Saturday, February 28, 2009

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?


Anonymous said...

At Dr. Gary North's suggestion I am reading Modern Money Mechanics by the Chicago FR Bank. The whole system is an abomination and in essence enslaves people to debt. First of all, just by purchasing say $10,000 of government securities with a computer keystroke the FED injects $10,000 of reserves into the banking system and this gives rise to an additional $90,000 in additional deposits (computer keystrokes in the same bank or other banks) so $100,000 of total new money is created.

Now, what's wrong with this?

God, called interest charged on loans usury. What would God call interest on a loan of ‘money’ that was created out of thin air (creating bank deposits through loaning to borrowers)?

First of all, bankers are allowed to charge interest on money that doesn’t really even exist except as computer accounting entries (bank deposits) and then the banks are given the ownership (liens against) the real assets for which the borrowers are borrowing the ‘money’ to purchase. So these banks retain the liens against the real assets until the principal and interest is finally paid off and if it is not paid off then the banks seize (confiscate) the real assets.
What a system!!!

“People who will not turn a shovel full of dirt on the project (Muscle Shoals Dam) nor contribute a pound of material, will collect more money from the United States than will the People who supply all the material and do all the work. This is the terrible thing about interest.” Thomas Edison

“If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People.” Thomas Edison

Jefferson said that no one deserves the occupation of moneylender except those who have money to lend.

Jim, this is why this crazy process just keeps on going and the whole thing is a house of cards. I made a post here a while back about how money is created in the banking system. You basically didn't like the paper that I sent you to and said that "he [author]is no professor". Well, I have been studying up on our money system ever since then because I truly want to understand it. I have run across a booklet that clearly explains the whole process. The booklet was created by the Chicago Federal Reserve Bank, which is a highly respected FR Bank that does monetary research. Surely this booklet would be considered "from the horses own mouth". Now, whoever wants to know and understand how our banking system works they can go to:

or just simply 'google' Modern Money Mechanics and download a copy of it from where ever you like. After all it was prepared by the FED for the purpose of educating the public about how the system works.


Anonymous said...

This is where the old saying comes from: "You want to be successful? Be the bank."

Yup. We're on a runaway train headed for some not wholly understood fate. Whether it is just around the bend or some miles down the track, it's gonna be a collision... we just don't know the details: when, how big, or the amount of deaths and injuries.

We have a basic idea of what is coming and we can't really change it at this late date (short of arresting and removing the president, his administration and congress and replacing them with new government) so the best strategy to follow is based on the "circular theory" of Akido and other intelligent forms of the
martial arts: learn to use the power or force coming at you to your advantage... turn it back towards your enemy, use it as leverage to achieve your goal.

We have deflation now for an unknow period and then we'll have inflation or hyper-inflation. It will occur rapidly or gradually. Take advantage of the deflation and prepare for inflation and take advantage of inflation when it comes.

How you do both of these is what should be open to discussion.

Deflation... save, be frugal, sell everything you don't need and add to your savings, work as much as you can to amass as much cash as you can.

Inflation... buy as many good hard assets as possible when the inflationary indicators rear their ugly head and BEFORE it truly begins; take on debt because you'll be able to pay it off with cheap dollars in the future; stay away from cash and get rid of it as soon as you get it (buy more assets) or if it is small amounts of money, buy simple things like extra food, tools, etc.

Everyone PLEASE share your ideas for dealing with the inflation that is coming.

Jim in San Marcos said...


The article you refer to is an excellent one. The link didn't quite transfer Click on this link I think I first read that in 1963 in high school.

In your example, the 10k put in would allow bank a 9K to loan out not 90k.

This Treasury mechanism you are looking at is not a method for flooding the country with money. The Federal Reserve uses this buy and sell tool to regulate the money supply.

Take a depositor at bank A. He requests that the bank buy him a Treasury Bill for 100k and the bank does just that. Now the Fed wants to inject cash into the system, they would buy the Treasury bill from bank A and issue cash.

There are three players, The Federal Reserve, The Treasury and the bank. The Federal Reserves main goal is to keep currency in circulation. A bunch of drug dealers in LA could create a currency shortage by shipping their profits to Mexico. The second thing the Federal Reserve does is transfer checks and other bank transactions. It is a clearing house for the banks. That's how your check written in Boston gets deposited in Kansas City.

The Treasury's job is to float paper (borrow) to finance the national debt. This is where the paper originates that the Fed buys.

