Just over a week ago in an article I published here in Big Government: “New California Budget Crisis May Torpedo November Tax Increase Initiative.” The article illuminated how State Controller John Chaing had shocked California’s spendthrift politicians by announcing the State would be out of cash beginning March 8th and would miss up to $5.4 billion in vendor payments through May 1st. The timing of the Chaing announcement was disastrous for state politicians; because it destroyed any hope that Governor Jerry Brown’s $6 billion tax increase initiative on the ballot in November would pass.

Now it appears that Brown successfully lobbied for California to get $6 billion in cash and siphon off a total of $18 billion from the $25 billion mortgage settlement with the five largest U.S. banks, who were accused of fraud in the handling of foreclosures and loan modifications. But as Franklin Center Fellow, Steven Greenhut asks in a deliciously sarcastic article: “Why should a taxpayer in Houston or Wichita bail out irresponsible California homeowners, banks and the state’s public employees’ retirement fund?” Greenhut highlights that the mortgage settlement money is really just another accounting entry, because the real source of cash to fund the “Left Coast” is “implicitly via Federal Reserve/Government coffers.”

Most Americans still snarl about crony capitalism when they think of multinational banks taking $1 trillion slurp of taxpayer’s hard earned cash and then paying themselves record bonuses, while hiking fees and cutting off borrowers. But with the United States President and Congress solemnly telling Americans healthy banks were key to our future, most Americans gritted their teeth and came together to bail-out of banks, insurance companies, and other financial firms.

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Presidential Candidate Ron Paul’s growing libertarian movement within the Republican Party is causing a high degree of angst among American liberals, who historically deflected any criticism of their crony capitalism by attacking Republicans as sycophants for the “American empire and big finance.” But with Ron Paul’s decades of authentic opposition of the “Military Industrial Complex” and the Federal Reserve, the left is being challenged as their vitriolic moralizing is boomeranging back at themselves and their Democrat allies.

An article: “Why Ron Paul Challenges Liberals”, by Mat Stoller of the Roosevelt Institute and former Policy Advisor to Democrat Congressman Alan Grayson, describes Ron Paul as:

“dedicated first and foremost, to his political principles, and his work with his grassroots base reflects that. Politics and procedure simply didn’t matter to him.”

Stoller confesses that liberals treasure the Federal Reserve as a power-tool of big government they wield to advance their social and military agenda. He concedes Paul and his staff have been effective by working with “vigor and principle” to force greater transparency regarding the Fed’s central banking practices and is disturbed that as Paul’s libertarian movement grows the power of the Fed to advance the liberal agenda will be diminished.

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On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech and Francis Cianfrocca are joined by Newt Gingrich to discuss his plans for entitlement reform, how he would change the Federal Reserve, the Eurozone crisis and more.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

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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.

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In a stunning worldwide move, the U.S. Federal Reserve in coordination with the European Central Bank, Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Swiss National Bank and China’s Monetary Authority agreed to temporarily “dollarize” the euro. Facing a vicious bank liquidity crisis and a political nightmare; the German dominated European Central Bank (ECB) agreed to the virtual outsourcing of Europe’s monetary policy to the U.S. Federal Reserve. Although described as a precautionary arrangement for political cover; the “dollarization” of Europe has re-established the U.S. dollar as the world’s only reserve currency.

Twenty years ago, European nations sought to form their own reserve currency to limit the power of the United States in controlling their economic destiny. Following World War II, the U.S. took control of European monetary policy by pouring over $50 billion of cash into the war shattered economies. Over time, sovereign currencies were re-introduced; but the U.S. maintained dominance over each nation’s monetary policy through its reserve currency status.

In 1971, President Richard Nixon exercised this domination in a trade dispute with Europe and Japan by suspending the convertibility of the U.S. dollar into gold, setting wage and price controls, cutting taxes, and placing a 10% surcharge on all imports in an effort stimulate the U.S. economy by devaluing the exchange rate of the dollar. U.S. stock markets had their largest one day rally in history; while foreign stock markets crumbled. Four months later; the United States forced agreements for currency appreciation by Japan of 16.9%, Switzerland of 13.9%, Germany of 13.6%, France of 8.6%, and Britain of 8.6%. This effective devaluation of the dollar is credited as creating 700,000 American jobs and cementing President Nixon’s reelection in 1972.

Having suffered from such manipulation under America’s control over European financial affairs; in 1992 the nations of Europe began creating an economic integration that would lead to the introduction of the euro currency on January 1, 1999. Overnight, Europe became the largest trading block in the world and the euro with €890 billion in circulation became the world’s second reserve currency.

Prior to the introduction of the euro; the southern European nations of Portugal, Italy, Greece, and Spain (PIGS) regularly devalued their currencies to remain competitive with the highly industrialized and sophisticated northern European countries. The introduction of the euro permanently fixed exchange rates for all euro members; but gave the PIGS access to loans from northern banks at less than half their prior interest costs.

