Monday, March 05, 2012

Inflation Is the Goal, Deflation Is The Dream

The 30 year home mortgage is at unheard of low interest rates of 4%. Of course people with savings in the bank, are getting about 1 ½ per cent interest. Whereas the banks, are borrowing short term from depositors and loaning long term to the home buyer.

What if bank B offers 5% interest on savings deposits? Whose money at bank A was loaned out for the 4% 30 year real estate loan? The most a depositor has to wait to get their savings out of a bank A is 90 days. The real question here, are the banks stupid enough to loan at these rates and repeat the fiasco the Savings and Loans had in the 1990’s (borrowing short and loaning long)? My guess is no, this is probably some sort of government supported funding of our real estate market.

The one thing that everyone overlooks is the fact that the original sellers of the homes now in trouble got paid cash when the sale closed. All the new owner had was a promise to pay for 20 to 30 years. This new home owner will walk away from the agreement. His promised payments over thirty years would have generated real earned dollars. Guess what, with a foreclosure, the Fed has to step in and pay the full amount today. When you look at the final outcome, the tax payer will pay for all those homes bought and foreclosed on. The previous owners got real money, and when the homes go into foreclosure, the banks get printed dollars from the Fed to cover their loss. If the loan had been paid off as agreed, the borrowers earnings would have been spent on servicing the note over a 30 year period. With the Feds quick payout, 30 years of future payments get blasted into the financial system immediately with no work effort to produce the funds.

This is where the difference lies between the deflationary depression of the past and the inflationary one we have today. In the 1930’s the banks failed, real estate collapsed, and the stock market crashed. Everyone lost money. There was no government bailout.

If the real estate bubble of 2006 had been allowed to fail (GSA’s included) and the banks not reimbursed, we would have had a deflationary depression.

We just had the biggest bank robbery our nation has ever seen (real estate speculation). Our government’s solution, print a like amount of dollars to cover the loss. The reasoning, the “stolen funds” will have only half of the buying power because of the dilution and as long as most of the money stays in the banks (why not, they’re federally insured) the loss of buying power will be realized very slowly. Of course Congress got carried away and printed an extra trillion or two (nobody will notice).

At some point in the future, interest rates have to rise. The present very low interest rate on 30 year bonds makes them dynamite. The same with 30 year 4% home loans, and as to who owns them, we can probably assume that the banks have none. They may write these loans but figure them to toss them like a hot potato.

The real kicker is the FDIC bank insurance and the Treasury offerings. All are insured against loss, but not against loss of purchasing power. The historical affection the Hoi Polloi had for gold in relation to the printed dollar has been broken. The price of gas, gold and ice-cream are all rising. We know OPEC is responsible for the increase in gas prices, but who’s responsible for the rise in the price of ice-cream?--- probably some dairy farmer cartel.

The last time there were complaints like this, someone said, "Let them eat cake." My advice this time around, let's not lose our heads over this.


AIM said...

We are in a pickle. One of the biggest in history. Nationally and globally. This can't end well for this existing system. There is so much cancer in the system it is beyond salvage. The sad and scary thing is that the average American doesn't realize this.

And those thinking that they have plenty of time to figure out a plan and decide what to do because we are on a gradual decline have a big surprise in store for them too.

Historical data shows that empire collapses happen quickly. An exponential climb upwards and then an instantaneous falling off the cliff.

Niall Ferguson's newest book, "Civilization: The West and the Rest" explains this.

Rome actually collapsed within a generation. Witness the USSR, Egypt, Libya, etc.


dearieme said...

who’s responsible for the rise in the price of ice-cream?--- Big Vanilla!

Anonymous said...

so...everyone stay home and cry about our current economic conditions. the world is screwed, in your opinion, so where are y0u going to go? to the moon?

you guys need to get out a little more and realize that life goes on, yes there were mistakes made and are currently being made. but most people are going on with their lives. just look around you and you'll see them, buying ice cream, gas, and everything else.

i know i know, the depression is around the corner...but until then, i might be dead.

Jim in San Marcos said...

Hi Anon 3:27

You have it wrong, we aren't crying about anything, we are just trying to connect the dots. There is a lot of information that is subject to interpretation. Stick around for a few articles, we are just trying to fit the puzzle pieces together. Bear in mind, we could be wrong and then again we could be right.

Its the feedback we get back that influences our thinking. I tend to view this blog more as a think tank, rather than my view or the highway.

The world was flat until someone decided to disagree.

Anonymous said...

Anon 3:27

So what is the purpose of your posting? What is the concept that you are attempting to share?

