The Funnel Effect (Reprint Feb 2007)

People are waiting for real estate to fall flat, and there is going to be a long wait. Not that it won’t happen, it’s almost a certainty that it will. But by the time it does come to fruition, it will be a moot point.

Here is a concept, let's call it the "Funnel Effect." Individual items drop into the funnel and combine with others. As they drop through this funnel as a group, they become more concentrated.

The easiest way to view the funnel effect is from bad housing loans, Visa and Master Card accounts. If you are a credit card company or a real estate lender, these problems are quite apparent; they could have hundreds if not thousands of people in a distressed state. This funneling effect of each individual, demonstrates what happens higher up in the retail/wholesale chain. We have consumers all over the world that purchase goods and carry on with their lives. When the economy starts to go bad, we have a situation where many people cannot manage to live in their accustomed manner and cut back on consumption in some form or manner.

Using a Starbucks Coffee Shop or Home Depot, the Funnel Effect (lack of consumption) would be reflected as a drop in sales. Individuals decide to spend less or not pay for an item like real estate taxes. Notice, that these choices of not to consume or pay a bill, converge into a group category. Housing funnels into lenders who made the loan. Bankruptcy’s funnel into credit card losses for the card issuer. The real estate tax base funnels into County Governments and School Districts.

Each home owner facing foreclosure will fight hard to survive and keep his house. What will happen, will be the funneling effect of their lack of consumption. They may go into foreclosure, but the lender's pain is far more evident earlier on, than the individual homeowner.

The thing not realized until it’s too late is that government expected receipts are projected out several years. In a declining market, this optimistic view of the future can lead to severe cutbacks in government spending. It's kind of like hitting a brick wall at 60 miles an hour. The wall wasn't there a minute ago.

Our government is the ultimate “Canary in the Coal Mine.” The City of San Diego is a deer in the headlights!

Is Madoff Worse Than Bernanke?

A reader emailed me a question the other day. I decided to post the answer I sent to him.

Why bond price go up when Fed buys bonds?

There are two things going on here. The Treasury issues and sells bonds and the Federal Reserve is in charge of the currency. The Treasury borrows money and the Federal Reserve exchanges like for like.

At a Treasury auction, the buyer is a person or institution with savings to purchase the bond. The purchase removes money from circulation (the government is going to spend it) The selling process is an auction. If there are more buyers than bonds, the price for the bond increases and in lock step, the interest rate decreases.

The other thing happening is when the Federal Reserve buys a bond. The Treasury prints the paper and the Federal Reserve pays for it with printed dollars. In this simplified form, it is a zero sum game and makes no real sense. Why would you create it and then sell it back to yourself?

These two things seem unrelated but carry it forward one step. If China decided that it wanted to sell the bonds it holds back to the US and there were no buyers, the bonds would drop in price until they found a buyer. If say, a previously issued bond was at par and paying 4% interest was offered for sale, and buyers demanded 8%, the bond would drop in value by 50%. This would be very observable to the buyers at present Treasury auctions and they too would want 8%. So the Federal Reserve is buying these bonds at par as they hit the market. The net result is an increase in the money supply. This action guarantees the value of all previously sold Treasury issues. Note, the investor pays in real dollars and gets back printed ones. Since all dollars are alike, we have more dollars chasing the same amount of goods.
[End of email]

I think what we need to look at here is values. Madoff got 150 years in prison and he is 71 years old. So he will be 221 years old when he gets out(I'll only be 212). I think that a 30 year sentence would have kept the judge from looking like an incompetent idiot. You do have to ask yourself, if Bernanke buys enough US Treasury's from China, does he get the same treatment? Of course if Madoff's sentence were to be adjusted for inflation, he just might be free in 10 years.

We are next in line to lose our savings by inflation and no one will go to jail, go figure!

Government Inflation

In California here, there was a 13% increase in sales tax. They raised it a penny from 7.5% to 8.5%. Doesn’t seem like much but none the less it is 13%. Vehicle registration fees rose from .65% to 1.15% of value. That’s pretty close to a double of 100%. On top of that there was a $1.50 increase in tax on a pack of smokes. Figure about a 40 percent increase there.

For simplistic purposes (for which I deserved to be shot) assume that the cost of government has remained about the same (as has a pack of smokes)(try to keep a straight face). Back in 1964 a pack of cigarettes cost 25¢ and minimum wage was $2.00. If you do the math, one could buy 8 packs of cigarettes for one hours labor. Let’s progress forward to now. Cigarettes are $5.50 a pack. Extend out the 8 packs per hour and we arrive at $44 dollars for an inflation adjusted minimum wage. This calculated wage is more than most people today are making per hour, so it seems pretty absurd.

What we are looking at, is forced inflation by government legislation. Our wages are not increasing, and at the same time, more of what we have earned being taken away from us in the name of taxes. These are just some of the visible taxes. There are a lot more that are hidden (home construction fees/taxes come to mind).

The funny thing is, I would consider it an act of decency to ban smoking all together, rather than to tax it to death, and at the same time ban any form of gambling like the state lottery. Nobody has accused any legislative person of late, as having some sort of moral fortitude let alone a backbone. They don’t want to get rid of the smoker or gambler, they just want to tax their addiction and benefit from it.

Where do we go from here? Is a pack of cigarettes worth $5.50 a pack and is the fair minimum wage $44 per hour. I seriously doubt it. Something is wrong; our wages are not fitting the tax structure in place. I get the feeling that a pack of smokes hasn’t really gone up in costs, but the consumer hasn’t caught on to the inflation aspect of it yet.

I wonder what free health care will do to the price of cigarettes? If the cigarettes don't kill you the taxes will.

Let's Tax the Poor

This phrase you hear from Congress all of the time “Tax the rich.” What does it mean? It certainly doesn’t refer to the person who has 10 million in the bank and who doesn’t work. They are talking about wage earners who get paid a lot.

The really weird thing is, 40 percent of the population pays no tax at all. They get to live here free (they don’t make enough money to pay taxes). The highest wage earners pay most of the taxes (god bless them).

Has anyone ever said, screw the taxation system and let's have everyone pay two month’s wages or work on a government chain gang to satisfy your government obligation? I do not get this “tax the rich” solution. If you are truly rich, you don’t need to work and what taxes are you going to pay?

People get rich in other countries and move here to retire. We are not taxing them or any of the truly rich.

If you are poor, you get a free health care, free food stamps, free college education, and free welfare. You don’t have to pay your fair share. Let the rich pay your bills.

Congress is so set on helping the poor. Everyone needs to pay into the system, tax wise. 40 percent of the population paying no taxes is absurd. Either pay with cash or labor.

Let’s tax the poor and not feel guilty. We have taxed the rich enough already; all they do is move to a country with a lower tax base. We need revenue from those who are a captive audience. The poor are the people who get the greatest return. It doesn’t cost them a dime to live here.

Of course, if your neighbor can't pay his mortgage, Congress will help them with that also. Do you get the feeling that deadbeats, have a lot of political pull? I can't quite figure that out! It has to be my money they are spending; they don't have any that they can call their own.

Why should some people get a free ride just because they claim that they can’t pay for it? Rome built its roads with labor from people that had no money to pay tax.

We're Not Out of the Woods Yet

This Blog tries to keep out of politics mainly because both sides think that the other side is the problem. When you think about it, without the other party being there, you have no one to blame the mistakes on.

Every four years we elect a president. About half of the voters get their choice of who gets the office. After elected, the President gives a couple of speeches and then settles down to the job of running the country. Then after about two years in office the press usually starts whining that there haven’t been enough Presidential news conferences.

This President’s plans may or may not work; only time will tell. But there is one thing that is very irritating; this guy will not stop talking. He has a solution for everything. Most probably, if he were to stop explaining what is being done, we might interpret things for ourselves and come to the “wrong” conclusions.

Can you imagine getting on an airliner for a cross country flight and have the pilot on the intercom talking to the passengers for the whole flight? Even if there was nothing wrong, you might question the pilot's mental state.

