Wednesday, May 04, 2011

Disneyland Economics

Most of us pay taxes. This is money; we were paid for producing something. Tax dollars are for government consumption. Our savings are kind of like taxes also, we are not consuming product if we save our dollars. In order to save for retirement, we have to forgo consumption now, for consumption in our retirement years 20 to 40 years out.

From there, our saving flow into a bank. Lately you hear about all of the money the government has thrown at the “Banksters.” Let’s step back and take a second look. From 1999 to 2006 the banks threw money (your deposits) at anyone that wanted to sell a house (not buy, follow me). An 80 year old with a bad cough in a wheel chair, could qualify to buy a home. Nothing down and the owner got a cashiers check from the bank. Real money was paid by the bank for the home sale. By 2008 it was rather obvious that real estate loans with nothing down, were performing rather poorly. The banking system as a whole, had lent about (your estimate here or mine) 12 trillion dollars. The money was given to the sellers of the real estate. Now with homeowners walking away from their loans, the FDIC has to make the depositors “Whole again.” In order to do it, the FDIC prints dollars to cover depositor’s losses. The investors/owners in the failed banks lose their whole investment. FDIC insurance only eliminates bank runs.

Next, consider our government, they collect 2.1 trillion in taxes and spend 3.5 trillion. Congress is spending 50% more than they take in taxes. OK so it is a loan, but look at it this way, it is pure consumption. Government doesn’t produce anything. They had to borrow the dollars from us savers in order to spend them. The product consumed by government is now gone.

Just as a rough estimate, the National Debt is about 14 trillion. Add another 4 trillion for the worthless debt held as collateral at the Federal Reserve. Add another 1.5 trillion dollars a year, from now on, as part of the Federal budget.

There comes a point to where educated people figure out that the game is over. I don’t think we are quite there yet. The government is both printing money and taxing us at the same time. Taxes work great, but you don’t have to raise taxes if you print money. Inflation is a silent and invisible tax and it pays government bills just as slick as taxes.

Congress has no idea of the mess they are in. FDR started the snowball rolling and it has gotten bigger. Today there isn’t enough product to satisfy the demand made by the savers, who over time, opted out for immediate gratification for consumption, by saving. Indirectly the money borrowed by government came from the banks and our Ira's. Without FDIC insurance in place the banks would have failed, and the government's source of funds to finance the deficit would have disappeared. (Can't have that happen, can we???)

In the truest sense, if our government was to pay back the 18 trillion dollars borrowed (laugh if you feel the urge), everyone would be whole, the trouble is, it is not going to happen. If Treasury rates were to hit 12%, it would take all of our taxes to pay the interest on the National debt. We have stepped into a new realm of economics I would like to label “Disneyland Economics.” You wish for what you want and Congress will provide it. The trouble is, real life doesn’t work that way. Congress borrowed 18 trillion of real money and wants to borrow more. It’s a little like buying a car and your only concern is, "Can I borrow enough to make the next payment?"

Looking at the bright side, this isn't the handbasket to hell drill, Congress is going to drive our nation to the new Disneyland in style. I'm so excited. Are we there yet?


Anonymous said...

This blog is the best blog I have ever seen that explains the current economic situation with a great humor and clear examples.

I was wondering what your thoughts would be about investing in large dividend paying companies that are making consumer products.

Would not this somehow cushion the blow that high inflation will bring to the savings?

Prices of the consumer products will increase with inflation and thus the earnings of the companies will increase that would allow for increases in dividend rates.

I am thinking about manufactureres of cigaretters, cereal, soft drinks, candy, gum, condiment and similar products that people will always consume. I assume that these companies plus pharmaceuticals and utilities could protect the savings from the inflation but I would love to hear your opinion.

Anonymous said...


All through the 70s 80s 90s I was a musician ignorant of politics, economics, etc. Never followed the news. Life went on as usual without much change. Prices went up a little for some things. That's about it.

Now that I follow economics I've learned about all the recessions, market crashes and problems that occurred during my musician days.I realize now that I was pretty much oblivious to all of it at the time and nothing really effected my life. I was able to be, do and have whatever I wanted.

Nobody really knows what is going to happen to us and how it will effect our lives and standards of living as regards our current economic circumstances.

Drawing on my past 40 years, probably nothing. A lot of worry and anxiety will be for nought. Just live your life and have fun. That is my philosophy.

Jim in San Marcos said...

Hi Anon 7:24

Thank you for the complement. It was very refreshing. (My wife kids me about writing the Anon comments myself---I can't win;>))

If you are taking a long term view of investments, in regards to inflation, that is pretty much the standard investing approach, buy stocks that market consumables.

If you are looking for hyperinflation to take off and render the currency worthless, consumer stocks wouldn't really do much for you. Instead, look for stocks that have lots of tangible assets. I would look to railroads, gas and oil pipe lines, communications companies, and maybe real estate holding companies. Your dollars could turn to dust, but your stock holdings are proof of ownership of a shared asset. Companies that pay a decent dividend, I would also recommend.

