The Inequity of Democracy

Last Friday the Wall Street Journal had an article on their opinion page “The Economics of a $6.75 Shirt.” The writer Rubana Huq is the managing director of the Mohammadi Group, a garment manufacturer and exporter in Bangladesh. His discussion touched on the current wage over there for garment workers of $70 to $80 dollars a month working two hours of overtime a day. He claimed that the labor cost per shirt was about 38 cents and the cost of materials was about $5.75. I tend to think that his cost of materials could be one or two dollars lower, but it reads good.

He went on to describe how the garment worker paid $40 dollars a month for rent and $13 per month per adult for 30 kilograms of rice. It kind of reminds me of when I was in Viet Nam in 1968. The wage scales and rents over there were about the same. I’ve heard a Congressman or two suggest that we need to bring back the clothing manufacturing back to the USA. The only thought that comes to mind is what were they smoking? Fast forward to today, many thousands of people emigrated from Viet Nam to the US. These people have been a real success story. They came from a world deep in poverty.

Over three quarters of the world’s population is working for slave wages, while we in this country are oblivious to the fact. Democracy is a system that allows us to inadvertently take advantage of other less developed countries. When you ask a supplier what is his bottom line on cost for producing a shirt or a cell phone is, his employees don’t even enter the equation. Low prices drive our cell phone and wide screen TV consumption.

What we are looking at is two worlds; those with real income and those living from hand to mouth. The one thing not understood by Americans is the slavery aspect of the third world. Work until you die or starve to death. In this case, having more kids is a retirement plan. The concept works but for all the wrong reasons-- an increase in the population decreases the food available for everyone.

This is where Islam is gaining support. The United States is the “Great Satin” because we benefit greatly from the sweat and toil of people in third world countries and they get little in return. Our government is claiming the recession is over, but if people in the US are consuming less, it affects these third world countries drastically. These are the countries facing substantial wage deflation pressures and possible starvation. People with a job, have no time to protest at these slave labor rates, but if unemployed, why not turn out for a riot and vent some anger?

The world seems to be in turmoil, and everything appears normal in the United States (if you’re a Democrat). The trouble is, a lot of seemingly unrelated items weave together to make us appear to be the cause for poverty in the third world. A cell phone made stateside might range in price from $500 to $1500 and an Ivy League button down shirt might cost upwards of $50. If we produced these items over here, we couldn’t go out to dinner as often as we liked plus the people that were previously building them would be unemployed and most likely starve to death.

Obama wants to give the third world Democracy. It’s kind of like passing out shoes to people with no feet. What they really need is some sort of support system for wages and food. Religious organizations seem to be the best avenue of support, whether they be Islam or Christian. The thing we need to comprehend is the inner rage of these souls in third world countries that can turn on a TV and view the world that they can only see, but not touch.

I propose a solution. Invade Mexico and make it the 51st State. As a state the minimum wage would increase and the people here illegally would now be citizens. And their country under American law would make it a very nice place to want to live. The neat thing about that, we wouldn’t have to wait for Congress to attempt to pass an immigration bill. And from there, statehood for South America.

It sounds ludicrous, but maybe Egypt or Libya might want to become the 51st state. There are definite advantages of statehood, the only problem, I doubt if any of these foreign countries have anyone in their ranks stupid enough to be a Congressman.

Let’s Do the Math

Here’s a quote from Bloomberg.com September 13,2012:

The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.

The Federal Reserve is buying 40 billion of real estate loans per month. The median price of a home in the US for December of 2012 was $180,000. Figure the banks want a 20 percent down payment. That comes out to 36K with a loan amount due of 144k. Take the 40 billion dollars and divide that by $144,000. That figures out to 277,778 home mortgages purchased per month. Just to kick this dead horse one more time multiply that amount by 12 months. The grand total is 3.3 million homes. The total number of homes sold in 2012 was 4.96 million. It kind of looks like the Federal Reserve holds a hell of a lot of home loans; almost 3/4ths of everything written last year. Of course, I must admit that I thought there was something seriously wrong with my pocket calculator when I first ran the numbers.

The biggest problem for a bank, is loaning money long term at low interest rates. Depositors don’t put their saving in a bank for 30 years; they move it around to get a better rate. Banks have no desire to finance 30 year home loans at these rates, when they can service your Visa card loan at 18 percent. They'll write the loans and sell them to the secondary market, and guess who's buying them? The Federal Reserve, in theory, can finance the loans and wait out the full 30 years for repayment and not lose a dime on the deal.

