Sunday, July 27, 2008

Let’s Define “A Depression” Reprinted

Here is a reprint from last year, May 13, 2007 that you may enjoy.

Let's define a Depression

It’s a drop in economic productivity for a length of time. Speculation comes to a standstill, and bubbles cannot exist. There is a tremendous contraction in the wealth of the whole country. The great money making machines (plural) will collapse.

People are beginning to see the housing bubble. The machine that is cranking out new houses, is still making a profit. Building contractors can easily undercut home sellers, no reason to stop yet. Sticky housing prices are a plus (to the builder).

The stock market has Google at $500 and no dividend. It will probably still go higher. I still laugh about the AOL Time-Warner take over. It was like John Paul Jones with the Bon Homme Richard against the H.M.S. Serapis all over again. Then there are hedge funds who hypothecate the whole mess. They seem to be making big returns. When money enters the market faster than the creation of new issues, then prices rise—-forever???

The IRA’s and Mutual funds are increasing in value because of the increase in share price. What you are looking at is not a return on equity, but an increase in the prices of the equity. For example if Google rises to $600 you have a market perception of its new worth. But if IBM doubles its dividend, this is a real return on an investment. A money manager would probably invest in Google over IBM, because the apparent gains from that investment strategy would bring more investors to his fold. (I could be shot for this oversimplification)

If you look at Detroit, houses are so cheap, that you can't build a new one at those prices. The builders are leaving. The stock market could go to the same extreme. In a crash, Investors would demand a dividend of $4 to warrant a price of $100. Otherwise why not put it in the bank. What we would be looking at, is a return to more realistic values for assets. Some comedian during the Great Depression quipped, "I'm not interested in the return on my money, but rather, the return of my money."

The collapse will be a massive redistribution of wealth, hitting the rich, not the poor. All of this hypothecated wealth would disappear. The million dollar cats, dogs and tulips would be marked to market. Paper millionaires would go up in a puff of smoke.

Decreased consumption, would lead to layoffs. This would expose the credit card bubble and threaten the banking industry, or who ever holds all of this credit debt. Liquidation would then be the final game.

If that isn’t enough, Congress will rise up and try to save us. That's the scary part! It's kind of like getting on an airplane and having an election, to see who's going to be the pilot.


I'm Not POTUS said...

I don't know about you, but my head is spinning from all this.

Did you catch the BMIT article today?
Well Fargo is still to this day getting hosed buy the fraudsters.
Karl is all over the place, I hope he has blood pressure medicine. All the talk about the bailout. I am wits end.

All I know is that J6P has to spend every cent of his paycheck to keep the wheels turning.

If the Feds can keep him going, they can put it off til' tomorrow.
They only pray tomorrow doesn't come tomorrow.

I think Paul & Bernie are trying to put a floor on home values and a ceiling on J6P debt.

The banks hand over all the debt monkeys that are ready and willing to stay in debt at a 15% loss. FHA glues the debt junkies to the house for at least 5 years. These reworked loans set the median for comps. Greedy grifters like those in the BMIT article help keep it inching up with 10 year resets.
Any failures get backed with federal insurance. So the losses get papered over.

Responsible people like myself who did not participate in the scams of the last 15 years get zilch. I still would have to overpay to own a home. To heck with that I'll invest my money in other markets that return on capital.

The government, being the only market maker rewards more lemmings who buy into the debt=home scheme with below market loan rates.
The whole thing grinds so slowly that home appreciation crawls for the middle to lower class homes.
Can you imagine the DMV running the home loan business?

J6P ends up spending 100% of earnings a month to eat, drive, watch pay per view wrestling and sleep under a roof.

What are the rich people going to do with their money???????

This whole situation is ripe for a Black Swan event. How far can they take us down the rabbit hole?

Jim in San Marcos said...

Hi I'm not Potus

I scooped BMIT's article by about a year if you look at my June 16, 2007 post. The first comment on that post was funny

I've still got a valid Realtors license (I haven't sold anything in 8 years) so I am familiar with most of the tricks.

The bank is really blindsided in these transactions. The escrow company could probably spot what is happening, but they would really have no proof. Make no doubt about it, it is fraud.