In the last 30 years, we have turned the $100 dollar bill into the new "$10" dollar bill. We don't have any bills larger that the 100 dollar note, so common sense suggests that there has to have been, a lot of discussion on this matter already at the Treasury.

You need a C note just to buy gas (20 gallons is $90). This tends to lead me to believe that there will be some sort of change to our currency. What it is, I'm not sure. I would expect them to do something cheap like drop one zero off of everyones savings and issue a new currency.

The real question right now is, are stocks overvalued and in bubble mode, or do they reflect that our financial situation is in bubble mode and, are price accordingly?

Depending on your view, one way is up the other is down. I lean to the idea that stocks will lose 50% of their value, and at that point, I would be a buyer. The goal would be to buy stocks that would hold value if the government issued a new currency.

If we did have such an event, look for the stock companies to hit upon share holders for operating capital. This is where Consumables wouldn't be able to raise capital. Whereas, companies like Valero and Burlington Northern would have assets to pledge against loans for operating expenses.

Jim in San Marcos said...

Hi Anon 7:44

I agree with your philosophy, enjoy life and relax.

Everyone tends to over react, and as you suggest, things work out OK.

We have a problem facing us, and just letting it happen is not something I accept. I am trying to preserve some of my wealth. Whether it works or not will be tested in the near future.

I can't play a musical instrument, so I guess I'll be holding a sign on the freeway, that says "Vietnam Vet Willing to Work for Food"

I'm just teasing, take care and thank you for your post.

Anonymous said...

This idea of ignoring the world is as old as Aesop's fables.
Re-read "The grasshopper and the ant."
Most people in the U.S. are grasshoppers.

AIM said...

Hi Jim,

This is all new... fiat money, central banks, quantitative easing, off balance sheet accounting, Fed Reserve and govmt bending or changing rules to suit their needs, etc. etc.

We really have no way to predict what will happen to us and how long we have. Whether we'll wind up in a deflationary or inflationary depression, hyper-inflation or whatever. We could "float" through all of this for another 5 or 10 years or we could have a big collapse. With a global economy and all the rule changing and hanky panky in the USA there are just too many variables to allow one to forecast where we are headed.

If you're in stocks you could lose everything, same with bonds, same with gold and silver, same with real estate. There really isn't anywhere to hide. No real protection, no real security or way to preserve your capital.

I believe the safest and most secure thing one can do is to not be an employee and own their own successful business that delivers services or products that people will want/need to buy no matter what the state of the economy.

The only safe employee is a government employee. You'll get a high salary and great benefits, healthcare and pension and tenure and will last until the government topples. said...

I, too, like what Anon 7:44 has to say about living life and relaxing. Problem is, I can't shake the belief that life as we've known it in America these past couple of decades is rapidly coming to an end.

Negative waves, Moriarty...

Anonymous said...

So taxes go up a little;;; the cost of gas goes up;;; food gets a bit more expensive;;; utilities go up a bit;;; and so on;;;

then out comes more fuel efficient cars;;; more mom and pop farms start up and people start having their own gardens;;; homes and appliances become more energy efficient;;; brilliant people keep coming up with inventions that make our lives more easily liveable;;; and so on;;;

life goes on;;; we can still pursue our goals and live comfortable;;;

the impending disaster and doom mentality is just not healthy;;;

I too believe we should just live our lives and be happy and things will turn out ok;;;

the age old law of attraction is what matters;;; you get what you focus on and think about;;; if you focus on what you don't want (criminal congress, a depression, etc.) you will get it and more of it;;;

you need to focus and think about what you want and skip all the negativity

Anonymous said...

well all you have to do is look at the usa's situation from an accountant's viewpoint and you know that the usa is sick financially and can not continue in this mode for too much longer. eventually there will be a collapse unless major paradigm shifts occur soon.

whether you can just live your life and be happy in the ensuing decades? maybe yes, maybe no.

you don't have to stress out about it all.

save as much as you can, get out of debt, maybe own your own home (altho renting may be smarter), live where you can have a small garden to supplement your groceries, have a home business or live in walking distance to your job. relax and work on these things and you'll be ok.

attitude and flexibility is the name of the game.

Anonymous said...

I am trying to figure out which way to go. I have no debt and about $100K in the bank. I plan on taking $20K and buying American gold Eagles for safety. One day I read FOFOA and I am thinking hyperinflation is around the corner, the next I read Mish and I think deflation is around the corner. I am too dull to figure out what stocks to buy so I have none. As of now though I am going to concentrate on my biggest concern...replacing my lawn mower.

I ramble on yes...I do that because I have no idea what is next but can feel something is in the works. That something I know is going to screw me one way or another...

AIM said...

Anon 4:11

If we have continuing bouts of deflation your 100k will be valuable. If we have high inflation it will lose purchasing power and it would've been smarter to put that 100k into something tangible (land, income property) that will ride the inflation wave upwards.

