G.E.'s Strategies Let It Avoid Taxes

So David Kocieniewski reports in the New York Times that:

"General Electric, the nation's largest corporation, had a very good year in 2010.

"The company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States.

"Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion."

Now, it's hard to read that and not have a kneejerk reaction like "those crooks!". But, stop and be fair for a second. If you, as a private citizen, could figure out a way to not only not pay taxes, but to get the US government to give you 62% of your US income as a tax credit, you would (probably) be on that in a heartbeat. And you'd be laughing all the way to the bank. Why should GE be any different? They don't like paying taxes either.

The only thing that offends me here is the fact that they're taking a tax credit. I fully believe that taxation is theft, but tax refunds in excess of the taxes you've paid[1] is also theft. You're taking money from another victim of taxation.

So, lets not hate GE for managing not to pay taxes. Let's just hate them for accepting stolen goods.

[1] At gunpoint, effectively.

Madoff, The SEC, Tax "Compromise", And Predator Drones

Quick highlights to wrap up the day:

Jeffry Picower's estate has agreed to settle civil suits to the tune of $7.2 billion. What? He's not a household name? He was an investor in Bernie Madoff's trust fund, and he died back in October of 2009. The $7.2 billion represents the profits of his investment in the Madoff Ponzi Fund.

The SEC has issued subpoenas to a number of banks[1]. Why? It's the next step into their ongoing investigation of how they packaged mortgages for sale to investors. They're looking into the role of the "master servicers", which are the firms that select and maintain the pool of home loans that go into mortgage-backed securities. They also want to know how the performance of the underlying loans were monitored and whether or not the loans were properly transferred to the trusts. At least, that's what the anonymous source says, because it's not public. Why? Beats me[2].

President Obama signed the tax cut "compromise" bill into law today. Christmas is saved.

And we have apparently sent armed drones into Pakistan, where over 50 people have been killed. There's no word on whether or not we asked permission before violating Pakistani air space yet again[3], but we are being assured that only militants have been killed.

[1] Including Bank of America, JPMorgan Chase & Co, Goldman Sachs and Wells Fargo.

[2] It wouldn't be the first time the SEC hasn't bothered to really take action on information, though. I'm not saying that they're going to cover this up. Just that it wouldn't be the first time.

[3] Apparently we launch attack drones into Pakistan on a several times weekly basis.

Forecast Is for "Bad Craziness"

That's right. We're having one of those news days that cries out for the mad prose stylings of Hunter S. Thompson himself.

Unfortunately, you'll have to settle for me.

So let's get this party started right by inviting in the Crown Prince of Crazy himself, the Dear Leader Kim Jong Il and the People's Glorious Revolutionary Atomic Mushroom Brigade! South Korea has announced that they will be conducting a live fire artillery drill on Yeonpyeong Island from December 18-21. The response from North Korea Crazy? A neopolitan ice cream of insanity, offering three distinct flavors for the price of one. They are now accusing the south of attempting to "kick up hysteria of war of aggression against the DPRK"[1], they have put forward the claim that the reason the south is doing this is to undermine "the progress made in the June 15 era of reunification" and to derail "the dialogue and cooperation between the north and the south", and they are warning[2] that the live-fire exercise "will play out a more serious situation than on November 23 in terms of the strength and scope of the strike"[3].

There is some speculation that all of this is just a way to improve the north's position when negotiations begin again. Rather like the way a small child attempts to improve his position regarding the acquisition of a toy by pitching a tantrum. Only with high explosives. And death.

China, which is no doubt banging its collective head on its collective desk over the antics of its crazy eastern neighbor, has hit a 28-month high for consumer inflation. It's up 5.1% from November 2009 (mostly on food prices), about 210 bps higher than the 3% target they had for 2010 and 110 bps higher than their 2011 goal. This, of course, is considered an omen of rising reserve requirements and interest rates[4].

Spinning the globe around to Europe, Moody's has cut Ireland's credit rating from Aa2 to Baa1, putting them on the same level as Russia and Lithuania. That's still investment grade, but you almost have to throw the air quotes when you say that. Meanwhile, on day two of the EU summit to create a permanent financial safety net for the euro zone, leaders refused temporary steps such as increasing the size of the EU bailout fund or using the bailout fund to buy bonds. European traders pouted and demanded that the summit offer more short term guarantees, and possibly milk and cookies before bed.

