Federal Reservations

As the Republican presidential hopefuls slug it out debate after debate, and sound bite after sound bite, and President Obama endlessly drones on from the sidelines with his mantra that the wealthy must pay their fair share (according to CBO and IRS data, the top 10% of households pay more than 70% of all federal income taxes and nearly 50% pay none) we are reminded of Sir Winston Churchill’s assessment of Democracy.  “It is,” he said, “the worst system there is except for all the others that have been tried.”

We believe the 2012 presidential election season, which really began last summer, is, as Sir Winston opined, the worst, but, we would hasten to add, also the best given the clear choices in direction the President on the left and the candidates on the right provide.  These are not the run-of-the-mill choices with which Americans are always presented at election time.  We are faced with truly transformative choices; choices that only a vibrant democracy could possibly provide.

President Obama represents a textbook example of one side of the Liberal/ Conservative divide. That is, collective equality versus individual liberty.  Domestically, President Obama is a strong proponent of a centrally managed, distributive economy and a muscular government forcefully asserting its regulatory authority over a wide swath of American business activity and personal life, greatly expanding its entitlement agenda and aggressively taxing (1) earned income (middle and upper), (2) capital and (3) returns on investment (dividends).  Perhaps, that’s the America to which a majority of Americans aspire.  We don’t think so.

As the nation watches and listens to the spectacle, which constitutes the race for the Republican nomination many spectators, especially among the Democratic left, are, we believe, misreading the edginess and the stridency of the on-going Republican free-for-all as a reflection of uniquely Republican temperament.  We beg to differ.

Recent polling data indicates that 87% of all Americans believe we will fall into another recession within the next two years, and nearly 75% of all Americans believe we are headed in the wrong direction.  Only six percent of the people approve of the job their national legislature is doing. These polls tell us that the electorate has a collective bad feeling about the economic outlook for the country, and that they feel that neither the Administration nor our Congress is taking us in the right direction.  Even more disturbing, a recent Gallup Poll finds that 50% of Americans believe that government has gotten too big and now represents an immediate threat to individual liberty. Gallup also finds that Americans, on average, believe that 51 cents of every dollar the government spends is wasted.

While the Republican debates are providing an impressive, indeed an exhaustive, array of positions and opinions that, at first blush, might seem a colossal free-for-all in the marketplace of ideas, Republicans are not the only voters watching and listening.  Independents and, not a few, disappointed Democrats are part of the surprisingly large viewing audiences these debates are attracting.  Some, no doubt, tune in to scoff at the verbal give and take of what is, essentially, political theater. Others representing that strong swath of voters described by the polling data referenced above tune in to ponder the conflicting messages to determine if they find greater comfort or confidence in what they hear from any of the these candidates compared to what they have been hearing and experiencing from Washington.

Among the Republicans, we have an array of candidates each of whom stresses his or her conservative credentials (they want to promote economic growth at home, reduce taxes on all Americans, and support our allies abroad) while also offering interesting and significant variations on the conservative agenda.  Their message is largely informed by the pervasive discomfiture poll after poll has begun to detect within the American body politic.

Mitt Romney is touted as the most electable of the Republican candidates.  Romney is clearly a man of substance (although he could have been sent into the fray from central casting). He has an impressive record of business success as CEO of Bain Capital, and has demonstrated substantial leadership skills.  He was drafted to rescue the failing and scandal-ridden Salt Lake City Olympics and swiftly and successfully turned around the mess the original organizers had left.  He was a successful Republican governor of one of the nation’s most liberal states.  His signature accomplishment, RomneyCare is also his biggest headache (no pun intended). While it can be argued that ObamaCare largely apes RomneyCare, Romney’s retort is that because it made sense for Massachusetts, doesn’t mean it should be imposed nationally.  He is pledged to repeal ObamaCare immediately upon entering the oval office.   The art of compromise was essential if he was to govern the democratically controlled Bay State, and his willingness to compromise and his skill at working a legislature made up largely of the political opposition has become an albatross he must carry as he fights for his party’s nomination.  Correctly or incorrectly, Romney (and Huntsman) are viewed as the most centrist of the Republican candidates, which may be a major plus in the general election, but which is a distinct negative in the fight to become their Party’s standard bearer.

Rick Santorum, whose campaign momentum has soared after fighting from single digits to a virtual draw with Romney in Iowa, has the wind at his back. He has been articulate and unequivocal on a wide range of issues.  He is an orthodox conservative, socially, fiscally (earmarks aside) and politically.  While all of the Republican candidates give the obligatory nod to being pro life, Santorum goes a step further. No exceptions! A zygote resulting from forcible rape must be allowed to develop to term.   It is the rapist who should be punished, he says, not the egg the rapist fertilized. Well, no one can argue over his pro-life bonafidies.

