During the Great Depression farmers poured milk in the streets rather than sell it for the price offered. And the result back then, Congress passed farm subsidies supports. Where is the deflation today? Don’t even mention housing, it still has another 50 percent to drop around here, just to get back to the year 2002 level. You don’t see oil refiners pouring gasoline in the streets to protest low prices.
In the 1930’s there were massive bank failures. The country lost 90% of its savings. There was no unemployment insurance or FDIC bank insurance. The deflation of that era was real, real money was lost. Measured by today’s values (adjusted for population and inflation), it was the equivalent of about 14 trillion dollars.
Anyone out there that thinks we are facing deflation, point to it, where is it? My wife just bought 4 new tires $750. Hamburger is four dollars a pound and Potato chips are four dollars a bag. Then there is Google at $600 or Apple stock at $300 per share and neither pays a dividend. The investor is chasing the wind.
The government is now dictating to private industry, like banks and health insurers, the prices they can charge (no deflation here). Not long ago, a business could charge whatever they wanted. Competition determined whether or not they survived and stayed in business. Now, by God, it’s a crime to make a profit (We need to punish these robber barons exploiting the masses)! Net result, the insurance companies are closing shop and moving their investment money to something offering better returns. Obama-care may be the only insurance left, with government “regulation” of private health plans. Do we hang these profiteers? Or recognize it for what it is, inflation.
Debt is money owed. As debtors default, the money loaned to them for that purchase normally goes up in smoke. The government process of saving debts like home loans, by buying them or guaranteeing their value is far from being deflationary. Deflation is impossible when the government prints the cash necessary, to redeem the bad loans the banks are holding on to.
The homeowner that sold his home for one million dollars got cash and the bank got an IOU from the buyer. Now the government is going to make that IOU good. Everybody wins???? Just how is that possible??? This isn’t deflation, it is massive inflation. The money received by homeowners who sold at the top is real money. The money paid by the government to reimburse the banks for the buyers that walked is printed money. The note is paid in full by the government with “thin air” funds (printed money). Instead of the funds entering the market from a home owner’s earnings for 20 to 30 years, it is printed and hits the market in bulk as a lump sum.
Deflation is where your dollar buys more and you work for lower wages. Wage earners today are getting paid the same amount per hour, and their paycheck buys less than it did last year. That’s not how deflation works. But it can’t argued, the government is saving us from the ravages of deflation. God bless them and their infinite wisdom. We just might not be very receptive as to how this plays out. Both roads, lead to the same ultimate destination, the poor house. Deflation is fast and furious; hyperinflation is slower and more painful. Congress has it figured out; if we are going to the poor house, why walk? Ride in style, take a limo!
Copyright 2010 All rights reserved
Sunday, October 24, 2010
Thursday, October 14, 2010
Quantitative Easing Sucks
The term Quantitative Easing is familiar to everyone. It is now referred to as QE followed by a number. What is it? It is printing money! It’s a little like the euphemism, “Used Dog Food.” It doesn’t sound bad until you give it some thought.
Did gold jump 100 dollars, or did the Bernanke dollar lose value? We have a President that thinks that the banks, Wall Street, and the rich people of this world are responsible for the current mess we are in. And by God we will make them pay Rah! Rah! A President chooses to tax the rich as a way out of this mess? I don’t follow it.
Congress has always taxed the rich; no need to wave a flag while doing it.
No cost of living increase this year, just like last year, for Social Security recipients. That could make for an interesting election next month. The checks don’t go as far as they use to, especially when the government removed food and energy from the cost of living index. The only things still left in the index are Denture-Grip, Preparation-H and Desenex Foot Powder and that pretty much covers everyone from head to toe (from a government perspective).
This quantitative easing by the government is keeping interest rates artificially low. Even the retirement funds which depend on interest rates for their income are being hurt by these unrealistic low returns on bonds. (Double click on image below for a larger view)
Notice that the CALIPERS figures above are a few years stale and the present discount rate is nowhere near 4 percent. These figures suggest that they are still trying to lock the barn doors after the barn has burned to the ground.
Gold and silver use to be a very poor investment (they still are). They pay no interest but they tend to keep up with inflation. Cash is getting no interest in the banks (if you count in inflation). Of course that light bulb goes off in your head saying "borrow cash and by gold." Do you run with the herd? Caution could be the word that wins the day. A buying frenzy here, could result in government intervention.
Gold and silver are increasing in price. Is this the last bubble in town? Or maybe it’s just a reflection of the true value of the dollar. Quantitative Easing is the name of the game and everyone with paper dollars gets to play (shh ---it’s only a tax on our savings).
