Monday, December 28, 2009

The Float

Bernie Madoff understood the concept of the float. He had fun with it for 30 years. A bank at any one time doesn’t have the cash to pay off all deposits and there is little worry that it will have to unless there is a run on the bank. What brought Bernie down was the fact the money coming in was less than the money going out.

Let’s travel back in time.

The FDIC insurance fund was established in 1934 to give the people confidence in the banks when there was none. If your bank had a good balance sheet that was up to par with Fed standards they were given the opportunity to become FDIC insured. Nine banks went under that first year, but that wasn’t close to the 4,000 that closed in 1933. The FDIC was pretty much collecting insurance premiums from the banks and paying out very little in claims.

Fannie Mae was created in 1938 to help stimulate the “depressed” housing market. Banks were not interested in investing in home loans. So this government program supplied the banks with federal money to finance home mortgages. Notice here too, the damage to the housing market had already occurred. Fannie wasn’t really sticking its neck out to insure the market.

Then we have the IRA retirement plans that started in 1974. These plans allow a wage earner to shelter income from taxes. Once you put it in the plan, it is no longer yours, the government tells you when you can spend it. Pay in hard earned dollars today and get back watered down whiskey when you retire.

Fast forward back to today.

If we examine the savings of our nation, It is somewhere around 20 trillion dollars. Probably between 8 to 14 trillion of that has vaporized. So going back to the Ponzi scheme, two things have happened that were not anticipated. The FDIC is insuring the bad decisions of bank managment, bank credit became very easy to come by. Also our government is insuring investors against loss for home loans that were written to just about anyone. It could be argued that the government programs encouraged this mess.

Madoff's Ponzi scheme collapsed when funds withdrawn exceeded those being deposited, and it ruined a great many people. Now we have a Ponzi scheme that depends on the Federal Reserve printing currency to cover the bad home loans and cover the failed banks. There is no concept that the Federal Reserve can run out of money or go to jail.

Now if we take this one step further, there was no excess money for Congress to spend during the prosperous years. But they found ways to increase spending. Now we have a financial crisis and funds are being found in abundance. We know that Congress never saved for that rainy day. Just look at the national debt at 12 trillion dollars. Do you get the feeling that somewhere along the line people are going to want real money, not this stuff that Bernanke is printing?

Presently if the dollar were to be revalued, 1:10 –--which seems pretty plausible, the government would be confiscating 90 percent of the savings of the people that have money, and issue a new dollar. Of course if you had no savings, you lost nothing. This could be the final game plan.

What you need to examine, is what would make banks lend again? There is no real profit incentive if the currency gets revalued every 10 years. There has to be a link to gold for real stability, but in lieu of that, you get very high interest rates to compensate for the risk. The real question to ask is how much of our retirement funds are really there? Since there is no real urge to spend it all today, the concept that half of our savings is gone is not apparent.

In just one day, the news of Madoff's failed escapades, turned millionaires into paupers. The sad thing is, they were millionaires until they were told otherwise. Their lifestyle underwent a drastic change. Bernanke and Geithner have tried to create real money out of nothing, trying to replace what has been lost. Money is usually a measure of a man's labor. Printing currency is not a measure of the labor used to build cars, bridges or produce food, no product was created. Its rightful name is counterfeiting

The government can't print gold and silver. I've given my retirement plan the boot. I'm going with silver from here on out, gold is too expensive. I might pay more in taxes, but you have to ask one question: "If toilet paper goes to $200 per roll, did you really enjoy a tax savings by shoving it into an IRA or 401K?


Anonymous said...

Yes Jim... moral hazard across the boards. Government bungled (all that New Deal/Marxist crap) and continues to bungle in present time. Investment bankers have been manipulating government and the markets for decades and decades. They infiltrated it in 1913.

I'm pulling all of my money out of my IRA and using it for active investments. I'll pay the taxes due from the pull out with a portion of the profits from my first investment. From that point on the money is mine to do with as I please and to make big profits... a much better alternative than having the government tell me what I can and can't do with it, and thus limit my profits.

Make lots of money during this deflationary period and turn it all into hard assets when the inflation monster rears its ugly head. That is my solution.


JMS said...

Sorry if this seams like a dumb question but why not go to platinum? Right now I am having a hard time trusting anyone. If I were to go down the precious metals route I would want to store it myself. Silver just takes up more space.

Mad As H*** said...

Silver and gold, silver and gold
Mean so much more when I see
Silver and gold decorations
On ev'ry Christmas tree

Jim in San Marcos said...


I'd leave the IRA alone, just change from now on out. There are ways to get to it without penalty, loans for college and as a down-payment for a home.

Jim in San Marcos said...


I don't see anything wrong with platinum.

I like silver because of its value in relation to gold is normally 16 to 1.

1000 oz of silver weights about 86 pounds. The average thief wants lighter stuff to pick on. You're right, it does take up some space.

Anonymous said...