Presidential speeches use to be rare enough to where you would take the time to listen to at least part of it. Does President Obama think he has a captive audience and can talk his way out of this mess? Haven’t we had one too many press conferences? Is this going to be one never ending pep rally? He reminds me of the construction worker who leans on his shovel when he talks.

I'd really like to turn on the TV and not get a Presidential briefing on how great the economy is doing (he'd be playing golf if that was true). It’s illuminating to hear the President say, “We aren’t out of the woods yet.” It sets my mind at ease to know, it's not a train tunnel that we're in.

Chrysler Fiat Deal Rips Bond Holders

When the banks and brokerages got Tarp money and then paid out those huge bonuses, it upset a lot of people. Whose money was being paid out? It seemed rather obvious, it was TARP money.

The automotive bankruptcies have a similar problem. In this case, the bond holders are being short sheeted. The government gives 9 billion dollars to Chrysler to keep it alive and then tells the bond holders to shut up and accept the buyout plan. The bond holders can very well contend that any money accepted from Uncle Sam’s bailout gift, was money they were also entitled a share of. Now the government says Fiat gets to buy Chrysler and the bond holders had better accept the deal.

There is a rush to push this bankruptcy through the courts. If the deal doesn’t go through fast, it won’t go through at all. The bond holders have the right to demand that they be paid in full, or sell the company’s assets and get their pound of flesh. These assets might sell for a lot more than the government is willing to admit. Some of this is prime real estate. Either way, the bond holders deserve their day in court. On top of that, these bond holders have already been burned by GM and Chrysler, why would they want paper that is subordinate to the debt they already hold?

What could happen here could become a real mess for the government. The courts could rule in favor of the bond holders. The US government wants to gift money to the car makers, to keep them in business. Haven’t they, by their actions, become a cosigner guaranteeing the car makers debt obligations? Why shouldn’t the bond holders be entitled to bail out money and maybe quite possibly payment in full?

The administration is talking cram down mortgages and now they are going to stiff bond holders. Isn’t it time for the courts to rise to the occasion and take back their power? Government has to be held accountable for trying to change rules of law that define our legal system (ie modifing original loan agreement terms). So far, nobody has dared to get in the way except a few bond holders. Look for a Supreme Court ruling on this litigation. It could be a real eye opener.

Fiat’s going to buy Chrysler? Give me a break! I think that once they explain to the Italians that you can’t put 4 wheels on a Gucci handbag (it's too small), the deal will fall through.

General Motors, a Bridge too Far

Our government says they own 60% of General Motors. 60% of nothing is still nothing. The company is going to keep Cadillac and get rid of Pontiac. I hate to say it, but Cadillac is an “Old Farts,” car. 50 years ago you were somebody if you had a Cadillac. Today, a Lexus, Beamer or a Mercedes will project an aura of status. You know damn well grandpa didn’t drive one of those! In the present economy, shouldn't the focus of production be more on utilitarian rather than luxury type cars?

Now the government wants GM to produce electric cars and “increase car mileage.” Electric cars sound great, but maybe in another 50 years they might be economically feasible. Now, they deliver too little and are not as cost effective as a regular gas guzzler. On paper, it's a no brainer, in the real world, they just aren't practical. Plus, Congress’s requirement for better gas mileage has more to do with car production than more efficient engines. The car manufacture mileage ratings are a reflection of the average miles per gallon for all cars produced by the company. So to increase gas mileage, you produce more smaller cars than larger ones.

When we examine what is happening to GM, it is very apparent that they have made extremely poor business decisions since the early 1960’s. The American car companies have always had an attitude problem. It’s kind of like Henry Ford’s comment, “Tell the consumer, he can have any color car he wants, as long as it’s black.” The leaders in innovation have come from the foreign car manufacturers, and they have earned their way into our country by being better.

In Southern California, massive traffic jams on are not an indication that we need more freeways. If we have to live with traffic jams like this, why can’t we have public restrooms every 10 miles on the freeway? (There are NONE in all of LA) The idea that better mass transit would lead to less cars on the highway never seems to be an obvious solution.

Here is an experience of mine that relates to mass transportation. Last year I was flying from San Diego to Washington DC. I got to Chicago and the connecting flight was canceled (talk about being irritated). I was able to book a flight into Baltimore MD. I was told by the ticket agent that it was a cinch to get to O’Hara in DC to recover my luggage (he stretched the truth a bit). From the Baltimore airport (the people there were extremely helpful), I took a 17 mile bus ride to the beginning of the Washington DC subway. The whole way on the bus, I’m thinking “Riding a subway late at night in Washington DC, I have to be nuts!” When I stepped into that subway station, I felt like a hick from the boonies. The size and grandeur of what they have built is mind boggling. This transit system got me to O’Hara in less than an hour; I picked up my baggage and my rental car and was on my way. As for sights to see in DC, I recommend the subway. The rest of the country needs a mass transit system on this level.

So with all of these car companies going broke, who in Congress is going to stand up and push for mass transit? --No one. GM has got to sell some vehicles, lots of them.

If we need to spend a lot of money to stimulate the economy, wouldn’t mass transportation be the spot to place it? Let GM die. They never had our best interests as a nation at heart. They wanted you buy a new vehicle every two years and keep them in business. The car companies from the 1930’s on, were responsible for the destruction of mass transit in the United States, “Everyone should own their own private vehicle.”

The only trouble with the government bailout plan for GM, is that how do you finance a car without a job? And if you do have a job, do you really need a new car? And of course it follows, if you don’t need a new car, then you don’t really need mass transit either. It’s amazing how things just seem to work out just right--go figure!

The Absurdity of Reality

Bank of America is going to sell another 825 million shares of stock at $10 a share. What the Company is doing to the share holder, is about on par with selling a hooker lipstick that prevents VD (you have to be blond to bite on that one). The TARP money is no good? It’s kind of hard to figure that out considering that the banks don’t have to account for it.

Put it another way, Bank of America needs 8 billion dollars to stay in business. So if you are already a stock holder, the added dilution is welcomed. Something added to nothing gives you a few cents in the “Bank.” Both Citi Bank and B of A have a good chance of collapsing sometime this year due to an inability to finance their credit operation.

Congress in their infinite wisdom is passing a law on credit card usury rates. Look for your rates to jump sky high before the law takes effect. The Credit card companies are not interested in future business, they want the money they loaned out, back, and that just isn’t going to happen.

Everyday now, we hear the phrase, “We have hit bottom.” Things are going to get better. California voters just turned down a bunch of bond measures to fund the budget. I guess hitting bottom, means that the Governator is taking bids on recycling the copper plumbing in state offices.

What gets cut first? --- Prisons, welfare, mental asylums, schools, teachers, fire, health services, and police. So if you have less than 5 years to serve in prison, you’ll be released. If you’re under mental treatment, you get to go “home” (find a shopping cart). Less school hours and no jobs, the neighborhood kids will be ransacking your house while you are at work. The police won’t arrest anyone, why bother, they won’t go to jail. So what are they going to do? Write you a traffic violation ticket and generate some revenue. Do you get the feeling that a lot of us are about to become victims in this fall from grace?

The California budget has had to face reality which is a good thing. The reality is that Disneyland is in California, but Congress thinks that Tinker Bell can throw this Fairy Dust (TARP money) everywhere. Governor Schwarzenegger is not asking Congress for fairy dust, he’s asking Congress for real help.

The Grand Old State of Kalifornia could go bankrupt while the banks gorge on Tarp money. Go figure, and they don’t even "want" it!

US Government Faces Bankruptcy

Our government has spent all of the Social Security and Medicare surpluses. They weren’t spent on what they were allocated for, but they were spent. There is no problem spending money that is allocated further down the road; today you can always cover the amounts with the current budget. That is unless you run into a deep depression (and we know that that could never happen).

So what has happened, we are broke. The only way to fix it is to raise taxes. No one wants new taxes. Let’s propose new benefits for everyone like health care. The idea here, is that it is mostly money coming in with very little going out. The contributors are quite young. There is a 40 year lag time on having to pay out in real dollars.

