Is Madoff Worse Than Bernanke?

A reader emailed me a question the other day. I decided to post the answer I sent to him.

Why bond price go up when Fed buys bonds?

There are two things going on here. The Treasury issues and sells bonds and the Federal Reserve is in charge of the currency. The Treasury borrows money and the Federal Reserve exchanges like for like.

At a Treasury auction, the buyer is a person or institution with savings to purchase the bond. The purchase removes money from circulation (the government is going to spend it) The selling process is an auction. If there are more buyers than bonds, the price for the bond increases and in lock step, the interest rate decreases.

The other thing happening is when the Federal Reserve buys a bond. The Treasury prints the paper and the Federal Reserve pays for it with printed dollars. In this simplified form, it is a zero sum game and makes no real sense. Why would you create it and then sell it back to yourself?

These two things seem unrelated but carry it forward one step. If China decided that it wanted to sell the bonds it holds back to the US and there were no buyers, the bonds would drop in price until they found a buyer. If say, a previously issued bond was at par and paying 4% interest was offered for sale, and buyers demanded 8%, the bond would drop in value by 50%. This would be very observable to the buyers at present Treasury auctions and they too would want 8%. So the Federal Reserve is buying these bonds at par as they hit the market. The net result is an increase in the money supply. This action guarantees the value of all previously sold Treasury issues. Note, the investor pays in real dollars and gets back printed ones. Since all dollars are alike, we have more dollars chasing the same amount of goods.
[End of email]

I think what we need to look at here is values. Madoff got 150 years in prison and he is 71 years old. So he will be 221 years old when he gets out(I'll only be 212). I think that a 30 year sentence would have kept the judge from looking like an incompetent idiot. You do have to ask yourself, if Bernanke buys enough US Treasury's from China, does he get the same treatment? Of course if Madoff's sentence were to be adjusted for inflation, he just might be free in 10 years.

We are next in line to lose our savings by inflation and no one will go to jail, go figure!

Government Inflation

In California here, there was a 13% increase in sales tax. They raised it a penny from 7.5% to 8.5%. Doesn’t seem like much but none the less it is 13%. Vehicle registration fees rose from .65% to 1.15% of value. That’s pretty close to a double of 100%. On top of that there was a $1.50 increase in tax on a pack of smokes. Figure about a 40 percent increase there.

For simplistic purposes (for which I deserved to be shot) assume that the cost of government has remained about the same (as has a pack of smokes)(try to keep a straight face). Back in 1964 a pack of cigarettes cost 25¢ and minimum wage was $2.00. If you do the math, one could buy 8 packs of cigarettes for one hours labor. Let’s progress forward to now. Cigarettes are $5.50 a pack. Extend out the 8 packs per hour and we arrive at $44 dollars for an inflation adjusted minimum wage. This calculated wage is more than most people today are making per hour, so it seems pretty absurd.

What we are looking at, is forced inflation by government legislation. Our wages are not increasing, and at the same time, more of what we have earned being taken away from us in the name of taxes. These are just some of the visible taxes. There are a lot more that are hidden (home construction fees/taxes come to mind).

The funny thing is, I would consider it an act of decency to ban smoking all together, rather than to tax it to death, and at the same time ban any form of gambling like the state lottery. Nobody has accused any legislative person of late, as having some sort of moral fortitude let alone a backbone. They don’t want to get rid of the smoker or gambler, they just want to tax their addiction and benefit from it.

Where do we go from here? Is a pack of cigarettes worth $5.50 a pack and is the fair minimum wage $44 per hour. I seriously doubt it. Something is wrong; our wages are not fitting the tax structure in place. I get the feeling that a pack of smokes hasn’t really gone up in costs, but the consumer hasn’t caught on to the inflation aspect of it yet.

I wonder what free health care will do to the price of cigarettes? If the cigarettes don't kill you the taxes will.

Let's Tax the Poor

This phrase you hear from Congress all of the time “Tax the rich.” What does it mean? It certainly doesn’t refer to the person who has 10 million in the bank and who doesn’t work. They are talking about wage earners who get paid a lot.