On the positive side for Europe - or, at, for the two-time would be rulers of Europe - the Ifo Business Climate Germany is out. The business climate index, the business situation index, and the business expectations index are all showing an across-the-board 60 bps improvement. So, overall, businesses are doing well and expecting to continue to do well in Germany.

Closer to home, the House passed the tax "compromise" on a 277-148 vote. The IMF Managing Director is pleased, although I'm not certain why Reuters felt the need to bring his opinion into the article[5]. In possibly unrelated news, Senate Democrats also threw in the towel on passing a budget, and agreed to a temporary funding measure.

So that's some of what's driving the markets around. Fear and madness and bad craziness. And four witches.

[1] No, really. That's the official English translation.

[2] "Warning" as the word is defined in North Korea, means "kicking someone in the teeth out of nowhere, and then threatening them with a switchblade if they try to punch back".

[3] For good measure, they also threw a diplomatic bone to the US: "The state of armistice is persisting on the Korean Peninsula and danger of war is not defused there because of the U.S. hostile policy toward the DPRL and its wild ambition for aggression."

[4] And you don't even need to visit Delphi on the seventh of the month for that one.

[5] Although the CIA World Factbook confirms that our public debt as a percentage of GDP is actually 30 bps higher than Spain's, so maybe we should be courting the IMF's good graces now...

Housing Gets Started, Unemployment Insurance Gets Claimed, And Spain's Pains Stay On The Plains

We've got some stuff happening today. About an hour ago, Housing Starts and Jobless Claims came out. Then, at 10 AM, we get the Philadelphia Fed Survey. Busy, busy day. And that's not even considering President Obama's tax cut "compromise" going to the House today[1], or FedEx (FDX) second-quarter profits missing expectations.

Last month, we had a heartily disappointing 519k new Housing Starts in October (we were expecting 590k). For this month, the Street is looking for 550k new starts. Meanwhile, last week, we saw 421k new jobless claims for the week ending 12/4 (marginally better than the 425k that had been predicted), and the Street is going conservative and predicting a mild improvement to only 420k new claims,

The reality is slightly better than expected. Housing starts for November hit 555k, beating the revised October figure of 534k (yes, the final number was revised upwards) by 3.9%. 465k of those were single-family homes, while only 72k were buildings with five units or more. 513k privately-owned housing units were completed in November (up 14.1% from October) and 530k new building permits were issued (up 4%). the bulk of these were in the region the Census Bureau describes as "South", so I guess that makes sense.

Turning to the First Time Jobless Claims, we came in at 420k new claims for the week ending 12/11, down 3k from the previous week's revised figure of 423k. Yes, that's right. The 12/4 421,000 new claims were revised upwards, meaning more people lost their jobs than was originally reported. Iowa and Idaho came out the best (they had a decrease in the number of claims), while 30 states had more than 1000 new claims (New York was worst off at +16,863, with North Carolina, Pennsylvania, and Georgia hot on it's heels with over 15k new claims each).

Combine all of this with the fact that Spain hasn't taken Europe's economy down in flames yet, and it shapes up to pretty good news for the morning.

[1] I'd expect it to be DOA. But I expected that when it hit the Senate as well, so now it's a wait-and-see game.

Rants, Respect, and Senator Bernie Sanders

Senator Bernie Sanders went for the gusto, holding an 8 1/2 hour filibuster. Old school. By actually standing up and talking for the entire time. Senator, you have my respect.

Not my agreement, mind you. You've said a few things, from the various quotes and excerpts I've seen, that I have to take issue with. But you have my respect. It's good to see an actual filibuster, instead of one of the lame "filibusters" we've seen over the past decade or so. Thank you.

That said, I have a few comments. On the tax cuts at one point, you said (according to USA Today):

"They're taking it from the middle class and working families and we're giving it to the wealthiest people in the country."

I assume that "they" are the people supporting extending the tax cuts, and "it" is money. Assuming I'm correct, I don't actually see how this makes any sense at all. A tax cut on the wealthy is not taking money from "the middle class and working families", nor is it "giving it to the wealthiest people in the country". It is simply a reduction in the amount of money that is taken - in a fashion that would be considered robbery[1] should one individual attempt to extract money directly from another in similar fashion - from any person who actually pays taxes.

