The Great Depression was a financial event. There was no war, earthquake or hurricane. The financial system ruptured and just about died. People stood in line to withdraw their saving from the banks. Thousands of banks collapsed. People, worldwide, lost their life savings. It was contended that the runs on the banks are what brought the system down. Upon closer examination, it’s easy to extrapolate the banks eventual demise from the poor economic conditions. The money borrowed could not be paid back by the unemployed. Many people were forced to live off of their savings (if they had any left).
In order to stem bank runs, the government came up with FDIC insurance. The Glass Segal act put this into effect January 1, 1934. This was after the horses escaped and the barn door was locked. If your bank met muster, you qualified for insurance and if it didn’t, you were toast. It didn’t cost the government a dime.
Let’s bracket that date January 1, 1934; either 100% of the population had collectively lost 80 percent of their wealth, or 80 percent of the population lost everything and 20 percent lost nothing. Almost everyone fell somewhere in-between the two categories. There was an obvious destruction of savings that was catastrophic in nature. This money wasn’t destroyed; it had been spent very foolishly over the previous 10 years on consumption. If you paid one million dollars for a dog or a wedding, you got your money’s worth, although I would argue that.
Fast forward to today. Bank deposits worldwide are insured. No one has lost a dime. The last part of the Kondratieff wave has to do with the contraction of the money supply and the repudiation of debt. The US Treasury is expanding the money supply while debtors have no problem walking away from their obligations. The most important thing to realize about the last part Kondratieff cycle is the end result. It destroys the obscenely rich and returns financial systems to a more normal functioning state. Bernanke is trying to preserve the status quo. The Fed is going to print us into prosperity.
Food prices have double this year. It is a little hard to see in some cases, the giant size potato chips bags, now fit in a lunch box. And then there is the specter of deflation. Autos and homes are just not selling.
Even if you have a job, your wages are not increasing, but your cost of living is increasing. So you dip into your savings, which seem to have lost a lot of buying power. Maybe that’s what deflation is all about, you spend until you are broke and then do without.
In 1930 there was no money to short the dollar on a carry trade. Bernanke has fixed that (it’s a little like a bank selling hand guns in the main lobby). The World(and probably Goldman Sachs) has shorted the American dollar. After getting rid of our clunker, we can now drive to the poor house in style. It kind of sets your mind at ease, doesn't it?
Sunday, September 27, 2009
Saturday, September 26, 2009
Squirrel Economics 101
The following article may look familiar to some of you, it is a reprint from exactly one year ago today. I thought it worth repeating for those that missed it.
Imagine a group of squirrels saving nuts for winter and depositing them in a bank (one nut one credit in their account). Let’s imagine that a truck pulls up and helps themselves to 80 percent of the nuts. The bank now has a problem. It can’t cover all of the deposits. But notice, if there isn’t a run on the bank, there is no real problem. Squirrels are depositing and withdrawing nuts with no problem.
In this little example even if there was some form of bank insurance, what ever it was, it could not replace the nuts (their winter food supply). The amount left for all of the squirrels is pretty much set to the 20% remaining plus net deposits made until winter. In this case, there is no inflation (you cannot print the squirrels food supply). The squirrel has no idea of the life or death consequences of what the bank has done until winter arrives (retirement).
The real estate market is the truck that pulled up to our personal savings and looted the bank. In this case, we have government insurance to “make us whole again.” The money taken was spent. Notice that every dollar deposited had to be worked for (a squirrel nut).
Labor created some product. By not consuming this nut and saving it, you were putting this towards retirement consumption. The money from the boom (real estate loans) was spent on many lavish toys and is forever gone. Now we have financial institutions with only 20% of capital left. In actuality, there is only 20% of product produced left (the nuts). The rest has been consumed. It is rather academic whether or not the government prints more money to make us w(hole) again.
We have a choice, leave the banks with the 20% which will buy the 20% of produced product left or we print enough money to restore everyone’s bank balance.
I am sure this little analogy could get me shot again or could be picked apart easily. I present it as an illustration of how money relieves us from the bother of having to barter for services and goods. Once you accept the convenience of money vs bartering, the concept of just printing it, is the equivalent to stealing.
So if you are a squirrel, “It’s grab your nuts and run!"