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From the The Telegraph (UK):

The Bank of England and central banks in the United States, eurozone, Japan, Switzerland and Canada have launched co-ordinated global action to ease a growing credit crisis among eurozone banks.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the Bank of England said in a statement.

The central banks are providing liquidity to the financial system by lowering the price on existing dollar swaps, making it easier for banks to get access to dollars.

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From BloombergNews:

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

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I warned last week that a recession and higher unemployment were about to hit the U.S. economy. On Tuesday, the Bureau of Economic Analysis cut their estimate of growth in the third quarter ending September from 2.5% to 2%. Then on Wednesday, the Federal Reserve rocked financial markets by forcing America’s 31 largest U.S. banks to “stress test” balance sheets to determine their capability to withstand an 8% drop in the economy; which would cause home prices to plunge by 21%, and unemployment rate to jump to 13%.

I illuminated in my report that U.S. Bureau of Labor Statistics has been under-counting unemployment by at least 2%. For a nation reporting 154.4 million workers; this means the 13.9 million reportedly unemployed should actually be 17 million. Given only 12.8 million were unemployed at the 1933 peak of the Great Depression, when the undercounting and the Fed’s stress test are added the total is 23.2 million unemployed; almost double the Great Depression.

Formerly bullish top bank analyst Dick Bove in an Bloomberg interview commented on the Fed:

“By taking these draconian views of what could happen in the market, if they in fact force the banks to defense themselves against the outlook that they’ve put up, they’ll cause a recession,”

Consistent with my prediction that the booming production of capital goods would fall hard next year after the expiration of the 100% “bonus depreciation” tax credit; the bad news parade picked up steam this week with reports that U.S. durable goods orders fell 0.7 percent last month and initial jobless claims came in higher than Wall Street analyst’s predictions.

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On today’s edition of Coffee and Markets, Pejman Yousefzadeh and Kevin Holtsberry are joined by James Rickards, to discuss why the Federal Reserve is wrong to keep interest rates at zero, concerns about inflation, and that increased regulations are needed on American banks.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

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There were three winners in the CNBC debate: Herman Cain, Mitt Romney, and Newt Gingrich. Gov. Rick Perry was the obvious loser because of his memory lapse.

The guy with the toughest job on Wednesday night was Herman Cain, who has been hammered by sexual-harassment charges. He needed a strong performance to put him back on message with his 9-9-9 tax plan and pro-business, free-enterprise views. I give him first prize, simply because he performed so well. He had the most to gain and the most to lose. He gained.

How these sex-harassment charges play out remains to be seen. And how much damage they will do to the Cain campaign is an unknown. But it’s noteworthy that a new Rasmussen poll for the Florida Republican primary shows Cain at 30 percent, Romney at 24 percent, and Gingrich at 19 percent. At the moment, Cain is still at or near the top of the pack. So far, it’s hard to find any Republican-voter migration away from Cain.

But the more interesting story might be Newt Gingrich, who has surged into third place. When I interviewed him on Tuesday, the night before the debate, I asked him about 1 percent versus 99 percent, the class-warfare argument being propagated by President Obama and the Wall Street protesters. Gingrich replied, “I am for 100 percent. I think this idea of 99 percent and 1 percent is grotesque European-socialist class-warfare bologna.” (Italics mine.) No one puts it that well.

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American taxpayers are on the hook for who-knows-how-many trillions of dollars in government bailouts/takeovers. And yet, to date, we have little information about how the federal government legally justified unprecedented its use of tax dollars to “bail out” private companies.

Why? Because the Obama administration continues to stonewall the release of documents that would almost certainly shed light on the internal discussions that took place in the Bush administration!

On November 1, 2011, we filed a petition on behalf of former Federal Reserve employee Vern McKinley, asking the U.S. Supreme Court to review a lower court ruling validating the Federal Reserve’s decision to withhold documents about this $29 billion Bear Stearns bailout. (Bailout Nation began with the Bear Stearns bailout in 2008.)

At issue in our Freedom of Information Act (FOIA) lawsuit is whether or not the federal government can withhold documents under the deliberative process privilege of FOIA Exemption 5 without demonstrating that the release of the documents would result in specific harm to government agency decision-making. As you might imagine, the “deliberative process” is loved by government officials who use it to keep as much information as possible about controversial decisions away from the American people.

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While Obama tours the country promoting his personal donation plan, the Republican Presidential hopefuls are in a pitched battle for the nomination and arguing which tax simplification plan is best. Threatened with the possibility of rate cuts, the Media and politicians trot out the usual suspects of lies about tax hikes and tax cuts.  This is a battle Republicans must win and, to do so, they need to expose those lies.

