The Great Depression of 2006

The Tea Leaves Are Misleading

2012-01-16T14:23:00.000-08:00

Unemployment is down or just maybe these people have exhausted their benefits and dropped off of the statistical charts. Consumption has picked up and maybe for the wrong reasons; immediate gratification feels better than the savings rate reward of one percent interest offered by the banks. You want to put something on your credit card, go ahead buy the Wide screen TV and pay 28% interest on the unpaid balance. Want to buy a car, there are fog a mirror loans everywhere, but the interest rates can be a little dicey.

The real question is what do we do with all of the people that were associated with the housing industry? Getting a job after being on unemployment for two years is not an easy task. At that point, reality and frustration become a part of your day to day existence. Unemployed and no job? Go to college or trade school and get that degree with government loans. If you are 62 or over consider early retirement.

Want to buy a home and finance it through a bank? Your name had better be ~~John D Rockefeller or JP Morgan~~ Warren Buffet or Bill Gates. The 20 percent down mortgage is still available. Nobody had 20% to put down in the bubble years and of course everyone that ever wanted a house bought one or two. Now it’s a real effort to sell a home. Of course Fannie and Freddie are still selling homes. Rumor has it; your signature is all the down payment you need.

The number of foreclosures entering the market this year range from one to three million depending on the source. Then there is also the phantom shadow inventory. If you talk to a Realtor, now’s a really good time to buy a house (loosely translated, “I haven’t had a sale in two years, am starving and six payments behind on my Mercedes”). Of course if you planned on selling your home and ease into retirement in style, things have changed a tad.

Our government didn’t save for that rainy day and now Congress can’t even pass a budget. The argument centers around, “Can we spend what we don’t have?” The Democrats say "yes" and the Republicans say "no."

We have an election coming up and the Republicans have the solution, “Try anyone but Obama.” How either party can increase the number of private sector jobs defies all logic. Governments consume taxes; they don’t build anything for consumption.

The stock market continues to go up, our retirement investments are secure, the banking system will not collapse and the housing market is as solid as a rock;>) Our present predicament, kind of reminds me of the one legged man who sold his crutches. As long as he likes where he is standing, there is no problem.

Real Estate Investment Musings

2012-01-01T18:57:00.000-08:00

There is a lot about simple finance that ought to be taught in high school, but it isn’t. It irritates me to hear the phrase “paying rent is throwing your money away.” That phrase has sold a lot of real estate in California when in actuality renting in our area is cheaper than owning.

The basic thing that never enters the question on home ownership is the cost of money. You borrow money to buy a home from the bank. After 20 years the home is paid off and you have no more payments, Right??? You’re wrong. Take a paid off home financed for 200K. Figure interest rates at 6% not the ridiculous current 2 percent. The interest generated by 200k at 6 percent is about $12,000 a year. This is what a paid off homeowner’s hidden costs are. The cash in his home is not paying him $12,000 a year, that’s his cost of ownership plus $2,000 in taxes plus about $2,000 in upkeep. So the paid up home owner is paying about $16,000 a year for the privilege of living in that home. Divide that by 12 and you get monthly “rent” payments of about $1334 a month. Everybody pays rent.

40 years ago you might have heard the phrase, “A home is the most worthless investment you will ever make, but a necessary one.” The reason being, it was a savings plan for young people starting a family and a long term hedge against inflation. Plus it had always been cheaper to own a home than to rent. Renters paid more for the freedom to pick up and move. The real estate bubble trashed that well tested concept and replaced it with two new ones, “Real estate always goes up,” and “Buy now before you get priced out of the market.” Everyone that ever wanted a home bought one and now this bubble has collapsed leaving our government (you and me) holding the bag.

Rental real estate may again become a viable investment option in certain parts of the country. A single family home purchased for 100 times its monthly rental, should have a very nice return. For investor owned real estate, the banks want 20 percent down. A 100k home, that can be rented for $1,000 a month, will cash flow nicely. Figure a down payment of 20k plus 6k in closing. If bought right, you could take $200 a month off the top for 20 years and then after that, you’d get a retirement check of $1,000 a month as long as you own the house. One thing to realize, landlords don’t set rental rates, the market does—the higher the rate, the more months the unit sets vacant.

Don’t go to Las Vegas and buy a home in one of those 4,000 house developments that has only 4 families living in it. The current tenants are probably busy recycling the copper and appliances out of the other 3,996 homes.

Fannie and Freddie ought to be offering some good deals in the coming year. The extra dollars they give you for buying a stripped out house, you can shop Craig’s List and buy back the water heater, furnace and dishwasher.

Cash held in the bank right now is taking a real beating. As a rule of thumb, a home is the equivalent of 150 ounces of gold. Not only that, it provides shelter, is a hedge against inflation and the banks will loan you 80% of its value as an investor, more if you decide to live in it. Maybe the investment tip for the New Year is; “Buy and hold things the government can’t print.”

So in the coming year if you have an extra 25k rotting in the bank, do you buy a new car or dabble in a rental? In 10 years, your wheels will then be worth $500 or you could have had 50k in tax deductions depreciating your rental. A lot of people in this country work full time for the car industry without even knowing it. So investing 20K and waiting 20 years, do you have the time to spare? At age 65 I keep asking myself, why didn’t I buy two instead of just one when I had the time?

Common Sense Revolves Around Our Perception of the World

2011-12-27T14:08:00.000-08:00

Conclusions are not necessarily right when everything is taken into consideration. Take the premise that warm water freezes faster than cold water. If you put two ice cube trays in the freezer, one with warm water and the other with cold water, they will both freeze at the same time. Conclusion: Warm water freezes faster than cold water. In reality, the warm water keeps the cold water from freezing until they are at the same temperature.

Now if we step forward to this tax the rich concept. Proponents state that lowering the tax rate of the rich from 90% to 20% did nothing economically to stimulate the economy. So let’s raise the rates back up to what they were and increase government revenues. The thing that needs to be examined, the rich will invest or not invest depending on the tax code laws. If taxes are 90% here, invest somewhere else.

If you examine the graph below, there is really no correlation between the high tax rates for the rich in the early 1950’s compared to present returns. The graph is flat. The rate of taxation on the rich appears to have had little effect on total taxes collected. You’d expect a dramatic drop in collections when rates were dropped.

The “ad-v” refers to ad-valorem taxes; these are real estate taxes and sales tax.

Notice the red area of the graph. This represents social insurance. Figure that the new health care provision should at least double the red values. This will increase our taxes by 25%. This won’t be a tax on the rich; it will be a tax on the poor who skip health insurance because they can’t afford it without reducing their standard of living. Of course the employer pays half of that tax doesn’t he??? If you have ever worked on a commission basis, you’ll discover that you pay both sides. It isn’t hard to figure what this new tax will cost $2,000 to $5,000 per employee. Figure more than you presently pay for private insurance.

The real problem lies in the fact that Congress may believe that raising taxes during these harsh times is a real solution. Common sense suggests this should increase taxes collected. In reality, the net result will be little change in revenue. It’s a little like that house you bought that everyone told you would never drop in value. Well it has dropped quite a bit and the property taxes on your home have dropped also. Unemployed people pay fewer taxes. So at this point raising taxes further restricts taxpayer consumption (a reduced standard of living) and Government revenues drop even further.

The Democrats want to increase taxes on the rich and the Republicans are dead set against it; the only real people it will affect are sports players and movie stars. The Republicans ought to let the Democrats win this one and let them go for it, see if the dollars roll in. It’s just political posturing on both sides.

What can we look forward to in 2012? A lot of belt tightening! A lot of political squabbling and finger pointing. An election is coming up, is Obama destined to be our Herbert Hoover? Will health care pass a Supreme Court review? Will the Euro survive? Can we increase the national debt one trillion dollars a year forever. Will civil war triumph over democracy in the Middle East? Could several States in the coming year need a Federal government bailout? I don’t mean to be pessimistic, but once we get all of this under our belt, it may be up instead of down from there.

None of our problems have been solved, they have only been ameliorated (to make more tolerable). What will happen in the coming year is veiled in uncertainty. But even so, here is wishing every reader Seasons Greetings and the hope for a successful and Happy New Year.

Guverment is goin ta fix things rite

2011-12-11T20:07:00.000-08:00

Now the government is trying to save us with a newly created institution called the Consumer Financial Protection Bureau. It has a planned budget in excess of 300 million dollars. This is one of those” lock the barn door after the horses have run off,” programs. Why not use the money for the unemployed and food stamps? These people need hope, not protection.

Then the Obama administration comes out supporting a restriction on purchasing a morning after birth control for anyone under the age of 17, they didn’t want 11 and 12 year old girls buying them. Just how many pills can you buy on a 50 cent a week allowance? The average kid probably has a better chance of being hit by a milk truck than being knocked up at the age of 11 or 12.

Alabama passed a stiff law against illegal immigrants, now they have no one to harvest the farm crops. The argument being that the farmers will have to pay better wages to get fruit pickers. Are you going to buy 89 cent a pound tomatoes grown in Mexico or the $3 per pound ones grown in Alabama? Farm land could be a good buy in that state, as farmers go broke trying to survive. Of course when the law is repealed, those who invested in that "worthless land," will make out like bandits. Passing legislation is a little like playing chess; you have to think several moves out to make a buck. These legislators did their thinking and by all appearances, looked like they were performing a public service; they got rid of the illegal aliens and are about to pick up some nice cheap farmland to boot.

New York plans to raise 2 billion dollars taxing millionaires. How does this work? The rich people will move out of the state (to their summer homes no less). The amount that New York raises from taxing the rich, will be passed to the middle class in the form of lower tax rates. What happens when no new funds come in from expected sources? Is this where they pull the rabbit out of the hat? I just love magic tricks!

A new Nevada law makes it more difficult for lenders to foreclose on home loans in the state. 3 out of 5 homeowners are already underwater with their mortgages. Where is the incentive for the banks to even write new home loans in the state? Just draw a red line around the state, home prices could drop a lot lower now that the banks have been shown "who’s the boss." Visa and Master Card could be the only ones doing home loans in the state.

Then we have FHA guaranteed loans to help people in California buy affordable homes up to $729,000. To my way of thinking, someone buying a home a few hundred thousand shy of a million dollars doesn’t need financing help. Why not set the bar at a more reasonable level of 150K for everyone. That might kick the air out of the inflated housing market in California. These loan levels are a prime example of a government program that fails to protect the best interests of the buyer. The amounts are absurd, and no one questions them.

Governor Jerry Brown just acknowledged that the state of California has a 13 billion dollar shortfall this year. I would hazard a guess that the current budget shortfall and liability obligations are closer to 30 billion dollars. It’s a little like the political concept of being “just a little bit pregnant,” it’s just a small problem right now. Tell the voters the truth and get hung out to dry. His solution is to cut services even more and raise taxes. It seems logical. But raising taxes, will it bring in more revenue? Just look at all of the supermarkets in LA that have their warehouses in Nevada. They truck their product in 250 miles. It’s all about taxes that vary considerably from one state to another.

Most of these government programs are kind of like using a shotgun to trim your toe nails. They kind of, sort of work, but results may vary depending on your eyesight. Using government logic, not having to take your shoes and socks off to trim your toe nails is a labor saving plus.

The Tax Money Is There

2011-12-08T20:01:00.000-08:00

Americans pay their taxes and now there are budget shortfalls. In Los Angeles, many city employees are getting 36 days of yearly furlough (14 percent of their wages are just not there anymore). Then there is the CalPERS retirement fund, which is severely underfunded (the consensus is the State of California will have to make them whole---Smoking some “Kalifornia hemp” makes this wish more plausible).

Each taxpayer firmly believes that the money is there to finance their special or necessary State programs, and the legislature is frivolously spending their taxes on something else that is worthless--- like education. This concept is set in stone, “The money is there and they won’t spend it on my program!”

Remember the old adage “the squeaky wheel gets the grease.” The wheels are starting to squeak and we’ve run out of grease. People with a programs being cut will march in protest--- This is where these many different protests combine together and turn to riots. Was it Congress that once said “Let them eat cake?” For some reason, the expression "Don't lose your head," comes to mind. Maybe a shot of Courvoisier Napoleon Cognac will help us remember what transpired in France 200 years ago.

Tax the Rich Is A False Cry, We Are Ripping Their Asses With Inflation

2011-11-30T20:38:00.000-08:00

When I was 23, I had about $3,000 in savings and most of it I earned while in Viet Nam. So when I see these protesters in the street, that are young, they’re not brimming over with wealth. Saving over a lifetime gives one riches. This is how wealth is accumulated. The Hoi Polloi definition of “Rich,” is a person with enough money that there is no need to work ever again!

The government (Congress) is talking about wage earners who earn a lot of money when they refer to taxing the rich. A family of three or four with two wage earners earning 55K pays no tax; so double that, the rich are 110K and above.

Now let’s figure that John Doe decided to save $600 a month for the rest of his life starting at age 20 after 40 years at 6% he would have $ 1,150,178 or under today’s Bernanke interest rate plan about $353,886 at a 1% rate.

So now, after 40 years of savings, you have over a million in the bank. No need to cash it out, it’s FDIC insured. But while you were collecting interest, the government was printing money for the last 4 years. Inflation is a tax on savings, so in this case, we are taxing the rich/savers. And at 8% inflation, over the last 4 years, that amounts to a 32% tax. It’s invisible, nobody presented you with a bill.

Then we have FDIC insurance. Great little promotional item thought up by FDR. All of the banks by that time that were going broke had already gone broke, so there was no capital outlay for this added bank guarantee. So in today’s world, if your bank gets real sick, there is no reason to go to the bank to withdraw your funds. A run on the bank, puts the bank out of business, this has been averted.

The real neat thing is if you keep your money in the bank for that rainy day ahead that is what the government is counting on. Once retirees start spending their savings, they will burn right through the paltry interest in no time. Those dollars saved way back 60 years ago were hard dollars, and those same dollars valued in today's purchasing power, have been taxed to death by inflation.

Then there is the suggestion that millionaires ought to pay more than 17 percent in taxes. Why more? 17 percent of 100k is 17 thousand dollars and 17 percent of one million is 170K. The percentage paid is the same, but the amounts vary by a factor of 10, plus throw in the 32% inflation tax. I guess what it comes down to is the fact that rich people are incredibly stupid and the voters are incredibly intelligent. There is absolutely no reason to pay an accountant 20k a year to help you pay less in taxes, or is there?

People point to the Bush Tax cut renewal and it cracks me up. If they pass it, it will be called the Obama tax cut. Think for one moment, has there ever been a permanent tax cut? Has Congress been cutting our taxes permanently year after year? Tax Cuts are sunset laws, the law expires at a certain date and Congress conveniently passes a new tax cut, and points out to their constituents that they lowered taxes, talk about exhausting work.

Let’s go back to Eisenhower times and tax the rich at 90 percent. This will satisfy the Hoi Polloi’s demands as to the status quo; and it will end up being nothing more than window dressing. Who would go to work and have the government take 90 percent of their earnings? Of course it might work out as intended for a lottery winner, winning 300 million; they’d end up with 30 million after taxes.

Let’s tax the rich, but understand one thing, if they are smart enough to get rich, they are smart enough to want to avoid paying the additional taxes. Believing that they will have to pay is pure stupidity. The funny thing is rich people behave just like you and I; we try to avoid paying more taxes than we have to. I wonder how dumb that is?

Brick Wall Dead Ahead

2011-11-24T02:14:00.000-08:00

The German bond market just had a miserable auction, nobody showed up. And of course the Euro is in fine shape. How many would you like to buy?

The Congressional Super Committee had a senior moment; they lost the cape and the t-shirt with an S on it. It’s no big deal; whatever they forgot to do, wasn’t going to happen until 2013 anyway.

Egypt wants Democracy. I guess General Motors could name a new car “Democracy,” and we could sell it to them. That’s about as close to Democracy as they will ever get. Democracy is a little like a car, the wheels are your social institutions. So far they have the military and Islam, one wants to shoot the occupants, the other wants to load it with explosives.

Syria seems to have a problem with too much press coverage. Fidel Castro had a rather effective solution, a cigarette and a blindfold. To a lot of people in the world, order and stability are more desirable than Democracy.

Tear gas orders for this Holiday season are up. There isn’t a dry eye in the house in Syria, Greece or Egypt. And at UC Davis they are gassing students after they paid tuition. If they weren’t crying about the cost of tuition before they paid it, they were afterwards.

Then there is the deficit, it’s now at 15 trillion dollars. Congress is fighting over raising taxes to pay for all of this, but it hasn’t slowed down the spending. You really have to wonder why the worry to raise taxes or reduce spending, things are running just “peachy keen,” the way they are.

Then we have Freddie and Fannie. Down the street a two bedroom 1 ½ bath is going for $325K. Of course the 4 bedroom 3 bath a block away is going for $355K. The government is going to sell your kids the one for $325 with no money down.

Interest rates have gotten so low that you need to work 80 years before you have enough saved up to retire (if you factor in inflation, double that up to 160 years). I think Bernie Madoff will be getting out of prison about then. California’s CalPERS retirement fund is still claiming that it is earning 7 percent on investments. It kind of shows you where Bush’s “No Kids Left Behind,” found employment. It's a little like a mortuary issuing birth certificates, something has to be out of whack and you’re not sure just what it is.

Unemployment is “under control.” For some reason, the number of mattresses under freeway bridges seems to be on the rise as are the people camping in city parks.

Our leaders reassure us everything is OK; they claim to have saved us from a Great Depression. With Cities going bankrupt for the first time since the 1930’s, you have to wonder, is Obama a used car salesman in disguise? The thing that worries me are the potential Republican contenders, all of them have that used car salesman look.

Have a Happy Thanksgiving everyone.

Squirrel Economics 101

2011-11-21T19:06:00.000-08:00

This will be familiar to a few of you, it is a reprint from two years back. I'm having a little writers block. I should be back on track by Friday.

Imagine a group of squirrels saving nuts for winter and depositing them in a bank (one nut one credit in their account). Let’s imagine that a truck pulls up and helps themselves to 80 percent of the nuts. The bank now has a problem. It can’t cover all of the deposits. But notice, if there isn’t a run on the bank, there is no real problem. Squirrels are depositing and withdrawing nuts with no problem.

In this little example even if there was some form of bank insurance, what ever it was, it could not replace the nuts (their winter food supply). The amount left for all of the squirrels is pretty much set to the 20% remaining plus net deposits made until winter. In this case, there is no inflation (you cannot print the squirrels food supply). The squirrel has no idea of the life or death consequences of what the bank has done until winter arrives (retirement).

The real estate market is the truck that pulled up to our personal savings and looted the bank. In this case, we have government insurance to “make us whole again.” The money taken was spent. Notice that every dollar deposited had to be worked for (a squirrel nut).

Labor created some product. By not consuming this nut and saving it, you were putting this towards retirement consumption. The money from the boom (real estate loans) was spent on many lavish toys and is forever gone. Now we have financial institutions with only 20% of capital left. In actuality, there is only 20% of product produced left (the nuts). The rest has been consumed. It is rather academic whether or not the government prints more money to make us w(hole) again.

We have a choice, leave the banks with the 20% which will buy the 20% of produced product left or we print enough money to restore everyone’s bank balance.

I am sure this little analogy could get me shot again or could be picked apart easily. I present it as an illustration of how money relieves us from the bother of having to barter for services and goods. Once you accept the convenience of money vs bartering, the concept of just printing it, is the equivalent to stealing.

So if you are a squirrel, “It’s grab your nuts and run!"

Euro Crisis Mismanagement

2011-11-09T21:17:00.000-08:00

Italy and Greece are financially insolvent and their governments are in a real mess. Austerity programs are being forced on both countries, and their citizens are not very happy about the coming cuts.

The money was borrowed and spent. When you read the papers, there is a mention that if Greece and Italy were to default, it could take other countries with them. At this point, you have Germany and France stepping in to rescue their fallen comrades.

The real question not being asked, is who loaned all of the money for this drunken orgy? Germany and France come to mind, not to mention a few State retirement funds. What is happening here is the same as Jingle mail in the US. It’s a little like buying a million dollar home with no money down and you lose your job. A bank that does too many of these finds themselves out of business real quick.

The problems in Italy and Greece are rather obvious. Problems in France and Germany are nonexistent, if they can get Greece and Italy to make their "house payments." Here in the US, everyone thinks that the Government is trying to bail out the homeowner and that is just not the case, they want them to continue paying their outrageous mortgages, with minor modifications. This keeps the banks paper current and on the books as written with no markdowns.

The big players in Europe, France and Germany financed these unsecured loans. The European banking system faces ruin, if and when the PIIGS stop paying. To say that the banks lose in this case, is rather an understatement, it is their depositors that take the hit. The banks only loan your money, and if they lose it all, that’s life. Look for problems at Deutsche Bank and Societe Generale.

Everyone knows the PIIGS are broke and that is no big deal. What's not realized, is that the people in trouble, aren't the deadbeats, but rather the bank depositors that had funds to loan. The loans will not be repaid, but that is less than obvious with all of these proposed repayment plans.

Nobody is going to go to prison over this, being incredibility stupid or optimistic and running a bank, is not against the law. The question you need to ask is your money safe in a Euro bank? The answer; "Not Sure," could start a run on the Euro. Retirement could be further away than you envisioned.

The Greeks Are Being Had

2011-11-03T22:09:00.000-07:00

Greek Prime Minister George Papandreou has struck a deal with ministers to step down and hand power to a negotiated coalition government if they help him win a confidence vote on Friday . . . . The source said Papandreou admitted he had made a mistake in calling on Monday for a referendum on a bailout package

If you read between the lines, the other nations said to him, “how dare you end the game when we have agreed to anti the money up for you to play?” PM Papandreou was born in the USA of Greek parents. I’ve listened to a few interviews he has given and he impresses me as someone who wants the best for Greece and is quite in tune to what will happen next.

The referendum would have avoided a collapse of the Greek government. If the Greek electorate made the decision, the chance of revolution was slim. You made your bed, now sleep in it. The trouble is, Greek politics are so corrupt, that the masses will not tolerate the austerity measures for long. Europe has rewritten Greece’s loans. Greece is going to pay for things already consumed for the next 10 years. The lenders want their money. It’s a little like going a restaurant, and discover you owe for all of those that ate before you.

The other interesting fact is that the IMF is involved in this mess. The most powerful man on the board of Governor’s is Tim Geithner with 17 percent of the vote. And the way it works, if Tim says no, the no’s have it. We have had the Fannie and Freddie Mae fiasco, what’s a little Greece to fry it all in? The Germans and the French are not going to bail out the “lazy Greeks.” They are the ones owed the money. So with an IMF bailout, the Germans and French don’t take the big hit, the US---AKA IMF (Daddy big bucks) does.

The Chart below shows who's in charge at the IMF, kind of a FYI thing.

Greek Prime Minister George Papandreou tried to save Greece by telling the creditors to go fly a kite and it should have worked out at an acceptable level for the Greek citizens. The new austerity measures pose a serious choice for Greece; pay retirement benefits or pay the debt? The military will end up taking over the government and their youth will abandon the country for jobs in other lands.

The real question to ask is: “Where is the REAL money coming from to pay for all of this?” I don’t have a clue. It’s a little like trying to hustle a hooker for a payday loan. What do you have that she needs—absolutely nothing!

Idiotic American Foreign Policy

2011-10-27T21:59:00.000-07:00

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?

This 'Great Depression' Could be Worse

2011-10-19T20:15:00.000-07:00

Congress and the Federal Reserve have suggested that the banks ease up on their lending restrictions and loan out more money to get the economy going. It’s a little like lowering the drinking age to increase liquor consumption. In essence, we need to restart the real estate party of a few years back. The “fog a mirror loans” are gone, the banks want full docs. If they had been doing that in the first place, the real estate bubble wouldn’t have happened.

Out here in California lenders are foreclosing quickly on the 300K mansions that originally sold for 100K. They are taking their sweet time on the “million dollar” homes for good reason. The hidden inventory is becoming rather obvious, a lock box on the door handle and a brown lawn.

Many Californians bought their homes and paid them off before the great housing bubble, These people are nearing retirement, and expect a slice of that “Glorious bubble real estate pricing” and its isn’t going to happen. More supply, less demand. Meanwhile, the banks out here, holding real estate, are like chickens sitting on unfertile eggs. Nothing is happening, just a lot of hope that things will improve, if given time.

Realtors drop off lists of homes sold in my area. The lists reflect short sales, regular sales, and REO’s. The short sales and REO’s reflect pretty drastic price drops for the area. The regular sales don’t. What happens here, when a home goes on the foreclosure auction block, auctioneer has an automatic bid from the bank, on money owed. If the bank is the only bidder, the home is theirs. This is counted as a “regular sale.” So if the original owner owed 600k on a first mortgage, with the homes current value at 300k, this would be listed as a sale at 600k to the bank. Hey, that looks great for comps if you are a real estate agent. So when you see the sale price, that the bank paid, that has no real bearing on what the current value is for the home.

What is hurting the banks is a concept labeled “the velocity of money.” When you have a feeding frenzy, you have high velocity. Right now, we have low velocity; no one is begging for a loan, the banks can’t find enough people qualified to loan too. The go-go party years of real estate banking are gone.

Our future looks bleaker than the historical times of the 1930’s and 1940’s. The US was pulled out of the Great Depression by war. When it ended, we were the only supplier of finished goods. The rest of the world had no production capacity to speak of. This time it could be very different, we are not the only global supplier with production capacity in need of buyers to survive.

Once you realize this, the concepts of what are happening in this world leaves doubts as to how a real and acceptable solution is an option. I have questions, but no answers and that is scary. From here you need to tell the wife, the cute student you’ve rented the spare room to will bring in a few dollars. If she calls you a Democrat, you know it isn’t going to float.

Regulation, A Presidential Cure for the Nation? I think NOT!

2011-10-08T20:31:00.000-07:00

I guess if we are going to tar and feather Obama over our hard times, we should probably get it right, on what he did wrong. Our present economic mess has nothing to do with him or his birth certificate issued in Hawaii. His major offense, is in thinking that as President, he can write or dictate our laws and have the Congress pass them. If my memory serves me right, Congress writes the laws, and if they don’t have a 2/3’s majority, the President has to sign it in order for it to become law.

Obama is like a very demanding wife; his way or the highway. Whereas a coy subservient wife gets everything her way indirectly, without the husband even suspecting that he has been manipulated. Obama forced the health care issue through Congress, and now the young get to pay for the health care already promised to the old. You can’t raise taxes in a depression and expect increased revenue. Revenues are dropping even at the current rate of taxation; less and less people are working.

Now there is a call to tax the rich. It sounds so easy and simple. Most of them fill out their own W-2 forms; they can easily hide their earnings. A lot of wealthy people donate to charities and get a tax deduction. They have a choice, give it to the government who will waste it (that's a personal opinion), or give it to a charity and appear to be magnanimous. Look for this loophole to disappear.

Let’s step back for a moment and examine where we are. As a country, we saved nothing for a rainy day. Congress spent every dime collected; they even spent our Social Security funds. Our nation has fallen on hard times caused by economic pursuits that were designed to fail because of human greed. We probably can cite Congress for enjoying the party while it lasted; they were asleep at the switch. They couldn’t afford to pay for infrastructure when times were good and now all of a sudden, it seems like a good idea when the country is broke. Its kind of like having no money to feed the kids and wife, but having 50 dollars for the hooker next door.

Obama’s latest way to save the taxpayer is with more government regulation. The neat thing about this is when you create government regulatory agencies, they get to enforce regulations they feel are necessary without the need for further legislative approval.

The latest idiotic piece of government lunacy revolves around debit card charges. Here we have the Consumer Protection Agency telling banks what they can charge merchants accepting the card. All of a sudden it’s against the law to make a profit? The net effect, Bank of America raises debit card fees $5 a month. Everyone thinks this is outrageous and something needs to be done about it. If you read between the lines, B of A doesn’t want to mess with debit cards anymore. It’s unprofitable for the bank, the customers who use them, are living paycheck to paycheck. It’s a little like what Sprint did when it dumped customers who called the help desk too much. 60 percent of the help calls were from 5% of its customers. B of A won’t lose a dime on the customers who walk.

Government regulation is killing this country. Our captain at the helm is going to save us with more Nazi rules and regulations. It's "full speed ahead, damn Congress and the National Debt." It's a little like a hooker offering customers pills to prevent AIDS. Business couldn't be better. The customers like the added "protection." You kind of have to wonder, how dumb is dumb?

Why A Solution Escapes Us

2011-09-30T20:41:00.000-07:00

Here is a Link to a reality that is little appreciated let alone comprehended. It is a rather long winded piece. To quote the articles main thesis:

The Misconception: When your beliefs are challenged with facts, you alter your opinions and incorporate the new information into your thinking.

The Truth: When your deepest convictions are challenged by contradictory evidence, your beliefs get stronger.

If you have ever been in a three hour discussions over several beers, you’ll know what I mean. By the end of the night, both of you are more ensconced in your personal beliefs. I use to enter into these discussions figuring that I could change the way people think, and by the end of the night, nothing had changed, but I hadn’t realized that. I’d figured that I had moved them somewhat. Now I know different. Don’t think for one minute that any argument you have, will ever change another person’s opinions, it will only push them to reaffirm and embrace their deep down beliefs.

My grandfather told me way back that discussions around politics and religion were a waste of time, you weren’t going to change anyone’s mind and I tend to agree with him now.

