HAPPY DAYS AREN'T HERE AGAIN (and why they're not)

It was about this time last year that the Federal Reserve announced that it would continue to hold down interest rates. The idea behind the low rates is Economics 101 stuff. If Federal Reserve interest rates are low our nation's banks - who borrow from the Federal Reserve - will lend more money to consumers at lower rates. Consumers (you and me) will borrow and spend money.

And, just like that, demand is increased and people are put back to work. Economic recovery here we come. Happy days are here again.

But, wait. A funny thing happened on the way to the market recovery (as it were).

According Tyler Durden over at Zero Hedge, the entire U.S. financial system is now sitting on $2 trillion more than they have in loans. As an example, Wells Fargo has far more money on hand ($176.5 billion more) than it has loans outstanding.

Without getting into the difference between deposits and reserves, these dynamics helps us understand why - according to the Federal Reserve - U.S. banks have over $1.45 trillion in "excess reserves" today (1-20-13).

In real simple terms what this means is that banks aren't lending money like all of our economic models tell us they should. Don't believe me? Think about all the time and hoops you or your friends have had to jump through to apply for a loan, just to get denied.

So, just what are banks doing with the money? They're buying U.S. Treasury bonds and profitting from the interest you and I pay them (through our taxes). They now hold over $1.86 trillion in U.S. bonds today (represented by several categories in the middle row below; 2012 data here, updates here).

The key point here is that banks are using the money they get from the Federal Reserve to "earn" billions in interest payments. Interest payments on $1.86 trillion should generate between $3-4 billion, and are used to underwrite earnings, backstop trillion dollar derivative bets, and allows executives to pay out big bonuses ... because banks are, you know, "doing just fine" now.

In a few words, traditional bank earnings based on deposits and loans - which are supposed to grease our economic wheels - have taken a back seat to banks making a living by sucking off of the Federal Reserve's cheap money loan programs. It is a bailout in perpetuity, by other means.

As I've pointed out many times before this should really come as no surprise to anyone. Our free market system is a farce, and has been for some time now. Dependence on cheap money dumps (via loans) from the Federal Reserve is how the U.S. financial system has worked since 2008 (for a detailed read on the topic check this out).

The worst part of this is that while the banks are using their cheap Federal Reserve money to create the appearance of financial health and to backstop their derivative gambles - which venture capitalist Bill Frezza does a good job explaining here - the rest of America is forced to foot the bill.

To be sure, we have seen some improvements in the economy. Trillion dollar money dumps will produce some positive spin-offs. But reduced confidence, record foreclosures, job insecurity, and a political system that's tethered to an economic model based on myth and the illusion of prosperity should be no cause for celebration.

- Mark

UPDATE: This post from Zero Hedge really drives home the point(s) made above. Specifically, the Federal Reserve has intervened in the market more than 1200 days since November 2008 (the first QE I), a whopping 81% of the time. The only months that the Federal Reserve hasn't intervened are the only months that the market has taken a dive. Incredible.

ANOTHER USEFUL SOURCE ... VISUAL CAPITALIST

Did you know that North America (Canada, Mexico, and the U.S.) possesses at least 34 percent of all the world's accessible gold deposits? This and other tidbits of commodity information can be found at visualcapitalist.com. The site has some of the best visuals on gold, silver, and other commodities, with easy to understand visuals that convey their history, global supply and demand, and where they stand as an investment.

Click on the gold (history) and silver (as an investment) graphics below for a quick review of what Visual Capitalist produces.

- Mark 

DEBUNKING THREE BIG BUDGET MYTHS

Only because so many people still don't get it (you know who you are), let's debunk some budget myths with graphs (again).

Myth #1: Since entering office President Obama is the biggest spender in modern American history.

Hmm, our national debt has climbed to more than $16 trillion under President Obama. This is serious stuff. OK, let's take a look ...

While spending trends from the Bush administration continue (he left trillion dollar deficits), new spending under President Obama has not followed the pattern from the previous administration.

More to the point, new spending programs under President Obama doesn't come close to what previous presidents from our generation initiated. Indeed, new federal spending under President Obama is growing at its slowest levels since President Eisenhower.

