Monday, October 12, 2009

We're Broke, Let's Write a Check

Congress is out trying to save “The American Dream,” of home ownership. The suggestion that everyone should own their own home is probably left over boilerplate from some old real estate ad. The American Dream has turned ugly. Long ago banks demanded 20 percent down payments and it worked splendidly. Today’s younger generation has had no real reason to save money. It was sign here, and move in or drive it away. Everyone that wanted a home, got one (or two). Housing right now is kind of like a hot potato toss. Uncle Sam gets to catch the hot ones. So it is pretty obvious, the no money down home loan is still available. Our government doesn’t care about the quality of the new loans. They are more interested in having these loans serviced (by someone with a pulse) for the next 20 years.

Here is where the dream turned into a nightmare. Our government didn’t squirrel away any money to cover this big mess; it was assumed that it could never happen. For the last 35 years our country has spent more than it collected in taxes, by dipping into the Social Security tax fund. The money has been spent and we have the IOUs to prove it!

Our retirement funds are doing exceptionally well. Most people I know, can’t afford to retire, so withdrawals are not a real problem yet. On the other hand, there are banks that are too big to fail and ones not so big, 98 so far this year have failed. The FDIC is almost out of insurance funds. On top of that, Freddie and Fannie are about to go nuclear and ballistic at the same time.

Then we have these two white knights (Nothing racial here, the black knight was generally the bad dude) coming to our rescue. Ben Bernanke and Tim Geithner show up with a check book and pen. This is an absurd con game. And to give it some credibility, you hear a "Car Salesman Close" from Congressman saying, “We are robbing from future generations.” You can’t steal from people that haven’t been born yet, it is impossible. The funds are bogus. Ink and paper are no substitute for real tax dollars. It kind of reminds me of a Herman cartoon where the little kid is up at the blackboard adding the numbers 2 and 3 together. His answer is about 10 digits long and he turns to the teacher and asks her “Where do you want me to put the decimal point?”

Where did this two trillion dollars in bailout money come from? It didn't come from taxes. It has to be some sort of a magic show. Look for it, coming soon ----to a theater near you ---“Inflation Nation.”


Anonymous said...

It doesn't seem right that, during this time of crisis, many are retiring on government and state pensions. Some are only working 2 years to get this. Others get 'promoted' to management a few years before they retire, in order to draw in a retirement check larger than their original salary. Meanwhile, the rest of us voluntarily* pay into this system. Yet, we have no hope of retiring ourselves.

*Our tax system is voluntary:

AngryTaxPayer said...

Hi Jim,

The engineers behind the development in trillions of X-$09 paper dollar airplanes circling DC have set the CG too far aft. All of them appear to be in a stalled left-bank death spiral headed straight for the Federal Reserve.

Under what circumstances can inflation be a good thing for the average Joe who prepare for it?


Jim in San Marcos said...

Hi Anon 12:59

Most of the inequities of our present system would be ironed out by a good depression.

It gets rid of the rich and all of the debt and future debt contracts (like retirement).

Of course if your getting old like me, this could be a tad bit troubling.

Jim in San Marcos said...

Hi Angry TaxPayer

I think that the average Joe would fare quite well with inflation. No real savings in the bank and all credit card debt would become increasingly easier to pay off. The average working class family has nothing to lose. It is the rich that stand to lose their fortunes.

The thing to realize about inflation is, the banks have all loaned their funds at ridiculously low rates, if and when inflation kicks in, they go BK just like the S&L's of the 1990's. There won't be a second bank bailout.

So I guess the answer to your question, is to carry some debt and when inflation kicks in, just pay the minimums. At that point, a home financed through the bank becomes a pretty good inflation hedge and at the same time a highly visible item to tax.

Silver still seems like a good buy. The decorative Englehart 100 oz bars look very nice as door stops. Nobody even gives them a second glance.

Hope this is of some help.

AngryTaxPayer said...

Jim..."No real savings in the bank and all credit card debt would become increasingly easier to pay off."

Does this assume that salaries will keep up with the inflation? Increases in salaries as the economy is spiraling downwards seems very unlikely.

What about those on a fixed incomes, like seniors and welfare recipients? Seems like inflation would be a cash killer for these folks similar to Obama's health care death panels.


Anonymous said...

Speaking of salaries, I just read that the minimum wage was lowered in Colorado.

Anonymous said...

Hey Jim...

Excellent post.

