Friday, August 27, 2010

Interest Rates Suck Big Time

The going joke is “If you ask 3 economists their opinion on the economy, you get 5 different answers.” The question arises today, if economists have inside knowledge to the economy, why didn’t they spot this mess coming years ago?

And then we have the question will it be inflation or deflation. Out come the experts with all sorts of graphs and charts pointing to deflation. Meanwhile I went over to Wendy’s for my 99¢ bacon cheeseburger today and the price is now $1.29. That’s a 30 percent increase. And if that wasn't bad enough, my Gin went up a dollar to $14 for 1.75 liters (I'm not sure that at that price it is considered Gin, rocket fuel might be a better description).

The real question is this, the government borrowed 10 trillion dollars from all of us and we feel comfortable loaning it to the government for only TWO PERCENT INTEREST. I’ve heard of The Dumb Friends League, but investors aren’t dumber than pets, are they? What gives?

Borrowed money is one thing, printed money is another. When Ben buys one of Geithner’s T-bills, that is printing money (the Treasury sells Bernake a T-bill and the Treasury gets a bank entry for cash in the government account). No real dollars are printed; from there, the government just prints a Social Security check or an unemployment check. Of course, the government can tax and the Treasury can redeem Tim's markers at any time. The real question comes up, how much in markers does the Federal Reserve hold? I’m guessing, anywhere from 2 trillion to 10 trillion dollars. Just the management of Freddie and Fannie implies about 3 trillion right there. What they bought from the banks could be a rather absurd amount, possibly mind boggling. No saver has lost a bank dollar, but our government had to pony up printed dollars for the losses on all the failed banks' ledger sheets.

Look at it a different way, say you have one million dollars in the bank. Gee, that means you get 20k a year in interest. Let’s not all queue up at once to take advantage of this wonderful offer. It sucks so bad, why even put your dollars in the bank? Why not just spend it?

The government has printed money, borrowed money and spent every bit of it. The only reason there is no apparent inflation with interest rates is because the government has taken risk out of the market, all bank loans are insured against loss. Without risk, there is no need for higher interest rates. Of course one issue pops up. Gold had one hang up, it paid no interest. Today looking at long term, GOLD is better than holding government paper.

Ask yourself one question, where will the money come from to pay for all of the health care and Social Security benefits in the future? The money isn’t there; it will have to be printed. We couldn’t pay for it as individuals. What makes it more affordable as a government plan? Do we charge everyone a fair share for all of these new benefits? That doesn’t seem very likely. The absurdity of zero percent interest rates and a national debt towering over 13 trillion dollars should set off an alarm bell somewhere. Credit cards are charging 14 percent. No discount for taxpayers???--kind of figures doesn't it.

The thing we need to interpret from this mess, is that the information we are getting from our government is incomplete. The pieces of this puzzle are all there and they do not fit together as expected. Zero interest rates are similar to a hooker offering free sex. How you ended up in a closet nude, with your hands tied behind your back, is another story.

Copyright 2010 All rights reserved


Tyrone said...

You're reading my mind with this post, Jim. I went to the butcher, today: $6.29/lb for bacon; $6.99/lb for Mortadella--On Special; sausage prices Up; heck, everything UP!!

Deflation, my A$$!!

Anonymous said...

I, too, have noticed an increase in food prices.

But more importantly, however, I'm glad to hear that I'm not the only one who has ended up in a closet nude, with my hands tied behind my back. I'm not alone, after all.

Anonymous said...

Police chief in San Jose,CA is retiring at age 50.
Pension benefits over the next 25 years-
$8,000,000. see

Jim in San Marcos said...

Hi Anon 1:03

He may get the 8 million and I'm guessing that the last million just might buy one bag of groceries.

Jim in San Marcos said...

Hi Tyrone

Where you can really see the inflation is in government services; passport prices, Driver license fees, postage stamps, car registration fees, sales tax etc.

Steak doesn't taste very good to me, when it's $15 a pound. Of course I guess I could accept this inflation and buy a few T-bones to throw on the barbecue. We need to spend our dollars, while they still buy something.

Ohio Loan Officer said...