*****************

Myth #2: We don't have a revenue problem, we have spending problem.

Wow, this sounds serious too. I say we take a look at the evidence ...

Irresponsible tax cuts have an impact. The Bush era tax cuts coupled with the impact of the two recessions dropped our national income by almost one-third. This would be the equivalent of someone earning $61,800 per year seeing their yearly income drop to $43,200 a year (and then going on a spending binge). This would hurt.

So, yeah, irresponsibly cutting taxes didn't do anyone a favor (except for the richest Americans, of course).

*****************

Myth #3: President Bush only added $4 trillion (actually, $4.9 trillion) to our total national debt in 8 years, while President Obama has done far worse in just 4 years.

For the record, I had one seriously clueless person write that President Bush's budgets only added $2 trillion to our national debt. Yikes.

With this kind of confusion, we're going to need two graphs.

First, people forget - or flat out ignore - that the CBO projected $5.6 trillion in budget surpluses by 2011. This means we could have paid off (or paid down) or national debt, perhaps by last year. Guess what happened? The Bush administration happened ...

So, in reality, not only did President Bush squander $5.6 trillion in projected surpluses during his administration, but he added an additional $4.9 trillion to our national debt with his unfunded spending programs. In my math book, that's a $10.5 trillion unfunded spending binge (even more if you play more budget math games).

As most of us know, we're still trying to deal with President Bush's economic mess, which fits nicely into the GOP's larger political playbook.

But let's be clear here. President Bush screwed up our national finances, big time.

*****************

OK, some bonus graphs, courtesy of Barry Ritholtz ...

Below, in the left bar, is what we spent in 2012.

Below, in the right bar, is the national income we derived from taxes and fees during 2012.

So, yeah, we don't have a spending problem. We actually have a spending and revenue problem. And it didn't start with President Obama.

For those who might not understand how to read this stuff ... federal spending (orange line) and national income (grey line) since 1960 are represented by the graph on the right.

Be sure to note when national income and spending begin to split widely (Hint: Early 1980s and early 2000s).

- Mark

OK, two more graphs, and that's it.

Take a look at what's happened to corporate America's tax contribution as a percentage of national GDP since the 1950s ...

... and then take a look at how much individual income taxes as a percentage of GDP have grown (or declined if you're a millionaire) ...

GOP ... LET'S KICK OUR NATION'S SENIORS IN THE GROIN

Guess who's provided the U.S. with the most money to cover our annual budget deficits? It's not China. Not even close. Rather, over the years our nation's seniors - through the social security trust fund - have lent our nation $2.7 trillion to keep our country solvent (updated figures here).

According to congressional Republicans the best way to thank our nation's seniors for their generosity and hard work over the years is to cut social security benefits, today. Why? Because "we don't have the money."

To be sure, the GOP thinks there's enough money to pay for tax cuts and corporate subsidies. They're also fine with the more than $16 trillion we guaranteed or turned over to Wall Street after 2008. Paying back the multiple trillions of dollars we owe to everyone else - like the Chinese, the "Caribbean Bank Centers," and our mutual fund industry - is OK with them too.

But we don't have to return the $2.7 trillion we borrowed from our nation's seniors because we can just cut back on their benefits. Nice.

Apart from saying that the U.S. government no longer has a constitutional (Art. VI) or moral responsibility to pay back our nation's seniors, the GOP is effectively kicking our nation's seniors in the groin by suggesting that we don't need to honor the $2.7 trillion they've lent our nation.

It's really that simple.

- Mark 

MONDAY CHUCKLES

This is too funny ...

While this is obviously someone being creative, this also looks like the tin foil hat stuff that Glenn Beck and the people at Fox often put together ;-)

- Mark 

A FEW THOUGHTS ON CALIFORNIA'S BALANCED BUDGET PROJECTIONS

According to Gov. Jerry Brown in 2013 the state of California will spend less money than it takes in, the first time a sitting governor can say this since 2001. A series of spending cuts and deferred expenditures (like the raises that were promised to us in 2008), plus new revenue from Proposition 30, have created the environment for this to happen.