Your point that the gov has spent more than it earns for the last 35 years jostled me back into the proper orientation: it's been a long track of errant policies, corruption, destruction of sound principles and decency in all aspects of life that have brought us to this point. Obama, Geithner, Greenspan, Bernanke, Paulson, et al. are just the current dunderheads.

All we the majority can do is prepare to survive being swamped by a tsunami (or a long series of lower case w's... in other words, continually in and out of mini recessions/depressions and no growth = lost decades and generations). Watch for that pivotal point when inflation takes over and turn your cash into hard assets.


Everyone's cash, when the inflationary phase ramps up, will be turned to trash. Savers, retirees (and all others who plan to deal in and live on cash) will get the proverbial shaft. Only solution is to move into hard assets at that pivotal point when the inflationary ramp up begins... most retirees will be too uneducated to take action on their own from taking the necessary or "unconventional" measures (plus they are held in check by their 401ks, IRAs, etc.).

Anonymous said...

dunderheads? Do you really think that is what is going on? If they are trying to bring down America without anyone figuring out what they are doing, then, they certainly are not dunderheads.
The American people overwhelmingly opposed the bailout, yet they did it anyway. It is like they are following their own agenda.

Jim in San Marcos said...

Hi Angry TaxPayer

Inflation is the politicians friend. They don't dare cut retirement benefits. Notice you don't have to reduce benefits by passing a law. Inflation does the job marvelously. When the average worker gets a pay raise, he thinks his world is improving. Plus it puts him in a higher tax bracket, so there is no need to raise taxes, it's automatically built in.

Your right about the retirees getting it in the shorts in spades. I would consider welfare another item, it is not earned.

Inflation is an invisible tax on our savings. So if you are broke, you feel no pain. That doesn't mean you can't starve to death. The free lunch program is just about over.

Jim in San Marcos said...

Hi Anon 12:57

I heard the same thing on the radio this morning. I think is was only 3 cents an hour.

It kind of makes me wonder about the news media at times. To top that off, every morning on the way to work, I have to suffer through ads about ED and my Prostate. It makes for a great mixed company commute.

Jim in San Marcos said...

Hi AIM (An Inquiring Mind)

I agree with you. A lot of people out there are hanging the blame for this mess on one of the two political parties. There is enough guilt for everyone. We didn't get to where we are overnight.

The retirees are extremely vulnerable. They need to be in cash and this is where the hit will occur.

I don't think that all of the retirees are non thinkers. If cash in the bank only pays 3% interest, the rule of 72 says it will take 24 years to double your money, gold and silver become a very viable option.

I do have my 401K in short term bonds and as you suggest, I can switch to stocks when/if (in my lifetime)the market tanks.

With this extremely low interest rate we are experiencing, it costs very little to speculate in commodities. Gold is somewhat suspect. Historically, it usually trades at a 1:16 ratio with silver and right now, that is not even close.

I like silver, a thousand ounces of silver weighs 85 pounds. It really can slow down a burglar.

Jim in San Marcos said...

Hi Anon 5:58

I like the word "Dunderheads" Congress is not trying to bring America down, they just want to make everyone happy.

The stupidity lies with the voter. give them gay rights, no gun control, free abortion and save the earth, you get their vote. Talk about a balanced budget and no one gives a damn or even understands the underlying hidden pitfalls.

The concept of our government going bankrupt is not even conceivable to anyone in Congress. It has a good chance of happening. Of course there is no sense of worrying over what may happen, let's just wait until it does.

I think as you suggest, Congress knows the score and this is a last chance ditch effort to save the bacon.

Thank you for your post and take care.

AIM said...


Do you agree?

The idea that taxes will handle our problems is a falsehood just as the concept that the next generations will inherit and handle the debt is. Tax revenues are only 2 trillion per year, and they are going to continue to go down.

A country with a symbolic or fiat currency can never go bankrupt... they will just print and inflate their way out of debt, etc. and the result is the demise of the currency.

Savers, investors and retirees are the ones who suffer from inflation the most. An economic crisis (like high inflation) is basically a redistribution of wealth. Inflation will reduce retirees' savings and investments towards close to zero.

The next generation isn't going to support all the boomer retirees. They'll change things so that they keep the wealth they create.

The youngins will work and create wealth with the new currency because they'll have the time to do so. But people who are now in their 50's and early 60's are in serious trouble and will be clobbered. Their careers and earning phases are almost over plus they will be having more health problems as they age. They need a plan for what is coming.

I offer a red alert to this demographic.

