For the second day in a row, we have warnings from the Federal Reserve on a potential quick reversal of the massive quantitative easing program. Today, we have Philadelphia Federal Reserve President Plosser providing these headlines:

18:00 29Sep09 RTRS-PHILADELPHIA FED PRESIDENT PLOSSER: SIGNS ECONOMY “TURNING A CORNER”
18:00 29Sep09 RTRS-PLOSSER: FED WILL NEED TO ACT PROMPTLY, “PERHAPS AGGRESSIVELY” WHEN TIME COMES TO EXIT
18:00 29Sep09 RTRS-PLOSSER SAYS BELIEVES FED WILL NEED TO ACT BEFORE JOBLESS RATES HAVE RETURNED TO ACCEPTABLE LEVELS
18:00 29Sep09 RTRS-PLOSSER: OUTLOOK FOR INFLATION IN NEAR-TERM REMAINS SUBDUED
18:00 29Sep09 RTRS-PLOSSER SAYS SEES GREATER RISK OF HIGHER INFLATION IN INTERMEDIATE TO LONG-TERM
18:00 29Sep09 RTRS-PLOSSER SAYS WILL SEE JOBLESS RATE COME DOWN ONLY WELL AFTER ECONOMY BEGINS TO RECOVER
18:00 29Sep09 RTRS-PLOSSER SAYS EXPECTS ECONOMY TO RETURN TO GROWTH IN SECOND HALF OF 2009
18:00 29Sep09 RTRS-PLOSSER SAYS EXPECTS GROWTH TO PICK UP TO 3 PCT IN 2010, 2.7 PCT IN 2011
18:00 29Sep09 RTRS-PLOSSER SAYS ANTICIPATES UNEMPLOYMENT RATE WILL “CONTINUE TO CREEP UP A WHILE LONGER”

He went on to specify that the central bank needs to be ready for 50 or 75 basis point rate rises. This hawkish view is the first time I’ve heard a Fed president mention Volcker like rate hikes. The key is that he gives you a time frame for when the problems will occur and the potential for aggressive action: intermediate to longer term. Plosser indicates that inflation will be an issue later on, but that the Fed will have to act before the unemployment rate returns to acceptable levels. Following up on my point from yesterday, Plosser said the Fed wants to avoid the a second “Great Inflation”….

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In the global quest for revenue and funding, three new entrants are making a splash. The European Bank for Reconstruction and Development (EBRD) has appealed for a 50% capital increase to mitigate the impact of the global economic crisis on central and eastern Europe according to the FT. They are asking for an extra E10bn ($14.5bn) to allow it to expand its lending and compensate for a sharp decline in private capital flows into the former communist countries. The EBRD is controlled by 60 countries.

BNP Paribas joins the long list of global banks attempting to buy their way out of government ownership by raising capital. France’s largest bank announced that they would launch a E4.3 billion billion rights issue that would be used to buy back E5.1 billion in shares the government bought to help BNP during the crisis. BNP joins J.P. Morgan, Goldman Sachs, and Morgan Stanley in repaying the government for their assistance.

Lastly, the FDIC is going to propose today that the bulk of the banking industry prepay three years’ worth of fees to replenish the fund that insures trillions of dollars of customers’ deposits. According to the WSJ, the FDIC having banks pay up front for 2010, 2011 and 2012 could bring between $36 billion and $54 billion to the government agency, which insures deposits at more than 8,000 banks. The WSJ said it couldn’t be learned when the assessments would have to be prepaid. Why is it when I read this new funding scheme, I think California? Here’s the question for Ms. Bair: what happens after the FDIC goes through this funding and needs more? 2013 to 2016?

In the United States, this demand for revenue/funding will grow exponentially should the Congress pass a health care “reform” bill that increases spending without finding a revenue source to cover the costs. One of the costliest components of the bills circulating that will eventually have to be reconciled is the public option. However, the bill will mandate a large increase in Medicaid spending that the individual states will have to support. Remember, US state governments received payments of $87 billion from the stimulus plan to help them with Medicaid.

EBRD, BNP, and FDIC indicate a global search for funds and revenue from three separate areas of the global economy. This demand will grow more acute as we head into 2010 if the global economy fails to rebound consistently. There is a waterfall effect developing from government economic spending and the resulting bill coming due in the form of government deficits. To deal with this demand, the tax base will need to be increased or the tax level will go up. I expect both to happen globally. Can bell bottom jeans, men’s facial hair, and 1970s stagflation be far behind?

Today at 1PM ET, I’ll be appearing on CNBC’s Power Lunch discussing the G20 meeting.

Here are the major points of interest on the G20 as the details leak out on what will be in the communiqué.