It is true that some of the monies extracted from the wealthy (and from the middle class) are then granted to the poor through various transfer payments and entitlement programs. This fact does not create a permanent, ongoing obligation of the individuals from whom the money is extracted to continue to transfer those monies to the recipients in perpetuity. Except insofar as the government, who (for an administrative fee) processes the transfer of wealth, elects to continue the transfer.

In other words, if tax money is being transferred from the rich (and/or the middle class) to the poor, and the government chooses reduce taxes and decrease or terminate the transfer, the money is not being taken from the poor and given to the rich (and/or the middle class). It is simply being allowed to remain with those had the money in the first place.

On a related subject, why are tax cuts always described as benefiting "the rich" over "the middle class and working Americans"? Many of the rich - particularly when "the rich" are defined as any individual or family earning more than $250,000 per year - work for a living. Just because someone doesn't work in a factory or drone a way as a cubicle wage slave, doesn't mean they don't work for a living[2]. There is no inherent virtue in working a minimum wage job, and there is no inherent vice in earning thousands of dollars an hour, so can we please stop pretending there is?[3]

Of course, there is nothing groundbreaking in any of this. The people reading this who agree with me will probably just wonder why I'm preaching to the choir, and the people reading this who agree with Senator Sanders no doubt already have their counter-arguments ready to go. So let me close with this:

I have to give Senator Sanders for being honest in his beliefs. He certainly isn't getting rich as a Senator, and his voting record certainly seems[4] to follow his conscience. And that's worth respecting, whether I agree with him or not. So here's to you, Senator Sanders. Keep giving long speeches.

[1] No, really. This is not hyperbole. Robbery is, by definition, "the crime of taking or attempting to take something of value by force or threat of force and/or by putting the victim in fear". Taxes are extracted from the American people by threat of force and/or by putting the victim - I mean, the taxpayer - in fear.
[2] Oh, wait. I forget. The language of class warfare requires that "the enemy" (whatever class they may be) be made to seem like parasites.
[3] The answer, of course, is "no".
[4] "Seems", because only he can say for certain.

The Market's Up. Why?

There's green in them thar hills. The three major indices are, at the moment, up. Why should this be?

First off, there's the good news about our narrowing trade deficit in October. Domestic traders love that sort of thing[1]. But on top of that, China announced that it saw a 16% decrease in it's November trade surplus (down to $22.9 billion).as their imports jumped 37.7%. Domestic traders also love that sort of thing[2], because it means we can sell more of our stuff to them. And because it could point another trade deficit improvement in November.

Speaking of China, they have increased their reserve requirements again. For the third time. In the past month. The 50 basis point increase takes effect on December 20, and brings the requirement to 16.5%.[3]. Even more interesting, analysts that follow China are expecting to see that requirement continue to go up - possibly as high as 23%. The end result of this is to reduce China's money supply, which could be a signal that Chinese interest rates won't be going up.

Beyond that? Well, the tax cut "compromise" deal still looks dead in the water. The Senate will vote on it on Monday but, with Capitol Hill Democrats chanting "Just say no!" in closed-door meetings intended to rally the troops, that vote looks like a failure waiting to happen. President Obama remains confident that it will pass, because he feels that nobody on either side of the isle wants to look responsible for making "people's paychecks smaller on January 1st because Congress didn't act."

And finally, we have Consumer Sentiment. November came in nicely improved at 71.6%, and analysts are looking for a further (mild) increase to 72.0%. The actual results indicate a 74.2%, which is almost breathtakingly better than expected. The official press release is not out yet, but can be read here when it is.

[1] Unless they've bet hard against the US economy and invested heavily in the EU and the BRIC. But we care nothing for those unpatriotic fools! Nothing!

[2] See [1] above.

[3] In other words, if a Chinese bank wants to loan out 100,000 yuan it must have 16,500 yuan in cash on hand. For comparison the United States has a reserve requirement of 0% on loans under $10.7 million, 3% on loans from $10.7 to $58.8 million, and 10% on loans over $58.8 million.

Anonymous, National Debt, And British Tuition Hooligans

The markets ended on a mixed note - Dow down 0.02%, NASDAQ up 0.29%, S&P 500 up 0.38%. The day's better than expected jobless claims data helped prop things up, but the (comparatively) strong dollar ratcheted up commodities prices and served as an anchor on any company that actually makes things. Of course, that's not the only reason the markets were flat. What else happened?