Copyright 2010 All rights reserved
Did gold jump 100 dollars, or did the Bernanke dollar lose value? We have a President that thinks that the banks, Wall Street, and the rich people of this world are responsible for the current mess we are in. And by God we will make them pay Rah! Rah! A President chooses to tax the rich as a way out of this mess? I don’t follow it.
No cost of living increase this year, just like last year, for Social Security recipients. That could make for an interesting election next month. The checks don’t go as far as they use to, especially when the government removed food and energy from the cost of living index. The only things still left in the index are Denture-Grip, Preparation-H and Desenex Foot Powder and that pretty much covers everyone from head to toe (from a government perspective).
This quantitative easing by the government is keeping interest rates artificially low. Even the retirement funds which depend on interest rates for their income are being hurt by these unrealistic low returns on bonds. (Double click on image below for a larger view)
Gold and silver use to be a very poor investment (they still are). They pay no interest but they tend to keep up with inflation. Cash is getting no interest in the banks (if you count in inflation). Of course that light bulb goes off in your head saying "borrow cash and by gold." Do you run with the herd? Caution could be the word that wins the day. A buying frenzy here, could result in government intervention.
Gold and silver are increasing in price. Is this the last bubble in town? Or maybe it’s just a reflection of the true value of the dollar. Quantitative Easing is the name of the game and everyone with paper dollars gets to play (shh ---it’s only a tax on our savings).
Copyright 2010 All rights reserved
Tuesday, October 05, 2010
The Freddie and Fannie Scam
So you want to buy a home. Where do you get the financing? Aren’t Banks just dying to loan short term funds at long term interest rates? Remember back to the Savings and Loan Crisis of the 1990’s, the Savings and Loan companies loaned short term funds at low long term rates. It worked great, until interest rates rose. It’s pretty hard to believe that banks today would venture to write 30 year paper at the lowest interest rates of the last 50 years. So from here, we can pretty well deduce that they won’t even attempt it.
Say you want to sell your home, the question arises, “sell it to whom?” There is no bank financing out there. What bank is going to do a home loan at 4 percent for 30 years when they can do a car loan for 7 to 9 percent for 5 years? Home loans are a lost cause. Of course, the car market isn’t on fire either, but on the other hand, Freddie and Fannie are obligated to guarantee new home loans.
But wait one moment; it is different if you want to buy a home. Fannie and Freddie have a home for you with financing. Now how is that possible? They offer very low interest rates, with little or nothing down. The only catch, you have to buy one of their homes. The Federal government doesn’t have to write any new paper, they already own the homes, they guaranteed the loans.
The government people in charge of selling these Freddie and Fannie homes are unloading them onto anyone that can “qualify.” Remember way back in 2006, everyone was fogging a mirror, I guess this time it’s different. They even get to take it off their books once a payment is received. Of course, you have to remind yourself, all they’ve done is gotten someone else to take over the payments on a non-performing loan. Notice each sale reduces Fannie and Freddie's inventory. It’s kind of like selling life insurance in the suicide ward of a mental hospital—there is no problem with sales, but can you afford to stay in business?
Basically what we have here is a government program/scam that keeps prices artificially high by providing government financing at very low interest rates at prices close to what the home originally sold for. This way the government limits its losses on the GSE’s at the expense of the new home purchaser. The trouble with buying a Fannie or Freddie home is the fact that there is no real market, it is all artificial. The new owners have no skin in the game. These GSE’s are praying for a miracle and increasing unemployment, is not the miracle they had in mind.
The quality of these new buyers is suspect, not to mention the price’s of the homes or the very low interest rates. And then there is that invisible inventory, I guess that’s the stuff that Fanny and Freddie don't own.
What would happen if the Congress tossed those two hookers (Fannie and Freddie) out in the cold? The taxpayers wouldn’t be buying any more homes in Detroit to bulldoze down. The present setup, is a little like charging a $1000 massage on your Visa card -- When your wife sees the bill, you get to pay for your mistake twice.
Copyright 2010 All rights reserved
Say you want to sell your home, the question arises, “sell it to whom?” There is no bank financing out there. What bank is going to do a home loan at 4 percent for 30 years when they can do a car loan for 7 to 9 percent for 5 years? Home loans are a lost cause. Of course, the car market isn’t on fire either, but on the other hand, Freddie and Fannie are obligated to guarantee new home loans.
But wait one moment; it is different if you want to buy a home. Fannie and Freddie have a home for you with financing. Now how is that possible? They offer very low interest rates, with little or nothing down. The only catch, you have to buy one of their homes. The Federal government doesn’t have to write any new paper, they already own the homes, they guaranteed the loans.