Ron Paul, a libertarian, who most liberals consider the archconservative among the Republican candidates is a crusader for individual liberty, as he believes the founding fathers intended when they crafted our Constitution.  He has, however, articulated a stand on a number of issues that would have made Abbie Hoffman stand up and cheer. Opium, cocaine, heroin, marijuana?  He explains that we got along for over 100 years without federal anti-drug laws, and nothing good has been accomplished since the feds stepped in. The feds should step out, he tells us.  Prostitution?  If it’s okay with the states, well, then, its okay.  Gay marriage? Why is that any of the Feds business? Don’t Ask, Don’t Tell? If a homosexual in the military is doing his or her job and not disrupting others, leave him or her alone. Abortion? Ron Paul strongly opposes abortion, but believes the issue is totally misplaced at the federal level.  He believes it is up to the individual states to allow or to abolish abortion.   He is a hard-money fiscal conservative who believes that paper money isn’t worth more than the paper on which it is printed if it isn’t backed by gold.  The supply of gold is, of course, fixed which places unrealistic limits on economic growth, accumulation of wealth and the funding of emergencies such as war and natural disasters.  Paul espouses not only a less expansive foreign policy, but also a policy tantamount to a retreat from history.

Newt Gingrich, after a somewhat poorly organized and sloppy beginning was catapulted to frontrunner status following a series of very impressive debate appearances. He has pledged to make firing Fed Chairman Ben Bernanke his first order of business upon assuming office, notwithstanding that the President has no authority to fire the Chairman of the Fed.  He is probably the best “idea man” in politics today, but has clearly been hobbled by an excess of overweight baggage.

Rick Perry presents a mixed message.  He has an impressive record as Governor of Texas.  Texas leads the nation in jobs creation, low taxes and strong economic growth.   He has shown a less conservative orthodoxy on immigration, offering in-state tuition to illegal immigrants, a practice frontrunner Romney refers to as providing a magnet that attracts illegal immigration. Perry also issued an executive directive (later withdrawn) making vaccinations for HPV mandatory for girls entering their teenage years.  He is smarter than his debate appearances would suggest, but he suffers from one too many “oops” moments.

Jon Huntsman, who has staked everything on a yet to materialize strong showing in New Hampshire, pledged in a recent debate, not to sign any “silly pledges”, a not-so-veiled, but risky rebuff to the anti-tax Norquist Pledge not to support any measure that raises any taxes.  His credentials as a successful business executive, a popular two-term governor and as a Chinese-speaking diplomat are impressive.  His ability, thus far, to inspire any sustained following or to gain any traction among Republican voters has, however, been less impressive.

Given the proportional allocation of delegates in the GOP nominating process, a decision on who will lead the Party seems a long way off.  That’s both a positive and a negative for the Republicans.  The seemingly endless energy, time and money the candidates are spending to diminish one another does little to advance the conservative cause.  The sooner the candidate cannibalization phase of the Republican selection process ends and the campaigns gets back to attacking the policies that have lavished trillions on programs and initiatives that have produced shamefully few, if any, positive results, the sooner the electorate can focus on the alternatives available to them through the 2012 election.  For the sake of the nation, the sooner, the better.

By Hal Gershowitz and Stephen Porter

Originally from Big Government

Don't hold your breath, says BNY Mellon currency strategist Michael Woolfolk.Yes, the euro EURUSD fell more against its U.S. counterpart, breaching $1.28, after ADP reported a jump in U.S. payrolls in December. Such strength in the dollar following better U.S. data suggested to some that the greenback could break a recent trend of rising when the outlook (including for the U.S.) looks bleak and stocks drop.   Intermarket's Ashraf Laidi, for instance, said U.S. data surprises could disrupt a 4-year trend of the U.S.. dollar falling when U.S. stocks rise.But Woolfolk doubts the greenback will start trading in lockstep with stronger domestic growth until the Federal Reserve changes its interest-rate policy, which has reduced benchmark rates to near 0%.

Originally from MarketWatch

With the S&P 500 heading toward the October lows on the Friday after Thanksgiving, the ever market manipulating central banks just had to do something. The decision was made on Monday, November 28 to provide a stealth bailout for European banks, and indirectly poorly managed sovereigns. Gerald Driscoll, the former Vice President of the Federal Reserve Bank of Dallas, penned an opinion piece which appeared in the Wall Street Journal on December 28. He stated in no uncertain terms:

Originally from The Market Oracle

The stock market is often referred to as a 'forward looking mechanism,' but analysts at Bank of America Merrill Lynch Global Research believe Wall Street is jumping the gun in predicting another round of quantitative easing by the U.S. Federal Reserve."We see the Fed on hold longer than the market anticipates," Priya Misra, BofA Merrill Lynch's head of U.S. rates strategy, told a gathering in New York on Thursday. "Every market signal implies quantitative easing is priced in right now, " said Misra, who adds any such move by the central bank is likely at least six months out.