Acknowledging Gov. Brown's work on the budget since his election in 2010 - including going out to aggressively campaign for Proposition 30 - GOP Assemblywoman Connie Conway called Gov. Brown "the adult in the room." 

Coming from a Republican, this is huge.

Indeed, despite what the critics and naysayers from the right said, Proposition 30 has provided Gov. Jerry Brown with the financial resources to project that California will reduce its annual budget deficit to zero by the end of 2013. Gov. Brown estimates that the state's $27.8 billion debt load will be reduced to $4.3 billion within four years.

To be sure, the final authority on the matter, the Legislative Analyst's Office (LAO), has yet to speak on the topic (the LAO saw less income from Proposition 30 than Jerry Brown during the campaign season). But the fact remains that California's budget picture is significantly improved because of the tax hikes imposed on California's richest citizens. Specifically, for the next seven years Proposition 30 imposes: 

• A 10.3% tax rate on taxable income between $250,000 and $300,000 (formerly 9.3%).

• An 11.3% tax rate on taxable income between $300,000 and $500,000 (formerly 9.3%).

• A 12.3% tax rate on taxable income between $500,000 and $1,000,000 (formerly 9.3%).

• A 13.3% tax rate on taxable income over $1,000,000 (formerly 10.3%).

The new tax is important because the number of millionaires living in the state of California jumped from 25,000 in 1990 to over 100,000 today. 

This translates into California having the highest proportion of people earning $1 million annually per capita. The new tax means that these new millionaires will have to pitch in more to help maintain the conditions that allow them to get fabulously rich in California. 

As a side note, the new tax means - all things being equal - that we won't have to read as many contemptuous articles and cartoons like this one over the next seven years ...

As for the argument that the higher tax would drive millionaires out? It's an urban legend. Simply put, the data doesn't support the claim (here's a nice synopsis). 

I'm sure we'll hear more on the topic in the coming months, especially from California's Legislative Analyst's Office. But one thing is clear. This certainly drills a hole in the GOP's "no new taxes" mantra at the national level. Big time.

- Mark

UPDATE: Citing Governor Brown, Bloomberg is reporting that we may end fiscal year 2013 with an $851 million surplus.

UPDATE II: Paul Krugman chimes in here. 

CORPORATE WELFARE vs. SOCIAL WELFARE SPENDING ... IT'S NOT JUST A $40 BILLION GAP

I have written about corporate welfare many times. I like to discuss this topic because almost every day we hear from conservative pundits and politicians that we need to end our culture of entitlements. The Republican Party has become particularly adept at getting America to believe that "dependence on government" is an economic and cultural sin that needs to be eradicated.

But, as I've pointed out in numerous posts (here, here, and here), government assistance comes in many forms, especially for the private sector.

FAVORABLE LEGISLATION: Market subsidies, market protections, market interventions, regulatory favors, favorable legislation, legal protections, ex-post facto reclassification's, government spending (Keynesian), artificially low interest rates (monetary policy), government takeovers of private sector "assets" (not what you think), and government bailouts (all discussed here and here) are only the tip of the ice berg.

SUBSIDIZING MARKET EFFICIENCY VIA SOCIAL POLICY: On a general level the state also has to protect freedom and individual rights, which subsidizes markets by helping markets function more efficiently. More specifically, as I've pointed elsewhere (and in my book), the modern state has to work consistently to remove or soften the impact of market enemies like market conspiracies (monopoly, oligopolies, etc.), societal prejudices (racism, sexism, etc.), government-corporate collusion or capture (favorable legislation, slavery, bailouts, regulatory capture, etc.), hereditary privileges (inheritances, wealth transfers, etc.), and outright corruption and theft.

HIDDEN GIFTS: Then we have "hidden" corporate subsidies that come in the form of tariff protections, dirt cheap land leases, royalty gifts to the oil industry, more than a trillion dollars in tax gifts, and increasingly longer copyright protections which are coupled with broader interpretations of what can be patented (especially good for drug and food manufacturers), which the New Yorker's James Surowiecki discusses here.

All of these subsidies, protections, and legislative gifts are backstopped and transferred by the state.