The government people in charge of selling these Freddie and Fannie homes are unloading them onto anyone that can “qualify.” Remember way back in 2006, everyone was fogging a mirror, I guess this time it’s different. They even get to take it off their books once a payment is received. Of course, you have to remind yourself, all they’ve done is gotten someone else to take over the payments on a non-performing loan. Notice each sale reduces Fannie and Freddie's inventory. It’s kind of like selling life insurance in the suicide ward of a mental hospital—there is no problem with sales, but can you afford to stay in business?
Basically what we have here is a government program/scam that keeps prices artificially high by providing government financing at very low interest rates at prices close to what the home originally sold for. This way the government limits its losses on the GSE’s at the expense of the new home purchaser. The trouble with buying a Fannie or Freddie home is the fact that there is no real market, it is all artificial. The new owners have no skin in the game. These GSE’s are praying for a miracle and increasing unemployment, is not the miracle they had in mind.
The quality of these new buyers is suspect, not to mention the price’s of the homes or the very low interest rates. And then there is that invisible inventory, I guess that’s the stuff that Fanny and Freddie don't own.
What would happen if the Congress tossed those two hookers (Fannie and Freddie) out in the cold? The taxpayers wouldn’t be buying any more homes in Detroit to bulldoze down. The present setup, is a little like charging a $1000 massage on your Visa card -- When your wife sees the bill, you get to pay for your mistake twice.
Copyright 2010 All rights reserved
Friday, October 01, 2010
Disasters Without Damage
Take an earthquake or hurricane, homes are destroyed and the infrastructure is broken. No lights, no gas, no food deliveries. Transportation cannot move and services are disrupted. A person could be stuck in their home for several days to a week. Emergency hospital care would be limited. Food and supplies pour in from unaffected areas.
Let’s picture an "Invisible" disaster. Suppose the value of our currency fell to zero. Money became worthless. At this point, is there any reason for a grocery store to stay open? Would the employees work on faith? Would gas stations feel the need to sell gas for the old dollars? Would the truck transporting toilet paper from Georgia to Los Angeles feel obligated to deliver it, if he couldn’t buy diesel fuel in Kansas? The supply of necessities to a city would be a major problem. No cash, no product. Plus what would consumers use for currency to pay for it with, even if it was delivered?
In a real disaster, everyone is prevented from doing their job because of barriers created by the disaster. In a financial meltdown, it is a little different. Food and gasoline deliveries to major cities would stop. Why go to work, they can’t pay you. Since money would not buy anything, there would be looting. If you can’t buy it, steal it. The banks would be hit and your safety deposit box trashed. Figure that after two weeks of fires and looting, the National Guard would have a handle on it. There will be no fire department, police or ambulance service.
We take for granted the aspect of plastic credit cards and the concept of what is cash. An IOU is not cash. A credit card is a promise to pay. If the financial system collapses, it doesn’t matter how sincere your promise is to pay, it just won’t happen and it is no fault of the sincerity of the user. Of course this just can’t happen—can it?
With the collapse of the dollar, the government would have to print a new currency. Credit cards would be non functional. Banks would have title to assets like cars and homes, so not all depositors’ dollars would be lost. How fast the new currency could be deployed is a real question. Could people work at their present jobs without pay for two weeks? Without gasoline sales, most people couldn’t do it.
The only good thing about a currency collapse is that the nation debt would also be vaporized (If you are owed money, you get to cry). From there, it would be no big deal for the new government to hand out five thousand dollars to everyone to help kick start the economy and the country. The only trouble would be how to value this new currency. It would have to have a perceived value, otherwise how would one determine a fair price for a gallon of gas or a pack of smokes? At this point the government is going to have to pick a commodity or basket of commodities as a reference point of value. Gold and silver come to mind. Would the new dollar be worth an ounce of silver? Would your weekly paycheck equal an ounce of gold? [insert your guess here]
The thing not realized so far, is the fact that this whole discussion has been structured under the assumption that everything will be orderly. What happens if it is not? Social Security, all retirement benefits, and bank savings would be gone. A lot of people would be very upset to say the least! Bastille Day comes to mind for some odd reason. Would we still have a Democracy?
This article might seem like a lot of gloom and doom, but the scenario above, could be the reason Congress decided to spend a trillion dollars of nonexistent TARP money to keep the game going. What the hey, it's only paper money.