The really weird thing is, 40 percent of the population pays no tax at all. They get to live here free (they don’t make enough money to pay taxes). The highest wage earners pay most of the taxes (god bless them).

Has anyone ever said, screw the taxation system and let's have everyone pay two month’s wages or work on a government chain gang to satisfy your government obligation? I do not get this “tax the rich” solution. If you are truly rich, you don’t need to work and what taxes are you going to pay?

People get rich in other countries and move here to retire. We are not taxing them or any of the truly rich.

If you are poor, you get a free health care, free food stamps, free college education, and free welfare. You don’t have to pay your fair share. Let the rich pay your bills.

Congress is so set on helping the poor. Everyone needs to pay into the system, tax wise. 40 percent of the population paying no taxes is absurd. Either pay with cash or labor.

Let’s tax the poor and not feel guilty. We have taxed the rich enough already; all they do is move to a country with a lower tax base. We need revenue from those who are a captive audience. The poor are the people who get the greatest return. It doesn’t cost them a dime to live here.

Of course, if your neighbor can't pay his mortgage, Congress will help them with that also. Do you get the feeling that deadbeats, have a lot of political pull? I can't quite figure that out! It has to be my money they are spending; they don't have any that they can call their own.

Why should some people get a free ride just because they claim that they can’t pay for it? Rome built its roads with labor from people that had no money to pay tax.

We're Not Out of the Woods Yet

This Blog tries to keep out of politics mainly because both sides think that the other side is the problem. When you think about it, without the other party being there, you have no one to blame the mistakes on.

Every four years we elect a president. About half of the voters get their choice of who gets the office. After elected, the President gives a couple of speeches and then settles down to the job of running the country. Then after about two years in office the press usually starts whining that there haven’t been enough Presidential news conferences.

This President’s plans may or may not work; only time will tell. But there is one thing that is very irritating; this guy will not stop talking. He has a solution for everything. Most probably, if he were to stop explaining what is being done, we might interpret things for ourselves and come to the “wrong” conclusions.

Can you imagine getting on an airliner for a cross country flight and have the pilot on the intercom talking to the passengers for the whole flight? Even if there was nothing wrong, you might question the pilot's mental state.

Presidential speeches use to be rare enough to where you would take the time to listen to at least part of it. Does President Obama think he has a captive audience and can talk his way out of this mess? Haven’t we had one too many press conferences? Is this going to be one never ending pep rally? He reminds me of the construction worker who leans on his shovel when he talks.

I'd really like to turn on the TV and not get a Presidential briefing on how great the economy is doing (he'd be playing golf if that was true). It’s illuminating to hear the President say, “We aren’t out of the woods yet.” It sets my mind at ease to know, it's not a train tunnel that we're in.

Chrysler Fiat Deal Rips Bond Holders

When the banks and brokerages got Tarp money and then paid out those huge bonuses, it upset a lot of people. Whose money was being paid out? It seemed rather obvious, it was TARP money.

The automotive bankruptcies have a similar problem. In this case, the bond holders are being short sheeted. The government gives 9 billion dollars to Chrysler to keep it alive and then tells the bond holders to shut up and accept the buyout plan. The bond holders can very well contend that any money accepted from Uncle Sam’s bailout gift, was money they were also entitled a share of. Now the government says Fiat gets to buy Chrysler and the bond holders had better accept the deal.

There is a rush to push this bankruptcy through the courts. If the deal doesn’t go through fast, it won’t go through at all. The bond holders have the right to demand that they be paid in full, or sell the company’s assets and get their pound of flesh. These assets might sell for a lot more than the government is willing to admit. Some of this is prime real estate. Either way, the bond holders deserve their day in court. On top of that, these bond holders have already been burned by GM and Chrysler, why would they want paper that is subordinate to the debt they already hold?