I sense apathy and a lack of concern or "devil may care" attitude about where we, our country and our world are headed.

The philosophy of "continue partying, living the good life and ignoring any consequences until you are caught out" doesn't work for me.

Understanding, prediction, preparation and the like seem to be more the words I want describing my philosophy.

Mark in Ohio said...

"dearieme said...
who’s responsible for the rise in the price of ice-cream?--- Big Vanilla!

Tuesday, March 06, 2012 7:48:00 AM"

Forget OWS, I say we occupy ice cream parlors!!!!

Anonymous said...

The price increase in ice cream is due to all the damn kids!

I say we take their ice cream cones away from them and eat them ourselves!

Jim in San Marcos said...

Hi All

I think Dearieme started something.

I go along with "Occupy an Ice Cream Parlor." Ice cream consumption stimulates the econonmy and my taste buds.

We need to keep the kids, how else can we justify ice cream?

I think ice cream is safe as long as Obama doesn't make it a health care benefit;>) (political satire, please forgive me, I couldn't help myself).

AIM said...

Hey Jim,

I think that we are all tired of the ice cream flavors of "Double Decadent Chocolate Fudge Obama" and "Bernanke Triple Mint Delight", don't you?

I'd sure like some "Fiscally Conservative Vanilla" or "Deficit Free Butter Pecan" or maybe some "Dutch Deleveraging Chocolate".

I think Bernanke is really between a rock and a hard place. He didn't decide to continue ZIRP until the end of 2014. He has to do it! He can't print print print much longer. If he inflates much more interest rates are gonna go UP and the US Govmt will not be able to service its debt, won't be able to pay the interest on the bonds, foreign countries won't want to buy any more of our debt.

Rising interest rates will really put this country deeper into the dark hole. On top of that we're getting the biggest tax hike in the history of the US in 2013. 7 major tax increases. That will really send us deeper into the black hole.

Rising interest rates and tax increases = collapse of GDP and this country.

I guess if we keep on digging this hole we'll wind up in China. Maybe our unemployed will be able to find work there!

Anonymous said...

Statistics show more credit and borrowing happening now. The de-leveraging has stopped. Most all of the leading economic indicators are positive. Looks like central banks and governments have managed to pull it off and keep us floating on the extend and pretend express.

I guess the spin phase of the spin, crash and burn cycle is going to last a lot longer than many of us thought.

New Oregonian said...

Consumer borrowing is inching up.

I think we're at the intersection of economics, history, and psychology. In the GD, there were frequent recessions prior and an aftershock only about 3 years later. Economic negative reinforcement. Zap the consumer monkey once a decade and he learns nothing. Zap him every 3-7 years, and he starts washing his aluminum foil and saving for a rainy day.

A recession/depression is a severe flu, everything hurts for a bit but then the germs are defeated. The pain pays off in a healtheir economy later. If you let the sick persist, you get lots of colds (recessions) and kill off the germs slowly. I predict aftershock recessions. The eventual result, though, is a healthier economic organism.

I don't think any of us are crying; we're just trying to make sense of why the other monkeys are twitching but keep reaching for banana. Life goes on, but I'm trying my darnedest to be the monkey with enough bananas in my 401k to live out my natural life. Our little brain trust here is trying to figure out which bananas are wired.

Anonymous said...

this is anon 327,

you can look at the world objectively, for starters. you guys that are trying to connect the dots cannot do so with the "great depression of 2006" glasses on. if you truly want the truth, then don't assume anything, look at the facts and then maybe you'll see that you live in the greatest country in the world, not that it's perfect but it's a lot better than the rest!!

Jim in San Marcos said...

Hi 3:27

Truth is a value judgment, right for you, wrong for your neighbor.

The facts are there. Gas hasn't doubled in price, our currency is worth half of what it used to be.

Ask yourself one question, why should gas prices rise? We are now shipping 60 million gallons a day of processed fuel out of the country from lack of consumption.

If you have saved up a million dollars in your life time to retire, it now has the buying power of 1/2 a million dollars.

No argument that its a great country, but screwing the savers to finance the budget sucks.

Anonymous said...

Hey 3:27. If you want the truth America is the "greatest" country in the world because...

The English and Europeans took it by force from the Native Americans.

America then took advantage of France and made the Louisiana Purchase.

America then took most of the Southwest and West by force from the Mexico.

America has sucked most of the natural resources from the planet, much more than its share.

America has controlled and toppled other countries through its foreign policy and the use of subterfuge (CIA, NSA, etc.) to maintain and build its power structure.