Getting educated on how to prepare and deal with inflation and not lose your wealth is the line of study they should be diligently following.


Jim in San Marcos said...

Hi Aim

I think your right.

I can remember back to being a kid. My dad worked for $5,000 a year my mom stayed at home in a $25,000 dollar home and our family had a $3,000 car.

All that has happened in the last 50 years is a decimal point shift. Multiply the numbers by 10 for todays standards.

Jim in San Marcos said...


To carry it further, the last shift took 50 years, the next one will probably take 5

AIM said...

Yikes! You could be right.

I'm all in cash now. No interest coming in but it is preserved and that is all that matters.

Right now we are in a deflationary spiral and the Fed hasn't been able to turn it around yet with inflation (money isn't getting out into the econ yet, banks aren't lending, etc.)

I'm watching my indicators and as soon as inflation begins to ramp up I'm converting my cash into residential income properties. Despite the hassle of tenants, etc. I'll get paid in the new or altered currency and my assets will ride the inflation wave and go up in value. That's the only solution I have right now for what is coming, besides also having a bit of silver and gold.

Anyone else have strategies to share?


Jim in San Marcos said...


You may have some problems. Real estate is highly taxable. And you just don't rush out and buy it in two days, there is about a 60 day wait.

If you can buy a place that sells for 100 times the monthly rent (and you wouldn't mind living in it yourself), go for it. It is a guaranteed 20% return on the dollar.

My wife and I are in cash on the sidelines, we no longer hold T-bills. California prices suck for RE investments. But we are vulnerable on our 401k's. I have mine in short term bonds and if/when the market goes to hell, I plan to switch to stocks.

The only trouble I see, is that a surprising number of people may be thinking the same thing.

Some plans work out wonderfully, but if everyone else is thinking the same (and they should be) there could be unforeseen problems. This is where we are the most vulnerable (thinking that we are the only ones moving towards the exit in a burning movie theater).

AIM said...

I know RE is highly taxable and puts you under the control of govmt... but, it is a tangible asset and people need shelter and despite all drawbacks, income properties give you income and "increase" in value in inflationary times. For someone like me who wants passive income which enables me to spend my time doing what I prefer to do... it seems to be one of the only answers to surviving intense inflation.

Not 60 days, 2 weeks, because I'd buy cash (insur, prop taxes and maintenance would be only expense enabling decent positive cash flow from the income property).

Plus, if I continue to update my list of the regions around the USA that have the best economic drivers for rental properties I'll always be ready to strike when the time comes and acquire a diversified portfolio of rental properties.

Also, I don't think that a large percentage of the society has a lot of cash that they can turn into income properties. The majority aren't savers and earn below 30k per year. I think I'm in a small percentage.

Does the above clarifications temper your earlier response to this strategy?

Remember inflation and taxes will wipe out all of your dollar denominated assets. The government will reduce your purchasing power down to 5% when the become totally desperate in their need to avoid default, get out of debt, etc.

Does anyone have a better plan for weathering the coming storm of inflation?

Believe me... I'M ALL EARS.


Jim in San Marcos said...


Your ideas will probably work quite well, but I think you are going overboard. Money is a tool and you are not using it effectively. Put 20% down on the rental. Have the bank as a partner. In a hyperinflation economy, it would be very easy to repay them.

Somebody once said that the only thing that can do more damage than a nuclear bomb is rent control. So rentals could have a down side in a depression more ways than one.

I think that a successful investing strategy is one that progresses over 20 years, not one that changes because of the probability of a bad event. There is the chance that we could be over reacting, but I rather doubt it.

People panic and unusually sell at a loss. That is the best time to buy. I bought gold at $200 and people laughed at me. I bought rental real estate when it was cheap. I got out of stocks in 1998, I thought they were overvalued and now if the price is right, I might get back in.

I might pick up my 100K dream yacht for 10K in the near future or another rental property with a cracked slab. If interest rates went to 20%, a 3% 10,000 dollar 30 year bond would be going for $1,500 dollars.

One big priority I have is finding a home with a granny flat on it or with the needed land to build one. I don't want to go to a rest home when I get real old.

I am a firm believer of having a plan and develop it over time. We can both end up at the same destination, but I think my risk is a bit less. You may disagree, it is a value call.

What it boils down to, is that a successful investment plan has nothing to do with the economy. All the economy does is present you with new and different investment offers.

