put a far kinder and gentler spin on the recent presidential bluster, saying that a regulatory regime shift would have to be drawn out over several years and do a minimal amount of harm. This appears to have calmed frayed nerves in the market, and is a nifty scoop for Burnett and Cramer. Cramer's inferring that Paul Volcker (a man with a history of bull-in-a-china-shop approaches to policy) has the President's ear, while Frank comes down with the more nuanced regulatory views of Fed and Treasury, which could make for some political drama in the year ahead. It could even be a high stakes game of good cop, bad cop -- time will tell.]

http://shadowcapitalism.com/2010/01/20/the-implications-of-a-dollar-squeeze-on-foreign-banks-credit-access/

http://www.miraeasset.com/data/download.jsp?file_path=upload&file_name=MiraeAsset_TheGlobalInvestigator_20090812.pdf

http://www.cnbc.com/id/15840232?video=1340630859

http://www.cnbc.com/id/34979114/site/14081545

A Strong Dollar Call

President Obama, continuing his recent streak of verbal fiscal hawkishness (our view is admittedly contrarian) signed a memorandum today regarding tax delinquencies among government contractors. To the extent that federal contracts are awared to tax evaders and tax cheats due to poor information sharing or availability, this is a good initiative, and it’s based on analyses from the GAO like this one.

It was the President’s remarks that were most telling, especially his argument that the federal government needs to align itself with the values and norms that tax paying households live by (of course, this completely ignores the fact that only the federal government can create the money required to fulfill tax, debt, and other financial obligations, not just of the public sector, but of the private sector as well). The underlying message of recent remarks by the President is that tightening via “fiscal discipline” is very likely in the months and years ahead; Obama is clearly signalling that he has staked out a very center-right position among Democrats, similar to the Blue Dogs and Democratic Leadership Council, as summed up in this recent piece by Harold Ford, Jr:

The ability of the private sector to produce new jobs — our economic future — depends on how quickly we can get back on the path to fiscal responsibility. This means that any health-care reform plan should be paid for — a promise that President Obama has made, and one that his predecessor should have made.

Ford’s assertions are based on the rather shaky assumption that they hold under all economic conditions. But as we’ve noted recently, there are only some environments where this holds true, while there are other environments where it does not. In the former, fiscal conservatism may be appropriate due to “crowding out” and other concerns. In the latter, the private sector’s capacity to produce jobs actually depends on public sector demand, investment, and intermediation, i.e., deficits. 

Most people, Ford included, accept this idea in the short run, e.g., during a financial crisis or a sharp economic downturn. But what we’re arguing, essentially, is that pessimistic expectations are sometimes rational, and that the factors driving them can theoretically remain in force over fairly long cycles of ten, twenty, or thirty years, even longer.  In the situation at hand, when we look at demographic shifts in the U.S. and residual damage from the financial crisis, we think the decade ahead will be of the latter variety in both the U.S. and mature European economies.  So the message of Ford, his fellow Blue Dogs, the DLC, and President Obama (especially of late) might be a suboptimal direction for policy, however well it might have worked in the 1980s and 1990s. [1/20/2010 UPDATE - well written piece here on how public thinking about policy is heavily informed by experiences since the 1980s, which might be akin to driving by the rear view mirror]

As a result, we now see several forces at work that lead us to expect a strengthening USD, all else equal. First, the prevailing view among Democrats appears to be that voters will favor fiscal hawks in midterm elections, and they will respond accordingly. Second, we expect upside volatility in the real economy in 2010 (due in no small part to public sector demand), which will relax pressures for additional fiscal stimulus. Third, invoking the ideas of the neo-Chartalists, we’d argue that when the federal government places a high value on “fiscal responsibility” or “fiscal conservatism”, it implies that monetary units are going to become more scarce, and thus more valuable. In other words, if the President’s recent signalling is sincere, the USD is likely to appreciate (as will Treasuries, despite their compressed yields), and commodities and other carry trade and risky assets are likely to suffer (today’s market movements seem to support this argument).

While most pundits are attributing today’s market developments to the Republican capture of Kennedy’s senate seat yesterday, and/or to policy tightening in China, which are almost certainly factors, we would argue that far too many are overlooking the impact that President Obama’s current policy tenor is having on the USD. He’s essentially promising that the “tokens” required to settle economic transactions and engage in productive activity are going to become scarcer.

This implies some important changes in who the marginal actors are in the political economy. After the 2008 election, we asserted that the Blue Dogs would be the marginal player in setting the course of economic policy. The President’s upcoming budget will give us a clearer idea of whether their fiscal conservatism, as Obama’s current rhetoric implies, has indeed become dominant. If it has, then we think the Fed becomes the marginal factor in policy direction and economic outcomes. How soon and how sharply they tighten will determine the risk of a 1937 or Japan style recession, and it will also have critical implications for the performance of emerging market equities and other risky assets in the short to intermediate term.