You're getting your steak at the wrong place---

Last Tuesday at our government subsidized Church Food Pantry we were handing out boxes of:

Slabs of Premium baby back ribs or USDA Choice New York Strip steaks.
Large boxes of Coco Krispie cereal.
Deluxe 16" rising crust pizzas.
and all the Panera bagels and bread you can carry.

AHhhh... I wish I could be poor in OBamaland too!
A 17 year old volunteering for the night commented, "How come it seems every one of these hungry people is so obese?" I had to laugh.

Well, I got to go make my Raman noodles and soda crackers for dinner. Bye!

AIM said...

Survival of the fittest under the canopy of an oppressive government.

Jim in San Marcos said...

Hi Ohio Loan Officer

In our area, the food distribution centers are running out of food to hand out.

The selection of food you describe sounds very peculiar for poor people, it sounds more like a car dealer promo for buying a BMW. Of course, maybe baby-back ribs and New Yorks steaks just aren't selling.

I'm on a hamburger and baloney diet. Of course Raman Noodles aren't bad--you don't want to screw it up with boiled tap water the way I do--bottled water adds that extra touch of essence!

Ohio Loan Officer said...

Actually Jim, the reason we are getting that kind of stuff is because regular folks have cut back. The ribs and steaks we get from large grocery chains. Most of the time it is from their Premium Butcher counters. Right after holiday weekends is when we get a large supply of such meats. The grocers stock up but folks just are buying like they were.
The Panera Bread we could get every night--- every Panera Bread store in the country stocks their shelves at 5:00 am. When they close at 9:00 pm everything left in the bins goes in plastic garbage bags and into the dumpsters--that is unless you are standing at the back door at 9:15 pm. Then you can have any or all that you want. Bagels that folks are paying $3.00 a piece for all day you can have for free. Large loaves of fresh bread that go for $7.00 --- FREE. The next morning the truck pulls up and restocks the shelves.
The waste is unbelievable!

Jim in San Marcos said...

Hi Ohio Loan Officer

It is kind of hard to believe.

But it makes sense.

Where to from here???

The food stores for people in this area are exhausted. Things could get dicey from here.

Of course, this is where we have the Democrats or Republicans come riding to out aid--we are going to be "saved."

Anonymous said...

The government and most of the population think the economy needs help and it is unhealthy. WRONG! The economy is VERY healthy. It is trying to clean itself out (all the bad investments, bad loans, bad decisions, failing banks and businesses, etc.) but the government is stopping that from happening. Government is going to make a healthy economy into a sick economy, and it will remain sick for a very long time as a result, a decade or more of no to slow growth and high unemployment. Instead of going through some pain now they are going to extend and pretend so that the pain is unbearable and chronic.

The Prophet

Anonymous said...

Right Prophet. Government is indeed our enemy. Taking a patient that is in the ICU and performing operations that have nothing to do with his malady and will surely kill him.

This mess that we are in can only end by either default or inflation.

Which is it going to be? Probably both: a little default, a little inflation, a little default, a little austerity program, a little inflation, a little more inflation, a little default, a little more inflation, ad infinitum for the next 2 decades.

You know what our real problem is on this planet? We don't have any leaders (just frauds, charlatans, perverts, self-serving assholes, despots and idiots). We need real leaders. They are out there. But the idea of walking into the political arena has never crossed their minds.

Fall of the Roman Empire, Fall of the American Empire--- deja vu all over again eh Yogi?

Anonymous said...



Jim in San Marcos said...

Hi Anon 12:37

Thank you for the rave review, it made my day.

I don't really see this mess hitting those 40 years old or younger. It's our savings that will be vaporized--us silver foxes will take it in the shorts.

I do think, if our model of what may lie ahead, is close to what will happen, we have a chance to take advantage of the situation. I think that the key is diversification of investments.

Take care

frakrak said...

Hi Jim,

Did anyone see this coming in the big end of town? Well I would say yes and no, the traders, trading floor managers of Lehman Brothers looked shell shocked taking their office belongings in a torn cardboard box down Wall Street for their last commute home, the day their company folded so no, I don’t think they knew.

Knowledge is like the military chain of command, the Lieutenant tells the troops to take the village in the valley below, gives them the intel to complete that specific task. The Lieutenant was briefed days earlier that his platoon is part of a wider operation to clear the whole sector of the enemy to make way for a huge airbase in the area. The generals have been told months earlier that gold was discovered in that particular valley, largest new reserve discovered globally in the last fifty years…. And so on!

