I
will be speaking at the Wealth Protection Conference 2013, April 5 &
6 in Tempe. It's a great conference. Click
here to find out more and make a reservation.
Send
in the Clowns
by
Sinclair Noe
DOW
+ 115 = 13900
SPX + 9 = 1496
NAS + 13 = 3129
10 YR YLD -.02 = 1,88%
OIL - .42 = 92.69
GOLD + 21.10 = 1615.70
SILV + .44 = 29.53
SPX + 9 = 1496
NAS + 13 = 3129
10 YR YLD -.02 = 1,88%
OIL - .42 = 92.69
GOLD + 21.10 = 1615.70
SILV + .44 = 29.53
Twice
a year the Fed Chairman visits Capitol Hill. He talks to senators and
the next day he talks to the House of Representatives. Today,
Bernanke told lawmakers that he had done a good job and he tried to
take his bows. Bernanke
said Fed policymakers are cognizant of potential risks from their
extraordinary support for the economy, including the possibility that
it might fuel unwanted inflation or stoke asset bubbles. But, he
said the risks did not seem material at the moment, adding the
central bank has all the tools it needs to retreat from its monetary
support in a timely fashion.
Bernanke
said: "To this point, we do not see the potential costs of the
increased risk-taking in some financial markets as outweighing the
benefits of promoting a stronger economic recovery and more rapid job
creation."
When
asked pointedly by Republican Senator Bob Corker about whether the
Fed's easy monetary policy was contributing to competitive currency
devaluations globally and laying the groundwork for inflation,
Bernanke was unequivocal. He said: "My inflation record is the
best of any Federal Reserve chairman in the post-war period. We are
not engaged in a currency war."
Elizabeth
Warren, a Democrat, pressed Bernanke on what she said is an implicit
subsidy that large banks receive in the form of lower borrowing costs
from being perceived as too big to fail. Warren asked:"We've now
understood this problem for nearly five years, so when are we gonna
get rid of 'too big to fail?'"
Warren
also asked whether big banks should repay taxpayers for the billions
of dollars they save in borrowing costs because of the credit
market's belief that they won't be allowed to fail, repeatedly citing
a recent Bloomberg View study estimating
that the biggest banks essentially get a government subsidy of $83
billion a year,
nearly matching their annual profits.
Bernanke
countered that Dodd-Frank financial reform rules had given regulators
more power to wind down failing financial institutions, making the
issue less of a concern. Bernanke said: "The subsidy is coming
because of market expectations that the government would bail out
these firms if they fail. Those expectations are incorrect. "
Bernanke
warned the near-term spending cuts known as the sequester, which are
set to take hold later this week, would threaten an already
challenged economic expansion: "The Congress and the
administration should consider replacing the sharp, frontloaded
spending cuts required by the sequestration, with policies that
reduce the federal deficit more gradually in the near term but more
substantially in the longer run."
Bernanke
also addressed the labor market:"High unemployment has
substantial costs, including not only the hardship faced by the
unemployed and their families, but also the harm done to the vitality
and productive potential of our economy as a whole."
Here
is a link to video of Warren questioning Bernanke.
The
main takeaway from the testimony is Bernanke downplayed the risks
from the
Fed’s economic stimulus campaign, describing it as necessary and
effective and making clear it is likely to continue for some time.
And then he told the lawmakers they need to do their part, saying:
“Although
monetary policy is working to promote a more robust recovery, it
cannot carry the entire burden of ensuring a speedier return to
economic health.”
Speaking
of which: The economy is going to hell in a hand basket! The sky is
falling, or airplanes will fall from the sky! The sequester is
coming, the sequester is coming!
Yeah
well. While President Obama warns of the dire economic impact from
across-the-board budget cuts, the nation may face more serious fiscal
debates in the months ahead on a potential government shutdown and
renegotiation of the debt ceiling.
With
just three days before the $85 billion in reductions for this year
are scheduled to start, Obama and Republicans led by House Speaker
John Boehner yesterday traded blame again for the impasse. The
president and his Cabinet officers drew a landscape of lost jobs,
long lines at airports, delays at ports and cutbacks at national
parks.
There’s
been no public sign of negotiations between Obama and congressional
Republicans. As the administration continued laying out details of
how programs used by many Americans would be curtailed, Republican
governors joined their congressional delegations in accusing Obama of
overplaying his hand. And it will probably take about
a month before most people really start to notice the cuts. Obama
said they were no less a threat to the world’s largest economy,
which stalled in the fourth quarter. “The
uncertainty is already having an effect,” Obama said. “Companies
are preparing layoff notices. Families are preparing to cut back on
expenses. The longer these cuts are in place, the bigger the impact
will become.”