When you think about it, a financial collapse can be worse than any event ever thought up by mother nature, it doesn't do any physical damage. It doesn't try to kill you, but rather just ruin your retirement and that just might kill you or make you mad enough to [fill in the blank/blanks].
Copyright 2010 All rights reserved
Let’s picture an "Invisible" disaster. Suppose the value of our currency fell to zero. Money became worthless. At this point, is there any reason for a grocery store to stay open? Would the employees work on faith? Would gas stations feel the need to sell gas for the old dollars? Would the truck transporting toilet paper from Georgia to Los Angeles feel obligated to deliver it, if he couldn’t buy diesel fuel in Kansas? The supply of necessities to a city would be a major problem. No cash, no product. Plus what would consumers use for currency to pay for it with, even if it was delivered?
In a real disaster, everyone is prevented from doing their job because of barriers created by the disaster. In a financial meltdown, it is a little different. Food and gasoline deliveries to major cities would stop. Why go to work, they can’t pay you. Since money would not buy anything, there would be looting. If you can’t buy it, steal it. The banks would be hit and your safety deposit box trashed. Figure that after two weeks of fires and looting, the National Guard would have a handle on it. There will be no fire department, police or ambulance service.
We take for granted the aspect of plastic credit cards and the concept of what is cash. An IOU is not cash. A credit card is a promise to pay. If the financial system collapses, it doesn’t matter how sincere your promise is to pay, it just won’t happen and it is no fault of the sincerity of the user. Of course this just can’t happen—can it?
With the collapse of the dollar, the government would have to print a new currency. Credit cards would be non functional. Banks would have title to assets like cars and homes, so not all depositors’ dollars would be lost. How fast the new currency could be deployed is a real question. Could people work at their present jobs without pay for two weeks? Without gasoline sales, most people couldn’t do it.
The only good thing about a currency collapse is that the nation debt would also be vaporized (If you are owed money, you get to cry). From there, it would be no big deal for the new government to hand out five thousand dollars to everyone to help kick start the economy and the country. The only trouble would be how to value this new currency. It would have to have a perceived value, otherwise how would one determine a fair price for a gallon of gas or a pack of smokes? At this point the government is going to have to pick a commodity or basket of commodities as a reference point of value. Gold and silver come to mind. Would the new dollar be worth an ounce of silver? Would your weekly paycheck equal an ounce of gold? [insert your guess here]
The thing not realized so far, is the fact that this whole discussion has been structured under the assumption that everything will be orderly. What happens if it is not? Social Security, all retirement benefits, and bank savings would be gone. A lot of people would be very upset to say the least! Bastille Day comes to mind for some odd reason. Would we still have a Democracy?
This article might seem like a lot of gloom and doom, but the scenario above, could be the reason Congress decided to spend a trillion dollars of nonexistent TARP money to keep the game going. What the hey, it's only paper money.
When you think about it, a financial collapse can be worse than any event ever thought up by mother nature, it doesn't do any physical damage. It doesn't try to kill you, but rather just ruin your retirement and that just might kill you or make you mad enough to [fill in the blank/blanks].
Copyright 2010 All rights reserved
Sunday, September 26, 2010
Unintended Consequences (Reprinted)
Here is a reprint from April 10th, 2008 that I added a few paragraphs to that still hits home.
In 1939 we had “Appeasement” to keep from fighting a war with Germany. It kind of worked for a couple of years; we still had a war, but if we had nipped it in the bud, it would have been small. World wars tend to be large.
Congress gave a subsidy for growing corn to make ethanol, and the price of beef went up. Turning food into fuel is pure lunacy (IMHO). The funny part is the subsidies more than make up for the unprofitably of the venture. God bless Congress for their infinite wisdom, their group stupidity will kill us (if their kindness doesn’t). I would like to see the gas stations give you the quart of ethanol instead of mixing it in your gas. You’d be able to fill your tank and get tanked. The DUI would be an unintended consequence.
The Fed dropped the interest rate when the stock market took a dive in 2001 and the real estate market took off. The solution to one problem created a new problem; of course everyone knows that real estate has hit “bottom.” The Fed bailed out Bear Stearns and God knows where that is going yet. Ben’s 30 billion dollar loan will buy a lot of “Blue Sky” (assets with intangible value). B of A is about to throw away the sucked out dry carcass of Countrywide. I guess they get to keep CW’s loan servicing department. This outcome however, was far from unintended.
Congress a few years back passed a law that allowed farmers to depreciate heavy farm equipment over five years. Every business in the US bought a Hummer as a 50K write off! A great business expense when gas was $1.50.