There comes a point where the Federal Reserve has to choose between becoming the financial institution of choice for our real estate market, or get out of it. If and when they exit, interest rates should jump a couple of percent. The neat thing at this transition, a larger portion of the people holding real estate will have “skin in the game.” Most of the liar loans will be off of the books.

What will happen to the real estate market when the Federal Reserve stops buying home loans? Who will step in to provide financing? This implies a future rise in interest rates. A significant rate increase could trash the bond market. And of course the interest paid by us on the national debt would go up accordingly.

Ben’s not traveling to Jackson Hole this year for the meeting of the world’s financial wizards; he has a “previous engagement” which I find hard to believe. Tim Geithner already left at Treasury (very silently) and his replacement has noticeably kept his mouth shut. Bernanke not showing up at Jackson Hole, and Tim leaving, kind of suggests a reshuffling of policy for the world bank which they were the head of, and controlled. Several countries are repatriating their gold from our shores. Nobody has yelled "fire" yet, but this looks like an obvious move towards the exits.

How do we interpret the actions of Tim Geithner and Ben Bernanke? Is there a policy change underfoot that key people disagree with? The only thing that bothers me is the annual 3.3 million home loans the Federal Reserve bought to save our real estate market from ruin. And if you read the papers, real estate sales are picking up --gee, I wonder why? --and for how long?

Surfing The Kondratieff Wave, Reprinted from 2006

Here is a reprint of my second post as a blogger way back in May of 2006 and reprinted again in March 2009. 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.

A Precious Metals Market Perspective

There are three ways to own precious metals, take physical possession of the metal, or let a proxy hold the gold for you in a storage vault, or trade the metal with your broker using ETF’s (Exchange Traded Funds).

In the first process, taking physical possession, you have the metal to hold in your greedy little hands. In the second process someone else holds your gold in their greedy hands and there is a good possibility if every depositor wanted delivery, it just wouldn’t happen. And in the third method of “owing” the metal is through ETF trading. This last method is kind of paper trading of the metal. A person can buy and sell and never really deal with the physical metal.

There is one problem though. Physical gold, silver and platinum are real. A lot of these markets are hypothetical. They trade on the price of the commodity, with the buyer and seller not the least bit interested in taking possession of the precious metal. A buyer sells 1000 ounces of gold for September delivery and buys them back before the due date to avoid having to make delivery.

I’ve made several trips to a gold and bullion wholesaler. I was converting my junk silver and gold. People are buying, not selling. And I must admit when I first went there, I thought I was telling the owner something new about Obama printing dollars and how I wanted to preserve my buying power. The last time I was there, an elderly couple was telling him the same thing. And Chuck patiently listened to them.

So there are really two markets, one that deals in physical delivery of the metal to the buyer and one that deals with the change in price for the holder of the contract.

The precious metals have dropped in price considerably in the last two days. The thing to look at is the physical delivery. People on the street think that now is a good time to buy gold, since the price is down about $400 from its highs.

It appears the ETF’s and futures markets are where the battle over price of precious metals is being fought. A lot of those contracts can be bought with only 6% down. So Monday there had to have been some pretty heavy margin calls and if you didn’t make the margin call, you got sold out.

On a local level, I only have my own observations to report, but some bullion dealers around here are running short of gold and platinum maple leafs. It now takes a couple of days to fill an order. And it’s been that way since January. What we are looking at is not a real shortage, but it suggests more people are buying than those selling physical precious metals. Remember there is a $48 dollar premium on the purchase of gold and platinum per ounce; so you’re not going to change your mind on a whim.

I think that Joe Sixpack has figured it out. The banks pay zip for interest. Costs are going up and paychecks are going down. Silver rounds can be purchased for about a buck above spot. Physical ownership has a real feeling to it; you’re in control. It’s rather strange to see someone come in to this precious metal wholesalers shop with a stack of 100 20 dollar bills and leave with 60 ounces of silver. That buyer just made a statement; the banking system sucks. GOT SILVER?

The Governments Good Intentions

Our government thinks that the American dream is home ownership, a college education for everyone. and of course, health care taxes for everyone (under the age of 65).

