Sunday, October 24, 2010

The Fear of Deflation

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

Thursday, October 14, 2010

Quantitative Easing Sucks

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

Tuesday, October 05, 2010

The Freddie and Fannie Scam

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

Friday, October 01, 2010

Disasters Without Damage

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