For politics, Congress comes to mind. There is no common ground anymore. Discussions seem to be rally around the flag parties. No mater whose talking, there is a flag behind them. Kind of reminds you of the Nazi party, with flags everywhere. Of course their mission statement was “Let’s get patriotic and kill someone.” It worked great, the three beer arguments just disappeared. If you weren’t paying attention you ended up on a cremation list for the following week.

With religion, the idea that a religious body can preach death and destruction to infidels runs against the grain of decency of everyone in the United States. Of course Allah’s 60 virgins as a reward, is worth it if you buy the whole package. It just goes to show that you can pimp virgins in the afterlife and have takers grabbing a number and dying to wait in line—maybe dying after a wait in line.

What we are looking at, is a world ready for war. Arguing isn’t going to cut it; people are willing to die to convey their beliefs on the assumption that the other party isn’t that gung-ho. The Funny thing is, both sides have no concept of how it will end.

What we need to examine, is the fact that just about everyone up to now, has been getting what they want out of life without compromising their beliefs. That is beginning to change. The economy has been thrown into a dumpster. And if you think about it, people with money can afford to have morals and scruples; lose your wealth and you’ll find how unaffordable principles and ideals are. Political beliefs and moral concepts do not feed a family. We can see the effects of that in the Middle East right now.

The Fall and Rise of Greece

2011-09-22T20:15:00.000-07:00

Greece is in the middle of political turmoil. It has to move in 4 different directions at once; cut spending, cut benefits, increase taxes, and borrow from the IMF.

The population as a whole has nowhere to turn with all of the political rhetoric, and posturing. Any faith they have had in their Democratic institutions, is gone. In the coming weeks, look for a military takeover of the country.

This would solve all of their problems. Repudiate the debt, go off the Euro, and eliminate any government obligations to present retirees. They will get Greece back to work. The youth will be employed in the military, and since the debts will be gone, reasonable life can begin anew. It’s a little like Iceland, but in this case, it will revolve around military, not civilian rule. With control of the currency, they would be able to offer some sort of retirement benefits to the old, but don’t look for those sacred government pensions of before. You can be nice to old people, but they are too old to do any real harm without the right to vote. Greece will solve its problems and the outside world will not like it.

The IMF and the Federal Reserve think that they can increase world debt and solve the world’s financial problems. They have tied the hands of the politicians; elected officials will be the scape goats for the public anger.

No European country is paying any real money to fix this mess. A dictator will clear out the smoke and mirrors and offer immediate results. For a Greek to wake up and find out that all of their debts are gone, now that’s a bank holiday! Look for a new Greece; it’s a solution that will work for their country. Meanwhile Tim and Ben (the unofficial heads of the IMF) will be prescribing Epsom salt enemas for the rest of the PIIGS and moving them closer to the fan.

The DOWnward Slide

2011-09-15T10:50:00.000-07:00

The Dow is at 11000 and its value represents the increase in value from way back in 1898, when the DJIA was started. It is a great little indicator; it gives the investor some perspective on where he has been and how far he has come. There is one major problem; the index has lost all perspective. It’s up and down movement don’t display current gains and losses; they reflect the historic gains and losses from when the average started.

A little understood concept, stocks bought and sold on Wall Street have nothing to do with the companies that own them. If an investor buys IBM stock, IBM doesn’t give a damn about the transaction. Upon the investors purchase, the transfer agent (another process) notifies IBM that there has been a transfer of ownership of shares to someone new. IBM makes a note that they have a new owner with an address to pay dividends to and also send proxy voting ballots when necessary. Of course if you buy 10 million shares, that’s a horse of different color.

At the present dividend rates, the Dow 30 Stocks are priced well and support their dividend rates. This is their only link to the real world. Stocks out there that pay no dividend are not linked to anything other than the greater fool theory. The South Sea Company bubble of the 1700’s reminds me of Google today (fabulous riches awaited the “well informed” investor).

Where is the money made on Wall Street? It’s in commissions for buying and selling. So a high volume day is one that generates lots of earnings (there is a buy and sell commission for every trade). The question everyone asks on Wall Street is; “How do you make a million dollars in the market?” The answer still is, “Start with two million dollars.”

What will happen to our market in the future? Probably it will be similar to what happened to Japan; their market went from a high of 39,000 in December of 1989 to 8,500 today. It took twenty years, to get there.

When times are tough, there comes the need to raise money for survival. The natural instinct with financial investments is to sell the good stuff and keep the dogs—in the hope they will come back. Of course when things get real bad, everything gets doggy. All of our retirement fund managers are doing just that, holding on to the dogs. It’s the only way for a manager to preserve his job. Sell and you will have nothing left to manage. Investors will move to "better performing funds."

Have you ever noticed that people run out of money very suddenly and become bankrupt (Bernie Madoff comes to mind)? In reality, it is a very slow process that reaches a point to where the individual gives up—that’s the sudden part of it. They really made no mistakes, it’s just that the financial rules changed over time and they didn’t adjust accordingly. They expected the old rules to hold firm.

How will this all end? The stock market is just like the real estate market. With one minor difference, when your neighbor sells his stock, it determines the present value of yours. There is no jingle mail with stocks. Watch for a big drop in stocks not supported by a dividend or ones that cut their dividend.

Of course the downward slide of your stock equity in non dividend stocks will be invisible. The Dow 30 will be untouched. Everyone is investing in exotic trades with more zing (index funds come to mind).

Bernanke and Geithner claim the damage from the PIIGS has been contained while the Treasury is paying zero interest in spite of the 8% inflation rate. This financial Ponzi scheme is worse than the housing crisis back in 2006. It's a little like using a hooker as a last chance sperm donor; it kind of works for all the wrong reasons.

The stock and bond markets are the last game in town, gather 'round and faites vos jeux.

Things Are Getting Better?

2011-09-06T20:54:00.000-07:00

The NY Times ran the following in Monday's paper

US Postal Service Nearing Default as Losses Mount

The United States Postal Service has long lived on the financial edge, but it has never been as close to the precipice as it is today: the agency is so low on cash that it will not be able to make a $5.5 billion payment due this month and may have to shut down entirely this winter unless Congress takes emergency action to stabilize its finances.

“Our situation is extremely serious,” the postmaster general, Patrick R. Donahoe, said in an interview. “If Congress doesn’t act, we will default.”

In recent weeks, Mr. Donahoe has been pushing a series of painful cost-cutting measures to erase the agency’s deficit, which will reach $9.2 billion this fiscal year. They include eliminating Saturday mail delivery, closing up to 3,700 postal locations and laying off 120,000 workers — nearly one-fifth of the agency’s work force — despite a no-layoffs clause in the unions’ contracts.

The idea of laying off 120,000 workers, closing 3,700 locations and eliminate Saturday delivery kind of makes you wonder. If there is a light at the end of the tunnel, what is it, another train? Congress is expected to fix it? I doubt it! This is the first time, in my lifetime, I can remember reading about something so dismal being suggested as a solution. The Post Office’s problems are directly related to the success of the Internet; email vs snail mail.

On Thursday President Obama will address us on jobs. I’m not sure what he will say. The Postal Service is an American institution, and needs our support like it or not. Government sponsored entities like Fannie and Freddie need to be cut off at the knees. Choices have to be made. And remember, an awful lot of people in California, haven’t made a house payment in two years. It must be nice to be so poor, to be that rich; "Let’s go to the Bahamas this year,Fannie Mae is paying."

The Financial Storm Brewing

2011-08-28T20:55:00.000-07:00

The US budget is 3 trillion dollars (I rounded the numbers to keep it simple). We have 300 million in population. Divide the population into the budget and we get a tax bill of $10,000 per person. Through taxes this year, we raised 1.5 trillion, so there is $5,000 loan per person being spent and added to the national debt for each and every one of us. Divide 300 million into the national debt and everyone owes $47,000. So a family of four owes 200K, and will have to pay the interest, but that's another story.

The neat thing about the National debt is that it is inheritable. It’s a weird concept, you die and a newborn somewhere in the US takes over your balance owed ---and you thought Congress didn't know what they were doing. We like to envision our passing where the kids get our assets, and the banks get to fight over our debts --- Not a chance!

Money in the bank is paying zero interest, but at the same time, Gold has gone from $1,000 to $2,000. The pundits suggest that silver and gold coinage is not necessary in today’s world. Of course if you go back 100 years, all of our debts were payable in gold and silver. In 1965 our silver currency was worth more melted down and disappeared from circulation. In 1982 the mint stopped producing copper pennies. The copper in the penny was worth more than its face value. We now have zinc, copper clad pennies. The words "deadbeat superpower" come to mind for some reason. The funny thing about gold and silver, they are a universal currency without a border or the need for a banker.

In 2006 everyone was buying houses with no money down with an 80/20 25/5 interest only loan with no PMI. Today, it is difficult to qualify for a home loan even with a large down payment. Plus the investment qualities of home ownership have evaporated. On top of that, everyone that ever dreamed of owning a home got one; and now they don’t know what to do with it. Real estate is going nowhere, which is kind of an understatement, unless its a mobile home.

A peculiar thing about real estate statistics is that when the market tanks, the average median sale price of housing tends to increase. What happens here, is that the rich buy houses when they feel like it. On the other hand, working stiffs with a poor credit scores can’t even get in the bank door to negotiate a loan. It is the low price homes sales in a good market that drag the median price down. Say normal sales are 10 starter homes to every high priced one. In bad times, the ratio could drop to 2 to 1. The new data would show prices are increasing when in actuality they're not; the number of low price homes in the data has dropped dramatically.

Politicians are commenting about the possibility of a double dip recession. Is the double dip reference, a car salesmen close? Accepting as fact; we have a chance of going back into a recession, implies we've bought the concept, that things have gotten better when they haven’t. The wheels were kicked off of the financial sector back in 2008 and it is not getting better.

We could be in the eye of a financial hurricane. The disaster hits and then calm and sunlight—and a sigh of relief. And then . . . . . . . that monster from your childhood years, that lurked under your bed or in your closet . . . . . . . I think it’s back, you can smell the fear in the air.

Government Intervention Is Not A Solution

2011-08-21T18:16:00.000-07:00

Election time is approaching (next year). People running for office are pointing out that Obama has not produced enough new jobs for the unemployed. Voting for President is kind of like buying a washer and dryer and expecting the salesman to show up every Saturday to do your laundry.

This whole mess started with a housing boom. I remember back in 1998 selling real estate. We would prequalify buyers before we even showed them a house. If you didn’t have a down payment, your quest for a home went no further. Later, the phrase “fog a mirror “ became popular. When it all collapsed, government stepped in to keep the banks solvent.

As the housing boom took off, there was plenty of employment for everyone and the pay was good. The country was producing more homes than they could consume in 10 years. Everyone that wanted a home had one (or two), with the thought of buying another. Government gleefully raked in the additional taxes created by the economic boom.

Then the party stopped. How was government suppose to pick up the slack? There are no new additional taxes coming in. Tax payments into the government are decreasing and payments out are increasing.

The economic issues we face today stem from the previous mis-allocation of resources. We blindly built and financed too many homes in the name of greed. On top of that, Congress has turned a blind eye to the fiscal bubble created over time with entitlements. Common sense suggests that the debt crisis needs fixing now, but it always gets put off, until after the next election.

We have two real problems, unemployment which is the result of the housing crash. And we have an entitlement bubble that has lead to a crisis over the national debt. In order to stimulate job creation, we need to cut taxes. In order to cover entitlements, we need to raise taxes. If you can’t do either, then it’s time to print more money. Are we rich yet? As the gold bugs have pointed out, you can’t print gold. If you are retired living on a fixed income, you’ll come to find out that the government can’t print food or medicine either.

So when you hear a politician say vote for me, I can create more jobs, he’s not lying; if he wins, he gets a job. Ask yourself one question: Do we really need more government employees? Maybe if we cut government paychecks in half, the problem would solve itself. We could tolerate an inefficient bureaucracy better if we had to pay a lot less for it.

Bernanke the Wizard

2011-08-14T07:58:00.000-07:00

Bernanke in remarks to Congress said that he would keep interest rates real low for the next two years. OK, tell me how? The only way to accomplish that is to buy every bond presented for sale on the resale market at full price. I wouldn’t pay full price for anything in this economy, it is counter intuitive. Every banker in town will queue up to the Federal Reserve to unload their dog eared bonds at full price.

People point to Japan over the last 20 years with super low interest rates, but the real game was obfuscated by international trading. The Japanese people were getting zero interest for their deposits but the country’s bankers were buying US Treasuries. These bonds were paying 7 to 8 percent so in actuality, we were subsidizing the banks in Japan. And by God they were patient, we made them whole over a period of two decades. The interest paid help bail out their failing institutions. They loaned us all of their savings for 20 years and we spent every dime. Of course, that’s another story.

Where do people want to put their money now? If you are super rich, it's in T bills. The money is insured by the full faith and credit of the US government. They are not worried about the return on their money, but the return of their money.

Bernanke has taken risk out of the market, all loans are guaranteed. The one market not under his control is stock market. It's looking a little sick lately. The real world is around here somewhere. Let's click some gold coins together and try to wake up--hopefully not in Kansas.

When You Thought It Couldn’t Get Any Worse.

2011-08-06T22:13:00.000-07:00

Congress just passed the debt ceiling bill. In two years, they get to raise the debt ceiling 2.5 trillion dollars for which they promise to cut the budget by 2.5 trillion over 10 years. What would you say if a College professor announced that he had struck an agreement with the college chancellor; If allowed to molest two students now, he promises to cut down his future molestations by two students over the following 10 years. The analogy is rather obtuse, but Congress needs to stop borrowing. Has anyone accuse Congress of being responsible for inflation? Hell no! The remark “We have always had inflation” sounds more like the punch line to a blond joke. You can’t lose an election pumping printed dollars into the economy.

This increase in the debt ceiling was kind of like an 80 year old man successfully struggling to have a bowel movement. He’s happy, but nobody else knows why, and tomorrow he faces the same problem all over again.

Let’s look one year down the road. Figure a 20 to 40% reduction in taxes collected this year. Of course the States are just doing peachy-keen; California is going to have to start growing pot just to pay their bills. People aren’t buying anything on credit; they are too busy paying off their cards with 20 to 30 percent interest rates. Figure the Federal government will pay out 20 to 30 percent more in benefits next year in unemployment, SSI and other goodies. What does that leave Congress to cut? Put a different way, you have two slices of pie and you need three.

Congress is probably confused about our new bond rating of double A. A triple D is something they can get their hands around; unfortunately credit ratings have little to do with bra sizes.

Monday things may start to deteriorate. Greece is in the cross-hairs; the country is about to implode. Not much of a problem with that, but investors everywhere bought insurance on the impending Greek collapse. The trouble is, the insurance isn’t going to pay; too many policies were sold on that event. From here, insurance on future events could fall apart (Google “Panic 1907 Bucket Shops”). This 50 trillion dollar betting parlor has been writing business worldwide. “Trimming the Hedges” on Wall Street, in the following weeks will not be referring to yard work.

The government references to a possible future double dip recession is to keep everyone from panicking. Yesterday, someone stated that our present housing crisis has surpassed that of the Great Depression. If you read between the lines, they are passing out hand baskets and we have just won a free trip to nowhere or somewhere thereabout.

Things are bad and far worse than any recession of record. Who are we fooling when Congress farts into a bag and claims to have solved our financial problems? People are not stupid, the trouble is, they will all arrive at the same conclusion at the same point in time. This could be shipwreck-week on Wall Street; where everyone tries to sneak for the exits (sssh--don’t tell anyone, it’s a secret).

Bonds, A Future Investment Opportunity

2011-07-30T20:35:00.000-07:00

Our bond market could offer some investment opportunities in the coming year if the Tea Party has its way. So here is a little insight in understanding the mechanics of bonds (as usual, I might get shot for over simplification).

If we were to buy a 30 year $10,000 bond at issue, at par, at an interest rate of 4.50% it would pay $450 each and every year for 30 years. Next year, suppose that interest rates jumped to 9%. Now if you were to buy a 10k bond at issue, it would pay $900 per year. That is double the interest rate of the bond bought the year before.

So if you are fleet of foot, you think, let’s sell the bond only paying 4.50%. Well guess what, the only bid you will get, will be for $5,000. It takes two old bonds to pay the same interest as one new bond. If you hold the lower paying bond to maturity, you will get your full 10k, but in the meantime, the newer bond by comparison paid twice the interest.

Several things affect the interest rate on a bond, the risk, and the length of the contract and market news. Another thing to consider is how low are interest rates? And will they go any lower Once you get to a yield of 3%, you can’t go much lower, but from there your risk of the rate going higher are almost a sure bet. Buying a 20 year Greek bond paying 33% interest means you get your investment back in 3 years (I'm lying, you're being robbed). The issuers of the bond are not paying that interest rate; it is the bond holders discounting the price, trying to unload a hot potato.

If we were to have a liquidity crisis, bonds offered for sale,would have few buyers, especially if they were small company bonds. As bonds prices drop, the interest rate paid, goes up.

Here is where the money is to be made. For example, a person purchases a 30 year 10K bond at issue with a 3% coupon, purchase price $10,000. Let’s figure that interest rates jump to 12% and that person needs to raise cash fast and decides to sell that 10K bond. The market would discount the bond to $2,500. That's the bond to buy. The new buyer gets 12% interest ($300) on his $2,500 investment. At maturity in 30 years, the bond pays $10,000, a capital gain of $7,500 on a $2,500 investment. The potential exists for higher rates; 12% though could be on the high side.

So as a rule of thumb with long term bonds, if interest rates double, the current value of the bond drops 50 percent. That could be the opportunity to take dollars out of the bank and buy bonds. Presently, interest rates are too low; risk and inflation have not been properly priced into rates. With the current budget crisis, the bond market is like a sleeping dragon---a loud Tea Party could wake it up.

As a side note of Interest

I have a sitemeter at the bottom of my blog and it gives me info on my viewers. I clicked on this one viewer in Washington DC and got a bit of a surprise, I just had to take a picture. Welcome to my blog whoever you are. Very few people use Apple computers.

Freeze The Debt Ceiling

2011-07-23T21:36:00.000-07:00

Why raise the national debt level? Congress is not going to tax everyone more to make up the difference. It just gets put on bar tab, to be paid at a later date, someday (200 years from now). The phrase “Kicking the can down the road,” is the new euphemism in town. Reality is not about raising the debt ceiling; it’s about keeping the punch bowl full and the party going.

If Congress doesn’t increase the debt ceiling, our government has to face reality. You can wish, but if you don’t have the cash, it is only a dream. Our dreaming is over, reality is a necessary event. Below is a pic from from my blog dated 4/6/08 about bubbles, the big one is still there.

Of course, there is one item that needs to be considered. The Federal Reserve could be sitting on a giant Ponzi scheme that is invisible. Technically they give cash to banks and companies like AIG for collateral. So it is a zero sum game if the Fed sells the collateral (in theory)(but it could be worthless).The US government owns all of Fannie and Freddie’s real estate. The underwater home owners now hand the keys back to the tax payer. An extra 6 trillion hidden here would be a surprise that could change the color of an IRA fund manager’s underwear.

Obama the other day was pontifying “Raise taxes on the rich and rewrite the tax code to lower everyone’s taxes.” ---Sounds like a religious miracle in progress. How can you do both? The phrase “Used Car Salesman” comes to mind. Obama reminds me of the guy pimping his wife for drinking money. He comes home after partying and gets mad when his wife offers him the same rates everyone else paid.

What is happening in Greece is a little different. If they issued 3 percent long term bonds, these are probably trading for about 15 cents on the dollar. So if the IMF went in and bought 100 billion of them, it might cost them 15 billion face amount. But they could turn around and gift them back to Greece at 30 billion when they mature. It’s a little like your home going up for auction for nonpayment and your brother-in-law buys the place for peanuts and lets you live in it with the agreement that you pay him back. It keeps his sister happy and the jerk she married, on a leash.

The Congressional mentality, is to borrow until we can’t afford to pay the interest on the debt. That concept reminds of the two boys that were warned of the evils of masturbation, they were told it caused blindness. The one kid turned to the other and said, "Lets do it until we need to wear glasses." The real discussion right now revolves around serious cuts during the rest of Obama’s Presidency and it doesn't look like there are any. These proposed 10 year plans,are an euphemism for "Not on my watch."

The debt limit should be frozen where it is. Let’s stop this madness now. The Geithner claim that our debt rating will be hurt is pure hog wash. Our government debt is the benchmark for the rest of the world’s securities. Raising the Debt Limit allows the Treasury to be able to sell to the Federal Reserve that extra trillion the government doesn't need yet. Bernanke (the Fed) will buy Treasuries in order to keep interest rate artificially low. The neat thing about the transaction, the Federal Reserve returns back to the Treasury the dividends paid by the Treasury on the bonds held by the Federal Reserve. These purchases keep rates artificially low. Thus the bills purchased and held by the Fed cost the Treasury nothing.

Refusing to raise the debt limit, doesn’t change the final outcome. It’s just going to happen sooner, rather than two years from now. Our government is broke. Without the "New Money," the Fed cannot keep interest rates low by buying Treasuries, rates will have to rise. Greenspan and Bernanke will take the blame for this when the history books are written. They offered a flawed painless solution to a very painful problem. Unfortunately economists are more like coroners; they are better at diagnosing what went wrong and why, after the fact.

To a majority of Americans "The Economy" is just a concept, little understood. The "Group Think" is that Congress can fix what is broken. Congressional solutions are a little like trying to use your clothes dryer to dry the kitchen dishes and glassware. When the buzzer goes off, you can rest assured that everything is dry! You end up getting what you were promised, but it's not quite what you had in mind.

Unintended Solutions

2011-07-17T21:40:00.000-07:00

Governments worldwide try to run their economies and regulate the interaction of their citizens. Most of the time the people are smart enough or are forced into an action that defeats the State's intended outcome.

We have the European Union of PIIGS trying to get out from under all of the burdening debt. Who gets to pay their bills? How do they get out from under the burden? The young can pick up and move to another country. This exacerbates the problem; these were the very people the countries were counting on to pay future taxes.

Students in the US can’t file for bankruptcy on college loans. Their paychecks are subject to garnishment. Even in death their estate will be used to settle those outstanding student loans. The obvious solution, pick up and move to another country. Our country invests in their future and leaves them only one option; emigrate and escape the chains that bind you.

States raise their sales tax rates. Now, everyone shops the local store to touch and feel the product. Then, they go on-line and buy it out of state. Retailers just love this concept.

Every year in the past, my wife and I got a customary 2 percent pay raise, and that didn’t happen this year. Our wages stayed the same, but just about everything went up in price. California increased the vehicle registration fees, so we sold that third car we hardly ever used. The cable company raised our rates for basic service, so we canceled that service. Raising prices or taxes does not guarantee increased income; you may end up with less. State governments during the Great Depression learned this the hard way.

The nations of our world economy have implemented financial smoke and mirror solutions to our present problems. They have little money saved in reserve. About the only thing we can draw from all of this, is that the expected government results, will not occur. As individuals, decisions will be made that will have far reaching results at the group level that were not anticipated. Net result, the politicians will be scratching their heads wondering where they went wrong.

Australia could become the new frontier for our young adults and anyone with a hell of a lot of student debt. Of course we need our young people to fight our wars and to work to help support our retired people (Social Security contributions). Kind of makes you wonder, where’s the incentive to stick around? Our manufacturing base left for foreign shores, our kids could be next.

The Buffett Mind Set

2011-07-08T12:08:00.000-07:00

Warren Buffett suggests that we raise the National Debt limit. If you look at it his way, we can only run out of money if we stop printing it. CNBC’s Rick Santelli, part of the original Tea Party, thinks that now is the time to stop spending. So what if the government can’t pay all of its bills, it needs to live within our means. Not everyone gets paid, but we won't be kicking the can down the road to the next election. Two opposing views that are radically different. And of course in this country, the more money you have the more valued your opinion.

Total tax collections for the country equaled 2.162 trillion dollars last year. Anyone want to bet that this year won’t quite make it to that level?

Total expenditures equaled 3.456 Trillion. And figure another 800 billion that somehow never made it into the colorful illustrations. The word "Off budget," comes to mind. The "Net Interest" below needs to be added to "Other Mandatory" for a more realistic number. Somebody from Fannie Mae must be doing these visual aids.

Below is a graph plotting future debt payments, to progressively higher interest rates, using the new anticipated national debt level of 16 trillion dollars. As interest rates rise, there are fewer dollars left for real government operations. The "Game Over" point is where taxes collected are less than interest owed. Our debt burden makes us very vulnerable to any future interest rate hikes. [double click for a more depressing view]

Government financing will fall apart way before we hit 12 percent. At an interest rate of about 9 percent, Social Security and Medicare would no longer be 100% fundable. The thing to worry about, is that interest rates don’t just increase slowly. Greece saw an interest rate jump from 12 percent to 26 percent in seven months.

We are at a fork in the road. Rick Santelli makes a lot of sense, no new taxes and put government on a budget. We can't seriously expect to spend our way out of debt. Our other option is a financial train wreck, a year or two down the road. With an added benefit, we get to wipe the 16 trillion off the books and start over. Of course if you're close to retirement age, the words "Start Over" means you're going to need a shopping cart with 4 good wheels and a large cardboard box for the long haul. It wouldn't be so bad if my wife didn't hate camping.

The Under Funded National Debt

2011-07-02T15:53:00.000-07:00

Last week Tim Geithner wrote a letter to Congress stating his opinion on why the national debt limit should be increased. Here are some excerpts from it:

I am writing in response to your letter of May 23, 2011, regarding the statutory debt limit. . . . . . .
The debate over the debt limit can seem esoteric, but a failure to resolve it in the near term would have painful implications for people in every walk of American life. It would have a serious impact on members of the Armed Forces who depend on paychecks to feed and house their families. Social Security recipients who subsist on their monthly benefits, veterans who rely on the government for their retirement and health care needs, and small business owners or employees who provide goods and services to the country.

In your letter, you suggest that the debt limit should not be raised, and instead the federal debt be “capped” at the current limit. You further propose that after the government’s borrowing authority is exhausted in August, the United States should for some indefinite period pay only the interest on its debt, while stopping or delaying payment of a broad swath of other commitments the country has made under the law. . . . . . . .

Even if the idea of “prioritization” were not so unwise, it would not be a mere exercise in “belt tightening,” as you suggest. The United States in now required to borrow approximately 40 cents for every dollar of expenditures. Your proposal would require cutting roughly 40 percent of all government payments. These deep cuts would be felt by all Americans, and they would risk throwing the economy back into recession.

Note his remark above, “The United States in now required to borrow approximately 40 cents for every dollar of expenditures,” kind of took me by surprise. Considering the present size of the deficit, it doesn't look as if it is a temporary thing.

Geithner goes on to state:

Under normal circumstances, investors who hold Treasuries purchase new Treasury securities when the debt matures, permitting the United States to pay the principal on this maturing debt. Yet in the scenario you advocate, in which the United State would be defaulting on a broad range of its other obligations, there is no guarantee that investors would continue to re-invest in new Treasury securities . . . . . . . . failure to pay non-debt obligations “would signal sever financial distress and potentially imminent debt default,” prompting the U.S. sovereign rating to be place on “Rating Watch Negative.”

If investors chose not to purchase a sufficient volume of new Treasury securities, the United States would be required to pay the principal on maturing debt, and not merely the interest, out of available cash. Yet the Treasury would be unable to make these principal payments without the continued confidence of market participants willing to buy new Treasury securities. Your proposal assumes markets would be unconcerned by our failure to pay other obligations. But if this assumption proved incorrect, then the United States would be forced to default on its debt.

The last two paragraphs seem to run contrary to supply and demand economics. A rise in T-bill rates would bring investors back. Presently, why are Treasury rates so low? Doesn't the risk of default imply higher rates? Credit card companies charge deadbeats around 30 percent.

How does raising the debt limit solve the threat of government default? It's nothing more than an accounting trick. A possible real solution, tax every man, woman and child in this country, an additional $1,000 per year (or deduct it from benefits received); this approach might eliminate the need to raise the National Debt level. And that’s not likely to happen.

This financial game being played in Congress is defined by rules, and as long as they play by the rules, the game can continue. In reality, the country is broke and the only thing keeping the government from defaulting is the extremely low interest rate on the National Debt. Our government is running on IOU’s. The 14 trillion in debt isn’t real; it’s too big to be real. True reality is that government check in your mailbox. Who gets the blame when the house of cards collapses? Naturally the Republicans, Obama gave them ample warning, raise the debt limit or else.

So today’s assignment kiddies, is to write down your net worth on a piece of paper. Now move the decimal point one place to the left. This is how you raise the national debt. The new figure is your equivalent buying power in todays dollars, at retirement. You didn’t lose a penny, but that’s how our daily newspaper went from a dime to a dollar.

Greece ready to Default

2011-06-28T21:25:00.000-07:00

Greece will default, maybe not today, but it is only days or weeks away. Odious Debt, a concept suggested in a 1927 treatise by Alexander Nahum Sack dwells on the principle that debt accumulated by a Sovereign Country doesn’t have to be repaid if it was borrowed for use that did not benefit the State and its citizens. With that in mind, all banks need to think twice about whom they loan to.

Right now Greece has problem borrowing money, the rates are outrageously high, and they are a bad credit risk. But what happens if they default? The bonds at that point probably go to about being worth 10% of face value. The Greek government could redeem those bonds at 10 cents on the dollar. Not a bad deal. Of course, the question comes up; do they really need to redeem the bonds at 10 cents on the dollar? Probably not.

Then after the default, their credit rating might surpass that of Iceland.