There is a lot of risk on this sort of transaction in a down market. I think that a lot of it could be plain desperation by a Realtor trying to make a sale to pay his bills.

Everyone that I know that could have had 100K has spent it by now. A lot of marines here at Camp Pendleton take their re enlistment bonus $45K and buy a "nice" car.

I share Karl's frustration, but I am more of the opinion that some of us might be able to benefit from these events in the coming year or two. Real estate could become a very good investment and inflation hedge once the government starts seriously printing money.

I kind of get the feeling that the newspapers are "making" the news as of late. A woman president isn't that far fetched, but the thinking that "Obama is going to save us" mentality doesn't take into consideration all of the racial hatred in this country. Without an endorsement of the Klu Klux Klan I don't see the guy winning even one state. I wish the guy the best of luck, but my point is, we are being "crap fed" by the newspapers.

Who are the people that lost all of this money?? It ain't J6P. It's the guy about ready to retire. This isn't rocket science, follow the money, its the old silver foxes like me getting ready to retire on $800 a month on Social Security, plus my savings. Who spent my hard earned savings? Well we are not sure yet! The thing we are sure of is, that its GONE!

The thing not realized is that this can cripple the rich, but it can destroy the middle class. Without the middle class we could lose Democracy. They preserve the dream of someday becoming rich and keep in place the rules that protect the already rich.

So what's all this boil down to?

Old Farts 0 : Government 1

Thank you for your comments and take care

Anonymous said...

Obama is going to be the president. This is well known.

Someone is going to take a shot at him. This is less well known, but not a secret.

The Democrats aren't going to support him the way that they should because the Democrats have a way of being lame. He will not be as productive as hoped for, but I think that Obama is far enough to the middle that he may get help from a few Republicans.

It is pretty clear that the main goal right now is to keep the money and the normal folks calm. If the money is sucked out of the system all at once, it is going to kill quite a few companies. However, keeping everyone calm allows the shock to be less, but it will extend the crisis.

The economy will not fully recover. Remember when the Roman Empire started to "keep their soldiers busy". What happened to the internal affairs? It melted down because there was no money to fight over.

Jim in San Marcos said...

Hi Anon 7:45

I'm not sure which way things will go. Neither side has declared a running mate.

The voters will decide this one not the newspapers.

Thank you for your comments

watchtower said...

Jim your "oil bubble" call awhile back is looking pretty good!
Take care.

Anonymous said...

I want it to get better.
Catholic girl

Jim in San Marcos said...

Hi Watchtower and Catholic Girl,

I think it will get better. When you lose your job, you don't have that long commute anymore, so you can really save on gas. An added benifit is a free weight reduction program, you'll be eating less. Plus you'll now have the time to drive Johnny to school since the districts are cutting out a lot of bus service.

Sarcasm aside, it looks like we're in for an uncomfortable time. Lower gas prices will not bring back the good old times.

I sure hope that oil comes down another $40. It could help out a lot of struggling people.

Thank you for the comments

Anonymous said...


Having relatives in CA and seeing the "value" of homes in their neighbourhood triple since 2000 really made me freak out. I told everyone that I knew back in 2004 that the world was headed for hoopville.

The paper millionaires have since been written about, the foreclosures have flooded, the banks are going tits up and oil is getting speculated to death by those who moved out of enron into housing and are now in oil- I think i kid but there might be a grain of truth to that.

This is one awesome blog in a pretty sick world.

Jim in San Marcos said...

Hi Anon 9:56

I know what you mean. Housing is getting worse, and I agree hoopville is around the corner. The only problem is that reality is not just around the corner.

We live in interesting times, thank you for your comments

Anonymous said...

Marriner S. Eccles, was the Chairman of the Federal Reserve from 1934 1948

In his 1951 memoir Beckoning Frontiers, Eccles detailed what he believed caused the Great Depression.
Our current situation is eerily similar.

Eccles wrote:

"As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth — not of existing wealth, but of wealth as it is currently produced — to provide men with buying power equal to the amount of goods and services offered by the nations economic machinery.

Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.