The reason I bring all of this up is because several of my conservative FB friends continue to point to the cost of government spending for housing and other welfare related expenditures. They claim it's busting the national bank. They're wrong.

The problem is that they never provide numbers and, quite frankly, don't know what the hell they're talking about (e.g. they like to conflate social security and Medicare with our budget mess when neither have anything to do with our current budget picture). My concern is that they choose to ignore (or never learn?) what Mike Sinn points out here.

Specifically, the almost $100 billion that we give as direct government subsidies for "corporate welfare" far outpaces the almost $60 billion we spend annually on traditional "social welfare" programs. Specifically, we spend  $17.6 billion on Temporary Assistance for Needy Families, (or TANF) and $41.7 billion on housing programs - where 54 percent of HUD-assisted households goes to the elderly or disabled - which adds up to $40 billion less than what we spend on direct corporate subsidies.

This corporate-social welfare gap explodes far beyond $40 billion if we consider the more than $4 trillion (yes, that's a trillion with a "t") that's been turned over to Wall Street and the financial sector since 2008, and the $16 trillion that we're now on the hook for as we continue to guarantee and subsidize our financial sectors economic recovery.

Here's what we should all understand from what's presented here. The GOP and their media noise machine on the right (Fox News is not alone) only want to cut welfare for the poor. They want you and everyone else to ignore corporate welfare for the private sector ($100 billion in subsidies + over a trillion in tax expenditure gifts + the trillions in post-2008 assistance).

The $40 billion gap between what we spend on direct corporate welfare ($100 billion) and traditional social welfare ($59.3 billion) is actually much larger. Much, much larger. The trillion dollars we give away in tax breaks (tax "expenditures") and the multi-trillion bailout program(s) that we crafted for Wall Street after 2008 should be ample evidence of this.

Unfortunately, many Americans simply don't see it. Sigh ...

- Mark

Addendum (11-5-15): Eventually I'm going to update this post. Until then, know that the Federal Reserve of St. Louis has a nice graph that shows the trillions of dollars in post-2008 market subsidies that I reference in this post. If you're not a policy geek here's an an explanation and link I posted, which provides a skyscraper 'visual' of the more than $4 trillion that we've dumped in to Wall Street since the 2008 market collapse.

I have another post here that shows how we've - in the words of one Federal Reserve director - created a "beer goggles economy" for market players with all the cheap money we've (through the Federal Reserve) released. So you know, we're on the hook for trillions more. Be sure to follow the links.

Again, I will revise and update this post at some point.

AMERICA'S BANKING SYSTEM A MESS ... AND POISED TO COLLAPSE (AGAIN)?

OK, I've been saying this over and over and over and over and over again for the past four years. No one, including sophisticated investors, trust or understand what the largest financial institutions are doing with the assets listed on their books. It's all smoke & mirrors which has created an atmosphere of blissful market ignorance, again.

This should come as no surprise to those who have read my book, The Myth of the Free Market, or follow what I write here.

Specifically at the beginning of Chapter Twelve I explained how supposedly sophisticated financial players have been in the dark about what the biggest banking and investing institutions have created with debt and other derivative "investment" instruments.

For those of you who don't have the money or time to get my book you're in luck. Last February I posted the discussion from my book on to my blog - "In the I Told You So Department" - where it has become one of my most popular posts (currently #3 in this week's "Hot Posts").

Making the same point that I discuss in my book (and on my blog) is The Atlantic's Frank Partnoy and Jesse Eisinger. In a blistering report on what's on the books of our largest banks - "What's Inside America's Banks?" - Partnoy and Eisinger make it clear that banks are securing a good deal of their income from derivative bets that could bring the whole house of cards down, again.

There's so much more to this story (like the money dumps that keep the whole thing going).

Unfortunately, most of America - and especially those in our Congress - don't have the tools to understand what's happening in our financial markets (still). It's one of the reasons that I'm having my Introduction to American Politics class read Barry Ritholtz's Bailout Nation. Like the Partnoy and Eisinger piece from The Atlantic, it helps us all understand why another market collapse is inevitable.

