Will We Stop 1929 from Repeating?

The Great Depression was a financial event. There was no war, earthquake or hurricane. The financial system ruptured and just about died. People stood in line to withdraw their saving from the banks. Thousands of banks collapsed. People, worldwide, lost their life savings. It was contended that the runs on the banks are what brought the system down. Upon closer examination, it’s easy to extrapolate the banks eventual demise from the poor economic conditions. The money borrowed could not be paid back by the unemployed. Many people were forced to live off of their savings (if they had any left).

In order to stem bank runs, the government came up with FDIC insurance. The Glass Segal act put this into effect January 1, 1934. This was after the horses escaped and the barn door was locked. If your bank met muster, you qualified for insurance and if it didn’t, you were toast. It didn’t cost the government a dime.

Let’s bracket that date January 1, 1934; either 100% of the population had collectively lost 80 percent of their wealth, or 80 percent of the population lost everything and 20 percent lost nothing. Almost everyone fell somewhere in-between the two categories. There was an obvious destruction of savings that was catastrophic in nature. This money wasn’t destroyed; it had been spent very foolishly over the previous 10 years on consumption. If you paid one million dollars for a dog or a wedding, you got your money’s worth, although I would argue that.

Fast forward to today. Bank deposits worldwide are insured. No one has lost a dime. The last part of the Kondratieff wave has to do with the contraction of the money supply and the repudiation of debt. The US Treasury is expanding the money supply while debtors have no problem walking away from their obligations. The most important thing to realize about the last part Kondratieff cycle is the end result. It destroys the obscenely rich and returns financial systems to a more normal functioning state. Bernanke is trying to preserve the status quo. The Fed is going to print us into prosperity.

Food prices have double this year. It is a little hard to see in some cases, the giant size potato chips bags, now fit in a lunch box. And then there is the specter of deflation. Autos and homes are just not selling.

Even if you have a job, your wages are not increasing, but your cost of living is increasing. So you dip into your savings, which seem to have lost a lot of buying power. Maybe that’s what deflation is all about, you spend until you are broke and then do without.

In 1930 there was no money to short the dollar on a carry trade. Bernanke has fixed that (it’s a little like a bank selling hand guns in the main lobby). The World(and probably Goldman Sachs) has shorted the American dollar. After getting rid of our clunker, we can now drive to the poor house in style. It kind of sets your mind at ease, doesn't it?

Squirrel Economics 101

The following article may look familiar to some of you, it is a reprint from exactly one year ago today. I thought it worth repeating for those that missed it.

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!"

The Time Lag Factor

A majority of people don’t really anticipate time lags. The results of Congressional legislation usually takes anywhere from 2 to 12 years to really take effect. Our leaders suggest that we have hit bottom and are rebounding out of the recession. I really have to wonder about that!

Legislators in Georgia a while back passed a law against unfair lending. The net result of the law, was to shut down bank lending in the state. The banks didn’t want the hassle. Congress passed a law for writing off farm machinery in a five year period. Hummer sales exploded for three years. Not quite farm equipment, but it qualified for the deduction.

A lot of times, the net result of a given action has very unexpected results. The UN taught people to farm in Africa 30 years ago and how to use fertilizer. It seemed like a real success story. People came to the area and the population exploded and things were fine for a while. The one thing overlooked was the need for firewood for cooking fires. 15 years later, there were no trees and the rain fall erosion turned the fertile fields into gullies and the population either starved to death or moved on.

When we examine cause and effect, there is a time lag between the two. Easy home loans created a speculative bubble. What we are looking at are the unintended consequences of economic forces that have a time lag built into them.

We do know that the Congress of the 1930’s figured that they had a chance to stop a lot of this stuff we are experiencing from ever happening again. Of course we were far wiser and knew what we were doing so, we changed the rules back to make the game better. After changing the rules in the early 1990's, things worked marvelously, everyone got rich. But then Bear Sterns had a small problem. The Nemesis from the 1930’s reared its head, with the same time lag.

Our government has initiated several programs to save the economy, from spending money that is nonexistent, to printing money to give to banks that has been lost through bad investments. I suggest that there is a time lag. What has been done will take several years to be “appreciated.” It’s a little like giving you underage girlfriend a girdle to hide her pregnancy. You haven’t altered the outcome----only made it more of a surprise.

The Obama Magic Act (Tax Increase)

Congress over the years has passed Medicare and Medicaid. There was no real funding for it. It was for the “greater good” which is quite questionable when funding wasn’t really taken into consideration. Now the government realizes that they can’t keep it funded much longer (a jar of Geritol and a tube of Preparation H just won't cut it).