That's just advice for your first million. If you had say 9 million more, I would put the rest in silver and bury it in the back yard. Just invite me over to do the gardening, I'll bring my own shovel.

Anonymous said...

To the person who asked how inflation or hyperinflation could happen if wages didn't rise.

And it's a good argument, because, as we know, the banks are not loaning out the taxpayer funded hundreds of billions they were given, to those same taxpayers.

So that's deflationary if they are hoarding the cash and it's not getting into the hands of the people.

But, here's a scenerio for triggering hyperinflation without relying on wages.

This is completely hypothetical, and in no way represents the current situation we find ourselves in. ;-)

Ok, banks hold trillions collectively of deposits from Joe & Jane Sixpack, but no worries mate, it's all FDIC guaranteed up to 200K now.

At some point in the near future, banks start defaulting, and not just Cherry Falls First Community Bank of Chickenswitch, Idaho either, I'm talking the "Too big to fail banks" C JPM WFC.

FDIC is tapped, these banks start closing their doors, Joe & Jane don't have their money, can't get answers from anyone with the bank etc and now are raising hell about the FDIC guarantee to the politicians.

These bastards of course do what is necessary to quell the rebelion from not just the "RACIST, RIGHT-WING EXTREMISTS/TERRORISTS" now, but also from angry liberals and people from every socio-economic-political class wanting "THEIR" money back from the failed institution.

What these politicians do is send Joe & Jane and millions of other depositors checks in the mail to make them whole and to try and keep the illusion of FDIC being invincible.

So now, the people with these .gov checks are obviously freaked out and not comfortable keeping this money in the surviving banks - because they too might fail soon, so they start buying up provisions, precious metals, land, vehicles, weaponry etc etc

All of that money, chasing tangible assets...The sellers of these assets are now getting multiple panic cash bids, and the beginning of the spiral is created...

The End.

- El Scorcho

Jim in San Marcos said...

Hi El Scorcho

That’s a good summary of what could happen.

Also consider that in the 1930's bank collapse, the money that was spent foolishly by the banks was lost, it was spent and gone. So when the depositors lost all of their savings, there was no inflation, just deflation.

In this cycle, the bank loses your money and the government gives it back to you. No one has lost anything. The money that the banks paid to the previous owners is gone and spent. Now the new money issued by Uncle Sam, doubles the money lost by the banks in circulation.

In essence, we have the same size pie of goods for sale, now we have twice as much money chasing them. In 1929 it was the exact opposite only worse 80% of savings vanished. No one had any money.

It is only a matter of time before this becomes apparent. It is already pretty obvious in food prices. I don't buy steaks at $10.99 a pound--it is not in my budget.

Thank you for your post.

Rob in NS said...

Hey El Scorcho

I love the nom de plume and you summarized things well.It also made me laugh this morning while having my cup of coffee. I think you're absolutely right but I still want to believe that the movers and shakers can pull another rabbit out of the hat. I doubt this will happen though. Even if they were successful they would only be kicking the can down the road. As for investing advice a good bottle of red wine and nice meal at home once a week takes the edge off things rather nicely.

As for where to put your money I have no answers. I really think stock market is bad place right now. One of my spouse's RRSPs (401Ks) in last eighteen months has gone from 31k to 19k and now back up to 24k. The prospectus calls this 401K a "Balanced Canadian Equities Fund" an oxymoron if there ever was one..

I'm no money manager but right now it makes more sense to get money out of that and sink it in government bonds. Selling debt to taxpayers, which is colectively ourselves, does not seem to me to be a good long term solution to current crisis. Writing a check to ourselves will not solve anything.



AIM said...

Jim 9:21
Very good points Jim. Thanks for that.

The only prob with putting 20% down is that a mortgage payment kills my passive income (my purpose for the RE investment).

Also, I'm pondering whether a long term investment strategy as opposed to a flexible one is correct. We will soon be in an environment of deflating assets/inflating money. Add increased taxes to that and it is going to be VERY hard to not lose one's purchasing power. I don't think any existing, conventional, long term investment strategies will be able to prevent the loss of net wealth.

Rent control and government interference with landlording definitely poses a threat to a RE portfolio.

If I had a million dollar portfolio I think I'd consider a little farm in New Zealand.

Anonymous said...

Another way inflation could become severe is by banks beginning to lend again (inflation occurs more by credit than printing of currency)... or foreign investors selling off their US treauries and buying real estate and businesses... or another "stimulus package" from Congress.

Inflation is excessive credit and dollars going into the economy. Can happen in many ways.

