Friday, October 03, 2008

Interest Rates Will Jump to the Sky

The government claims that the small businessman can’t borrow money and consumers can’t purchase new cars. Bernanke needs 700 Billion to fix this liquidity crisis. Interest rates rose a bit yesterday, 3 month T Bills are paying a little better than 1% per year (not per month). New car loans are under 7%. Do you get the feeling that just maybe the consumer stopped buying?

What happens when there is a shortage of funds for borrowing? Interest rates rise. They sure don’t seem to be rising. Inflation is roaring in at 10% and everyone is hunkered down with a bank deposit just under 100K. If I didn’t know better, you would think that the banks were flush with cash and nobody wants to borrow money.

If banks were to pay a decent interest rate, money would become available. 12% interest on cash might be better than holding on to the yellow metal which pays nothing. Of course if a banana republic printed up 700 Billion Pesos, gold might be the currency of choice. The wisdom of owning gold boils down to one thing, you can mine it, but you can’t print it. The government is out of the loop on Gold.

Remember back to the last housing slump from 1992 to 1998? It was 6 to 8 years in length depending on where you lived. Here we are into one year and one month of this crisis that started with the implosion of Bear Stearns and we need 800 billion. What will we need next year? You kind of have to wonder about year six, using year one as a measure. If we were to do that, it looks rather grim.

The one thing that really keeps a market going is confidence, there is none. The opportunity to make money with borrowed funds is pretty much gone. We can’t borrow a dime from the banks unless we can prove we don’t need it. Whereas the lenders that are broke, are given unlimited loans on bad debt.

This bailout mess is kind of like having flatulence contest in a crowed elevator with the winner getting a government cash award. It takes a real "Stinker" to win.

This could be the last part of the “Perfect Storm.” We the people ( AKA government) have 10 trillion in debt. If the interest rates climb to 10%, that’s one trillion a year of the budget for interest only. If interest rates go higher, the game could be over. If Paulson injects the new found funds, institutions will fight for the cash by offering higher rates for real money deposits.

Next week Bernanke and Paulson will be sponsoring the "Wall Street Iron Man Enema Competition." You don’t have to participate in the event to be “Cleaned Out.”

As a post note:

This was written before the Bail Out was passed. In my humble opinion, Congress raised no funds to pay for this from their tax base. The fact that Congress said they must do something to fix this crisis is a joke and a travesty. They did nothing. No real money was added to the system. The Fed could give counterfeiters a bad name.The fact that they spend 800 billion (that they didn't have) sounds impressive. Don't be fooled by the smoke and mirrors--I feel disappointed and let down by what has happened.

Copyright 2008 All rights reserved


Anonymous said...

Well, my coworkers plan to move their 401K's out of the market following the "post-bailout rally" didn't happen. Ouch.

I'm a little bit stunned that our representatives did not vote the will of what seems to be a super-majority of people. Very ironic for the House of "Representatives."

My rep and both senators voted for this turkey; tonight I donated money to their competitors for the November election. Unfortunately, both Presidential candidates voted for it too. Sigh...

Jim, aside from buying back all the bad mortgages we sold to China, do you think this bailout will do anything positive?

Jim in San Marcos said...

Hi Anon 8:45

The Bailout is like adding 800 to both sides of an algebraic equation. It doesn't do anything. We are back where we started.

This bill isn't buying China mortgages, they can go fly a kite, what is happening, is that the Fed is supplying funds to banks hoping that they will lend money--they won't, they're too busy covering their ass.

IMHO the bail out does nothing.

Tyrone said...

We the people ( AKA government) have 10 trillion in debt.

I've been saying to friends that nobody is talking about the elephant in the room--National Debt. Go "fix" the mortgage/banking problem, but what about the original debt (the elephant)? Add to that the future defaults and what does this bailout accomplish? This is what ultimately drove me to get a gold/silver position.

Hope for the best, prepare for the worst.

Jim in San Marcos said...

Hi Tyrone

I agree, interest on the debt could be the real bone crusher.

It's quite irritating to point this mess out to public years in advance and be blown off and laughed at. Now when the solution is so obvious, the same incompetent yahoo's have their own solution.

You can't get to where we are now without a lot of incompetence. There is no reason for them to listen to us now.

They made the bed and we have to sleep in it.

Thank you for your comments

Anonymous said...


Have you ever seen this chart before?

It is a chart of the "Total Credit Market Debt as a % of GDP"

My question: Is this what is "deleveraging" right now?

This looks like a mountain compared to the "1929" molehill that led to the depression back then.
Am I misunderstanding this chart?
If not, then this looks a lot more serious than it did in the 1930's era.
Please help me to understand this chart and what it means if you are able.

Jim in San Marcos said...

That graph show the values sky rocketing from 1930 to 1935 and then down by 1940.

Here is a Link to that site. The last part of his link didn't copy

So with the Paulson bailout of 800 billion, we just went off the chart. If the historical perspective is any clue to the future, there is a lot more bail out coming. We have five years where the numerator (debt)will be increasing while the denominator (GDP)is decreasing.

So at the least, we have about 10 years of bad times coming our way.

Thank you for the link

Anonymous said...

This is Anon 6:37.
Thanks for taking the time to help me with that, very much appreciated.