The Necessary Pain of Cutting Deficit Spending

04/06/11 St. Louis, Missouri – Well… How does a euro (EUR) – that was supposed to be collapsed by now – at 1.43, look? And what do we have here? Political will to do something about the deficit? Well… Maybe… because…

Under the category of “wouldn’t it be nice if we could wake up, in the morning when the day is new, and never have to worry about the deficit, only because it would ruin the whole day through”…
House Republicans unveiled a plan that would cut government spending by $6.2 trillion over 10 years, lower the corporate tax rate to 25%, and dramatically revamp Medicare.
Now… No one, including myself, ever said that making deficit spending cuts was going to be easy, harmless or carefree… They are going to hurt… But, we need to hurt some… Look, once I was diagnosed with cancer, I knew there would be lots of pain, but in the end, it would all be better… Same thing, folks… Same thing… It may not be better for you, but it will better for your kids and grandkids for sure, if we begin to cut deficit spending in a meaningful way!
But… I’m a realist… And I know in my heart of heart, that the plan has a snowball’s chance in hell of passing as is… But if you call your representative and say that you want to see the deficit cut in a meaningful way, you just never know!
OK… So, I started off with a note about the euro gaining to 1.43… Yesterday morning, when it was getting sold, because of the choice of words by Big Ben Bernanke, I told you that it was merely a tempest in a teapot, and that soon the markets would realize that Big Ben wasn’t pulling back the curtain and letting the markets see a rate hike that was on the way… And lo and behold, there he was, bright and early yesterday morning, playing down his words… And as soon as the markets heard that, the rally was on for the currencies once again!
As we draw closer to what might be a HUGE move by the European Central Bank (ECB) tomorrow (rate hike), traders are pushing the envelope on the euro, taking bets that the ECB will indeed hike rates tomorrow, thus widening the rate differential to not only the dollar, but the yen (JPY), and Swiss franc (CHF)! Does a rate hike clear the way for the euro? No… The wolves are always at the euro’s door, folks… The Portugals, Irelands, Italys, Greeces… Every time the euro begins to move forward, one of these deficit-laden countries gets back in the news…
The price of oil moved back above $108 overnight, and has pushed the Canadian dollar/loonie (CAD) to the $1.04 handle, and the Norwegian krone (NOK) to below the 5.44 handle… And the Russian ruble (RUB) just keeps kicking tail and taking names later… I even saw that the Russian government had announced that they would take some oil revenues and reduce their deficit… Now, that’s putting money to good use! Not that I’m advocating going out and backing the truck up to the Russian ruble… But, with oil prices surging, even the ruble gets some love…
The Aussie dollar (AUD) shook off the pain of a wider trade deficit, (it was small), and is back on the rally tracks this morning, as it closes in on $1.04… Do you think that yield differentials don’t mean a hill of beans? Well, check this out kids! Australia auctioned 7-year 5.5% yielding bonds yesterday… The auction was oversubscribed by 5.4 times! And like I’ve a few times now… IF the ECB does hike rates tomorrow, it benefits the countries like Australia that already enjoy rate differentials! Especially if the country that has the rate differential doesn’t come with baggage like Greece!
The Swiss franc continues to get love from all corners of the world. The franc is trading above the $1.09 handle this morning… Geopolitical problems, US and Japan deficit problems, and anything else you can throw in the wheelbarrow of reasons the franc continues to gain value… As long as these problems exist, there’s nothing that the Swiss government or central bank can do to stem the franc’s rise in value…
