There are a lot of oil producing countries that depend on oil dollars to pay the bills. With oil at 100 dollars a barrel, they have to pump x barrels of oil to be able to pay to run the government. If oil were to drop $11 like it did last week, and an oversupply surplus is announced of 11%, these countries will fall short of meeting their planned budgets. The prime directive of each country is now to pump more oil to make up the shortfall. Short term, this solves the problem. Only now, the oversupply might be 15% and the price could drop another 11 dollars. The oil producers will quickly realize that the increased production is cutting their own throats. The trouble is, the respective governments need the dollars, not the oil. These countries can’t cut their budgets anymore; their only option is to pump more oil.
With world unemployment at around 20 percent, energy consumption has to drop. This is where people will cut. No air conditioning, no heat, no cooking. A heating bill in California is about zip, but in Colorado, it could be about $200 a month in the winter time. I have seen senior citizens cut off the heat and sit in a stack of blankets to keep warm because they couldn’t afford to pay their heating bill. And of course, Obama the white knight will fix that--more blankets please!
Gasoline consumption stateside could drop from 20 to 50 gallons a week for a family of 4, down to possibly 10 to 25 gallons a week. Multiply this drop in consumption by millions of people, and the lack of demand for product becomes very noticeable.
Look for oil production to continue at present production levels, and for world consumption to drop another 10 -15 percent. The price of oil could collapse and drop below $60 per barrel before December. That would be welcomed news here, but for the rest of the world selling oil, it could translate into serious financial problems. At 50 dollars a barrel, countries would have to pump twice as much oil to obtain the same revenue. And that sort of overproduction could send prices even lower. Remember the Arabs are buying food and other consumables with their oil revenues.
This drop in the consumption of energy is a sign of economic hard times worldwide. A drop in oil prices is a drop in taxation for a country like the United States. Call it a tribute tax. It will make life a little more bearable for the near future, for the US and Europe, but sooner or later, bankers and oil sellers are going to demand a currency linked to gold. You can print money, but you can’t print food or the other things that oil can buy.
Look for the price of oil to collapse in the coming months. And after is does, look for it to be pegged to the price of gold and silver. Do you get the feeling that our currencies are floating on a cesspool of debt? Nah, it must be my imagination acting up again.
Copyright 2012 by Jim Brubaker
Thursday, September 27, 2012
Sunday, September 16, 2012
Low Interest Rates Make No Cents
The economy is doing just great. If you are retired, your savings are generating just gobs of interest--right! Figure a million dollars in the bank is generating about $10,000 a year. Remember when interest rates were about 8% and your return would be more like $80,000 a year?
If you are into buying bonds, there is no reason to buy any further out than 5 years at these interest rates. They can’t go much lower, and if they do, why even buy them? Do you want to hold a 100K 3% 30 year bond if interest rates double. Can you wait 30 years to redeem them? Or take a 50% haircut when you redeem them early?
The interest carry costs for futures are warped out of place. For a futures contract, 100 oz of gold one year out, a majority of the option cost is figured as interest on the actual amount of money tied up in the contract till delivery, plus storage fees and a volatility premium. So the commodities game right now is in play, with very low interest rates. It’s not rocket science to figure out that borrowing the money to buy gold futures is a money making proposition, the interest costs are negligible. Sounds a little like the housing boom doesn’t it?
Your health care and auto insurance companies invest the premiums received, into the financial markets to get an additional return. These returns allow them to reduce premiums charged on policies. This nice little cost cutter has gone to hell.
Retirement plans like CalPERS have assumed that the return on investment would be around 8.5%%. Guess what, it is not even close. Figure 100% of all state government plans are in some form of denial, “This can’t be happening.” If they were marked to market and held to realistic return rates, a lot more money would have to be ponied up by the states. Naturally the legislatures hope that this problem will just go away given enough time—Translation: After they are dead and gone.
Real Estate loans, you want to buy a home? Fannie and Freddie still offer nothing down loans at competitive low interest rates. If your credit rating isn’t up to par, that will not stop you from getting the loan. The aggravating thing, is that if the government got out of real estate financing, the sale prices would be a hell of a lot lower than what Fannie and Freddie are offering with government financing. To compound matters, there is no one out there to buy 30 year paper at these interest rates. By no one, I mean the banks, investment firms, and anything else you can think of. This is why Mr. Bernanke has decided to go with a 40 billion dollar a month re-purchase of mortgage securities.