Imagine a group of squirrels saving nuts for winter and depositing them in a bank (one nut one credit in their account). Let’s imagine that a truck pulls up and helps themselves to 80 percent of the nuts. The bank now has a problem. It can’t cover all of the deposits. But notice, if there isn’t a run on the bank, there is no real problem. Squirrels are depositing and withdrawing nuts with no problem.
In this little example even if there was some form of bank insurance, what ever it was, it could not replace the nuts (their winter food supply). The amount left for all of the squirrels is pretty much set to the 20% remaining plus net deposits made until winter. In this case, there is no inflation (you cannot print the squirrels food supply). The squirrel has no idea of the life or death consequences of what the bank has done until winter arrives (retirement).
The real estate market is the truck that pulled up to our personal savings and looted the bank. In this case, we have government insurance to “make us whole again.” The money taken was spent. Notice that every dollar deposited had to be worked for (a squirrel nut).
Labor created some product. By not consuming this nut and saving it, you were putting this towards retirement consumption. The money from the boom (real estate loans) was spent on many lavish toys and is forever gone. Now we have financial institutions with only 20% of capital left. In actuality, there is only 20% of product produced left (the nuts). The rest has been consumed. It is rather academic whether or not the government prints more money to make us w(hole) again. We have a choice, leave the banks with the 20% which will buy the 20% of produced product left or we print enough money to restore everyone’s bank balance.
I am sure this little analogy could get me shot again or could be picked apart easily. I present it as an illustration of how money relieves us from the bother of having to barter for services and goods. Once you accept the convenience of money vs bartering, the concept of just printing it, is the equivalent to stealing.
So if you are a squirrel, “It’s grab your nuts and run!"
Tuesday, September 22, 2009
The Time Lag Factor
A majority of people don’t really anticipate time lags. The results of Congressional legislation usually takes anywhere from 2 to 12 years to really take effect. Our leaders suggest that we have hit bottom and are rebounding out of the recession. I really have to wonder about that!
Legislators in Georgia a while back passed a law against unfair lending. The net result of the law, was to shut down bank lending in the state. The banks didn’t want the hassle. Congress passed a law for writing off farm machinery in a five year period. Hummer sales exploded for three years. Not quite farm equipment, but it qualified for the deduction.
A lot of times, the net result of a given action has very unexpected results. The UN taught people to farm in Africa 30 years ago and how to use fertilizer. It seemed like a real success story. People came to the area and the population exploded and things were fine for a while. The one thing overlooked was the need for firewood for cooking fires. 15 years later, there were no trees and the rain fall erosion turned the fertile fields into gullies and the population either starved to death or moved on.
When we examine cause and effect, there is a time lag between the two. Easy home loans created a speculative bubble. What we are looking at are the unintended consequences of economic forces that have a time lag built into them.
We do know that the Congress of the 1930’s figured that they had a chance to stop a lot of this stuff we are experiencing from ever happening again. Of course we were far wiser and knew what we were doing so, we changed the rules back to make the game better. After changing the rules in the early 1990's, things worked marvelously, everyone got rich. But then Bear Sterns had a small problem. The Nemesis from the 1930’s reared its head, with the same time lag.
Our government has initiated several programs to save the economy, from spending money that is nonexistent, to printing money to give to banks that has been lost through bad investments. I suggest that there is a time lag. What has been done will take several years to be “appreciated.” It’s a little like giving you underage girlfriend a girdle to hide her pregnancy. You haven’t altered the outcome----only made it more of a surprise.
Legislators in Georgia a while back passed a law against unfair lending. The net result of the law, was to shut down bank lending in the state. The banks didn’t want the hassle. Congress passed a law for writing off farm machinery in a five year period. Hummer sales exploded for three years. Not quite farm equipment, but it qualified for the deduction.
A lot of times, the net result of a given action has very unexpected results. The UN taught people to farm in Africa 30 years ago and how to use fertilizer. It seemed like a real success story. People came to the area and the population exploded and things were fine for a while. The one thing overlooked was the need for firewood for cooking fires. 15 years later, there were no trees and the rain fall erosion turned the fertile fields into gullies and the population either starved to death or moved on.
When we examine cause and effect, there is a time lag between the two. Easy home loans created a speculative bubble. What we are looking at are the unintended consequences of economic forces that have a time lag built into them.
We do know that the Congress of the 1930’s figured that they had a chance to stop a lot of this stuff we are experiencing from ever happening again. Of course we were far wiser and knew what we were doing so, we changed the rules back to make the game better. After changing the rules in the early 1990's, things worked marvelously, everyone got rich. But then Bear Sterns had a small problem. The Nemesis from the 1930’s reared its head, with the same time lag.