Most of the people from the age of 18 to 45 will pay less in actual health care costs than what they would have paided into health insurance (by several thousand dollars a year). Today, the WSJ ran an article on “Mandated Health Insurance Squeezes Those in the Middle.” A Mr. Norton, in Massachusetts (where health care is mandatory) can get a $2,000 deductible per person for his daughter and himself for $464 per month or $5,568 per year. His words were, “This is insurance you can’t possibly use.” His solution is to pay the $1,000 dollar penalty for not being insured.

Obama is right when he says this new health insurance program will not increase our debt, it will lessen it. The younger generation will pay in $5,000 per year and get very little in benefits (do you wonder why?---they don’t get sick much). Here is the kicker that Obama mentioned. Everyone has to be enrolled. Otherwise people would only enroll when they were sick. That’s why insurance companies don’t cover pre existing conditions. You are covered if you sign up before you need it, not after. And you hear the whine; that’s unfair.

Another thing to review about our health care in the United States; it is the best in the world. The more skilled of a doctor you are, the more you can charge. If you are incompetent, you will be sued out of business.

State run health care plans have nothing to do with a doctor’s skill or experience. It is all customer count, procedures performed and pills prescribed without cost accountability. Three fourths of our country (18 to 55) can say no to health care costs if they rise too high. The other fourth doesn't have to. Kind of neat to be the latter group, isn’t it?

What everyone needs to realize, we are not being sold health care. Those (the young) who will be paying it will benefit very little. It is a tax. It will be used to keep the government from going bankrupt in the near future. Congress has abused and spent/consumed the Social Security Trust Fund. IT IS GONE! Obama desperately needs new tax revenues. The health care plan is the bait. It is a plan to generate new tax dollars. Our kids get to pay for it, thinking it is health care.

As a side note, maybe we ought to send Obama to Afghanistan in search of Osama. After a couple of months of listening to him, the Taliban would probably surrender and accuse us of Obama-boarding. His constant television ramblings irritates me no end. Put a sock in it. I would suggest, anyone with all the answers is part of the problem.

1929 Depression With a New Ending

You’ll notice that this blog's name has the year 2006 in it, which seems somewhat dated. Many times readers have suggested that I change the year until I get it right.

From reading the personal accounts and tragedies of that time, the most impressive but elusive thing, is the time line. From a historical point of view, we refer to the Great Depression as an event of 1929. There was no depression in 1929. Things were still swinging. Granted Florida was already a basket case, but the rest of the country didn’t have a clue that something was wrong. Then, the stock market crashed in October of 1929. It wasn't until 1931 and 1932 that people realized things were real bad and then they got progressively worse into 1933. From there, there was no argument, we were either in a depression or you were a pretty blond, married to a Rockefeller.

The concept that the people back in 1929 were aware they were in a depression is a false assumption. In November of 1932 when Roosevelt ran for office, there was no argument that things were bad. Right after being sworn in 1933, FDR declared a long bank holiday and a thousand banks never reopened.

Obama appears to be our Hoover. Hoover was quite intelligent and no dummy when it came to running the government. FDR pretty much continued the programs he had put in place. The "New Deal" was new hope, a wish and a prayer, government programs that did little. The war brought us out of the depression.

Today's problems are similar to what confronted Hoover. He faced the frustration and the inability to control what was happening next. Back then, the voters felt misled. Things had gotten increasing worse, not better. There was the constant government banter that things were getting better.

This is an economic problem that can get a lot worse with more political intervention. There is no government solution. The time line to get out of this mess is quite a ways away. Hoover had 4 years and it took another 6 under FDR before we "turned the corner." Add 10 years to 2006 and you have a more realistic view of when this "Full Feature Film" will end.

Will we be ready for a "New Deal" come next election? People are already tired of hearing that the recession is over. Poverty is reality without the politics. Optimism is certainly not in the wind. Uncertainty is what the world is about.

This is playing out a little like the "Wizard of Oz," only this time when you click your heals together three times, you wake up broke, wishing you owned a home in Kansas.

The Federal Reserve's Madoff "Manuer" Maneuver

I was just cleaning up my upstairs office and ran across some correspondence I wrote to Mr Greenspan at the Federal Reserve warning him about the future housing and banking crisis. It was written in 2005, 6 months before I ever even thought of writing a blog. Double click the picture for a larger view.



Here is the letter I got back. I was rather disappointed that it wasn't from Mr Greenspan himself. But it was read and answered by someone in his organization. Everything was under control as far as they were concerned.


My main point in running these two letters was to demonstrate, that this train is set in its direction and is not going to stop. The hand writing is on the wall, all I did was point it out.


