Wednesday, May 12, 2010

The Last Hurrah

Interest rates right now are a joke; Banks are paying ½ to 2%. My wife and I stopped buying T-bills that were paying a ¼ percent. Interest rates usually measured risk, the lesser the risk, the lower the rate.

Look at bonds as a long term investment. The investor might be willing to take more risk to increase his rate of return. If there is no risk (because of government guarantees), the interest paid will approach zero. With inflation running in a range of around 6 to 15 percent (pick a value) bonds look like a real dumb investment.

Consider that the bond market is 5 times larger than the stock market, where is money going to go? The stock market appears to be the only option left.

The real question is, what level do interest rates need to rise to keep money in the bond market? A 10 percent rate would ruin the housing market, and a 20 percent rate would spell financial disaster for the country. Now we have the European Union printing up one trillion Euros to save the Euro. This frees up the money from bad loans (unredeemable) made to Greece. Where are investors going to put this money, in other markets? What’s a trillion Euros trying to find a home? Answer: Inflation.

Notice, governments never question markets that reach to the sky. But have one that takes an ugly dip like the real estate market or the stock market and they hold an inquisition.

Where to from here? Dow 30,000, Gold $3,000? So as the Dow Jones average rips through 40,000 next week, look for Obama to declare the recession over. Even though I am joking around here, this is the last party in town and they just refilled the punch bowl.


AIM said...

I"m amazed at how long poor fundamentals, errors, corruption, waste, etc. can be hidden or disguised and the system propped up. Big entities like super-power countries move slowly. In comparison to an individual this speed is like that of molasses. Unnoticed by the lumpen masses, as a country we are descending down into the depths at the speed of molasses.

Bob Barker said...


If this is the last hurrah, in your mind what is next? I sense hyperdeflation, not inflation. This is a K cycle winter. Deflation will be the enemy, no matter how much they print.

Anonymous said...

So many writeoffs it is difficult to imagine that the burst of inflationary expansion won't be swallowed up in a huge black hole of defaults.

The amount of private credit that is yet to be written off is so large that the government will not be able to overcome it.

Jim in San Marcos said...


You have to remember this isn't just one event, it is several interacting, housing, banks, government spending, presidential policy and inept government. It will be slow, and that's good. We really don't want to go where we are headed.

Jim in San Marcos said...

Hi Bob

I don't think there is enough info for a time line for deflation or inflation. I believe we will have both. Deflation to start and hyperinflation 5 to 10 years down the road.

Right now the money being printed is being used to pay of debts for items already consumed. Also baby boomers are trying to sock away some cash. So the printed dollars are not inflationary until they are presented for consumption.

I see the Kondratiev winter cycle happening, but it doesn't have to be linked to deflation. The winter represents a tremendous destruction of wealth.

Basically in the 1930's the banks and investment trusts collapsed and everyone lost their saving and there was deflation. That's not much different from the government printing dollars until they become worthless. At that point you are also broke. It's the new currency that will reflect the deflation.

This is just how I see it, I'm always open to another opinion.

Thank you for your comments.

AIM said...

So... the answer to the question, "Will we have deflation or inflation?" is... YES.

AIM said...

Gold, silver, gas and oil, energy, food, real estate, health care. These will be the only way to stay afloat.

Anonymous said...

Good article.

Anonymous said...

Doesn't this just say it all?

"The ruling classes want to keep everything under control. Like governing elites everywhere, they want to prevent change – at all costs. So, they prop up the old industries…reward the bad banks…and protect failed companies and bad speculators. Why? They’re on the top of the heap…and they want to stay there.They own the present. The future be damned!So, what’s their strategy? It’s to squeeze the working classes and the middle classes…and everybody else. Anything and everything to preserve the old order.Scrape the barnacles from the hull? Not a chance. They are the barnacles!"

I pulled this little excerpt out of an article by Bill Bonner on the Daily Reckoning website.

AIM said...

A very interesting article from Chris Martenson. Seems quite astute. Of course fiat currenty isn't dependable (especially with what central banks have recently done and will continue to do with it). Of course the debt is too big to ever pay off. Debt will eventually be defaulted upon or blown away with cheap hyperinfationary dollars (same as being defaulted on). Governments will never be able to pull back from the growing budget deficits. And the use of debt and rollovers to handle our problems (which is mostly debt) will continue to be the policy of choice. We're doomed as regards the value and purchasing power of our currency, sooner or later.

As for gold... is it really a solution? Is it really safe? Can't it be manipulated? Can't it drop back down to $800/oz. due to unexpected events or government interventions? Can't the government confiscate it or devalue it as they did in the 1930's?

Anonymous said...

The gold bugs out there should remember that gold is not a limited amount of supply.
More can be mined anytime.
Ask the two brothers who tried to corner the silver market in the early 80's. They fell flat on their face when supply increased.

Jim in San Marcos said...

Hi Anon 5:48

I beg to differ with you. The Hunt brothers did corner the silver market. The Chicago CBOT changed the rules so that their members wouldn't be ruined. The CBOT had sold more forward contracts of silver than could be delivered and the Hunts were asking for delivery, which was impossible.

The supply of silver didn't increase, only the speculation in it did. The CBOT limited all silver futures for liquidation only. The price promptly dropped from $50 to $10 and the Hunt brothers were ruined. The CBOT laughed all the way to the bank. The Hunt brothers loss was their gain.