Our government has initiated several programs to save the economy, from spending money that is nonexistent, to printing money to give to banks that has been lost through bad investments. I suggest that there is a time lag. What has been done will take several years to be “appreciated.” It’s a little like giving you underage girlfriend a girdle to hide her pregnancy. You haven’t altered the outcome----only made it more of a surprise.
Wednesday, September 16, 2009
The Obama Magic Act (Tax Increase)
Congress over the years has passed Medicare and Medicaid. There was no real funding for it. It was for the “greater good” which is quite questionable when funding wasn’t really taken into consideration. Now the government realizes that they can’t keep it funded much longer (a jar of Geritol and a tube of Preparation H just won't cut it).
Most of the people from the age of 18 to 45 will pay less in actual health care costs than what they would have paided into health insurance (by several thousand dollars a year). Today, the WSJ ran an article on “Mandated Health Insurance Squeezes Those in the Middle.” A Mr. Norton, in Massachusetts (where health care is mandatory) can get a $2,000 deductible per person for his daughter and himself for $464 per month or $5,568 per year. His words were, “This is insurance you can’t possibly use.” His solution is to pay the $1,000 dollar penalty for not being insured.
Obama is right when he says this new health insurance program will not increase our debt, it will lessen it. The younger generation will pay in $5,000 per year and get very little in benefits (do you wonder why?---they don’t get sick much). Here is the kicker that Obama mentioned. Everyone has to be enrolled. Otherwise people would only enroll when they were sick. That’s why insurance companies don’t cover pre existing conditions. You are covered if you sign up before you need it, not after. And you hear the whine; that’s unfair.
Another thing to review about our health care in the United States; it is the best in the world. The more skilled of a doctor you are, the more you can charge. If you are incompetent, you will be sued out of business.
State run health care plans have nothing to do with a doctor’s skill or experience. It is all customer count, procedures performed and pills prescribed without cost accountability. Three fourths of our country (18 to 55) can say no to health care costs if they rise too high. The other fourth doesn't have to. Kind of neat to be the latter group, isn’t it?
What everyone needs to realize, we are not being sold health care. Those (the young) who will be paying it will benefit very little. It is a tax. It will be used to keep the government from going bankrupt in the near future. Congress has abused and spent/consumed the Social Security Trust Fund. IT IS GONE! Obama desperately needs new tax revenues. The health care plan is the bait. It is a plan to generate new tax dollars. Our kids get to pay for it, thinking it is health care.
As a side note, maybe we ought to send Obama to Afghanistan in search of Osama. After a couple of months of listening to him, the Taliban would probably surrender and accuse us of Obama-boarding. His constant television ramblings irritates me no end. Put a sock in it. I would suggest, anyone with all the answers is part of the problem.
Most of the people from the age of 18 to 45 will pay less in actual health care costs than what they would have paided into health insurance (by several thousand dollars a year). Today, the WSJ ran an article on “Mandated Health Insurance Squeezes Those in the Middle.” A Mr. Norton, in Massachusetts (where health care is mandatory) can get a $2,000 deductible per person for his daughter and himself for $464 per month or $5,568 per year. His words were, “This is insurance you can’t possibly use.” His solution is to pay the $1,000 dollar penalty for not being insured.
Obama is right when he says this new health insurance program will not increase our debt, it will lessen it. The younger generation will pay in $5,000 per year and get very little in benefits (do you wonder why?---they don’t get sick much). Here is the kicker that Obama mentioned. Everyone has to be enrolled. Otherwise people would only enroll when they were sick. That’s why insurance companies don’t cover pre existing conditions. You are covered if you sign up before you need it, not after. And you hear the whine; that’s unfair.
Another thing to review about our health care in the United States; it is the best in the world. The more skilled of a doctor you are, the more you can charge. If you are incompetent, you will be sued out of business.
State run health care plans have nothing to do with a doctor’s skill or experience. It is all customer count, procedures performed and pills prescribed without cost accountability. Three fourths of our country (18 to 55) can say no to health care costs if they rise too high. The other fourth doesn't have to. Kind of neat to be the latter group, isn’t it?
