Thursday, January 31, 2013

The Pipe Dream (Reposted)

Here is a little something reprinted from March 9, 2009 that might help span the gap for my writers block right now. I should have something new by Sunday.

The government is going to stimulate the economy and create jobs with this multi Trillion dollar plan. It’s a little like the Marshall Plan in reverse. We are going to get the money before the disaster, not after it. The reasoning is, we get the free martini and the deck chair to sit in. Logic states that if you’re lounging in a deck chair enjoying the band, you can’t be standing in line to board the lifeboats.

Giving hundreds of billions to AIG is not going to increase jobs or stimulate the economy. This company is on life support, and we don’t even know why. This has to be a bill for previous consumption (financial insurance bets). We didn’t eat the meal, but we get to pay the bill. Add insult to injury, we have massive layoffs.

Interestingly there are two different types of layoffs. In the private sector, the layoffs are the result of a lack of consumption, car sales are in the dumps and real estate has gotten too real. In the government sector, the layoffs are a result of decreasing tax revenues, teachers and police. Notice if you’re in the latter group your workload increases and your wages don’t. It might be a good thing, less education makes for dumber criminals.

We couldn’t afford to spend the money when times were good and now we can??? It doesn’t take a pencil and paper to figure out that we have been shorted a couple of cases of whiskey, on this order!

The government isn’t creating new long term jobs. These jobs have to disappear when funding stops. Of course when you think about it, four years is a long term job in the government sector.

We need to invest in the private sector and focus on building items that people want to consume. Give that a thought or two. Look at all the business expenses the owner has to outlay for pension, health care, unemployment and taxes before he even hires one person. The government already has its hand in your till.

A lot of new entrepreneurs in California are starting pot farms; there are no government startup costs, fees or taxes. Plus the state offers a free vacation plan if you get caught.

A world war seems to have pulled us out of the depression in the 1930’s. The government was buying from the private sector, tanks ships planes and armaments. The private sector needed employees to fill the government order. So if we carry this forward to today, a government contract to purchase four million General Motors vehicles could be a hell of a stimulus to the economy. Give the cars to the people that didn’t act financially irresponsible. It’s their savings that the government is spending anyway.

Of course, it’s probably not in the cards and that's what a pipe dream is all about; there is no realty, just a lot of smoke and government mirrors.

Saturday, January 19, 2013

Inflation, Here Is How It Works

Picture a pie cut into 4 slices. The whole pie costs one dollar and each slice is 25¢. For simplicity, figure that the baker that made the pie had zero costs and the dollar represented his profit. 25¢ went for taxes, 25¢ went to savings, 25¢ went for groceries and 25¢ went for rent. There are 4 slices of pie that others are now entitled to. There is just one problem; the government needs 50¢ to keep the country moving so it prints an additional 25¢. There are now 5 claims for a slice of pie and only 4 slices available. This is what inflation is all about. The new price for a slice of pie is now about 6 cents more or 31¢ a slice.

This year the baker sells a whole pie for $1.25. Now 31¢ goes to taxes, 31¢ goes to savings, 31¢ goes to groceries and 31¢ goes for rent. Naturally the government will probably print an extra 31¢ to balance the budget. This can keep going on for a long time.

The basic reality here is that government is way over budget and not charging the taxpayer enough in taxes. In this case here, the baker pays one fourth of his income in taxes. To realistically balance the budget, he needs to pay 50 percent. This tax rate would be unacceptable to almost everyone.

Then, politicians create a new wrinkle like health care. The price of each slice cannot increase in price. Picture the same pie now cut into 8 pieces and each one is 25¢. The cost per slice is constant, the number of slices isn’t. Notice that to buy the whole pie, it now costs 2 dollars. If a person wants the same amount of pie, it now cost 50¢.

Then we have financing. Normally in order to raise additional funds to run the government, the Treasury issues bonds which savers purchase. The trouble is, not enough bonds are being sold at 1% interest. So the Federal Reserve steps in and purchases the bonds for currency printed. This theoretically is a zero sum game, the Federal Reserve can come in and redeem the T-bond and take the dollars back out of circulation whenever it deems it necessary. Or why bother? -- With 6 percent inflation and 1 percent interest on the bonds -- they are virtually worthless in 30 years.

Then there was the housing bubble collapse. Congress bailed out Fanny and Freddie and kept all banks solvent. The homes were sold for real cash. The new buyers were supposed to pay back that borrowed money over the 30 year period of the loan. The repaid loan money would be cash that wasn’t available for consumption. That didn’t happen, printed dollars paid off the delinquent loans with no time delay. A tremendous amount of additional currency, available for consumption, was put into the economy.