But the BIG winners yesterday were gold and silver! At one point yesterday, I noticed that gold was up nearly $20 on the day… And silver was trading over $39!!!!! I’ve figured out something that I’ve thought long and hard about … And that is, one would think that rising interest rates (like we might see in the Eurozone tomorrow) would be gold and silver’s kryptonite… But NOOOOOOOOOOO! Here’s the skinny… Rising interest rates are thought to be bad for global growth, and investors turn to the safety of gold and silver!
And did you hear the news about how the US mint is having difficulty finding silver to mint to Eagle coins? I can’t begin to smile like a Cheshire Cat quick enough, folks… Silver is up $14 since I did the story in NewsMax, when I said that I thought that silver had a chance of rising to $50… The way Silver has gained so far this year, $50 looks very conservative!
Getting back to the ECB and the chance of a rate hike tomorrow… Here’s a piece of data that just might sway them toward a rate hike… German Factory Orders for Feb rose 2.4%, which was much stronger than the forecast, which called for a rise of 0.5%! And to top it off, January’s prior print of 2.9% was revised upward to 3.1%! I would have to say that tomorrow, before the ECB meets, Industrial Production for February will print, and with this strong of a Factory Orders print, one would have to think that Industrial Production will also surprise on the upside… Having that news right before the ECB votes just might be enough to push the ECB ministers to hike rates…
Yesterday, I told you about the fresher-than-fresh news that China had announced yet another rate hike. Now, as I look at it, this is the fourth rate hike by China, so by now, the economy should be moderating… And if it isn’t, it will… But, speculators that drive the forward points on renminbi (CNY) (remember forward points are what you pay for buying renminbi in the forward market, in other words, any day past spot, which is two days), are continuing to push the envelope on renminbi forward points, which means they aren’t buying the “rate hikes will moderate growth” rhetoric… I don’t know what they “know” or what they are smoking, but speculators just aren’t buying the moderation story for China’s economy… And when they drive the forward points higher, it just makes it that more expensive to buy renminbi!
The New Zealand dollar/kiwi (NZD), had a strong performance last night. And even though the Reserve Bank of New Zealand (RBNZ) had cut rates last month to assist the earthquake ravaged economy, interest rates are still higher in New Zealand than they are in the US and Japan… And like I said above, and several times lately… Interest rate differentials are the driver right now… It’s been some time since interest rate differentials played the leading man, in currency valuations, but the old man is making a comeback… Come on back old man, I’ve missed you!
And the selling of Japanese yen continues, folks… The yen has lost 3.3% in the past month, and I just don’t see this being a short-term move… So, in other words, I don’t like yen… Yes, Mother Nature dealt Japan a blow. Unfortunately for the yen. You see, Japan is going to have to keep rates at zero, inject more deficit spending, and none of that is going to help the yen…
Then there was this… Here’s a report that can be viewed a couple of different ways… The report said that personal income in 2010 rose…
Hmmm… Well, with 23% unemployment, one has to wonder how that happens, right? Well, you can always count on me to explain things so that the masses aren’t confused! Basically, those of us who had jobs saw our income rise… (Maybe you did, but I sure didn’t! UGH!) So, on paper, incomes rose… But in reality, they probably rose for the most part due to longer hours worked by those remaining in the work force! So, before your local politician begins to pound his chest and say that his constituents saw their personal income rise in 2010, you might want to elbow him and point out the facts…
Chuck Butler
for The Daily Reckoning
Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter, which is reposted here at The Daily Reckoning. With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News and World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune. Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.
For additional information visit EverBank
View articles by Chuck Butler The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