It's only a "great nation" because of force and violence. Not due to merit.

Just like any individual the same goes for a nation... he who lives by the sword, dies by the sword.

The empire is collapsing. Due to it falling into the trap of being a welfare/war-monger state. Just like Rome.

The use of Socialism and Communism and Keynesism and the growth and out of control actions of the "military-industrial-congressional-think tank" complex has sealed this empire's fate.

Becoming a fascist police state is the last stage of a dying empire.

God bless America!
The land of the free and the brave!
The greatest country on earth!
The home of democracy!

What a bunch of drivel!

Franco Bollo said...

Where did all the Trolls come from?

Anonymous said...

Hey Franco, why don't you listen to anon 1:410 and maybe you'll learn a thing or two instead of calling people trolls. by the way, your comments are very informative...

As for anon 1:40, you are absolutely correct!!!
america is great partly bc we have bullied others but also bc we concentrate on innovation rather than manufacturing.
but the problem is this, when we are all benefiting from the "loot" and we are on the take, it's hard to complain.

I see guys driving 100k cars, living in million dollar houses, saying this is wrong and that is wrong. ok, why don't you cut from your lifestyle a bit and make it right for someone else???
more than half the world lives on less than $1/day but Jim from san marcos is worried abut his nest egg!! if your hungry, the last thing you are worried about is tomorrow bc you might not make it through today. that's how good we have it that we van spend our spare time BS-ing about these things rather than looking for our next meal.

even homeless people in america live better than half the world.
again, yes we sometimes cheated and sometimes stole but if you have a problem with that, get off your ass and do something about it!
the regulars posting here, have you protested out in the streets? have you volunteered your time to make this country better? can you do more? or are you just good at finding problems but never really offer solutions or put your energy into solving the problems!!!

there is a lot wrong with america but until im willing to give my luxury V-8 and 3,000 sqft house up, i should STFU and appreciate this great life and opportunity this country has provided me.

as long as the u.s. innovates, it will always have military superiority and thus it will be able to bully others and we all benefit from that, so don't take the money/benefit and then complain about where it came from.

as jim said, everyone has their own thought process but some of the posters here should take a few minutes and look at the facts.

again, when you look at everything through "depression" glasses, everything looks "depressing".

Fact is, we live in the greatest country in the world and it will continue to be the greatest country in the world for at least another few decades, those calling the demise of this empire are misled by there perception.

Anonymous said...

With the technology, money, distribution channels, manpower, etc. that exists in this world there should be no one without clean water, food and shelter on this planet.

As long as there is a child in Africa or China or Russia or any place else that has to drink muddy, toxic water and doesn't have a meal we are a disgrace to our race.

If there is a starving child, man or woman then we are all starving.

Jim in San Marcos said...

Hi Franko

I guess someone didn't appreciate your free humor.

Not many trolls living under the bridges out here, most of the freeway residents are Walmart employees. :>) -or maybe they just shop there and steal the cart.

Jim in San Marcos said...

Hi Anon 3:37

I have been writing this blog since 2006 and it is not about doom and gloom. Its about the reality around us. Each of us will interpret it differently.

What is happening to my nest egg, I understand completely. When you get to be 65 and you see your purchasing power eroded drastically by inflation, it becomes a serious issue as to your well being and your future plans for retirement.

What I was trying to point out was the fact that we don't need to blame the oil companies and Wall Street for the high price of oil, we need to blame the government for printing dollars. The more you print the higher prices rise.

A country that taxes the rich (old people) with inflation (printing of money) is pond scum (IMHO). The real irony is the cry by Congress, to tax the rich, they are already doing just that by printing more dollars (your savings have less purchasing power).

Just examine a 1964 silver quarter. It will still buy more than a gallon of gas.

The hand writing is on the wall, this is no longer the great country it used to be. It has changed and very few have noticed.

PS in Kalifornia, you can still buy a million dollar home with 30k down and a 100k car with a 10k down-payment. After you buy the house, you can live in it rent free for 2 years (until the bank forecloses) and probably pay off the Ferrari in the meantime.

Anonymous said...

How can anyone have patriotism, deep belief or loyalty to any country anymore? If you do, you must have your head in the sand.

All current governments are oppressive and the source of most all of our problems. They've got the military, law enforcement and the prisons to ensure they stay in power.

Just like we threw off the monarchs, the time has come for us to throw off oppressive governments that intervene in our personal and business lives and force us and our future generations into debt slavery.

A political Renaissance is coming. The internet is the catalyst that will hasten it along.

War is INSANE. Destruction of the physical world and our fellow man solves nothing and only serves to degrade humanity.

