I hope you read Mary O’Grady’s great piece in today’s Wall Street Journal Argentina Seizes the Central Bank. When you read it, think of the parallels with recent events in the U.S. I bet you feel a chill up your spine just like I did.

Argentina’s nut-job President, Cristina Kirchner (wife of former president Nestor Kirchner) decided she didn’t want to use the tax money in the treasury to pay foreign debts but would simply seize the reserves of the banking system for the purpose. Martin Redrado, President of the central bank, refused to hand over the keys so she fired him last week. In his place, she appointed Mercedes Marco, a young Yale-trained economist, who thinks the idea that central banks should be independent of politicians is very old-fashioned. Goodbye bank reserves; hello inflation.

This is the same Presidential couple who confiscated private pensions in 2008, fired the head of the government statistics office because he refused to cook the books on the inflation numbers and passed a law punishing media companies for publishing stories critical of the government.

The Kirchner government has tons of money to buy votes. They tried to tax the rich to pay for them but aren’t collecting much revenue. Inflation is already 17%. International creditors want to be paid. The only way out is to seize control of the central bank and print the money in bales. That’s what this story is about.

When your currency is fixed to nothing but the good behavior of the central bank it is crucial that the bank have at least a semblance of protection from political pressure. Argentina now has none. Unfortunately, here in the U.S., the Fed has lost some of its hard-won reputation for independence over the past few years.

Wait a minute. Huge increase in government spending. Fast-rising debt. Tax the rich. Appoint political advisors to run the central bank. That’s us! Last week Moody’s warned they would have to review the U.S. credit rating in light of the information in the new budget.

There goes that chill up my spine again.


I just got a mass email from the Teamsters union urging everybody to vote for the jobs bill that will be voted on this week.

That’s sufficient reason to vote against it. I have seen the legislation these guys have supported before (Obamacare, where they got a special exemption from having their insurance plan taxed like the rest of us.)

We don’t need to pour any more money down the political rathole they call “stimulus.” Congress already has $1 trillion per year deficits over the next decade. We need to get spending back under control before the U.S. gets a banana republic credit rating.


I don’t often write about government policies that I like. It’s not that I’m crabby; it’s because they are so scarce. But today I will make an exception. Today, the Fed and the Treasury, along with several other financial regulators, correctly identified the cause of the small business lending problem–themselves–and took steps to fix it. It’s about time.

Today the financial regulators passed the grown man test by “manning up” to what we have known all along; banks have been effectively redlining loans to small businesses due to fears of regulatory reprisal. You can read the statement by clicking here.

They have made a start at addressing the problem by instructing banks to look at the health of the borrower, rather than computer models, when assessing loans. And they have gone on record that banks who do their homework and make loans to healthy small businesses will not be subject to criticism from the regulators.

The purpose of the directive is “to ensure that supervisory policies and actions do not inadvertently curtail the availability of credit to sound small business borrowers.”

minus $300B in loans last 12 months

Banks have loaned U.S. small businesses minus $300B over the past 12 months

As you can see from the chart above showing bank lending to business borrowers. it would have been helpful if they had started ensuring that this wouldn’t happen 15 months ago when banks slammed their doors shut for business borrowers. But let’s not quibble. I’m happy they are taking action now.

Longtime readers will know that I believe non-price credit rationing to be the principal trigger for downturns in employment. It happens when regulators get over-zealous and lay their heavy hands on lending standards. I called it a credit crunch in a series of articles I wrote for the Wall Street Journal in the early 1990’s and again in 2001, which prompted a vicious response from the then Comptroller of the Currency, who denied it ever happens. The fact is, business customers don’t decide how much money to borrow based upon the interest rate; it’s the availability of credit that matters.

This time around, non-price credit rationing has fallen especially hard on small businesses–the source of almost all new jobs. In the dotcom bust, only 15% of the drop in loans hit small businesses. This time it is almost half.

The facts are simple. Employment can’t increase until small businesses can borrow the money to meet payroll. Today’s step just might be a nudge to make that happen.