What could happen here could become a real mess for the government. The courts could rule in favor of the bond holders. The US government wants to gift money to the car makers, to keep them in business. Haven’t they, by their actions, become a cosigner guaranteeing the car makers debt obligations? Why shouldn’t the bond holders be entitled to bail out money and maybe quite possibly payment in full?

The administration is talking cram down mortgages and now they are going to stiff bond holders. Isn’t it time for the courts to rise to the occasion and take back their power? Government has to be held accountable for trying to change rules of law that define our legal system (ie modifing original loan agreement terms). So far, nobody has dared to get in the way except a few bond holders. Look for a Supreme Court ruling on this litigation. It could be a real eye opener.

Fiat’s going to buy Chrysler? Give me a break! I think that once they explain to the Italians that you can’t put 4 wheels on a Gucci handbag (it's too small), the deal will fall through.

General Motors, a Bridge too Far

Our government says they own 60% of General Motors. 60% of nothing is still nothing. The company is going to keep Cadillac and get rid of Pontiac. I hate to say it, but Cadillac is an “Old Farts,” car. 50 years ago you were somebody if you had a Cadillac. Today, a Lexus, Beamer or a Mercedes will project an aura of status. You know damn well grandpa didn’t drive one of those! In the present economy, shouldn't the focus of production be more on utilitarian rather than luxury type cars?

Now the government wants GM to produce electric cars and “increase car mileage.” Electric cars sound great, but maybe in another 50 years they might be economically feasible. Now, they deliver too little and are not as cost effective as a regular gas guzzler. On paper, it's a no brainer, in the real world, they just aren't practical. Plus, Congress’s requirement for better gas mileage has more to do with car production than more efficient engines. The car manufacture mileage ratings are a reflection of the average miles per gallon for all cars produced by the company. So to increase gas mileage, you produce more smaller cars than larger ones.

When we examine what is happening to GM, it is very apparent that they have made extremely poor business decisions since the early 1960’s. The American car companies have always had an attitude problem. It’s kind of like Henry Ford’s comment, “Tell the consumer, he can have any color car he wants, as long as it’s black.” The leaders in innovation have come from the foreign car manufacturers, and they have earned their way into our country by being better.

In Southern California, massive traffic jams on are not an indication that we need more freeways. If we have to live with traffic jams like this, why can’t we have public restrooms every 10 miles on the freeway? (There are NONE in all of LA) The idea that better mass transit would lead to less cars on the highway never seems to be an obvious solution.

Here is an experience of mine that relates to mass transportation. Last year I was flying from San Diego to Washington DC. I got to Chicago and the connecting flight was canceled (talk about being irritated). I was able to book a flight into Baltimore MD. I was told by the ticket agent that it was a cinch to get to O’Hara in DC to recover my luggage (he stretched the truth a bit). From the Baltimore airport (the people there were extremely helpful), I took a 17 mile bus ride to the beginning of the Washington DC subway. The whole way on the bus, I’m thinking “Riding a subway late at night in Washington DC, I have to be nuts!” When I stepped into that subway station, I felt like a hick from the boonies. The size and grandeur of what they have built is mind boggling. This transit system got me to O’Hara in less than an hour; I picked up my baggage and my rental car and was on my way. As for sights to see in DC, I recommend the subway. The rest of the country needs a mass transit system on this level.

So with all of these car companies going broke, who in Congress is going to stand up and push for mass transit? --No one. GM has got to sell some vehicles, lots of them.

If we need to spend a lot of money to stimulate the economy, wouldn’t mass transportation be the spot to place it? Let GM die. They never had our best interests as a nation at heart. They wanted you buy a new vehicle every two years and keep them in business. The car companies from the 1930’s on, were responsible for the destruction of mass transit in the United States, “Everyone should own their own private vehicle.”

The only trouble with the government bailout plan for GM, is that how do you finance a car without a job? And if you do have a job, do you really need a new car? And of course it follows, if you don’t need a new car, then you don’t really need mass transit either. It’s amazing how things just seem to work out just right--go figure!