The idea that Social Security, Medicare and Health benefits are undeniable benefits is absurd. These contributions are taxes. Your W-2 form shows what you paid where. It shows what your employer paid, but you paid that also (your employer figured it into your wage rate). The Supreme Court ruled Social Security taxes are taxes, the government can spend them as it sees fit.

Congress wants to offer us universal health care. Notice it is not free. They didn’t say that. They are going to charge you for it. Right now, you can get free medical care from any emergency room. What makes this different? Your paid wages will be subject to a health tax.

We can probably assume that 90 percent of those paying into the program are probably healthy and in very little need of health care. So from here the money is transferred to our over extended budget. At the same time you have to figure that all of those retired silver foxes on Medicare are relieved that their savings will not be wiped out by health costs. God Bless Congress in their infinite wisdom!

The shift of leadership to the Democratic Party didn’t change the seriousness of the problem, but now there is the chance that health care can be passed as a “benefit.” In actuality, Congress is raising our taxes without really figuring out how to pay these future benefits. The future will take care of itself, that’s what worries me with this Congress.

Obama needs the health care to pass. This benefit will take about $5,000 from each wage earner's yearly paycheck. We will have Universal health care and will probably have to wait 5 hours to see a physician.

We can’t borrow from other nations. Who will loan the government money at zero percent interest? My wife and I have gotten out of T-bills. We are putting our cash in a safety deposit box. We are not the least bit interested in interest rates of .17 percent. Give us a decent rate, and we might loan out our money.

"Free" Healthcare or "Raise Taxes?"

Obama says that 45 million Americans are without health insurance. Just tragic! Right! Is he talking about the 60 million kids under the age of 15? Or the 80 million people between the age of 15 and 34? Then there is another 100 million are between 35 and 59.

This number of people “neglected by our health care system” is probably severely mis stated. I assume that they can’t pay for it themselves. In order to cover them, those of us that pay for health care insurance must pay more since they can’t.

Add it up; there are about 140 million people under the age of 34 that really don’t need health insurance. Why not? They are healthy. Health insurers give them a very good rate on insurance. This is called the gravy boat, money coming in and very little going out. Under Obama’s plan, their rates could triple.

Have you had two heart attacks, want health insurance and wonder what your rate will be? I don’t, we know you can’t pay it.

Just been in a shootout with the police and have critical wounds and no insurance, who pays the bills? By god these people need health insurance, 300K to 400k worth just this week alone.

From an insurance concept, you build up an actuary table and figure out what everyone has to pay to get health care over their lifetime and charge accordingly. Presently it looks as if we need about 200K to 600k just for an elderly person. We are not talking rest home here, that’s extra. So if you work 40 years, that amount to about $5,000 to $15,000 per year in health care taxes. Since we have to cover those already old, double the amount to say $10,000 to $30,000.

Right now, everyone over the age of 65 has a blank check for health care and they never paid a dime for it.

People that end up in the emergency room are also entitled to free health care (they don’t have to pay for it). This concept of free care is about to shut down emergency rooms nation wide.

Then we have people on Medicare. The government pays $2,000 per day in Chemo therapy for people dying of cancer. Price is no object.

Currently we have a budget that needs more tax revenues. The country will not stand for a tax increase. Well, let’s give the masses free health care. That means we can take the 180 million people between the ages of 20 to 59 and charge them for this added benefit. $5,000 per person per year for health insurance would raise about 1.8 trillion dollars per year. And the employer pays half—oh goodie. That way, we can pay for the 48 million people already eligible for Medicare.

The question arises, does government need money for health care or for operating expenses? It’s kind of like hiring a hooker to solicit customers at a blood bank. The bank takes a quart instead of a pint. And you’re now more worried about making it to your car without collapsing, rather than the good time you had in mind. There is a fine line between what a hooker does to you and what the government does to you. The results the same, but only one will leave a smile on your face.

Going Broke Without a Clue

A notice from the water company arrived yesterday. They are raising their rates because of decreased consumption brought about by the drought. They are selling less water, but their fixed costs remain the same. So we get to pay more for using less.

It is the same story with GM and Chrysler. Selling fewer cars makes the companies financial future questionable. The fixed costs don’t drop. It used to be that the last two months of the year was the car company’s profit. When sales drop 50% those last two months never arrive. The contraction of sales can have the unexpected effect of forcing a company into bankruptcy; the fixed costs just don't go away.

If that is not bad enough, there are 50 state budgets, whose tax collections could fall 30 to 40 percent in the coming year. The state legislatures will select which bills get paid. Usually, Police, Fire and Education get cut. This really irritates the taxpayer to say the least. There are a lot of fixed retirement costs that will not disappear despite the labor cuts. Most states have already spent the money collected for this year. Now with the revenue collections dropping drastically, there is less and less money to fund various state programs into next year.

We have a very good chance of several states declaring bankruptcy before the end of the year. California, Florida, Michigan, Arizona and Nevada are high up on the list. Will the Federal Government step in and save the states in trouble?

What happens in this new era of too big to fail? Does the bankruptcy court take over the powers of the state legislature? Or does the Federal government take over and administrate the bankrupt state?

The government appears to be in a cover up mode. People in charge are losing their jobs for going along with the government’s strong arm persuasions. Government entities are being accused of overstepping their mandate (The Federal Reserve, comes to mind).

The economy in our area doesn't seem to be improving. We went garage sale-ing yesterday and I noticed 6 new commercial retail plazas under construction and two brand new ones that were almost completely vacant. Half of the present plaza malls in this area have many closed shops up for rent. Commercial real estate building is still in a boom stage here and there is really no explanation for it.

Of course the stock market has no clue as to what is going on—yet. Stocks are doing OK only because your IRA money manager refuses to sell. The losses are yours not theirs. This vast pool of money they manage is waiting for the market to rise up and return to the way things were.

What can we interpret from all of this? Conditions are not quite what our leaders are suggesting. The reaction to the possible Swine flu pandemic was blown way out of proportion; the bail out AIG probably accomplished little. The guys in charge rattled our cage and we panicked and accepted their proposed solution, just as we were suppose to. The real problem right now is where do we get the money to fix what we have just "paid" for?


Are we going to die of Swine Flu, or freeze to death while sleeping next to our shopping carts out on the street? Actions speak louder than words. Bawl out car executives for taking private jets to Washington and then take Air Force 1/2 (the short bus) on a low level fly-by of NYC???? It gives you an idea of where we are headed. Greenspan's quote, "Often wrong but never in doubt," seems to sum up the governments approach to solving this mess.

Sorting Out The Reality

I turned on the TV this morning and there is somebody from the Whitehouse discussing how things are under control. I’m wondering, "My god, what happened now." After a few minutes I figured out that they were talking about, Swine Flu. It seems like it is one crisis after another, those guys are running around with their rectal muscles in knots. Do you get the feeling that they are already in panic mode? A Presidential address day after day is getting incredulous let alone ridiculous. I wish someone would tell the guy to let up, he won the election. If you are busy talking to me, you can’t be working solving the nations problems, unless you’re trying to sell me something --- Hmmmm.

Bank of America CEO Ken Lewis is in hot water. Paulson told him to keep quiet about the Merrill Lynch deal if he knew what was good for him. Now the guy is being hung out to dry by the share holders for keeping his mouth shut. He can already claim that he doesn’t have a Porsche to piss in (he sold it to his CFO). This could be a real feeding frenzy for his lawyers; it could take years, before they spend his last nickel.

At first the banks needed a trillion dollars in TARP money and now they want to pay it back? It seems like no one wants to work for Uncle Sam. Maybe if the banks pay back the TARP, then they will get their bonuses and then they can send the Fed’s some jingle mail. There is nothing like telling people how much they can earn a year.

The bank stress test was a success. Everyone passed, what that means is anybody’s guess. They may have been checking for TARP money stashed at home.