The world banks want their loans to be repaid. Better terms and more years to pay doesn’t make the debts any more manageable. The debts will not be paid. But that concept eludes our international bankers. This is just hanging paper, over a bad financial transaction. There comes a point when kicking the can down the road no longer has any appeal, it ceases to ameliorate the problem.

Greece has arrived at its final destination. Repudiation is the next step and from there, better times for the country. The repudiation pretty much ruins anyone with retirement savings, they are gone. Everyone gets to start over again. If you are 75, the idea might not be greeted with much enthusiasm.

After Greece defaults, the game is pretty much over. Do we cover their debts to keep the financial ball rolling? If so, what stops the rest of the PIIGS from queuing up?

Of course, could it be, that maybe the bail out money being used to finance Greece’s bailout, is from the funds deposited by the USA in the IMF? Why do I get the feeling that the answer is yes? Maybe, because the Germans have no desire to finance the spendthrift Greeks?

The headline could read “Bernanke Finances Greek Bailout.” Of course I could be wrong. It is all Greek to me.

Military Spending Cuts—Why?

2011-06-19T11:27:00.000-07:00

A lot of newspaper talk revolves around the cost of the wars in Iraq, Afghanistan and in Libya. Congress wants to cut military spending so they can keep the social programs of entitlements running at full bore.

There are two things to look at here. The billions we are spending on the wars are not being spent in those countries, but rather in the US. We build weapons and tanks for deployment by the military. Secondly there is an obsolescence factor for many weapons. The Napalm produced for the Vietnam War is still hanging around leaking, presenting a nightmare disposal problem. I’d hazard a guess that the missiles we fired on Libya had a “use by date” that had expired (this eliminates a potential disposal problem and justifies the reordering of replacement weapons).

The Kennedy moon program was on par with military spending, the money was spent on research and production in the private sector and it stimulated the economy. Critics often point to the space craft on the moon being worth 2 billion dollars. Not quite, it took two billion dollars to put them there.

Right now in simple terms, our government has three spending modes, administrative costs (running the government), two transfer payments (Social Security, Unemployment, Medicare) commonly called entitlements, and third, discretionary, spending (military, infrastructure, scientific research etc).

Administrative spending won’t be cut much, unless they cut a department or two ( offhand 9 or 10 come to mind).

Of the three types of spending, entitlements (non discretionary) are just a redistribution of wealth to people for consumption. These payments stimulate the economy the least.

Discretionary spending is where we get the biggest bang for tax dollar spent, and it’s all “optional.” A strong defense and a solid infrastructure have a definite return for the average citizen and is a necessary expense, but of course, here is where the first cuts come. In the future, we will have to tolerate bad roads and lousy government service. Funding will not be there for it. Honk your horn before you drive into a pot hole.

Military spending is an exceptional economic stimulus, but it does have one drawback, it is not for private consumption. You might want a wide screen TV, but not a Bradley Tank; it wouldn’t fit in the garage, plus it gets lousy gas mileage.

The government interest expense last year ($413 billion) is close to what we budgeted for defense ($515 billion). The current Congressional goal is to cut spending and at the same time continue borrowing. How does that work? Why not just stop borrowing? It’s a little like using a pay toilet that has no toilet paper. The solution to one problem creates another.

New technological advances don’t come from Social Security and health care entitlements. Investing in our future has to do with the youth of our country. Entitlements are benefits that should be the first things to be cut in the government budget, not the last. Congress is eyeball to eyeball with the silver foxes. What will happen to military spending and other government research? Sadly, it is all about votes. Maybe that’s why Congress and the President like to play golf, if you lose your balls, you can always buy more.

What Lies Ahead?

2011-06-12T18:01:00.000-07:00

Don’t look for housing to rise out of the ashes and get back to 2006 production levels any time soon. The housing bubble was all about greed. Getting a bank loan, was robbery without a gun. While the drunken real estate orgy was in full swing, nobody bad mouthed bankers by calling them banksters. In this country, making a lot of money is a sign of intelligence, inversely, poor people are considered stupid. So if you are poor and not stupid it has to be somebody else’s fault.

From there we could claim that the large unemployment numbers are the result of the poor economy, but the problem is far bigger. The Information Age has bloomed and left many people unemployed. Back in the early 1900’s banks employed thousands of accountants to tally their books from day to day. The invention of the Burroughs adding machine made about half of the banking work force redundant.

In the early 1900’s, the agrarian (farming) economy employed 41% of the population. By 1930 it had dropped to about 21%. The mechanical combine harvester and the tractor changed farming forever. At the same time, the assembly line production increased worker efficiency and output. It was this shift in technology that added to the unemployment of the Great Depression.

Today, one computer and an excel work sheet can eliminate the bean counters in a large retail firm. Stores no longer need to check the shelves when ordering inventory. Theirs scanned sales totals give them the numbers for their replenishment orders. The gas and electric companies don’t employ meter readers any more, each residential unit is in direct communication with the utility. Today we have 20 million unemployed people that need to be retrained, in order to secure a new job. For a lot of these people, their old jobs no longer exist.

There is a question to ask yourself when you go into a retail store,” How many of the items on the shelf are made in the United States?” A future Smoot-Hawley type tariff could be used to entice offshore American corporations to return to the USA to produce their wares. Of course your flat panel TV produced in the US would be of low quality and probably triple the price of anything made in China.

Over a span of 60 years, the shifting of American production overseas has been so gradual that it was not noticed. The companies that used to be US based, don’t need the added aggravation costs of health care and retirement benefits. They can survive very well outside the US. These labor jobs are not coming back.

Bernanke’s quantitative easing is a method of paying back for what we have already borrowed; with no tangible results that I can see. Whereas government program to improve the infrastructure of the country (roads, sewage, etc) would be a positive step in the right direction. Plus it would be something that they have to do anyway no matter what the economy is doing.

The aspect of whether we are facing inflation or deflation has been a rather active topic on this blog lately in the remarks section. I didn’t get a pay raise this year (government pay freeze). My wife got a 10% pay cut and all of our household bills went up (gas, electric, water cable and trash). My son’s tuition went up $1,200. If this is deflation, why am I paying more and getting less in return? The real irritating thing about the increase in the water bill was we had to pay more for consuming less (there was a push by the utility to conserve water and they accomplished their conservation goal). Unfortunately they didn’t sell enough water to cover the fixed costs, so we got a rate increase. This points out the vulnerability of large companies trying to down-size from a drop in consumer consumption. Fixed costs don’t disappear overnight.

I went to Starbucks this morning for a large Coffee (It’s probably been about 4 months since I was last there). The price has gone from $1.80 to $2.15. At the Supermarket, my favorite candy bar is still the same price, only it’s about half the size it used to be. Gasoline has dropped 15 cents this month (of course it’s still a dollar more than it was last year).

So what lies ahead? Hard times. Of course, that doesn’t sell newspapers does it? Don’t expect a government solution; our government is a consumer of wealth, not a producer. We are earning less, spending more and getting less in return. I guess inflation is when the size of the product you buy stays the same, and the price increases. Deflation must be where you (cough, cough) get less for the same price ;>)

The Kondratieff Wave Revisited (reprinted)

2011-06-02T20:43:00.000-07:00

I'm suffering from a little bit of writers block, here's a reprint from October 2006. The historical quote below, sounds a bit too familiar.

A while back, in May, 2006 I covered the Kondratieff wave and it seems to be more to the point as time goes by. Below is a link to a history lesson that's well worth reading.

The Kondratieff Wave

This gentleman's theories were published in 1925 way before the Great Depression. Here is a quote from the link, dealing with "The Autumn" just before "The Winter," labeled Depression.

Excesses of an unpopular war, along with fiscal liberalism, cause popular reaction toward stability or normalcy. A mood of isolationism permeates . The plateau period generally lasts seven to ten years and is characterized by selective industry growth, development of new ideas ( both technological and social ) and a strong feelings of affluence, terminating in a feeling of euphoria. The inflated price structure from the primary recession, along with the desire for consumption, produces a rapid increase in debt. Eventually, wealth consumption expands beyond all practical limits, and economy slips into a severe and protracted depression.

These cycles tend to be about 60 to 70 years long. If you think about it, everyone that was about 30 years old during the last depression is no longer with us. The group memory of the past depression is gone and most of the financial shenanigans going on, are "new" in our mind's eye.

The point about perceiving a depression, is that its only visible in your rear view mirror. The investment trusts that collapsed in the 1930's seem very similar to the index funds and derivatives of today.

As a post note: don't link a Depression automatically with deflation, hyperinflation is also an option. The Federal Reserve (with today's powers) and absurd national debts were not part of the mix way back then.

The Village Idiot

2011-05-21T16:05:00.000-07:00

Right now we have political unrest in the Arab world. Our President tends to interpret it as a move towards Democracy. Last month Obama pumped 100 missiles into Libya to speed up the process. The people in Libya don’t want Democracy; they want to be rich like the American tourist who visits their country. Wealth is Democracy to them. Expect nothing more than a regime change, there is no middle class to sustain a Democracy. If we really wanted to to exercise our military might in a constructive way, why not in Somali? That country has a thriving Pirate and hostage program (600 hostages and growing). Our country is paying millions in ransom fees and here we attack a country doing nothing more than selling us oil?

There is one true Democracy in the Middle East, Israel. A country with a population of about 7.5 million people, surrounded by 40 million Muslims and Arabs who want the Jews dead or gone. Here our President stands up, and tells Israel “return the land to the Arabs.” The Grand Wizard has spoken. Israel is our only true ally in the Middle East. What is macho Obama thinking?

The Arabs want a piece of our Democracy, just like everyone else; a Mercedes and several young wives and that is as far as it goes. The Muslims offer the “Pilgrim Economy Package,” an explosive vest and 70 virgins in the afterlife. The plan has been pretty successful; sex sells, people are going to pieces over it. The Arabs negotiate using the principle “What’s mine is mine, and what’s yours is up for discussion.” Real compromise isn’t an option using that modus operandi. Obama's going to give the Middle East Democracy (yawn) (rah! rah! rah!).

The President’s foreign policy has been defined by a lack of direction. Oddly enough, the news media has kept silent. They give him air time and offer no hint of criticism. Here is a guy blaming our problems on 100 dollar a barrel Arab oil when the problem is a government printing too much currency. Our 14 trillion dollar national debt is what makes gas four dollars a gallon. I guess the press figures that they will document how deep Obama can dig this hole.

His domestic solutions are part of our present financial crisis. Government health care is a noble concept, but there is no way, we as a nation can afford it. Social Security and Medicare have grown to an unmanageable size. Now Congress is haggling over increasing the debt limit by 2 trillion dollars just for this fiscal year. The size of the increase is mind boggling, but I guess that is of no concern to the media, it’s not news.

I get the feeling when listening to Obama that he is talking down to us. We are children that need his guidance. This beet-head needs to be called out on the carpet. His policies are incredibly expensive and poorly thought out, considering the current economic conditions. How can he presume that government has access to unlimited resources?

I saw a license plate frame the other day. On top it said “Your village called.” And on the bottom it said “Their Idiot is missing.”

Receiving the Nobel Peace Prize for winning a Presidential election, should have been a clue. We can put our minds at ease now; the idiot is no longer missing (and that’s only the good news). Our newspapers are curiously silent, apparently Obama can do no wrong.

The Abstractification of the American Mind

2011-05-13T21:43:00.000-07:00

We have names thrown at us every day. Big Oil, The Bankers, Wall Street Barons, The Rich, Democrats, Republicans, Liberals, Conservatives and the list goes on.

We are looking at abstract names for groups of things, not individual items. This analogy will make more sense, if we picture ourselves making cookies in the kitchen. These cookies are going to be very different. We might use a hubcap as a cookie mold for making Democrat cookies. Follow me here. For Republicans, we might use a Jello mold. What we are doing is taking a container and stuffing it full of cookie dough and the shape represents our visualization of the group we are talking about.

There is where the problem lies. If the two of us were both discussing Democrats, the only part of the concept we share is the word. I’m using a hubcap as a mold for Democrats while you may be using a mop bucket.

Let’s make up a group. Combine Banker and Gangster and you get Bankster. For this cookie mold, I will use a cigar box and lace the cookie dough with bullets and a couple hundred copper pennies. Someone else may choose to use a chamber pot for a cookie mold mixing in expensive cigar butts and a 100 or so Mercedes car keys. We both end up with a cookie, with the same name, but mine won’t have that hint of ammonia fragrance. The thing to realize here is that we are talking about imaginary groups or abstract concepts. We created a container in our mind, given it a name and stuffed it full of cookie dough and whatever else suits us. The guy next to you is doing the same thing.

So when we all get together to discuss a concept like government health care, you wonder what rock some of these people crawled out from under.

We need to be very careful of using words that are abstract. They give us a false sense of understanding that isn’t shared. For example, many Americans probably believe that the rest of the world should encompass Democracy with open arms. We lost the Viet Nam war because of that abstract concept called Democracy. The villager could point to his wife, kids and his land, he couldn’t point to Democracy. In undeveloped countries, you have a very hard time selling life insurance; it’s an abstract concept that sounds more like a con game to the average person.

The other day I was reading about a Congressional investigation of the oil industry. They wanted to know why the consumer was being gouged 4 dollars a gallon for gasoline. The answer is plain enough, inflation. But what is inflation? To most people, that’s where prices rise every year. But if you are worth your weight in salt, you know Congress is spending more than they are taking in. Inflation is a very abstract word. It’s kind of like the lost Viet Nam war, all over again. You can point to the price of gas, it’s real, but you can’t point to inflation.

Disneyland Economics

2011-05-04T21:28:00.000-07:00

Most of us pay taxes. This is money; we were paid for producing something. Tax dollars are for government consumption. Our savings are kind of like taxes also, we are not consuming product if we save our dollars. In order to save for retirement, we have to forgo consumption now, for consumption in our retirement years 20 to 40 years out.

From there, our saving flow into a bank. Lately you hear about all of the money the government has thrown at the “Banksters.” Let’s step back and take a second look. From 1999 to 2006 the banks threw money (your deposits) at anyone that wanted to sell a house (not buy, follow me). An 80 year old with a bad cough in a wheel chair, could qualify to buy a home. Nothing down and the owner got a cashiers check from the bank. Real money was paid by the bank for the home sale. By 2008 it was rather obvious that real estate loans with nothing down, were performing rather poorly. The banking system as a whole, had lent about (your estimate here or mine) 12 trillion dollars. The money was given to the sellers of the real estate. Now with homeowners walking away from their loans, the FDIC has to make the depositors “Whole again.” In order to do it, the FDIC prints dollars to cover depositor’s losses. The investors/owners in the failed banks lose their whole investment. FDIC insurance only eliminates bank runs.

Next, consider our government, they collect 2.1 trillion in taxes and spend 3.5 trillion. Congress is spending 50% more than they take in taxes. OK so it is a loan, but look at it this way, it is pure consumption. Government doesn’t produce anything. They had to borrow the dollars from us savers in order to spend them. The product consumed by government is now gone.

Just as a rough estimate, the National Debt is about 14 trillion. Add another 4 trillion for the worthless debt held as collateral at the Federal Reserve. Add another 1.5 trillion dollars a year, from now on, as part of the Federal budget.

There comes a point to where educated people figure out that the game is over. I don’t think we are quite there yet. The government is both printing money and taxing us at the same time. Taxes work great, but you don’t have to raise taxes if you print money. Inflation is a silent and invisible tax and it pays government bills just as slick as taxes.

Congress has no idea of the mess they are in. FDR started the snowball rolling and it has gotten bigger. Today there isn’t enough product to satisfy the demand made by the savers, who over time, opted out for immediate gratification for consumption, by saving. Indirectly the money borrowed by government came from the banks and our Ira's. Without FDIC insurance in place the banks would have failed, and the government's source of funds to finance the deficit would have disappeared. (Can't have that happen, can we???)

In the truest sense, if our government was to pay back the 18 trillion dollars borrowed (laugh if you feel the urge), everyone would be whole, the trouble is, it is not going to happen. If Treasury rates were to hit 12%, it would take all of our taxes to pay the interest on the National debt. We have stepped into a new realm of economics I would like to label “Disneyland Economics.” You wish for what you want and Congress will provide it. The trouble is, real life doesn’t work that way. Congress borrowed 18 trillion of real money and wants to borrow more. It’s a little like buying a car and your only concern is, "Can I borrow enough to make the next payment?"

Looking at the bright side, this isn't the handbasket to hell drill, Congress is going to drive our nation to the new Disneyland in style. I'm so excited. Are we there yet?

The Health Care Train Wreck

2011-04-27T19:54:00.000-07:00

Government health care for retirement is not very well thought out. Some of us have already had a dry run with an aging parent or grandparent.

For example, a married couple that retire at age 65 with 300K of savings in the bank probably have at least $12,000 apiece or $24,000 total per year to live on from Social Security. The government health insurance provided for seniors would probably cost about 8 to 12 thousand per person per year for a private plan of equivalent value. To say the least, it would be unaffordable to most retirees. The government insurance is real, but invisible to the recipients. Uncle Sam pays all.

Let’s go forward 10 years to age 75. At this point, a lot of retirees are ready for a rest home and these homes charge a minimum of about $4,000 per month per person. So with a married couple, that’s about 100K a year (the 300K in savings will go fast). Someone unfortunate enough to come down with Alzheimer’s disease, figure about $8,000 a month in a rest home (100K per year). Studies have shown that during the last months of a person’s life, they could rack up 180k in medical bills (in intensive care). The government gets to pick up the tab here too.

Social Security was a lottery ticket, when it was implemented. Everyone paid in but very few lived to collect. Living to age 65 today, is almost a given. Now, we have Medicare and Medicaid added on to retirement benefits. Where are the government funds coming from to pay for future elderly health care? Ask one question, how much in total did the retirees pay in taxes over a life time? Does it warrant the government payments being made in their behalf?

How much longer can the game go on? Entitlements already exceed tax collections. Who do we "throw under the bus," our kids? How about a Democrat or two?

Inflation Defined: Government Printing Of Currency, In Lieu Of Taxation

2011-04-23T18:03:00.000-07:00

Here are a few pictures of hyper inflation in Germany from the 1920's. We are not talking gold and silver here, just paper money.

We are not quite here yet. Toilet paper rolls are one inch shorter as are boxes of Kleenex. $3.99 for 10 ozs of potato chips rubs me the wrong way!

Let the Treasury print two trillion for next year and we will be here.

From there it is all downhill. Kiss your retirement savings good-by. Of course this can't possibly happen to us. This only happens in third world countries!

The picture below shows you what real money looks like. The government can coin it, but it can't create silver coins with a printing press.

The Silver dollar currently is worth about 40 dollars. The 50 cent piece is a twenty dollar bill. The silver quarter will buy lunch for two, and the minuscule dime will buy a gallon of gas. But hasn't gas gone up in price???

Ask yourself one question, if silver coins have held their value so well over time, why aren't we still using them? To quote Shakespeare's Hamlet; "Therin lies the rub."

Taxing the Rich

2011-04-17T09:17:00.000-07:00

The Democrats want to tax the rich. They are going to repeal those tax cuts given to the rich by the Bush administration.

The concept of being rich to the voter is something entirely different than what Congress is talking about, but they’re not about to correct Joe Six-pack's misconception. The average person envisions a rich person as someone with gobs of money that doesn’t have to work. So go ahead and tax the rich bastards. The trouble is, this is not the group Congress wants to pick on.

In order to pay taxes, you have to have earnings or a big healthy retirement plan. You can’t really tax a millionaires savings to death. Three million in the bank might return 30K a year but the taxes are a measly 4K.

The people the Democrats are targeting are the high wage earners and families where both the husband and wife work. Many of these people run businesses that have employees. If their future taxes increase, they will contemplate moving offshore. So we have more taxes and Obamcare for this group of rich people. If you’re an employer, it really puts a crimp in your bottom line. From off shore, the employer gets to keep the $12 profit per shirt and claim a modest one dollar profit as a jobber supplying imported product to the US. Notice how the taxes and labor costs drop out of the equation. I don’t think Congress can assume that rich people are stupid and are going to wait in line, to pay the new taxes.

The Democrats don’t need to tax the rich; the inflationary spending policy of Congress (printing money) does a superb job. Anyone with a savings account has lost 30% of their purchasing power over the last 10 years and we are liable to lose another 30% before the next election. That gentleman in the example above with three million in the bank now has the buying power of 1.5 million and he hasn't lost a dollar, kinda sucks doesn't it?

This snowball started rolling down the hill way back in FDR’s time. Very few people lived to collect Social Security at age 65 back then. Social Security in the beginning was a carrot on a stick. In today’s world, we either need a longer stick or a hell of a lot more carrots.

So rally around the Democrats, they are going to tax the rich and big corporations (who also pay no tax, the consumer pays it, it’s in the price tag). They are going to save Medicare and Medicaid for the elderly and keep those nasty Republicans at bay. “Nobody gets thrown under the bus.” Just love these analogies. Does Congress have a waiting list for people to be thrown under the bus?

We are spending 1.5 trillion more dollars than we take in, in taxes. If we cut out discretionary spending and the military, this budget could work. What’s left, is the money needed to service the national debt, Social Security, Medicare and Medicaid. And look out, here comes Obamacare entitlements.

People are beginning to realize that the budget has grown absurdly large and is very unrealistic. In Congress it is business as usual. By God, we are going to tax the rich and raise 50 billion. Of course we’ll need to raise the national debt limit up another trillion dollars. Do you get the idea that Congress is doing something incredibly stupid? Of course, it appears to be working so why worry.

Congressional Logic: Insanity Mixed With Self Importance

2011-04-09T18:19:00.000-07:00

Congress almost shut the government down because both sides couldn't come to an agreement over a 40 billion dollar cut in the budget. That's hard to fathom let alone comprehend their thinking.

The pie chart below shows how much government took in taxes in 2010, $2.162 trillion dollars.

Now look at how much they spent, $3.456 trillion dollars. Our government almost got shut down over some petty change issue?? Spend $3.456 trillion and the taxes received were $2.162 trillion; hmm where did the extra $1.3 trillion come from??? It must have been a loan! No thought of cutting here.

Uncle Sam paid $413 billion in interest on the national debt in 2010. Figure the government is paying 3% on funds borrowed. What would happen if interest rates doubled to 6% like they have in Greece? A possible jump from $400 billion to $800 billion in interest charges doesn't even faze those in Congress. $413 billion dollars in interest, is paid out each year. How many taxpayers does it take to pay, just the interest?

Somehow, the phrase "penny-wise and pound-foolish," seems to have lost its meaning. The $1.3 trillion dollars borrowed is real, in the sense that it is gone. What would be the monthly repayments on $1.3 trillion dollars borrowed for 20 years? Of course, if you don't plan to pay it back, who cares? That appears to be the way Congress plans to handle it, and that's insane. It's kind of like trying to retire on the bonus dollars you get back from using your charge card.

Last week's Congressional Brouhaha,(to paraphrase Shakespeare from Macbeth) was, "a tale told by an idiot, full of sound and fury, signifying nothing."

The Impending California "Bankruptcy"

2011-04-01T21:29:00.000-07:00

State employees want every dollar promised to them and nothing less. California has one minor problem, a lack of funds. In the past when times were good there was always a way for the States to generate new funds with bonds and fee hikes. Adding to this deep pockets concept, the Federal Government doesn’t need a balanced budget, they can print dollars. Everything can be funded-----Right??? To the average voter, the lack of funds is a political, rather than fiscal issue. In reality, it is the other way around. It’s a fiscal issue, at the State level that is getting worse.

The Damn Republicans are tightwads and don’t want to spend the money. The Democrats are sobbing die heart liberals that are going to save mankind. Take either side, it makes no difference. Notice though, lack of legislative funding will terminate State government worker paychecks in a rather sudden way. They might keep police and fire departments running, but for how long. Who pays for the gas in the squad cars and fire engines? The Police in Illinois can’t use State credit cards for gas purchases. Stations refuse to honor them; the state is considered a deadbeat.

Governor Brown of California wanted to have a special election for raising new taxes and the Republicans wouldn’t go for it. The previous governor (Arnold) tried it and it went nowhere. Can you envision a line of people, enthusiastically waiting to vote to raise their taxes in a special election? You have to be smokin' something for that to seem half way real.

The 25 billion dollar shortfall for California’s budget could be more like 65 billion—it depends on who is doing the books. All of the accounting tricks are starting to unravel. The people running the government are people just like you and me;-----understating the bottom line isn’t really lying. I suspect that current tax collections for next year’s budget have already been spent in this fiscal year (a minor bookkeeping anomaly).

What happens from here? California is broke; it can’t pay all of its bills. Of course the concept means nothing to the average citizen. It has never happened before in our life time. To most people, it is an impossible event, it can’t happen. “Where is my paycheck!” will be the cry from State workers. And from there, the real world will be seen again as it is, for the first time in 80 years. The option to pass a bond issue, and kick the can down the road another 4 years, is over. The shortfall of 25 billion has already been spent and we only have 3 months before the new fiscal year begins and California has to have a balanced budget.

If there isn’t enough money to go around, then who gets paid by the State? The bigger question, who doesn’t? The answers will be forthcoming-- from who-- well, that’s hard to determine, but you can bet your bottom dollar that it involves a lawyer.

The Invisible News

2011-03-20T20:12:00.000-07:00

Japan had an earthquake, tsunami and a very bad nuclear accident, with the loss of ten to thirty thousand lives. There has been no mention of possible U. S. insurance claim involvement for Buffet and AIG.

Then we have the Euro, a currency renown for its flatulence. The European Central Bank is going to save the European Union,---from what, they’re not quite sure of at this point. It depends on which country you live in.

The Middle East has people rising up and demanding an end to the tyranny. Our newspapers Stateside, translate that as a demand for Democracy. Where is their middle class, the necessary ingredient for a stable Democracy? Gee, they don’t have one, just a few rich people and a hell of a lot of poor people (that want to be rich).

I’m glad to see Obama finally going after the pirates attacking our shipping. Unfortunately he got his countries mixed up. Somalia, not Libya is where all the hostages are. Thomas Jefferson already did Libya. The UN’s effort to make Libya a “No Fly Zone” is admirable. I hope they include Fruit flies along with House Flies. God bless these UN health initiatives. Kidding aside, getting rid of the present regime will not solve any of Libya’s present social unrest, and it will acerbate survival for many in the country. The UN lost points on this. The Arabs are more into religion than material wealth, and they will remember what the UN (the Christians) did to an Arab brother.

At home, there is a hiring freeze on all new government employees. And if Congress fails to keep on passing one of these temporary budgets every two to three weeks, the Federal Government won’t be able to meet payroll. Government employees are anywhere from 3 weeks to one day away from being layed off. It depends on how close it is to payday. Come Friday, if they tell you not to come to work Monday, you can’t whine about not being paid a week later, now can you?

Our dollar is buying less gas, food and utilities, and that's just not world news. Of course, if you live in the Middle East, you may beg to differ. Bernanke’s inflationary policy is changing the world. Everyone’s currency is buying less. In the US, we cut cable and the extra vacation. In the Middle East, it’s the amount of food on the table that gets cut.

The real news in the world is not about a move towards Democracy, it is revolt against perceived injustice. There is a lot of anger out there. It’s in Wisconsin, Egypt, California, Libya, Illinois, Tunisia, Nevada, Mexico and Florida to name a few.

I’m thinking of discontinuing the newspaper, not much in it any more. The depression is over, we’ve licked inflation, the national debt is no longer a problem and stocks are bouncing off of new highs.

Inflation, What Inflation?

2011-03-09T20:22:00.000-08:00

Let’s look at inflation in another perspective. Figure a worker making $12 per hour that comes out to about $24,000 per year, or $500 per week

Figure one tank of gas per week has double---$25 (extra)
Groceries per week have doubled----------------$50 (extra)
Utilities have increased-----------------------------$20 (extra)
Cable, sales tax, state license fees--------------$ 5 (extra)
Total---------------------------------------------------- $100

So when we do the math, the minimum wage worker has had a 20% haircut. In the span of a year, that is a loss of $4,800 in buying power. You get the same paycheck; it just doesn’t go quite as far.

The well off person with 100K in the bank has lost 20K in buying power. Of course, that really isn’t perceived by the saver, he can get the cash and dance all over the bedroom throwing 100k in one dollar bills everywhere. The concept that his savings have somehow decreased is not at all obvious, after all he still has every dollar.

PIMCO dumps all of their Treasury bond holdings? I wonder what they replaced it with, gold, silver, oil?? It seems the message here, is if you have cash, don’t loan it out for peanuts, rates are going to have to go higher. Student loans could be the goose laying golden eggs. A student with 200k in debt at a future 12% interest rate, amounts to slavery. Of course, how could interest rates ever get that high???

With all of the real estate “under water,” picture Bernanke in a boat named “The Economy” drilling a hole in the bottom of it--to correct this mess. That’s what inflation is all about, the boat is sinking---contrary to popular belief, the water isn’t rising.

So those earning the minimum wage pay the piper big time. If you earn double their wages, your pain is a lot less. If you are retired and living on your savings, you got nailed. The funny thing is, things really haven’t gotten bad--yet. The hourly wage hasn’t been cut, but your spending power has. It’s very invisible and “painless.”

The Great Depression of the 1930’s rang true, because of the belief, that things could get even worse. People were not in control of their lives. All hope had been abandoned. People got sick of hearing that “Prosperity lies just around the corner.”

It will be different this time. All of the people we blamed for the last depression are dead. I think we can excuse them for dying, it wasn’t a planned event.