First, the Bush tax cut "compromise" deal appears to be dead in the water. The House Democrats approved a resolution of opposition to it, and Speaker Pelosi will "honor the resolution".

Speaking of budget deficits and the problems on Capitol Hill, Erskine Bowles and Alan SImpson, co-chairs of the National Commission on Fiscal Responsibility and Reform, released a statement in which they sate that there needs to be a bipartisan agreement to reduce the $14 trillion[1] US national debt before any long-term increase in the debt limit is approved. "Our businesses will not be able to grow and create jobs and our workers will not be able to compete without a strategy to get this crushing debt burden off our backs." They have proposed an austerity program of sorts, relying on cuts in spending and streamlining of the tax code, but the panel's own members didn't support it.

Douglas Shulman, Commissioner of the Internal Revenue Service, announced that information from it's lawsuit against UBS AG "...has proved invaluable in supplementing and corroborating prior leads, as well as developing new leads, involving numerous banks." This is, of course, in reference to the IRS pursuit of US taxpayers who shelter assets in overseas banks and then do not declare those assets. The IRS is also considering another amnesty program for tax evaders, since the one last year got around 15,000 individuals to declare their offshore assets.

By popular demand[2], we now turn to the Cyberwar. Operation Payback crippled Visa, MasterCard, and PayPal with a 30,000-node DDoS attack. www.paypal.com was down for several hours, rendering it unable to process payments, MasterCard's SecureCode service was also disrupted, although service has been restored, and both MasterCard's and Visa's websites went down for a while. Amazon.com has been declared the next target, not only for refusing to host Wikileaks but for then offering for sale a Kindle version of the Wikileaks documents[3].

What does all of this have to do with the market? Imagine the damage to Visa (symbol V), MasterCard (symbol MA), PayPal (a subsidiary of eBay, ticker EBAY), and Amazon.com (symbol AMZN) if Anonymous manages to keep them going down over the Christmas shopping season. Yeah. That got your attention.

In the "What Were They Thinking" department, the TSA pulled Meera Shankar out of line at the Jackson-Evers International Airport and frisked her. Because she was wearing a sari. Despite the presentation of her diplomatic credentials, establishing her identity as the Indian Ambassador to the United States. The Indian government is not happy about this...incident.

Finally, we have anarchy in the UK. Students protesting an increase in tuition fees in England[4] attacked the car containing Prince Charles and the Duchess of Cornwall. 37 people were hurt during the riot, and police made 22 arrests.

[1] Yes, trillion. With a "t".
[2] That is, one reader asked.
[3] Go figure.
[4] As much as 9000 Pounds sterling per year.

Jobless Claims! Also, News!

Last week, we had some depressingly bad results for first time jobless claims - 425,000 were anticipated, and we actually had 436,000. Well, it's new jobless claims day again, and the Street is going for optimism. The consensus is that for the week ending 12/4, we will only see 425,000 new claims.

While we wait for the results, let's check the news.

Futures are up, partly on optimism about the jobless claims expectations and partly on general excitement that 2010 is almost over. No, that doesn't (just) mean that traders are looking to the future and wishing away the last few months of lackluster performance. No, it's also driven by the fact that with only 16 trading days left in the year, underperforming fund managers will be under pressure to snap up stocks with solid fundamentals and good performance. When (if) this happens, the sudden spike in demand will lift market prices.

Debate on the Bush income tax "compromise" deal should hit the Senate by Friday. Senate Majority Leader Harry Reid thinks it's pretty much a done deal, and Republicans believe that the Democrats should "...get together and look at the overall bill and realize this is the presentation on the table." In preliminary statements, the rank and file Democrats do not seem impressed. If it passes, look for the equity markets to have a little party (yay! lower taxes!) and the bond markets to sell off more Treasuries (aiee! increasing Federal debt!).

Looking to Europe, the Bank of England (in a move that surprised no one) voted to keep in place the 0.5% interest rate and 200 billion pounds of quantitative easing they've had in place since February. The response from the European markets was to shrug, watch Fitch Rating downgrade Ireland's sovereign debt (BBB+, down from A+), and then go ahead and hit a 26-month high on optimism about the US economy.