Then there was the TARP money and the GM retirement fund bailout. 40 million on food stamps and Obama care is coming.

What all this boils down to, is that an awful lot of virtual dollars have been spent on consumption trying to support an economic way of life that we cannot realistically afford to pay for. When the country has borrowed all of our savings and is paying us one percent interest and printing more dollars to pay the new bills, we end up with a smaller slice of pie. The person with no savings and a ton of debt has nothing to worry about, in fact they’ll enjoy the ride --- And that’s about everyone under the age of 45. The people who have saved their whole life for a nice retirement are the ones that take an inflation hit on their savings. The slice of pie that everyone is counting on for retirement may be considerably smaller than expected.

Bernie Madoff couldn’t print dollars, so when bad times came, he couldn’t deliver the interest rates demanded and his empire collapsed. The real peculiar thing was that these people that invested in his enterprise were rich up until the moment they found out that they had been had.

The phrase “Let the rich pay their fair share,” reminds me of another fool in exactly the same situation 224 years ago, that said “Let them eat cake,” neither suggestion offers a real solution. We won’t lose our heads over this, only our dollars in the bank.

As an aside, here is a cartoon from November of 2008 that still has a chuckle in it.

Copyright Jim Brubaker 2013

Monday, January 14, 2013

The Fall of Great Governments in History

From time to time "Anon On A California Mountain" leaves something in the comments section that IMHO deserves more exposure. Hope you like it.

Don't you find it amazing that there isn't a government on this planet that has a logical approach to finance, business or its country's economy? That there is not one government that operates on sound fiscal policy, has reserves, a surplus of cash, and spends less than it makes (from taxes or whatever)?

There is no model to aspire to.

History just continues to repeat itself, or rhyme. All of these empires, dynasties and countries on Earth that have amassed such great power, wealth and influence have all gone by the boards: Babylonia, Egypt, Chaldea, Persia, Rome, Portugal, Ottoman, Holland, Spain and England, to name a few.

Do you think Japan, Europe, the USA or China will NOT have the same fate as their predecessors? Current facts and events seem to point to the reality that they will.

Some empires faded due to war, conquest, pestilence, weather changes, etc. Yet, many faded due to the mishandling of finance within the government and poor oversight and/or proper support of their economies. And over-reaching and meddling in the private affairs of its citizens (aggressive taxation, regulation, etc.).

Man never seems to learn his lesson, does he? These civilizations have just faded to dust and blown away, and then new ones appear to follow the same cycle of action.

Some start out with excellent tenets. Like the USA: small government, Bill of Rights, Constitution, no income tax, support of a free market and entrepreneurship, property rights, rule of law, etc. Yet, somehow they get corrupted or altered and go by the wayside.

It is not that those in the past, or we in the present, didn't or don't have the basic knowledge or technologies to accomplish a strong and logical infrastructure that fosters creation, growth and longevity. We haven't lacked in the sciences or industry. I think we've been weak in the humanities to some degree in that science and technology have moved forward in quantum leaps, but the human studies have mostly stood still, as if frozen in time.

I believe that the human mind, human behavior and the human spirit are the areas that are least understood and form the common denominator behind the fall of most all of our past attempts at civilization. I think the answers lay in these areas... not in the areas of political science, quantum physics, math, medicine, economics, etc.

Note: I didn't include psychology, psychoanalysis or psychiatry above, as none of them are sciences (per definition) and neither has made any true inroads towards the goal of man understanding himself. They were all quickly converted into government control mechanisms anyway.

Man has demonstrated that he is capable of cooperation, creativity, production, prosperity, peace, etc. yet there is a virus or series of viruses that tend to break these virtues down over time on a micro level, which then does everyone in on the macro level.

However imbalanced, Man is on a slow but positive trajectory of evolution and progress. He's been going through governments and empires like a persistent inventor (e.g. Edison and his light bulb) in an attempt to get it right. He's had his dark moments and his bright ones.

Looks like we are closing the book on a bright period and ending off with another dark period.

The most important points are to somehow be prepared for whatever comes, as a few more of our empires come to their end (i.e., how do we preserve our wealth? have access to clean water and food and shelter? maintain or create quality in our lives?, etc.) and most importantly to be building a new civilization now, based on all of the positivity and knowledge of our past, so our kids are offered a new path to prosperity.

