Saturday, January 24, 2015

Currency Adjustments (The Collapse of the Euro)

Switzerland gave no notice when it stopped supporting the Euro. People were surprised that the message wasn’t telegraphed like the Federal Reserve does. Think about it for one moment. Why give any advanced notice? England in 1967 denied that it would devalue the Pound up to the minute it did it. We went off the gold standard in the blink of an eye. When it comes to currency, countries are ruthless.

Right now, we probably have several European countries printing the first of their new currency. A new currency could take from about 3 to 8 months to produce before any announcement is made. Notice one thing, this all has to happen under extreme secrecy. It will be a sudden and swift conversion from one currency to another. Figure a three day weekend with a holiday sandwiched in so the currency can be distributed to the banks.

Europe is going off of the Euro. It is a little like a divorce. Each side thinks their significate other has no idea of what is about to happen. The trouble is, the shoe doesn’t fit any better for you than it does for her. I would hazard a guess that the following countries are now printing a new currencies; Spain, Portugal, Italy, and France. This is all about the failure of Euro.

Travel on to oil related problems, and any country that has an economy supported by oil at $90 a barrel will soon repudiate its debts and issue a new currency. Of course the basket cases like Venezuela, Greece, or Nigeria, are more likely to witness a regime change first and a new currency second. In this case you lose your life savings.

What we will be facing is the rise of dictatorships where one individual can get things done; replacing a Democracy smothered in bureaucracy. Adolf Hitler’s rise to power wasn't so surprising, Germany of the 1930's was today’s Greece, smothered in debt.

The European commonwealth is going to buy back over a trillion Euros as a Quantitative Easing package. They looked at what the Fed did in the US and it appears to have worked. The trouble is, the effect was cosmetic. It moved future demand into present demand. Politicians that manipulate the financial system too much, will end up losing the confidence and support of their citizens.

At some point in the future, gold silver and platinum will have to be a part of any world monetary system. The present system is a political solution to a financial problem. Increasing the amount of currency that a government can print to pay the bills, over time loses all perspective. You end up paying more for less. Savings is defined as the option to consume later what you produced today. Printed dollars are the product of zero production, but they spend just as well as those that were earned and saved.

Look for France to exit out of the Euro in the coming year, followed by Greece, Spain and Portugal. The reason I picked France to be first, is that there used to be a saying that the French devalued the French Franc every time they changed their underwear. Let's give them an excuse to change their underwear.

Monday, January 19, 2015

They Have Tiped Over The Apple Cart

The financial fiber of the world economy got a jolt when Switzerland announced that they would no longer peg the Swiss franc to the Euro. They had been buying Euros to support the parity by printing Swiss francs. The volume of money involved forward into the future was a blank check and they didn’t like the concept. They already owned 480 billion Euros that they didn't even need. I have often stated that the Euro will die, only for one reason, the politicians cannot print Euros. Guess what, they are about to print Euros over someone’s dead body and it doesn’t look pretty. Gone is the Swiss backing of the Euro. Everyone wants to hold Swiss francs, but spend Euros. Bad money always chases good money out of circulation.

The low interest rates around the world are beginning to take a toll. Very low rates tend to accelerate the miss allocation of resources to nonproductive ends. Normally, interest rates play a big part in whether a project will get built or not. Very low interest rates force the flow of cash to investments that pay a higher return. So if the banks are paying 1 1/2 interest and the stock market returns 12% guess where money is going? The current chicken coming home to roost is oil exploration investments. Canadian tar sands which has the consistency of very thick molasses (after heating) can be pumped through a pipeline if someone thinks that it is a good buy at $100 a barrel. Whoever financed the tar sands project is probably standing at a freeway exit holding a cardboard sign saying, "Will work for food."

Some people are claiming that the economy is out of the woods now because there isn't the hint of a recession. I’d like to point out to them that a recession and a depression are two different animals. We are in a full blown depression and have been since 2006. A recession is an economic statistical calculation. In a depression, you have terms like Quantitative easing, high unemployment, ZIRP, high enrollment in government programs like food stamps, and extreme government waste (economic stimulation) trying to find solutions like Solyndra. We can't stop printing dollars and we don't dare let interest rates set their own level (if we expect to pay the interest on what we printed).

The real trouble right now is the trust of government, and I suggest that it is misplaced. Fanny and Freddie have resumed writing 3% down low interest, home loans. The house is way overpriced, but this will make it easier for minorities to purchase a home. Common sense suggests that if these homes were such good deals, there wouldn't be any left. Isn’t this what started the housing mess?

The government ZIRP (zero interest rate policy) stimulates borrowing and encourages people to take on more debt and consume product. Couple that with Quantitative Easing (printing money) and this is what the world is dealing with. We used to put money in the bank and talk about compound interest being the 8th wonder of the world. Now it’s all about consumption and seeing how many dollars you get back on your credit card purchases. You don't have to wait and save up to purchase what you want, you can have it now. Kind of makes you wonder, isn't this what bubbles are made of?????

Switzerland just tipped over the apple cart by saying “no” to printing more francs and the funny thing is that nobody is quite sure what will happen next. The sanctity of the Euro has been challenged by the oldest successful banking country in the world.

As a post note:

In Switzerland
Step one: Foreign depositors face a 7 ½ percent tax on Swiss bank deposits
Step two: Swiss Franc unpegged from the Euro 1/15/2015

In Denmark
Step one: Foreign depositors now face a 2 percent tax on Danish bank deposits 1/19/2015
Step two: Hmmmm

Saturday, January 10, 2015

Congressional Idiots

I had a day off from work the other day and decided to listen to a live session of the House of Representatives. The discussions revolved around taxing the rich and stemming the flight of corporations to foreign shores.

The Democrats normally pull out an example of some corporate CEO making millions while his workers make very little. You never see this “rich“ (high income earner) person being a basketball or football player who makes millions but pays very little in taxes. It is always the rich against the middle class. Did you ever notice the difference between the two? The rich don’t have to work and if you don’t work, you pay no taxes. In the process of getting rich, you pay taxes. Once you make it, you have no more taxes to pay. Middle class people have taxes to pay and if you have enough deductions to escape taxes, you’ll be classified as poor. From a basic point of view, the rich and the poor pay no taxes and the middle class is stuck with the bill. So we get a two hour Congressional litany on why Congress should tax the rich, great vote getter, rah rah, rah.

Congress also wants to stem the flow of companies moving offshore. Have you ever asked yourself the question, why all of the new startup companies, start in a garage? Answer: the government cannot control what you do in your garage. Want to start a business? The paperwork is ridiculous, not to mention the extra money needed to satisfy all of the state laws that needed to be observed. Before you even open, you have to open up accounts with the state for unemployment insurance, workman’s comp, Social security, employer tax ID and so on. They will send you forms 4 times a year that threaten you with fines if filled out wrong or sent in late. I can guarantee that you will not even comprehend how to fill out the forms unless you are a lawyer. And if you become a success, the lawyers will feed on your company as if it was dead carrion. No wonder manufacturing has moved to a safer less restricted havens.

You really don’t have to think too hard to realize that Congress has dug itself in a deep hole and hopes passing a few new laws will somehow change things back to the ways they were. Their approach is a little like walking down the stairs with both shoes untied. They know where they are going, but its going to be a little different this time.