Three paragraphs following, added September 26, 2010
Congress enacted a fine on airlines that could cost them a couple of million if they left a plane waiting the the tarmac for 3 hours. The net result,The airlines eliminate the possibility of a fine by canceling the flight. It's very upsetting to fly into Chicago and find out your flight to DC has been canceled--I remember it well!
Obamacare prevents insurers from putting caps on medical payments for children. The net effect, insurers will stop offering coverage for kids.
A few years back the Georgia legislature passed a bill against abusive loans by banks. The net result, you couldn't find a bank to borrow money from to buy a home, in the state of Georgia. That got fixed rather fast.
We need to accept the idea that the solution to one problem creates a new problem. If that wasn’t the case, we would have solved all of humanity’s problems hundreds of years ago. Once you realize this, you begin to understand politics. The problems are real, but the solutions are only trade offs. The whole mess will sort itself out with or without any intervention. Intervention will not change the final outcome.
It reminds me of the saying “give a man a fish and you feed him for a day, Teach a man to fish and you feed him for a lifetime. The unintended consequence here is you have a couple of guys in a boat drinking beer all day. The additional unintended consequence is a mad wife with a frying pan waiting for her drunk husband to crawl home. Ouch!
Copyright 2010 All rights reserved
In 1939 we had “Appeasement” to keep from fighting a war with Germany. It kind of worked for a couple of years; we still had a war, but if we had nipped it in the bud, it would have been small. World wars tend to be large.
Congress gave a subsidy for growing corn to make ethanol, and the price of beef went up. Turning food into fuel is pure lunacy (IMHO). The funny part is the subsidies more than make up for the unprofitably of the venture. God bless Congress for their infinite wisdom, their group stupidity will kill us (if their kindness doesn’t). I would like to see the gas stations give you the quart of ethanol instead of mixing it in your gas. You’d be able to fill your tank and get tanked. The DUI would be an unintended consequence.
The Fed dropped the interest rate when the stock market took a dive in 2001 and the real estate market took off. The solution to one problem created a new problem; of course everyone knows that real estate has hit “bottom.” The Fed bailed out Bear Stearns and God knows where that is going yet. Ben’s 30 billion dollar loan will buy a lot of “Blue Sky” (assets with intangible value). B of A is about to throw away the sucked out dry carcass of Countrywide. I guess they get to keep CW’s loan servicing department. This outcome however, was far from unintended.
Congress a few years back passed a law that allowed farmers to depreciate heavy farm equipment over five years. Every business in the US bought a Hummer as a 50K write off! A great business expense when gas was $1.50.
Three paragraphs following, added September 26, 2010
Congress enacted a fine on airlines that could cost them a couple of million if they left a plane waiting the the tarmac for 3 hours. The net result,The airlines eliminate the possibility of a fine by canceling the flight. It's very upsetting to fly into Chicago and find out your flight to DC has been canceled--I remember it well!
Obamacare prevents insurers from putting caps on medical payments for children. The net effect, insurers will stop offering coverage for kids.
A few years back the Georgia legislature passed a bill against abusive loans by banks. The net result, you couldn't find a bank to borrow money from to buy a home, in the state of Georgia. That got fixed rather fast.
We need to accept the idea that the solution to one problem creates a new problem. If that wasn’t the case, we would have solved all of humanity’s problems hundreds of years ago. Once you realize this, you begin to understand politics. The problems are real, but the solutions are only trade offs. The whole mess will sort itself out with or without any intervention. Intervention will not change the final outcome.
It reminds me of the saying “give a man a fish and you feed him for a day, Teach a man to fish and you feed him for a lifetime. The unintended consequence here is you have a couple of guys in a boat drinking beer all day. The additional unintended consequence is a mad wife with a frying pan waiting for her drunk husband to crawl home. Ouch!
Copyright 2010 All rights reserved
Saturday, September 18, 2010
The Tax Cut, a Carrot on a Stick
Obama wants to raise taxes on the rich but not the middle class. Is it really a bright idea, to piss off the rich by singling them out? It is kind of like a pick-pocket walking up to you and telling you he is going to steal your wallet; at that point he has little chance of success. It sounds like a great statement to the masses, but when you look at the Health care bill that just passed, whose going to get the bill for that (I give you one guess)? So if you are rich, what do you do? Hop on your jet and move to the Bahamas where tax laws are nonexistent? Hmmm Of course I will have to admit, people who get rich quick assume it’s because they are more intelligent than those around them. That mistake can cost a lot if you buy the multi-million dollar homes and the toys that go with it. There is high tax maintenance on all of that stuff. The “Look at me, I’m Rich,” game cost money to play--- I’m just glad there are people out there that enjoy playing that game.