Should you ever have to use it, wouldn't silver be a better medium of exchange for basic commodities? Americans are accustomed to silver. It has been in general circulation for generations, until recently of course.

Jim in San Marcos said...

Hi Anon 12:12

I remember back to high school when a school lunch cost a silver quarter and gas was 20¢ a gallon. A silver quarter is now worth $4 and silver dimes are worth $1.60

The buying power of our original currency (silver) has held up well. Silver will still by a school lunch or a gallon of gas at the "old prices."

The expression that "Bad money chases good money out of circulation," holds true.

People see the price of silver and gold going up and they have it backwards. It's the currency that is going to hell. Of course, how could that be? A dollar, is a dollar, isn't it?????

Thank you for your comments.

Anonymous said...

The dollar is going to cycle up and get strong again... when we have the next big crash and everyone flees to USD. Metals will drop at that point. That would be the time to buy some gold and silver. Eventually the USD will go down and go down hard, due to our government inflating, and its purchasing power could wind up being next to nil. Those who have some gold and silver in their possession and other tangible assets will be much better off than those with dollars in the bank.

Jim in San Marcos said...

Hi Anon 10:54

You may have a point there, I have never seen the price of gold and silver respond to common sense. They seem to have a mind of their own.

I would love to pick up silver at $5 an ounce or gold at $500 an ounce. It could happen. People could sell precious metals to raise cash to pay bills.

Maybe we will luck out and get a chance, keep your fingers crossed.

Thank you for your comments.

AIM said...

Sell stocks on rallys and buy gold on dips seems to be the general prudent play today.

This depression could very possibly be pushed forward by government into a long slow, unfolding process. That is most likely the scenario as opposed to a severe and chaotic crash. We'll probably be dribbling along for years or decades (a la Japan).

US government could confiscate gold. Some say the people wouldn't stand for it, yet... look at all the abuse and diminishment of liberty, etc. that the American people have already taken lying down. I think "we the people" may not have it in us to get out of our comfy sofas, get rough and tough and revolt re: gold, food, water, taxes or anything. I think we are big push overs (apathy).

The planetary banksters are pushing their agenda forward. They've snowed the US government and are now the controlling force. They own Congress, who has sold out the American people, and has made a mess of things. The banksters greed and desire for power and control will blow up in everyone's face, including theirs. There is nothing our government or politicians can do to sort out our economic mess. It is out of control.

Own your home, get off the grid, turn your back yard into mini-farmland to grow your own fruits and vegetables, have some chickens too for meat and eggs, have some gold and silver, have tools and replacement parts and other survival gear. Own some rental properties if you can for additional income. Hunker down and protect yourself, family and friends as you move through The Greater Depression.


Jim in San Marcos said...

Hi An Inquiring Mind

I think that is just a bit too pat.

The Congress has been spending beyond it's means for many years, and now the money isn't there.

The Federal Reserve has been trying to keep the financial system afloat by printing money.

The consumer has been ripping off the banks on credit cards because they can't do it on housing anymore.

Add it all together, and you get one big mess.

I tend to agree with you that what is happening is out of control.

I don't see any real way to sort it out short of a currency revaluation.

Having a few chickens around might be a good idea, but probably the government would come up with a "Chicken Tax." The real truth is, these people know where you live.

Take care, and thank you for your comments.

Anonymous said...

"US government could confiscate gold"

Another reason to buy silver, over Gold.
Another option would be to purchase collector gold coins, over bullion.

Jim in San Marcos said...

Hi Anon 9:51

You raise a good point, but reading through history, I don't think anyone was prosecuted for having gold buried in their back yard. It was only confiscated from deposit boxes in banks.

Keep it out of the bank and you should have no problem

Anonymous said...

rember going off the gold standard goverment made it so no one could even own gold and they took everyones gold and no one revolted

Justin said...

Great advice, Jim. I don't think they are going to revalue, I don't think that is in their plan. They would much prefer to continue collecting interest on their debt.

Load the donkey up as heavy as possible, but don't break its back! Uh, yeah, we are the donkey.

Jim in San Marcos said...

Hi Justin

I assume you meant that the government would be happy just paying the interest rather than collecting it.

A problem arises if the interest rates jump to about 15%. Tax collections won't pay the interest on the national debt. That would spell bankruptcy for our government.

As for what will or won't happen, I haven't really got a clue. If you told me three years ago what they would be doing today, I wouldn't have believed you.

Thank you for your comments.

AIM said...

To paraphrase Dan, from the movie DAN IN REAL LIFE...

"The only thing that you can plan for in life is to plan to be surprised."

We try to predict and forecast and use the correct estimate of effort because that is inherent within the survival tendency of humans. Yet... with our government interventions and all of the dynamics of the global economy, prediction has become next to impossible.

Set it up so that you have water, food and shelter covered no matter what happens as your foundation. Build upon that and be happy with whatever progress you are able to make until the government actions and policies sabotage your life.


Tyrone said...