The suicide of the CFO at Freddie Mac was kind of like touching off a nuclear bomb in the back yard, the neighbors, or what’s left of them are real quiet.

It appears that the focus of this administration is to fix everything at once, right now. They are going to stop Swine Flu, protect our borders, solve the banking mess, fix health care and lower taxes. This blather sounds more like an answer to a beauty pageant question. Where is the money, to do all of this, coming from? If we take a page from FDR, the fastest way to raise taxes like he did, was to promise Social Security benefits to the worker. This time, it will be free (socialized) health care.

Just for a joke, look at your tax forms that you just filled out and sent in. We paid $6,000 in Federal taxes, $1,500 in state taxes, $6,000 in Social Security taxes (your employer matches it) and $1,500 in Medicare (your employer matches it). Contrary to the way it is stated the employer doesn’t pay into Social Security and Medicare. It’s figured as part of the wage your employer offered to you, so you pay it all. My wife and I, paid $7,500 in Federal and State taxes and we also paid $15,000 in Social Security and Medicare.

So, when Obama says we’re not out of the woods yet, it means they need additional revenue (spending money). Figure they need a half trillion more in funds to run the government each year, the fastest way to get it on the books is as a health insurance benefit (AKA tax). The employee pays half and the employer pays half (yea right). Figure $2,500 for the employee and $2,500 from the employer. At the same time they can drop your income taxes $500 and fulfill an election promise.

So look for a new government benefit called health care. It will be run like our public rest rooms. Our government is desperate for cash. Remember this quote from long ago, “What’s good for General Motors is good for the country?” It kind of has a scary prophecy to it now. I'm reminded of a ditty from 1929, "Mellon pulled the whistle. Hoover rang the bell. Wall Street gave the signal. And the country went to hell." Looks like the ride has started, hold on!

Do You Know Where Your Money Is? (reprint)

Reprint from February 26, 2007

The question has to come up sooner or later. Why put money in the bank with these lousy interest rates?? Using the rule of 72, when you divide the savings rate into it (3%), you get the number of years for your money to double. In this case, it's 24 years. The inflation will eat you alive. A $100,000 in 1964 dollars is equivalent to $1,000,000 in purchasing power by today’s standards. So, to make it simple, over the last 44 years, we have had 90% inflation. The decimal point has been moved one space to the right. In 1964 gas was 30 cents a gallon and a house cost $20,000. Today gas is $2.65 a gallon and a house is around $200,000 (definitely not California!).

Examine a concept that is being glossed over and not taken at face value. Every house, stock, bond or mutual fund share has an owner at every instant in time. The certainty is, selling at the top is good and buying at the top is bad. Every dead horse has an owner (owning one is not a desirable thing unless you process dog food).

So let’s see, we have a zillion houses out there that are empty. We have 424,805 bankruptcies and 154,910 foreclosures nation wide according to foreclosure.com. The question comes to mind, who’s footing the bill? The money has been spent, just whose money was it?

It looks like the next thing to drop dead is going to be a credit card company. Wouldn't that be a real mess! Every layoff is a potential no pay. How many credit cards do you have in your wallet??

Any way you look at it, somebody OWNS all of this junk that is going bad. Its almost a forgone conclusion that whoever it is, has no idea of their vulnerability or their potential liability. Naturally this will all go away if we just close our eyes. My retirement fund or mutual fund couldn’t be that stupid or could it?

The One and One Half Trillion Dollar Loan?

The amazing thing about government is that they can solve all of our problems and give us all what we need. Step back one step and think about that. If it was true, all of our problems would have been solved hundreds of years ago.

The government is about to spend one and one half trillion dollars to stimulate the economy. Nobody has offered up the question of “Where is this money coming from?” The government is borrowing this money from somebody so we can consume what the savers denied themselves by saving it. The government is going to consume without producing new product for consumption.

Government taxation is a method whereby the government gets to spend a share of what the taxpayer produced. This spending is for defense, commerce, laws, education and other things that have become too numerous to mention let alone irritating to think about!

OK they want to spend 1.5 trillion dollars. Who’s going to be willing to loan to the government money at ½ percent interest (present 3 month T-Bill rate)? The Banks are getting free loans from the government and are declaring record profits. 25% interest on credit card loans from the bank’s ledger book are real “Money in the bank.”

Is something out of whack here? Banks get zero interest loans from the Fed, homeowner’s get 4.5% interest rates and the T-Bill rate is under ½% for 3 month T-Bills. If you figure the population of the US at 300 million and divide that into 1.5 trillion of proposed spending, we end up with $5,000 per person. So a family of 4 is about to spend 20 thousand dollars that they are never going to have to pay back? In other words, they are going to consume 20K that will never pass through their hands. Let’s add in free health care. Do you get the idea that we are dealing with someone with an addiction problem?

My question is this, where does the government get one and one half trillions dollars from, at these interest rates? If interest rates don’t rise dramatically, then it just might be time to buy gold. There is no reason to loan the government money at these low rates. It’s a little like pimping your sister, and you are her only customer. It kind of works, for all the wrong reasons.

Economic Terpitude (Reprinted)

Here's a reprint from October 21, 2007. It still has a pretty good punch. Maybe it's a bit more creditable today.

Banks, hedge funds and what ever are taking billions of dollars in loan loss provisions. I have been suggesting for over a year, that a lot of this money may be coming from our retirement funds. Think about it. If your wife buys a new fur coat with your paycheck, now you can’t pay the rent, that is obvious very fast. If the wife turned a trick with the old geezer down stairs and bought the coat, you are stuck wondering how she did it. The reason I suggest Retirement funds, is that the losses suffered so far appear to affect no one. But bear in mind, retirement income funds deal with the future. Most people are not ready to retire so these funds should have plenty of time to recover losses (keep quiet, keep your job). The write downs are massive. Nobody even blinks an eye. What’s a 10 billion dollar loss? The perspective is beyond comprehension. This money has to be coming from somewhere. Whoever’s money it is, they don’t seem to need it--yet.

The money supply worldwide seems to be contracting. Usually this would imply a rise in interest rates. That doesn’t seem to be happening. Commodities are increasing in value, which could be an inflation indicator. If reserves are being added to the banking system, then this could explain why rates are not rising (using a truck is cheaper than using Ben's helicopter).

A lot of the new earned money entering into the economy is not being used to create new jobs, its being “invested” in financial instruments. Workers are not creating new product, investors are placing side bets on the financial markets. The profit is gone from home building industry. Investment in rental property is a losing enterprise. Consumption seems to be tapering off. Home remodeling appears to have hit the skids. Starbucks seems to be doing OK, you have to draw the line somewhere.

Interest rates are dropping but you can't force people to borrow money unless there is some sort of return (like a house appreciating at 20% a year). That would explain why the stock market as well as the commodity’s markets are still in play. Cramer the other night was forecasting Google at $750. Everything is still going up. The stock market had a little hiccup on Friday. Nothing to worry about, Google kept on ticking just like a Timex watch. Of course it can’t be a bubble, bubbles don’t get that big!

You have a bunch of banks forming a consortium to bail out the CDO and SIV holders . They are creating a new financial instrument called a "USA," which is short for “Up in Smoke Assets.” It ought to be a hot item if they can figure out a way to package it. It’s kind of like selling invisible goldfish. Give the buyer one or two extra for free, so he thinks he’s getting a real bargain and then sell him some invisible fish food to boot.

The economy’s current condition reminds me of the embezzler and a millionaire taking a vacation at the same resort. The embezzler knows whose money he is spending. The millionaire has no idea that he is broke, but hey, everyone is having fun. Are we broke yet?

US to Sell Gold Reserves

World leaders agreed the other day, that the International Monetary Fund should sell gold to help stimulate world economies. Naturally the price of gold dropped below $900 per ounce when the markets learned that the IMF is going to sell 400 tons of gold.

Let’s just picture the IMF secretly located on some remote island with 3,400 tons of gold. Pretty implausible, isn’t it? This gold had to come from various world governments (i.e. members of the IMF). Most probably the IMF has pledges of gold in the form of paper certificates.

