Sunday, September 24, 2006

The Perpetual Money Machine

Let's see the banks are paying 5 percent interest and our current inflation rate is around 4 percent. That gives us a ONE percent rate of return. That certainly isn't much incentive to save for a rainy day, especially if the inflation rate is higher than what the government states.

Interest rates are an indicator of money in the market looking for a borrower. The rates are high if there is a shortage of money to loan and low if nobody wants to borrow. Obviously the United States is floating in surplus bank funds. The Feds raised the interest rate 17 times and the 30 year bond hiccupped.

Another name for this surplus is DEBT.

Joe Six Pack bought the car, the plasma screen and put it on plastic. Let's say he's on the high side of 30k on his cards and he has no problem making the monthly payments. Here is where the bank can do the Fannie Mae routine.

(The following is pure conjecture on my part and could be way out in left field.)

The bank needs to reimburse the retail outlet in cash for the goods charged. Now bear in mind that the bank is getting 18% minimum on these loan amounts carried over 30 days. What better way to raise money than to package these borrowers like Fannie Mae does and sell them to some mutual fund. This way, everyone gets paid and the game can continue. It seems to me, if this was done right, the bank passes the bag to some other institution like a pension plan wanting 8 to 10 percent on their funds. These notes would be far from FDIC insured.

Everyone that needs to borrow is probably already maxed out and wouldn't qualify for more borrowing using a regular loan. But, if you're a bank, you give them a credit card. As long as the banks can issue credit cards, the game can continue. The minute that they stop issuing cards, the game would be over. The banks have monetized the debt and created a perpetual money machine. The more you charge the better it gets.

Bye for now from Left Field.


bubble_watcher said...

On the subject of a yield curve inversion, something rather interesting is happening to the markets right now that has not happened since the 1930's..

On US Treasury debt, long term rates are falling much faster than short term rates.

3-month T-bill yield chart:


30-year bond yield chart:


Dynamic Yield Curve chart:


and from Wikipedia:

"Although negative liquidity premiums can exist, specifically if long-term investors dominate the market, current financial philosophy is that positive liquidity premium dominates, so only the anticipation of falling interest rates will cause an inverted yield curve. Strongly inverted yield curves have historically preceded economic depressions."


Anonymous said...

Great San Diego Housing Flip site

chris mcdonalds said...

um.. i have a unrelated question (this being the last post)... here ( you see the graph of median sales prices in LA... here's a question:

how come the stickiness at around 600K??? what could be doing that?


Jim in San Marcos said...

I could hazard a guess, I haven't seen much that sells for less than 600k in LA.

A 60 year old dump that you need to demolish is in that price range. What you are seeing as sticky, is the price of developed land minus the house.

A lot of those 60 year old dumps are sitting on what is considered two to three lots in todays zoning regs.

So as a developer its costing him 200k for each lot 200k for building the house, and he gets 200k to 400k profit. He can still sell them for less than the old homes and hey, they're bran new!

Jim in San Marcos said...


regarding your site recommendation

Bob Filippa (if that his real name) writes a pretty good column, so I have put his site on my blog

Thanks for the recommendation.

Jim in San Marcos said...

Bubble Watcher I haven't forgotten you, I'm researching your links for a coming post.

Thanks for the info


bubble_watcher said...

Glad to here from you, Jim, because the yield curve inversion is starting to get steeper (higher short term rates vs. lower long term rates).

An inverted yield curve tends to have a adverse impact on businesses and banks that borrow money at the short end of the curve and loan out and the long, which means that the 'perpetual money machine' is starting to run out of money..