The bank can only loan the depositor's money. They can't create any. Technically they can with a float. That's where you write the check Thursday the day before payday.

That first link you referred to, the person had mixed the Federal Reserve and the Treasury all into one and had used one branch when he really meant the other.

On top of all this you have fractional reserve banking. If someone makes a deposit at your bank, the FRB demands that the bank put say 10% of their deposit in cash reserves currency. The Bank deposits that 10% in the local FR bank. At closing that night, Bank A calls up the federal reserve and orders currency for delivery the next day for cash transactions. Money doesn't move as smooth as it should at times and if the banks reserves drop below the specified amount (10% in this example) then they borrow from the Feds overnight window.

Hope this straightens it out a bit for you.

Jim in San Marcos said...

Hi Anon 9:32

I think we can see inflation and deflation at the same time. Nobody wants to buy a car or a home. A bag of potato chips is now four dollars, a steak is ten dollars and a chicken is six dollars. Taxes are increasing and government services are decreasing.

There is that tendency to borrow and spend, but I think the credit card companies are the next thing to collapse. That could limit consumption to cash only.

This interview with Paul Keating the former Australian Prime Minister Link is pretty scary(hat tip to Common Sense Forecaster). It is his view that the banks of the world have lost three quarters of their depositors funds.

Explained another way, 3/4th of what we have produced and refused to consume by savings for retirement, has been consumed by someone unknown. The banks loaned it out and now hold worthless loan agreements.

It's going to be hard to smile as a Walmart greeter.

Anonymous said...

Jim, I didn't say Bank A would have $90k to loan out. Bank A would have 9k to loan out. This is done by creating deposits for borrowers. The 9k is then dispersed into other banks by these borrowers writing checks on these accounts. These banks then must hold back $900 but they can loan out $8100. This $8100 again goes on down the line to other banks. They again must hold back $810 in reserves but can loan out $7290. The theoretical expansion is $90,000. This happens across many banks and many transactions. Look at the charts in the booklet. Also, this article was revised and published after 1990 because it clearly gives examples from the 1990's. Murray Rothbard, Lew Rockwell, Ron Paul, Gary North, G. Edward Griffin are not fools. They understand the system and refer to the same booklet. You can lead a horse to water but you can't make him drink.


Jim in San Marcos said...


you have carried the process to an absurd limit.

You cannot assume that no one is going to spend the money, it is just going to be deposited and loaned out again. Plus, how long would it take for your example to complete it's cycle to 90K on the assumption that no one bought anything, they just kept putting it in the bank, 3 years, 10 years? When you borrow money you have a payment schedule which will pay off the debt. Subtract the payments and the consumer purchases from the money created. If the first person takes the 9k and buys a car for 18K you have a contraction.

I think you are confusing hypothecated assets here. If you buy a house for 100k and sell it to someone else for 1 million. That 900k is blue sky that no one worked for. If the prices drop back to 100k, the bank has made a very poor loan. They guy who sold the house gets to keep the 900K and the bank eats the loan. At this point you have an insolvent bank and the depositors take the loss. With FDIC insurance, we the people get to suck up the loss. In this case, making the depositor whole, introduces an additional 900k to the money supply. The bank gets zip.

Anonymous said...

Jim, the process also works in reverse. When a dollar is borrowed a dollar comes into being; when a dollar is paid back a dollar is destroyed. When the economy expands money is created when the economy contracts money is destroyed. Each dollar that is created comes into being the instant that it is borrowed and it is detroyed the instant that it is paid back. Money is continually being created and destroyed. Its not a one way process. If all debt was paid off there would be no money, not even paper money, or coin. Our money is based purely on debt. It is fiat through and through. With the system that we have there is no way to prosper except to go into 'debt'. Why not just read the article that the FED wrote. Its not a difficult article and for the first 10 or so pages they explain how money is created and then they explain how money is destroyed. For the 90 or so years that they have been in existence they have created more money than our economy has needed. This is a devaluation of our currency. If the dollar of 1913 is the reference dollar then our present dollar is worth about 4 cents. The true definition of inflation is that it is a devaluation of the value of the currency that is used to purchase goods and services. As the money is devaluated it will buy less and less assets. So prices go up. Inflation is a hidden tax on the American people. I have attended 5 years of college in science, engineering and mathematics and I made very high marks. I can read and understand simple charts. I am not boasting because my post is anonymous. I recieve no glory from my post. I have laid out an article for the people that come here that was written by people from the FED. It speaks for itself. Money is created out of thin air (cneckbook entry, computer keystrokes, pen and inkwell) and is is detroyed in a reverse of the same process. Just read the booklet. I don't know what else to say.