Bravo to the regulators for taking steps to fix the problem they created in the first place. Now it’s time for banks, large and small, to respond to this statement by giving small business owners the loans they need to do what they always do best–make more jobs for people who want to work.


This week is jobs week. Not Steve Jobs–last week was his, with blowout Apple earnings and the announcement of the slick new iPad. Real jobs–remember those? Where people actually get to go to work and earn a paycheck.

This week’s data include the ADP report, today’s initial unemployment claims number and Friday’s payroll employment report along with several other reports (ISM manufacturing, ISM non-manufacturing, and factory orders) that give further color on the subject. Add them all together and what do you get? Blah! Positive but crappy growth–not enough to meaningfully increase employment. That will still have to wait for the banks to start lending to small businesses. And no, they haven’t started yet.

The ADP National Employment report, released yesterday, estimates that January nonfarm private employment fell by 22K jobs, the smallest drop since January, 2008. 19K of the 22K lost jobs were at large firms; small ones did better (-3K). Goods producers lost jobs (-60K); service companies added jobs (+38K). Manufacturing lost 25K jobs, the smallest in two years. Take this with a grain of salt, however. ADP reports have overstated the Labor Department’s estimate of private payroll job losses by 500K in last six months of 2009.

Friday’s employment report is likely to show no loss, or even a small gain of 10K jobs or so. That’s better than getting poked in the eye with a sharp stick but don’t expect any parades. That’s because on Friday the Labor Department is also going to release one of their strange revisions for the year from April 2008 to March 2009. It’s going to be a whopper. They will report that March 2009 employment was actually 824K lower than they had previously reported.

The culprit is the faulty business birth/death model the Labor Dept. uses to correct for a bias in their data collection method. They collect establishment employment data by calling a list of known businesses. That list shrinks over time by attrition, however, as some companies die from natural causes. Others came into business too, of course, but they didn’t get the phone call because the Labor Dept. doesn’t know who they are, which would tend to make the job numbers shrink even if employment didn’t. So they “correct” the data by assuming that, more or less, the births offset the deaths causing them to add a fudge factor (+55K jobs/month from April 2008 to March 2009) to the data to make up for the missing new company jobs.

Unfortunately, it doesn’t always go that way. Shockingly, more companies die during recessions that are born (duh). So they are going to take all those fudge factors out in tomorrow’s number. Hence, the -824K revision. But wait, as they say on the infomercials, there’s more. This revision only takes us up to last March. The Labor Dept. gurus added another +900K in fudge factors in the months since then.

Confused yet? (I certainly am.) Bloomberg has a very elegant and easy to understand graphical explanation of this on their website. The real issue, of course, is how many people will understand all this when the number is released at 8:30AM EST tomorrow morning. My guess is not all of them will, which is not good news for tomorrow’s stock prices.

Take all this together and you get a picture of an economy that is growing, but not by enough to light the job market on fire. As this week’s ISM Manufacturing and ISM Non-Manfacturing reports show, the strong recovery in manufacturing has not yet shown up in the service sector. I don’t think that can happen until the banks are open for business again later this year.


Interesting article today. More than 40 former lobbyists work in senior positions in the Obama administration, including three Cabinet secretaries and the CIA director. Yet in his State of the Union address, Obama claimed, “We’ve excluded lobbyists from policymaking jobs.”

You can see a list of the hires and who they lobbied for by clicking on this link.

The reporter asked the White House if he chose his words poorly, but the media affairs office defended the president’s statement: “As the President said,” a spokeswoman wrote in an e-mail, “we have turned away lobbyists for many, many positions.”

So, the country may have heard, “we haven’t hired lobbyists to policymaking jobs,” but the White House tells us Obama meant, “we only hired some of the lobbyists who applied for policymaking jobs.” In other words, they’ve excluded some lobbyists.

Almost as good as Bill Clinton’s famous “I did not have sex with that woman” defense.

This President certainly gives good speech, as we saw last week. I wish he also gave good policy.


Cool chart from my friend Andy Roth at Sinology

Contrary to Belief, China's GDP is Mostly Home-Grown

Contrary to Popular Belief, China's GDP is Mostly Home-Grown

The National Bureau of Statistics has just released a detailed breakdown of China’s 2009 GDP growth.