Obama’s idea that we are coddling millionaires is ludicrous. When I was a kid, the average wage earner might earn a quarter of a million dollars in a life time. Millionaires today are a dime a dozen now. Many people I have bumped into have matter a factly mentioned that they are millionaires. I don’t know who they are trying to impress, but when my dad earned 5K a year and our home cost 25K, a million dollars was something. In today’s world, the “air” part of millionaire is the only real part. Not too long ago a million dollars in the bank would earn 100K in interest a year and there were taxes to pay; but at 2 percent interest, your return from the bank is a paltry 20K. Many a person saving for retirement needs to consider the fact that a million dollar nest egg isn’t much if you end up in a rest home at 70k per year ( that goes double in spades if you are married). It will only last about 8 to 12 years. The concept of being a millionaire hasn’t lost its luster in the mind’s eye; everyone overlooks the reality that the bar has been moved up to billionaire, and that of course has nothing at all to do with inflation (cough cough).
If these George W Bush tax cuts expire, the rich escape, the middle class gets hit and the poor get a free ride. And the funny thing is, it happens without Congress doing a damn thing; everyone’s taxes return to pre-Bush rates (Is "pre-Bush," "Democrat" spelled backwards?). The concept of making a tax cut permanent, runs against the grain of Congressional job security; it would be the last tax cut we would ever hear about. This way the tax cut expires and Congress can vote again to cut taxes. It's a little like a furniture store holding their annual "Going out of Business sale," only in this case, Obama wants the rich people to pay full price. I guess millionaires don't shop at Walmart, do they?
Copyright 2010 All rights reserved
Obama’s idea that we are coddling millionaires is ludicrous. When I was a kid, the average wage earner might earn a quarter of a million dollars in a life time. Millionaires today are a dime a dozen now. Many people I have bumped into have matter a factly mentioned that they are millionaires. I don’t know who they are trying to impress, but when my dad earned 5K a year and our home cost 25K, a million dollars was something. In today’s world, the “air” part of millionaire is the only real part. Not too long ago a million dollars in the bank would earn 100K in interest a year and there were taxes to pay; but at 2 percent interest, your return from the bank is a paltry 20K. Many a person saving for retirement needs to consider the fact that a million dollar nest egg isn’t much if you end up in a rest home at 70k per year ( that goes double in spades if you are married). It will only last about 8 to 12 years. The concept of being a millionaire hasn’t lost its luster in the mind’s eye; everyone overlooks the reality that the bar has been moved up to billionaire, and that of course has nothing at all to do with inflation (cough cough).
If these George W Bush tax cuts expire, the rich escape, the middle class gets hit and the poor get a free ride. And the funny thing is, it happens without Congress doing a damn thing; everyone’s taxes return to pre-Bush rates (Is "pre-Bush," "Democrat" spelled backwards?). The concept of making a tax cut permanent, runs against the grain of Congressional job security; it would be the last tax cut we would ever hear about. This way the tax cut expires and Congress can vote again to cut taxes. It's a little like a furniture store holding their annual "Going out of Business sale," only in this case, Obama wants the rich people to pay full price. I guess millionaires don't shop at Walmart, do they?
Copyright 2010 All rights reserved
Sunday, September 12, 2010
Educational Loans, Student Slavery to a Bank
It school time, and a lot of our sons and daughters have headed on to college. This is where parents and the young who wish to improve their station in life seek out college loans to finance their great quest. Whether it is a trade school or college, the government will co-sign on these loans. What most people don’t realize is that a college and a trade school are businesses. Without customers who can pay for the services to be rendered, they cannot survive. Student loans are the life blood of higher education and more so for the fly-by-night trade schools.
There is one little snag to the whole warm and fuzzy idea of higher education. Nowhere does it say that you will be offered or even find a job after graduation. The other thing not mentioned is that your field of study might be flooded with graduates or technicians already looking for a job, X-ray technician and dental assistant come to mind. You might not like the idea of moving to Montana, Wyoming or Tennessee, they are not the greatest places if you’re single looking for a wife. Plus usually the single mom with kids, looking for a new career gets cornholed into a trade school that spits out plenty of hope but no real jobs.
So here is what happens, the student applies for these student loans and gets everyone of them. Your kid can run up 20K a year on student loans. So it is not uncommon for a college graduate to have 80K (or more) in student loans and the payments start 6 months after you graduate. Sounds just great doesn’t it, but what happens if you can’t find a job? Once you sign that promissary note, you can never file bankruptcy and wipe that student loan off of your slate. It follows you for life.