Here is where it gets technically twisted. Before when the world was on the gold standard; each country had a gold room with locations assigned to each and every country. If Germany sold one million dollars of goods to the US, one million in gold went from the U.S. part to the German location, and vice versa. If one country in the U.S. depositary got a pretty good size accumulation of gold, they might send over a boat to pick up the surplus. Then when you get about 10 of these world depositary storage vaults talking back to each other, the boat is not necessary, you owe to some other country your gain here.

If the IMF were to take a U.S. gold pledge certificate and submit it for cash currency, no gold is sold, but the IMF’s account now has less gold bars in it. It is here, that the true purpose of the gold backing can be realized. The gold guarantees the purchasing power of the sponsoring government's currency. If the US currency drops in value drastically, we have to cover the gold certificates at the present gold exchange rate.

Imagine that the IMF comes to one of these storage facilities to take physical possession of the gold, and then they sell it. Assume that the gold is sold in the US for dollars and the IMF gets a U.S. currency deposit of X amount of dollars. The extra effort to sell the gold on the spot market doesn’t make a whole lot of sense, does it?

Once you understand that the IMF holds no physical gold, the picture becomes clearer. World governments are realizing that there is a rush to convert currency into gold and as prices for the real thing escalates (it doesn’t seem like you can lose on this investment). So if we take the headline “IMF to sell gold,” and change the wording a bit to: “U.S. Government to sell down its Gold Reserves,” and I might add in parentheses, (in an attempt to tank the speculation in gold commodities), you see the real story. It didn’t work for Nixon and he had to eventually close the gold window.

I do caution the readers, I have not been able to really find any viable research information on what you have just read. Most references, from Google, were extremely vague in reference to the tangible assets of the IMF. You have to ask yourself, where do you get 400 tons of gold to sell, matter of fact like? Once you answer that question, this seems to fall into place. I could be accused of using a razor blade to make puzzle pieces fit, but I leave it to you the reader.

Fictionalized Accounting -- AKA BS

Forgetting politics, I am getting tired of turning on the TV and every day there is Obama telling us what the government is doing next. A lot of Presidents were accused of shunning the media, not this one. He even stood up the other day and told us that the government would honor GM car warranties. Just who is going to pay that bill? It’s nice to know that when the Defense Department buys a tank from GM, we the people cover the warranty repair.

It seems as if the taxpayer’s wallet is removed from this whole situation. Congress is going to lower our taxes, on top of that many people won’t even pay taxes, (they’re unemployed). Government revenues will drop by 50% and at the same time government spending will triple.

The housing collapse is getting “better,” it still doesn’t cost anything to buy a foreclosure. And if it doesn’t work out give it back to Fannie. At least you get to live rent free for a year.

This bail out money going to the “banks” is another strange item. Why loan to perspective home owners at 4.5% interest when the bank can put in into the latest and greatest bubble credit card debt? In that market, financial institutions can clean a plow with 28% interest return on cash loaned at zero percent interest (by way of the Bank of Uncle Bernanke Sam). I get 5 credit card applications a week still. It’s hard to figure out why these companies issues more; haven’t they done enough damage already to people that are broke?

The Federal Reserve lists credit card write offs at 8.82% for February. They suggest that it could approach 10% by year end. I suggest it could approach 14% by June. The aggravating thing about credit card debt is the fact that many families could conceivably have 20 to 30 cards.

Sane banks might suggest that all credit be cut off; our government will suggest otherwise, extend credit to stimulate the economy. Do you get the feeling that the people in charge haven’t got a clue, but by golly they’re going to fix this mess, even if it kills the taxpayer?

The irritating statements I see being made lately suggest that the worse is over and we are emerging out of this slump. It’s kind of like being hit by a car, laying on a rail road crossing and the train is right around the bend blowing its whistle.

Surfing the Kondratieff Wave

Here is a reprint of my second post as a blogger way back in May of 2006 and reprinted again August 2007. Click on the link in this article, you won't be disappointed.
If you're into investment cycles and charts, the Kondratieff Wave is one to examine. Basically the boom and bust cycle had a 60 year span. Here is a link to more detail http://www.kwaves.com/kond_overview.htm Credit the picture above from this link.

The cycle this time around is a little long in the tooth. There is a reason for this and I believe as do some others, that it has to do with the increase in the length of the average persons life span.It use to be about 60 years now we are up to about 75 years.

Each generation has a group of elders that can draw from past mistakes. We are at a point right now, that the follies of the 1920's and 1930's are not part of our "group memory" any more. Most people from that era would be at least 100 years old now. Now when you quote some historical aspect a cause of the last depression, you hear the phrase,"Its different this time."

People today think that the interest only no money down mortgage is something new. Well it isn't. They were written right up to the collapse in 1929. The banks soon realized that it was like the neighbor taking out your daughter for a "test drive" before he married her. The responsibility factor was missing.

Cycles are usually displayed as circles that would follow through phases and complete back where they started. I think that this is not a true analogy of what is happening here. If you start with a spiral going out from the center, this more correctly displays "history repeating itself." It s not quite the same, things have changed somewhat.

People are consuming more and more, and with that, comes the creation of more debt. It is this debt that will be marked to market. Mr. Kondratieff's theory suggests that all of this debt will disappear and the money supply will contract accordingly (drastically in this case).

I don't think that people fully realize how money disappears. Take Lucent Technologies a few years back. It sold for $80 per share and went down to $2. Somebody owned it the whole way down.

What really scares me today, is the people with savings and retirement funds, they have been funding this whole thing. The market will always go up (believe that and I'll tell you another). The trouble is, a majority of the owners of wealth, are going to want to get out of the market pretty soon and they are at the head of the line-- the baby boomer's.The baby boomer's think that this will be a relaxing walk into retirement. More likely its going to be one hell of a panic. If Mr Kondratieff is right, there will be a drastic contraction of the money supply because of the debt marked to market, and because of this, commodities should fall in price.

My question is this. If the world population has increased 4 times in the last 60 years and most of these governments have been printing money at a very vigorous rate, can gold and silver still be considered commodities? I think that they reside outside the realm of consumables.

As an addition to the original post, here is a little bit of video from You-Tube that everyone is carrying.

Shut Down the Federal Reserve

During the Great Depression over 3,000 banks failed; interest only home loans and 90% stock loans, were major factors. When people started runs on the banks, the institutions started to collapse because there was no central authority that could bring in reserves. The Federal Reserve did not insure deposits. It was pretty much a zero sum game. The speculators that made money and the people who borrowed it, got wiped out if their funds were in a bank.

When you examine the 1930’s scenario, one person buys a home for 100K and then sells it later for 500K. There is 400K created in speculation that no one really had to work for. So when the house is sold for 500K the seller puts it back in the bank. If the buyer defaults, the bank goes insolvent and the home later sells on the market for the original 100K. The 400K that no one worked for goes poof and disappears.

In today’s market, with FDIC insurance, it works differently. First the Federal insurance will cover most deposits. Now also, the Fed will guarantee the value of the home loan notes by Freddie and Fannie. The speculative money created by the housing bubble is allowed to exist. Also since it wasn’t destroyed in the collapse, the banks have to be made whole by honoring the bad loans. So all of the money created by the housing bubble still exists (money that no one worked for) and on top of that we are going to cover the amount that the banks lost in this bubble (nobody worked for this money either). So in effect, the government will double the money created by the original bubble. No one has lost a dime. That pretty much takes care of the banks.

The mutual funds and retirement accounts are a little different. There is no FDIC insurance. About half of the money in these accounts can be withdrawn without penalty, the other half can’t. The only reason Bernie Madoff’s Ponzi scheme worked so well, was that no one needed the money they had invested with him. This group of investments’ is very suspect right now. These investment funds are probably selling Treasuries to raise funds for payout. If you happen to be in the half that can’t draw their money out without penalty, you can share the pain of Bernie’s depositors.

Here is a quote from the Feds FOMC meeting.