Copyright 2012 by Jim Brubaker

Tuesday, January 08, 2013

Precious Metals Vs Government Currency

Throughout history, silver and gold were the international currencies of trade. The historic ratio between the two metals was 16 to 1. Governments rose and fell, but either of these two metals buried in the back yard, preserved your wealth.

The odd thing about government currencies is that they start out strong and then end up being debased by the government. What happens is that a different metal is substituted for silver and gold with the implied value. If you were around in the 1970’s silver coinage disappeared in our country. There is a saying that “Bad money chases out good money.” In 1964 the US mint took silver out of our coins. It cost more to buy the silver than the coin was worth to produce. Then in 1982, if you collect pennies, you’ll notice that there are two different types of pennies, copper and copper clad. The price of copper had risen to where it was too expensive to mint copper pennies. The thing to observe here is that metals act like a barometer for the currency in circulation.

The present government can print all of the dollars they want to print, and the price of gold and silver will tend to reflect it, in their “rise in value.” It’s like being in a row boat and someone chops a hole in the bottom of it. The water is not rising, the boat is sinking. The apparent rise in the value of precious metals can be attributed to two things; the number of people wanting to buy it, and the supply available. That seems so obvious, but it really isn’t. The world population has doubled in the last 50 years. (Double click for a larger view)

There are twice as many people desiring precious metals. So the actual supply has been cut in half. Second, people have a lack of faith in paper money. Usually when a currency falters badly, owning gold is curbed or restricted. No government wants their currency dumped for precious metals. They will halt it immediately.

The world’s currencies are a mess. They kind of convert using gold and silver. If you do a bit of googling, you’ll find out that the world has about 40 billion ounces of silver and about 5.1 billion ounces of gold. So if we have 7 billion people in the world, there is enough silver for everyone, but not enough gold. Then if we bring in the precious metal Platinum, there are only 186 million ounces of it.

Let’s look at some historical ratios:
Silver trading to gold 16:1
Silver at $32 implies gold at $512
Gold at $1700 implies silver at $106

Silver trading to Platinum 50:1
Silver at $32 implies Platinum at $1600 and vice versa

Examine the total supply of precious metals:
Supply of silver to gold 8:1
If gold is fairly valued at $1700 then silver should be $212
If silver is fairly valued at $32 then gold should be $256

Supply of gold to Platinum 27:1
If gold is fairly valued at $1700 then platinum should be $45,900
If platinum is fairly valued at 1600 then that implies gold is only worth $59

Mull it over in your mind and about the only thing you can really agree on is that Platinum is way under priced. There is enough silver and gold in the world, where those buying and selling will determine the price and no one can really corner those markets. Probably three quarters of the world population doesn’t have $500 in savings so a one ounce gold purchase is out of the question--silver maybe. But we do have to realize that the doubling of the world population has probably doubled the demand for precious metals

At some point in time world governments are going to have to consider platinum as a medium of exchange in world markets. That’s not saying that they couldn’t miss the bus. The private sector will pick up on this even if they don’t. You can’t print dollars forever and not expect inflation. (Double click for a larger view)(Don't click if you are already depressed by what you see)
Look at the increase in the number of 100 dollar bills in just the last 10 years. I have to laugh when the reason given for doing so is to stave off deflation. It reminds me of the drunk clapping his hands in Central Park to keep away the elephants. When told there were no elephants in Central Park, he replied “See it works!” Any way you look at it, too much money is being printed worldwide to solve present financial problems and it just isn’t going to work. Some form of precious metals conversion will have to be in effect to facilitate world trade.

Another thing to realize is that silver has “become more valuable.” 100 oz. bars of silver are now worth $3,000. I was OK with a $300 dollar doorstop, now I feel like taking it to the bank for safe keeping. Its the same damn doorstop, but it's worth stealing now. I didn't do anything to it to make it worth more.

Platinum appears to be the biggest bang for the dollar. I bought gold when it was $300 and considered worthless as an investment. It’s still worthless as an investment, because it pays no interest. I can truthfully say the same thing for my savings account right now. Converting a portion of your gold holdings to platinum is not a bad deal right now, you get money back on the exchange. Platinum is cheaper than gold. It’s not an investment; it’s a bet that the government won’t stop printing dollars. And of course, there are only 186 million ounces of that precious shiny metal left (subtract what I finished buying yesterday).

Here is what the Platinum bars look like:
Expect to pay a $24 premium on the bars and a $48 premium on the coins.

Or you can play the game the Congressional way.

Copyright 2012 by Jim Brubaker