The Land of Unintended Consequences (Reprinted)

2011-03-06T19:59:00.000-08:00

This is a reprint of something I wrote back in May of 2008. It's dated, but things haven't changed much, except for administrations. Hopefully I'll have a new post by Thursday.

A Time magazine article April 4th pointed out that 1/5th of our corn crop was diverted (hijacked) to ethanol refineries. Corn prices have shot up and American farmers are planting less soy beans. Brazil in turn has increase soy bean production. Of course they are burning down a rain forest to do it. This ethanol lowers our dependence on foreign oil and at the same time increases the price of beef. We get to save a dime on gas and get to choke on the price of ground round.

20 years back in Africa, the UN showed starving people in one country how to plant crops and use fertilizer. The net result was increased food production and an increase in population. One thing little noticed was that families needed firewood to cook with. Once the country was denuded of trees, the farm land washed away with the rains. A great plan ran amok because of firewood. People died as a result.

The government and Congress are going to save Bear Stearns, Countrywide, give everyone who paid taxes $600 dollars and keep the economy out of a recession. You know they mean well, but maybe just doing nothing might be a better approach. My only question is this; whose money are they going to do it with? Don't they have to tax people to raise the cash? We are going to poorhouse in an air conditioned limo! Forget the hand basket to hell, that’s step two (when YOUR healthcare runs out).

The voters seem to think the political party in power is responsible for our present situation. From a more realistic view, what we are experiencing today, is the result of plans put in motion 5 to 75 years ago. Clinton in 1999 signed the repeal of the Glass-Steagall Act (from the depression) which freed up the banking system (you can kind of see where that went). The final outcome could be the reverse of what was intended.

The real issue here is that the solution can result in a bigger problem. Note also, the people with solutions for everything, are usually part of the problem. Time is the only true test. The real estate market may seem to be just one issue, but it is intertwined with the banking system, the economy, Wall Street and government. Change one program and everything else moves in some unintended way. It's a little like taking Viagra, only to have your hemorrhoids swell up. You knew what you had in mind, and it certainly didn't involve a lot of pain! Our Government works, almost in the same manner.

Inflation, “Painless Taxation”

2011-02-26T17:02:00.000-08:00

Inflation concepts are not taught in school, it is just something we are told to live with. Historically, it has ranged between 3 to 12 percent. Prices increase and employers raise pay rates to offset it. It lends to the perception that you are moving up with each “pay raise.” Notice as you “earn more” you tax rate increases accordingly. Congress doesn’t need to raise the bar, inflation did it for them.

What is inflation? In simple terms, it is the government printing money instead of taxing the people. But there is more to it, than that. In a normal economy we produce 100 widgets and get paid 100 dollars. You get a dollar for each widget. If the government needed 50 widgets, they would print 50 dollars, purchase them, and then consume them. Then there would be 50 widgets left for consumption and 150 dollars chasing the remaining widgets. The net effect is that widgets have jumped in price to three dollars apiece. This is what inflation is all about.

Inflation is too much money chasing too few goods. When Spain brought tremendous amounts of silver back from the new world, inflation took off. This was “real money” but there wasn’t any product to match to it, prices increased dramatically. The same thing is happening here. We get paid money for making product. When dollars are printed, the product is still consumed, but now there are more dollars chasing fewer products. The government can print money, but they cannot print food, energy, and housing. Government consumption, by way of food stamps and unemployment insurance, makes goods scarcer for consumption and prices rise.

The government taxes about 20% of our earnings through income taxes. With inflation there is no government paperwork. Let’s say you were lucky and saved up a million dollars before retirement and it took you 20 years. In this case, inflation is an invisible tax, you haven’t lost any dollars, but your dollars have lost half of their purchasing power. The government’s printing of money has confiscated half of your bank savings. The reason this government game works so well, is that the average person has a complete disconnect, between the concept of the real purchasing power of the dollar, and the apparent value of their savings. Their dollars are all there, nothing is missing---shhh, no need to upset them.

The politicians want to tax the rich; I suggest they are already doing an outstanding job of it. The sky rocketing ascent of the national debt is proof enough. Inflation is rampant if you include food and energy. We will see a dramatic loss of our purchasing power over the coming years. You won’t lose one dollar, but a dozen eggs could cost 12 dollars. Naturally, there will be a Congressional investigation into the chicken farmers gouging the public.

The thing that ought to make everyone angry is that inflation is stealing from those that saved a lifetime. You save hard earned money only to have the government make it worth less over time. Inflation is not perceived by our youth, it takes time to experience the reality of it. But, to those about to retire, they have experienced its effects. The silver foxes can see what it has done to their retirement savings and their plans for the future. Mention any of this to a Congressman and he’ll look back over his/her shoulder to see who you are talking to,--it can’t be him.

What’s next, ten dollars for a cup of coffee? -- And a dollar for cream and sugar? Of course with Obamacare, maybe I can get my doctor to write me a prescription for Bacon and Eggs with Coffee and OJ ( I have a $10 co-pay on prescriptions). That’s an inflation pill I can swallow.

Democracy on Life support

2011-02-22T07:07:00.000-08:00

Democratic Wisconsin legislators leave the state so the legislature wouldn’t have a quorum to act on legislation. The reason being, they did not want to see certain legislation passed. If this isn’t an undemocratic act, what is? These representatives need to be relieved of their elected position and replaced. An example needs to be set here. Democracy works because of the vote, not from the lack of it.

The idea that the money is there, if it is spent “our way,” doesn’t float. Pay as you go or forget the trip. And that doesn’t set well with Democrats, social programs are their agenda, the funding is just not there. What is going to be cut? Easy answer, if you don’t pay taxes, whatever you are collecting will be cut. What’s that mean? They are cutting benefits to everyone that pays little or no taxes.

Some Congressman the other day defended not cutting Social Security entitlements. He stated that “Social Security is independently funded with no cost to the taxpayer.” What he said was true and very misleading. Congress uses this fund as a piggy bank. Our government has borrowed and spent the 2.5 trillion dollar Social Security surplus. What we need to look at, is the fact that the government can’t pay back the funds borrowed or meet the obligations of promised Social Security benefits for the future. In FDR’s time, 7/8th of the population was dead before retirement. That alone was enough money for the 1/8th that survived to collect benefits.

So let’s see if I have this right now. You pay in 12 percent of your earnings into Social Security per year and when you retire, you get to collect 10 times what you paid in. If this sounds too good to be true, then it probably is. To top that off, your contributed funds are not invested, they are spent that year on the budget. Of course the Social Security fund gets an IOU from Uncle Sam. The words “Congress” and “Pond Scum” seem to define each other here.

Then we have the word “Bipartisan,” repeated incessantly in every Congressional interview. It’s the panacea for what ails the economy. It translates from the Latin as “two parties together.” Today it is defined as “Complementary rectal loading.”

The States are literally falling apart and are bankrupt. Most have already spent that loan we gave them (over payment of 2010 taxes) (They will probably apply your refund to next year’s taxes). We have 5 months before the new fiscal year begins for most of the States, this is when it will "hit the fan."

It is becoming very apparent that something is wrong with government on the State level that cannot be fixed. Obama pulled a fast one on the Republicans in Congress with health care and now we have a similar situation in Wisconsin where the outcome is a given. In this case it was different. The Democrats got up and left the state; what they did was very un-American. Voters, not protesters make our laws--hmmm, I might be wrong about that.

Tongue in Cheek Solution for California Budget shortfall:

Governor Brown should send several armed ships to Somali to hijack oil tankers and hold them for ransom. The insurance companies would pay the ransom and California could then make its budget; 29 ships and 660 hostages held in that country is a travesty. The only reason they are there, is because piracy has become very profitable.

Naivety: A Political Definition of the Hoi Polloi

2011-02-14T19:48:00.000-08:00

The Teabag movement is like a wave sweeping the country. Ride the wave, count the votes and get elected. I listened to several Tea Party home town meetings and it was summed up by one moderator, “We will stand behind you [the Congressman having the town meeting] in making those cuts in spending.” What these town hall meetings lacked in youth, they more than made up for with participants my age or older. When it comes time to make cuts; out comes a list of things that can’t be cut. That there, gives you an idea of how serious the concept of cuts are. Of course, the cuts I deem reasonable are not the ones my neighbor agrees on, so how do we cut any program? The solution was simple, until we tried to implement it.

Then we have an 8 trillion dollar commitment guarantee to save the Fanny and Freddie GSE’s (prop up property prices). Add to that, about 4 trillion in insurance guarantees to bail out the banks, some of which are “too big to fail.” Actual out of pocket so far, is a vague amount. It is kind of like throwing a party on a budget. When you see the estimated bill, for 10 cases of vodka, two hookers and 1000 condoms, you know the party isn’t going to be as advertised; expectations for the hookers were set a tad too high.

Let’s move to Egypt. The people there think that they have overthrown a dictator. I can’t quite figure that out. The dude Mubarak was 82 years old. All they had to do was pop a paper bag behind his back to induce heart failure. I think all this guy wanted to do, was die in office and get the tribute of a free State funeral. It’s not like he needed to kill a few more people to keep the regime going. The country has been a dictatorship since 1958. The youth of the country think that things have changed and they are now in control, the naivety of their thinking will be tested very shortly. The Egyptian military still runs the country.

So where are we now? Everyone wants change, but the money needed is not there. We can have less, but not more. The Well is dry. Obama proposes a budget of 3.7 trillion dollars with a savings of over 1.1 trillion over 10 years (I guess the savings are all in the 10th year). Tax collections this year are about 2.1 trillion. Here we have a President standing up and announcing a budget that is underfunded by 1.6 trillion dollars claiming a savings of 1.1 trillion over 10 years. The real implied statement here is that the President thinks the general population is dumber than a sack of rocks. I don’t have any problem with that; I think he’s on to something. I get irate for being grouped with the Hoi Polloi (the sack of rocks).

Our political representatives have promised us that lobster and steak dinner and believe it or not, they are going to serve it to you at McDonald's. It looks like three card Monte and selling well know bridges are passé. I’m getting hungry, let’s go to McDuck's for Surf and Turf!

Things Change Over Time

2011-02-05T08:21:00.000-08:00

In the 1930’s, Social Security was for those over the age of 65. Very few people lived to be 65. Smoking wasn’t going to kill you, old age was. Penicillin and new medical treatments later on in the century extended our lifetimes tremendously.

Back in Abe Lincoln’s time, health care wasn’t a big expense; you either died or got better. Today you can exist in a coma for years; premature babies can cost 100k apiece. The personal concept of paying for it all doesn’t exist. Just who pays for all that is another story. Now we have government health care for those who can’t afford it. The private insurance companies can see the handwriting on the wall; you can’t compete and undercut the price of government programs, the government doesn’t have to make a profit to survive. Look for private health care to fade out of existence.

Home ownership after WWII was considered a God given right. Private financing with acronyms like GSE kept the game going for 50 years. This financing plan has pretty much collapsed. The Federal Reserve and Congress stepped in to provide the funding to keep the ball rolling. When the game started, you needed a 20 percent down payment. Just before the collapse, the banks were writing loans to anyone that could fog a mirror. Now the government has extended the “fog a mirror” program; of course you have to “buy” one of the zillion homes they now own.

40 years ago, government jobs were very low paying. Most people went to work for private industry. Of course many people started working in government to get some experience and then jumped into the private sector. In today’s world, the government does surveys to figure out what to pay employees so “they won’t lose them to the private sector.” They weren’t really losing anyone at that pay rate; they were inconvenienced with the fact that they had to train a new employee. Yesterday’s low hire government employee is today’s retiree with the Rolls Royce health and pension plan.

When I went to school, it wasn’t hard to flunk a grade and get set back a year. I remember a guy graduating in my senior class, was 21, real nice guy, he was more into cars, girls, cigarettes and beer. He had a great time in High School. There were probably 4 straight A students in my high school with 800 students. My son who graduated from high school last year was a straight A student, as were many of his class mates. There are so many straight A students in today’s world, that it is meaningless. No kid left behind has pretty much trashed the educational system. The kid selling drugs on the sidewalk is getting more of a math lesson than the stoned kid in class who bought the weed. Success today, is guaranteed to our children; then they hit the reality of the real world, after graduation.

When the Constitution was written, there was the right to bear arms. If you ever want a fun time, try to load and fire a flint lock pistol from that era. When you pull the trigger, the intended victim has about 1 ½ seconds to dodge the bullet--- the flint hits the steel which lights the gunpowder in the flash pan, which ignites the powder in the barrel, which launches the bullet. It could probably misfire one out of three times. It’s not much like the weapons they sell in the gun stores today.

The invisible issue here is that things change over time very slowly. But our perspective doesn’t. We still see the program in its original design. The change has escaped us, but the penalties haven’t. The bill is coming due and everyone has all these entitlements they have been promised. It’s kind of like enjoying a full meal in a very expensive restaurant and informing the waiter that the next person to sit in your chair will pay your bill. The waiter will have none of that no matter how indignant you get. Reality is right around the corner, let’s see if we can kick the can that far.

Let's Define "A Depression" (Reprinted)

2011-02-02T19:37:00.000-08:00

Here is a reprint from May 13, 2007 that you may enjoy. It is a travel back in time 4 years.

Let's define a Depression:

It’s a drop in economic productivity for a length of time. Speculation comes to a standstill, and bubbles cannot exist. There is a tremendous contraction in the wealth of the whole country. The great money making machines (plural) will collapse.

People are beginning to see the housing bubble. The machine that is cranking out new houses, is still making a profit. Building contractors can easily undercut home sellers, no reason to stop yet. Sticky housing prices are a plus (to the builder).

The stock market has Google at $500 and no dividend. It will probably still go higher. I still laugh about the AOL Time-Warner take over. It was like John Paul Jones with the Bon Homme Richard against the H.M.S. Serapis all over again. Then there are hedge funds who hypothecate the whole mess. They seem to be making big returns. When money enters the market faster than the creation of new issues, then prices rise—-forever???

The IRA’s and Mutual funds are increasing in value because of the increase in share price. What you are looking at is not a return on equity, but an increase in the prices of the equity. For example if Google rises to $600 you have a market perception of its new worth. But if IBM doubles its dividend, this is a real return on an investment. A money manager would probably invest in Google over IBM, because the apparent gains from that investment strategy would bring more investors to his fold. (I could be shot for this oversimplification)

If you look at Detroit, houses are so cheap, that you can't build a new one at those prices. The builders are leaving. The stock market could go to the same extreme. In a crash, Investors would demand a dividend of $4 to warrant a price of $100. Otherwise why not put it in the bank. What we would be looking at, is a return to more realistic values for assets. Some comedian during the Great Depression quipped, "I'm not interested in the return on my money, but rather, the return of my money."

The collapse could result in a massive redistribution of wealth, hitting the rich, not the poor. All of this hypothecated wealth would disappear. The million dollar cats, dogs and tulips would be marked to market. Paper millionaires would go up in a puff of smoke.

Decreased consumption, would lead to layoffs. This would expose the credit card bubble and threaten the banking industry, or who ever holds all of this credit debt. Liquidation would then be the final game.

If that isn’t enough, Congress will rise up and try to save us. That's the scary part! It's kind of like getting on an airplane and having an election, to see who's going to be the pilot.

Copyright 2011 All rights reserved

Diminishing Returns

2011-01-24T20:17:00.000-08:00

When times were good, business’s everywhere realized that doubling in size, doubled profits. Now there is a problem of diminishing returns. The consumer is making choices on what to consume. In my quest to be shot for oversimplification, figure that a business that has 100 customers a day needs the first eighty to pay the bills and the rest is the return on investment or profit. Many businesses are seeing a 10 to 20 percent drop in consumer traffic. A drop in business like that is enough to give a store manager sphincter muscle lockup.

If you’re my age, a dentist chair is more than familiar. Now days, there are no long lines. No three week wait, they are going to do it today. I told my boss that I’d be a half an hour late because of a dental appointment—I spent 4 hours getting an inlay. I kept saying no, they kept saying yes. They wanted $400 to begin with. At $200, I gave in and said yes, kind of hard to believe that I have dental insurance. I don’t know what my HMO paid, but my cost wasn’t even close to what I had anticipated.

New Years, I bought chips and dip for the Rose Bowl and found out that it was on ESPN, my basic cable wasn’t good enough so I had to watch it on my laptop on ATDHE.NET. Then a week later, the Number 1 and 2 of college football played on ESPN and I had to watch that also on my laptop. I’m tossing the cable company; I can stick an antenna up in the back and get HDTV. Not the greatest solution, but I won’t be paying for all the Spanish channels I never watched.

The 10 to 20 percent drop in consumer spending is a real problem that is invisible to most of us. The good thing, there is no waiting to be seated or long lines at the checkout counter.

The neat thing about consuming less when it comes to public utilities, your rates increase. That might seem like I miss-spoke, but the utilities have fixed costs and if everyone cuts back, your share of the bill goes up,

Then when you get to government, 15 percent unemployment is about a 10% drop in tax collections. Sandwich that with decreasing property tax revenues. You don’t have to worry about a double dip; the politicians in charge haven’t even felt the first dip yet. There is a time lag where it all gets swept under the rug, and there is an awful lot under this rug.

People are getting less, but everyone still demands the plan they had yesterday. It’s time to realize, there are no government lifeboats, only government life vests made out of cinder blocks.

If you and the wife just retired with a half million dollar nest egg, you’re going to have lots of fun. Two percent of 500K is $10,000 per year to live on. Nothing like the 8% interest rates the banks use to pay, before Bernanke decided he needed to save us.

What we have here is diminishing returns; less earnings coming in and more savings going out. This is the new prosperity. Of course, government has been doing this for years; I wonder why it doesn’t work on the individual level?

Obama tomorrow will tell us that we are emerging from this recession. Think about it. We are getting less of everything and it is costing us more. Bernanke has saved us from deflation, and sentenced us “old farts” to financial retirement starvation.

Bernanke and Obama are kind of like hookers that grew old and fat. They were wise enough to know what worked in the past, but lack the insight to see what has changed.

Copyright 2011 All rights reserved

We Can't Get There From Here.

2011-01-09T20:17:00.000-08:00

Blue Cross just raised some eyebrows in California with its new proposed rate increases of up to 59%. The newly elected Insurance commissioner called for a delay in the rate hikes saying recent increases by the industry were alarming. Not everyone needs health insurance, but if you are old, you are being singled out. All of that spare retirement money, just laying there. It’s a side effect of “quantitative easing” AKA inflation.

I just switched my company health insurance from Health Net to Anthem Blue Cross. My Anthem rates are about $15 a month higher. Just before the conversion I got a letter from Health Net stating that my present doctor, dentist and pediatrician would no longer honor the plan. By switching, I was able to keep all three of our doctors. It kind of makes you wonder what Health Net did that my doctors, as a whole didn’t like. Notice with the proposed Obamacare, who cares how much the premiums are?

Then we have our new Governor “MoonBeam” Jerry Brown and his new budget proposals set for release tomorrow. Let’s just call it Christmas in reverse. The press prints phrases like “Painful budgetary truth,” “Chronic budget shortfalls.” The new governor wants a pay check, he won’t work for free. The truth is, no one valued Arnold’s free advice, it was deemed "Worth less." Make Californians pay for the "Bad news" advice.

A cure-all statement that is constantly repeated by politicians with little effect is: “We need to create more jobs to stimulate the economy.” If no one is buying, what are you going to produce and hire people to make? Better yet, what products can we make here cheaper than out sourcing to China?

So what is the bottom line? --no new money for government, no new jobs, high health care costs, no money for education, fire or police. If you are on welfare, they are going to pull the rug out from underneath you.

There is a comfort level we all enjoy, and it is starting to look as if, --We can't get there from here.

Copyright 2011 All rights reserved

Musings for the New Year

2010-12-31T14:07:00.000-08:00

Another year has come and gone. We have gone from the year that was called the “Worst recession since the Great Depression,” To “The Great Recession.” The price of oil is up to 90 dollars a barrel and silver just hit 30 dollars an ounce (Ben denied printing any money on 60 Minutes).

The debate in Congress for the coming year will revolve around jobs. Of course the new hires will be off shore where there are no mandatory health care insurance premiums to pay.

Look for a Congressional investigation of the retirement funds, CalPERS will be center stage. A lot of life insurance companies could also be in very bad shape; not many annuity models were built on a 2 percent return on equity.

Several States will run out of funds for operation. Technically they can’t file for bankruptcy but they will be insolvent just the same (a vendor or a citizen can’t sue a state for non-payment). You might have to wait 100 years to get paid. Of course that won’t stop several hundred cities from declaring bankruptcy and adding to the frenzy. This could lead to local governments outsourcing emergency 911 calls to India.

Nationwide, expect the median price of homes to increase -- why buy a starter home when you can purchase a McMansion for 20K more ---with low interest and nothing down government financing.

Several European governments could collapse or repudiate their debts; Greece and Ireland come to mind. The problem not fully understood here, is that the real wealth of these countries is their educated youth. These people will vote with their feet if things don’t change and emigrate to other lands.

Iceland’s repudiation of its debt is kind of like a cat walking in front of a chained dog (i.e. the Euro Union). Will the Germans pay to keep the toilets clean in the rest of Europe? This could become another tea party movement, a goose-stepping one on steroids.

The idea that big is better in business, kind of falls apart during bad times. Fixed costs and tight profit margins can kill you. The A & P Tea Company, one of the nation’s largest grocery stores just filed for bankruptcy. Look for several more big names to file for BK this year.

The commercial loan sector is exhibiting severe signs of stress. A lot of non renewable 2 to 5 year loans are coming due. Bernanke is going to have a rough time trying to wall paper over this mess. More debt to add to the residential real estate bank losses.

Congress will have to deal with Social Security and Medicare. The new medical plan will be called Shaft-care---the Democrats and Republicans will unite together and shaft the silver foxes.

Look for oil to go higher and silver and gold to drop in price. It’s a normal reaction when you need to raise cash. Sell the good stuff and hold on to the dogs hoping they will come back. In reality people should be selling the dogs for what they can get, while they are still worth something. Retirement funds will save the garbage because it stays on the books at cost. Of course Ben and the Banks do the same thing.

Tomorrow brings in the New Year. It will be time to figure out how much we owe in taxes for last year. Thank God that we don’t have to pay for everything that Congress bought, where would we get the money?

Have a Happy New Year everyone, and God Bless.

Copyright 2010 All rights reserved

Public Education Doesn't Teach Thinking

2010-12-26T19:26:00.000-08:00

Lately everyone is blaming our poor education system for the state of our affairs. We are turning graduates out of high school that can’t read or write. I have no problem with that, we need people to man the hamburger stands. If they can get my order right “Double cheeseburger, no pickle,” they pass my education test.

When I went to school (in an era fondly referred to as the “Stone Age,” by my son) everyone had a pretty good idea where they fit in. There were three people that always got A’s on all of their exams, then a few more were B students and the rest of us were C students. There were a few D and F students that were destined to become auto mechanics. On the whole, everyone accepted the fact that they weren’t genius material, but we all knew where we stood in the group; if you had a B or an A in one course, you could think of yourself as “above average.”

The TV and newspapers back then provided the news with very little political content. Being a Republican or Democrat back then was kind of like being a Protestant or a Catholic, it wasn’t a big thing except at election time. There was an unwritten law that one did not discuss religion or politics. It was a waste of time, you weren’t going to change anyone’s views, just piss them off (notice how this hasn’t changed).

The high school students today are not much different than 40 years ago. Everyone gets an A now, so an employer needs to weed out the “Car Mechanics” before they hire someone. The big thing that has changed over time is the inability of people to think for themselves and challenge what they read or hear from the media or their acquaintances. The point I am trying to stress here is that people don’t question the statements made by the media anymore, they quote them and/or shop for the news they want to hear.

The other day an economist on the news, stated that gas prices were increasing because of Chinese consumption. If you make 20 cents an hour, how much gas are you going to buy? Are gas prices increasing or is the value of our dollar decreasing. Am I the only one rising up out of my chair in disbelief of what I am hearing?

A while back, a friend of mine made the statement that everyone on the Federal Reserve Board was Jewish and he even got on the Internet and pulled up the article to prove it. The word “everyone” made me somewhat suspicious. The Aryan Nation is not what I call a non biased news source. The concept of shopping for "documentation" on the Internet makes me cringe.

There is no questioning of the “facts” anymore. The more a “fact” is repeated the more valid it becomes. The idea that one can question these jewels of refined thought and laugh at them, as being absurd, is heresy. Using common sense to disagree with what is accepted by our peers isn’t acceptable behavior. Keep your mouth shut or the others will laugh at you. Our schools don’t teach thinking skills, where you question the material presented. You’re asked only for the right answer to each question.

It brings to mind the Rest-Home-Senility-Test where the applicant is presented with a bathtub half full of water and given the option of using a bucket, a cup, or a teaspoon to empty it with. The right answer is not the bucket; you would pull the plug to drain it.

At some point more of us will start to question the options government is shoving at us. No police services, no fire, no schools, no military, but don't cut one penny of retirement, Social Security or Health care. And if they refer to something as a “No-Brainer,” it is you they have in mind (with no brains) and your wallet is in the cross-hairs.

It's time to start questioning the answers we are being given. California can cut all services and still not balance its budget. But of course Ben Bernanke, "Keeper of the Federal Purse," still has checks in his check book so I guess we are OK for now—if we don’t think about it too hard. We don't want to upset an upside down apple cart--do we? Give it some thought--there really isn't too much to lose if we did, go figure!

Copyright 2010 All rights reserved

Congress is not a Christmas Solution

2010-12-19T20:12:00.000-08:00

Everywhere we turn, someone in a legislative body is passing a law to solve a problem. We have passed a laws handing out free health care, one for retirement benefits, one for a gay military, one for bank bail outs and there are several against drugs. Did it every occur to these lawmakers that laws just regulate people or their entitlements. They don’t solve problems, they create new ones.

The laws dealing with drugs backfire in an unusual way. You get caught dealing drugs, you go to prison. This is really an “Advanced Educational Training Camp” where you learn how to do it right. Plus you can pick up new skills, like lock picking, and identity theft. Let’s face it our high schools just don’t have the resources to offer these courses.

Then we have these wonderful laws setting up retirement plans. They have been working just great until a few people in government started to wonder aloud, where is the money coming from to pay for all of this? CalPERS states that it is making 7.75 percent interest on their investments; do we dare accuse them of lying or just laugh at their claim.

Congress cannot pass a law that will create jobs to replace the ones that were lost; most of those jobs are gone forever. They passed laws setting the minimum wage and demanded more taxes from these rich employers. The net result, whole industries moved off shore to produce their product and then import it. If you want your bread buttered for free, guess what, the butter isn’t going to be there for long.

Now it’s OK to be gay openly in the military. I can’t figure that one out. The last thing you would ever want to do is walk up to a marine and ask him if he was gay (you body probably wouldn’t be entitled to a military funeral). I guess you don’t have to be “A real man” to join the army now (that ought to be a real boost to enlistments). The only reason I bring this up is because of its insignificance. It’s not like half of the voters are gay, they are a very small part of the population and they get a tremendous amount of attention from Congress. The gay population can’t be more than 3% but it is at the top of the “To do” list for Congress. When you think about it, a bill on cancer research would get a “Ho Hum,” but a bill having to do with gay rights will get that Congressman’s name in the paper with a photograph. This program could work out real well with the Navy; the sailors wouldn’t have to come home every 9 months to be with “loved ones.”

Congress also reduced the Social Security tax by 2%. My only question is why? Isn’t this supposed to be money saved towards our retirement? (of course the Supreme Court said that it was a tax and not a retirement plan) So you get to spend it now instead of later—all $400 of it. It is very hard to raise taxes, and even when it has been done, and then reversed later in time, you feel the burn a second time, for the same thing. We know that Congress needs to raise taxes, but they seem more like clowns running a circus; “Vote for me, and get a free ride.”

The thing we really need to ask ourselves, are all of these new laws constructively solving our problems? The second question we need to ask, can they accomplish the task? The third question you need to ask is where is the money coming from? And the fourth question, does anyone really understand the bogus financing? If you have read this far, you know your up to your neck in quicksand, but hey, this is only a dream---- waking up could be a real nightmare.

Santa is coming to town next week and surprisingly he doesn’t look a bit like a Congressman. Just maybe we need to think about what we need for the coming New Year and sadly it is jobs. All I can suggest is help someone you know in need; God Bless and Merry Christmas to all.

Copyright 2010 All rights reserved

The Gold & Silver Shortage---A Future Brick Wall

2010-12-11T19:38:00.000-08:00

Commodities are the only game left in town. This is the one market that Ben can’t effectively control. And this could be his downfall. The real cost of borrowing money is zero if you factor in inflation. This has a win win effect for investors buying futures. In simplified terms, the future price of a commodity future one year out would have a premium. It would be the interest on the money for the term of a year, needed to purchase the commodity on the spot market, plus storage costs over the year before delivery. So a free ride with interest charges, with incidental storage costs and an add in for the volatility cost.

Commodities as a whole are rising in price. A lot of it is inflation related. Since there is no cash return for dollars in the bank; commodity speculation is the new frontier open to abuse. In the futures pit, one trader will sell the future delivery of one million barrels of oil, say for November 2011. At the maturity date for that trade, the seller delivers the oil or buys his contract back. All contracts are matched buyer to seller. If you are speculating, you never want to take delivery. The speculator sells naked contracts for delivery if he believes the price will drop and he buys contracts when he thinks they will increase in value. This person will close out the deal by selling or buying the opposing trade back. Margins are as low as 6 percent. So to control one million in gold, you need 60K in face money.