URLs:

http://www.whitehouse.gov/the-press-office/memorandum-heads-executive-departments-and-agencies-1

http://www.gao.gov/new.items/d07742t.pdf

http://www.dlc.org/ndol_ci.cfm?contentid=255070&kaid=85&subid=65

http://en.wikipedia.org/wiki/Chartalism

http://www.cfeps.org/pubs/wp-pdf/WP10-Wray.pdf

President Still on Message…and It’s a Costly One

President Obama stumped over the weekend for Martha Coakley, who is running for Ted Kennedy’s vacant Senate seat against GOP upstart Scott Brown. He echoed his recent hawkishness, pitting green jobs against the oil industry, and taxpayers against “fat cat” Wall Street bankers, repeating his “I’ll get your TARP money back” meme. 

[1/20/2010 UPDATE - In an interview currently running on CNBC, Warren Buffet pointed out that most of the TARP recipient banks have repaid the federal government with interest, and that the industry, via FDIC, has absorbed the losses resulting from bank failures. TARP losses are the result of GSE's like Fannie and Freddie, and AIG, where many stakeholders - not just CDS counter parties, but also insurance settlement and annuity receipients - were paid with TARP funds. Important points, and they make the President's recent TARP rhetoric all the more puzzling.]

Obama’s current approach to policy is a net economic negative that will not reduce unemployment, at least in the short run. It will merely shuffle employment around between industries, creating inefficiencies and piling additional dislocation on top of the residual pain of a deep recession. And preaching to the choir could not have helped Coakley, given that she had lost a double digit poll lead due to migration of moderate and independent voters in recent weeks. Arch lefties are simply not going to swing the special election in Massachusetts, and they are probably not going to swing the 2010 midterm elections. For the second time in the last couple of weeks, we are left to wonder which cabinet member(s) the president is currently getting his strategic and tactical guidance from, and how much it’s going to cost his party before he starts looking for better advice.

We would assert that the Dems have lost a great deal of ground since they and the president began taking a more hawkish fiscal stance, and since PAYGO came back into vogue (though we could be wrong – perceptions of overreaching on health care reform may have been more important, for example). The parties’ current approaches to policy are basically:

Dems:    increased public spending  + higher taxes

GOP:      decreased public spending + lower taxes

It’s interesting to note that in many environments – this one included, we think – those options won’t differ a whole lot in terms of economic output. Thus, the choice may not be about economic performance as much as private versus public control of resources, which seems to be fairly characteristic of the American voter. That’s too bad, as there are some important public sector initiatives, including infrastructure, energy efficiency, gaps in the health care system, even a public employer of last resort, that could and arguably should be undertaken. Unfortunately, every time the President or members of his party claim that the private sector (however narrowly defined and targeted) will be put on the hook for funding some initiative, he shuts down these important opportunities.

As we’ve noted elsewhere, the federal government issues the money used to service its debt. Thus, the only real constraint on public sector deficits is inflation expectations coming unhinged. This has not happened to date, and most forward looking indicators are pointing in a disinflationary if not outright deflationary direction, at least in purely domestic goods and services. This realization offers a less divisive way forward for whichever party grasps it first, i.e.:

Dems:    increased public spending  + increased deficits

GOP:      lower taxes + increased deficits

In what appears to be a  ’Keynesian’ decade ahead, these approaches offer a healthier framework for policymaking. And arguably, the Dem direction – if they had the courage to advocate it, and the sense and restraint to do it reasonably well – would lead to better economic outcomes overall.

More Important Than Facebook?!?

Hold your tongue, internet security expert!

A Georgia mother and her two daughters logged onto Facebook from mobile phones last weekend and wound up in a startling place: strangers’ accounts with full access to troves of private information.The glitch — the result of a routing problem at the family’s wireless carrier… — revealed a little known security flaw with far reaching implications for everyone on the Internet, not just Facebook users.

In each case, the Internet lost track of who was who, putting the women into the wrong accounts. It doesn’t appear the users could have done anything to stop it. The problem adds a dimension to researchers’ warnings that there are many ways online information — from mundane data to dark secrets — can go awry.

Several security experts said they had not heard of a case like this, in which the wrong person was shown a Web page whose user name and password had been entered by someone else. It’s not clear whether such episodes are rare or simply not reported. But experts said such flaws could occur on e-mail services, for instance, and that something similar could happen on a PC, not just a phone.

“The fact that it did happen is proof that it could potentially happen again and with something a lot more important than Facebook,” said Nathan Hamiel, founder of the Hexagon Security Group, a research organization.

URLs:

http://news.yahoo.com/s/ap/20100115/ap_on_hi_te/us_tec_facebook_at_t_glitch

Philly Fed’s ADS Index

The Philadelphia Federal Reserve publishes something called the Aruoba-Diebold-Scotti (ADS) Business Conditions Index on its website, which integrates high frequency data to construct a measure that indicates whether business conditions are positive or negative, and to what degree. Coincident data is limited, but at this point, it certainly doesn’t indicate that “overheating” is likely. Admittedly, we’re exhibiting confirmation bias by posting it, but it does lend additional support to our current view that, despite a couple of robust GDP prints ahead of us, the underlying state of the economy is still uncertain, and by extension, that policymakers (and plenty of voters) are pushing too hard and too soon for balanced federal budgets.

http://philadelphiafed.org/research-and-data/real-time-center/business-conditions-index/ads_2yrs.pdf