Keep in mind that the battle between those who create wealth and those that want to redistribute it, mainly politicians, is as old as civilization itself.  We read of tax battles and even reform in every age, like Urukagina’s tax reductions in Babylonia/Sumer in 2350 BC.  Equally venerable are the constant set of demagogic lies by those against tax cuts and simplification.  It is important to note that politicians like complicated tax codes and high tax rates because they control those rates and dispense the loopholes and regulations that complicate the tax code.  Tax simplification means they lose power.  As a result, resistance to tax reform is more often the rule than reform. As for the lies, they abound, so let’s consider just a few:

Lie # 1: Tax cuts cause deficits/Tax hikes balance the budget.  The Media and the Left often say that the Reagan and Bush tax cuts led to deficits while Clinton’s tax hikes led to a balanced budget. In truth, according to the IRS, federal tax revenues rose dramatically after the overall Reagan tax cuts/reforms (98%) and the Bush tax cuts (a record $700+ billion). This is just as they did after the Harding/Coolidge cuts (61% revenue increase) and after the Kennedy/Johnson cuts (62% revenue increase).  Those are the four major income tax reductions we have had since the inception of the income tax in 1913 and every time revenues rose after they were in place – every time.

So did the tax rate cut cause a deficit? The lie, of course, is to blame the revenue gathering mechanism (tax code/rate cut) instead of the revenue spending mechanism, i.e. Congress/Presidents.  The spenders kept spending – often at an accelerated rate when they saw the new revenues.  Thus, the fault for continuing deficits lies not with tax rate cuts, which produced higher revenues, but with politicians who spent too much.

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Here’s one of the protesters Reason.tv spoke to at Occupy Wall Street in Los Angeles on October 12, 2011. She identifies herself as Patricia McAllister and as an employee of Los Angeles Unified School District.

“I think that the Zionist Jews, who are running these big banks and our Federal Reserve, which is not run by the federal government… they need to be run out of this country,” she said.

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Los Angeles became the first city to officially endorse the Occupy movement when its city council unanimously passed a resolution affirming the group’s right to camp out on lawns in front of city hall. The council members had glowing words for the movement.

“These are things worthy of protest. And I thank you for speaking out and helping move the debate forward,” said City Councilman Paul Koretz.

Many of the protesters had similarly positive words for their local politicians, as well as local law enforcement. Reason.tv was on the scene to ask protesters about their general attitudes towards government power.  Is Occupy Los Angeles (and Occupy Wall Street) simply a pro-government movement, or is there room for libertarian sentiment within it?

The answer is… well, it’s complicated. While we spoke to a few small government libertarians at the event, others eschewed anti-government rhetoric and said that criticism of the Federal Reserve is a libertarian “pet issue” distracting from the real matter at hand: economic justice.

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Congressional hucksters sold last year’s “Dodd–Frank Wall Street Reform and Consumer Protection Act” as a pro-consumer effort to prevent future big bank bail-outs. The good news, according to the U.S. Government Accountability Office, is that Dodd-Frank expanded big government payrolls by nearly 3,000 new positions and seven new agencies. The bad news is the bill has destroyed 130,000 private sector jobs, will cost consumers $11 billion in fees, and is doing a fine job of creating a new American bank crisis.

The U.S. House and Senate took only 21 days to pass the Dodd-Frank Act. And it was signed into law by the President on July 21, 2010 as the largest overhaul of banking in our nation’s history. The massively complex Act is 2,300 pages long and a masterful piece of crony capitalism, which explains why Congress passed the bill before anyone could actually read it.

The public was deeply concerned by the rushed passage and has never been in favor of the legislation. A recent poll by FTI Consulting found that only 12 percent of the public were satisfied with bill, while 54% were dissatisfied. A large majority, 66%, believes the act is insufficient to protect against future bailouts. These opinion polls are about to go from concerned to downright angry as the public begins to learn how much pain they will suffer.

I estimate that the Dodd-Frank Act will cost banks in the United States $22 billion annually. Approximately one third of those losses will come from the “Durbin Amendment”, which was secretly inserted into the bill for the sole benefit of the merchandise retailing association. The language in the Act directs the Federal Reserve to set debit card swipe fees that “are reasonable and proportional to the cost incurred by the issuer.” Although this language looked innocent, it had the effect of cutting the $.44 per swipe fee banks receive to $.26 per swipe. When multiplied on the 180 million debit cards outstanding, the banks are required to transfer $7 billion of profit to the retailers. To survive crony meddling by Congress in their private industry affairs, the banks have no choice but to begin firing another 130,000 staff and directly charging consumers for their losses.

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From the Associated Press:

Federal Reserve Chairman Ben Bernanke says the economic recovery “is close to faltering” and the central bank is prepared to take further steps to support it.