The problems: nobody has a crystal ball and can see the future... our government or The Fed Reserve can intervene and make something going in a natural direction go in an artificial direction, thus one can't predict using standard rules or axioms due to the distortion caused by government... our economists don't know what is going on. If Economics was a true science, then they would all agree on the same outcome because the axioms and rules and historical data would make it clear where things are going.

It's not comfortable being in a state of mystery and confusion is it?

Deflation? = USD
Infaltion? = tangible goods/assets

We've allowed our banks, corps and government to create this environment.

Gold and silver are not an answer. You won't be able to buy groceries or pay rent with them, and if you can you won't get anywhere near the true value of that silver or gold coin (that is what happened in Chile, Germany, etc.). Plus gold could be confiscated or devalued by the government. Depend on it as they are not your friend.

Figure out how to have pure water, food, a roof over your head and a small business that can help you to survive by taking in the devalued currency that you will need to use to buy the necessities you need.

Jim in San Marcos said...

Hi Anon 4:11

I'd definitely suggest buying the lawn-mower. You missed your opportunity to buy silver and gold years back. I wouldn't even think of buying them at these prices.

I would recommend buying a rental for about 70K and put down about 20% and finance the rest. A 20K investment like that should return about $850 a month. I only pick that because I did just that 25 years ago and have never regretted it. My dad had a rental that he accidentally rented out to a Hell's Angels chapter and he ended up losing the house to the city (they used the interior for fire wood). So if things don't go as planned for you, remember, I did suggest that there could be risks.

Don't feel as if you are alone, we are right there with you. There is a lot of luck involved and if you diversify, you can spread out the risk.

There are deals out there, I'd point them out, but I hate to stand in line, so I'll be silent. Best of luck to you.

Jim in San Marcos said...

Hi Anon 7:59

When you suggested a small garden to supplement your groceries, I had to chuckle.

I've had several gardens, and it is a lot of work. If you don't know what you are doing, you're just feeding the wildlife. The only real difference between a weed and a vegetable, is the vegetable tastes better. The weeds just grow faster.

I tend to think that your suggested approach to life and work are not an option for most people until they retire. There will be a lucky few that will have a life as you suggest.

Jim in San Marcos said...


I don't see deflation anywhere. If you were the government printing money like a madman, wouldn't it be to your advantage to float the worry of deflation to everyone? Even if it only makes half of us hesitate, they have accomplished their goal.

In 30 years we have gone from millionaires to billionaires. Our government went from a budget of billions to trillions. Instead of hyper inflation, let's just call it rampant unrelenting inflation.

I agree that bonds could be a very big loser, but stocks, are a share of a company, and like real estate, have some value even if the dollar becomes worthless.

We could be combining two events here, a stock market crash and a dollar collapse and they are not the same thing. In a stock market crash, bonds would be king. In a currency crash, bonds would be trashed and stocks would have value under the new currency.

As for gold and silver, governments don't confiscate them, they redeem them for currency. Usually it is a fair price at the time.

Ask one question, does it cost any more to pump oil out of the ground than it did 10 years ago? Either the price of gasoline has doubled or the buying power of the dollar has halved.

A magician uses distraction for a successful illusion, IMHO the deflation threat is the distraction.

Anonymous said...

Haven't bought the mower yet, but thanks for your answers. I already own a house free and clear (except for property taxes). No houses where I live anywhere near $70K, maybe in a few years at the going rate though. That is why I want to buy a little gold. No I don't expect to buy a Hershey bar with it but at least it will still be worth something regardless. The thought of being a landlord sends shivers down my spine. I guess I am lazy as well as dull. This fence riding makes my backside sore. I admit that it is up to me to decide what to do and I keep hmmming and hawwwing. Your input does help and I thank you for it.

Jim in San Marcos said...

Hi Anon 4:11

I'd consider a home paid off as the equivalent of 175 ounces of gold. You are protected very well from inflation. If you have the space, you might want to build a granny flat for your retirement. Sure beats rest home prices.

Strategic Investor said...


right on the money.

Sadly, this doesn't even include the promises the Congress has made that it cannot keep (in the form of promised benefits to Entitlement recipients and pension obligations).

Sadly, the US government is not required to use accrual accounting. Intesad, it uses cash accounting over whatever period the legislator choses.

Very, very sad.

rob in ns said...

Politicians have been using that type of accounting for thousands of years. It works for a while but eventually the bar tab needs to be paid. Being broke doesn't mean you have to leave. However as I have experienced first hand the pretty girls as a rule don't want to dance with you.

I wonder what that says about how to prepare. Buy gold and silver, real estate... nah... maybe I should just learn how to make my own beer and wine and skip the bar.


Anonymous said...

For anyone interested in projections for our future I recommend Chris Martenson's The Crash Course. His material covers the perfect storm of economics, energy and environment hitting us all at the same time.

He is interviewed by Jim Puplava here...

I went onto Martenson's website and watched the Crash Course for free.

His advice on the preparation necessary to survive and thrive in the next 20 years is the soundest I've heard.