Sign Up for The Daily Reckoning e-letter and receive a copy of our newest report How to Survive the Fall of Social Security… at NO CHARGE.

We Will Not Share Your Email.
We Value Your Privacy.

View the original article here

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.

Why Consumer Spending is Down Despite Economic Upticks

By Eric Fry

03/31/11 Laguna Beach, California – Today’s issue of The Daily Reckoning finds a resurgent US stock market. Despite dipping – briefly – into the red for the year-to-date a couple weeks ago, the S&P 500 is closing out the first quarter with a gain of 6%! Despite the noteworthy stresses around the globe – and the considerable economic uncertainties here at home – the S&P sits less than one percent below its peak levels of the last two-and-a-half years.

So the stock market’s doing pretty darn well. The US consumer…not so much. The chart below, for example, looks nothing like the ascendant price chart of the S&P 500 Index.

Consumer spending, apart from spending on essentials like food and gasoline, is sluggish at best. A chart of disposable income, after taxes and inflation, would look equally dismal. In other words, despite some measurable upticks in economic activity, these upticks are failing to bear much fruit down at the level where real people earn and spend money. Inflation is chewing up almost all the statistical economic gains of the last several months.

Even though incomes are rising somewhat, inflation is rising just as quickly…which means that net wealth is going nowhere. Perhaps that’s why companies like Marriott International are posting disappointing earnings results. Earlier this week, Marriott disclosed that its “revenue per available room” (Revpar) will be lower than originally forecast, due to weakness in North American demand. International revenue remains “robust” however, according to Marriott.

Perhaps this “weakness in North America” is a one-off or perhaps it is a sign of things to come. Whatever the case, the contrast between the sluggish growth rates of the world’s Developed Markets and the robust growth rates of the world’s Emerging Markets is very real…and this contrast is becoming a staple of the global investment environment.

Eric Fry
for The Daily Reckoning

Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research —  institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

View articles by Eric Fry

The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

Sign Up for The Daily Reckoning e-letter and receive a copy of our newest report How to Survive the Fall of Social Security… at NO CHARGE.

We Will Not Share Your Email.
We Value Your Privacy.

View the original article here

Why Consumer Spending is Down Despite Economic Upticks

By Eric Fry

03/31/11 Laguna Beach, California – Today’s issue of The Daily Reckoning finds a resurgent US stock market. Despite dipping – briefly – into the red for the year-to-date a couple weeks ago, the S&P 500 is closing out the first quarter with a gain of 6%! Despite the noteworthy stresses around the globe – and the considerable economic uncertainties here at home – the S&P sits less than one percent below its peak levels of the last two-and-a-half years.

So the stock market’s doing pretty darn well. The US consumer…not so much. The chart below, for example, looks nothing like the ascendant price chart of the S&P 500 Index.

Consumer spending, apart from spending on essentials like food and gasoline, is sluggish at best. A chart of disposable income, after taxes and inflation, would look equally dismal. In other words, despite some measurable upticks in economic activity, these upticks are failing to bear much fruit down at the level where real people earn and spend money. Inflation is chewing up almost all the statistical economic gains of the last several months.

Even though incomes are rising somewhat, inflation is rising just as quickly…which means that net wealth is going nowhere. Perhaps that’s why companies like Marriott International are posting disappointing earnings results. Earlier this week, Marriott disclosed that its “revenue per available room” (Revpar) will be lower than originally forecast, due to weakness in North American demand. International revenue remains “robust” however, according to Marriott.

Perhaps this “weakness in North America” is a one-off or perhaps it is a sign of things to come. Whatever the case, the contrast between the sluggish growth rates of the world’s Developed Markets and the robust growth rates of the world’s Emerging Markets is very real…and this contrast is becoming a staple of the global investment environment.

Eric Fry
for The Daily Reckoning

Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research —  institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

View articles by Eric Fry

The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

Sign Up for The Daily Reckoning e-letter and receive a copy of our newest report How to Survive the Fall of Social Security… at NO CHARGE.

We Will Not Share Your Email.
We Value Your Privacy.

View the original article here

Want to Create Jobs? Cut Government Spending

03/28/11 Sometimes, the methods to produce results are counter-intuitive. For example, skillful pruning of grape vines is essential to the production of vineyards, and cutting back a rose bush promotes its growth. Based on experience, we can learn where cutting can lead to growth.

The following statement is at first just as counter-intuitive: A reduction in government spending will not slow job growth. In fact, the experience of the last two years provides compelling evidence that a reduction in government spending will lead to increased employment and output in the US economy.

Since 2008, annual federal spending less net interest has increased by $530 billion or 19%. Yet, even with February’s welcome gain of 192,000 jobs, there are 2.3 million fewer people employed today than in February 2009, the month before the Obama Administration turned on the spending spigots with the passage of its economic recovery plan. Over those 24 months, private sector employment has declined by 2.0 million. In spite of the rapid expansion of the Federal bureaucracy, government sector employment has fallen by 360,000.

Moreover, a comparison of these results to the recovery from the economic crisis of the early 1980s casts doubt on the Obama Administration’s claim that without the unprecedented increase in government spending, the recession would have been even worse and the recovery slower. In December 1984, two years after the Reagan tax rate reductions began to take effect, the equivalent of 11 million more Americans were employed, including 10.6 million in the private sector, and 460,000 in the government sector. Bottom line, two years of record spending and deficits have produced a 13 million jobs gap when compared to the recovery from the economic crisis of the early 1980s.

Why the abysmal results of the past two years?

