Sunday, December 28, 2008

Saving for a Rainy Day

Even governments should save for the anticipation of lean times. The collective attitude of Congress is “Why bother.” Iceland went broke as a country in October. They were consuming like us, only they were borrowing foreign money. We as a country have a hedge on this; the rest of the world holds US dollars as a form of emergency currency. If the dollar drops in value, our exports become cheaper in other countries. Conversely anything that has to be imported will cost more. Foreign creditors are left holding the bag. "Full Faith and Credit," is kind of like a prayer.

Presently the current long term interest rate in the US is about 2.6% for the 30 year bond. Using the rule of 72, it will take about 28 years for your money to double. With the present inflation rate of 12%, a savings account in a US bank is a pretty worthless investment; you end up with a negative 9.4% return. Using the same rule of 72, it would take about 7 years for you purchasing power to drop 50%. So if your savings depreciate 50% every 7 years and double in value every 28 years, you can work your way to the poor house.

Something is out of whack. Our government is 10 trillion in debt and borrowing 3 trillion to keep the show going. Isn’t there a point where interest rates have to rise because there is a risk of non payment? But the government guaranteed everything. They had to, the risk was so great that the system would collapse without government support (do you sense a catch 22 here). Interest rates are not rising. Doesn’t that imply that the system has already collapsed? Everyone owed a dollar will get a printed one. The system will be back in balance, everyone will be made whole and no one looses a dime. Who are we kidding here?

If our government had built up some cash reserves over the years instead of spending beyond their means; we wouldn't have to tax our children's future. Borrowing one to three trillion dollars at these low interest rates seems acceptable, but think again. Our total debt is approaching 13 trillion dollars. An interest rate of 10 percent would put a severe crimp in our budget; it would take 30% of the government tax revenues to finance just the interest on the debt. Total tax collections for next year could be rather anemic to say the least and that money has been already counted and spent (not collected--yet).

Government has assumed too many responsibilities. Social Security and Health Care are going to have to undergo major modifications that the “Entitled” will hate. From here, we as a nation are broke. Collective economic greed got us to where we are today.

Our government is being looked to, to clean up this financial collapse. Responsibility means saying "no" when it's all too easy to say "yes." If compound interest is the 8th wonder of the world, then the 9th wonder is probably, “How will we pay for all of this?” Decreasing tax receipts and increasing interest rates could be the next perfect storm. And now a new set of politicians gather in Washington to fix the economy. What scares me is the assumption that they can "fix" it.

Copyright 2008 All rights reserved

Thursday, December 25, 2008

“Government Owned” Real Estate (GORE)

Fannie and Freddie own close to a half million /million (choose one) foreclosed homes. These are now owned indirectly by the Fed and even more indirectly by you and me. Let’s say each one has a note for 200K on it. The cash was paid out, the money was spent and the bank was hung out to dry.

In a regular real estate deal, the buyer goes to a bank and negotiates a loan. Right now the banks are a tad short of cash. They are trying to convert non paying IOU’s into performing home loans. In order to borrow real money from a bank, persons need to prove that they really don’t need it (having a last name like Rockefeller or Buffett also helps). To top it off the banks are asking for something unheard of, a down payment and proof of financial responsibility!

Why not look at foreclosures? Hmmm. Uncle Sam will loan the full purchase price plus all fees and maybe some money up front for “repairs. “ ----Just multiply the wannabe’s gross salary times five. This determines the bottom line bid amount with 100% financing.

This new program is what I call the “Hamburger Flipper Dream Home Loan Program.” This is a recast of the old “Fog a Mirror Home Loan Program.” The government will sell you a 200K home for 100K. They (you and me) eat 100K but the real estate loan is back on line being serviced by a new owner.

From a homeowner standpoint, if you can sell your present home for more than you paid for it, the gain is yours, if not the loss belongs to the government (you and me). Our government has guaranteed that there will be no losses on the sale of home loans by the banks. Such generosity!

Maybe next year, the government will throw in a free car (GM, Ford or Chrysler--your choice) and a chicken with every home loan. It kind of brings you back to that old Hoover election ditty saying “a chicken in every pot and a car in every garage,”—prosperity’s right around the corner.

It might be a good time to buy a home (I’m lying). If prices drop, the buyer can always walk away from it. The neat thing with this arrangement, the government indirectly guarantees the down side. If they print too much money, the house will be very easy to pay off with worthless dollars. One thing to consider here, is the fact that a home is a sitting duck as far as government taxation goes. Any property tax obligations would keep up with inflation.