We just went through a housing bubble crash. Notice the people that sold their homes got cash and the people who bought them got a house they couldn’t afford. So if you paid nothing down and moved in, the term “Underwater” kind of evokes sympathy from the reader, but in most cases it didn’t cost much to move in. In fact, to rent out here, you need first and last month’s rent which is about $3,500. So for as little as $1,500 you can still buy a home out here.

I was listening to Gov. Huckabee on FOX yesterday and he question the current government policy of lowering credit requirements for new home buyers; “Weren’t low down payments the cause of the housing bubble?” Well, kind of, but the government is in a situation where selling these foreclosures to someone new, improves their balance sheet somewhat (since they already own them). The worse that can happen is that they get the house back. The real problem is the financing.

Before the crash, the banks packaged and sold this “toxic waste” (that’s what the banks called the stuff) to investors. Now that won’t happen in today’s market for two reasons, everyone knows the stuff is bad already, and you could get some jail time for selling it. Now you see why Bernanke is buying real estate paper. Once the Fed purchases the paper, Fannie and Freddie have more money to offer for home loans. Taking advantage of the American dream of home ownership, the government transfers these foreclosures to our unsuspecting kids. The average home buyer is not interested in the cost, only the monthly payments. The higher the price, the more the homeowner pays in property taxes. “Oh Goodie” says Uncle Sam.

Here is where it gets interesting. Student loans offer a method to increase the amount of debt owed by our kids. Remember the dreams we had of future success after completing college? It’s a little like buying 100K in lottery tickets. You’ll read about the winners. I’ve known people who’ve had 30K in Visa debts and that is about where the debt goes from being manageable to unmanageable. At that point they file for bankruptcy. And of course with the student loans, bankruptcy is not an option.
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During tough times, the amount owed on a student loan could double in just 12 years. This is where home ownership and a wife that wants to stick around, are all part of a meaningless dream world that will fall apart. Too many debts will kill any marriage ever made. There is a way to escape this trap that Congress overlooked. Move to another country like Australia (sshhh that’s a secret).


Then on top of that I was doing my taxes and looking at what I, the wife and son pay for health care coverage combining our payments with our employers—about 20K. And this is just basic coverage. Obama care hasn’t even really kicked in yet. Why do I get the feeling that we will be paying a lot more real soon?

Let’s get rid of Fannie and Freddie. We don’t need to save homeowners who have no skin in the game. Give our kids a shot at a home that has a reasonable price tag. Modify student loans so bankruptcy is an option. Teach the lenders not to fiddle with kids right out of high school. It’s literally a license to steal from those too inexperienced to know what they are signing. As for Obama care, this law eliminates the decision many families made about what they considered necessary, like auto or health insurance. Why worry about your right to bear arms when the government can tell you what you are going to buy with your paycheck?

Do you get the feeling that all of this government help we’re getting is making things a lot worse?

We have a government that has successfully screwed up the housing market by trashing the bond market interest rates. The student loan program works for all the wrong reasons. It reminds me of those “fog a mirror“ real estate loans. The good thing, when your two years of unemployment runs out, your student loan will put food on the table for four more years--Then apply for your passport (wink wink).

Look for the work week to be shortened to 32 hours (to get more people covered by Obamacare). And of course Congress will have to raise the minimum wage by $4 per hour so workers don’t starve to death making their mandatory health care payment. On top of that, the government will probably lay off all of the people responsible for managing these programs to teach us a lesson for wanting leaner government (it gets meaner as it gets leaner). All of this lends more credence to the saying, “The road to hell is paved with good intentions.” This isn't the hike we signed up for. "We are not out of the woods yet" and Obama can't smell the smoke.

What Seems So Clear On A Personal Level

Each of us if left to solve the world’s problems would have the job done in weeks or maybe a few months at most. The trouble is our solutions are not the same as what your neighbor might offer. What we have in Congress are a bunch of “do gooders” who want to solve world hunger and give everyone Democracy. Each solution to a problem creates new problems.

On a world level, providing food for everyone is a noble gesture, with unexpected results. World population would increase as a result and the demand for resources would be taxed even more. Feed the world now, only to have many more hungry people in the future willing to die for the resources we were willing to share with them in the past (Japan entered WWII in a quest for resources). Of course another problem of not feeding these future starving masses is that they become incubators for diseases not even in existence yet.