The cost of producing gold in even the marginal mines is around $650 an ounce so at the present price, every mine in the world is producing. The price of the yellow metal doesn't seem to be dropping much.

Silver is a different story, you just don't go out and mine silver. Most silver is a byproduct of copper production. Now you see why the Hunts picked it.

If for any reason, you want to dabble in gold and silver futures or options I recommend the European exchange ICE not the dirtbag CBOT.

Supply is not a mining issue, it is far more complex.

Jim in San Marcos said...


Thank you for the link.

It is hard to say about gold. I think that it won't drop below $600 an oz. Of course I bought it at $325 and watched it drop to $225. I still have it, but I don't consider it an investment, its more like a life preserver, it's there if you need it.

I would consider home ownership the equivalent of owning 150 ounces of gold. Even in hyperinflation, you get to keep your assets.

If we were to go the hyperinflation route, the home would be a high profile item for taxation. If you own a 5 million dollar home and the currency goes to hell, you might not be able to come up with the taxes on the property under a new currency.

I have been recommending silver as a hedge against inflation as opposed to gold. Historically, the silver to gold ratio was about 16 to 1. I see silver as a better deal.

With the economy the way it is, you might be able to pick up an 8 to 12 piece setting of sterling silver ware for just the smelt value. The only downside is you have to polish it.

Jim in San Marcos said...

Hi Anon 10:40

Thank you for the quote. It is true the regime in power is trying to preserve the status quo. But there is a reason for it. All of the money borrowed by government to run everything was borrowed from people saving for retirement.

The middle class and the rich pay the taxes. If they get trashed, the fabric of Democracy falls apart.

Perspective is in the minds eye, you see what you want to see or what other suggest is there.

Thank you for your comments.

Anonymous said...

Do you weekend academics ever consider things outside the box?

1) why do you need a currency backed by gold when you have something even better, world's strongest military. our currency in the u.s. is backed by our military, this is the realization Nixon made decades ago, its time the rest of us understood that.
2) if you are the school yard bully and lets say you owe people money, who can collect from you? a debt is only good if it can be collected.
3)the u.s. can fix the "game" anytime it likes, just look at greece/europe. a year ago the dollar was being trashed and the euro held up as the next reserve currency, with a wave of the hand, the euro has collapsed in the past month and the dollar is back on top as THE only reserve currency.

economics makes sense out of things that are theoretical, the real world does not exist in the theoretical world or in a textbook. the real world is fixed, therefore all this inflation/deflation talk is only an academic exercise.
currencies are relative, as long as our currency is not the stinkiest, we are ok.

laastly, does the u,s. need the rest of the world, if tomorrow we stopped trading with everyone, would we die?
answer is no, we grow our own food, we have enough of our own natural resources, so i would say the world needs the u.s. more than we need the rest of the world.
i'm happy with one pair of jeans, don't need china supplying me with more. i'm happy to use the bus to go to work, don't need a 6000lb suv to commute and thus saudi oil.
point being, we are the greatest country around and we'll be just fine. stop stressing and appreciate this great country you live in. a country which innovates like no other and as long as it does, it will be the place to be.

happy anon

frakrak said...

Treasury securities have also moved back as an investment for your banking system. The market oracle has a recent article on this. In the 50’s and 60’s, 40% of the banks portfolio were treasury securities, and the rest, a mix of mortgage backed securities. Now an average U.S. bank holds 98% of its portfolio as mortgage backed securities.

Jim in San Marcos said...

Hi Frakrak

I thought the banks had gone to zero on mortgage backed securities and maxed out on Treasuries? Do you have a link to that?

Jim in San Marcos said...

Hi Anon 3:04

I tend to agree with your macro economic view, but what we are "stressing about," is the micro economics of the individual.

Governments are trying to print their way out of this mess. The individuals who hold the debt through retirement funds or investments, will be burned royally.

Massive amounts of money were lost in the housing and financial bubbles. Probably 70% of the worlds savings are gone. Printing dollars to replace those spent dollars doesn't create new product to consume. 30% of the product is still left to consume, but we now have that 100% chasing the 30% that is left.

There is no real problem with the 70% of printed dollars if they stay in the bank.

Once the baby boomer's start to retire, their spending along with government spending is going to be very inflationary. Right now though, people are paying off debts and saving more. That would suggest deflation.

The issue that is rather invisible, is the lack of interest being paid to bond holders. I see a big shift from bonds to stocks to make up for the lack of interest income. If and when the stock market collapses, these losses will not be government insured.

It's the savings of the retiree that are most at risk here.

Thank you for your comments.

AIM said...

Just look at the behaviour of the USA in its fiscal and monetary policy, debt, spending, borrowing, foreign relations, trade, wars, domestic production, reliance on oil imports, etc.

Here is a simple view: Ask yourself what you would so with an individual person in your family, business or neighborhood who operated this way in their life.

Don't be surprised if concepts like prison, mental institution, shunning, banishment, etc. come to mind.

Jim in San Marcos said...


I know what you mean.

A lot of what we are talking about revolves around common sense.

I think that we will start to see an unraveling in the rest of the world (Greece, Spain and Thailand).

The trouble is, it is far away, it can't possibly involve us in the States. Believe that and I have a real deal on a bridge in Brooklyn.

Take care

frakrak said...

There you go Jim:


Jim in San Marcos said...

Hi Frakrak

Thanks for the link.

I need to do some research on this.

Take care.