Here is a little story of what happened to me many, many years ago at Syracuse University. I graduated in June of 1971. My student loan came due six months after I graduated. The bank sent me a letter with a promissory note to sign for all of the money I had borrowed. The amount was for $4,000 which by today’s standards would be about $40K (inflation—go figure!). As a young padawan, I read the note and several things stood out. (This is from memory, so the wording is not legalese and it has been a long time—39 years) My debt to them was to be paid first even if I filed for bankruptcy. I thought that a little unfair if I owed money to other people, I thought everyone should get a slice of what was left. Then there was a passage that said if the US government no longer existed, I would owe the money to the new government. I thought that a bit strange also. Anyway, there were three lines of verbiage that I did not like, and took a ruler and a pen to and crossed them out. I signed it and mailed it to the bank. They called me and asked me to come down to the bank and I did. When I got there, they informed me that I couldn’t cross out items on their legal agreement, they wouldn’t allow it. The bank manager was saying “You can’t do this!” I explained to him that I already received the money, spent it, and if he didn’t like the agreement, I wasn’t going to sign another just to please him. They defaulted my loan even though I had never missed a payment.
To make a long story short, I paid the interest on the loan every month for 10 years. About that time I was making more money and they called again to see if I would increase my payment. I had been talking to this collection agent for several years and I asked him what the payoff was? He said something strange, “Offer 50 cents on the dollar and see if they take it. So I offered them $1,500 to pay off the $4,000 note and they countered with $1,800. I wrote them a check.
I don’t know if things are still the same, but when Congress offers money to students and these loans are excluded from the bankruptcy laws, they have enslaved our college students to the banks. My advice to students who receive a promissory note to sign, tell the bank to go fish. You already have the money. All they can do is ruin your nonexistent credit rating.
I'm not suggesting that college students walk away from their obligations. But the right to file bankruptcy would make these lenders think twice about the amount of money they would lend to a teenager who has never held a job.
Bankruptcy is a way we can preserve our right to prove to Congress that we don’t have to pay for their bumbling stupidity. College should be the door that opens to new opportunity, not one that leaves students prey to their trusting naive innocence.\
Copyright 2010 All rights reserved
There is one little snag to the whole warm and fuzzy idea of higher education. Nowhere does it say that you will be offered or even find a job after graduation. The other thing not mentioned is that your field of study might be flooded with graduates or technicians already looking for a job, X-ray technician and dental assistant come to mind. You might not like the idea of moving to Montana, Wyoming or Tennessee, they are not the greatest places if you’re single looking for a wife. Plus usually the single mom with kids, looking for a new career gets cornholed into a trade school that spits out plenty of hope but no real jobs.
So here is what happens, the student applies for these student loans and gets everyone of them. Your kid can run up 20K a year on student loans. So it is not uncommon for a college graduate to have 80K (or more) in student loans and the payments start 6 months after you graduate. Sounds just great doesn’t it, but what happens if you can’t find a job? Once you sign that promissary note, you can never file bankruptcy and wipe that student loan off of your slate. It follows you for life.
Here is a little story of what happened to me many, many years ago at Syracuse University. I graduated in June of 1971. My student loan came due six months after I graduated. The bank sent me a letter with a promissory note to sign for all of the money I had borrowed. The amount was for $4,000 which by today’s standards would be about $40K (inflation—go figure!). As a young padawan, I read the note and several things stood out. (This is from memory, so the wording is not legalese and it has been a long time—39 years) My debt to them was to be paid first even if I filed for bankruptcy. I thought that a little unfair if I owed money to other people, I thought everyone should get a slice of what was left. Then there was a passage that said if the US government no longer existed, I would owe the money to the new government. I thought that a bit strange also. Anyway, there were three lines of verbiage that I did not like, and took a ruler and a pen to and crossed them out. I signed it and mailed it to the bank. They called me and asked me to come down to the bank and I did. When I got there, they informed me that I couldn’t cross out items on their legal agreement, they wouldn’t allow it. The bank manager was saying “You can’t do this!” I explained to him that I already received the money, spent it, and if he didn’t like the agreement, I wasn’t going to sign another just to please him. They defaulted my loan even though I had never missed a payment.
To make a long story short, I paid the interest on the loan every month for 10 years. About that time I was making more money and they called again to see if I would increase my payment. I had been talking to this collection agent for several years and I asked him what the payoff was? He said something strange, “Offer 50 cents on the dollar and see if they take it. So I offered them $1,500 to pay off the $4,000 note and they countered with $1,800. I wrote them a check.