Originally from MarketWatch

There’s a reason why the Federal Reserve used to obfuscate; it was to keep the markets guessing.

Originally from MarketWatch

About a month ago, I posted in regard to what I called “the euthanasia of the saver.” This comment had to do with the fact that nominal interest rates in the United States for financial investments such as bank certificates of deposit and bank savings accounts—the kinds of investments traditionally employed by retired persons and small savers, who wish to gain income without exposing their funds to great risk of capital loss—now fall considerably below the rate of inflation, and hence the real (or inflation-adjusted) yield on such investments is negative. That is, the nominal payoff is insufficient to offset the loss of purchasing power of the money invested.

About a month before I wrote my commentary, my old friend Richard Rahn had, without my noticing, written on the same issue in a commentary article published in the Washington Times, but he had gone beyond the simple point I made. Rahn notes that besides suffering the loss of wealth occasioned by the negative real yield on such investments, the investor has to pay tax on the nominal yield—truly a case of the government’s adding insult to injury. He notes that given the currently prevailing rates of interest, rate of inflation, and tax rates, a small investor who earns a nominal yield of 1% and pays a 20% marginal tax rate, while the rate of inflation is 3.5 %, actually ends up paying a real tax rate of 370%. For example, an investor buys a $100,000 CD, earns $1,000 in annual interest, pays a tax of $200, and incurs a loss of $3,500 in purchasing power on the invested principal. Total (nominal) income is $1,000; total real tax (nominal tax plus inflation tax) is $3,700.

This expropriation of private wealth is not accidental.

It is the joint product of the Fed’s near-zero interest-rate policies, the Fed’s money supply increases that underlie the current rate of inflation, and the tax rates established by Congress and administered by the IRS, including the taxation of nominal interest earnings even when they amount to real losses of capital, rather than genuine earnings. The government clearly aims to expropriate private wealth on a massive scale. The only plausible alternative interpretation of these policies requires us to believe that the government officials who set these policies are complete idiots about basic economics.

The expropriation amounts to a huge sum. For example, the value of the Non-M1 component of the monetary aggregate M2—consisting of savings and small time deposits, overnight repos at commercial banks, and non-institutional money market accounts—currently amounts to more than $7.5 trillion. If investors lose 2.7% on this investment each year (nominal yield minus the sum of the amount lost via taxation of nominal interest and the amount lost via the inflation tax), the loss amounts to about $204 billion. Because this type of investment is not the whole of the investments subject to this effect, the total amount the government is expropriating comes to a much larger sum.

Because this taking continues year after year, so long as current conditions persist the continuation of this expropriation for another year or two will bring the cumulative amount expropriated in this fashion to more than $1 trillion since the onset of the recession and the Fed’s adoption of the near-zero interest-rate policies, along with its allowance of substantial growth of the money stock and the consequent decrease in the money’s purchasing power. This is a rough calculation for the purpose of illustration. My point does not hinge on a precise estimate, because any well-founded estimate is sure to amount to a gigantic sum.

In sum, the government’s monetary and fiscal authorities are currently engaged in the expropriation of private wealth on a vast scale. Entire classes of investors—especially people who saved during their working years and expected to live on interest earnings on their accumulated capital during their retirement years—are being steadily wiped out. Astonishingly, this de facto robbery is being committed by a government that misses no opportunity to shed crocodile tears over how single-mindedly it seeks to protect the weak and helpless among us.

Originally from Big Government

The economy is growing in most parts of the U.S., the Fed said. The data suggest a slow if increasingly steady recovery.

Originally from WSJ.com: Economy

The economy is growing in most parts of the U.S., the Fed said in its latest beige book. The data suggest a slow if increasingly steady recovery.

Originally from WSJ.com: Economy

Operation Twist through 2012, and keeping the benchmark interest rate near zero to at least mid-2013. Nevertheless, the more important (albeit coded) message is how much more pessimistic the Fed has gotten just within the past five months.  Below are the table from the Fed latest November economic forecast with the prior projection issued in June.

Originally from The Market Oracle

Mirroring a sharp split on the Fed, market participants are divided over the direction of central bank policy with the October CNBC Fed Survey finding just under half expecting the Fed to launch another round of quantitative easing in the next year.

Originally from All News, Video and Posts related to TOPIC: Federal Reserve