China and North Korea reached a consensus on North Korea Crazy's Yeongpyeong Island Tour. What was that consensus? That they "agree on the need to resolve the situation." The world can now breathe a sigh of relief.

Now, back to the first time jobless claims results. On the up side, the week ending 12/4 saw only 421,000 new claims - better than expected and better than the previous week. On the down side, the prior week figures were revised upwards to 438,000 new claims - which is not so good.

The Future's Are So Meh, You Don't Gotta Wear Shades

Right now, the domestic markets are still being driven by the news about the tax "compromise" from Monday. The news has helped drive Treasury prices down by 2%, pushing up yields. Why? Because this, combined with everyone's reaction to "Big" Ben Bernanke's comments on 60 Minutes, has bond traders worried about a long-term rise in the national debt.

Amusingly enough, the international markets are taking the improving yields as a good sign. According to Adam Cole[1], "the market is taking the rise in US yields as a positive for the dollar rather than a supply story. There are rising expectations for growth." As a result, the dollar is up against the euro and against gold.

China, which does not want to dominate the world thank you very much[2], does not agree. "For now, market attention is still on Europe and for the coming 6-12 months, it will not shift to the United States," said Li Daokui[3]. "But we should be clear in our minds that the fiscal situation in the United States is much worse than in Europe. In one or two years, when the European debt situation stabilizes, attention of financial markets will definitely shift to the United States. At that time, US Treasury bonds and the dollar will experience considerable declines."

Oh, apropos of nothing else, brace yourself for problems with your credit cards. Anonymous has declared war on MasterCard for blocking donations to WikiLeaks[4].

[1] The Global Head of Foreign Exchange Strategy for RBC Capital markets.
[2] "The international community should welcome and not fear China's peaceful development; help it and not hinder it; support it and not hold it back," says State Councilor Dai Bingguo. It doesn't have quite the same ring as "We will add your biological and technological distinctiveness to our own. Your culture will adapt to service us. Resistance is futile" or "all your base are belong to us", but it does carry a quiet air of understated menace.
[3] Director of the Center for China in the World Economy at Tsinghua University, and one of the academic members of the PBOC Monetary Policy Committee.
[4] A link that is probably not work safe, no matter where you are, now that Homeland Security is pushing to declare WikiLeaks a "terrorist website".

The Futures Are Up!

And what are they up on? The tax cut compromise, that's what they're up on!

"What compromise?" you ask. Well, let me tell you...

At 6:32 PM last night, President Obama announced the details of the compromise between the Democrats and the Republicans on the subject of whether or not the Bush tax cuts will expire. As a reminder, the Democrats wanted to extend the tax cuts for anyone making less than $200,000 (about 96.9% of the populace, according to my calculations from IRS figures[1]) while the Republicans wanted to extend the tax cuts for everyone (about 100% of the populace, according to IRS figures).

How did the compromise work out? In the words of the President, "we have arrived at a framework for a bipartisan agreement. For the next two years, every American family will keep their tax cuts -- not just the Bush tax cuts, but those that have been put in place over the last couple of years that are helping parents and students and other folks manage their bills.... Now, under this agreement, unemployment insurance will also be extended for another 13 months, which will be welcome relief for 2 million Americans who are facing the prospect of having this lifeline yanked away from them right in the middle of the holiday season."

In other words, the compromise boils down to "the Republicans get everything they want, and the Democrats give it to them." An interesting definition of compromise, don't you think?

But surely that's not it? What else is driving futures?

Well, Reuters is reporting that China's central bank is getting ready to tighten the yuan by raising interest rates. Their CPI has hit a 27-month record high of 4.7% and this, combined with fears driven by US market concerns about the Fed possibly buying more than $600 billion in Treasuries, has China concerned about inflation. Rising interest rates are the universally-accepted cure for inflation, so get ready. Asian markets were down initially on the news, but recovered somewhat (mostly because the markets have already priced in more tightening).

And, of course, there's the Treasury announcing an underwritten public offering of it's remaining 2.4 billion shares of Citigroup common stock, at $4.35 per share. Once these are sold, that will eliminate the Treasury's full position of Citigroup common stock, although it will continue to hold warrants for more common stock as well as $800 million in TruPS[2].