Look at the table below, here is where things look very out of whack with our national debt.

How do you explain 4.785 Trillion dollars that are part of our national debt that is held by the Federal Reserve? Is this the total amount of extra printed money stuffed in mattresses around the world? I can see where the rest of the world got their money to buy our debt, but come on, what product does the Federal Reserve make that earned it almost 5 trillion dollars to purchase our Treasury's? Question two; do they get paid interest on those holdings with our tax dollars? It looks like a lot of smoke and mirrors. I guess with this "robust" economy, there is so much smoke; they can cut down on the number of mirrors.

Leave the Bar of Soap on the Ground

The bad news is that they just yelled “Fire!” in the movie theater, the good news is, there are now seats available. Want to buy a home or a car? Boy, do we have a deal for you! Officials have just declared that the recession is over. Just think about it, the government never knew we were even in one until it became so damn obvious. Now they claim we are out of it--Just who is out of what?

Over consumption got us into this mess. Now, more government spending is the solution? It’s kind of like giving a guy with a broken leg, a second set of crutches so he can move twice as fast.

Here is the latest release on Unemployment figures and it is not good. Add SIX PERCENT to those values to reach more realistic figures.
Then we have the foreclosure reports nationwide. The shading colors dress it up a bit. Compare the unemployment statistics with the foreclosure map. The two together suggests that the problem has some size to it. It could be argued that the foreclosure data is not as current as the labor statistics, which would add more rain to the parade.


Let's color everything from 8% on up as distressed.Here is what it should look like (you know things are getting worse when you need fewer different colored crayons). This problem is not going away. Many state budgets are in a financial crisis. Tax bases are shrinking while expenditures are increasing.

As for a gauge of where we are at, our leaders in Congress appear to be mixing Preparation H with AstroGlide. The thought that they claim to know what they are doing, bothers me.

Abstraction Deception

Kind of a weird title, but there is a Political game being played with your mind and here is how it works. Visualize a pencil and a pen. We can put these two items in a group called “Writing Instruments”(notice that a can of spray paint could be considered a "Writing Instrument"--it's in the group by default). Abstracting up another level, the "Writing Instruments" are also in a group called “Communication Media.” We could still be talking about pens and pencils, but the last layer of abstraction also would include TV's and Radios. As one abstracts upward, the groups encompass more items. I am talking about a pencil which I visualize as green; you might see a red one without an eraser. The Senators talks about “Writing Instruments." Congress passes a bill on “Communication Media.” The voter thinks he is choosing between the different colors of pencils. Everybody believes they are on the same page and that is the farthest thing from the truth.

Now let’s visualize some basic health items; health insurance, hospital costs, Doctors compensation, Nurses salaries, insurance company rates, drug company prescription charges, these are the pencils and pens. Let’s group them all together and call it “Health Care.” Then from here we have items not mentioned that fall into the "Health Care" level group; "Government Health care for the retired" and :"Government support for hospital emergency room services." There could be more, but we’ll take the three items and abstract it up another layer and call it; “The Great Health Care Reform.”

What is ticking people off, and they might not know why, is the fact that the people pushing these arguments seem somewhat logical but you know something isn’t quite right. Everyone is talking pens and pencils (health insurance) and the Congress is trying to pass Communication Media (The Great Health Care Reform). The terms "Health Insurance" and “The great Health Care Reform" are used interchangeably. If you buy onto the "Health Insurance" plan, you have just inadvertently signed up for the "Health Care Reform". They are not one and the same. You have been abstracted to a higher level without realizing the shell game in progress.

What Congress knows, is that the socialized retirement plans called Medicare and Medicaid are gigantic black holes. They cannot be funded at the promised rates. Congress is talking about low level items like "Health Insurance" with very little abstraction and then switches to labels like "General Health Care"--used in the high abstraction layer. This Health Care plan, is a very big item that covers a lot more than just Health Insurance. We are being sold a pig in a poke. It's kind of like falling in love with the girl of your dreams, only to find out that she needs another 40 grand to make the sex change operation complete. The question comes to mind "Is it time to cut and run?"

As a post note, if you ever want to read a book that will change the way you think, I recommend "The Tyranny of Words" by Stuart Chase. It was written during the Great Depression. It deals with abstracting to a higher layer. I guarantee once you read it, you will never lose another argument (unless it's with your wife).