The question has to be asked, who really benefits? The government can still borrow at ridiculously low rates. The interest on the national debt remains lower than normal, and Congress can spend more than it takes in in taxes and kick this can further down the road.
The big thing to understand here is that the current interest rate keeps the government debt manageable. Plus it facilitates the borrowing of more money. Why not borrow instead of tax the constituents? The concept of borrowing and putting it on the national debt has no real tie to the world most people live in. The national debt is just a place where we park debt we have no plans of ever repaying.
Americans are led to believe that the Arab crisis is the reason for the doubling of gasoline prices, when in reality; it is due to the massive printing of dollars. The US government is going to tax everyone with a savings account 50%. You have the same amount of dollars in the bank, but it only buys half as much. Bank depositors need to ask one question, why keep your money in the bank at these rates, where is the reward?
Our government has borrowed 17 trillion dollars. As long as interest rates are artificially low Congress will have no problems, but the minute they rise, we as a nation are in serious trouble. The funny thing is, the money they borrowed, was from people preparing for retirement, the silver foxes were going to live off of the interest. It’s a little like having retirees stand on a chair with a rope around their necks. They bought the rope and the chair and now the government wants the chair. Their savings were their lifeline to comfort in retirement. But by God, the government will not fiddle with your Social Security, all $1,200 a month of it. They are going to fiddle with the million you have in the bank. You’ll now get $800 instead of the $6,600 a month in interest; you had counted on for your golden years.
Ben has to buy all paper presented in order to keep interest rates low. If he doesn’t, you'll get more interest on your savings, and we can’t have that, can we? Risk has been taken out of the financial markets. Government guarantees for everyone, drinks on the house. What ever happen to plain old common sense?
Romney says he'll replace Ben if elected, so we do know when the party ends--- November 6th. At that point the movie is over and reality sets in---Got Food Stamps? Looking on the bright side, the Sunday paper is now cheaper than a roll of toilet paper and goes further if cut right.
Copyright 2012 by Jim Brubaker
If you are into buying bonds, there is no reason to buy any further out than 5 years at these interest rates. They can’t go much lower, and if they do, why even buy them? Do you want to hold a 100K 3% 30 year bond if interest rates double. Can you wait 30 years to redeem them? Or take a 50% haircut when you redeem them early?
The interest carry costs for futures are warped out of place. For a futures contract, 100 oz of gold one year out, a majority of the option cost is figured as interest on the actual amount of money tied up in the contract till delivery, plus storage fees and a volatility premium. So the commodities game right now is in play, with very low interest rates. It’s not rocket science to figure out that borrowing the money to buy gold futures is a money making proposition, the interest costs are negligible. Sounds a little like the housing boom doesn’t it?
Your health care and auto insurance companies invest the premiums received, into the financial markets to get an additional return. These returns allow them to reduce premiums charged on policies. This nice little cost cutter has gone to hell.
Retirement plans like CalPERS have assumed that the return on investment would be around 8.5%%. Guess what, it is not even close. Figure 100% of all state government plans are in some form of denial, “This can’t be happening.” If they were marked to market and held to realistic return rates, a lot more money would have to be ponied up by the states. Naturally the legislatures hope that this problem will just go away given enough time—Translation: After they are dead and gone.
Real Estate loans, you want to buy a home? Fannie and Freddie still offer nothing down loans at competitive low interest rates. If your credit rating isn’t up to par, that will not stop you from getting the loan. The aggravating thing, is that if the government got out of real estate financing, the sale prices would be a hell of a lot lower than what Fannie and Freddie are offering with government financing. To compound matters, there is no one out there to buy 30 year paper at these interest rates. By no one, I mean the banks, investment firms, and anything else you can think of. This is why Mr. Bernanke has decided to go with a 40 billion dollar a month re-purchase of mortgage securities.
The question has to be asked, who really benefits? The government can still borrow at ridiculously low rates. The interest on the national debt remains lower than normal, and Congress can spend more than it takes in in taxes and kick this can further down the road.
The big thing to understand here is that the current interest rate keeps the government debt manageable. Plus it facilitates the borrowing of more money. Why not borrow instead of tax the constituents? The concept of borrowing and putting it on the national debt has no real tie to the world most people live in. The national debt is just a place where we park debt we have no plans of ever repaying.