1. There will be broad agreement on the need to reign in bankers pay. They will attempt to provide rules to tie compensation to risk. and to tighten/capital requirements.

2. There will be broad agreement on financial regulatory reform with the specific plank of tightening/increasing bank capital requirements.

3. There will be broad agreement to be deliberate on withdrawing stimulus to their economies and to cooperate/coordinate the exits.

4. There will be broad agreement to increase the participation in the IMF by EM with a 5% point shift in voting rights.

5. There will be broad agreement to promote more balanced current accounts, and will undertake monetary policy consistent with price stability in context of market-orientated foreign rates. Members with external deficits will promote saving, fiscal consolidation, while those with external surpluses pledge to strengthen domestic sources of growth.

Again, the most market moving events will be the side commentaries from the Finmins……

Read the following and think of how you feel

“The market is not functioning properly. There has been a widespread loss of confidence, and major sectors of America’s financial system are at risk of shutting down. The government’s top economic experts warn that, without immediate action by Congress, America could slip into a financial panic and a distressing scenario would unfold.

More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically.”

“And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And, ultimately, our country could experience a long and painful recession.”

Anxious? Uncertain? Grab the beef jerky and head for the hills? Well, this is a section of the speech US President George Bush gave on September 24th, 2008 during the “Panic of 08″. Again, this underscores that leadership was lacking and mistakes were being made at the height of the crisis. Since our current president is much better at hopium and speechifying than Bush, we can only dream big and wish we don’t have to hear such downbeat language ever again.

Here are the two clips from my Saturday interview on WGB radio in Chicago.

Jerry Agar and I talked about job losses in the United States, job gains in Canada, and why I was joking when I said the Bush years weren’t really that bad compared to now.

Clip One: http://www.illinoispolicy.org/uploads/media/mulitmedia/jerry/Andy%20Busch%20clip%201.mp3

In next section, we also compared today to the 1930’s and talked about the amount of power the unelected chairman of the Fed has. In the second section, you will hear which nation I blame for the world-wide recession.

Clip Two

http://www.illinoispolicy.org/uploads/media/mulitmedia/jerry/Andy%20Busch%20clip%202.mp3

 Friday brings us to the favorite part of the month when we sigh and think:  were the Bush years really that bad?

 Seriously, the August US unemployment rate is expected to jump increase to 9.5% from 9.4% in July and non farm payrolls are expected to have declined 230k.  From a low of 4.4% in October of 2006, the number of unemployed has soared to 6.7 million in the United States.  It’s one of the contributing factors for why President Obama is seeing his approval ratings sink.

The recovery is based primarily on inventory rebuilding and industrial order pickup with US exports accelerating.  Factory orders and ISM manufacurting have shown improvement that leads me to believe they will resume hiring soon.  Watch the average non farm weekly hours for an increase and a potential bump to income. 

Hovever, consumer spending is lacking.  This is why there is consternation over the lack of job creation even with growth returning this quarter.  It’s seen as either unsustainable or lacklustre going forward. 

In the markets, the oddity remains of why gold is rallying in the face of lower US bond yields and a relatively firm US dollar.  The answer may lie in central banks keeping their foot on the monetary gas and indicating their foot is going to stay there for a long time.  Additional reasons:  Swiss bank clients switching out of US assets into gold, closing of a gold ETF, and worries over a Latvia default.  

If China is our paradigm for how monetary stimulus leaks into commodity markets, then this is another reason why gold may be rallying as well.

Never a dull moment ahead of Payroll!  Unlike others, I’ll be in all day watching to see if the link between Risk On/Risk Off breaks down.

Rasmussen daily tracking polls show that President Obama’s presidential approval ratings hit -11. The peak was at +30 on the 2nd day he took office and has been declining ever since.  As the NYT David Brooks writes, “All presidents fall from their honeymoon highs, but in the history of polling, no newly elected American president has fallen this far this fast.”

This further perils his ability to get a health care bill passed in the fall and certainly means his fixation on public option will be in jeopardy. If he can’t compromise on the public option, he runs the risk of what happened to Bush on social security. Bush wanted private accounts and alienated key Senators by not compromising.

Read the two NYT op-eds from this Sunday on how Reagan’s tax reform of 1986 is an excellent paradigm for how to successfully bring about health care reform. Both Hubbard and Bradley write on the topic from their experiences with the Bush White House and the Reagan White House.

As an indication of what’s coming, the Senate Finance committee held 130 meetings over the bill in the lead up to getting it passed. It took time, but it got done.

I would expect something similar to happen with health care: more time, more thoughtful consideration of the outcome, and more likelihood of it getting passed.