This government housing program is a little like a hooker run funeral home. They’ll get you coming and going.

Copyright 2008 All rights reserved

Tuesday, December 23, 2008

Stimulate the Economy?

My wife came home and matter of factly said she had been out “Stimulating the economy” (she had bought gas and groceries). It wasn’t a splurge to satisfy a whim, just everyday stuff for consumption. You have to pause when people start to joke about stimulating the economy. The hand writing is on the wall and everyone can read it.

The car companies need twenty to thirty billion to stay in business till April of 2009. Kalifornia needs 30 billion to meet payroll up to July 2009 and they don’t have it (of course its only 18 billion right now—just wait a month or two). Sadly the only place to cut is in public services; fire, police, social programs and education. Government can raise taxes, but it does not increase incoming revenues, it does the exact opposite (the legislature will figure that out given enough time). The thing that irritates me is that some of us bloggers saw this coming and we were laughed at. Now when the reality of the situation is quite apparent, these same people have a solution that will work? Who are we fooling here?

It seems rather obvious that the government can’t spend us back into prosperity. The real problems of the 1930’s depression revolved around the failure of government to provide adequate services. The State and Local governments literally stopped functioning because of a lack of funds. The federal government should abandon this vendetta to save the banks and concentrate and focus on keeping local and state governments functioning on a realistic level.

It’s a little like old age, you can’t stop it, but if you can understand it, you can live accordingly. We can’t print our way out of this, there will be nothing left to buy unless we produce product for consumption. Printing money does not plant crops or build automobiles. But if you are a Congressman, you can save the world and redeem Democracy. The only trouble is we need real money to do it with. Of course if you subscribe to the Madoff philosophy, Congress can dazzle the world with little or nothing in the bank, and ruin millions that had millions.

Copyright 2008 All rights reserved

Wednesday, December 17, 2008

Look for Opportunity in Times of Crisis

Here is post pulled from the comments section of my last missive "Recipe for Failure" that summarizes our current situation

Written by: Anon on a California Mountain:

It is indeed unsettling for many to consider the fact that the force of this current deflationary motion (continually feeding upon itself as it spirals downwards, gathering more and more momentum) may at this point be unstoppable. The Fed and US government will do everything and anything to prevent it (destroy what is left of the dollar—hyper inflating a la 1930's Germany; turn us into a socialist or minimally a "government or central bank controlled capitalist state"; and so on) but at this juncture the forces may be too great to mitigate or hold at bay.

Our government (one administration after the next) has been able to avoid, cover up and push economic maladies forward for decades... refusing to face the unworkability of the systems and stubbornly attempting to prop up the status quo and "protect it" from the natural forces and laws of economics.

Maybe amidst this current insanity of ad hoc government groups throwing out unusual and arbitrary solutions, and every tool they have in their tool box—no matter how dangerous the future ramifications are of their usage—and by possibly inventing new "tools", can prop things up for another decade or generation. Maybe they'll "work the magic" and postpone the threatening debacle again.

Natural market forces just want to punish excess, errant behavior and unusual solutions (unusual solutions always become tomorrow's problems). Earlier, these forces wanted to purge the system of these unusual solutions. Now they may want to destroy the whole system so we can start anew... hopefully with ethics, a responsible view of the future and coming generations, and solid economic fundamentals.

(Keynesian economic theory was written when we were on a gold standard and before we had floating foreign currencies. It's obsolete theory! Government spending to stimulate the economy was only supposed to be an occasional tool, not de rigueur.)

The public's complete loss of confidence in the government, academia, corporate leaders, and the resultant crash of the system would be the necessary fodder for the creation of a "new civilization" as it were.

Unpredicted natural forces have unwittingly been put into play by actions implemented as early as 1913... such as: poor monetary and fiscal policies, government interference in business; the Marxist concepts utilized by FDR; Keynesian economics; corruption; excess of debt and consumption; de-industrialization; etc. etc. etc. ad infinitum.

We have made ourselves terribly "crisis prone". These multiple forces are beginning to bombard us all at once, forming a "perfect storm". In my opinion, the government's actions over the next 1-2 years (or sooner) will let us know what direction America is headed towards for the intermediate and long term: a deep and long recession, like Japan's "lost decade"... or a depression.