Now where does the major risk lie with this entire chain of knowledge? I guess you could say with the people that have the least view of the bigger picture.

How could the larger percentage of the U.S. population for nearly one hundred years not know that the navigator that plots the course for the entire U.S. economy (the Fed) was a private institution? And not, as the greatest part of your population believed it to be part of your democratically elected government, until 2008?

So here’s my point, if your government has never had the power to create and direct capital expansion, why would anyone of your citizens feel any shame or guilt or sense of responsibility in the coming capital destruction? A greater portion of your government debt was the conversion of debt from your (uncontrolled and private banking system) to public debt.

So after 13T dollars worth of Fed balance sheet expansion in two years, has produced a thirty percent rise in cheese burgers, and about the same in traffic light tickets, and not hyperinflation, shouldn’t it be time to ask what else you don’t know about the action of the Fed, where the wealth of these banks now resides, why in twenty years the bulk of your economy was invested off shore to give countries like China a free go at global domination? With the excuse that American labour was too expensive?

Here’s the situation as it stands now, the U.S. taxpayer has been given a debt it can’t pay back, because the means to pay it back has been given away! BOTH these decisions were not made by the U.S. taxpayers, but now have been given the risk and the responsibilities of decisions that were made for them ……

Jim in San Marcos said...

Hi Frakrak

We can't pay it back, doesn't make the borrowed dollars any less real. The people that loaned it are SOL.

The world wide governments printing of money is just kicking the can a year or two into the future. Even with Bernie Madoff's ponzi scheme, some people got out with all of their money--albeit not many of them.

I think right now, countries around the world will start to implode from this financial mess. I am guessing that the last to fall may not have as much of a loss since all foreign debts would be in some sort of limbo.

If you examine the mess, gold and silver have to play some sort of role in the financial rebirth of each countries financial structure. There are lots of things you might want to shove up your Congressman's butt, but gold and silver are just not on the list.

Anonymous said...


It's called take the wins and socialize the losses. A strategy of the power elite. It's all about distribution of wealth. They want it all. But they aren't as smart as they think they are. They and their future generations are on this planet too and they will ultimately suffer the consequences of their unethical behaviour (unethical behaviour = unconcern for the future). What is the point of owning everything? Having all the money? All the land? All the energy and resources? All the power? Control of all people? There is no real constructive purpose to any of it, and it on the opposite side of the spectrum of happiness. These people are hollow shells, soul-less individuals.

Do your best to survive and thrive and help others to do so as well. Maintain your integrity and ethics and do good deeds. You won't wind up in the dark, in pain and friendless for eternity like the evil doers on this planet.

frakrak said...

Agreed Jim,

It is now only a matter of time! You will have to excuse my selfishness in wanting the U.S. to get thru this quickly and intact. My belief is that Australia is here only by the grace of American power, if you go down the tube, then China will set up shop here within 72 hours (only if they are polite enough to observe our speed limits :-) ).
We are all more or less Frakked, its not an exclusive club, as it turns out it is a very inclusive club....


Anonymous said...

"you will have to excuse my selfishness in wanting the U.S. to get thru this quickly and intact."

It is nice to want that, but it ain't going to happen. You'd need a time machine to go back and change things. You'd need to go back and 1) have the Fed raise rates when they should have; 2) stop the banks from making crazy loans; 3) overhaul the rating agencies so their ratings were accurate; 4) police Wall St. so they didn't go into such insane leverage ratios; 5) regulate the creation of toxic derivative investment vehicles; and so on.

It's too late. Nothing Obama, Congress or The Fed can do about it now. The credit bubble has now broken and it needs to be cleared out and all of this debt defaulted upon or inflated away. All the government has been doing since 2007 has been extend and pretend and creating further debt with stimulus programs that didn't work.
Housing is crashing again and prices are ready to drop another large percentage level. There is nothing in sight that will create all the jobs that are needed.

The U.S. isn't going to get through this quickly and in tact. This is a depression and there will not be any prosperity for at least a decade.