[1] The President puts it at 98% in his speech, but what's 1.1% between friends?
[2] TruPS? Investopedia (http://www.investopedia.com/terms/t/trustpreferredsecurity.asp) defines them as "trust preferred securities), securities similar to debentures and preferreds that are generally longer term, have early redemption features, make quarterly fixed interest payments, and mature at face value. They also maintain the appearance of equities in a company's accounting statements, which sounds to me like an accounting trick to make the company look like it has less liabilities than it really does, but it is in accordance with GAAP. So it's legal.

Statement by the President on Tax Cuts and Unemployment Benefits (http://www.whitehouse.gov/the-press-office/2010/12/06/statement-president-tax-cuts-and-unemployment-benefits)
China rate rise talk builds as loans and inflation rise (http://www.reuters.com/article/idUSTRE6B60XG20101207)
Treasury Announces Public Offering of Citigroup Common Stock (http://www.treasury.gov/press-center/press-releases/Pages/TG994.aspx)

Super Diplomatic Ministerial Ninja Team, Sanjo!

So. What seems like it's going to push the markets around tomorrow?

First off, we have a compromise on the expiring "Bush tax cuts". Let's see here. The Republicans get an across-the-board two-year renewal of the tax cuts, a 2% employee payroll tax cut, extended breaks on dividend and capital gains taxes, and a 35% estate tax with a $5 million personal exemption. The Democrats get... well, they get a 13-month extension on unemployment benefits. And I guess they get to not be presented as the grinch that raised taxes on 96.9% of the American people for Christmas.[1]

I think we have to call this a win for the Republicans.

The European Central Bank still isn't bowing to pressure to conform to rumors and rain euros from the heavens. Or, as the Prime Minister of Luxembourg put it, "We don't have any new decision to announce to you."

European markets are expected to collectively throw themselves on the floor, kick their feet, cry and scream "I hate you ECB" until the bank gives in.

The Super Diplomatic Ministerial Ninja Team, consisting of Secretary of State Clinton, Foreign Minister Maehara, and Foreign Minister Sung-hwan, have officially urged China to "shape North Korea's behavior". There is no word on when the People's Glorious Revolutionary Atomic Mushroom Brigade will issue an official response.

There's the massive PR storm called "Operation Broken Trust" going on right now. I doubt that this will have any significant impact on the markets, though. It'll result in a few sexy show trials, a lot of trials that nobody will care about unless they were directly involved, and the remaining frauds remembering to cover their trails better.

[1] No matter which way you lean politically, you have to acknowledge that the Republicans were going to filibuster to death any bill that didn't extend the Bush tax cuts for everyone, and then blame the Democrats for "making them do it". Where did I get the 96.9% figure? IRS data. In 2008 (the most recently compiled year), there were 142,450,569 individual tax returns filed. 138,074,910 of those returns were for adjusted gross incomes below $200,000. The rest is simple math.

Interestingly enough, the same simple math reveals that this 96.9% of the income tax filing households paid 72.7% of the total income taxes that were actually collected by the IRS. The remaining 3.1% paid 27.3% of the total. That's a topic for a different time, but it's something to consider the next time someone says the rich (i.e. those making more than $200,000) aren't "paying their fair share".

"We could raise interest rates in 15 minutes if we have to."

"Big" Ben Bernanke himself was on 60 Minutes today.



As the interview says, this is rare. Apparently, he decided to do it "because he believes his critics may not understand how much trouble the economy is in".

I suspect that is not a fair assessment. I don't think anyone has any real illusions about how much trouble the economy is in. It's probably more accurate to say that his critics do not agree with his solutions to the trouble the economy is in. But that's neither here nor there for the moment, because this is Big Ben's chance to shine. So watch the video, read the quotes, and revel in the rare interview provided by the Chairman of the Fed.

I'll have a few comments on the other side.

On unemployment:

"The unemployment rate is just not going down. Unemployment is just about the same as it was in mid-2009 when the economy started growing. So that's a major concern."

"At the rate we're going it could be 4-5 years before we are back to a more normal unemployment rate. Somewhere in the vicinity of 5 - 6 percent."

"More than 40% of the unemployed have been unemployed for 6 months or more, and that's unusually high."

On small businesses:

"A lot of small businesses are not seeking credit because their business is not doing well, because the economy is slow. Others are not qualifying for credit, maybe because the value of their property is going down. But some also can't meet the terms and conditions banks are setting."