And
for now, the markets are freaked out, traders and analysts still
think there will be a compromise within the next 30 days or so.
Looming
even larger than the March 1 start of the automatic spending cuts is
a potential government shutdown if Democrats and Republicans can’t
agree on a stopgap funding measure by March 27, the date that current
government funding expires. Without a deal in Congress that Obama
would sign, government spending would halt.
In
the battle over the sequester, Boehner has maintained his pledge not
to entertain any new tax revenues. President Barack Obama and
Democrats have called for a resolution that consists of both spending
cuts and increased revenue, such as closing corporate tax loopholes
and implementing the Buffet rule to raise taxes on billionaires.
During
a news conference, Boehner showed no signs of hedging. "The
president says we have to have another tax increase in order to avoid
the sequester,” he said. "Well, Mr. President, you got your
tax increase. It’s time to cut spending here in Washington."
So,
don't expect a sequester deal. Sen. Ron Johnson (R-Wis.) said House
Speaker John Boehner (R-Ohio) would lose his speakership if he agrees
to new tax revenues to avert the across-the-board spending cuts that
are set to kick in on March 1.
Much
of the motivation for deficit reduction, a goal shared by policy
makers across the political spectrum, is the belief that deficits
consume the nation’s seed corn. That is, deficits represent
negative saving. Because saving is presumed to be the key determinant
of long-term real economic growth, deficits deplete the supply of
saving and thus reduce growth. There
are many problems with this analysis. One is that it assumes that all
government spending is consumption. In fact, much of it consists of
investment. the
federal government will invest $550 billion this year in physical
capital (buildings, equipment), research and development and human
capital (education). This includes grants to state and local
governments for these purposes.
It
is perfectly reasonable to finance long-lived capital projects with
borrowing. Because the benefits will accrue over many years, it would
be silly to treat things like highways as if they were consumed
within a single year for budget purposes.
Unfortunately,
the federal budget is silly in this respect. It treats investment
spending the same way every other budgetary item is treated – as if
it were consumption with no long-lasting benefits for the nation.
An unfortunate consequence of this budgetary convention is that reducing federal investment is viewed as beneficial if it reduces the deficit. Moreover, it is often easier to cut investment spending than consumption, just as homeowners suffering from an income loss may find that deferring maintenance or planned improvements is the easiest way to conserve cash.
An unfortunate consequence of this budgetary convention is that reducing federal investment is viewed as beneficial if it reduces the deficit. Moreover, it is often easier to cut investment spending than consumption, just as homeowners suffering from an income loss may find that deferring maintenance or planned improvements is the easiest way to conserve cash.
Many
economists say they believe that the best thing the federal
government can do to raise the long-term economic growth rate is
increase infrastructure spending. It would have the double benefit of
mobilizing idle resources, especially unemployed workers, while low
interest rates permit capital projects to be financed very cheaply.
One main barrier to achieving this double benefit is the confusion
between investment spending and consumption spending, which is
distorted by the way the budget is presented and the way we calculate
saving.
Meanwhile,
Italy's
politics have almost literally become a clown show. The front-runner,
who had teamed with the former European Central bank technocrat, did
not do well in yesterday's election. Go figure. Beppe Grillo, the
clown comedian did well, his movement was the top vote getter, even
though he didn't win, and even though or perhaps because he is not a
politician, he is not particularly wise, he does not have a permanent
tan, he does not own the entire telecommunications industry in Italy,
he is no a shameless unrehabilitated whoremonger, and he is not a
Goldman Sachs puppet, (which may be a bit redundant). The Italians
failed to do the responsible thing and vote for austerity. Go figure.
Italy
is doing what Greece was (quite understandably) too small, too afraid
and too vulnerable to do which is to say, collectively, “up yours”
to austerity, technocracy and cronyism. And yes, they probably won't
get away with it. Italian party chiefs began jockeying to forge a
coalition of rivals and head off a second vote as a political vacuum
of at least a month loomed.
The
Five Star protest movement of comedian Beppe Grillo looked likely to
emerge as the biggest single party in the lower house. The scourge of
bankers and corrupt elites, Mr Grillo has campaigned for a return to
the lira and a restructuring of Italy’s $2 trillion public debt.
The
conservative bloc of ex-premier Silvio Berlusconi looked poised to
win the senate, coming back from the political grave with vows to rip
up the EU’s austerity plans and push through tax cuts to pull Italy
out of deep slump. The majority of Italians have clearly voted
against the Brussels consensus. That is a damning indictment. But
if they can't come up with a coalition, look for another technocrat
to be installed to run things until they figure it out.
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