Jim in San Marcos said...

Hi Anon 4:28

I see one problem with banks loaning out money. They will be pretty picky on who they loan it to. The barn door is now locked. Rockefeller once said, "a bank will only loan you money if you can prove you don't need it."

Fannie and Freddie will sell you a home nothing down but they aren't banks. These two rotten apples could produce the effect you suggest.

Jim in San Marcos said...


Your statement "The only prob with putting 20% down is that a mortgage payment kills my passive income" limits your options.

If there is going to be a collapse in the next two years, having the bank as a co-owner is just using leverage to your benefit. If there is rapid inflation, you benefit from the leverage. If things settle down, you can still pay off the loans. A 100K house bought with 20K down that rents for $1,000 per month, would generate a $200 dollar a month positive cash flow after expenses and offer a 3,500 tax deduction for depreciation of the asset.

Your long term plans hamper your options for the short term. In my opinion, the short term options are more important. You need to use bank leverage and maintain high cash reserves for future deals or to later convert to plan one.

AIM said...

Jim 10:29.

Thanks very much for pointing that out Jim. I believe that you are correct: Use leverage now and benefit from the coming inflation, pay off the debt with cheaper dollars when the time is right, the debt on the property being gone then maximizes my cash flow on that property.

The theory is to saddle up with as much debt as possible right before a major inflationary phase begins (of course one of the most difficult points to nail is the point when deflation turns to inflation... can happen gradually or suddenly. Gulp.).

Being self-employed with a small income right now... makes me ineligible for home loans (unless I find private money).

Interesting dilemma too... when you borrow from someone before an inflation phase you are basically stealing their wealth... you borrow from them, buy an asset, your asset goes up in nominal value, you pay them back with cheap dollars, they have devalued dollars and you have an asset... they lose.

Guess the best strat is to 1)preserve your existing cash, 2) amass as much additional cash as can, 3) keep an alert eye on all your inflation indicators, 4) when inflation really starts to take off, use your cash and leverage to buy your income properties, 5) let inflation continue to lesson your debt value, 6) when you're at the top of the cycle, pay off your mortgages with super cheap dollars, 7) now you have free and clear assets to sustain you.

Is that a more logical approach?

AIM said...

Anon 4:28 and Jim...

I just learned that one important fact that most people don't understand (and what the deflationists are missing) is that banks are less than 25% of loan resources in the USA. Credit comes from many other areas... foreign, insurance companies, mutual funds, etc. etc.

Lots of credit can seep into the economy out of most people's awareness and BANG... inflation!

Watch gold, the dollar and prices (food, shelter and energy) as your best inflation warnings.

AIM said...

Per my studies, it is very possible that the significant asset deflation is over (it may continue on a slow, gradual basis for awhile). We can have asset deflation and monetary inflation simultaneously! Just because assets are down and continuing down doesn't mean you don't have to be alert to inflation potentials.

We could have a long bout of intense stagflation... not much growth and inflation on the rise ( all camouflaged by minor booms and busts).

We are a political currency because we are the reserve currency. It took England 68 years before international influences decommissioned the pound as the world reserve currency. It is happening to the USA now. By being a fiat currency we can't have a deflationary depression because our government will print whatever is needed to avoid deflation... despite destroying the dollar.

I think your Great Depression will be an inflationary one... what do you think Jim?

Anonymous said...

Only one problem with watching for start of inflation phase. What metrics do you use? Statistics from government are either misleading or inaccurate depending on your view.


Anonymous said...

some very interesting comments on here. I believe AIM is right in that we will have more deflation and that cash is the best way to hold onto wealth, in a safe bank of course! here's a link to why I think this

Jim in San Marcos said...


I think that it can be both. Cars and Houses lack bank financing. Banks don't keep the loans, they sell them to someone and then use the money again. There is no one to sell them too.

I think we are seeing inflation in consumables right now, gas, food and health care.

There has been no destruction of wealth yet. So it looks like hyper inflation could be what happens next as you suggest. Nothing appears to be clear about the future at this point in time. It could go either way. Deflation in the future seems less and less of a direction for the economy.

Jim in San Marcos said...

Hi Rob

I don't think that there are any metrics to measure what is happening. Most of what is out there, is after the fact.

I do see food prices shooting through the roof, potato chips and steak have tripled in price. Heath care and drug costs have gone up also.

I think it is one of those things that is very easy to observe from the rear view mirror. And that's when it's too late!