Monday, August 21, 2017

The Silence before the Collapse

Federal Reserve debt 4.5 trillion, national debt 21 trillion. 2.7 trillion in government bonds to Social Security. Figure about 30 trillion the government has borrowed and issued paper for. Then spent it.

Imagine that you have 10 billion in the bank. What you need to realize is that you have no way of realistically spending it. So, in this case, we have a person well off, that doesn’t need the extra dollars in his account. From an economic perspective, the money does not exist, because there is no opportunity for the owner to spend it, the sum is so large.

This 10 billion cash savings from one person represents a small portion the future buying power of deferred consumption. Count the total amount of funds involved for all the rich, the amount could be quite substantial. Since the inclination to spend it is absent, inflation remains low and plenty of product remains on the market. The extremely rich are holding on to dead money that will never enter the financial system to generate inflation. So, the government is happy with the rich getting richer, no appreciable inflation for just that reason.

Naturally the drive to get richer involves the rich as a group to suck more money into their grasps. The government loves the idea. A real millionaire in 1960 could buy a house and a car every year on the interests of 30,000 generated a year. In today’s market, 10 million dollars in the bank might generate 30,000 a year and might buy half a luxury car. To be wealthy today, you need to be a billionaire. Cigarettes have gone from 22 cents a pack in 1964 to 100 dollars a carton today.

This pretty much explains why schools don’t offer much education that revolves around the concept of inflation. Even if they did, it would do no good. Everything an 18-year-old wants to buy has always been that price. They have no historic memory of price. The funny thing is, for the super-rich, it is the same concept. Even though one zero drops off of their buying power because of inflation, they don’t see it. But in reality, the 10 billion has lost 90 percent of its buying power over the last 20-year period.

The cumulative savings in this country for retirement have increased dramatically over the last 10 years. An awful lot of individuals realize that they didn’t save enough to retire comfortably and are saving a lot more. They are now working longer to make up the difference. This too, decreases consumption and keeps inflation lower that it should be.

Some people argue that this game can go on forever. And I do not think it can. From 1960 to 1990 we lost a zero on buying power vs money in the bank. Then we lost another zero from 1990 to 2010. The thing to notice is that the gaps are getting shorter in time. I think it foolish to say that the next zero drops off in 2020. The progression of 30 years to 20 years to 10 years makes too many assumptions.

Once the rich realize that they are losing a zero (90% of their purchasing power) on their net worth over a 10-year timeline, there will be a very significant switch in asset allocation.

The investment model has to change. Compound interest is no longer the 8th wonder of the world. The rule of 72 where you divide your interest rate at the bank into 72 gives you the time it takes to double your savings. That kind of sucks when one into 72, returns 72 years. Compound interest at that interest rate will not make you rich.

So, with today’s back of the envelope calculation, 100,000 in the bank for 10 years will lose one zero in buying power. 10 years from now, you’ll have the purchasing power of $10,000 to $20,000. You are looking at 9 percent inflation per year. In reality, the bank should be paying the inflation rate plus 2.5 percent on savings.

You might disagree with everything above, but there are two things we can agree on. If there was a shortage of funds to borrow, interest rates would have to rise. And you cannot force people to borrow money. What you can conclude from that is there is a hell of a lot of dollars looking for an investment and surprisingly they are satisfied with the interest rate offered. Economically that puzzles me.

The other factor that bothers me is the spread between junk bonds and Treasury’s. Its 4 percent. It portends that every loan transaction is a viable and fungible event with a very high bond rating. More than likely, an older person is looking for the highest rate of return to keep from exhausting his retirement fund. The poor guy probably thinks triple D is like a bra size, very desirable. The small spread implies that there is very little risk in the market.

We are at a point where we have tremendous wealth and tremendous debt and it is kind of a zero-sum game. People are looking for a stock market crash, but it could be different this time, it could be an electronic credit and debit card crash that the structured internet cannot handle.

This could play out in the coming months. October is the month to watch, that's where the action has been in the past.


dearieme said...

"there is a hell of a lot of dollars looking for an investment ...": that's presumably why asset prices are so high, especially equities.

"and surprisingly they are satisfied with the interest rate offered": short of looking abroad, there's no choice. The market offers what the market offers, even when the market has been jiggered by the Fed.

Talking of high asset prices .......

Unknown said...

Hahaha ... desirable like a triple D bra size!

I Have missed this site. Actually got caught up in other things, and have been absent some number of years.

I have some back reading to do to catch up, I see. Love it that you are all still going! I came here first in 2008, I think.