Take Obama- care is it really total health care? Is there any mention of dental work, hearing aids and eye glasses? How about rest homes for the elderly? No, we are only covering health care from age 0 to age 65. What is covered right now is pretty straight forward. You get shot by the police, you have no medical bills to pay. New cancer treatment drugs are $2,000 per day (what if you need the drug in order to live another 5 years?). What happens if some new miracle drug extends life another 20 years? The plan in place has no adjustment to what entitlements each individual in his or her life is entitled to over their lifetime.

Social Security was supposed to solve the problem of old people dying destitute. They didn’t have to depend on their kids for support. Of course where does the government get the money from to pay retirement benefits? You guessed it, your kids. Social Security coupled with health care along with advances in health care has created a new problem; old people living past their retirement savings. This is an individual issue. The real group issue that seems far removed from the problem is that these social programs are spending our government into the poor house.

Then there is government thinking verses the group think of providing services to all in need. The government created Social Security in order to be able to tax people through their employers. The initial payouts were small but the taxes raised were huge. Seriously, folks, do you honestly think that employers pay half of your Social Security and offer free health care? If you are self-employed, you know the answer both questions. Obama care wasn’t made to provide health care, it was designed to pay for the health care already in place being paid for by government. In essence, the age group from 18 to 45 will be taxed to cover this new “benefit.” Notice the individual envisions a health care plan, whereas to the government, this is a tax based revenue stream. Remember Social Security and Obama Care are not entitlements, only a promise of future benefits. The Supreme Court has ruled both are taxes.

What we all need to realize, when we talk on an issue of government spending or health care, we are all on a different page, the topic joins us together as a group. Our mental vision of the plan fails us only when our individual expectations are not met. And that’s what happens in a Democracy. The problem is, when you redefine it and make it even fairer, you are now defining socialism.

We know that we are headed off the cliff and each and every one of us has a solution that could stop that from happening. The trouble is, the group solution is to use the processes already in place. It kind of like buying a car with 5 other people; you want a sun roof and someone else wants ashtrays and cup holder for his beer. The car you end up “buying” isn’t the one you had envisioned—in fact, it is far from it.

In a Democracy, we need to define the government’s contract to each individual on an equal personal basis. If we define the contract on need for the individual and consider it a blank check, there is unlimited liability for the government and this smacks of socialism.

To sum it all up, we are leaning to live with inflation and the new government programs. Ask yourself one question, “Are they going to make a larger bill for currency, like a $1,000 dollar bill. The gas pumps still won’t take $50 or $100 bills, maybe it is time for reality to kick in. Where can you go on a twenty dollar bill? What's really intensely clear on a personal level, the advent of a $1,000 dollar bill would confirm our suspicions about what Congress has been doing to us. Of course, forgive me, it's just my imagination running wild again.

Recession What Recession?

The City of Stockton is headed to bankruptcy court. The real question arises, is the State of California responsible for debts or long term contracts entered into by the cities? Retirement benefits come to mind.

Chicago is closing 54 schools in face of a 1 billion dollar deficit. Is the money saved going to be spent on students in other schools as has been suggested? (Insert howling laughter here) On top of that, the state of Illinois is broke; their retirement fund is 100 billion underfunded. A state can’t file for bankruptcy, but that is no big deal. You can’t sue them to get your money either. So if (more likely when) Illinois reneges on its debts, it’s the note holder that has the problem. You’ll probably get your money given time, lots of it. Mississippi discharged a 100 year old debt a few years back.

Detroit is on the verge of Bankruptcy with no solution in sight. Obama claims the recession ended two years ago. He saved the auto industry, but it couldn’t have been in Detroit. Being successful in that city is measured by how many bags of recyclable cans you have tied to your shopping cart. Of course a municipal-bankruptcy filing by Detroit would be the largest such filing in U.S. history.

These three cities also have other problems. Major city infrastructure funding has been cut drastically. Police, fire and other government services have been cut to the bone. Downsizing the labor force will not cut fixed costs. The cities are committed to future fixed cost spending as far as 20 years out. And a lot of it is funding for retirement. When a city implements draconian measures to cut costs, the inhabitants start voting with their feet.

The recession is over and things are getting better? When’s the last time we had 3 cities on the verge of bankruptcy? (Hint: not in my lifetime) These problems are serious and are being swept under the rug. You must admit the phrase “We’re not out of the woods yet,” sounds a tad better than “We’re in the grips of a Great Depression.” No need to panic the sheeple feeding on Ben's freshly printed green dollars.

Muddled Thinking

A lot of what we are currently experiencing has to do with solutions to problems that are not well thought out or the solution has unintended consequences or ridiculous expectations.