To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

What the Federal Reserve is attempting to do is wrong, insanely wrong. This is stepping way beyond their mandate. They have to be stopped from doing this. They are exercising implied powers that go beyond their reason for creation.

I am beginning to see why Andrew Jackson shut down the Second Bank of the United States, which I believed up until now was a mistake. These actions to print money should violate some law of the land and it seems as if they don’t. If this bank cannot be controlled, it needs to be destroyed. Its new policies will destroy our financial system and ruin the retirement plans of many already on a fixed income.

In my humble opinion, the present policies of our government are devoted to preserving the status quo of the obscenely rich by destroying the middle class wealth by way of inflation. The poor lose nothing since they have nothing. Using the Federal Reserve in this sleigh of hand is unconscionable and despicable to say the least. Sadly I guess is what it boils down to is "Who cares?"

What is the Fed Up 2?

The Fed announced it will buy up to 300 billion of long term Treasury’s. Everybody just glosses over it, not understanding the implications.

First the Treasury sells the bonds to investors to finance debt. The Federal Reserve then buys the bond from the private investor offering a rate or a little above market rate to entice the owner to sell it. It is still a zero sum game. If the Fed prints the dollars and holds the long term bond, the day the bond matures, the Treasury redeems the bond held by the Federal Reserve and this returns the dollars put into the economy. Normally, the Fed might buy and then sell the bond way before it matures. It’s a way of increasing the money supply on a temporary basis.


There is another reason they might want to do the same thing. Suppose that the people owning the 30 year bonds need cash and have to sell in a hurry. Remember the bonds will pay face amount in 30 years at say 3.5% interest. That is a pretty long wait. To sell them fast, they need to discount them. So they might offer a 100K 30 year bond for 90K. That sort of a discount will move it pretty fast usually. When you discount the bond, the effective interest rate increases so in this case, the guaranteed yearly dividend of $3,500 divided by the purchase price figures out to be 3.89% interest for 30 years and a payoff of face amount 100k.

Look at it from a more realistic point of view. Suppose interest rates jump to 7%. In order to sell the 100k 30 year bond paying 3.5, you would have to discount it to 50K or wait 30 years for the full amount back. The interest rate doubled and the price of the bond dropped to 50% of face.

There are two things in play here. The interest rate paid on long term Treasury’s is a cost of doing business for government. The higher the interest rate, the more we the people have to pay on servicing the national debt. The second thing is investors trying to raise money by selling the long term paper. If there are no buyers, they have to discount it even more until it is sold.

What is happening here is that the Federal Reserve has become a market maker for people needing to cash in their long term bonds. If they buy every bond offered, the interest rate doesn’t have to rise, because there is no need to discount the bond. This is what the Federal buy back program is all about.

My interpretation of what is happening, is that the government sees massive redemptions of long term Treasury’s by failed financial institutions and needs to do some damage control. They will try to keep these Treasury’s from hitting the market and prevent interest rates from rising higher. This means they have to buy them all!

There is one slight problem here. The Feds need to sell the bonds back, later on, to contract the money supply. Their buying binge will probably fail. Then when interest rates rise to say 14%, each 100k bond will only be able to repatriate 25k not the 100k they dumped into the market. They can hold the bond for 30 years and collect the face amount, but they cannot contract the money supply by selling the purchased 30 year bonds unless they take a hell of a discount, and why do that? So from there inflation will roar to the finish line. I give this new program three weeks before it falls apart. The Huns (AIG) are looting the Treasury and Congress is helping them cart it away. Go figure! It's probably just my over active imagination running amok as usual.

A Touch of History

An Anonymous blogger has left a comment in the remarks section that I thought needed more exposure. AIM (An Inquiring Mind) is his byline. His thoughts adds some organization to what we have been discussing. Here is his post:

We've been on shaky ground and developing all sorts of systemic diseases for over a century due to operating with a central banking system controlled by The Fed, following Lord Keynes theories; income tax, going off the gold standard, totally utilizing a fiat currency, allowing politicians, lobbyists and the military industrial complex to dismantle our economy. Yet, as far as causality goes for this recent episode, here is my understanding and take on it:

It started with the Carter administration and the Community Reinvestment Act ("everybody should have a home and we'll lend you the money to buy it"). Clinton and Bush expanded it in their administrations.

Then we had the tech or dot com crash, a recession and the 9/11 terrorist attack. So, Greenspan lowered interest rates for a very long term. He created very cheap money. Lenders started coming up with all sorts of mortgage structures to facilitate home sales (ARMs, option ARMs, interest only loans, stated income only loans, etc.) They dropped all protective guidelines and standards because they were able to transfer the risk... they packaged and sold them to Wall St.

Wall St. with their new flock of financial engineers securitized these mortgages (as well as credit card, auto and student debt) in the form of CDOs, MBS's, SIVs, etc. and sold them off to every far corner of the world. They also transferred the risk to pensions, mutual funds, money market, hedge funds, etc. The credit agencies gave them falsely high ratings. Congress passed or rescinded laws in order to increase leverage, allow banks to become investment banks, create derivatives. The SEC allowed some to leverage at 40 to 1.

Then the bubble floated into a pin and popped. Beginning the financial collapse and cascade of trouble that we are now enjoying. Continuous and erroneous policies have been implemented as the solution (TARP, TALF, TLGP, TSLF, SLF, PDCF, HAM, ETC. ETC. ETC. ETC.) and they are being continued in the Obama administration. The fallout is historic: foreclosures, bankruptcies, commercial RE, debt destruction, unemployment, etc. etc.

There is a worldwide attempt to deleverage, restructure, and recapitalize. The International New World Economy boys see their chance to move things in their direction now, and will attempt to do so (under the "capitalism doesn't work" guise).

Our current administration has no focus or certainty. They go from one emergency or fire to the next. This is traumatizing the markets. We have a tsunami of trouble: zombie banks, zombie homeowners, key drivers of the economy are crashed, energy and food problems in the near future, etc. etc. And our government is basically running in the wrong direction with every solution they implement. They have no idea what other complications or collateral damage they are causing in our near and distant economic future.

The guys that caused this or allowed it to happen (Bernanke, Geithner, Summers) are now in charge of fixing it?! Many more explosions are yet to come. Due to this, there is really no way to predict where things are going and what will happen.

We've been forced into a situation of instability and inability to predict. We have to live week to week, month to month and can't rationally plan beyond these short time frames. The government is PUBLIC ENEMY #2. We are PUBLIC ENEMY #1 for allowing our government to grow into what it is and our politicians and corporate leaders to run astray.

More basic to this all is human nature. Once the government, wittingly or unwittingly, removed a significant amount of restraints the people went hog wild. Greed, something for nothing mentality, the party mentality, debt mentality, etc. all flourished and blossomed within the Capital building, the White House, Wall St., the halls of corporate America, the banks, the lenders, the shadow banking system, Main St. and in our own homes.

Hell, we are all to blame. Now we need rationality more than ever. Where is that going to come from?

Government "Enhanced" Spending

Some people have caught on to the new government approach to economic stimulation. If you have a credit card, you can still borrow, courtesy of the banks and the Federal Reserve. This is spending to stimulate the economy. I know people who have over 100K in credit card debt.

If you can’t pay off the principal on your credit card and it is way beyond being absurd; why not add more on to it, until they cut you off? It’s not like you have to work for what you’re buying. Be happy and consume. If you are broke, max out the card. Get what you can while you can. Plus if you are over 65 you get a bonus, you don’t need to file for bankruptcy. What wages can they garnish if you don’t work? Give your kids everything they’ve always wanted.

Somehow I don’t think that this concept of maxing out credit cards, has been appreciated for what it is, by the credit card companies. Unsecured debt is free money. Tarp funds are letting a very large credit card bubble grow even bigger. If the banks all got together and sorted accounts by address. They would realize that 15 different cards at one location, doesn’t indicate the residence is an apartment complex. It might indicate things are a not quite as they appear.