On the subject of banks that took risks that caused the crisis not being willing to take risks to improve the economy:

"We want them [the banks] to take risks, but not excessive risks. We want to go happy medium. I think banks are back in the business of lending, but they have not yet come back to the level of confidence - overconfidence - that they had prior to the crisis. We want to have an appropriate balance."

On deflation:

"The other concern I should mention is that inflation is very very low, which you think is a good thing. And it normally is a good thing. But we are getting awfully close to the range where prices start falling."

On deflation:

"Well, I would say that this point, because the Fed is acting, I would say the risk is pretty low. But if the Fed did not act, then given how much inflation has come down since the beginning of the recession, I think it would be a more serious concern."

Is the $600,000,000 a bad thing?

"I know that some people think that. What I think they're doing is looking at some of the risks and uncertainties associated with doing this policy action. What I think they're not doing is looking at the risks of not acting."

What about the fear of inflation?

"This fear of inflation I think is way overstated. We've looked at it very very carefully. We've analyzed it every which way. One myth that's out there is that what we're doing is printing money. We're not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we're doing is lowering interest rates by buying Treasury securities, and by lowering interest rates we hope to stimulate the economy to grow faster. So the trick is to find the appropriate moment when to begin to unwind this policy."

Is inflation a lesser concern for the Fed?

"No. Absolutely not. What we're trying to do achieve a balance. We've been very very clear that we will not allow inflation to rise above 2% or less."

Can you react fast enough to keep inflation from getting out of control?

"We could raise interest rates in 15 minutes if we have to."

What are the odds we will fall back into recession?

"It doesn't seem likely that we'll have a double=dip recession.... Now that being said, I think a very high unemployment rate for a protracted period of time, which makes consumers, households less confident, more worried about the future - I think that's the primary source of risk that we might have another slowdown in the economy."

Is the recovery self-sustaining?

"It may not be. It's very close to the border. It takes about 2.5% growth just to keep unemployment stable, and that's about what we're getting. We're not very far from the level where the economy is not self-sustaining."

On deficit reduction:

"We need to pay close attention to the fact that we are recovering now. We don't want to take actions this year that will affect this year's spending and this year's taxes in a way that will hurt the recovery. That's important. But that doesn't stop us from thinking now about the long term structural budget deficit. We're looking at 10, 15, 20 years from now a situation where almost the Federal budget will be spent on Medicare, Medicaid, Social Security, and interest on the debt. There won't be any money left for the military or for any other services the government provides. We can only address those issues if we begin to think about them now."

On taxes:

"Tax code is very inefficient, both the personal tax code and the corporate tax code. By closing loopholes and lowering rates, you could increase the efficiency of the tax code and create more incentives for people to invest."

In short, there really aren't a lot of surprises here. He reiterates his stance on the economy, demonstrates his confidence that the Federal Reserve is up to the challenge of getting the US through the not-really-a-recession-any-more, and generally reminds everyone that whether you agree with his policies or not, he has reasons that seem good to himself and the rest of the Fed for the policies he sets. He really isn't just tossing a dart at a board and seeing what sticks.

I will say I was surprised by his comments on how long it will take to see unemployment rates come down. I mean, the Fed has been pretty candid about thinking they'll stay at 9.5% or so through 2011, but I did not expect to hear him say "4-5 years". I also did not expect (but I do agree with) his comments about the tax code.

Will this interview mollify his critics?

No.

Did you really expect it to?

No.

But it does do a good job of allowing him to make his case to the American people, and of reminding them that he didn't just get the job because he has a nice beard.

That Was An Unexpected Rally

"Rally?" I can hear you all asking. "Have you lost your mind?"

No, not really. Hear me out. At one point, the Dow was down 109.51, or nearly 1% (0.99%, if you want to get technical). It closed only 46.47 (0.42%) down. That's not a great rally, but it is a rally.

Now, what drove it? Part of it was the unexpectedly good consumer confidence figures. Part of it was President Obama and Republican congressional Leaders agreeing to seek a compromise on the expiring Bush tax cuts (says the AP)[1]. Still, despite the guarded optimism and weak rally, it was a sad, sad ending to a sad, sad month.

Still, Pyongyang hasn't unleashed the People's Glorious Revolutionary Atomic Mushroom Brigade, so things are looking up. For the moment.