Being a boomer, I’ll bet that the majority of boomers (raised in affluence and security) never thought there would ever be a depression in their lifetime. We have a 50/50 chance of depression at this time. Such a collapse will not bring us into a "dark age". Of course there will be chaos and pain in the short interim. Yet, I believe that a collapse will manifest into a long needed evolutionary step—an opportunity for integrity and knowledge to flourish, raising us up to a more responsible, civilized and survival oriented status with a long term world view.

This old Chinese proverb is quite relevant: "within each crisis lies a great opportunity". We must stay positive and focus on peace and prosperity no matter the current conditions... and discover that opportunity.

Copyright 2008 All rights reserved

Saturday, December 13, 2008

Recipe for Failure

Picture a small economic model where everyone works and produces a product and they get paid a fair value for what they produce. Let’s assume that the total amount of product adds up to one Trillion dollars. The cash eliminates the need to barter what you produced for someone else’s product.

Here is where I get shot again for oversimplifying, just imagine that the government steps in and spends 4 trillion dollars to bail out the economy. The net effect, you now have 5 trillion dollars chasing 1 trillion dollars worth of goods.

A lot of people have spent a lifetime saving for retirement. This introduction of new money is an effective 80% TAX on savings in the bank (using this model). If you are in hock up to your eyeballs, this is called debt relief. You borrowed hard dollars and pay back easy ones. It nice to know if you weren’t greedy and kept a level head through this whole mess you get to pay for the clean up.

The auto industry is caught in an impossible situation. Car sales are down drastically and with the layoffs, more used cars will be on the market competing for buyers. Financing will be the real issue. GMAC is not in the best of shape. Rumor has it some Bernanke "Fairy Dust" could turn them into a bank and make them eligible for a CRAP/TARP(your choice)loan.

Even with a government bail out of the big 3 autos, all the government is bailing out is the workers retirement pension plan. It’s these benefits that have put GM and Ford into a death spiral. An employer can promise the employees the moon and if the company goes bankrupt doing it, the government isn’t obligated to honor those commitments.

UAW president Gettelfinger is nothing more than a very slick poker player. He bet the farm on a government bailout and it looks like he may get it. We keep on hearing about how massive the unemployment would be if we let them fail. Question, do you still build cars if no one wants to buy one? If consumption of cars drops to 50%, doesn’t it follow that massive layoffs are in the future as a given? Unemployment is a function of consumption. The bail out will not stimulate car sales.

The whole theory of financial collapse has to do with the misallocation of resources. An example of that was the cattle speculation in Africa 30 years back. Everyone was breeding cattle and becoming wealthy (the more cattle you owned the wealthier you were considered). Then feed prices went up and the farmers couldn’t afford the cost of feed and started selling the cattle. The market collapsed, the cattle starved to death and the farmers followed them to the grave. A government feed subsidy would have only allow the problem to continue longer.

We have two problems here, misallocation of resources and the confiscation of real savings by printing money. Both are keeping the game going. California's state sales tax income from new car sales and the property assessment taxes collected on homes are both dropping fast. Public employees are being laid off. Congress needs to help out the state budgets; we need the police, firemen and teachers, the hell with Wall Street and Main Street! These bailouts for the car companies and the banks are a little like a hooker with VD. You’ll pay now for what you get, and pay later for what you got.

Copyright 2008 All rights reserved

Friday, December 12, 2008

Government Embezzlement

Dec. 12 (Bloomberg) -- The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.
Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.
Let’s just take a guess where the money is, maybe 1/3rd was loaned to the very big banks, 1/3rd was used to buy credit card debt instruments and 1/3rd was used and is still being used to keep the stock market from tanking.

Consider each bank consolidation, not as an opportunity to increase in size, but rather as a payback to the federal government for money lent. As a fair guess, most of the big banks probably have 10 to 30 billion of negative net worth. Consider every bank on this list below as doomed.

The second place that the government has to cover is credit card transactions. This is the new system of economic commerce. Everything is done by credit cards. If there is no cash to loan out (everyone is in zero percent T-bills) that part of the system would lose its liquidity and seize up. Assume massive cash infusion to keep the market from locking up.

The third place is one I really worry about. Bear with me on this one, it is pure conjecture on my part. Paulson once headed of one of the biggest brokerage houses in town. Why not create several very big brokerage accounts in these troubled banks (don’t divulge the purpose of them to anyone) and make computer trades on the DOW just like the big boys. The goal is to be a super market maker. Keep the markets from taking the big plunge by injecting liquidity and buying when there are no buyers. There is a need for complete secrecy; Cheney has been all but invisible since October and in this proposed theory of what is going on, would be the man behind the curtain.