Unemployed? Start your own business. Buy a color Xerox laser printer and some linen paper and print up a couple of thousand 20 dollar bills. Let’s lend a hand, and help our government get this money printed. If we could get the unemployed set up to print dollars, we could be out of this mess by Christmas(Employment suggestions are for entertainment purposes only, talk to your probation officer for employment advice).

Poor old Barney Madoff has been put in jail for using creative Congressional financing practices. Congress is mad as hell. He spent a lot of that “rich people” money that they were going to tax. They are going to put him away for 150 years. That seems a little steep for impersonating a Congressman. There is a difference though, when Barney ran out of money, he went to jail. In our case Congress still has a check book, so we can’t be broke.

Here are some pictures from the past.











It's kind of a Grimm Fairy Tale with a bad ending for everyone.

Hard Times Lie Ahead

Here is another well written missive from the comments section of my last post, I thought deserved more exposure.

From Anon on a California Mountain:

This is the worst economic downturn the USA has experienced in 80 years. Granted, we have many safety nets, systemic cushions and advanced living systems that could prevent the degree of physical hardship that existed in the 30's, but avoidance of those hardships is not necessarily guaranteed. This crash could conceivably turnout to be the worst in this country's history.

We've had huge debt destruction and there is more to come. Huge de-leveraging is and will continue to take place. Assets have fallen precipitously in value and will continue to do so. Prices haven't followed and when the finally do (by marking to market, etc.) this will be a significant deflationary phase.

From an economic standpoint, the core reason behind this downturn is a generational period of very poor policy choices.

Healthy, sustainable economic growth is SAVING induced. Savings leads to a buildup of capital and productive capacity.

The economic "growth" that we have experienced in these decades has been POLICY induced. This has created booms that are artificial (i.e.Monetary Policy: long term low interest rates; Tax Policy: favoring debt and spending over equity and saving; Regulation Policy: opaqueness, laxity and lack of oversight; Social Policy: home ownership regardless of affordability).These policies created artificial economic demand that could only be financed by debt (because savings/equity didn't exist).

As I've opined in an earlier post, this is not a recession within a business cycle. This is a structural collapse... a soft depression, which could become a brutal and hard depression; a tsunami of deflation and then of inflation.

The economy must be reinvented. It must retool: it has to absorb trillions in bad debt and then transition into new productive endeavors. It must create productive capacity for the 21st century (energy, health, food and water being key areas that need new technologies and expansion).

The politicians want to reflate the value of assets, incurring trillions of dollars of additional debt to create the demand to buy these assets. Basically this is debt begetting debt.

This government intervention might bring about a limited period of "recovery"; although it will again be artificially generated and thus false. Unfortunately, this intervention will ultimately stifle actual long term growth, innovation and creativity for years to come. Our future will be dire unless we reinvent or restructure our economy.

Our leaders haven't learned from the past. Most anyone with first hand experience of, and an astute understanding of the Great Depression is no longer with us to point out the dangers. Our current leaders will destroy the currency through inflation in an attempt to halt the natural correction that is attempting to purge our system of its mal-investments, excesses and errors.

As individuals we can separate ourselves from the current political mindset and herd mentality, and utilize our knowledge of history and basic economic principles to predict the coming conditions and trends and implement strategies to mitigate the coming destruction within our personal lives.

The Pipe Dream

The government is going to stimulate the economy and create jobs with this multi Trillion dollar plan. It’s a little like the Marshall Plan in reverse. We are going to get the money before the disaster, not after it. The reasoning is, we get the free martini and the deck chair to sit in. Logic states that if you’re lounging in a deck chair enjoying the band, you can’t be standing in line to board the lifeboats.

Giving hundreds of billions to AIG is not going to increase jobs or stimulate the economy. This company is on life support, and we don’t even know why. This has to be a bill for previous consumption (financial insurance bets). We didn’t eat the meal, but we get to pay the bill. Add insult to injury, we have massive layoffs.

Interestingly there are two different types of layoffs. In the private sector, the layoffs are the result of a lack of consumption, car sales are in the dumps and real estate has gotten too real. In the government sector, the layoffs are a result of decreasing tax revenues, teachers and police. Notice if you’re in the latter group your workload increases and your wages don’t. It might be a good thing, less education makes for dumber criminals.

We couldn’t afford to spend the money when times were good and now we can??? It doesn’t take a pencil and paper to figure out that we have been shorted a couple of cases of whiskey, on this order!

The government isn’t creating new long term jobs. These jobs have to disappear when funding stops. Of course when you think about it, four years is a long term job in the government sector.

We need to invest in the private sector and focus on building items that people want to consume. Give that a thought or two. Look at all the business expenses the owner has to outlay for pension, health care, unemployment and taxes before he even hires one person. The government already has its hand in your till.

A lot of new entrepreneurs in California are starting pot farms; there are no government startup costs, fees or taxes. Plus the state offerers a free vacation plan if you get caught.

A world war seems to have pulled us out of the depression in the 1930’s. The government was buying from the private sector, tanks ships planes and armaments. The private sector needed employees to fill the government order. So if we carry this forward to today, a government contract to purchase four million General Motors vehicles could be a hell of a stimulus to the economy. Give the cars to the people that didn’t act financially irresponsible. It’s their savings that the government is spending anyway.

Of course, it’s probably not in the cards and that's what a pipe dream is all about; there is no realty, just a lot of smoke and government mirrors.

1929 Was Different

Our present crisis is not taking effect the same way things happened in 1929. There are some distinct differences.

In 1929 the individual investor made up the stock market. When the investor pulled out, the market tanked drastically. In today’s market the individual investor is removed from the market, the fund managers invest the individual’s money. These people don’t really have to have a position in the fund. Closing out the fund would tend to eliminate their reason for employment. So why sell if you can collect a paycheck. Using this perspective, the drop in the Dow could be a slow and long burn to the bottom.

When the banks failed in 1931 it was due to a combination of stock and real estate loans. Those who made a lot of money in the stock market and real estate and got out of the market just in time, still got killed when the banks went bust. In today’s market, those that got out at the top get to keep their winnings. The FDIC will cover the bank losses. The gains and losses are real; somehow what the bank lost will be made “unreal” by reimbursing the depositor. Notice the winners keep their winnings and the losers get reimbursed and the government has saved the banking system. Why go to Vegas when you get a real deal with the bank? The net result is 50% inflation and now that house is worth what the bank says its worth. What a *$@#*%$ miracle!

The third thing that is different is the welfare system in place in 1929. There wasn’t one. Hurricane Katrina pretty much displayed how much of that city depended on government support. There is a very large welfare system that is a way of life for many in this country.

Fourth, in 1929 hardly anyone paid income taxes, the government was small. We can’t say the same today. Everyone pays taxes including the drug dealer (sales tax)

Fifth, there was no real national debt in 1929. There was no Social Security or Medicare system in place like there is today. There was no threat of bankruptcy from spending too much on social programs.

Sixth, the repeal of the 18th amendment Prohibition, in December of 1933, probably convince some people that the government was starting to move in the right direction. The peculiar thing is that this is the only amendment to ever be approved by state conventions, not state legislatures (Congress figured the legislatures wouldn’t let it pass for political reasons). Having a drink meant a lot; the severe cocaine abuse of that time had scared many lives. Today, we are starting to lose faith in government. The amounts being spent are ludicrous.

So to sum it all up, we are not going to pay back what we are spending in the name of necessity. For some reason everyone thinks that this spending will work. Ask one question: How does one spend their way out of bankruptcy? Isn’t there a point that people stop loaning money to this country and say no? It’s a little like storing cyanide capsules in the fridge so they won’t spoil. Nobody is going to argue with your reasoning. Who wants to be the first, to test one that hasn't been refrigerated?

Great Expectations

The government announces tax hikes for the rich earning over 250k a year. The goal is to raise taxes and pay down the deficit. It seems that many people in government cheat on the taxes they owe. How do you overlook 100K in income as a future Secretary of the Treasury? Nationwide, a lot of people have lost their jobs, so there are fewer taxes to be paid. The taxes collected next year will be a lot less than what they were this year.