For those of you interested in a quick (but hardly complete) review of Partnoy and Eisinger's Atlantic article you can check out this Huffington  Post piece. If you're really interested in what's happening click on the links above, or read Ritholtz' (or my) book.

- Mark

UPDATE: Here's a venture capitalist saying pretty pretty much the same thing about our out of control derivative market(s). 

THESE PEOPLE ARE BATS**T CRAZY

The people in charge of the GOP in Congress are Bats**t Crazy. I could put it another way, but I really can't at this point. Here's why.

Back in July of 2012 the undisputed budget scorekeeper for Congress, the Congressional Budget Office (CBO), was asked by Speaker John Boehner (R-OH) to take a look at what would happen to our financial picture if Congress repealed Obamacare. At the time Republicans in Congress were busy introducing legislation that would eliminate, scale back, or defund Obamacare (33 times in 18 months). So it only made sense to ask an impartial referee how their actions would affect our budget picture, right?

The CBO came back with this letter, which made it clear that repealing Obamacare would cost the American taxpayer over a hundred billion dollars more. Oops.

Specifically, the CBO reported that repealing Obamacare would increase the federal deficit by $109 billion between 2013 and 2022. While there are many reasons why this happens, the CBO makes it clear that Obamacare saves hundreds of billions over the current system (actually, over $700 billion) by reducing the amount paid out to insurers, manufacturers, and hospitals.

John Boehner's response? After being criticized for dismissively saying that the CBO was "entitled to their own opinion" when they issued their preliminary Obamacare repeal assessment in January of 2011, Speaker Boehner took another tactic. He pretty much ignored the July 2012 CBO letter. Nice.

But wait. Boehner's doing it again. Or, more correctly, even though the Supreme Court says Obamacare is constitutional, the GOP is going after Obamacare, again.

Even though the 112th Congress hurridly finished business, and ignored Hurricane Sandy financial relief pleas from New Jersey Gov. Chris Christie, newly elected Speaker Boehner seems to have no problem standing by while the most radical House Republicans in the 113th Congress introduce legislation to repeal Obamacare, again.

So, this is what we have. After failing 33 times to repeal Obamacare ... after failing miserably (or not trying at all) to introduce or make headway on job creation ... after getting called out for pushing a misleading report that accused the CBO of double counting (or omitting) Obamacare numbers ... and in spite of CBO projections telling them that repealing Obamacare would actually increase our national debt ... the GOP is once again prepared to go after Obamacare.

What's that saying about doing something over and over again? Anyways ...

What's so frustrating about all of this is that the GOP is being led by the same group of people who actually:

* Presented a budget with no numbers.
* Tried to redefine rape to fit their position(s) on abortion.
* Had the Majority Leader of the House claim - against all constitutional logic and history - that if the Senate didn't pass their legislation that their bill (H.R.1) would "be the law of the land."
* Consistently ignored or voted to block job creating programs in the 112th Congress because the jobs programs might help make President Obama look good.

You get the point. We're back to business as usual.

With sequestration (automatic spending cuts) and the debt ceiling coming up over the next two months you would think that the GOP might find the time to work on other things besides playing games with Obamacare. Think again.

Seriously, what the hell is wrong with these people? Wait a minute, I think I know.

Being regular crazy isn't good enough. These people are Bats**t Crazy.

How else do you explain it?

Sigh ...

- Mark 

AGAIN, WE DON'T NEED TO TOUCH SOCIAL SECURITY TO DEAL WITH OUR DEFICIT PROBLEM

Again, we don't have to touch social security to deal with our annual deficits.

The primary reason why is that our annual budget deficits are being driven - and have been driven - by policies and developments that do NOT have anything to do with social security. Here, check it out ...

And, yeah, our annual budget deficits would be close to "0" if we could erase/amend the policy responses we developed between 2001 and 2009 (think about it as a "Fiscal Ghosts from Administrations Past" storyline).

In case you want to see the what I'm saying another way check out this graph, which explains how we got our budget deficits from Glenn Hubbard, dean of the Columbia Business School.

I've said before and I'll say it again. Going after social security for today's deficit mess would be akin to FDR attacking Mexico after Pearl Harbor. It makes no sense.

- Mark