The commodities market has a valid justification for its existence; it helps take the risk out of business ventures. An airline would buy jet fuel futures a year or two out to limit upside costs. The company is not sure what the future market price will be, but buying a futures contract for later delivery, locks in their costs. If a gold company has production costs of $800 an ounce and plans to produce 1000 ounces of gold, they would sell 10 futures contracts for delivery say 6 months out at $1300 an ounce. This guarantees that they will meet their payroll and keep the bookkeeper happy.

For every 100 futures trades, only 10 are real (a commodity actually changes ownership from one holder to another). All the rest of the transactions are speculation. A problem can arise in the futures market if the prices take off. All of the buyers of gold and silver futures might demand delivery---especially if the price increased dramatically.

The Hunt brothers tried this in the 1980’s and successfully cornered the silver market. They were buying it and taking possession. Needless to say prices took off. The Hunts had a legal corner on the market and it was about to ruin a majority of the Chicago Board of Trade (who were opposite the trade). So the CBOT changed the rules on the Hunt brothers and limited the number of contract that could be held, to 10 million oz and all contracts over that amount, had to be liquidated. Naturally that saved the ass of every scumbag CBOT trader and bankrupted the Hunt brothers.

With a little thought, it doesn’t take much Gray matter to figure out that one can run the futures market with only a small amount of real gold changing hands, and at the same time have several million ounces of contracts being traded daily.

Many people have their gold and silver stored in bullion banks. IMHO, I don’t think even one of those banks could payout on a modest 10% run on the bank. That’s why it takes up to 30 days for delivery when you request it. They have to go out and buy it on the open market.

The question we need to ask is “Have we built a gold and silver bubble, or is this perceived increase in price, a measure of how bad this quantitative easing has gotten?” The futures market could turn into a tar pit if everyone decided to take delivery of their gold and silver.

Bernanke has tinkered with reality. Maybe, its gold and silver’s turn to tinker with Ben’s QE2. Do you know where your gold and silver are? They might not be where you thought they were.

The $20 coin at the left, was in circulation 100 years ago and has kept its value quite well. The old money is no longer in circulation; it's worth quite a lot more than the 20 dollar bill it represents today, go figure.

Copyright 2010 All rights reserved

Just Say NO to DRUGS DEBT

2010-11-26T11:13:00.000-08:00

Well they bailed out Greece and now they are going to bail out Ireland. This is proof that there is a pot of gold with every rainbow. Who bailed out Greece and Ireland? And with what from where? Now we have Spain, Portugal and Italy waiting in the wings. Grab a tin cup and queue up, it's free money!

These European government "train wrecks" are the result of borrowing and spending too much money in the past for things that they couldn’t afford in the first place. Many countries are broke and raising taxes is not an option. Ireland doesn’t need a bailout loan, they need to wipe the slate clean and start over. If they don’t do that, their citizens will leave the country in droves. Saving the financial world order will enslave us to our debts. Idealistic planning and dreaming got us into this mess. The good times are over. The world’s great social programs are underfunded or bankrupt. The people that benefited most from them could never be expected to contribute their fair share. When is enough too much?

In the United States, we are now spending money we never even dream of spending when times were good. The only way to pay the bills today, is to print dollars; it certainly won’t be raised in taxes. Four million homes in foreclosure and twelve percent unemployment, kind of suggests tax collections will be very lean in Obama-land this year and for many more years down the road.

Where all of these new found funds are coming from to bail out everyone? In Europe, it is the IMF to the rescue. Ever wonder who's in charge at the IMF?-- Ben and Tim!

In this country The Federal Reserve is buying Treasuries from Goldman Sachs; which is very logical when you think about it. The Fed needs to maintain interest rates of bonds already sold on the secondary market; therefore they have to buy every bond presented at par to maintain the interest rate. This insures that the rates at auction stay low without the perceived hand of government bidding at the auction. This could increase the money supply on a rather large scale (depending on how much is presented for redemption). The Treasury sells T-bills to China. China, later, dumps the bills on the open market and Goldman Sachs buys them for Bernanke at the Fed, keeping the interest rates low.

Are we really facing deflation or an end of “The good times?” The free-ride-gravy-train jobs are gone. In the 1930’s there was a measured drop in wages, people were desperate for work. The hourly wage didn’t keep dropping, there were limits as to what people would accept. The jobs that really took the hit were high paying ones, they disappeared (a lot of them were government jobs). Things returned to more reasonable levels.

Presently a lot of “million dollar homes” are slowly being revalued back to 240K. Is this deflation, or a return to reality? We could consider the release of air from the real estate bubble as a form of "deflation."

The Germans could be the key to this whole mess. Why should they have to foot the bill to keep the public restrooms in the rest of Europe clean? Their financial system has been through the wringer twice, once just before the Great Depression and again at the end of WWII. More debt is not a solution to solving the world’s financial crisis. The assumed financial responsibility to pay this borrowed money back is not there, "Just put it on our tab." The German’s are going to say “NEIN” to the PIIGS in Spain and that could spell the end of the Euro. This won’t set well with Das Über Führer Ben Bernanke.

Copyright 2010 All rights reserved

Bernanke the Great Invisible Tax Assessor

2010-11-14T21:35:00.000-08:00

QE2 used to refer to a luxury liner that sailed the ocean. In today’s world “Quantitative Easing 2” sounds like a euphemism for a bowel movement in a retirement home. Notice that no one has described this easing using the word “Titanic,” or the word “Gigantic.” The first portends an aurora of imminent doom and the latter suggests something that is going to cost a lot, like government health care. The average person has no idea of the financial impact on their wallet. QE2 is just another government program.

The idea that Ben Bernanke can take 20% of everyone’s savings without Congressional approval and spend it on bailouts is to say the least very upsetting. The average guy on the street has no clue as to what the Federal Reserve is doing. Their money is safe in the bank. Ben’s technique is called Inflation. We’ve lived with it all our lives. Nobody loses a dollar on the deal. Your $100 dollars only buys $80 of food after the fact. Debtors love inflation; you borrow real dollars and pay the loan back with cheaper inflated dollars later. Heaven help us if deflation was to creep into the mix—our savings would have more buying power. The biggest debtor that comes to mind is the US government ---HMMMM

The average worker making 40k a year, still gets 40K, but after QE2 it will only buy 32K of goods and services. The worker hasn’t seen the hand of the government messing with his pay check, but the price of everything went up. The bank depositor is a babe in Toyland. Oblivious to what is going on behind the curtain. The worker that saved up one million dollars now only has the buying power of 800K and he's clueless until he tries to spend it. Of course, the person without a dime to his name has lost nothing.

Add up the taxes, Social Security, Health Care, Federal tax, State tax, gas tax and sales tax. These are all visible. Then there is the dirty little Ben Bernanke tax (It’s not a tax, they are going to pay it all back—Guffaw, Guffaw).

The Federal Reserve's powers need to be curtailed. This institution was not created to perform the functions it is now exercising. Bernanke has been delegated tremendous power over our financial system without any Congressional say so. He needs to be reigned in and throttled down or maybe just throttled and fired.

Of course, between Obamas health care and Bernanke's bailout we have a plan that works only because nobody has to pay for it. This must be heaven. I'm sure this will become even more plausible after consuming a 12 pack of beer.

Copyright 2010 All rights reserved

Payback's a Bitch

2010-11-06T09:23:00.000-07:00

Now that the elections are over, the Congress and the President can get back to business. Or can they? The honeymoon is over and we are starting divorce proceedings. The Democrats, with the health care bill, snuck up on the Republicans and hit them over the head with a shovel. Now, the shovel is gone and Obama says he will work any way he can, with the Republicans to get us out of this mess.

Obama had to have known the repercussions when he forced the health care legislation through. In essence, he told the Republicans to go fly a kite; we don’t need your votes or your input.

So what happens during Obama’s next two years of office? Figure that, the Republicans will act like a mad crazed foreclosed home owner; concrete in the toilets, sell the appliances and trash the house. Forcing this health care bill through Congress in this manner was the wrong way to go. I would chalk his mistake up to pompous arrogance (let the GOP eat cake).

Revenge for the Republicans’ will be sweet. Obama will have his health care plan (without financing) and a non functional Congress. This could be a good thing. The economy is a mess and there is no political solution.

Tax revenues are decreasing as government expenditures are rising. More Social Security, Food Stamps, Unemployment, Health Care, Bank Failures, Freddie Crapola, Fannie Caca and the list goes on. Reality is right around the corner, along with Deck Chairs, Icebergs and Lifeboats.

The Republicans and Democrats in Congress are kind of like a husband and wife. There is a lot each of them might want to do, but if they’re not equal partners, there is no marriage. President Obama will figure it out; no new Democratic legislation unless he signs every bill the Republicans pass. How likely is that? It's a little like the wife catching the husband kissing the neighbor's wife. He's going to pay for that kiss a million times over.

Copyright 2010 All rights reserved

The Fear of Deflation

2010-10-24T19:13:00.000-07:00

During the Great Depression farmers poured milk in the streets rather than sell it for the price offered. And the result back then, Congress passed farm subsidies supports. Where is the deflation today? Don’t even mention housing, it still has another 50 percent to drop around here, just to get back to the year 2002 level. You don’t see oil refiners pouring gasoline in the streets to protest low prices.

In the 1930’s there were massive bank failures. The country lost 90% of its savings. There was no unemployment insurance or FDIC bank insurance. The deflation of that era was real, real money was lost. Measured by today’s values (adjusted for population and inflation), it was the equivalent of about 14 trillion dollars.

Anyone out there that thinks we are facing deflation, point to it, where is it? My wife just bought 4 new tires $750. Hamburger is four dollars a pound and Potato chips are four dollars a bag. Then there is Google at $600 or Apple stock at $300 per share and neither pays a dividend. The investor is chasing the wind.

The government is now dictating to private industry, like banks and health insurers, the prices they can charge (no deflation here). Not long ago, a business could charge whatever they wanted. Competition determined whether or not they survived and stayed in business. Now, by God, it’s a crime to make a profit (We need to punish these robber barons exploiting the masses)! Net result, the insurance companies are closing shop and moving their investment money to something offering better returns. Obama-care may be the only insurance left, with government “regulation” of private health plans. Do we hang these profiteers? Or recognize it for what it is, inflation.

Debt is money owed. As debtors default, the money loaned to them for that purchase normally goes up in smoke. The government process of saving debts like home loans, by buying them or guaranteeing their value is far from being deflationary. Deflation is impossible when the government prints the cash necessary, to redeem the bad loans the banks are holding on to.

The homeowner that sold his home for one million dollars got cash and the bank got an IOU from the buyer. Now the government is going to make that IOU good. Everybody wins???? Just how is that possible??? This isn’t deflation, it is massive inflation. The money received by homeowners who sold at the top is real money. The money paid by the government to reimburse the banks for the buyers that walked is printed money. The note is paid in full by the government with “thin air” funds (printed money). Instead of the funds entering the market from a home owner’s earnings for 20 to 30 years, it is printed and hits the market in bulk as a lump sum.

Deflation is where your dollar buys more and you work for lower wages. Wage earners today are getting paid the same amount per hour, and their paycheck buys less than it did last year. That’s not how deflation works. But it can’t argued, the government is saving us from the ravages of deflation. God bless them and their infinite wisdom. We just might not be very receptive as to how this plays out. Both roads, lead to the same ultimate destination, the poor house. Deflation is fast and furious; hyperinflation is slower and more painful. Congress has it figured out; if we are going to the poor house, why walk? Ride in style, take a limo!

Copyright 2010 All rights reserved

Quantitative Easing Sucks

2010-10-14T20:50:00.000-07:00

The term Quantitative Easing is familiar to everyone. It is now referred to as QE followed by a number. What is it? It is printing money! It’s a little like the euphemism, “Used Dog Food.” It doesn’t sound bad until you give it some thought.

Did gold jump 100 dollars, or did the Bernanke dollar lose value? We have a President that thinks that the banks, Wall Street, and the rich people of this world are responsible for the current mess we are in. And by God we will make them pay Rah! Rah! A President chooses to tax the rich as a way out of this mess? I don’t follow it.

Congress has always taxed the rich; no need to wave a flag while doing it.

No cost of living increase this year, just like last year, for Social Security recipients. That could make for an interesting election next month. The checks don’t go as far as they use to, especially when the government removed food and energy from the cost of living index. The only things still left in the index are Denture-Grip, Preparation-H and Desenex Foot Powder and that pretty much covers everyone from head to toe (from a government perspective).

This quantitative easing by the government is keeping interest rates artificially low. Even the retirement funds which depend on interest rates for their income are being hurt by these unrealistic low returns on bonds. (Double click on image below for a larger view)

Notice that the CALIPERS figures above are a few years stale and the present discount rate is nowhere near 4 percent. These figures suggest that they are still trying to lock the barn doors after the barn has burned to the ground.

Gold and silver use to be a very poor investment (they still are). They pay no interest but they tend to keep up with inflation. Cash is getting no interest in the banks (if you count in inflation). Of course that light bulb goes off in your head saying "borrow cash and by gold." Do you run with the herd? Caution could be the word that wins the day. A buying frenzy here, could result in government intervention.

Gold and silver are increasing in price. Is this the last bubble in town? Or maybe it’s just a reflection of the true value of the dollar. Quantitative Easing is the name of the game and everyone with paper dollars gets to play (shh ---it’s only a tax on our savings).

Copyright 2010 All rights reserved

The Freddie and Fannie Scam

2010-10-05T21:48:00.000-07:00

So you want to buy a home. Where do you get the financing? Aren’t Banks just dying to loan short term funds at long term interest rates? Remember back to the Savings and Loan Crisis of the 1990’s, the Savings and Loan companies loaned short term funds at low long term rates. It worked great, until interest rates rose. It’s pretty hard to believe that banks today would venture to write 30 year paper at the lowest interest rates of the last 50 years. So from here, we can pretty well deduce that they won’t even attempt it.

Say you want to sell your home, the question arises, “sell it to whom?” There is no bank financing out there. What bank is going to do a home loan at 4 percent for 30 years when they can do a car loan for 7 to 9 percent for 5 years? Home loans are a lost cause. Of course, the car market isn’t on fire either, but on the other hand, Freddie and Fannie are obligated to guarantee new home loans.

But wait one moment; it is different if you want to buy a home. Fannie and Freddie have a home for you with financing. Now how is that possible? They offer very low interest rates, with little or nothing down. The only catch, you have to buy one of their homes. The Federal government doesn’t have to write any new paper, they already own the homes, they guaranteed the loans.

The government people in charge of selling these Freddie and Fannie homes are unloading them onto anyone that can “qualify.” Remember way back in 2006, everyone was fogging a mirror, I guess this time it’s different. They even get to take it off their books once a payment is received. Of course, you have to remind yourself, all they’ve done is gotten someone else to take over the payments on a non-performing loan. Notice each sale reduces Fannie and Freddie's inventory. It’s kind of like selling life insurance in the suicide ward of a mental hospital—there is no problem with sales, but can you afford to stay in business?

Basically what we have here is a government program/scam that keeps prices artificially high by providing government financing at very low interest rates at prices close to what the home originally sold for. This way the government limits its losses on the GSE’s at the expense of the new home purchaser. The trouble with buying a Fannie or Freddie home is the fact that there is no real market, it is all artificial. The new owners have no skin in the game. These GSE’s are praying for a miracle and increasing unemployment, is not the miracle they had in mind.

The quality of these new buyers is suspect, not to mention the price’s of the homes or the very low interest rates. And then there is that invisible inventory, I guess that’s the stuff that Fanny and Freddie don't own.

What would happen if the Congress tossed those two hookers (Fannie and Freddie) out in the cold? The taxpayers wouldn’t be buying any more homes in Detroit to bulldoze down. The present setup, is a little like charging a $1000 massage on your Visa card -- When your wife sees the bill, you get to pay for your mistake twice.

Copyright 2010 All rights reserved

Disasters Without Damage

2010-10-01T21:10:00.000-07:00

Take an earthquake or hurricane, homes are destroyed and the infrastructure is broken. No lights, no gas, no food deliveries. Transportation cannot move and services are disrupted. A person could be stuck in their home for several days to a week. Emergency hospital care would be limited. Food and supplies pour in from unaffected areas.

Let’s picture an "Invisible" disaster. Suppose the value of our currency fell to zero. Money became worthless. At this point, is there any reason for a grocery store to stay open? Would the employees work on faith? Would gas stations feel the need to sell gas for the old dollars? Would the truck transporting toilet paper from Georgia to Los Angeles feel obligated to deliver it, if he couldn’t buy diesel fuel in Kansas? The supply of necessities to a city would be a major problem. No cash, no product. Plus what would consumers use for currency to pay for it with, even if it was delivered?

In a real disaster, everyone is prevented from doing their job because of barriers created by the disaster. In a financial meltdown, it is a little different. Food and gasoline deliveries to major cities would stop. Why go to work, they can’t pay you. Since money would not buy anything, there would be looting. If you can’t buy it, steal it. The banks would be hit and your safety deposit box trashed. Figure that after two weeks of fires and looting, the National Guard would have a handle on it. There will be no fire department, police or ambulance service.

We take for granted the aspect of plastic credit cards and the concept of what is cash. An IOU is not cash. A credit card is a promise to pay. If the financial system collapses, it doesn’t matter how sincere your promise is to pay, it just won’t happen and it is no fault of the sincerity of the user. Of course this just can’t happen—can it?

With the collapse of the dollar, the government would have to print a new currency. Credit cards would be non functional. Banks would have title to assets like cars and homes, so not all depositors’ dollars would be lost. How fast the new currency could be deployed is a real question. Could people work at their present jobs without pay for two weeks? Without gasoline sales, most people couldn’t do it.

The only good thing about a currency collapse is that the nation debt would also be vaporized (If you are owed money, you get to cry). From there, it would be no big deal for the new government to hand out five thousand dollars to everyone to help kick start the economy and the country. The only trouble would be how to value this new currency. It would have to have a perceived value, otherwise how would one determine a fair price for a gallon of gas or a pack of smokes? At this point the government is going to have to pick a commodity or basket of commodities as a reference point of value. Gold and silver come to mind. Would the new dollar be worth an ounce of silver? Would your weekly paycheck equal an ounce of gold? [insert your guess here]

The thing not realized so far, is the fact that this whole discussion has been structured under the assumption that everything will be orderly. What happens if it is not? Social Security, all retirement benefits, and bank savings would be gone. A lot of people would be very upset to say the least! Bastille Day comes to mind for some odd reason. Would we still have a Democracy?

This article might seem like a lot of gloom and doom, but the scenario above, could be the reason Congress decided to spend a trillion dollars of nonexistent TARP money to keep the game going. What the hey, it's only paper money.

When you think about it, a financial collapse can be worse than any event ever thought up by mother nature, it doesn't do any physical damage. It doesn't try to kill you, but rather just ruin your retirement and that just might kill you or make you mad enough to [fill in the blank/blanks].

Copyright 2010 All rights reserved

Unintended Consequences (Reprinted)

2010-09-26T19:53:00.000-07:00

Here is a reprint from April 10th, 2008 that I added a few paragraphs to that still hits home.

In 1939 we had “Appeasement” to keep from fighting a war with Germany. It kind of worked for a couple of years; we still had a war, but if we had nipped it in the bud, it would have been small. World wars tend to be large.

Congress gave a subsidy for growing corn to make ethanol, and the price of beef went up. Turning food into fuel is pure lunacy (IMHO). The funny part is the subsidies more than make up for the unprofitably of the venture. God bless Congress for their infinite wisdom, their group stupidity will kill us (if their kindness doesn’t). I would like to see the gas stations give you the quart of ethanol instead of mixing it in your gas. You’d be able to fill your tank and get tanked. The DUI would be an unintended consequence.

The Fed dropped the interest rate when the stock market took a dive in 2001 and the real estate market took off. The solution to one problem created a new problem; of course everyone knows that real estate has hit “bottom.” The Fed bailed out Bear Stearns and God knows where that is going yet. Ben’s 30 billion dollar loan will buy a lot of “Blue Sky” (assets with intangible value). B of A is about to throw away the sucked out dry carcass of Countrywide. I guess they get to keep CW’s loan servicing department. This outcome however, was far from unintended.

Congress a few years back passed a law that allowed farmers to depreciate heavy farm equipment over five years. Every business in the US bought a Hummer as a 50K write off! A great business expense when gas was $1.50.

Three paragraphs following, added September 26, 2010

Congress enacted a fine on airlines that could cost them a couple of million if they left a plane waiting the the tarmac for 3 hours. The net result,The airlines eliminate the possibility of a fine by canceling the flight. It's very upsetting to fly into Chicago and find out your flight to DC has been canceled--I remember it well!

Obamacare prevents insurers from putting caps on medical payments for children. The net effect, insurers will stop offering coverage for kids.

A few years back the Georgia legislature passed a bill against abusive loans by banks. The net result, you couldn't find a bank to borrow money from to buy a home, in the state of Georgia. That got fixed rather fast.

We need to accept the idea that the solution to one problem creates a new problem. If that wasn’t the case, we would have solved all of humanity’s problems hundreds of years ago. Once you realize this, you begin to understand politics. The problems are real, but the solutions are only trade offs. The whole mess will sort itself out with or without any intervention. Intervention will not change the final outcome.

It reminds me of the saying “give a man a fish and you feed him for a day, Teach a man to fish and you feed him for a lifetime. The unintended consequence here is you have a couple of guys in a boat drinking beer all day. The additional unintended consequence is a mad wife with a frying pan waiting for her drunk husband to crawl home. Ouch!

Copyright 2010 All rights reserved

The Tax Cut, a Carrot on a Stick

2010-09-18T09:22:00.000-07:00

Obama wants to raise taxes on the rich but not the middle class. Is it really a bright idea, to piss off the rich by singling them out? It is kind of like a pick-pocket walking up to you and telling you he is going to steal your wallet; at that point he has little chance of success. It sounds like a great statement to the masses, but when you look at the Health care bill that just passed, whose going to get the bill for that (I give you one guess)? So if you are rich, what do you do? Hop on your jet and move to the Bahamas where tax laws are nonexistent? Hmmm Of course I will have to admit, people who get rich quick assume it’s because they are more intelligent than those around them. That mistake can cost a lot if you buy the multi-million dollar homes and the toys that go with it. There is high tax maintenance on all of that stuff. The “Look at me, I’m Rich,” game cost money to play--- I’m just glad there are people out there that enjoy playing that game.

Obama’s idea that we are coddling millionaires is ludicrous. When I was a kid, the average wage earner might earn a quarter of a million dollars in a life time. Millionaires today are a dime a dozen now. Many people I have bumped into have matter a factly mentioned that they are millionaires. I don’t know who they are trying to impress, but when my dad earned 5K a year and our home cost 25K, a million dollars was something. In today’s world, the “air” part of millionaire is the only real part. Not too long ago a million dollars in the bank would earn 100K in interest a year and there were taxes to pay; but at 2 percent interest, your return from the bank is a paltry 20K. Many a person saving for retirement needs to consider the fact that a million dollar nest egg isn’t much if you end up in a rest home at 70k per year ( that goes double in spades if you are married). It will only last about 8 to 12 years. The concept of being a millionaire hasn’t lost its luster in the mind’s eye; everyone overlooks the reality that the bar has been moved up to billionaire, and that of course has nothing at all to do with inflation (cough cough).

If these George W Bush tax cuts expire, the rich escape, the middle class gets hit and the poor get a free ride. And the funny thing is, it happens without Congress doing a damn thing; everyone’s taxes return to pre-Bush rates (Is "pre-Bush," "Democrat" spelled backwards?). The concept of making a tax cut permanent, runs against the grain of Congressional job security; it would be the last tax cut we would ever hear about. This way the tax cut expires and Congress can vote again to cut taxes. It's a little like a furniture store holding their annual "Going out of Business sale," only in this case, Obama wants the rich people to pay full price. I guess millionaires don't shop at Walmart, do they?

Copyright 2010 All rights reserved

Educational Loans, Student Slavery to a Bank

2010-09-12T22:27:00.000-07:00

It school time, and a lot of our sons and daughters have headed on to college. This is where parents and the young who wish to improve their station in life seek out college loans to finance their great quest. Whether it is a trade school or college, the government will co-sign on these loans. What most people don’t realize is that a college and a trade school are businesses. Without customers who can pay for the services to be rendered, they cannot survive. Student loans are the life blood of higher education and more so for the fly-by-night trade schools.

There is one little snag to the whole warm and fuzzy idea of higher education. Nowhere does it say that you will be offered or even find a job after graduation. The other thing not mentioned is that your field of study might be flooded with graduates or technicians already looking for a job, X-ray technician and dental assistant come to mind. You might not like the idea of moving to Montana, Wyoming or Tennessee, they are not the greatest places if you’re single looking for a wife. Plus usually the single mom with kids, looking for a new career gets cornholed into a trade school that spits out plenty of hope but no real jobs.

So here is what happens, the student applies for these student loans and gets everyone of them. Your kid can run up 20K a year on student loans. So it is not uncommon for a college graduate to have 80K (or more) in student loans and the payments start 6 months after you graduate. Sounds just great doesn’t it, but what happens if you can’t find a job? Once you sign that promissary note, you can never file bankruptcy and wipe that student loan off of your slate. It follows you for life.

Here is a little story of what happened to me many, many years ago at Syracuse University. I graduated in June of 1971. My student loan came due six months after I graduated. The bank sent me a letter with a promissory note to sign for all of the money I had borrowed. The amount was for $4,000 which by today’s standards would be about $40K (inflation—go figure!). As a young padawan, I read the note and several things stood out. (This is from memory, so the wording is not legalese and it has been a long time—39 years) My debt to them was to be paid first even if I filed for bankruptcy. I thought that a little unfair if I owed money to other people, I thought everyone should get a slice of what was left. Then there was a passage that said if the US government no longer existed, I would owe the money to the new government. I thought that a bit strange also. Anyway, there were three lines of verbiage that I did not like, and took a ruler and a pen to and crossed them out. I signed it and mailed it to the bank. They called me and asked me to come down to the bank and I did. When I got there, they informed me that I couldn’t cross out items on their legal agreement, they wouldn’t allow it. The bank manager was saying “You can’t do this!” I explained to him that I already received the money, spent it, and if he didn’t like the agreement, I wasn’t going to sign another just to please him. They defaulted my loan even though I had never missed a payment.

To make a long story short, I paid the interest on the loan every month for 10 years. About that time I was making more money and they called again to see if I would increase my payment. I had been talking to this collection agent for several years and I asked him what the payoff was? He said something strange, “Offer 50 cents on the dollar and see if they take it. So I offered them $1,500 to pay off the $4,000 note and they countered with $1,800. I wrote them a check.

I don’t know if things are still the same, but when Congress offers money to students and these loans are excluded from the bankruptcy laws, they have enslaved our college students to the banks. My advice to students who receive a promissory note to sign, tell the bank to go fish. You already have the money. All they can do is ruin your nonexistent credit rating.

I'm not suggesting that college students walk away from their obligations. But the right to file bankruptcy would make these lenders think twice about the amount of money they would lend to a teenager who has never held a job.

Bankruptcy is a way we can preserve our right to prove to Congress that we don’t have to pay for their bumbling stupidity. College should be the door that opens to new opportunity, not one that leaves students prey to their trusting naive innocence.\

Copyright 2010 All rights reserved

Where's the Money?

2010-09-06T21:48:00.000-07:00

A while back Congress came out with the 814 billion dollar stimulus program. In essence they borrowed money to pay others who lost money in the grand scheme of investment finance. Today Obama announced a 50 billion dollar work program. Isn’t it missing a zero? It seems rather paltry. And then on top of it he blames the Republicans for our current economic plight because they are opposing his plans for the country. From my vantage point, it looks like the Republicans only have an issue of how do we pay for all of this. It’s a little like taking 10 of your friends to a massage parlor and telling the Madam that the last guy is paying. If the lady of the house is a Republican, the last guy with the money, is going to move to the head of the line—naturally of course he can’t find his wallet.

The Democrats are beginning to look like dead beats in a restaurant with no money,trying to stall for time by ordering another entrée. The New York Times today suggest that the government should let the housing market collapse.

“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”

The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent.

The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.

Caught in the middle is an administration that gambled on a recovery that is not happening.

And then we have all of this stuff exploding around us, absurd government salaries, retirement benefits and States going broke. Unemployment is doing just great; too bad it’s not a stock. Most graphical comparisons to historical statistics are off the charts. One news article the other day, called this, “The worst recession since the Great Depression.” When you think about it, most things in life, start out small and get bigger. So we started out with a “small” recession and now it’s getting bigger.

The Democrats think that the solution lies in bigger government and increased spending. The Republicans are not quite so sure. The elections are coming up in November and they could prove quite interesting. California could be the state to watch Jerry Brown Dem vs. Meg Whitman Rep; one’s too old and the other’s too rich. The present Republican Governorator has been giving the Democratic legislature a wedgie, still no budget for the fiscal year that started in July.

The State of California will be writing IOU’s in a couple of weeks. I wonder how that works if your paycheck is direct deposited? The electronic transfer of an IOU to your bank account?? It looks like Halloween pranks are a little early this year.

Copyright 2010 All rights reserved

Interest Rates Suck Big Time

2010-08-27T20:27:00.000-07:00

The going joke is “If you ask 3 economists their opinion on the economy, you get 5 different answers.” The question arises today, if economists have inside knowledge to the economy, why didn’t they spot this mess coming years ago?

