Sunday, March 17, 2013

Muddled Thinking

A lot of what we are currently experiencing has to do with solutions to problems that are not well thought out or the solution has unintended consequences or ridiculous expectations.

You read the paper and find out that home ownership is down. Or that money is on the sideline in the stock market waiting to jump in. Let’s examine it another way. Every home in America is owned by someone, and not everyone is responsible enough to be a home owner. Every stock or bond in existence is owned by someone, just like every ounce of platinum, gold, and silver. The idea that people are buying means little unless they are selling a lot of something else or borrowing to do it. If there is too much supply, prices go down. And vice versa, if there is too little supply, prices tend to go up.

In real estate in California, the supply is drying up in the rich areas. The house that you paid one million for in 2008 is now selling for 700k and you aren’t about to put it on the market at a loss. The current very low interest rates will sustain the 700k price, but not the one million dollar one. Plus, houses are not really appreciating. The current low rate implies higher rates in the future (especially if government funding of home loans stops). This could in turn affect the amount of house one could afford buy. The max monthly payment in relation to household earnings determines housing prices. This isn’t 2007 where people were lined up to buy a home with “liar loans.” Housing prices are not jumping through the roof, just a gentle trickle of people that feel the need for home ownership (the nesting instinct). Question, what makes this real estate market different from that of 2007. Answer government financing.

The phrase “tax the rich,” got some real meaning this week. Cypress is about to tax savings in the bank. 9.9 percent of funds over 100K and 6.7 for funds under that. It raises the question, “Is holding currency a better bet than money in the bank?” And of course the answer is yes. Look for Spain and Italy to have a run on the banks. I would expect people to convert the currency to gold; rats love to make nests out of paper, which could be worse than any tax. Printing currency has the same effect as a tax, but takes a couple of years to take full effect; this is faster and prevents flight or conversion of bank held dollars.

In our country, the Federal Reserve printed currency to cover bank losses. Cypress has no central bank that can print currency to guarantee their banks. The European Central bank could be considered the lender of last resort, but they are not a bottomless money pit. Reality sets in for them next Tuesday. Their two biggest banks fail or they rip off the retirees. This taxing ploy is a little like using a lit match to find a gas leak. You’ll find the leak, and also make the nightly news.

Congress wants us to grow corn and turn it into ethanol to put into our cars. We use to be the top of the food chain, and now automobiles are? Talk about worthless legislation. The Federal tax subsidies insure that this program will continue. One problem, the gasoline producers don’t have to sell their product here, they can sell it overseas without adding ethanol. Do the math, jump through hoops or sell to a straight shooter like Europe.

There are motions afoot to link gasoline taxes to inflation. The state instead of charging “X” tax per gallon, wants to charge according to the sales price charged for a gallon of gas. If our government is going to print dollars, don’t expect city and state to sit idly by and watch their purchasing power from tax revenues decrease.

What can we deduce from all of this? Legislative controls only change our approach to the problem; the issues that caused it have not gone away.

Cypress will be an interesting event to watch unfold. How can Cypress socialize the banks and penalize the people who saved all of their life? If it teaches only one lesson, gold and silver have no government to answer to; financial freedom is money in the bank only as long as the government says so. Where too from here? Good question.


Anonymous said...

This is totally disgusting. They call this a bail in, and not a bail out. All these names give me the spooks. This is nothing more than robbery.

The guy from and who is very accurate with this market calls, is saying this will be the next catalyst for the market to fall and sell off.

dearieme said...

Cyprus may be in one of those fixes where all the "solutions" are awful. It seems that the solution chosen is one that's intended to suit German politicians.

I don't much like the situations that the US and UK find themselves in either. The problems have been reasonably clear since, what, 2008? But there's little sign of any intellectually serious attempt to deal with them. I understand that Canada, Sweden and NZ have each got themselves out of parlous positions in the last two or three decades, but they presumably didn't need to do it against a background of much of the rest of the world being in trouble too. The Eurozone, Japan ... Where will it end?

Jim in San Marcos said...

Hi Anon 10:55

"Disgusting" is the proper classification of this event.

From what I read, it looks like the one bank that could fail is too big for the government to bail out. How that is possible eludes me.

The tax on savings looks like it might go through. The options presented were to not do it and trash the economy with a bank failure or save the bank and the economy survives.

I wonder what happens to the bank after they get the EU funds? If everyone withdraws their savings, the bank would have no money left and cease being a financial institution.

Will the poor and the middle class ever trust a bank again?

Jim in San Marcos said...

Hi dearieme

Iceland comes to mind as a country that told the world to "go fly a kite," and things are doing great over there now.

We need to reward failure with bankruptcy not government bailouts.

As you suggest, it doesn't seem to be in the cards. The US and Europe didn't save for a "rainy day," and the bills are coming due.

I have the same question as you, "Where will it end?"

dearieme said...

Jim, here's a link to rather a good blog post on the subject.

Jim in San Marcos said...

Hi dearieme

Great link, thank you for posting it.

There is one item in it that refers to money laundering "dirty Russian money," that caught my eye. These two banks are too big for the Cypress government to bail out, but the fact that they are laundering money gives me pause to think something isn't right here. The banks have been caught doing something they shouldn't have been doing in the first place.

Power To The People said...

Yes, Iceland is the way to go - Power to the People as John Lennon and Yoko Ono sang.........

By the way, Cypress is a tree and Cyprus is a Country (Countree)

Rob In Nova Scotia said...

The EU kicked the can down the road by kicking dirt in Russia's face. Hope those folks have lots of life insurance as they tend to play for keeps in Moscow.

Jim in San Marcos said...

Hi Rob

I would imagine that this could start a bank run in other countries. The first thing our banking system did when we had the Savings and Loan fiasco in the 1990's was to guarantee all deposits no matter how big. It was those deposits that could do the most damage to a bank if they were withdrawn.

It is so easy to transfer money electronically. Tomorrow could be one of those "Shoot yourself in the foot" days for Cypress and the Euro.

Cypress just guaranteed itself an instant depression. Could be a good month for buying gold and shovels.

Rob in Nova Scotia said...

It is going to be interesting. I am still amazed at how those in power can continue to keep all the plates in the air for this juggling act.