Overall GDP rose 8.7%, with 92.3% of growth (8 ppts) from gross capital formation; 52.5% of growth (4.6 ppts) from final consumption; and a negative 44.8% (-3.9 ppts) contribution from net exports.

What does this mean? 1) China’s stimulus program last year–mainly spent on infrastructure and other investment projects–was much more effective than ours, which was mainly made up of handouts. 2) China does not need the U.S. to grow as much as many people think. Don’t expect their leaders to bend over when our politicians fly there to tell them how to run their economy. 3) Long-term, less interest in buying U.S. debt, pressure on both U.S. interest rates and the dollar.


Take a look at this chart from our friends at Cato showing federal government spending as a share of GDP. It breaks out defense (drops by half) and non-defense (doubles) spending trends.

You can reach your own conclusions. Mine are simple. Spending is totally out of control. And the projected numbers we saw last week in Obama’s proposed budget are mind-numbing.


We can’t afford this!

The Obama 2011 budget proposal was released to the press at 9AM today and to the public at 10AM Available at GPO website at http://www.gpo.gov/fdsys/search/home.action

-2450 pages including appendices.
-weighs 10 pounds for all four books
-2011 deficit is $1.6 trillion, biggest in history
-That’s $160 billion/pound, or $10 billion/ounce.
-That’s $653 million/page.

Spending $3.8 billion.
-That’s $380 billion/pound; or $32 billion/ounce.
-That’s $1.5 billion/page.


(2/1/10) U.S. stock prices have dropped like a stone over the past two weeks. Total market capitalization of U.S. stocks was $13.1 trillion at yesterday’s (1/31) close, down $885 billion from its $14.02 trillion peak on 1/19.

Some analysts think it was China’s monetary tightening that caused the drop in stock prices. Some think it was Obama’s announcements of new taxes and new regulations on banks. Some think that investors have simply lost their nerve.

It was Obama’s war on capital that caused the meltdown. The numbers below show total U.S. market capitalization–the total value of all stocks trading in all markets–at several key dates over the past 2 weeks.

U.S. Market Cap

On 1/11/10, before any of these things happened, the U.S. markets were worth $14.02 trillion, which we will use as a benchmark for our analysis.

On 1/12/10 Chinese officials announced they would tighten monetary policy. There were sharp changes in individual stock prices but on 1/13/10, two days later, U.S. market cap was essentially the same at $14.02 trillion. No big deal.

On 11/13/10, the evening before Obama announced the punitive tax on big banks–$117 billion collected over 12 years. On 1/19/10, six days later, U.S. market cap was essentially unchanged, at $14.02 trillion. This makes sense. An ostensibly one-time tax of $117 billion, collected over 12 years, is only worth $66 billion in today’s dollars at a 10% discount rate–a rounding error in market cap numbers.

Obama Bank Tax Estimates
Obama Bank Tax
On 1/21/10, Obama dropped the bomb. He essentially announced the breakup of the banking industry, imposing limits on the allowable size and business activities of a bank, measures that would force banks to divest many of their most profitable operations. U.S. market cap fell by $740 billion (6.3%) from $13.88 trillion to $13.14 at yesterday’s close. Altogether, market cap fell by $880 billion since Obama started meddling with the banking system. This $880 billion was sucked directly out of the value of U.S. pension assets and household net worth. An anti-stimulus plan if I ever saw one.

Way to go, “O”.

It is obvious why Obama is attacking the capital markets. Republican wins in Virginia, New Jersey and Massachusetts driven by public rejection of his health care plan have undermined public support and put the mid-term elections in jeopardy. The public is angry. Obama would like to redirect that anger on someone else. Hence the war on banks.

We can’t afford Obama’s war on capital. The cost of punitive policies, in lost net worth, slower growth and fewer jobs, will fall directly on the people he claims to want to defend–the middle class. Unfortunately, this may be just the beginning of the Obama Inquisition. Stay clear of the stock markets until it is over.


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