As a second post note; some people reading may think that I am just being a hard ass on health care, that is not the case. My mother died of cancer at the age of 54 and had a hospital bill of over a half million dollars (hard money 25 years ago) (my dad had to sue the insurance company to get them to pay the bill). My Dad at the age of 81 (believe it or not) had a triple heart bypass which he survived only to be paralyzed from the shoulders down, by a blood clot. From there he was in the intensive care unit of the rehab wing of the hospital, in physical therapy for 4 months until he passed away. Since he was a World War II prisoner of war, he had free medical. I can’t imagine how much that must have cost the VA. Sadly, we have to admit that the government can't solve all of our problems, we have to learn to accept the reality of old age with responsibility.

Concepts 101

Lately you hear in the same sentence:” We need health insurance, and everyone knows that the present health care system needs to be fixed.” Let’s break it down into two parts. We probably all need health insurance as we grow older. Very few will need it while they are young. Old age leads us to the second half of the sentence. “Everyone knows that the present health care system needs to be fixed.” What idiot can’t figure out that there is no way we can pay for the free health care plan for the over 65 crowd already in place? It is impossible!

The initial concept behind Social Security was everyone contributed towards their own retirement. Look at it from a Congressional point of view. Everyone pays more in taxes and Congress can spend more now. All of the Social Security money has been spent. The new concept is; the kids pay for mom and dad’s retirement through the SSI tax. If you think about it, the real bill that Congress passed was a law that stated the children have to pay their parents retirement income while they are still alive. Your parents don’t have to feel uncomfortable asking you to support them, the government is the intermediary.

Basically the present Medicaid and Medicare programs will fail miserably unless we can tax those who use very little in benefits to insure those that will be using a lot of benefits. Just imagine if everyone over the age of 75 needed $100K worth of health care a year. Who’s your doctor going to treat, the kid with an earache or the 75 year old gentlemen that needs a double hip and knee replacement? The present health care for those over the age of 65 will bankrupt the country; it needs to be cut drastically. Ask a Congressman, how will doing that get them re-elected? So that will not happen, ever!

Tomorrow there is going to be another one of those informal town hall meetings over health care presided over by Obama. This should be a very controlled agenda. The Democrats want to push “health insurance” and combine it with “Medicare and Medicaid.” If I was to write the bill, it wouldn’t be a thousand pages long, it would read: "If mom or dad gets sick the kids have to pay the bill, no matter how much it is."

Look for some key items tomorrow at the town meeting. A large American flag, references to patriotism, and “Doing what is right.” This town meeting will deliver a message, but I think the real message will be after the meeting. People are tired of being manipulated by the press. The real issues are not being questioned by the news media.

Everyone needs health care, the question arises, as we progress into our older years, is the present system really viable for the country? Congress has realized that it needs to be fixed. The concept that it is unaffordable is of no concern to our elected officals. Keep quiet and get re elected to Congress. Go figure

Cash for Clunkers

Starting with some trivia, back in the 1930's a little man rose up to save Germany from Communism with Socialism. He put in motion a car company called Volkswagen which translates as "The People's Car." You may have noticed one or two of them on the road. The picture below may suggest what the future has in store for us.

-----------(Satirical Rendition of Batman’s nemesis, The Joker)---------

Let’s see now, your car isn’t worth $1,000 and you can turn it in and buy a new car and get a $4,500 rebate. I wonder if the $4,500 is considered a down payment? Then the dealer is going to drain the oil on the clunker and then add Liquid Glass to it and run the engine until it freezes up. In essence, the government has destroyed the low end of the car market. The new minimum price for a used car is now $4,500—do you wonder how I arrived at the figure? Plus why do we have to destroy vehicles that have real value as spare parts?

California still offers a plan where you can get $1,000 for a clunker that can’t pass a smog check. Of course the only way to get it to fail the test is to disable one or two spark plugs (sshhh). Business has to be slow at the smog return window.

Charity car donations have gone to hell. The services they provided have vaporized (things like food banks and soup kitchens). They don't even need the volunteers anymore, they have nothing to hand out.

I’m not ready to turn in our 95 Dodge Caravan and have them pour Liquid Glass in it. It has another 50,000 miles in it. Why not let anyone that wants a car get the rebate? Not everyone bought a gas guzzler.

Most of those clunkers are probably paid off. Let’s give these new car owners some real debt to help "stimulate the economy" (force them into bankruptcy????). Now, the car buyer has a new car for a couple of months or until the repo man discovers the vehicle's location.

Lost your home and have clunker? Relax, trade up to a new Ford Camper, courtesy of our government. Thank the "Klunkers" in Congress for your new "Mobile home." The great thing with this rebate program, if you keep on the move, you don’t even have to worry about making the payments.

Do you get the idea that the "Fog a Mirror" Real Estate Loan Game works quite well when applied to other products?