Jim in San Marcos said...


If we define our terms, money is not being created or destroyed. The money supply increases or decreases. We are not pulling anything out of thin air. Even though the government raises the national debt ceiling, this is real money borrowed from someone's savings. There is the concept that the government could borrow so much that it could not pay it back. That could kick your retirement plan into the next century.

The inflation we have experienced since 1914 or what ever year you pick, is the result of government consuming more resources than they received in taxes. They have to borrow the money.

Its a little like you and your neighbor going to an auction. Your neighbor borrows an extra hundred from you and outbids you on an item you are both bidding on. The resulting inflation is a tax on your savings.

If you hadn't have made the loan, the neighbor couldn't have out bid you. The next time he wants to borrow, you'll kick up the interest rate to make him think twice about it.

What you are observing is happening, it is just a little more complex than it appears

Anonymous said...

Then how does the 'money' supply grow? Surely the 'money' that existed in past generations is less than the 'money' that exists today.
Did you know that our founding fathers defined the 'dollar'? They defined it to the very 'grain' of a base metal. They were very specific. They were very specific to tie it to something of value so that the politicians and bankers could not debase its value. That definition still exists to this very day and has never been rescinded by the government. I cannot recall exactly what that value was. I will certainly be able to find the definition and inform you of its value. Money is a medium of exchange - nothing more, nothing less. Our money should not be based on something that is tantamount to shifting quiksand. Again I offer you the article that is written buy the money masters own hands and that is written in plain English for all to see. I will also find for you the plain and down to earth admission that was written by another FR bank head that plainly states that if all debts were paid off then no money would exist, not even paper money or coins. These are facts. Ignore them if you will.


Anonymous said...

I thought that the interest rate was set by the FED. It is now almost zero.

Shouldn't the interest rate be set by the 'free market?


Jim in San Marcos said...


The Feds Fund rate is close to zero. This is the rate the Fed charges the banks for an overnight loan. Say a check they presented for clearing with the Feds is drawn on a foreign bank for 1 billion. That could take a few days to clear. To make the bank books balance, they borrow from the Fed. Also if someone goofed in the loan department and wrote a loan they did not have funds for, they would also borrow at the discount window.

The interest rates are set by the market. If everyone is scared to death and doesn't want to borrow, the banks can't loan it out. There will be some lending but it is not like there is a shortage of bank money. You can't fog a mirror and get a loan. You just about have to prove that you don't need the loan in order to get it.

The other thing not notice is that the Fed is allowing crap on the bank books to be deposited as reserves (from my understanding). They are accepting SIV as collateral for bank reserve requirements.

One article that I can't verify stated that the Fed has 1.8 trillion in questionable paper held as bank reserves. It seems unbelievable and I hope it is. Otherwise the ball game could be over.

That would mean that the banks have taken their dogs and converted them to currency with the promise to make the held reserves good at a later date. It could be that the Fed is only giving them 20 cents of the dollar. This is just a guess of what may be going on.

As for the money supply increasing in olden times, you mined gold and silver and turned it into the government for paper money. The money supply was limited to the amount of gold and silver in circulation. With the advent of fractional reserve banking, the money supply could expand to accommodate the increases in population.

Money is a measure of total goods produced for sale at any given time by an increasingly larger population. You don't have to be paid in money. If you made shoes, you could take your pay in shoes and barter for what you want.

Anonymous said...

I don't know what everyone else is planning. For my part I plan not only to survive but also to prosper. There's no point in curling up in fear at swirling disaster. Either you profit from it today or you profit from it tomorrow.

Debt is the weight that sinks the hook. It's fine when small and proportionate. When the debt is too heavy, however, it can pull down the fisherman -- and maybe even his boat.

To avoid becoming a bottom feeder, one needs to shed debt. A mortgage is debt. A car payment is debt. Student loan is debt. Find a way to shed it all quickly.

Build up a cash position. Once there are no more buyers, step in and buy. Is $1 for a 20 foot sailboat too low when no one's bidding against you?

As for higher taxes, they are inevitable. Someone has to pay for all the generosity. The good thing is (if ever there is such a thing regarding taxes) you can manage your tax hit by changing your ways. If the government wants to punish consumption, for example, then stop consuming, unless it's conducted over the black market.