Americans are led to believe that the Arab crisis is the reason for the doubling of gasoline prices, when in reality; it is due to the massive printing of dollars. The US government is going to tax everyone with a savings account 50%. You have the same amount of dollars in the bank, but it only buys half as much. Bank depositors need to ask one question, why keep your money in the bank at these rates, where is the reward?
Our government has borrowed 17 trillion dollars. As long as interest rates are artificially low Congress will have no problems, but the minute they rise, we as a nation are in serious trouble. The funny thing is, the money they borrowed, was from people preparing for retirement, the silver foxes were going to live off of the interest. It’s a little like having retirees stand on a chair with a rope around their necks. They bought the rope and the chair and now the government wants the chair. Their savings were their lifeline to comfort in retirement. But by God, the government will not fiddle with your Social Security, all $1,200 a month of it. They are going to fiddle with the million you have in the bank. You’ll now get $800 instead of the $6,600 a month in interest; you had counted on for your golden years.
Ben has to buy all paper presented in order to keep interest rates low. If he doesn’t, you'll get more interest on your savings, and we can’t have that, can we? Risk has been taken out of the financial markets. Government guarantees for everyone, drinks on the house. What ever happen to plain old common sense?
Romney says he'll replace Ben if elected, so we do know when the party ends--- November 6th. At that point the movie is over and reality sets in---Got Food Stamps? Looking on the bright side, the Sunday paper is now cheaper than a roll of toilet paper and goes further if cut right.
Copyright 2012 by Jim Brubaker
Thursday, September 13, 2012
Idiotic American Foreign Policy (reprinted)
This is a reprint from last October 27. I'm reprinting it to point out how bad our goodie-two-shoes foreign policy is going ("sucks" might be a more apropos verb). I apologize to readers who already read this. Normally I wait a few years to republish previous articles. Next new article should be ready Sunday.
Normally this blog deals with the coming Great Depression so foreign policy is a bit of a stretch. We have just helped kill the leader of Libya. Not much of a big deal, but we did it so these people could have Democracy. That country is totally devoid of any social institutions so there will be no Democracy, the guy with the most bullets will be the new President. Of course if your currency becomes suddenly worthless, you are pretty much in the midst of a depression. Life in Libya looks rather brutal for the foreseeable future.
We are getting out of Iraq. Great idea; Christmas comes early for Iran. There is turmoil in Palestine, Jordan and Egypt; Israel could go bananas and nuke Iran or vice versa.
Oil ties the US to the Middle East; water ties the Middle East people to the land. The real key is not oil, but rather water. Iran and Turkey, China and South East Asia, are building dams that could start a war over water; the hell with the people downstream.
Then in Pakistan, we send a woman (Hillary) (where women are considered property) to tell them how to run their government. Great for women’s lib, but who are we kidding, the Pakistanis would like to chain her up in a basement and teach her what the slang term "airtight" means. These people are not going to listen to a woman, more to the point; they feel insulted having to deal with her.
The US press is selling their readers this "goodie two shoes" idealistic policy of spreading Democracy to the world. The reason we lost in Viet Nam, was because the average farmer could point to his family and land, but he could not point to Democracy. Democracy does not come from the masses who have nothing, but rather from those who have a position of wealth that needs to be preserved. Democracy is not an option for the Middle East; they have always taken what they have wanted. Might is right.
U.S foreign policy towards Libya has been very irresponsible; we can't shoot first and then think about it. Getting rid of Qaddafi accomplished nothing. His supply of stinger missiles is now on the auction block. Leaving Iraq without some advisory troops begs Iran to move in. Obama needs to send Hillary home with a box of cigars for Bill. And while he's at it, he mise well paint a bull's eye on Air Force One. The score is Obama 3 Arabs 0. I feel that the game is only pausing for the half time activities. Got Stingers?
Copyright 2012 by Jim Brubaker
Normally this blog deals with the coming Great Depression so foreign policy is a bit of a stretch. We have just helped kill the leader of Libya. Not much of a big deal, but we did it so these people could have Democracy. That country is totally devoid of any social institutions so there will be no Democracy, the guy with the most bullets will be the new President. Of course if your currency becomes suddenly worthless, you are pretty much in the midst of a depression. Life in Libya looks rather brutal for the foreseeable future.
We are getting out of Iraq. Great idea; Christmas comes early for Iran. There is turmoil in Palestine, Jordan and Egypt; Israel could go bananas and nuke Iran or vice versa.