Man has become so inverted and insane that he seeks to control and profit from war. That is our military/industrial complex at work. Our Joint Chiefs of Staff, our Pentagon people, our Commander in Chief, our CIA, our NSA, and whatever other shadow clandestine groups exist should all be locked away in prison in order to protect humanity. And that goes for all of the other groups that exist in every war-mongering country on this planet.

Our youth have been brainwashed with concepts such as honor, bravery, courage, be all you can be, etc. These concepts are used to turn them into unthinking killers, detached from themselves and humanity.

If you deny the above then you should watch the documentary "Why We Fight". The facts are the facts and it's time every American faces them.

The only reason we have war is because not enough of us have stood up and said "hell no, we won't go".

It's over for the FSofA (Fascist States of America).

We are evolving.

Anonymous said...

Jim in San Marcos,

Inflation may be the goal but what if deflation wins?

Do you think it is possible with deleveraging, derivatives, bad loans, defaults, foreclosures, unemployment, low velocity of money, etc. etc. that Bernanke might now be able to make a difference no matter how much he "prints"?

Could we actually be overpowered and have deflation?

Or at least a significant deflationary period before inflation can actually gain traction?

Anonymous said...

To remove the Anonymous Trolls, just remove the ability to post Anonymous.

This allowment of anti government rhetoric distorts the true meaning of this blog. As a long term reader, I disappove of these thread stealing, government bashing, non related entries.

Anonymous said...

Anon 12:22

WOW! You are obviously a devout member of the status quo.

And in keeping with this ever-growing totalitarian regime you want to censor people who are critical of the government.

Why are you even here? Go away!

AIM said...

Yes, Mr. "I haven't got a clue" Anon 12:22,

Our economy happened to have crashed because of our government. We've been on a downward spiral ever since such great "civilizing actions" have been taken by the government such as The New Deal and its socialist programs; the Fed Reserve; coming off the gold standard; and all the other government intervention in the form of destructive fiscal and monetary policy, foreign policy, war-mongering, etc.

Civilization has come from the private sector, from private enterprise. We owe all the great capitalists for what we have today. NOT the government.

You don't understand the government just gets in our way 9 out of 10 times in every issue.

I for one am sick of these blind American flag waving, patriotic, God fearing types who don't have any knowledge of economic or political history and thus don't understand the destructive direction that this government is leading it citizens in.

Politicians have not done much at all for our nation. Government hasn't either. It has been the people, the public sector, despite being oppressed and victimized by their government which is a parasite.

Government has given us taxes and war and is heading us towards destruction. We deserve 100 more 9/11's for the things we have done to other nations and people. You're lucky you are still around.

It is not this country, its founders, the constitutional framers, the concept of a democratic republic, etc. that the people here are critical of. It's the government NOT our country. The government is our enemy.

It should be small, should stay out of our business and personal lives, maintain the basic infrastructure of the country and defend us from enemies (and we wouldn't have any enemies if our government wasn't antagonizing the rest of the planet).

Just like the Federal Reserve causes all of our business cycle busts and booms and recessions and depressions and destruction of our currency and then comes to the rescue to fix it, the government creates and manufactures our enemies so that the Pentagon can get the huge appropriations from Congress for "defense" in order to maintain their power and reach.

It's all fear based and that is how the public is fooled into it.

Just because the government changed its military's name from the Department of War to the Department of Defense doesn't fool me.

Screw the God, America and apple pie BS. The people are waking up to this and are realizing who their real enemies are. They just want peace and private enterprise and to be able to raise their families in a decent world and work at making the world better for all of us.

Only the demented want chaos, war and poverty. Thus the government is demented and if it was an individual it would be locked up in a straigt jacket in a mental ward somewhere for its behaviour to date.

Hey, look at me, I'm not anonymous.

Jim in San Marcos said...

Hi Everyone

I have to stand up for 12:22

I think his remarks were pointed at Anon 10:00.

Anon 10:00 was hijacking this thread and had nothing really to contribute. Plus he was way off topic.

Jim in San Marcos said...


Great piece of writing, I don't really think that 12:22 was the real target. He was miffed with Anon 10:00

The words you knitted into a fabric have an "Everyman" ring to it. I liked it, it made a lot of sense.

Your comments are always welcome.

Anonymous said...

Correct, it was my response to 10:00's comments. Aim's posts are, as always, great. He just aimed it at the wrong person. Does anyone really think I would be a 'status quo' guy, while reading this site for years?

I would just prefer that we stay on topic, or a subtopic within and the topic was inflation.