First and foremost, it is due to a utopian view of government largesse, which considers only the benefits, and none of the costs. Such a view ignores the underlying human phenomenon that produces economic activity. A job is produced when individuals enter into exchanges that lead to mutual gains. As a consequence, they work for each other. Each individual improves his or her own economic condition; incomes rise; new opportunities for mutually advantageous exchanges are created; the number of jobs expands.

This basic economic proposition cannot be replicated by one-sided exchanges in which the government takes money from some, and gives it to others.

Advocates of government spending tout the jobs created as a direct result of the expenditures, but ignore the jobs that are lost as resources are taken from the rest of the economy, either through taxes now, or through borrowing now and higher taxes in the future. Every dollar the government spends has to come from those who would otherwise have spent or invested their money in the private sector. To the extent the money is borrowed from non-US residents, the money can no longer be spent on exports or foreign investments in the US private sector. In either case, the net cash flow and net increase in demand generated by government spending is zero.

However, the effects do not stop there. Since government spending is not based on mutually beneficial exchanges, it often is wasteful. By displacing the opportunities for wealth enhancing voluntary exchanges, wasteful spending further reduces employment and the overall wealth and income of the American people.

For example, labeling government spending as “investments” in so-called “green-jobs” is just political spin to cover money-losing investments by elite government bureaucrats with none of their own money on the line who, nonetheless, believe they have an ability to pick winners. But, squandering money on expensive energy gambits reduces our wealth, and therefore shrinks the economy and the number of jobs.

The path to more robust growth is first to stop doing what demonstrably has not worked for the past two years. As I wrote in “Toward a New Economic Consensus,” studies by professors from Harvard to the London School of Economics are providing a growing body of empirical evidence that shows the combination of spending restraint and reductions in tax rates are the best ways to stimulate economic growth and employment.

The Republican proposal to reduce 2011 spending by $61 billion is only a modest start, but at least headed in the correct direction. Such a “cut” would merely slow the estimated increase in Federal spending for 2011 to $300 billion, and represents less than 2 cents of every dollar of the $3.8 trillion the Federal government will spend this year. Given the failure of increased deficit spending to create jobs, the claim of several pundits that such a modest reduction in government spending would reduce employment by 700,000 jobs or more is simply preposterous.

A second important step would be to prohibit any new regulations, and to get rid of as many useless or counterproductive government mandates as possible. Regulations prevent economic activity that otherwise would take place. And although many are aimed at helping the middle-class and those with lower incomes, new regulations on credit and debit cards are driving up the cost of consumer credit and leading to new fees on checking accounts with less than significant balances.

The combination of lower government spending and fewer regulatory burdens would increase the space in which the American people could discover opportunities to create mutually beneficial exchanges. At the end of the day, those are the basis of economic activity, job creation, rising incomes, and an expanding tax base essential to restoring balance to federal, state and local budgets.

Regards,

Charles Kadlec,
for The Daily Reckoning

The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

Sign Up for The Daily Reckoning e-letter and receive a copy of our newest report How to Survive the Fall of Social Security… at NO CHARGE.

We Will Not Share Your Email.
We Value Your Privacy.

View the original article here

Spending chief in charge of protecting the public purse claims £4,000 for one-minute walk

By Rebecca Evans

The man whose job is to ‘protect the public purse’ claims a travel allowance of £4,000 a year for a daily one-minute walk from his hotel to office.

Eugene Sullivan, the £180,000-a-year chief executive of the Audit Commission, also spends £18,000 of taxpayers’ money each year staying in the luxury hotel.

The 62-year-old receives £5,000 a year for train fares, taxis and car mileage, on top of his £4,070 travel allowance.

Each week, Mr Sullivan spends three nights at the £160-a-night Westminster Mint Hotel that is only 164 yards from his office at Millbank Tower.

At weekends, he travels back to his £500,000 family home in Ilkley, West Yorkshire.  Mr Sullivan, who was promoted internally from the post of managing director, has basic pay of £165,004.  This is topped up by an £18,000 ‘additional responsibility allowance’ and £43,704 in pension contributions.  His total package comes to more than £250,000.

[more...]

Bill Bard says:

Greedy rip off bastards.  We know there are many more doing the same thing.

View the original article here