And then we have the question will it be inflation or deflation. Out come the experts with all sorts of graphs and charts pointing to deflation. Meanwhile I went over to Wendy’s for my 99¢ bacon cheeseburger today and the price is now $1.29. That’s a 30 percent increase. And if that wasn't bad enough, my Gin went up a dollar to $14 for 1.75 liters (I'm not sure that at that price it is considered Gin, rocket fuel might be a better description).

The real question is this, the government borrowed 10 trillion dollars from all of us and we feel comfortable loaning it to the government for only TWO PERCENT INTEREST. I’ve heard of The Dumb Friends League, but investors aren’t dumber than pets, are they? What gives?

Borrowed money is one thing, printed money is another. When Ben buys one of Geithner’s T-bills, that is printing money (the Treasury sells Bernake a T-bill and the Treasury gets a bank entry for cash in the government account). No real dollars are printed; from there, the government just prints a Social Security check or an unemployment check. Of course, the government can tax and the Treasury can redeem Tim's markers at any time. The real question comes up, how much in markers does the Federal Reserve hold? I’m guessing, anywhere from 2 trillion to 10 trillion dollars. Just the management of Freddie and Fannie implies about 3 trillion right there. What they bought from the banks could be a rather absurd amount, possibly mind boggling. No saver has lost a bank dollar, but our government had to pony up printed dollars for the losses on all the failed banks' ledger sheets.

Look at it a different way, say you have one million dollars in the bank. Gee, that means you get 20k a year in interest. Let’s not all queue up at once to take advantage of this wonderful offer. It sucks so bad, why even put your dollars in the bank? Why not just spend it?

The government has printed money, borrowed money and spent every bit of it. The only reason there is no apparent inflation with interest rates is because the government has taken risk out of the market, all bank loans are insured against loss. Without risk, there is no need for higher interest rates. Of course one issue pops up. Gold had one hang up, it paid no interest. Today looking at long term, GOLD is better than holding government paper.

Ask yourself one question, where will the money come from to pay for all of the health care and Social Security benefits in the future? The money isn’t there; it will have to be printed. We couldn’t pay for it as individuals. What makes it more affordable as a government plan? Do we charge everyone a fair share for all of these new benefits? That doesn’t seem very likely. The absurdity of zero percent interest rates and a national debt towering over 13 trillion dollars should set off an alarm bell somewhere. Credit cards are charging 14 percent. No discount for taxpayers???--kind of figures doesn't it.

The thing we need to interpret from this mess, is that the information we are getting from our government is incomplete. The pieces of this puzzle are all there and they do not fit together as expected. Zero interest rates are similar to a hooker offering free sex. How you ended up in a closet nude, with your hands tied behind your back, is another story.

Copyright 2010 All rights reserved

The Impending California “Bankruptcy”

2010-08-17T20:27:00.000-07:00

The State of California taxes its residents and provides services. The legislature which has a Democratic majority can’t quite come up with a two thirds vote needed to raise taxes (two Republicans need to vote with them). And of course since the Governor is a Republican, it’s all his fault. The State is running out of funds; expenses are greater than the incoming taxes.

One thing little noticed, in the last 20 years, because it has been so gradual, is the absurd rise in pay and retirement benefits for public employees. It used to be that you got your experience in the public sector and then moved into the private sector for a pay raise—government jobs used to be a joke.

Presently, we have a State that can’t produce a balanced budget without "creative accounting." The thing to remember is that California is supposed to pay education and bond interest first out of the tax revenues. Then there is this State retirement plan called CALPERS.

CALPERS assets dropped from 260 billion to 180 Billion in a span of one year. At the time, 260 billion was sufficient; dropping to 180 billion ought to set off an alarm somewhere. The implication here is that the State guarantees your retirement even if the investors at CALPERS screw up. These money managers bought boat loads California Nevada and Arizona real estate paper. All we need now is a stock market crash and CALPERS will be sucked down a drain. It is assumed the taxpayers of California will be responsible to make up the shortfall of the CALPERS fund. Profits belong to the retirees, losses belong to the taxpayers. That’s not quite right.

Two questions arise. CALPERS took some horrific losses; are these losses automatically insured by the California taxpayer? If the cities/counties declare bankruptcy, is the State liable for their incurred losses? The answer is no in both cases.

Here is where things could get quite peculiar. Bankruptcy laws don’t cover States. California as a State can’t file for bankruptcy (it doesn’t have to), but every city and county in the State can. Bankruptcy is a tool used by many to avoid paying their debts. Stating matter of factually that the State cannot file for bankruptcy kind of implies that the State is on the hook no matter what, and that is a very wrong assumption.

States can repudiate their debts, it happened in the 1840’s. The real issue is state sovereignty. The concept of bankruptcy revolves around the settlement of debts through the courts. The courts can’t force the State to do anything. The 11th amendment prohibits citizens from suing the State.

California created a retirement fund that guarantees benefits according to the wage earners salary and not on what the fund has available to pay out. These two facts point to the obvious, you can’t have it both ways. That and the 40 billion dollars that the State needs to keep going next year means that California is at the end of its rope. California will run out of money soon.

If the State is short of funds there is no bankruptcy dodge, it can decide who gets paid and when. California doesn’t even have to repudiate the debts; it just doesn’t pay them all. Investors will find out what the implications are, when loaning to a sovereign State. You can’t sue them. Plus if you’re a city in trouble, file BK and give your debts to the State, chuckle, chuckle.

With CALPERS, California will contribute its designated percentage for this year’s wages to the fund. But from there, CALPERS is toast. The State is not obligated to bail them out. So a lot of these 100k retirement plans now have some issues. The item that amuses me, does CALPERS have sovereign immunity just like the State?

Things are getting a little dicey; reality and retirement are on a collision course. It reminds me of the airline pilot who use to email me, he had a future 80K pension and bought a 300K house just before retiring. When his airlines came out of bankruptcy he had a 40K pension and lost the house.

The Great Depression of 2006—seems like a start, and it is 2010 and the show has hardly begun—everyone is dragging their feet, and I don’t blame them. I hate to contemplate what's next.

Karl Denninger has also written some material on this. Here is a link to it.

Inflation the Path to Future Deflation

2010-08-08T14:36:00.000-07:00

There are two ways a government can tax. The obvious way is with taxes, and the other way is by printing money. We hear all of this hoopla of “Tax the rich.” I can’t quite figure that one out. First of all if you’re rich, you don’t need to work and there isn’t much the government can tax except for your toys, like mansions, fast cars and yachts. Now if you’re earning quite a bit of money, then the government could get a good share of it. Of course that’s assuming that you’re dumber than a sack of rocks.

Here is a quote from the WSJ by Arthur Laffer

Just look at Sen. John Kerry’s recent yacht brouhaha. He bought and housed his $7 million yacht in Rhode Island instead of Massachusetts, where he is the senior senator and champion of higher taxes on the rich, avoiding some $437,500 in state sales tax and an annual excise tax of about $70,000.

(WSJ Aug2, 2010 page A13)

The government can try to levy a high income tax on the rich, but it will fail miserably. A tax accountant knows all the loop holes that the rich can use to their advantage to avoid taxes.

Inflation is one invisible tax that gets into everyone’s wallet. The eerie thing, is the poor (those living from paycheck to paycheck) never really experience the full blast of inflation. Those saving for retirement get hit the hardest 20 years down the road.

Figure an average taxpayer paying 20% in income taxes. His savings is being taxed by inflation rate of about 6%. Neat! huh? And the über rich, with bundles of dollars in the bank, are being taxed while they sleep. In 12 years they will have lost half their purchasing power from inflation alone. Of course if you’re unemployed and broke, you’re not very concerned about taxes or inflation.

In a depression unexpected things happen. Increasing tax rates brings in less revenue. Plus unemployed people generate less tax revenue. At this point, the government has to print more dollars to cover the short fall. It is the same with private business, the fixed costs are still there, the profit isn’t. This is where the herd gets thinned out, only the strong survive. Private enterprise can’t print their way out of this mess like our government can.

The quasi appearance of deflation will show up in items that we can do without; fast food, cable TV, Internet, sports tickets, advertising. The reduction in price of a taco at Del Taco from 59 cents to 39 cents is the final step before bankruptcy---sell them a taco and hope to make a buck on the soft drink. What we are looking at are institutions, that relied on a wild spending economy, to survive. Business models are collapsing. Can a basketball team afford to pay a superstar 16 million if the fans and advertising drop 50 percent? Do we need a Starbucks coffee shop spaced every half mile?

And with public services, we found out here in San Marcos what happens when everyone got together and cut down on water use during the drought, we got charged more for consuming less!

The real thing that bothers me is that the country as a whole is oblivious to the fact that the national debt is drastically out of whack. It’s the concept; “We did it yesterday and it worked, let’s do it again today.” Collectively we have 17 trillion in savings, and the government has borrowed and spent 13 Trillion of it. This is one of those plans that work until it doesn’t.

The deflation that we seem to be experiencing is coming from over capacity. Too many homes, too many restaurants, etc; lack of consumption is about to fix that. The inflation out there is real. My paycheck is buying less and less every day. The neat thing about inflation, the government doesn’t have to collect it as they do with taxes. Inflation generates more taxable income. The government finds it easier to pay off hard earned borrowed dollars with inflated ones in the future.

Real deflation (massive debt destruction) is still possible with this out of control unfunded government deficit spending. All it would take, is for interest rates to hit 8% and Uncle Sam would be insolvent; the national debt bubble would pop. Vaporizing 13 trillion in debt would be equivalent to what happened during the Great Depression. So its full speed ahead, the national debt be damned. We’re not sure where we are going, but we’re making excellent time.

Inflation, It's There Somewhere

2010-07-25T19:41:00.000-07:00

We went to Berkeley last week to see where my son will be going to college. The two pictures below are of a parking meter that was a block from the campus.

Notice the rates in the second picture. Two minutes for a nickel and a dime is good for 4 minutes (minimum transaction is 30 cents). The thing that surprised me was that it also accepts credit cards. Three of the cars parked in front of this "Revenue Raising Tax God" had handicapped tags swinging from the rear view mirror. If you're handicapped, you don't have to pay. Notice the bicycler chained his bike to the machine.

You have to wonder about this 12 minute minimum charge. The nearest public restroom is a 6 minute walk (if you know where it is).

30 years ago, a quarter would have bought an hour of time on the meter. Now it buys 12 minutes. So the quarter buys only 1/5th of what it used to. Put another way, our dollar has lost 80 percent of its value in 30 years.

The dollar's devaluation has been very gradual and spread out over time. California is about to raise the state sales tax to around 10%. If you study history, you'll notice that the sales tax was started during the Great Depression as was Social Security. These two taxes are approaching absurd levels and now we will face a health care tax.

Here we sit arguing over whether or not we are going into inflation or deflation and the real question is; have we had enough of incompetent government yet? The Mayor of Bell California was getting $787,000 until it was put in the press. The price tag for running a photo red light in California is $400, thats enough to start a divorce among young newlywed couples.

I would like to suggest that the reason we haven't seen any inflation is because of the obscene salaries of many people, they can't spend it that fast so they put it in the bank. As long as it is in the bank, there is no inflation effect, if the bank can't find anyone credit worthy to loan it to. Of course the little people like you and me don't have to worry about how to keep $250,000K FDIC insured in a bank (we don't have it to begin with).

Bernanke's goal is to stave off deflation. It's kind of like him going into a "house of ill repute" and slashing rates 50% and claiming it will bring in more business. He's right, but he's wrong. You'll get more business, but it is business you never wanted to see in a lifetime. Common sense rules when you have to work for a dollar the hard way. It is a shame that the government doesn't do it's COLAS off of hooker revenue. Minimum Social Security might approach 100K a year.

Copyright 2010 All rights reserved

It's Never Been This Bad Before (Reprinted)

2010-07-20T20:13:00.000-07:00

I've been on vacation the last 10 days. This is a reprint from January 16, 2008 that is worth a second look.

Here is a little bit of history. It gives you an insight into real estate during the Great Depression from people who lived through it. Quoted from: http://xroads.virginia.edu/~HYPER/ALLEN/ch11.html

By 1927, according to Homer B. Vanderblue, most of the elaborate real-estate offices on Flagler Street in Miami were either closed or practically empty; the Davis Islands project, "bankrupt and unfinished," had been taken over by a syndicate organized by Stone & Webster; and many Florida cities, including Miami, were having difficulty collecting their taxes. By 1928 Henry S. Villard, writing in The Nation, thus described the approach to Miami by road: "Dead subdivisions line the highway, their pompous names half-obliterated on crumbling stucco gates. Lonely white-way lights stand guard over miles of cement side- walks, where grass and palmetto take the place of homes that were to be .... Whole sections of outlying subdivisions are composed of unoccupied houses, past which one speeds on broad thoroughfares as if traversing a city in the grip of death." In 1928 there were thirty-one bank failures in Florida; in 1929 there were fifty-seven; in both of these years the liabilities of the failed banks reached greater totals than were recorded for any other state in the Union. The Mediterranean fruit-fly added to the gravity of the local economic situation in 1929 by ravaging the citrus crop. Bank clearings for Miami, which had climbed sensation- ally to over a billion dollars in 1925, marched sadly downhill again:

1925.............................$1,066,528,000
1926................................632,867,000
1927................................260,039,000
1928................................143,364,000
1929................................142,316,000

And those were the very years when elsewhere in the country prosperity was triumphant! By the middle of 1930, after the general business depression had set in, no less than twenty-six Florida cities had gone into default of principal or interest on their bonds, the heaviest defaults being those of West Palm Beach, Miami, Sanford, and Lake Worth; and even Miami, which had a minor issue of bonds maturing in August, 1930, confessed its inability to redeem them and asked the bondholders for an extension.

This next bit discusses the dire straights of many states in 1933: Pg 285 America’s Great Depression by Murray Rothbard. Quoted from Agricultural Discontent in the Middle West, 1900-1939,Wisconsin Press 1951 p.448

As in most depressions, the property rights of the creditors in debts and claims were subjected to frequent attack, in favor of debtors who wished to refuse payment of their obligations with impunity. We have noted the Federal drive to weaken the bankruptcy laws. States also joined in the attack on creditors. Many states adopted compulsory debt moratoria in early 1933, and sales at auction for debt judgments were halted by Wisconsin, Iowa, Minnesota, Nebraska, and South Dakota. Governor Clyde Herring of Iowa asked insurance and mortgage companies to stop foreclosing mortgages. Life insurance companies protested that they were being very lenient, yet in many areas the courts would not enforce foreclosures for insurance companies, enabling many borrowers arrogantly to refuse to pay. Minnesota forbade foreclosures on farms or homes for several years.

So we can say without a doubt that we have never seen anything like this, but it did happen here about 78 years ago. We could be on our way to an experience of a life time. Are you ready?

We Have Been Here Before (Reprinted)

2010-07-10T17:35:00.000-07:00

Reprinted from 2/1/07.
Today we read that the savings rate in the US has dropped to a negative one percent. It is also mentioned that it hasn’t been this bad since the Great Depression years of 1932 and 1933. The following is an article from way back when, that appeared in the Saturday Evening Post, CCV (November 5, 1932), pp. 3-4 titled" What about the Banks." It was written by Frank A. Vanderlip, former president of the National City Bank of New York. Bear in mind that 1932 was three years into the Great Depression. So if we carry forward to today, this would have appeared in the future year 2012. So we are not really where he was at, when he wrote this.

The present economic disturbance has been so severe that it as make even some changes in our language. No longer is it an apt metaphor to say that anything is “as safe as a bank.” The word “securities” has almost become obsolete. An investment that drops in price to a tenth or, perhaps, even to a twentieth of its former range is not a security; it is a jeopardy. The page of stock-and-bond quotations might well be headed Quotations of Risks and Hazards. To call them securities in the light of their fluctuations is ironical.

In 1720, a financial debacle added to the English language a phrase which has persisted in common world-wide use for two centuries. A hopelessly exploded financial venture is to this day called a South Sea Bubble.

The South Sea Company in its time was the rival of the Bank of England. It was the ambition of the Tories that it should supplant the Bank of England. When the bubble burst, the extreme decline in the price of the stock was from 1,000 to 135. The company withstood the shock, however and continued in business for eighty years.

Here is an example from out own times: United States Steel and General Motors stocks, the two leading industrials of the country, declined from the high quotations of 1929 to 8 per cent of that price. The decline in the stock of the South Sea Company was only to 13 ½ per cent of its highest quotation. Take another: The stock of what has long been one of the premier banks of the country declined from 585 to 23 ½. That is to say, it fell to 4 percent of its highest quotation. The decline in the market price of this great American banking institution was therefore more than three times as severe as was the fall in the stock of the South Sea Company.

That illustration is by no means a unique one. There were innumerable American bank stocks which made a more distressing record. Between October 1, 1929, and August 31 1932, 4,835 American banks failed. They had deposits aggregating $3,263,049,000. . . . .

The decline in the price of bank stocks was only a minor phase of our debacle. The quoted value of all stocks listed on the New York Stock Exchange was, on September 1, 1929 $89,668,276,854. By July 1, 1932, the quoted value of all stocks had fallen to $15,633,479,577.

Stockholders had lost $74,000,000,000. This figure is so large, that not many minds can grasp it. It is $616 for every one of us in America. It is, roughly, three times what we spent in fighting the World War (WWI). . . . . . .

Not only did our investments shrivel in the last three years but we even frequently lost our pocketbooks. Cash in hand, left for safekeeping in a bank, often went the way of our investments, and worse. Almost $3,000,000,000 of our daily-used cash funds were sequestered in the doubtful assets of the 4,835 insolvent banks. Widespread communities were left with only the mattress as a safe depository, and with little to put into it. People became so frightened in regard to the safety of the banks that they locked up in safe-deposit vaults, or secreted elsewhere, more than $1,500,000,000.

In the Great Depression there was a very good reason for feeling negative about life. The interest only mortgage loan had ruined many banks. If you had any money invested, it was probably gone by then. Age 65 ready to retire, it must have been very depressing to some.

This bit of history was full of pain, the players from that era are just memories. The show will play again and we will be the actors upon the stage. The trouble is, we are not willing participants.

Invisible Inflation

2010-07-03T21:15:00.000-07:00

Some prices seem to be declining, and others are increasing. So if one looks for inflation or deflation, it doesn’t take much searching to find an example to fit either argument. There are two different things happening here. One group of items that have been produced for retail sale, are also being resold by end consumers to raise cash. When you have consumers reselling into the market against retailers, prices will drop. The second group of items is pretty much just for consumption without a resale option. These prices are rising dramatically; food, beer, cigarettes, gasoline, drugs, and health care.

With prices rising the consumer has a choice, pay the higher price or switch to an off brand or generic. Blue Goose Vodka at $35 a liter doesn’t have quite the bang of a generic 1.75 liter bottle of the store brand at $10. Of course, then there is the nagging sleight of hand trick where the product size gets reduced and the price stays the same. The family size bag of potato chips now fits in a lunch box.

It’s not hard to notice the decreased consumption of optional goodies; cable, cell phones, internet, the second car, eating out at restaurants. This decreased consumption has a peculiar effect on public utilities. If everyone decreases their water consumption, water bills increase (this happened in our area). Why? Every company has fixed costs that don’t decrease when consumption decreases. With government services, the costs will increase or stay the same, even though they lay off police, firemen and teachers. You get less, so you’re really paying more for it.

What we are going to see from here in the coming year, is a concentration of thought, on how to enjoy our lifestyle by spending less. By shopping more carefully we get better prices from everyone. Some of us know how to do it, the rest of us will learn by going hungry now and then. The real question to ask is, are we able to buy more with our paycheck (deflation) or less (inflation)?

If you buy the premise that Bernanke and the Federal Reserve are saving us from deflation, then you’ve bought into the assumption that printing all these dollars is good for the economy. If you buy the premise that raising the national debt level passes these costs on to our kids, you have bought into the assumption that it’s free for now, and you’ll struggle with the morals of this despicable act of passing our debts onto future generations. If you reject both, you realize that we have a debt problem that will never make it to the grandkids. Our government has borrowed every penny in our banks and spent it.

One of my readers (Rob) commented that the candy bars he purchased had gotten smaller. My half gallons of ice cream are now 1.75 quarts and they take up more space in the freezer. The gallon bottles of ammonia for a dollar are now half gallons. If you have gotten on an airliner lately, there is a new seating section called “cattle class.” What is happening to us is almost invisible. It is a little like sawing a quarter inch off of Grandpa’s walking cane every week; sooner or later, he’s going to catch on. Old Ben Bernanke might convince Grandpa that he’s growing taller and sell him a new cane.

This Great Depression is Different

2010-06-27T16:55:00.000-07:00

During the Great Depression of the 1930’s the banks, trust funds, and stock market lost 90 percent of their value. If you had a thousand dollars saved up or invested back then, you were left with one hundred dollars. If you lost your job there was no unemployment or Social Security. Deflation became a very serious issue; nobody had any money left to speak of. If you had been living paycheck to paycheck, all you could lose was your job (a rather anemic understatement).

March forward to today. No depositor has lost a dime in the banking system. All of the foreclosures will be bought by the government. Unemployment is collectible for two years. There has been no 90% loss of savings. The government has printed dollars to cover all bank failures.

Millions of people are collecting unemployment and not producing anything, but they are consuming product using their government check. At the same time, tax collection revenues have been decreasing at an alarming rate while government expenditures have been increasing geometrically.

Our government has no increased tax revenues coming in unless you count the new health care. They are printing money to pay the bills. At some point this leads to inflation. Deflation cannot happen, everyone has their dollars. The unemployed are consuming the products we savers chose forego, when we deposited our money in a retirement account. Our savings were a way to defer consumption into the future.

As long as retirement redemptions are minimal, inflation does not even enter the picture. The product produced matches the printed dollars spent. We will see inflation when the baby boomers decide to spend some of their deferred consumption.

The Economic rhetoric from Bernanke claiming his actions will save the country from a deflationary spiral, is pure nonsense. The Emperor is wearing no clothes, claiming otherwise changes nothing. Inflation is the name of the game, and hyper inflation is our destination. It cures all of Fannie Mae’s and Freddie Mac’s problems. They don’t have to mark down to market; they get to mark up to market.

At one point the government had a choice of deflation or inflation to solve this bubble. If we had done nothing, we would have had the 90 percent haircut and deflation just like the 1930's did. We chose to solve the problem differently with a printing press.

What’s it mean? The government can’t stop the inevitable; they can only slow it down. Our dollar will be the new dime of the 21st century. We still get the 90 percent haircut. The money borrowed was squandered on consumption. It is gone, it can't be undone. This is not something that can be reversed with a printing press. The government is only increasing the number of dollars chasing a decreasing inventory of product.

Where to from here? 15 trillion in debt and we have a President who keeps on saying “We are not out of the woods yet.” If you owe 15 trillion dollars, why get out of the woods? Stay there and hide!

Robbery Royale at Fannie Mae

2010-06-23T21:09:00.000-07:00

Karl Denninger of the Market Ticker had a bit today on Fannie Mae giving everyone the green weenie. It’s worse that what he stated. Fannie Mae has a delaying tactic. They have a deed for lease program where you can rent back your property from them at the current market rental rate. Here is a Link. So, instead of a walk away home that gets stripped, you have a home that is being lived in by the previous owner. The lease is for one year and that could extend for many more if you read the tea leaves.

This program delays real estate from hitting the market in the form of a foreclosure. The inventory is eased into the market gradually instead of all at once. This is the hidden inventory that everyone talks about. The other thing is their great financing program for new buyers, here is a link.

If you read their boilerplate carefully, you don't need to pay for an appraisal, which costs dollars. My question, would the property appraise for what they are trying to sell it to you for? Probably not, it is called rip off the poor and uninformed, sell them that dream of home ownership. A dollar down moves you in. If you look this gift horse in the mouth, you would walk away.

Fannie will give you 3 1/2 percent of the home’s value for closing costs or whatever. You need to have 3% down, but you could get a check cut for 10% of the home’s value for repairs. Oh goodie free money.

Here is an article I wrote showing my frustration with what they were doing two years ago link . The couple that bought this home both worked at a movie theater making $8 per hour. They got $10,000 for repairs and spent it on a bike and a pick up. It ended up going back to the bank (Fannie Mae). It only cost them a dollar to move in.

The thing to take pause at here are the Realtors. Commissions are 6% so we know whose raking in the real money.

I use to sell VA repos, and that was on an auction basis. High bid won. Now we have a candy ass program; Fannie Mae will finance your dream, if you agree to pay their price. The people at Fannie Mae need some jail time.

The Low Bond Yield Conundrum (Reprinted)

2010-06-21T20:27:00.000-07:00

This is an edited reprint from November 19, 2006 which demonstrates what large swings in interest rates can do of the bond market. Note the interest rates are off a bit; at the time of writing, there was less than 100 basis points between the 30 year Treasury bonds and the one year T-Bills. The 30 year interest rates have remained constant, the short term rates have gone to hell. Greenspan was the man in charge at the time.

The bond market is at a point right now that leaves an awful lot of long bond holders (buyers of the 30 year) very vulnerable.

With the coming vaporization of the second trust deed market, there should be a scarcity of funds. Add to that, marking to market of foreclosed homes adds even more to this up and coming "enterprise." Seventeen interest rate increases by the Fed and the long term rate comes out very little changed.

In Greenspans speech to Congress last year June 9, 2005 he is quoted:

Among the biggest surprises of the past year has been the pronounced decline in long-term interest rates on U.S. Treasury securities despite a 2-percentage-point increase in the federal funds rate. This is clearly without recent precedent. The yield on ten-year Treasury notes, currently at about 4 percent, is 80 basis points less than its level of a year ago. Moreover, even after the recent backup in credit risk spreads, yields for both investment-grade and less-than-investment-grade corporate bonds have declined even more than Treasuries over the same period.

What it really boils down to is; there is a very large demand for long term bonds. More than the market can supply. Otherwise interest rates would rise to attract buyers (this may not seem obvious, but as the price of a bond drops, its interest rate increases and vise versa). The Baby Boomers could be going to less risk in their portfolios. An insurance company locking in rates on an annuity for thirty years, this would be a smart call.

Where it gets kinky, is the fact that everyone is loaning 30 year money at close to the rate paid for the one year Treasury. Look at a 30 year bond issued today at say 5%.

Value of Face amount-------interest rate--------interest paid
----$1,000,000-----------------5%-----------------$50,000

No problem with the investment, but if the interest rate went to 10%, the dynamics change. Using that same 1,000,000 bond we now have:

Value of face Amount-------interest rate--------interest paid
------$500,000------------------10%-----------------$50,000

What this shows, is that your market portfolio could, if marked to market have a haircut of 50 percent. Notice however, if you hold on to maturity, there is no "real" loss of principle. 30 years is a long time to wait if you are already 60 (I turned 60 yesterday).

The real pure play for the bond market is to buy when the market is at 10% and sell when it goes to 5%. That play, a reverse of the first example, would net a cool half million. This is where the money is made in the bond market. (Note if you were to buy at 10% and it swung even lower to 20%, your jaw could hit the floor rather hard.)

The only thing that makes today a buying opportunity, is the belief that the interest rate will drop to 2.5%, this would double your bond portfolio's value, and it just ain't going to happen.

Another thing that Greenspan mentioned, that people were willing to accept more risk with less reward. Everything except Delta Airlines Bonds are trading as if they are US Treasury's (admittedly an exaggeration, but the rates commanded are rather unrealistic if not pathetic).

We seem have a market running on the herd mentality of "If it works, go with the flow." At some point there will be a demand for funds that could raise the interest rate to quite a spectacular level, even if for a short period of time. It is at that point, that cash can buy into the bond market and make a killing.

A stock has to double to double your money. With a bond a 50% drop in the interest rate doubles your return. The thing to remember in a panic, it's like going into a pawn shop with a $10,000 wedding ring, you're not going to get list price or anywhere near it. You're are going to take what you can get according to how desperate you are for cash funds.

What you really have, is a mistake being made by retirement funds, that will take them 30 years to fully appreciate. Your clients only have 15 to 35 years to live. They just might need the money before the call date. The real culprit is unperceived inflation --your monthly retirement check might only buy a weeks worth of groceries. I guess this is how you get "saved" from a severe deflationary spiral--more government printing.

The Conundrum is, why invest in bonds? You're guaranteed a loss at present interest rates.

Read Between the Lines

2010-06-16T20:13:00.000-07:00

Tuesday's San Diego Union Tribune ran a front page story; the county's median home prices were up 15.3 percent.

San Diego County home prices, which were falling at double-digit rates a year ago, are now rising rapidly as investors grab the last remaining bargains and upper-end buyers find deals to their liking.

It makes you wonder a bit about their chart below, until you look at the new homes for May 2009 and compare them with new homes for May 2010. [double click for a clearer image]

Looking at it realistically, the buyer lost $77,000 if they bought a new home last May (highlighted in yellow). And now there are a lot of 600K "used" homes that are now selling for 400K. The condo sales don't make much sense unless the new units in downtown San Diego (previously selling at 600K) have been reduced to move at 250K. Just try and find a banker that will finance a condo.

The other thing to realize is that used home totals are actual, new home sales are usually 2/3's of those listed; they are counted the minute the contract is signed and a lot fail to close. Another item to take into account, the tax incentive just expired so the totals for May stole from June.

You can't fault the newspaper for printing "Good News."

The Anatomy of a Bubble

2010-06-10T18:57:00.000-07:00

In order to understand a bubble, one has to examine two conditions of our environment. One, there is a randomness with the way we interact with our economic community; everybody works, but we all have different types of jobs. Two, our resources are finite; they can be exhausted by consumption.