Anonymous said...

I've been personally taking advantage of extreme deflation in one segment of the market: toddler toys and yard equipment. While many of my friends are buying expensive new stuff for their kids, my wife and I have been buying mostly used toys and yard equipment (swingset) off of Craigslist. Usually to the tune of 90% savings. The stuff works great; we just wipe it down with some Lysol cloths. And when our son outgrows items, we re-sell them for close to what we paid, so we've been saving tons of money (that we keep in a "high interest" savings account, if you consider 2.5% high interest).

We've noticed that people are unloading everything they can find on Craigslist to raise cash.

If it weren't for sites like ebay and Craigslist, I think a large part of the population would be in an even deeper cash crunch.

John @ Texas

Jim in San Marcos said...

Hi John

I think a lot of people never really learn what they can buy if they were to shop around.

I buy day old bread, meat and dented cans. I pack a lunch and thermos of coffee for work every day. I'm not cheap or anything, but I value money as a tool. It is an acquired skill.

My first days of grocery shopping in College, I got taken to the cleaners, I learned fast, summer jobs only paid $2 per hour back then.

There is a lot of stuff I don't need, but if the price is right, why not?

Anon 8:00 pointed out a 20 foot boat for a dollar might be too good to pass up. I might go $500, I love to sail.

There are some real good deals out there.

Thank you for your comments and take care.

frakrak said...

Jim thanks for the link to see our former prime minister “simplify” his version of international finance! It is somewhat strange to see his arrogant mug again in the limelight. I try to follow all the links your blog puts up, has helped me de-fuzz economic theory, but it has been a stretch! The latest form of entertainment I have discovered is watching world renowned economists going head to head on the television, giving their version of where this is all headed, a perfect example of denial and a good reason why governments should not subsidize doctorates in economics!

By the way Keating has always been pro Chinese, can’t help but to think that China may not get the slice they want of Global finances! I still think there maybe a few surprises to work thru all this.

I remember back in the ’87 crash, some of the captains of western capital sold high (before the crash) and took their time buying back into the market, I can think of one instance where major acquisitions were made 14-18 months after this particular crash!
To try and keep this on topic - China is trying to acquire major mining interests in this country, they are not holding back, offering what may turn out to be top buck for these assets, if we take this over a time frame of say the next 18 months. Wouldn’t it be more prudent for the Chinese to hold back and buy at the bottom? Is this the bottom? Or is China spending its Capital on tangible assets now before we see the next phase to this?

Australia has always been a bit of an historical anomaly, small population, large natural wealth and a growing insecurity with its geopolitical surroundings. Now I have heard some talk of late that Barack maybe considering offering a deal for Australia to become the 51st state of the union! Now that could be the mother of all stimulus packages for our economies! Imagine the pluses; our twang would be rectified within a decade, we would have the largest reserves of bauxite, uranium, iron ore, lead, and zinc in the world! Not to mention diamonds, gold, and coal deposits! Our president would get the opportunity to notch up some fairly serious frequent flyer points! The 51st state would triple its population in a decade. California freeways would have half the traffic (most of its citizens would have emigrated down under)! And it would keep out the Chinese!
Can’t wait for the comments ….

JMS said...

John @ Texas

I have been noticing that in the Baltimore Craigslist too. There is a ton of yard equipment/tractors for sale. I have seen sales for 2-300 bucks for a used (3-5 year old) riding mowers. Why even bother going to Homedepot with prices upward of 1k. Mostly decent brands too. Also, I have been noticing a lot of small heavy equipment up for sale like bobcats and backhoes.

Anonymous said...

Hey Jim...repost that article some time ago about the 6800 DOW you predicted over a year seems to finally be there today!

Anonymous said...

The next chapter...

EU banking totally collapses. Their only way out will be inflation.

US commercial real estate is starting its crash. It will be much worse than the residential crash (that is continuing its freefall) because the loans are bigger and more highly leveraged. Retail and office space is becoming quite vacant.

No one has thought about farming. What will happen soon when farmers go to the bank to get their loan to launch their spring crops and the banks won't lend? Uh oh... Farmers going out of business and food shortages.

Our "leaders" don't have the intellect to resolve or even slightly mitigate this titanic collapse.

The only thing you can do is put lots of nuts away for the winter; work out how to keep creating income; and prepare to launch your transition strategy for when inflation kicks in.