Oil ties the US to the Middle East; water ties the Middle East people to the land. The real key is not oil, but rather water. Iran and Turkey, China and South East Asia, are building dams that could start a war over water; the hell with the people downstream.
Then in Pakistan, we send a woman (Hillary) (where women are considered property) to tell them how to run their government. Great for women’s lib, but who are we kidding, the Pakistanis would like to chain her up in a basement and teach her what the slang term "airtight" means. These people are not going to listen to a woman, more to the point; they feel insulted having to deal with her.
The US press is selling their readers this "goodie two shoes" idealistic policy of spreading Democracy to the world. The reason we lost in Viet Nam, was because the average farmer could point to his family and land, but he could not point to Democracy. Democracy does not come from the masses who have nothing, but rather from those who have a position of wealth that needs to be preserved. Democracy is not an option for the Middle East; they have always taken what they have wanted. Might is right.
U.S foreign policy towards Libya has been very irresponsible; we can't shoot first and then think about it. Getting rid of Qaddafi accomplished nothing. His supply of stinger missiles is now on the auction block. Leaving Iraq without some advisory troops begs Iran to move in. Obama needs to send Hillary home with a box of cigars for Bill. And while he's at it, he mise well paint a bull's eye on Air Force One. The score is Obama 3 Arabs 0. I feel that the game is only pausing for the half time activities. Got Stingers?
Copyright 2012 by Jim Brubaker
Monday, September 03, 2012
Slow Money Vs Fast Money
Believe it or not, there are two types of money. It sounds implausible, but it’s true. If you live paycheck to paycheck, you have “fast money;” it’s here today and gone tomorrow. “Slow money” is the funds socked away for that rainy day, years in the future.
Enter someone like Bernie Madoff. His investment program was a Ponzi scheme. The money he was using was "slow money,” investors didn't need for several years out. Rich people are rich as long as they don’t spend the money, which goes without saying. Notice though, Bernie’s rich investors were rich up and to the day the scheme was uncovered, they didn’t get poor slowly over time--it happened immediately. What did him in was a bad economy. His investors needed funds to cover losses. As a group, their increased withdrawals, was the monkey wrench that fell into the gears. Bernie’s “slow money” accounts were turning to “fast money” obligations before his eyes.
Our government “borrowed” the 2.6 trillion in the Social Security trust fund and spent it. Then Congress purloined 4 trillion to cover the housing mess and it's gone. Then there is that 8-10 trillion in IRA savings that we have loaned indirectly to the government, spent also. So long as everyone doesn’t decide to retire at the same time, there isn’t much of a problem. The trouble is, that is just what is happening. People unemployed and 62 years old, are not going to wait until age 65 to 70 to retire and they are cashing in their IRAs. These people are no longer paying taxes; they are now receiving tax money (i.e. Social Security benefits). The government’s financial pain is further exacerbated by high unemployment, low tax collections and legislative fiscal irresponsibility.
It's becoming more obvious that the present system cannot last without reducing the massive government spending. “Kicking the can down the road” or “Rearranging deck chairs,” both point to that moment in time where things get real. It’s a little like promising to quit smoking. Everyone quits eventually--- For most, it’s not a planned event.
Our national debt is comprised mostly of “slow money” borrowed from financial institutions worldwide. With the deteriorating economy and the higher than normal redemption of funds, the government needs to borrow more, or an option not available to Bernie, print more dollars.
People are beginning to dip into their “slow money” accounts. As long as the money wasn’t needed, the government had no problem. Everyone assumes that FDIC insurance is to protect the depositor. It isn’t, it’s there to keep depositors from withdrawing their funds from the banking system in times of financial stress. Our government has already borrowed and spent a great deal of this bank money and needs access to the banks in order to borrow more.
Lack of "slow money" was the problem that Bernie Madoff faced. The system works perfectly as long as more is being deposited than is being withdrawn. All of this “slow money” that the government borrowed and spent will suddenly turn to fast money obligations. How do you pay back 17 trillion when you are borrowing an extra trillion a year to add on to it? Just like Bernie Madoff’s clients, you have a piece of paper stating how much you have in your accounts. It isn't a cash balance, its an IOU. The money was spent.
Reality is when your wife puts 170k on the family credit card. There is a complete disconnect when the Federal Government puts 17 trillion on plastic. We don’t have to pay that one—do we??? Bottom line, your retirement funds paid for the party that is still in progress. Learn the full particulars sometime after the next election.
Copyright 2012 by Jim Brubaker
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