Bravo! Well said.

Anonymous said...

"I've given my retirement plan the boot."

Ain't that the thing? Just done much the same to mine too.

Not quite as dramatic as you, but reduced my contributions by about 40%

In the UK silver is subject to 17% tax, so from that perspective gold looks a better buy. I do think it overpriced just now.

Things may get so bad we could see Argentine type confiscation of the private pension funds, there being nothing in the public funds.

So I think it a prudent idea to keep as much as you can outside the 'system'.

Land still appeals to me. Grow your food and keep a few chickens

AIM said...

Right. Eventually the investment bankers agenda and our government will sabotage us... I refer to our individual potential for growth and prosperity as well as personal freedoms and liberties. This can happen in two years or maybe slowly over 10 years. It will be in the form of stagflation, inflation or hyper-inflation, encroaching and smothering socialism, restrictions of the Patriot Act and other such government controls, etc.

Entrepreneurialism, innovation, creation, wealth building, etc. are going to be inhibited and very difficult to make happen.

My plan is to earn as much as possible before these restrictions hit, in order to: 1) own a little farmette free and clear (so I have food, water/well and shelter)... 2) liquidate all the possessions and stuff that I don't need for cash to add to my savings... 3)have a bunch of cash built up in which to buy income properties before the inflation phase takes off... 4) have some gold and silver just in case... 5) have all the tools and basic survival equipment and gear needed... 6) work on creating businesses that can actually make money during a depression.

The above will be my Ark. If things don't turn out to be as bad as I predict they will be... no harm done. If they do... I'll be able to float along with a decent standard of living and the wife and I will also have the wherewithal to care for ourselves in old age.

Medical needs? The same or better quality and MUCH less expensive is just a plane ticket away (Cuba, Costa Rica, Panama, Bangkok/Thailand).

Anonymous said...

Those backyard chickens may not be an option. NAIS is a federal program that tracks farm animals (including chickens) and the premises where they are grown. The federal program is voluntary right now, but federal funding to certain states and other entities makes the program mandatory for some growers.

If most animal owners voluntarily join the program, it will become easier to mandate - they'll say "94% of farmers joined voluntarily, so it's not a big burden to make the program mandatory for all." Unfortunately, the program favors big farmers (letting them identify herds) while raising costs on small farmers (making them microchip and register each animal). Your chicken won't save much money if it costs $20 plus headaches to chip it and register it. Factory farming guarantees another serious disease outbreak, and the government uses disease outbreaks to pass new mandatory programs to "protect" the people. So many people believe that NAIS will become mandatory for all "farmers" (including backyard chicken growers).

We need true right-to-farm legal protections that specifically allow chickens, small sheep, and gardening in suburbs, and protect grow-your-own farmers from government intervention. Unfortunately, I doubt we'll get those protections.

If you do decide to raise chickens, you might look into babydoll sheep, too. They can mow the lawn while they grow, and then provide some tasty meals. The small size makes them a novelty pet and easier (than full-size sheep) to manage in the backyard.

Anonymous said...

Re: giving the retirement plan the boot... Be careful there. Retirement funds are generally protected from seizure in bankruptcy or lawsuits.

You can convert your retirement plan to a Roth IRA (401k holders have fewer conversion options, though). You'll have to pay the tax on the rollover, but you can leave your money in the Roth to earn tax-free gains until it suits you to withdraw it. You can withdraw your tax-paid contributions from the Roth without penalty. It's a hedging action that lets you stay flexible.

Yes, it's a risk, because the gov can change the rules on you. But AARP is a big force, and they tend to defend retirement programs. The Roth lets some of your money grow tax-free.

I am not a tax professional and you should run your specifics by a tax pro before making a decision. I just hate to see people lose the legal protections and tax-free growth of a retirement account if the Roth could give them the flexibility they need for quick liquidity and self-directed investment.

AIM said...

Not many truly understand what a thief and a liar inflation is. Not many understand the one two punch of deflation and inflation.

Take 2007 for an example. Case/Schiller Index announced that home prices went down 8.9%. What wasn't noted was that the inflation rates for that year (CPI: the largest in 17 years, and the PPI: the highest in 26 years) further devastated the net worth of Americans.

Asset deflation coupled with monetary inflation (loss of purchasing power) actually made the value of homes drop over 15% in 2007. Considering values continued to drop through 2008 and 2009, you can imagine what the total percentage drop in home values must really be!

People thought they made money when their home appreciated back in the 70's and 80's. They didn't the devaluing power of inflation wiped all of that away. People actually lost 3% of their home value even though the "nominal" prices of their homes went up.

Just look at what the current purchasing power of your house value is worth today.

This is insidious stuff.


Jim in San Marcos said...


You raise and interesting point. Another thing to consider are those pay raises everyone gets. You think you're making more, but you are really keeping up with inflation. Pay raises make you feel good. What sucks, is that the governments slice increases because you are now in a higher tax bracket.