And I disagree with you Jim when you say it is only the silver foxes that will suffer from this. The youth will suffer: they are graduating from college now after working for years to get their degrees for prestigious universities and there are no jobs for them (except as checkout person at Target); inflation is going to raise their cost of living; they can't get loans to start businesses; austerity programs and volatile markets and sub-economies will wreck havoc on their life plans; etc.

All generations are screwed in the USA. It's our country, our Congress (but not our Fed Reserve) and we let it happen.

Land of the free and home of the brave will soon be land of the slaves and home of the pissed off.

frakrak said...

Would find plenty to agree with, referencing the anonymous comments. Don't know any gullible Americans though, and do know quite a few of your country men and women. Have an Auntie in Sacramento, she's definitely very sharp. With regard to my Fed comments, governments around the world treat their citizens with contempt at some level, so I wouldn't beat yourself up with that one :-)
Not my place to comment further on your country, except that its greatness has always relied on its people, so I think your more than half way there to fixing the mess...

Anonymous said...

Jim......about a couple of weeks ago Bill Gross from PIMCO went directly to the White House.....ever since the bond yields have been on the downside.....could this be the unloading of his hugh portfolio of his 3...4...5% bonds......putting billions in cash to later come back and buy the 8.....9......10% bonds...knowing of the inflationary depression is coming?

Jim in San Marcos said...

Hi Anon 8:58

What I meant by this not affecting the under forty crowd, is that they have the luxury of being able to go to plan B after plan A fails. And they have 20 to 40 years of employment to build some sort of structured retirement plan.

At age 64, if I lose everything, plan B is a cardboard box and a Colman lantern. The closer you are to retirement, the less options available to you.

Plus, the younger you are, the less wealth you have to lose if the bottom falls out.

Jim in San Marcos said...

Hi Anon 5:22

I didn't catch anything about Bill Gross from PIMCO going to the White House.

Anybody in bonds at 3% interest is a glutton for punishment. Of course if it is all short term stuff, he has his powder dry waiting for a good shot.

The thing to remember here is that people that control large amounts of investment securities, can't just sell and expect a reasonable price. They have to sell in small increments, and in a panic, that doesn't work too well.

Jim in San Marcos said...

Hi Frakrak

Your comment "your more than half way there to fixing the mess..." made me snarf my Gin and tonic.

Nothing is fixed and things are getting worse. You work harder and longer in the fear that you could lose your job.

The warm and fuzzy feeling is gone. Who gets laid off next? That's the real question that runs through the employees minds around here.

It is the uncertainty that is driving everyone nuts. It's hard to plan for the future.

We need to keep our sense of humor here, its the only thing that will save us, our government or a bible isn't going to cut it on this one.

Tyrone said...

Who gets laid off next? That's the real question that runs through the employees minds around here.

Very true.

I work as much OT as I can right now just in case I'm next. I like to think I'm using the excess cash wisely. And my employer is instituting all sorts of new HR/personnel plans, in addition to the yearly performance review, such as:
- Required development plans
- Employee 'Potential' ratings
- Who is mentoring who (or whom?)
- Planning profiles
- Career aspiration discussions
- "Leader" succession plans

All of this is electronically entered and tracked and available for HRs "use". Is it possible they're doing this because they care about us? Perhaps. But it would certainly assist them if there is carnage.

Tyrone said...

OMG, I don't believe it. I just purchased some toilet paper--same brand I always buy (Northern). I put a new roll on the bar and it looked narrower. I measured the new roll and compared it to cardbard center of the old roll.

new roll is ~7/16 inch narrower

Production variability? I doubt it. Now they're inflating by deflating my a$$-wiping potential. LOL

Rob in NS said...

That is the funniest thing I've heard all weekend. Maybe there is a paper shortage from all the BS being spread by our politicians.


Anonymous said...

Actually, this is not as bad as everyone on this blog says.
About 20% of the entire workforce are govt.workers
(teachers, cops, federal workers, etc.)
They all have guraranteed pensions,adjusted for inflation every year, so they should be OK.

Penny Beer said...

I think you hit the nail on the head but not the reasoning behind it. The interest rates are incredibly low and yes "it doesn't make sense to save" with such conditions, but that is exactly the point. The Fed is trying to force our hand so that we don't save as much but rather spend. We, in this case, refers both to us as consumers as we all to us as companies in the market.