The problem is Two Trillion is not enough to handle the current situation. It could be enough to keep the credit card system functioning and the banks, so I could be in error here suggesting that the stock market is being manipulated. But I have never seen a market like this. If they were manipulating the market, figure another 2 trillion. My best guess at why Bloomberg got refused the information, was that the figures are absurdly higher than what is assumed, rather than because of who received the funds.

We saw today part of the house of cards collapsing that the Government and all of the king’s horses can’t fix. Ponzi schemes like Bernard Madoff’s fund are the first of many to hit the fan. In the past I have suggested that probably 50% of the 10,000 mutual funds world wide are insolvent or broke. The monthly statement is done on a computer and printed out and mailed to the subscriber, how gullible can they get?

The information everyone is getting is what they want to hear. The problem is, the information being withheld could spell your ruin. As I have stated in the past, a rich man and his embezzler can go to the same resort, the only difference is the rich man has no idea that he is broke, the embezzler knows whose money he is spending, and they both will have a great time.

Copyright 2008 All rights reserved

Sunday, December 07, 2008

Rotten Fish Smell With T-Bills

My wife yesterday pointed out to me that our last T-bill renewal for $10,000 only paid $7.50 for three months. I told her not to renew the damn thing, we can convert it to cash and put it in a safety deposit box. No sense in letting the government borrow it for one of their ill begotten schemes. Here is last weeks auction results.
If you want to talk about safe assets, is cash one of them? I have to question even my own thinking. Why give anyone a loan in these troubled times unless the borrower wants to pay a real return. Risk money should be at about 12 to 18 percent. Just look at what your credit card wants for financing, 18 to 30 percent interest annually.

Here is what the Fed was paying last year and it was reasonable:
There is a conundrum here, why loan money at such low rates? I have no answer except the the words "Bernanke and Paulson." We are not renewing our T-Bills, the government can "Go Fish!"

Copyright 2008 All rights reserved

Time to Take Our Medicine?

Here is a comment posted yesterday to my October 20 article on Invisible Taxation. I thought it deserved more circulation and it is well worth the read.

From Anon on a California Mountain:

I don't think there is anyway to predict economic futures in our present day. There is too much government interference; too many manipulators; the power elite; the new global economy; and many unexpected and unknown manifestations and reactions hitting us due to all of the fiddling the government has done with our economy over the last century (Fed Reserve, central banks, fractionalized banking, New Deal, off the gold standard, ERISA, etc. etc. etc.).

If the government were a person it would be arrested and sentenced to life in prison for all of its crimes and insanity.

Today we have a contraction of credit, contraction of wages, contraction of employment, spiraling deflation, we've been de-industrialized, etc. yet our misguided government leaders are attempting to solve our situation by cutting rates and offering credit ("stimulating" the economy) in order to make consumers borrow and spend?! What sort of idiocy is that? That is what got us into this trouble in the first place. The logic... if someone is drowning you pull them out of the ocean, give them a glass of water and throw them into a swimming pool? If someone is dying of hunger you put them on an austere weight loss program? You take an obese person who is sick due to food related issues and buy them a double bacon burger, fries and a milkshake? This sort of logic only belongs in a lunatic asylum.

The sad thing is that we the people have made this mess. We are the ones who elected the representatives and legislators who have built and administered this government. We are the ONLY ones who can change it. When you get down to it, it's not "the government" ... it is you, it is me. We are the cause of it all.

If we American citizens (the building block of our society) aren't educated, free from apathy, constantly alert and continually defending our rights, then the great experiment put here by our founding fathers will be a failed experiment.

We are complacent and atrophied. We've succumbed to the Super Bowl, TV, medication, Haagen Dazs, entertainment, fast foods, Disneyland, etc. etc. We've been manipulated through "bread and circuses" (a repeat of the fall of the Roman Empire). Our morality and integrity have been usurped by the negative influences existing in this decaying and degraded society.

We need to snap out of it, roll up our sleeves, get educated, draw on history's lessons, become active in our government, salvage our youth and create real leaders. Otherwise we are doomed.

When we consider the mess we are in, the first and smartest thing we can do is to go and confront the culprit that is responsible for it. And that is done by standing in front of a mirror.

It kind of reminds me of being a little kid that did something wrong waiting for Dad to get home for the anticipated spanking. Will Mommy (Congress) step in and save us from our deserved spanking? We get punished as a group for the actions of our peers.

A hat tip to: Anon on a California Mountain, thank you.

Copyright 2008 All rights reserved