[1] Yes, the markets were mildly happy about a promise to try and reach a compromise. Expectations have been lowered for your convenience.

Articles cited:
Stocks pare losses on optimism over tax cuts (http://hosted.ap.org/dynamic/stories/U/US_WALL_STREET?SITE=SCAND&SECTION=HOME&TEMPLATE=DEFAULT)
Obama, GOP promise to work on differences on taxes (http://hosted.ap.org/dynamic/stories/U/US_OBAMA_CONGRESS?SITE=SCAND&SECTION=HOME&TEMPLATE=DEFAULT)

U.S., Panama Sign New Tax Information Exchange Agreement

U.S., Panama Sign New Tax Information Exchange Agreement

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November 30, 2010
TG-982

U.S., Panama Sign New Tax Information Exchange Agreement

WASHINGTON – In a ceremony at the U.S. Department of the Treasury today, Treasury Secretary Tim Geithner and Panamanian Vice President and Minister of Foreign Affairs Juan Carlos Varela signed a new tax information exchange agreement (TIEA) between the United States and Panama.

"Today, we are ushering in a new era of openness and transparency for tax information between the United States and Panama" Secretary Geithner said. "This bilateral agreement to provide for the exchange of tax information between our two countries reflects the commitment of the United States and Panama to the importance of transparency of tax information."

Upon entry into force, the new TIEA will provide the United States with access to the information it needs to enforce U.S. tax laws, including information related to bank accounts in Panama.

The TIEA will permit the United States and Panama to seek information from each other on all types of national taxes in both civil and criminal matters for tax years beginning on or after November 30, 2007. Information exchanged pursuant to the TIEA shall be used for tax purposes, although the information may also be used for other purposes as permitted under the the provisions of the Treaty on Mutual Legal Assistance in Criminal Matters between the United States and Panama as long as the tax authorities of the country providing the information consents to such use in writing.

The full text of the TIEA and the TIEA Joint Declaration can be viewed at the links below.

###

LINKS

• U.S., Panama Tax Information Exchange Agreement
• U.S., Panama TIEA Joint Declaration

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Questions? Contact Us

What's Going On This Morning?

Much of it is the "same old same old". The 85 billion euro Irish bailout isn't giving anyone in Europe any comfort. Sovereign bond investors are demanding an increasing premium to hold Spanish and Italian debt, because (in the words of Everett Brown, IDEAglobal European bond strategists) "Spain is almost too big to be bailed out whereas Italy is too big to be bailed out." Italian and Spanish bond yields are up, the euro is down, European equities are weak, and US Treasury prices are up.

North Korea Crazy [1] isn't making things any better as it announces construction of a uranium enrichment plant. But rest assured, the nation that shelled Yeongpyeong Island last week and then declared the US and South Korea to be "arch criminals disturbing peace and security" (for the crime of, y'know, calling Kim Jong-il a raging nutbar), will use it entirely for peaceful purposes. Oddly enough, their new mushroom cultivation technologies have not calmed anyone's concern.

Closer to home, the Street is watching with keen interest the "negotiations" between President Obama and the new Republican Congressional majority over whether or not to extend the Bush-era tax cuts. The president wants to extend them for the middle class [2], as he feels that the loss of some $700 billion in tax revenue would have a negative impact on the Federal budget. Meanwhile the Republicans want to extend them for everyone and then cut spending [3] to prevent the negative impact on the Federal budget.

[1] "BANG! There It Is" still in the top 10 a week after release.
[2] No word yet on how "middle class" will be defined.
[3] No word yet on what actual spending they would cut. Except probably NPR, which they seem to believe is staffed by Nazis.

Articles cited:
Euro debt contagion keeps markets uneasy (http://www.reuters.com/article/idUSTRE69K04L20101130)
DPRK says to actively develop nuclear capability for peaceful use (http://news.xinhuanet.com/english2010/world/2010-11/30/c_13628272.htm)
US-S. Korea Wholly to Blame for Escalated Tension and Danger of War (http://www.kcna.co.jp/index-e.htm)
New Mushroom Cultivation Technologies Developed (http://www.kcna.co.jp/index-e.htm)
Obama, Republicans in tax face-off at White House (http://www.reuters.com/article/idUSTRE6A44K020101130)