What everyone needs to realize, we are not being sold health care. Those (the young) who will be paying it will benefit very little. It is a tax. It will be used to keep the government from going bankrupt in the near future. Congress has abused and spent/consumed the Social Security Trust Fund. IT IS GONE! Obama desperately needs new tax revenues. The health care plan is the bait. It is a plan to generate new tax dollars. Our kids get to pay for it, thinking it is health care.
As a side note, maybe we ought to send Obama to Afghanistan in search of Osama. After a couple of months of listening to him, the Taliban would probably surrender and accuse us of Obama-boarding. His constant television ramblings irritates me no end. Put a sock in it. I would suggest, anyone with all the answers is part of the problem.
Wednesday, September 09, 2009
1929 Depression With a New Ending
You’ll notice that this blog's name has the year 2006 in it, which seems somewhat dated. Many times readers have suggested that I change the year until I get it right.
From reading the personal accounts and tragedies of that time, the most impressive but elusive thing, is the time line. From a historical point of view, we refer to the Great Depression as an event of 1929. There was no depression in 1929. Things were still swinging. Granted Florida was already a basket case, but the rest of the country didn’t have a clue that something was wrong. Then, the stock market crashed in October of 1929. It wasn't until 1931 and 1932 that people realized things were real bad and then they got progressively worse into 1933. From there, there was no argument, we were either in a depression or you were a pretty blond, married to a Rockefeller.
The concept that the people back in 1929 were aware they were in a depression is a false assumption. In November of 1932 when Roosevelt ran for office, there was no argument that things were bad. Right after being sworn in 1933, FDR declared a long bank holiday and a thousand banks never reopened.
Obama appears to be our Hoover. Hoover was quite intelligent and no dummy when it came to running the government. FDR pretty much continued the programs he had put in place. The "New Deal" was new hope, a wish and a prayer, government programs that did little. The war brought us out of the depression.
Today's problems are similar to what confronted Hoover. He faced the frustration and the inability to control what was happening next. Back then, the voters felt misled. Things had gotten increasing worse, not better. There was the constant government banter that things were getting better.
This is an economic problem that can get a lot worse with more political intervention. There is no government solution. The time line to get out of this mess is quite a ways away. Hoover had 4 years and it took another 6 under FDR before we "turned the corner." Add 10 years to 2006 and you have a more realistic view of when this "Full Feature Film" will end.
Will we be ready for a "New Deal" come next election? People are already tired of hearing that the recession is over. Poverty is reality without the politics. Optimism is certainly not in the wind. Uncertainty is what the world is about.
This is playing out a little like the "Wizard of Oz," only this time when you click your heals together three times, you wake up broke, wishing you owned a home in Kansas.
From reading the personal accounts and tragedies of that time, the most impressive but elusive thing, is the time line. From a historical point of view, we refer to the Great Depression as an event of 1929. There was no depression in 1929. Things were still swinging. Granted Florida was already a basket case, but the rest of the country didn’t have a clue that something was wrong. Then, the stock market crashed in October of 1929. It wasn't until 1931 and 1932 that people realized things were real bad and then they got progressively worse into 1933. From there, there was no argument, we were either in a depression or you were a pretty blond, married to a Rockefeller.
The concept that the people back in 1929 were aware they were in a depression is a false assumption. In November of 1932 when Roosevelt ran for office, there was no argument that things were bad. Right after being sworn in 1933, FDR declared a long bank holiday and a thousand banks never reopened.
Obama appears to be our Hoover. Hoover was quite intelligent and no dummy when it came to running the government. FDR pretty much continued the programs he had put in place. The "New Deal" was new hope, a wish and a prayer, government programs that did little. The war brought us out of the depression.
Today's problems are similar to what confronted Hoover. He faced the frustration and the inability to control what was happening next. Back then, the voters felt misled. Things had gotten increasing worse, not better. There was the constant government banter that things were getting better.
This is an economic problem that can get a lot worse with more political intervention. There is no government solution. The time line to get out of this mess is quite a ways away. Hoover had 4 years and it took another 6 under FDR before we "turned the corner." Add 10 years to 2006 and you have a more realistic view of when this "Full Feature Film" will end.
Will we be ready for a "New Deal" come next election? People are already tired of hearing that the recession is over. Poverty is reality without the politics. Optimism is certainly not in the wind. Uncertainty is what the world is about.
This is playing out a little like the "Wizard of Oz," only this time when you click your heals together three times, you wake up broke, wishing you owned a home in Kansas.
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