Tuesday, December 27, 2011

Common Sense Revolves Around Our Perception of the World

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.

Sunday, December 11, 2011

Guverment is goin ta fix things rite

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.

Thursday, December 08, 2011

The Tax Money Is There

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.

Wednesday, November 30, 2011

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

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?

Thursday, November 24, 2011

Brick Wall Dead Ahead

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.

Monday, November 21, 2011

Squirrel Economics 101

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!"

Wednesday, November 09, 2011

Euro Crisis Mismanagement

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.

Thursday, November 03, 2011

The Greeks Are Being Had

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!

Thursday, October 27, 2011

Idiotic American Foreign Policy

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?

Wednesday, October 19, 2011

This 'Great Depression' Could be Worse

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.

Saturday, October 08, 2011

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

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?

Friday, September 30, 2011

Why A Solution Escapes Us

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.

Thursday, September 22, 2011

The Fall and Rise of Greece

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.

Thursday, September 15, 2011

The DOWnward Slide

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.

Tuesday, September 06, 2011

Things Are Getting Better?

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."

Sunday, August 28, 2011

The Financial Storm Brewing

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.

Sunday, August 21, 2011

Government Intervention Is Not A Solution

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.

Sunday, August 14, 2011

Bernanke the Wizard

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.

Saturday, August 06, 2011

When You Thought It Couldn’t Get Any Worse.

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).

Saturday, July 30, 2011

Bonds, A Future Investment Opportunity

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.

Saturday, July 23, 2011

Freeze The Debt Ceiling

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.

Sunday, July 17, 2011

Unintended Solutions

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.

Friday, July 08, 2011

The Buffett Mind Set

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.

Saturday, July 02, 2011

The Under Funded National Debt

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.

Tuesday, June 28, 2011

Greece ready to Default

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.

Sunday, June 19, 2011

Military Spending Cuts—Why?

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.

Sunday, June 12, 2011

What Lies Ahead?

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 ;>)

Thursday, June 02, 2011

The Kondratieff Wave Revisited (reprinted)

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.

Saturday, May 21, 2011

The Village Idiot

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.

Friday, May 13, 2011

The Abstractification of the American Mind

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.

Wednesday, May 04, 2011

Disneyland Economics

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?

Wednesday, April 27, 2011

The Health Care Train Wreck

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?

Saturday, April 23, 2011

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

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."