Carlos Lam

Why a New Stimulus Package Is Premature

Two reasons why we don't need a new stimulus:

1. They don't work. We tried them during our Great Depression, and they were found lacking. Indeed, even FDR's own Treasury Sec'y mused, "We have tried spending money. We are spending more than we have ever spent before and it does not work ... After eight years of this Administration we have just as much unemployment as when we started." The Japanese tried them during their (continuing) lost decade, and the Nikkei is still way below where it was at its height, Japan has taken on debt that now stands at 180% of GDP, and Japanese citizens' savings rates have plummeted from 15% (1990) to under 4% (2004).

2. We can't afford it. China has the reserves to finance a "stimulus" program, as foolish as the idea of stimulus may be. We don't have the money:
* Nat'l debt...$12 TRILLION
* SS unfunded liability...$14 TRILLION
* Rx unfunded liability...$18 TRILLION
* Medicare unfunded liability...$74 TRILLION
*** TOTAL...$118,000,000,0...

If you thought California was a mess, Pew Research has a table of the nine other states (who, remember, can't run a deficit as easily as the federal government can and must slash services) "barreling toward an economic disaster" as tax revenues take a dive.

On Nov 11 07:34 PM Machiavelli999 wrote:

> right? WRONG! Over the past few years all states have cut spending
> drastically, including California.

What source do you cite for this statement?


> Second, yes the states and local governments need a bailout. Unless
> you are OK with them pulling cops off the street and stuffing 100
> kids into a classroom?

Again, what sources do you cite for claiming that cops will be pulled off the street and 100 kids will be placed in a classroom? Alternatively, perhaps local government workers can do what we Johnson County employees did: take a pay cut.

The Unsustainable Lie of Inflation

On Nov 09 02:25 PM Michael Clark wrote:
> Deflation is God's way of punishing the rich. Deflation will have
> its day.

Michael, I agree with about 75% of your comments, but i don't get this one. How does deflation punish the rich? If by "rich" you mean people with plenty of fiat currency in the bank, then deflation makes each of their units of currency buy more.

Expect the Economic Crisis to Continue

"There doesn’t seem to be much danger of inflation before then."

You may be correct if you subscribe to Mike Shedlock's theory that in our economy one must "count" credit as part of the money supply to determine if the money supply truly is growing at an inflationary rate. That theory has its merits.

There is another reason as to why we may experience price shocks: a run on the dollar. There are a few factors that point to a future run on the dollar:

* China's repeated warnings about their concern for the value of their reserves

* Indian and Sri Lankan purchases of gold reserves and jettisoning of their dollar reserves

* Foreign gov'ts reducing the share of dollars as reserves (only 37% of new reserves versus 63% a decade ago)

* Gold making repeated new highs

* China moving to shorter term maturity Treasuries

* The near-vertical rise in the monetary base (per the St. Louis Fed)

* The rise in oil prices

In sum, there is A LOT of paper being issued by the Fed, and individuals and foreign central banks and governments are willingly exchanging their dollars for non-dollar assets. At some point, MANY individuals and central banks/governments will decide that the dollar is too troubled, and a less-than-orderly decline will ensue.

Obama's Fiscal Stimulus Has Saved Jobs

The author continues his shilling for the Obama Administration. Indeed, he once again shows his Keynesian stripes by arguing for the efficacy of stimulus without noting the negative consequences (i.e. higher debt, dollar debasement).

All government stimuli cause one thing: market distortion. The following is a partial list of the stimuli that government provided for real estate that, in part, caused the real estate bubble:

* the Community Reinvestment Act
* exclusion of capital gain taxes on residential real estate
* deductibility of mortgage interest
* post-dot-com interest rate drops by the Fed
* allowance for rental real estate losses to offset earned income
* jawboning about an "ownership society" by Pres. Bush

In short, government action--even if well-intentioned--has unintended consequences that government authors cannot begin to comprehend. Indeed, the unintended consequences are often worse than the "problem" that they are attempting to cure.

How Nations Spent Their Stimulus Money

The bars should also show how much of the "stimulus" funds had to be borrowed. In the case of the US, it would show that percentage to be 100%. Three-quarters of a trillion dollars that we will be paying interest on for the forseeable future. Keynesian "stimulus" doesn't work; during a depression, debt must be liquidated before an economy can rebuild. However, at least nations like China did not have to borrow to "stimulate" their economies.

What if U.S. Social Fabric Tears?

On Nov 09 02:48 PM TxTim wrote:

> Some people write about the "unravelling of America" because deep
> down that's what they wish for.

Well, of course. That IS what I wish for. I wish for a restoration of the time (pre-1865) when Americans were first and foremost citizens of their states, not of a nation with a strong central government. I wish for an America where the central government is weak because that's what the Framers of our Constitution wanted. They knew that a group of powerful men on the Potomac couldn't successfully dictate policy--economic or social--to the entire country.

In economics there's a principle of dis-economies of scale: when an organization gets too big, it actually destroys wealth through waste. That is what we have with the federal government: in its attempts to keep us safe, provide for the poor, satisfy workers, develop supposedly future technologies, and keep the environment clean, it actually does a pretty inefficient job.

The USPS is a perfect example. It has a monopoly on first class letter delivery yet last year lost $7 billion, and 2008 wasn't the only year that it's operated at a deficit. If the USPS was a private corporation--or even didn't have a de jure monopoly--it would be out of business by now.

I do not contend that state, local or municipal government is the paragon of efficiency. What I have seen, however, is that those governments are better able to adapt to on-the-ground situations than is the federal government.