The first step of a bubble is the severe misallocation of resources. Production focuses on one particular item. The misallocation, means that we are about to allocate most of our resources towards that one goal. This starts out gradually and then progressively consumes more and more resources.

In the second step of a bubble, a large group of people are no longer interacting with the economy in a random fashion; they are all pursuing the same wealth creation formula. This too, starts out with a normal amount of people employed in the bubble sector of the economy. As the bubble gets more robust, more people with a desire for riches join in with lost abandon.

As we enter step three, there is the comfort that everyone participating in the bubble, feels sort of group camaraderie (the herd mentality). Notice as people acquire more riches from their venture, they come to accept the fact that they’re just MORE intelligent than ordinary people. At this point greed and stupidity mix well; double your investment and in turn, double your profit.

Then we come to the final stage (step four) loss of control; the resources are exhausted and the bubble collapses. The damage has been done and it is real.

Examine these two bubble examples from the past:

A river boat ferry, in India 20 years back, was packed with 600 people. Two teenagers in love were going to jump off the boat and commit suicide (their parents wouldn’t let them get married). Needless to say 600 people rushed to one side of the ferry to witness the event. The ferry capsized with a very large loss of life. What happened was sudden and very unexpected by all involved.

The second case was in Africa 50 years ago. Wealth was measured in cattle. The more cattle you owned, the more wives you could afford (this also produced a lot of kids that had to be fed). Cattle production shot through the roof over several years, everyone was getting rich. Even the people growing the hay to feed the cattle were making money. The price of cattle feed started to increase; there wasn't enough supply to meet demand. The cattle were starting to exhaust their food supply. Farmers found it difficult to feed all of their cattle, so more went to market for sale. Prices started to drop and the cattle market collapsed. The livestock died off in mass and the general population faced the aspect of starvation. There wasn’t any drought that brought this famine on, just the misallocation of resources.

Identifying a bubble is at best, very difficult in the early stages. The housing bubble over time has become obvious. Medicare is a bubble in progress. Resources are limited more so than is apparent; high costs in the past have kept medical demands in check.

The national debt is also a bubble but the concept of what constitutes resources (real money) is one of those magic acts, that go on forever. An increase in the interest rate to 9% could spell doom for the US Treasury and the national debt (of course that could never happen).

The ferry boat (our Ship of State) is full and pushing away from the dock; I wonder if Romeo and Juliet are on board?

Live Rent Free, Don't Give the Bank the Keys (Reprinted)

2010-06-05T08:56:00.000-07:00

Here is a reprint from this blog back 3 years ago, September 6, 2007. The probability of it, has come to pass.

Everyone is talking about all of the foreclosures and how rental rates will rise because of the demand from all of the displaced owners. Maybe there is one item that has been overlooked.

When banks foreclose and get title, there is a year or two wait to complete the process. We are talking about the actual deed, not a note saying that the title was conveyed and it is free and clear. The paperwork takes a while.

In the mean time, the neighbor across the way trades out his broken dishwasher with the one in the foreclosure. In California, the air conditioner would probably grow legs in two weeks. In a year’s time, there might not be much left. I’ve seen places that the neighborhood kids would use and by the time they are finished with it, you really wouldn’t want it at any price.

This can even get worse. Consider a foreclosure in Colorado, the pipes freeze and break. In Florida, a closed up house might mold over like a loaf of bread. Some states have laws on the books that allow the foreclosed owner two years to redeem the house after the event. So, clear title could be a very long wait.

Considering the length of time needed to sell a house lately, a year is not an unreasonable estimate of time. The note holder has a chance to lose big time. His asset could be run through the local recycler without his knowledge, copper pipes and all. It behooves him to have the house occupied.

The foreclosed home owner can’t lose if he plays his cards right. Walk up to the lender handling the foreclosure, and offer to keep living in the house rent free until it is sold, on the condition that you take care of the lawn and the house in general. Sounds crazy, but who the hell is going to buy it in this market? At least nobody is going to steal the air conditioner before you have a chance to sell it. At the present time, things aren't quite that bad, so you might have to pay monthly rent payments.

An impossible pipe dream? People living in foreclosed homes and not being tossed out?? It’s happened before, just not in the last 75 years. States even passed laws so it could happen.

Post-note June 5, 2010:

The property tax arrears on these homes could become a nightmare. They are not being paid and the states depend on the dollars for their budgets. Just who owes the money is the real question. Some states allow you to pick up a home for back taxes, others don't. In California it looks like the bank pays the back taxes from the proceeds of the foreclosure sale. If the home is upside down, the FDIC, FANNIE, or FREDDIE become the indirect guarantor of the taxes. It's just another way of saying this is a free ride on the taxpayer.

Pay Rates, Here and There

2010-05-30T22:06:00.000-07:00

An AP report on the front page of the San Diego Tribunes business section Saturday boggled my mind. A $26 a month pay raise for 300,000 workers in China making our cell phones, IPods and computers.

TAIPEI, Taiwan (AP) — The Taiwanese electronics company buffeted by a spate of suicides at its China factories said Friday it will raise the pay of workers by an average of 20 percent.

The pay raises at Foxconn Technology Group have been in the works for months to cope with a labor shortage following China's recovery from the global recession, said a company official speaking on condition of anonymity because he was not authorized to talk to the press.
. . . . The basic salary at the China plants of Foxconn Technology Group — which makes iPhones and other popular gadgets — is currently about 900 yuan ($130) per month.

. . . . The company, part of Taiwan's Hon Hai Precision Industry Co., is the world's largest contract maker of electronics. Its long list of big-name customers include Apple Inc., Sony Corp., Dell Inc., Nokia Corp. and Hewlett-Packard Co.

Cheap labor runs the industrial world. A manufacturer that can sell it cheaper and better will make money. You have to marvel on how these workers can survive on the present $130 a month. Just imagine if they took out for Health care and Social Security. It does explain how electronics in this country are so cheap. Of course if that’s all you are being paid, you can’t consume very much either.

Here is a link to a CNBC video with Steve Wynn. He is a big resort owner in Las Vegas who needs inexpensive labor to keep his hotels running.

CNBC Video

In essence, Obama’s new health care plan adds 2 dollars to the minimum wage (the employer’s share). Of course the employee gets to kick in a matching 2 dollars. If we figure the minimum wage right now at $8, add $2 for employee SSI and unemployment benefits then add $2 from the new health insurance costs, and calculate employee cost per month; $12 X 40 hours X 4 weeks, $1,920.

Let’s see if I have this right. The monthly wage of Chinese laborers is being raised to $156 dollars per month, and stateside the minimum wage will soon be $1,920 a month. If a manufacturer wants to produce a retail product for consumption, they’d be an idiot to produce it in this country. On the other hand, if the business deals in servicing customers, the employer is caught paying the going rate unless it can be accomplished by phone support based in some third world country.

Steve Wynn from the link above is taking advantage of this dichotomy in the world economy; gambling is a service business. His move to Asia allows him to offer 10 times more in service and still pay less on the bottom line.

A lot of medical procedures are going offshore also. India offers open heart surgery at one third the price in the US and that includes airfare.

The question arises, how do we recapture our industrial base that has moved offshore? I guess the real question is; “Why bother?” China is still advancing us credit, by buying our Treasury’s on the “Fog a Mirror” plan. It worked great for us for a while, in real estate. I guess this is where I keep quiet; we’ll let China figure this out the hard way.

The Pot is getting warmer

2010-05-24T21:00:00.000-07:00

Here is a small AP news release from May 22, 2010, hidden on page 6 of the Sunday San Diego Tribune that speaks volumes:

Protesters decry proposed New Jersey cuts

TRENTON, N.J. (AP) — A crowd estimated at 30,000 to 35,000 people gathered Saturday near New Jersey's Statehouse to protest Gov. Chris Christie's proposed budget cuts.

State police, who gave the crowd estimate, said no problems were reported.

The crowd is believed to be one of the largest ever to protest in state history. It was mostly composed of public employee union members and several community and nonprofit groups that would lose some or all their funding if Christie's plans are adopted.

Christie has called for workers to accept wage freezes, and he's pushed for them to contribute toward their health benefits.

Christie has called for workers to accept wage freezes, and he has pushed for them to contribute toward their health benefits. The governor was not in the Statehouse on Saturday and was not at the rally.

The Republican governor has said that protesters have the right to speak their minds.

Here is a Link to a very dynamic and entertaining video by New Jersey's Governor Christie, that explains what is happening (it's 26 minutes long). His plan of action is quite impressive, it is drastic. Here is a governor that isn't all talk. We need more people like him, but as he suggests, it won't get you re-elected.

This is the sort of news that defined the Great Depression of the 1930's; hardship and protests. It was a sign of the times.

CalPERS-- A Bridge Too Far

2010-05-22T16:18:00.000-07:00

A pension plan is a form of savings that allows one to retire with a predetermined monthly income. It’s a little like putting money in a savings bank until you retire. A pension fund is a little more sophisticated they employ all sorts of advisors to figure out what your monthly payment from them will be when you choose to retire. In order to come up with these projections, they have to know beforehand your monthly contribution, the average life expectancy and a projection of future interest rates. From there it is a pretty cut and dry calculation.

Let’s examine it in a more simplified form. Assume that we have a person ready to retire with one million dollars in cash in the bank. That’s his total retirement. If we compute the interest rate on that at 12%, it comes out to about $120,000 a year. At 8% we get $80,000, at 4% we get $40,000, at 2% we get $20,000 and at 1% figure a whopping $10,000. Just examining the return rates here, it is easy to realize that a mistaken assumption of where interest rates will be, changes your spending habits and could force you to tap into the principle as well.

Examine the rule of 72. Divide the interest rate into 72 and you have a pretty good idea how many years it takes for your savings to double. It also works quite well for inflation. Divide the inflation rate into 72; only in this case we are not doubling, we are halving. Figure that the banks are paying 2% interest. That is about 36 years to double your money. Inflation is around 6% so figure 12 years down the road, you’ll still have a million dollars, but only half the buying power.

The difference between say CalPERS (California Public Employees' Retirement System) and an individual savings account used for retirement is that the left over funds in a savings account goes to your heirs. Pension funds don’t need a big cushion. They know that everyone as a group will drop dead at age 78 by using actuary tables.

Every year in the past CalPERS was asked, "Is there enough money in the plan to carry everyone to the drop dead age?" At 7.75% interest with no loss of principle, the answer was "Yes." Well, CalPERS lost 56 billion and the interest rate is now about 1.5%. Rates can’t stay this low for 20 years, like Japan, now can they? So this is only temporary. Now that you’ve bought the bridge, can we interest you in a toll booth to go with it?

The picture below is an excerpt from a Stanford study requested by the Governator's office, published in April of 2010. Here's a Link to it. Notice that CalPERS is using a 7.75% interest rate for their calculations and Stanford at the time chose 4.14%.

Double click for a larger view

The present attainable interest rates are in a range of 2 to 4 percent. CalPERS whole financial structure was built on 8%. This low interest rate was not anticipated. If we were to take their present asset base and double it, that doubling would generate the interest income needed, to keep the fund solvent.

As usual, I could be shot for this over simplification. It seems certain that things are going to get worse before they get better. This Stanford projection of future pension costs appears quite reasonable. The three retirement funds cited in the report could have a half trillion dollar short fall. The size of the shortfall amount appears absurdly large, the possible reality of it, is rather unsettling.

Governor Schwarzenegger has stated that the California pension plan program is unsustainable. At the same time CalPERS wants 600 million more of State funds for just this year. Who do you listen to? One thing to consider, our next governor won't work for $1 a year.

The Kalifornia Solution

2010-05-16T21:12:00.000-07:00

A lot of states are coming to a fork in the road; how to live within their budget. Here in California, teachers, firemen and police have already gotten their budgets trimmed. Now it is time for deeper budget cuts or entertain the idea of raising taxes.

Here is a breakdown of present expenditures:

The Republicans are dead set against tax increases and more or less figure if you pay no taxes in, you’re first in line to lose benefits. In essence, it's the free stuff that the poor qualify for.

The Democrats on the other hand, want to raise taxes on the rich and big business and leave entitlements alone. Needless to say, the Democrats are not after the Big business vote. By God, make those fat corporations pay their fair share, rah rah rah! (I might sound a bit biased here, but show me a business that pays taxes, it's passed on to the customer)

We have two political philosophies that differ immensely. California’s problem is a financial one created by an economy that has gone sour. If the economy was in good shape, this problem would not exist.

The question arises, will either political view, result in a solution? Sadly, probably not. From looking back at history, raising taxes in hard times (the Democrats plan) brings in less revenue and stifles the creation of new businesses. Of course if you are poor and your entitlements get cut (The Republicans plan), you will vote for the Democrats to get them back. Both perspectives appear doomed to failure.

Where else can the state governments cut? There are limits here; people expect and demand services for their tax dollars. The part of the budget that might end up being cut could be welfare and health care.

Governator Schwarzenegger is suggesting elimination of some welfare programs. However it seems more likely that California residents might see an across the board cut in welfare benefits of say 25% this year and another 25% the following year. This would put our state in line with the benefits other states pay. We could also see major cuts in health care. Health care for kids could flat out disappear.

And as if it couldn't get any worse, new laws will prevent four million Arizona "tourists" from their annual trek to the San Joaquin Valley in California to harvest vegetables this year (a definite crimp on "tourism"). This should have no adverse effect on this years bumper pot crop.

It kind of looks as if those that don't help row and bail water out of the boat, get to swim along side.

The Last Hurrah

2010-05-12T08:16:00.000-07:00

Interest rates right now are a joke; Banks are paying ½ to 2%. My wife and I stopped buying T-bills that were paying a ¼ percent. Interest rates usually measured risk, the lesser the risk, the lower the rate.

Look at bonds as a long term investment. The investor might be willing to take more risk to increase his rate of return. If there is no risk (because of government guarantees), the interest paid will approach zero. With inflation running in a range of around 6 to 15 percent (pick a value) bonds look like a real dumb investment.

Consider that the bond market is 5 times larger than the stock market, where is money going to go? The stock market appears to be the only option left.

The real question is, what level do interest rates need to rise to keep money in the bond market? A 10 percent rate would ruin the housing market, and a 20 percent rate would spell financial disaster for the country. Now we have the European Union printing up one trillion Euros to save the Euro. This frees up the money from bad loans (unredeemable) made to Greece. Where are investors going to put this money, in other markets? What’s a trillion Euros trying to find a home? Answer: Inflation.

Notice, governments never question markets that reach to the sky. But have one that takes an ugly dip like the real estate market or the stock market and they hold an inquisition.

Where to from here? Dow 30,000, Gold $3,000? So as the Dow Jones average rips through 40,000 next week, look for Obama to declare the recession over. Even though I am joking around here, this is the last party in town and they just refilled the punch bowl.

Greek Bailout

2010-05-05T21:15:00.000-07:00

From the AP wire May 2, 2010:

Of the 110 billion euros in total commitments endorsed Sunday, the euro zone will contribute 80 billion euros to the package, with 30 billion of that to be made available this year. The rest of the money would come from the Washington-based IMF

Greece gets 30 billion this year from everyone. But reexamine the statement. The total amount raised is 110 billion euros. The Eurozone will contribute 80 billion (sometime in the future) with 30 billion of that available to Greece this year. 110 minus 80 comes out to 30 billion not covered---“The rest of the money would come from the Washington-based IMF.” Here is a Link that goes into more detail

IMF funding, hmmm! Sounds like some big bucks there, ever wonder whose money is being spent? Who’s in charge of this “One stop shop for loans with no collateral?” The United States of America pretty much runs the organization they have 17% of the vote and nothing happens unless they say so. Who’s in charge for our side?--- Tim Geithner and Ben Bernanke. At the last Senate hearing for the Federal Reserve, Bernanke got asked a question about the IMF and more or less stated he didn’t have enough information on the subject. Talk about a piece of lit dynamite and no one in the panel called Ben on it! Here's a graphical representation of how the United States fits into the IMF. It is our baby, we run it.

There is absolutely no reason to bail out Greece. They had a walapalosa party; does the rest of the world have to pick up the tab? Do we keep the game going one more year, or let the chips fall where they may? There is Spain and Portugal with Ireland waiting in the wings.

Germany may find 29 billion (over a time span of 3 years) for Greece, what happens when Spain comes knocking? At what point do these loans become grants of aid that have to be written off by the issuer? This wouldn’t be an issue to bring up when running for reelection in say Germany.

There are two different goals here “Save the Euro,” and/or “Save the PIIGS.” Everyone is for the idealistic Euro. Europe is not ready to save the Greeks. The bar of soap is on the shower floor, and no one has any intention, to bend over and pick it up. Refinancing Greece’s debt, in a world economy that is plunging into the abyss, has very little chance of success. You are only adding more debt to the system. It could be time to cut and run. Sometimes doing nothing is the solution, the problem solves itself.

My advice, go to the concession stand and get a box of popcorn and a drink and find a seat, the show is about to begin. In this episode, Ben is going to save the Euro with American Dollars from the IMF. Aw gee, I guess I spoiled the ending—sorry.

The Eye of the Hurricane

2010-05-02T12:13:00.000-07:00

The newspapers are all claiming that the housing market is coming back. Something isn’t quite right here. The banks aren’t about to loan any one money for a home unless they have a 20% down payment. Of course, if you want to buy a Fannie Mae foreclosure, all you need is 5% down and the government gets another bad loan off the books. This isn’t a bank loan; it’s a government loan that happens to be part of the national debt. The phrase "No skin in the game," seems to echo in the background.

Then you hear about the 20% of house sales that are completely cash sales. You have to wonder, where did they get the money? With 1 out of 17 homes in the US facing the possibility of foreclosure and then we have 1 out of 5 buyers paying all cash? I find it hard to believe. Common sense suggests, why buy one house? Investors only need 20% down, buy 5 and share the risk with the bank, the interest rate can’t be beat.

Three years ago, anyone that wanted a loan could have gotten one. And now you can’t get a loan without a substantial down payment. The marginal buyers (no doc’s) are gone and so is their demand for housing.

The housing market is not coming back, the surge of baby boomers has peaked, the Silver Foxes are looking for smaller retirement homes, not the McMansions that have been built. Real demand is declining. Our government wants to keep home prices from collapsing so people don’t take a walk; otherwise Freddie and Fanny get more home loans to eat. They have painted themselves into a real neat corner; 5% down moves you in and of course they’ll throw in $20,000 for repairs.

Right now the housing market is in the eye of a hurricane, enjoying the calm. The 5/30 interest only loans are starting to convert to conventional loans. Unemployment is getting worse. State tax collections are abysmal. On top of that, the baby boomers are getting ready to retire; they will be trying to sell their homes and move to Arizona (Mexico’s Northern most State). Why buy a home from a Silver Fox when you can buy one from Fannie Mae and get cash back? I just love these government programs, sure beats renting.

Risk Has Left the Building

2010-04-25T12:03:00.000-07:00

The financial collapse of AIG wasn’t an accident. The conditions were just right for individuals of every walk of life to make a killing on the way the financial system reacted to the real estate boom. The basic mistake was the misallocation of resources. The world didn’t need all of this new housing, but it was very profitable to build and finance. The increased property values implied that the banks couldn’t lose on any loan. The tax base increased proportionally and government expanded (exploded). It was only "short bus" math to figure out that over 30 years, a person earning $35,000 per year was not going to have the resources to pay off, a 30 year, one million dollar mortgage.

All of a sudden it stopped, the bubble burst. AIG and several hedge funds collapsed. The side bets (derivatives/insurance/credit-default swaps) covering those exposed to loss came to the surface. These hedge funds were writing insurance on everything including the kitchen sink.

Risk had been removed from the business model. It’s hard to lose money if you place the right side bets (that’s without even including Fannie and Freddie in this mess). Too much “insurance coverage” had been written. The insurance premiums were collected and went into someone’s pocket. The estimated 40 to 80 trillion of derivatives written to insure against financial loss will never be paid.

For example, Greek bonds have a substantial risk, but buy insurance and your worries are gone. If you are the Greek government, buy the insurance (you can’t lose). If you work for the Greek government, why buy the bonds? Just buy the insurance and when Greece goes belly up, retire to the good life. Greece will make that glaringly apparent when they collapse (after receiving their bail out money).

The real fault with this "insurance" is that you don’t have to have a relationship to the asset being insured. There is nothing to stop you from insuring your neighbor’s home and then burning it down. Plus if the neighborhood has "a gut feeling about that house," there’s going to be several policies written on that home. Then when the expected happens, (it burns to the ground) everyone gets rich. It’s as if, AIG was the insurer for anyone placing a bet on that house. Geithner and Bernanke saved the day; everyone got paid on that one.

Three questions arise. Were the insurance rates too low for the coverage written? Should the contracts have been allowed to be written in the first place? Shouldn’t you have to prove your vested interest in the insured, in order to purchase the product?

The Panic of 1907 led to legislation that made this sort of "insurance" illegal; the bucket shops which sold it, were banned in 1909. And then 91 years later, Congress rolled that law back. We were smarter now and knew what we were doing. Just as a our person making $35,000 a year can't pay off that million dollar loan, the 50 trillion dollars in risk arbitrage can't be paid either. The risk in the market is real, the "insurance" isn't. And, as in all fairy tales, everyone lives happily ever after.

Mortgage Market Meltdown (reprinted)

2010-04-20T21:15:00.000-07:00

This piece was written August 4, 2006. I thought it might bear a review.I get irritated when I watch the PBS feeds of the Congressional committees, who ask why no one saw this real estate mess coming? Congress has to assume the biggest share of the blame. If I could see it, they could too. Of course this was bringing in a lot of tax dollars, which they could spend on new toys; Spend-------ad infinitium.

Lets look at an organization named Fannie Mae. Picture it as a 4 x 4 x 4 foot black box with the words Fanny Mae printed in white on it. Envision Mr. or Ms. "Mortgage Market" dropping into the box all of their 80% finance loans and when the box gets to $1 million it spits out an investment certificate for 1 million paying 5%, face amount guaranteed, which is purchased by Mr. or Ms. "Unknown Entity," AKA "mark" or "sucker."

The little black box is a great transformer and redistributer of debt. Nobody wanted to touch that crap until they built the little black box. By God everyone is entitled to the American dream of home ownership rah! rah! rah!

So we have this box and the question arises, "What the hell do they do inside that box?" My guess--absolutely nothing.

There is really no problem with the design model aspect of the black box. It will perform within its parameters. After all, its rather absurd to have a real estate market drop 20% isn't it? (Believe that, and I have a bridge to sell you). What is not realized is that the market can drop 50 to 70 percent. In this scenario, the little black box fails to function as expected. It doesn't have the funds necessary to back the claims it made in the past. What funds does it have for back up of bad loans? My guess, is none. Say you need one or two trillion dollars to back up the investors who bought these certificates---total tax collections for the US of A is about 1 trillion a year. Sounds like someone is going to get short sheeted!

The question arises who's holding all of the crap and who is going to get burned?

My guess is mutual funds and IRA's and I could be wrong.

Off Track Betting

2010-04-13T21:29:00.000-07:00

40 years ago I had a summer job working for Delco as an Engineer in training. It impressed me that there was this one guy that would get off early and go to the race track. Naturally everyone would give him a couple of dollars to bet on a horse or two. On one particular race day several of the requested bets won big. The guy didn’t come back to work for a while. It seems he had been pocketing the money and betting on his own tips. Two workers had asked for a Trifecta ticket of say 711. Those 3 horses won and the payout was astronomical; but no tickets for that combination were sold at the race track. So it got added to the payout for the next day.

This might seem unrelated to the stock market, but look at options. 90% of all options expire worthless. So a big brokerage, could take the orders and not place them, and cover them internally. And on expiration the brokerage gets the money. If there is a small winner, pay the guy off.

If you were to change your mutual fund holdings, and move from investment x to investment y, the question comes up; does the mutual fund go out and change what they are doing just because you move a few things around? Probably not.

Take gold and silver bullion storage facilities. It is not unreasonable to suspect that these companies only keep less than 10% of the demanded holdings in actual metal. It’s rather tempting to hold the rest as some sort of certificate, and invest the proceeds in selling puts and calls on the “bullion in storage?” Remember 90% of options expire worthless.----everyone is not going to ask for their gold at once. Hmmmm--- What happens if they do?

The amount of physical gold and silver in the world to date is a measured known amount. Just like everything else, as long as the system has no real stress applied to it, things function quite well. If everyone decided to take possession of their gold or silver, it just might not be there. It has been suggested that only one ounce of gold for every 100 under contract could be delivered, if demanded. The neat thing about gold and silver, is that the FDIC/Treasury can’t print either one.

The people we trust are not doing what we ask because they can buy an option to satisfy our requirements. The trouble is, these option tools may prove to be very inadequate in a panic. As Buffett suggests, we will see who was swimming nude, the irritating thing is, it could be us.

4 Trillion Dollars worth of Inflation

2010-04-09T08:34:00.000-07:00

Let’s examine the housing bubble. For this example, we will use a million dollar home (before the bubble it was worth 300K). The buyer secures a 30 year loan for one million dollars. The home's seller puts the untaxed windfall gain in the bank.

The housing market tanks and now million dollar homes are worth 300K again. Each homeowner signed an agreement with the bank, to pay on the loan for 30 years. Assume these home owners walk and send the keys to the bank. The homeowner’s loss is probably negligible.

The bank now has a problem. Instead of a steady income stream for 30 years, they have many 300K homes and a loss on each home of 700K. The bank is now insolvent and the FDIC insurance will step in to make good on the bad loans.

At this point, two things are evident. The money that was to be paid back by the buyer, was to be done with earnings over 30 years. The money paid by the FDIC to the bank to cover the bad loan was printed money paid immediately. So the contract to pay on the home for 30 years has been canceled, this money if it had been paid, would have been real money, i.e. earnings.

In our example, the bank now owns the house worth 300k and receives from the FDIC the other 700K. Instead of the banks getting 1/30th of their investment (plus interest) back every year, they get 7/10ths back right away and the rest when they unload the home.

When you realize that a 30 year home loan has a payoff of 2 ½ times the amount borrowed, the 4 trillion dollar loss currently projected would represent 10 trillion of real earnings over 30 years. This would have been money that could not be used for consumption, it was already under contract. Under the FDIC plan, the banks get immediate remuneration with printed money and their depositors are still whole. It’s painless; no one had to work for it.

So, everyone that sold their house before the bubble popped is a winner, everyone that walked away from their bad investment, after the pop, is a winner and everyone with money in the bank is a winner (A real fairy tale ending). The government pours 4 trillion dollars into a banking system that expected that sum back with interest over a 30 year time frame. Now the bankers have all of this money to lend with no one credit worthy enough to loan it to. Where do the banks go next to lend money? Greece, Portugal, Spain, Ireland—they can’t lose, they’re FDIC insured. And of course there is no inflation, the person who sold his house for 700k more that he paid for it, gets to keep it. The bank that lost the 700k (when the new buyer walked), gets reimbursed by the FDIC. We have a bank owned house still worth 300k and 1.4 million dollars of new money in the banking system.

The thing to realize here is that the new homeowners never really had the earnings to pay these loans off, 30 years down the pike. But our government will pick up the tab on this failed dream of riches. Real estate was a get rich quick scheme and an obvious bubble. America is the new Wonderland; you wonder how we will pay for all of this. You won't have to wonder long.

Reading Between the Lines

2010-04-03T19:10:00.000-07:00

With Friday's job report, the message is “We have turned the corner on the recession.” This reinforces my belief that in bad times people want to hear good news. There are some serious miscalculations here. A lot of the jobs that have been lost are not coming back; people will have to be retrained for new types of work. In the 1930’s we switched from an agrarian economy to a manufacturing one. The switch is happening again. We need computer skills to fit into the new world of Information Technology. The problem is trying to retrain those over the age of 45 with these new job skills.

Housing also seems to be picking up. It seems like savvy investors are picking up rental property. Think about that for one moment, if housing prices drop below what renters are paying for rent, why rent? Buy a house. So as housing prices decrease, the rental market goes to hell. In some places like Detroit Michigan or Helmet, California, home prices have hit $80,000, that’s the construction cost of the house with zero land value. The net result home builders disappear. $600 dollars a month would move you into a home. I hear Fannie and Freddie Blowin' In The Wind; get a free toaster with your purchase of a house.

Then we have state budgets and legislators on the road to nowhere. The recently elected New Jersey governor Chris Christie is starting to get the state moving in the right direction. Here is a Link worth watching, it's about 26 minutes . He has the right ideas. He knows what he’s doing, won’t get him re elected. Maybe some of the right people, to fix this mess, are getting elected.

And finally, public employee retirement plans are making the news. Taxpayers are beginning to realize the retirement benefits are a bit on the extravagant side. The state financing (nationwide) needed to keep these plans funded, are a couple of trillion dollars short, three to be exact (so far). It will be interesting to see where this money comes from.

If you are wealthy, you’re oblivious to today’s hard times. Some Indian father threw a $200,000 wedding in downtown San Diego yesterday. He even rented an elephant, see the picture below.

It kind of makes one wonder about the distribution of wealth in the world. Opulent consumption of this sort during hard times never sits well with the masses. The quote “Let them eat cake” comes to mind and we know how that turned out.

Inflation Is The Name Of The Game, Tough Times Lie Ahead

2010-03-28T22:00:00.000-07:00

People getting ready to retire have put about 17 trillion dollars in their retirement savings. Our government borrowed and spent 12 trillion of that. The banks have 4 to 8 trillion in bad real estate loans that the government will make whole again (roll the presses). This retirement money the government borrowed has been spent on consumption. Whereas the money from the sale of real estate was deposited in the home seller’s account. That money made from the real estate market is still in play—the house isn’t.