The economy is growing more slowly than the Federal Reserve had expected, Bernanke said Tuesday before the congressional Joint Economic Committee. He said the biggest factor depressing consumer confidence is poor job growth.

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Commentators and pundits, some of whom ought to know better, continue to harp on the idea that the recession persists because consumers are not spending. Every Keynesian seems to believe that because consumers are in a dreadful funk, only government stimulus spending can rescue the moribund economy, given (to them, at least) that investors will not spend more because the Fed, having already driven interest rates to extraordinarily low levels, cannot use conventional policies to drive them any lower and thereby elicit more investment spending.

People, please look at the data. They are conveniently available to one and all at the website maintained by the Commerce Department’s Bureau of Economic Analysis, the outfit that generates the national income and product accounts for the United States.

According to these data, real personal consumption expenditure recovered from its recession decline by the fourth quarter of 2010. Continuing to grow, it now stands (as of the most recent data, for the second quarter of 2011) even farther above its pre-recession peak.

Real government expenditure for consumption and investment (this concept does not include the government’s transfer spending, such as unemployment insurance benefits and social security benefits) is also running higher than its pre-recession level. In the second quarter of 2011, it was running more than 2 percent higher (recall that this is “real,” or inflation-adjusted spending; nominal spending has grown substantially more).

The economy remains moribund not because consumption spending has failed to recover and not because government spending has failed to increase, but because the true driver of economic growth—private investment—remains deeply depressed. Gross private domestic fixed investment fell steeply after the second quarter of 2007, and in the second quarter of 2011 it remained 19 percent below its pre-recession peak. This figure fails to show how bad the investment situation really is, however, because the bulk of the investment spending now taking place is for what the accountants call the “capital consumption allowance,” the amount estimated as necessary to compensate for the wear and tear and obsolescence of the existing capital stock.

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Stocks collapsed roughly 700 points over two days after the Federal Reserve launched its “Operation Twist.” The market correctly perceives that the central bank’s plan to swap $400 billion of short-term notes for long-term bonds adds no new reserves to the financial system. So it wasn’t QE3, that’s for sure. No stimulus. In fact, with the Treasury yield curve flattening, the Fed’s sterilized asset swap actually tightened financial markets.

The Fed should have listened to the GOP congressional leadership, which in a letter advocated no more stimulus and no more market-subverting interference.

But the real issue is the new FOMC forecast: “There are significant downside risks to the economic outlook, including strains in global financial markets.” That was the killer statement.

So let me repeat: We are on the front end of a recession. The profits picture is very much in doubt. More Obamanomics tax hikes are in the air. Europe is unsolved. U.S. finances are a mess. All this is being discounted by slumping stocks.

Corporate credit risk spreads have been widening, which is a negative for the profits picture, as economist Michael Darda has pointed out. Profits are the mother’s milk of stocks. And the European funding markets have tightened substantially, as their much-wider financial-stress spreads all indicate.

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Once upon a time in a land far, far away, there was a country famous for its apples. In fact, it produced nothing but apples and so was called Appleonia. The people ate many apples in many different ways: raw apples, baked apples, apple pies, apple fritters, and candied apples, to name just a few. They found lots of different ways to use their apples, even as fuel.

But Appleonians didn’t consume all of their apples. They saved lots and lots of apples for their seeds so they could enlarge their orchards and grow more and more. For hundreds of years, the Appleonians consumed lots of apples and made their orchards bigger and bigger. Everyone in Appleonia worked in the apple business and prospered.

It turned out though that not every place in Appleonia was perfect for growing apples. Some areas were filled with worms that just loved apples. Little by little, the worms began to infest the orchards. No one noticed until one day a young boy opened a barrel and, taking a big bite out of an apple, bit right into a worm. Undeterred, he picked up another, with the same result, and another and another. At last he found an apple that was as good inside as it was outside.

But word spread quickly that there were worms in the apples and that the worms seemed to be spreading from orchard to orchard. People quit harvesting in the infested areas and, even worse, they could no longer guarantee the high quality of their apples as they had in the past. For the first time, they produced fewer apples, and many people were put out of work.

The Appleonian government grew very worried and, after brief consultation with academic experts, came up with an idea. To put people back to work and restore faith in the apples, the government hired lots of people to polish all the rotten apples. Of course, this didn’t really work: the polished apples may have looked better on the outside, but they were still rotten on the inside. Things didn’t get any better. People were still out of work, and the quality of the apples was still hit and miss. Government officials came up with another plan. They hired another bunch of people to spray a thin layer of wax on the rotten apples. Again, their remedy was superficial: the bad apples may have looked gorgeous, but they were still rotten on the inside, and hence worthless.

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On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech are joined by Francis Cianfrocca to discuss the collapse of the European markets over the past six weeks, the Fed’s “Operation Twist” and the crazy philosophies of Elizabeth Warren.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

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