You read the paper and find out that home ownership is down. Or that money is on the sideline in the stock market waiting to jump in. Let’s examine it another way. Every home in America is owned by someone, and not everyone is responsible enough to be a home owner. Every stock or bond in existence is owned by someone, just like every ounce of platinum, gold, and silver. The idea that people are buying means little unless they are selling a lot of something else or borrowing to do it. If there is too much supply, prices go down. And vice versa, if there is too little supply, prices tend to go up.

In real estate in California, the supply is drying up in the rich areas. The house that you paid one million for in 2008 is now selling for 700k and you aren’t about to put it on the market at a loss. The current very low interest rates will sustain the 700k price, but not the one million dollar one. Plus, houses are not really appreciating. The current low rate implies higher rates in the future (especially if government funding of home loans stops). This could in turn affect the amount of house one could afford buy. The max monthly payment in relation to household earnings determines housing prices. This isn’t 2007 where people were lined up to buy a home with “liar loans.” Housing prices are not jumping through the roof, just a gentle trickle of people that feel the need for home ownership (the nesting instinct). Question, what makes this real estate market different from that of 2007. Answer government financing.

The phrase “tax the rich,” got some real meaning this week. Cypress is about to tax savings in the bank. 9.9 percent of funds over 100K and 6.7 for funds under that. It raises the question, “Is holding currency a better bet than money in the bank?” And of course the answer is yes. Look for Spain and Italy to have a run on the banks. I would expect people to convert the currency to gold; rats love to make nests out of paper, which could be worse than any tax. Printing currency has the same effect as a tax, but takes a couple of years to take full effect; this is faster and prevents flight or conversion of bank held dollars.

In our country, the Federal Reserve printed currency to cover bank losses. Cypress has no central bank that can print currency to guarantee their banks. The European Central bank could be considered the lender of last resort, but they are not a bottomless money pit. Reality sets in for them next Tuesday. Their two biggest banks fail or they rip off the retirees. This taxing ploy is a little like using a lit match to find a gas leak. You’ll find the leak, and also make the nightly news.

Congress wants us to grow corn and turn it into ethanol to put into our cars. We use to be the top of the food chain, and now automobiles are? Talk about worthless legislation. The Federal tax subsidies insure that this program will continue. One problem, the gasoline producers don’t have to sell their product here, they can sell it overseas without adding ethanol. Do the math, jump through hoops or sell to a straight shooter like Europe.

There are motions afoot to link gasoline taxes to inflation. The state instead of charging “X” tax per gallon, wants to charge according to the sales price charged for a gallon of gas. If our government is going to print dollars, don’t expect city and state to sit idly by and watch their purchasing power from tax revenues decrease.

What can we deduce from all of this? Legislative controls only change our approach to the problem; the issues that caused it have not gone away.

Cypress will be an interesting event to watch unfold. How can Cypress socialize the banks and penalize the people who saved all of their life? If it teaches only one lesson, gold and silver have no government to answer to; financial freedom is money in the bank only as long as the government says so. Where too from here? Good question.

The Federal Reserve’s Conundrum

The commodities markets have just about played out and the bond market can’t go much lower. Real estate is no buy, unless you want to finance it with nothing down. It looks like stocks market is the last gambling parlor with any real action.

The Federal Reserve is buying bonds to prop up the real estate market. This has in effect kept interest rates very low and it’s doing a very good job of goosing the housing market even with the baby boomers selling and downsizing. The trouble is, people are starting to sell bonds and buy stocks. Interest rates can only remain this low if the Fed buys all bonds presented at par. This is not a bad deal for bond sellers. A buy and sell price that are different implies risk in the market. With a locked interest rate, the buyer is guaranteed the same price when he sells. You have to marvel at the liquidity of bonds, there is no risk.

There is one problem. The bond market is 10 times bigger than the stock market. What happens when a large majority of people make the decision to sell bonds and buy stocks? It’s a little like the passenger ferry many years back in India where two star-crossed lovers decided to commit suicide--their parents wouldn’t let them marry. All the passengers rushed to one side of the boat to watch them jump. The ferry rolled over and drowned hundreds of people. Kind of gives new meaning to the phrase “Misery loves company.”