It is good to be back!

Jim in San Marcos said...

Hi dearieme

Thanks for the link.

I've got a few I could post for LA, but it makes my blood boil to see someone paying those prices for absolutely nothing. In most cases, they are buying it to sell to someone else at a higher price.

Take care

Jim in San Marcos said...

Hi MJ S1213

I am glad you found the site. I've lost a lot of readers to old age. I surmise you are not one of them. To cite the obvious, dead people don't write, but I digress.

Welcome back. Enjoy

I haven't been writing as much, the economy is in kind of a pause mode for the last 4 years which has me dumbfounded. Plus I don't write just to talk. You can probably count on me for at least two articles a month from now on.

The "Wild ride of the century" could be about to start. Grab a seat and some popcorn and enjoy.

Take care

Unknown said...

I think you are correct about the wild ride of the century thing. I am really worried ... and that is why I am back, actually.

It is time to stock up on essentials, pay off some debts if possible, and get ready to hunker down for a month or two if / when things get rough.

I hate to be a downer, but it feels ominous to me, and most people I work with and see on a daily basis are completely oblivious.

I am positioning financially for a financial train wreck, but cannot seem to get so many other people to become aware that it is even possible.

This Fall looks bad. It has been years and years in the making, and you are still like 'Babe Ruth pointing to the stands' calling this thing out so many years ago. It is a slow motion train wreck.

So ... I am back here to at least read this blog, because it makes me feel less alone.

I live in Illinois, to provide a point of mental reference point to the kind of idiots that surround me where I live hah

Thanks for staying alive ;)

Unknown said...

Oops ... "point of mental reference point".

Maybe I should apply for work at the Illinois department of redundancy department?

Jim in San Marcos said...


Sorry to hear you live in Illinois. That state is in bad shape. I always laugh when a politician raises taxes expecting more new revenue to flow in. The good thing about not having any money flow into their treasury, they don't have to hire people to count the non-existent dollars coming in.

Has it gotten any better with the police and ambulances? I heard they had their credit cards yanked and now they have to pay cash at the pumps for gas.

Unknown said...

The situation has not improved, but at least seems to have stabilized currently, though still at a pretty rough level. Ambulances and police in some areas I believe are still needing to pay cash for gas, and service work. Of course, they hide these things in Springfield, which remains well funded, but other areas - particularly in the poorer areas of Chicago -- are suffering.

I work for a healthcare group, and I know for a fact that the state of Illinois is 3 million behind payments for the group I work for alone. If you multiply that by all healthcare groups, hospitals, and clinics in the state, not counting the VA ... then Illinois is very far behind just on healthcare payments to providers.

At least after the recent budget deal they brought the lottery back ... which I play, admittedly, but I have always considered the state lottery a 'tax on stupid' hah

Unknown said...

My buddies and I are making bets on which state will fail first: Illinois, or Connecticut. There is also Puerto Rico to bet on also, if it becomes a state....

Unknown said...

Ugh. Update ... republican governor Bruce Rauner just signed a law making Illinois a 'sanctuary state'.

We cannot afford this. We are broke already. What is Mr. Rauner thinking?

IS he thinking? *crickets*

Maybe he is thinking illegals will still pay sales tax? That is the only positive thing I can figure....

munch said...

You write that if you have a billion dollars in the bank it cannot be spent by you and it is dead money. Of course that is not true.

Once you have enough money to buy the things you want, you invest the remainder. you make every dollar a tireless worker making more money for you. Buffet invests. If you are not interested in making any more money, you collect art or engage in charity. The money always works.

Poor people think of money as something only to spend. I once read a car review for a Ferrari where the author wrote if you make 70K a year you would spend 35K for a car without question so if you make 2M a year you would spend 1M for a car. It does not work that way - someone who makes 2M does not increase spending on each category of spending proportionally. They spend a little more and they invest the great surplus because having money working for you is better than employees (no bitching or sick days and the money turns over 100% of its production to you keeping nothing for itself).

Jim in San Marcos said...

Hi Munch

We agree, but the defining of terms is where the problem lies. Spending and consuming product is where money is redeemed for product. A billionaire is not consuming any more than most people.

The accumulated dollars in the bank may be invested in whatever, but they are not being used for consumption. It is the spending of those dollars earned in consumption that leads to inflation. My point was that if the rich get richer, it doesn't really affect consumption. From that premise, it is like a sponge soaking up excess water, it doesn't contribute to inflation. The dollars never hit the consumption market.