Silver Prices Are About to Fall

"Sovereign demand can potentially support gold against both artificial price suppression, and its inverse relationship to the dollar. There is no sovereign demand for silver."

Let us assume you are correct. Currently, the silver-gold ratio is at 62-1. The most recent peak was about 80-1 in Feb-03. If gold remains at about $1100 and the ratio revisits 80-1, that calls for a $13.75/oz. silver price. An $11/oz. price (with gold at $1100) would mean a 100-1 ratio; not impossible, but highly unlikely.

Now, if gold were to retrace some gains, obviously silver could fall as well. However, with the Indian and Chinese "puts" on gold now extant, any correction in the gold price would seem to be short-lived.

Silver Prices Are About to Fall

On Nov 05 02:31 PM Russell Upsomgrubb wrote:

> Warren Buffett is perhaps the most successful investor of all time
> and just bough Burlington Northern, making a huge bet going forward
> on the growth of the American economy over the next 5-10 years.

The BN purchase can just as easily be viewed as a bet that commodities (i.e. coal, grain) will be transported by rail to our west coast ports en route to China and India. Moreover, it can be viewed as shorting the U.S dollar inasmuch as BH will be using cash (and borrowing some as well) to purchase a hard asset (the railroad).

> Mark Faber, a doomsayer, claims the value of the
> dollar will eventually fall to zero. Gee, I'll bet he owns a lot
> of gold.

Dr. Faber is correct: all fiat currencies eventually fall to zero. Gold, on the other hand, is money and has been so for 5,000 years. I disagree with Dr. Faber that we will experience hyperinflation in the next few years, but I do believe that we will experience high inflation here in America given the Fed's relentless money printing.

More Fodder for Inflation / Deflation Debate: Higher Gasoline Prices

On Nov 05 06:37 PM John Evans wrote:

> The price of gas is rising only and solely due to collusion. The
> world is and has been producing more oil than we need for years.
> How can the price rise we seen be predicated on anything but collusion?

It IS collusion but not the type you believe it to be: it's collusion among the members of the Federal Reserve Board to continue driving the dollar lower. As they print more dollars, it takes a greater quantity of those dollars to buy a given amount of oil.

Berkshire + Burlington = Hypocrisy, Expediency and Full Dose of Ego?

On Nov 05 12:33 PM SamiC wrote:

"Financial weapons of mass destruction for the idiots at AIG, Bear, Lehman, not for people like him who are good at calculating odds and spotting underpricing, and never take positions with unlimited downside risk."

Buffett didn't qualify that derivatives were WMDs of financial mass destruction only for "idiots." He made a general statement. Then, he proceeded to engage in derivative trades. Again, I do not want to invest in a company whose chairman blatantly says one thing and does the opposite. Perhaps you are correct that Buffett isn't as two-faced as I perceive him, perhaps not. Either way, I view the principle-agent risk to be too great.

Berkshire + Burlington = Hypocrisy, Expediency and Full Dose of Ego?

Perhaps he has great insights into investing, but because Warren Buffett is a hypocrite of the greatest magnitude I simply would not trust him with my money. Behold:

* Buffett criticized Pres. Bush's tax cuts and said that Americans should pay more taxes yet had BH bid for Fannie and Freddie's $3 billion in tax credits. If we Americans should pay more taxes, Warren, doesn't that mean BH shareholders as well?

* Buffett begged the US Senate in '03 to NOT eliminate the estate tax. What went unsaid was that BH has an insurance business that BENEFITS from the estate tax by selling a kind of insurance policy that makes sure that heirs have enough money available to pay the estate tax without having to liquidate assets.

* Buffett famously called derivatives "financial weapons of mass destruction" yet BH sold $2.5 billion in credit-default swaps in '08.

Such a duplicitous person may, of course, make money for those who he invests for. It's the agency risk--trusting a person who is two-faced--that would keep me up at night.

U.S. in Worse Shape than Japan Was

Good points. Japan's GDP is not as consumer-dependent as the US's, and the Japanese people (until recently) were prodigious savers.

What Japan WILL face--which is infinitely worse than our condition--is a demographic winter. One in 5 Japanese citizens is over 65. The Japanese birthrate is only about 1.25 children per woman. In sum, the Japanese population pyramid will be helplessly inverted, with more retirees supported by fewer and fewer workers.

What Is Decline in Nonresidential Construction Telling Us?

The author is correct that nonres construction has fallen. With the overleveraged consumer, government-created regime uncertainty, and inflationary-inducing fiscal and monetary policies, there's very little reason to start or expand a business.

The question I have is this: what will happen with res construction going forward. Again, given the debt that consumers have, I cannot imagine a return to the housing boom era. Indeed, if interest rates head higher, as I believe they must given the monetary policy pursued by the Fed, res construction will eventually fall as well.

Daimler (DAI) October U.S. sales: +9.4% to 18,854 vehicles. Mercedes-Benz +21.3% to 18,193, and Smart -70.4% to 661. (PR)

On Nov 03 01:33 PM Niner wrote:

It ain't pretty yet; but, it is getting better. I
> not telling you it is going to be as bed of roses either. We are
> all in for some tough times still. But, the economy is getting better.
> We will survive!

No, it only APPEARS to be getting better. All the money printing can create the APPEARANCE of growth as the new money chases things. All the fiscal stimulus can create the APPEARANCE of growth as the taxpayer shoulders even more debt so that a few people can purchase new cars or homes.

All the money printing is also causing our currency to crater, thereby robbing the purchasing power of savers.