Ben Bernanke faces a similar situation. Does he buy all bonds presented and trash the currency or let the rising interest rates trash the bond and the real estate market? The stock brokerage houses loan money at prime plus 1 ½ percent. And they don’t care who they borrow it from. Ben’s dollars are as good as anyone else’s. And if stocks are going up, the interest paid by the “investor” is a cost of doing business. All it would take, to start the ball rolling, is for Google to jump up a couple of hundred dollars a share. The Internet is this new frontier with values expanding geometrically. It’s an opiated dream of possible future returns; hold on for a wild ride —the South Sea bubble comes to mind.

We know one thing for sure, the baby boomers, with cash in the bank, ready for retirement, are sick and tired of ¼ of 1 percent interest on their savings. This investment “ferry” is going to rock and roll --—over.

What can Bernanke do? Will he allow rates to rise or endeavor to keep them fixed? The Bernanke conundrum. Remember one thing; an economist can’t predict the future they can only explain, the why of what happened--after the fact.

Welcome to Wall Street, "Faites vos jeux." Let's give the dice a roll. I get the feeling that we've been here before---maybe in a previous life.

The Misallocation of Resources

This news release the other day leaves room for thought.

Bernanke said the Fed's policies mirror what other central banks around the world are doing.
"Long-term interest rates in the major industrial countries are low for a good reason: Inflation is low and stable and, given expectations of weak growth, expected real short rates are low," he said.

Interest rates are usually an expression of future risk. The more risk, the higher the rate charged. Interest rates are also a function of “you want it now" (three dollars now for five dollars on pay day). You either save up and pay cash or you borrow funds at some cost, to reward those who saved the money you are borrowing. The present rates are low only because of government intervention in the markets.

Bernanke claims to have studied the Great Depression at length, and so have I. His method for our recovery is not one I agree with. We survived the Great Depression. The major cause was a misallocation of resources. One sector of the economy took off and everyone piled on trying to get rich. And then it collapsed. It took quite a while for the economy to return to normal.

In Africa 40 years ago there was a cattle boom. The more cattle you owned the wealthier you were perceived to be. As the cattle population increased over time, more and more resources were devoted to feeding them. All it took was a drought and, the cost of hay skyrocketed. Most farmers found that they could no longer afford to feed their herds, let alone sell them to someone else. The cattle market collapsed. A lot of the livestock died from starvation. From there, families starved to death. Notice, it wasn’t a shortage of food that killed the people, it was a misallocation of resources. Their apparent cattle wealth disappeared, and they had little if any savings to buy food with.

We are trying to recover from a misallocation of resources in the real estate market. Guess what--- the government is not going to let the market collapse, just because people spent too much money on it ---they are going to keep it going. In Africa, the government could have stepped in and provided food for the cattle, but it wouldn’t have solved the problem. Resources would have been expended on items that were economically unfeasible. This is what our government has done to the housing bubble. It has enabled more resources to be spent on a project that has no real return. Notice that as long as the real price for raising cattle or real estate is subsidized by government forces, the market cannot return to normal. The government subsidies insure that the misallocation of resources will continue.

The questions that need to be asked, are; “Where does the Federal Reserve get the written authority to buy 85 billion dollars’ worth of bonds each month?” and “Where does the Federal Reserve get the mandate to set interest rates?”. We are talking about a government agency that has the ability to spend trillions of dollars a year, saving the banks and the housing market from ruin, on the assumption that this “herd of cattle can be fed” and sold later for the dollars loaned earlier. This is a government agency that has the ability to spend more in one year than Congress has funds to spend from taxes collected.

It comes to mind that we have a 85 billion dollar sequestration for a year that appears to be a real monkey wrench in the economy. And here's the Federal Reserve with that same amount for a monthly allowance with which to purchase bonds.--must be my imagination.

People over a lifetime saved their earnings for retirement expecting interest rates would reflect risk in the market. Does the Federal Reserve have the right to artificially manipulate interest rates to support this misallocation of resources? The Federal Reserve has saved the banking system and now they are working on Fannie and Freddie. Failure is rewarded with bailouts and individual risk is eliminated with government guarantees. Without the Federal Reserve interference, interest rates would be able to return to normal levels. That would be too bad for the housing market, but then maybe our kids could afford to buy a home, and Grandpa and Grandma, might get some real interest paid on their savings. Let’s return risk to our markets and reward success --- unfortunately Ben's going to save that real estate market, and avoid a Great Depression. Ben's got some great deals on 100 acre "farms" inside the city limits of Detroit and they're already zoned residential.