Increasing tax rates does very little. The same thing happened in the 1930’s. State legislatures back then figured that increased taxes would result in increased revenues. The results proved to be the exact opposite. People instead of hanging on, gave up from the added tax burdens and walked away.

California is doubling the vehicle registration fee; well I’ve got a car that will get sold. I don’t need it. Increased costs force everyone to rethink financial decisions. My cable TV rate went up I decreased to just the basic channels. The net effect, the government collects less by asking for more.

Car sales are in the dumps, that’s a big ticket item for state and county budgets. Raising the state sales tax by 1% is incentive enough to run a vehicle until it drops. Paying 9% sales tax on a new car kind of makes you choke while making General Motors cry (over lost sales). California could file for bankruptcy in the middle of July. They could file for stupidity right now, but sadly the route you take to arrive at bankruptcy is of no concern to the courts.

Where is all of this new tax money coming from with 10% unemployment? We kid about the Tooth Fairy saving us, but this seems a little too real. How do you spend your way out of a bankruptcy?

The Next Tea Party

A lot of people think our present financial crisis can be blamed on one political party or the other. The Republicans did this, the Democrats did that, and from there you have a raging argument. Once you accept this premise, you vote accordingly, its payback time. Anybody with a political ax to grind has plenty of fodder and a good share of devoted listeners. Kind of a real waste of time.

If we jump back to a President that was qualified to lead in recent history, I would pick Eisenhower. The guy ran a world war machine that defeated the Germans. He knew what sort of logistical costs were involved in moving thousands of men to a foreign land. His concept of getting something done, had to have answers on how to keep these men supplied, logistics is the name of the game in any successful war plan. His decisions were weighed in men’s lives not political BS.

With the present financial mess, I think Ike would have come to the conclusion, we cannot successfully support the banks, it’s logistically impossible. They have to fail and be taken over. Too big to fail means that they should have never been given the chance to get that big. Pay now, or pay later.

We need to fix the present mess and doing nothing is a viable solution. Rick Santelli’s comments from CNBC put it out for everyone to see. Why do we have to pick up the bill for these losers? The rebuttal from the White House Press Secretary was in the clouds. He would have had more credibility announcing that his kids had just won a Posturepedic bed wetting contest. This press secretary needs to take some public speaking lessons, “um” is not something you slip in every third word. The guy reminded me more of a rest room attendant handing out towels; not sure of why he's there or what he's suppose to be doing.

The financial commentators on CNBC are not dummies, they have interview hundreds of people and in their own right, have good financial acumen. Mark Haines has been grilling some of these financial pundits and exposing their narrow comprehension of the situation. It's fun to watch.

I think that we are seeing a consolidation of what the financial commentators consider a solution. The crap has to be marked to market. The banks need to fail for that to happen. If the process is speeded up, it is the foreigners that have the most to lose; they are the ones currently pulling out their money with no loss.

Doing nothing is a solution. What do we have to lose? The country is broke as it is. The bail out money has to be printed and we all know that. Rick Santelli called for a "Chicago Tea Party." Here's a Link to it. Congress needs to wake up and read the tea leaves!

Warning: Government Will Change the Rules

Here is a bit from Karl Denninger, a You Tube expose which explains illiquid assets, it is well worth clicking on the Link I promise you.

The thing we need to understand right now is that the rules that we play financial games by are changing by the moment. Dare to short the bank stocks; they change the rules, no shorting. Right now, they can change the rules on just about any investment. Want to buy futures? Why bother they might close the stock market!

Uncertainty is the name of the game.. Gold could be illegal to own once again. Pre 1964 U.S. coinage is not in circulation. It's worth far more than the money it represented.

The other thing you have to look at right now is miss-information. The government can't spend 787 billion that they don't have. They might have a shot at borrowing an additional 100 billion more than the 400 billion they are presently borrowing this year, but come on folks we are broke. This money is coming from no where!

In the next three weeks, nations are going to start declaring bankruptcy; Spain, Portugal, Italy, Greece, and most of the Eastern block. This problem is not going to go away; it is getting worse by the minute.

Here is the next step. You give the clerk your credit card for a purchase and it does not go through. All credit cards fail to negotiate. The Banks are broke; it just doesn't seem real yet. You now have a Cash and Carry society, no CREDIT. It's a little like that last car on the freeway that causes gridlock, or that super cooled fluid that gets one fiber of dust in it and freezes solid.

The problems are real, the solutions are not. You can depend on the certainty of government to change the rules. That alone makes any investment risky. Sorry to be so pessimistic, it kind of looks like I am making sulfuric acid out of lemonade. I could be wrong and that would be a good thing.

Stimulus Package?

Here was the morning headline. A 787 billion dollar bailout package. Look at the picture. The editor of the newspaper selected a picture of everyone laughing. There is an editorial statement here that speaks volumes silently ("Insanity strikes the Capital").
It Kind of reminds me of the Mad Hatters Tea Party in Alice and Wonderland.


Then down at the bottom of the page we have reality coming home. If 787 billion dollars wasn't enough to smile about, here is a real knee slapper!


You get to laugh with Congress and wet your pants without having to turn the page.

Too much spending got us into this hole, now we are going to spend print our way out? Notice how it is labeled a "Stimulus Package," it's not a "Titanic Spending Bill." Choice of words is what it's all about. A "stimulus package" has a subliminal link to the successful pretty little blue pill Viagra. A "titanic Spending bill" has a subliminal link to rearranging deck chairs and icebergs. What we have here, is a titanic blue pill with deck chairs, that's going to hit an iceberg and sink in the Atlantic.

The Credit Card Bubble (reposted from 2007)

Here is post from March 27, 2007 that bears repeating.

Let’s put ourselves in the banker’s chair. Suppose the credit situation is getting more strung out. People are not paying on time and charging more on their cards. How could you hide it? Ans. by issuing more cards. This would make the debt per person seem reasonable and at the same time your creditors would loan you more to do the same thing, give people free money to buy more stuff.

What we have is a balloon that is inflating ever more rapidly. The reason it’s inflating more rapidly, is that it’s a real Ponzi scheme. As long as the credit card companies can pay the interest and the defaults haven’t killed them, they are still in business. More “new” customers keep the game going (how many cards do you have?).

The credit card companies shouldn’t have much of a problem paying the maintenance fees, to service the debt. They are charging 18% interest to the credit card borrowers. So they need to give their lenders of good faith 7% off of the top. That leaves them a net of 11% return during good times. So as long as times are good, the lenders to the credit card companies are getting a 7% return and the Credit card companies are getting 11% for managing unsecured debt.

Notice as with a Ponzi scheme, it’s the float that keeps the thing going. As long as there are more investors putting money in, there isn’t much worry. It’s when loan renewals stop exceeding cash demands that a problem arises.

What happens when big money decides not to renew their loans to the credit card companies? It could be considered a contraction of the money supply. That 11% float would be used to pay off any called loans. Its when you realize that the 11% in good times might only be about 3% in bad times with credit card write offs.

So let’s see, 2 trillion of unsecured credit card debt. Now, if you are a retirement fund manager and decide the risk is too great, and decide to not renew your note with a credit card bank, what happens next? Remember, how the sub prime and alt-A 100% loans disappeared? Hmmmmm!!!!

It was the banks in 1929 that bit the dust, this time “it’s different,” it could just be the credit card companies. The government is not going to bail them out. That amounts to paying off Joe Six-pack’s wide screen Plasma TV and the sex change operation.

The real problem at this point, is the problem created by giving everybody a credit card. The amount owed on a lot of the issued cards will probably not be paid. The interest on the debt was the only concern of the consumer. When payment is called for, it’s just not there. There is cash to pay the interest, but nothing to pay the principle. The people who loaned to the credit card companies have secured debt. Secured by 'what' is kind of a joke. It’s kind of like a rock, paper, scissors game, only this time its rock, paper, scissors, and caca.

Nah, it’s probably just my imagination running wild again. . . . … . .