What does all of this mean? By saving money, you defer consumption to a later date. The government borrowed and spent it. The IOU’s are there, but the option to consume 12 trillion dollars worth of product at a later date is gone.

There is no real problem yet, the people getting ready to retire are not going to withdraw the 17 trillion dollars all at once. We are probably looking at a 6 to 8% withdrawal rate per year for retirees. The unemployed/employed won’t be a replenishing source for these retirement funds because of the economy. In fact, they will be drawing down any saving they have available.

The country is producing less and spending down their savings. Forget the equity home loan. People are tapping their savings, mutual funds and stocks owned.

The stock market has been immune to this mess so far. The market keeps on going up. All the shares of a single stock are valued at the price it last traded at. Sounds a little like how it used to work in the housing market. So if you need cash to pay the bills, you sell the winners and keep the dogs, hoping that they too will turn around.

Bonds are another item of concern. Low interest rates are not what an investor wants. If you are buying a house, low rates are a good thing. The banks have been writing 30 year home loans at low fixed rates. Isn’t this what happened to the Savings and Loan’s of the 1990’s? They loaned dollars long term at low rates, when their deposits were short term. Rates doubled and depositors moved their money to a bank with a better rate. The net result, the Saving & Loans went to Hell in a hand basket. This time, it won’t be about interest rates, people will withdraw their savings to pay bills.

Two years ago, 60 percent of our taxes went to entitlements. What is it now, 120%, 160%, 220%? (Pick one, your choice) These created dollars are just as good as the ones I get from working 40 hours a week.

With Bernie Madoff’s Ponzi scheme, it was the lack of dollars to fund withdrawals that spelled the end. The government doesn’t have that problem; it can’t run out of dollars. The San Diego Union news paper was only a dime a few years back, now it’s 75 cents (that’s what I use to pay for the Sunday paper). Obama claims that health care costs are unfordable, well maybe that’s a result of printing too many dollars (AKA inflation). There are no COLA raises for Social Security this year, kind of makes you wonder. T Bone steaks at $9.89 a pound are a little unfordable for me, but they taste better than Obama’s health care. At least you get to spend your [hard earned \food stamp] (pick one) dollars on what you want, not on what the government says you need.

The sad thing that is no joke, the elderly are living on a fixed income. Tough times lie ahead, for everyone.

Health Care a Government Time Bomb

2010-03-25T21:26:00.000-07:00

If health care extends everyone’s life an extra 10 years, figure that could double the amount of money needed to fund Social Security. With a longer life, you’re probably going to consume more pills and Medicare. More exotic life saving operations will become available to extend our lives.

Cigarettes use to be the old equalizer. You paid into Social Security and at the same time, were taxed on every pack and died before retirement. This was the FDR plan. The planned retirement back then at age 65 sounded great. Most people didn’t live long enough to get that old, but it was a benefit worth contributing towards. It was tax dollars coming in and virtually nothing going out. Democrats view this from a historical point of view and remind everyone that FDR changed the way we look at retirement. In reality, it was a lottery ticket that had a very slim payoff. It brought in revenue.

Kaiser Wilhelm II back in the 1889 offered the first government retirement plan. Retirement benefits were to be paid at age 70; average life expectancy was age 45. So the first attempt at a retirement plan was very well thought out as to the future entitlements to be paid out.

When FDR was president, there was no real income tax. Our government raised revenues from import duties, liquor and tobacco taxes etc. Social Security was a successful attempt to register workers and tax them. FDR gets credit for the benefits we pay out today. His actual plan was to raise revenue by taxing labor. How was he to know, that people would start to live longer, it had never happened before.

At the end of WWII, we now had penicillin and other miracle drugs. The retirement laws didn’t change, but the length of life changed. All of a sudden entitlement got a tad bigger. From there more and more got added on to the benefits. Government entitlements in FDR’s time were about zero, today they are about 60 percent of the declared budget.

Then we went to Medicare in1965. The quadruple bypass, Knee and hip replacements and kidney transplants were not even thought of. Modern medical science took huge leaps. Now Congress has passed health care. The question arises, who is stupid enough to believe that we can pay the bill as a country?

The US can reasonably afford to start retirement benefits at age 75. And probably be able to come up with $5,000 per year in Medicare payments for ages 65 on up. Reality has to set in or we will be taught a very severe lesson. There is no free lunch, the elderly will expect the government to fulfill their desires at the expense of the young taxpayers as promised . Of course we all get old so it equals out doesn’t it? We will all eventually get to feed at the trough, won’t we?

Yesterday Social Security announced that the fund will pay out more this year than it takes in. Last year, it was stated that this present condition would not occur until 2016. Hmmmm.

This was part of their news bite:

Its so-called balance is, in fact, a history of its vast cash flows: the sum of all of its revenue in the past, minus all of its outlays. The balance is currently about $2.5 trillion because after the early 1980s the program had surplus revenue, year after year.

Congress spent that money and gave the Social Security people an IOU certificate. Bernie Madoff was doing OK until people wanted cash, he didn’t have it, he had spent it--our government is in the same boat. Think I am kidding? Here is a link Link A hat tip to Cancel our Debt Blog

We have proof that the money was collected and proof that it was borrowed and spent by Congress. Plus we have a bunch of Social Security employees that claim the fund has money; "We have all of these Treasury certificates-------------" (God help us!)

Our new health care entitlements program could consist of one pack of Roll-aids and a tube of Preparation H. The thing that irritates me, is that we might have to wait in line to get it.

Private Insurance Rates, Measure Reality

2010-03-20T09:04:00.000-07:00

A private insurance company has to charge rates that allow it to survive and show a profit to shareholders. Right now profitability is around 6% (one earthquake could turn that negative). As businessman starting up a venture, you want to see at least 12-20% profit. Otherwise put it in the bank and let the bank take the risks. Health insurance sucks as a business venture. A home builder can make 200% so why sell insurance?

Not only do insurers face very low return on equity, any State or Federal legislation could put them out of business. When Insurance companies raise rates, they are showing you the reality of health care costs. Obama is blaming the insurance companies for making health care unaffordable. Is home owner's insurance unaffordable? How about automobile insurance? These insurance carriers have scores of accountants using actuary tables to figure their bottom line daily. In order to survive, they have to charge accordingly.

What do you get with a government health care plan? As with any part of government program, there is no financial responsibility. Our government can’t even balance their own budget. The European health care plans are smoke and mirrors. They don’t charge their citizens the true cost of the insurance, they tack it on to their national debt. Plus there is no competition and a surgeon with a lot of experience can’t charge more than one out of med school.

In this country, a lot of our doctors, new to open heart surgery, get to practice on Medicare patients. Then they move on to cash paying customers. Many doctors won’t take Medicare patients; the government reimbursement rates are too low. Of course a doctor that knows how to play the game could abuse a Medicare patient by sending them in for 10 different tests and make a pretty good return. This type of doctor, will send a cab to your door to pick you up.

Unlimited health care is unaffordable with any private insurer. It is not any more affordable as a government run enterprise. In Great Britain, the waiting time for surgery is now down to ONLY 18 weeks. It’s kind of like being told you can use the bathroom once every three days; can you wait that long?

The reason a lot of people like Obamacare, is that they know the government has no way to figure the actual costs. The plan will trim a half trillion dollars of benefits to Medicare that the government has been picking up and add it to the premiums to be paid by the wage earners health plan. Isn't that slick!

Most people could probably afford health care if it was a priority. A priority is a new shiny car, two packs of cigarettes a day and a twelve pack of beer (this would vary, pick your own items). The kids get cereal and a bag of candy. The government figures it this way, everyone will have to pay for insurance or be fined. That way you can’t wait until you are sick to subscribe. So before you get your paycheck, the government is going to take out one pack of cigarettes and a 6 pack of beer every day and two car payments per year. What's Joe Six-pack's reaction? The kids get to eat their cereal with water and he cuts back on their candy, clothing, school supplies and they walk to school. Plus he drops his auto insurance. The good news is that if you work under the table, like selling drugs or hooking, you are considered poor, and qualify for free health care.

I listened to Obama’s speech today and couldn’t believe the rhetoric. Here is an excerpt from it:

At the heart of this debate is the question of whether we’re going to accept a system that works better for the insurance companies than it does for the American people -- (applause) -- because if this vote fails, the insurance industry will continue to run amok. They will continue to deny people coverage. They will continue to deny people care. They will continue to jack up premiums 40 or 50 or 60 percent as they have in the last few weeks without any accountability whatsoever. They know this. And that’s why their lobbyists are stalking the halls of Congress as we speak, and pouring millions of dollars into negative ads. And that’s why they are doing everything they can to kill this bill.

I try to avoid political comments and have been neutral on Obama up to this point. But this President is a Beet Head. You don’t shoot the messenger. You can bet your bottom dollar that whatever the insurance company deems reasonable for premiums, keeps them in business and no government can do it for less.

I think this President has an ego to feed; he wants to write some history. The trouble is, if this passes, we might have a Constitutional convention to rewrite our constitution. There are enough states riled up about this to make it happen, and that might not be a good thing. The government printed a ton of money and gave it to their cronies on Wall Street (900 billion dollars). Now Obama complains that it is un-American to make a profit. But threaten to go broke, and they throw money at you, just ask AIG. On the other hand, let's go get those robber drug companies, Rah, Rah, Rah!

This government health care plan is what I have referred to in the past as the "Disneyland Plan." You have no problem getting in, but the length of the lines for each ride are a joke. Grab a number and wait.

Health Care Math, Obama Style

2010-03-17T21:05:00.000-07:00

Obama says we have 40 million people without health care and he wants to give it to them, by giving it to us (the taxpayer). My employer and I pay $400 dollars every two weeks for health insurance, that’s $10,400 per year. Multiply $10,400 times 40 million people and you get $416 billion dollars to insure them at my level. Let’s cut the estimate by 50% to 200 billion dollars a year. Figure that there are 150 million workers working. Divide the 200 billion by the 150 million workers. The additional revenue needed from each and every worker would be $1,333 on top of what they are already paying for health insurance.

Remember the 40 million people without insurance will pay nothing into the pot, they can’t afford insurance. So in order to fund this, the workers would have to kick in $1,333 to maybe $2,666 extra per year.

Our government in the past has been known to buy toilet seats for $1,000 and hammers for $800. The idea that government health care can be cheaper than the private health care we already have, is absurd, to say the least. To claim it will pay for itself boggles my mind.

There isn’t much math or thinking that went into this, it makes you wonder about the quality of our educational system and how it has prepared present day voters for the real world. If we cut the educational budget by 50%, that ought to double the number of Democrats in the voting system, given time (that worries me). Our kids have to be taught, there is no free lunch, even though schools do have a free lunch program. In order for government to give someone a dollar, they have to take it from someone else.

If you do the math, the Congressional way, it's a little different. They already know that tax receipts for last year are down 40% (an educated guess on my part) and they need money, bad. Take the $10,000 per year in health care payments per employee and multiply it by 150 million workers. Whadaya get? 1.5 trillion dollars! Do you understand why Congress is so interested in passing the health care bill? You think they will spend it on health care? Obamacare will be a box of band aids and a bottle of aspirin. This health care legislation is a tax hike of “Titanic” proportions----where’s an Iceberg when you need one.

Taxation and Our Government (Reprinted)

2010-03-13T16:16:00.000-08:00

Here is an edited reprint from August 12, 2006. Back then, what I was suggesting, seemed absurd to a lot of visitors to my blog. Today, it seems to fit in line with last week's news of Kansas City's massive school closings.

Every day you hear some Congressman talking about taxing the rich, and more welfare reform for the poor. If we go back in history to the times of Rome and Greece, every male owed one month of labor to the state. The state did not classify people as poor. You either came up with someone to work for you or you did the month of labor.

Now let’s advance several thousand years. Today in the US, we have the rich, the middle class, and the poor. We know the poor don't pay much in taxes. The middle class is the real bread winner for the government. Then we have the rich. They don't really have to pay taxes either. Once you make the money, you can't be taxed on it a second time. We do have people that make over $100,000 a year working two and three jobs with the wife's wages added in, and these people are considered the rich that need to be taxed, neat huh?

Another item to consider is real estate taxes. Real Estate is visible wealth and is taxed as such. So if your house value triples in price, your house taxes also jump--California is an exception. Prop 13 limited the increase to a small yearly amount based on purchase price. That’s little consolation if you bought in the last two years. Notice that it is the Want-To-Be-Rich group of home owners that pay a disproportional part of their income in real estate taxes. And hey it’s all tax deductible. But lose your job and have no income, deduct it from what?

Back in the 1920's local governments had been spending their new found wealth. Then in the 30's with the collapse of housing, the tax base for local communities collapsed. Schools closed because they couldn't meet the payroll. Here is a quote from "The Great Depression" pg. 93 by David Shannon.

People never enjoy paying taxes. With the lower incomes of the depression came widespread demand for retrenchment and lower local taxes. Indeed, many citizens and property owners were quite unable to pay their taxes at all.

Since a large part of the revenues of local government is spent for public education, it was perhaps inevitable that the tax crisis should produce cutbacks in the schools. Many communities decreased their school spending severely. In effect, they passed the burden on to the teachers, the students, or both.

So we have the rich, the middle class, and the poor. The only ones that have lost their way are the middle class. These are the people about to enter a new world, called bankruptcy.

Another compounding factor back in the 1930's was the legislative stupidity that figured "If you raise taxes and fees, it will bring in more income." Well, to their surprise it brought in less. Unfortunately, intelligence is not a prerequisite when running for public office.

Our Economy is in Recovery Mode?

2010-03-06T22:48:00.000-08:00

When you think about it, unemployment insurance gives people a way to purchase items and continue life and at the same time stimulate the economy. What they buy determines who will stay employed. So if you are buying a TV or a toaster, someone in China gets to keep their job.

Most of what we consume is made in a foreign country; clothing, appliances, cosmetics, footwear, car parts, tools. We still produce our own food, autos and housing. And “by God everyone deserves to own their own home” ---and we know where that went. Now we have cash incentives to buy homes, cash for clunkers, and the old standby, food stamps for those with no cash at all.

Right now the United States is a service economy. We don’t make ANYTHING! It is not hard to figure out our economic future. Our manufacturing base moved off shore because of the cheaper labor. There is little or no incentive to move back to the US, either. The US consumer is addicted to cheap foreign products. How do we stimulate our economy by buying stuff made in Asia? How can we compete against countries that have no health insurance or retirement benefits or unemployment insurance? Imported goods have to rise in price, in order for domestically produced goods to be profitable. The real question is: what sort of industrial production is going to come into play to put people back to work?

“Buy American” might be the final solution. Congress is doing their part (printing money); it now takes eighty US dollars to buy a barrel of oil when it used to take thirty. Put another way, the thirty dollars you put in your IRA 20 years ago won’t even buy half a barrel of oil today.

The President and his men are claiming that we are in a recovery. Bernanke is claiming that we averted a great depression. It's what people want to hear, but sadly it isn’t based in reality. Their solutions are most probably part of the problem. It’s a little like a hooker with VD; you keep quiet about medical problems, it’s bad for business.

Health Insurance, a Financial Tool, not a Government Entitlement

2010-02-28T21:58:00.000-08:00

The administration keeps on telling the world that there are 40 million people in the US without health insurance. It’s as if they want it real bad and can’t get it. Are the 35 million people on food stamps a part of this group? How about the 10 million people on unemployment? They interviewed a gentleman the other day about health insurance. He said he was doing without, because he was putting his daughter through college. Now if they were to pass health care, he wouldn’t have the option to make that decision; the money for his daughter’s education wouldn’t be there.

Once you buy the idea that there are 40 million people that have no health insurance, then they hit you with the statement that these same 40 million people can’t afford health insurance. Back up and look at it a different way. 40 million people are self insured; they pay their doctor bills out of pocket. All insurance is, is a way of paying for future health costs in advance. Some choose to pay as they go. That plan works OK unless they have a very serious illness. Of those 40 million people that choose to be self insured, it takes a major illness for them to consider health insurance as unaffordable. It’s not the insurance that is unaffordable; it is the 20 to 40 years of missed payments that come due when you get sick. The idea that the government can manage anything cheaper than private enterprise has got to be a joke.

In my 64 years, I have spent about $4,000 total (including insured amounts paid) on doctor bills. Being self insured would have saved me quite a bundle, probably about $20,000. Oddly enough, I have spent probably over $8,000 sitting in a dentist chair. It is interesting to note, as we grow old, that Medicare doesn’t pay for dental fillings or dentures. I guess that’s why you don’t look a gift horse (Medicare) in the mouth.

Last Wednesday a Congressional committee grilled Angela Braly the CEO of Wellpoint Health Insurance (Anthem Blue Cross). House member Bart Stupak was upset that Angela was paid a million a year and the Company made 2.7 billion dollars. The fact that it was a 4 percent return on investment, didn’t sink through Representative Stupak’s head. He kept referring to the 2.7 billion dollar profit, being a lot of poor people’s insurance premiums; that was just too much profit for a private insurance company. He thought that a 39 percent increase in premiums was outrageous. As an investor, a 4% return is pretty poor also. Common sense suggests that no company would raise rates 39 percent just to make a profit. Irritating your policy holders isn’t doesn't help when it comes to renewals.

It's hard to believe that health care costs are increasing at 12 percent a year. Look at it other way; we know the government is printing too many dollars, their decrease in real value leads to the false assumption that prices are increasing. To the man on the street, if wages and prices increase together, it’s inflation. If your wages stay the same, those price hikes are real. Ouch!

Health insurance is like buying a car, cost is an issue. If you want a Lamborghini, you need big bucks. If you want to buy a Ford pickup, it is probably well within your budget. With the government's proposed health plan, you are "entitled" to the Lamborghini. The trouble is, you order the Lamborghini and you get a Ford pickup. Gee, how did that happen?

Governments Can't Solve Our Problems, They are the Problem

2010-02-24T21:39:00.000-08:00

Last week Blue Cross raised rates, some as high as 39 percent and now the nation is in an uproar; "How dare they raise rates." Nobody said anything when Lays Potato Chips went from $1.89 a bag to $3.79. If McDonald's wants to raise the price of a Big Mac 40% do you think anyone will care? Competition is the name of the game. If health insurance is such a lucrative field, how come there aren’t a half a million companies trying to sell us a plan better than the one we already have? We went from 10 mutual funds to over 10,000 today; why didn’t health insurers increase proportionally?

Our government whines and complains that it is not right to make large profits (Bill Gates and Warren Buffett's name never seem to be brought up). Congress reminds me of Claude Rains in “Casablanca” when advised that gambling was taking place, he said “I’m shocked—shocked to find out that gambling is going on in here.” Later a waiter handed him his winnings.

It is assumed that the rate raise by Blue Cross implies excessive future profits. Just maybe, the rate increases indicate what the government (by way of Congress), has done to the dollar by printing more of them. Plus with the bad economy, a lot of people are cutting corners on health insurance (if you’re not sick) it's optional—buy food and gas for work instead. The insurer's pool of young buyers is decreasing drastically.

Where does government get the power to tell private enterprise what they can charge? Obama today stated his party platform was not advocating Socialism. But “By God, everyone deserves health insurance!” Forget that “We the People,” can’t pay for it individually or as a group. If you want to see what government price controls do, examine what rent control does to local real estate. Someone once compared it to having an atomic bomb go off in the area, the damage was the same, there just wasn’t any explosion, it just took longer.

Figure that government in its evolution, has had 3,000 years to perfect itself. The basic products supplied by government turned out to be; roads, police, fire suppression, military defense, regulation of commerce, pretty basic stuff.

Solving problems sounds easy. But how come governments today, have the same problems as they had hundreds of years ago? Wouldn’t it seem logical that most of the serious problems facing man would have been solved by now? Let’s face it, the mind set is “We are smarter than the people from the past, now we can fix it.” I tend to doubt that premise.

As for the future, how can the government give us back everything we paid in taxes, as a retirement and health care benefit? Just maybe, the people that claim to have a solution to all of our problems, are part of the problem.

The New American Dime (Reprinted)

2010-02-21T20:34:00.000-08:00

The following is a reprint from May 19, 2007 that some of you may have missed.

Here are two coins, an old silver dime and the new Presidential dollar coin. Just for a laugh, which one is worth more? Answer; the silver dime is worth about 9 cents more.

To be a millionaire in the ‘1960’s meant something. In today’s world, a millionaire is a piker with 100K in 1964 dollars. Inflation makes people think that they are getting richer. People are making more money and their house and other investments have appreciated. What could be better?

Inflation is the hidden tax. Government spends a little more each year than they take in, probably about 3%. Over a 20 year period, the decimal point moves over one space to the right (i.e. $1,000,000 becomes $100,000). This worked pretty much OK until they passed Social Security.

When you contrast the silver dime with the new dollar, a new problem becomes visible, inflation taxation vs COLA (cost of living allowance) linked retirement benefits. What is different now, is that most of these retirement items that everyone depends on, were locked into the dime that was made of silver. So now benefits have to pay at the old dollar rate, inflation adjusted. As long as the dollar could inflate without COLA's, there was no problem. Once Congress linked the cost of living into retirement benefits, it created a monster that would bite them in the ass with every COLA increase.

Let's add to this, the health care package for seniors. Imagine, at the age of 55, your health insurance cost is $300 per month. What a relief that at age 65 it will be free. We are still talking BUBBLES, and this bubble is bigger than all of the rest, and is not going away. Give it another 15 years before it's visible. The real question to ask; "Is it possible to believe that we, the people (the government) are really going to pay for what, we the people, (as individuals) could not afford to pay?

Well, this kind of gives you an idea of where we are headed. They have super sized the dime and called it a dollar. So size does matter to your Congressman, doesn't everybody deserve a bigger dollar?

The government claims the inflation rate is under 3%, that keeps the COLA's low but kind of ruins their credibility. The real rate is probably closer to 12%, that's if you buy gas, milk, meat and beer. (Who can afford to buy all four at the same time?)

The Collapse of the Euro

2010-02-15T16:46:00.000-08:00

There is a new acronym "PIGS" floating around. It refers to the countries of Portugal, Ireland, Greece and Spain. They all share one thing in common their currency is the Euro.

The Euro is a peculiar creation. Most currencies evolve out of the individual government and are subject to regulation by the state. In this case, a group of countries got together and formed an economic union supporting a common currency. The thing that distinguishes this currency from all others, is that there is no inflationary printing of money unless all nations agree to it.

Greece is the poster child for the Euro. Their government has lied to the people for so long that the aspect of an overthrow of the government isn’t what could be considered plan B; it’s plan A. Greece has frozen wages and increased taxes, to get in line, with what the Euro community expected them to do to get their house in order. The problem is; it doesn’t appear to be working. The people there, are fed up with the conflict between the political rhetoric and the economic reality they have to live with.

Then we have Portugal and Spain waiting to see what will happen to Greece. They too, would like a bailout. Somehow Ireland got swept under the carpet (2.39 Trillion dollars worth of debt???). The Euro is one of those concepts doomed to failure. It was a great plan to facilitate economic free trade. The trouble was that it removed the politicians’ access to the government check book. They could no longer fiddle with the currency to balance the budget, like the United States and Great Britain. This collective economic bond to the Euro prevents the politicians from spending more than they collect in taxes. Some countries promised the moon and now can’t deliver; the money isn’t there.

The Euro’s impending collapse centers around nationalism. The European confederation cannot come to an agreement. Why should a German or Frenchman take money from his kids future, to give to someone in Greece or Spain? Why should countries who acted responsibly, be taxed and have that revenue given to those that didn’t? The Germans don’t want to bail out the “shiftless” Greeks. On the other hand, the Greeks had a taste of Hitler decades back and don’t want these” Krauts” controlling their lives for a second time; telling them cut wages and increase taxes. Nationalism is a pot boiling over in Europe.

In most countries, the decision to inflate/ debauch the currency is not one that comes up for a vote--- it just happens quietly. With the Euro, that question will have to come up for a vote in the future; and it has to be unanimous. A collapse of the Greek government could make that vote a moot point. Look for the European Union to break up, they can't afford to feed the PIGS.

A Final Letter from the Top Educator in Poway

2010-02-11T20:52:00.000-08:00

The following email was sent to all of the Poway Unified School District Supervisors by Dr. Don Phillips Superintendent of Poway Unified Schools, February 4, 2010. If you go back to my December 11, 2009 post you can see how the problem has increased in size from his previous letter (3 months ago). I might add that Dr. Phillips has announced his intensions to retire in the coming months. I left his letter unedited. It doesn't imply great times for our childrens' future education or for the teachers who educate them.

Dear Staff,

I wish I had some good news for once. Over my past nine years as superintendent, we have made cuts in five of those years totaling over $48 million and now face additional cuts. As you know, we have made every effort to keep cuts away from the classroom by finding efficiencies in our system, narrowing our focus, and soliciting parent and community support. Through our collective efforts we have been successful, to date, in minimizing the negative impact of budget cuts on our students’ education.

As one measure of success, our Academic Performance Index ranks among the top 3 school districts in the state with 20,000 or more students, along with Irvine Unified and San Ramon Unified. Our students also excel in everything from robotics to theater and in all extracurricular and co-curricular programs, including athletics. At the heart of this success is you – our staff – who are dedicated and highly professional, working daily with our students, supporting the overall district operation, and seeking ways to make the system work, even with all of the reductions. I see evidence of this in our custodians, library clerks, administrative assistants, food service workers, instructional aides, administrators, classroom teachers, and others. Much like hospitals that cannot run with doctors only, schools need support systems to help teachers be effective and to provide a safe and orderly environment. I’m very proud and appreciative of your extra efforts during these most difficult financial times.

However, as you already know, we are facing yet another challenging financial year in 2010-11. Our initial budget projections for next year included a $17 million funding reduction due to the continuing state economic problems and the depletion of one-time federal funds, which provided some budget relief this year. Although the Governor publicly committed to “protect education funding,” his proposal actually results in over $2 billion in additional cuts to K-12 education, or an additional $7-plus million in reductions to Poway Unified. This means that instead of a $17 million shortfall for next year, we now anticipate a $24 million shortfall. As we scan the horizon, we fear there may be additional state cuts which would further impact our district.

A $24 million reduction, on top of the major funding cuts we have already made over the past two years, is almost unfathomable. We are committed to maintaining our core educational efforts, but as we keep cutting, this commitment becomes more and more difficult. We will all feel the weight of these additional reductions, both individually and collectively. We will be presenting our initial negotiations proposals to the Board of Education for all three bargaining units on Monday, February 8. We will obviously continue to look for additional solutions in order to meet our budgeting constraints. Nevertheless, most class sizes will increase and we will enter into negotiations around possible further concessions in total compensation. Additionally, we are exploring the potential of a shortened student school year from 180 to 175 days. I could never have imagined we would face such a dire picture in California and K-12 public education.

As we enter into the 2010-11 budget development process, we will be using the following criteria to help us prioritize our resources:

· Support college readiness initiatives and high expectations for all students

· Focus on student learning and student support systems

· Provide a safe and orderly environment

· Continue to seek ways to increase efficiency and effectiveness in operations

· Support and, wherever possible, minimize staff losses

On the legislative front, I am seeking state budget relief in the form of greater categorical program flexibility, elimination of class size reduction penalties, and attendance relief from H1N1 absences. We are also pushing to hold the line on additional cuts beyond the Governor’s January proposal, as the state will likely need to make additional budget cuts next year. It is essential that each of you, individually and collectively, reach out to our legislators and help them understand the impact of these cuts on our collective work and, most importantly, on our students.

I have written a letter to our community that provides more detail regarding the budget, my appreciation for your support in keeping student learning at the forefront, the fact that these cuts will impact our work, and the need for their voice in Sacramento to avoid even deeper cuts for next year.

While next year will be even more challenging than this year, great people and great organizations rise to great challenges. I know you are dedicated to doing your very best with the constraints we face from such deep budget reductions over multiple years. We will work collectively to best address these additional cuts because of our belief in the importance of the education of our students. Poway Unified is a very special school district, and we are committed to help keep it that way

Don

(Dr. Don Phillips, Superintendent, Poway Unified School District)

The Paradox of Decreasing Consumption

2010-02-08T20:15:00.000-08:00

When times are tough, families cut back on consumption. Last June, Vista Water District announced that we were doing such a good job of conserving water, that they had to raise rates to cover the fixed costs. People are starting to realize, a decrease in consumption raises the unit price of water, natural gas, etc. These suppliers have fixed costs no matter what the consumption level. The net effect, we consumed less and paid more.

Anthem Health Care for California, today raised rates 30 to 39 percent. The government is shocked, and by God, they are going to get to the bottom of this.

Basically families have decided to do without insurance unless they really need it. With less people wanting insurance, the rates have to go up, to pay for those claims from people who are sick. All the insurance company does is take total costs, add in a profit and divide it by the number of customers, to arrive at a billing cost. It could be argued that the insurance companies are ripping people off, but I would argue, if they show enough profit, there would be lots of competition.

Look for the same to follow with car insurance. Rates will go up. Our land line telephone just went up three dollars a month as did our cable bill. Our household has changed auto insurance providers in just the last month because of cost. We are about to drop cable and the land line telephone.

America is downsizing at a drastic rate. Costs will go up while this happens. Then follow the bankruptcies, and then we get the lower rates.

The irritating part of this is that a family can feel the financial pain of a contracting budget, just like a State government. The Federal Government still has money that they can pull from "thin air." It kind of makes you wonder. If they can pull something out of "thin air," what part of what they are doing, IS NOT a magic act?