I don’t know if things are still the same, but when Congress offers money to students and these loans are excluded from the bankruptcy laws, they have enslaved our college students to the banks. My advice to students who receive a promissory note to sign, tell the bank to go fish. You already have the money. All they can do is ruin your nonexistent credit rating.
I'm not suggesting that college students walk away from their obligations. But the right to file bankruptcy would make these lenders think twice about the amount of money they would lend to a teenager who has never held a job.
Bankruptcy is a way we can preserve our right to prove to Congress that we don’t have to pay for their bumbling stupidity. College should be the door that opens to new opportunity, not one that leaves students prey to their trusting naive innocence.\
Copyright 2010 All rights reserved
Monday, September 06, 2010
Where's the Money?
A while back Congress came out with the 814 billion dollar stimulus program. In essence they borrowed money to pay others who lost money in the grand scheme of investment finance. Today Obama announced a 50 billion dollar work program. Isn’t it missing a zero? It seems rather paltry. And then on top of it he blames the Republicans for our current economic plight because they are opposing his plans for the country. From my vantage point, it looks like the Republicans only have an issue of how do we pay for all of this. It’s a little like taking 10 of your friends to a massage parlor and telling the Madam that the last guy is paying. If the lady of the house is a Republican, the last guy with the money, is going to move to the head of the line—naturally of course he can’t find his wallet.
The Democrats are beginning to look like dead beats in a restaurant with no money,trying to stall for time by ordering another entrée. The New York Times today suggest that the government should let the housing market collapse.
The Democrats think that the solution lies in bigger government and increased spending. The Republicans are not quite so sure. The elections are coming up in November and they could prove quite interesting. California could be the state to watch Jerry Brown Dem vs. Meg Whitman Rep; one’s too old and the other’s too rich. The present Republican Governorator has been giving the Democratic legislature a wedgie, still no budget for the fiscal year that started in July.
The State of California will be writing IOU’s in a couple of weeks. I wonder how that works if your paycheck is direct deposited? The electronic transfer of an IOU to your bank account?? It looks like Halloween pranks are a little early this year.
Copyright 2010 All rights reserved
The Democrats are beginning to look like dead beats in a restaurant with no money,trying to stall for time by ordering another entrée. The New York Times today suggest that the government should let the housing market collapse.
“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”And then we have all of this stuff exploding around us, absurd government salaries, retirement benefits and States going broke. Unemployment is doing just great; too bad it’s not a stock. Most graphical comparisons to historical statistics are off the charts. One news article the other day, called this, “The worst recession since the Great Depression.” When you think about it, most things in life, start out small and get bigger. So we started out with a “small” recession and now it’s getting bigger.
The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent.
The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.
Caught in the middle is an administration that gambled on a recovery that is not happening.
The Democrats think that the solution lies in bigger government and increased spending. The Republicans are not quite so sure. The elections are coming up in November and they could prove quite interesting. California could be the state to watch Jerry Brown Dem vs. Meg Whitman Rep; one’s too old and the other’s too rich. The present Republican Governorator has been giving the Democratic legislature a wedgie, still no budget for the fiscal year that started in July.
The State of California will be writing IOU’s in a couple of weeks. I wonder how that works if your paycheck is direct deposited? The electronic transfer of an IOU to your bank account?? It looks like Halloween pranks are a little early this year.
Copyright 2010 All rights reserved
Friday, August 27, 2010
Interest Rates Suck Big Time
The going joke is “If you ask 3 economists their opinion on the economy, you get 5 different answers.” The question arises today, if economists have inside knowledge to the economy, why didn’t they spot this mess coming years ago?
And then we have the question will it be inflation or deflation. Out come the experts with all sorts of graphs and charts pointing to deflation. Meanwhile I went over to Wendy’s for my 99¢ bacon cheeseburger today and the price is now $1.29. That’s a 30 percent increase. And if that wasn't bad enough, my Gin went up a dollar to $14 for 1.75 liters (I'm not sure that at that price it is considered Gin, rocket fuel might be a better description).
The real question is this, the government borrowed 10 trillion dollars from all of us and we feel comfortable loaning it to the government for only TWO PERCENT INTEREST. I’ve heard of The Dumb Friends League, but investors aren’t dumber than pets, are they? What gives?
Borrowed money is one thing, printed money is another. When Ben buys one of Geithner’s T-bills, that is printing money (the Treasury sells Bernake a T-bill and the Treasury gets a bank entry for cash in the government account). No real dollars are printed; from there, the government just prints a Social Security check or an unemployment check. Of course, the government can tax and the Treasury can redeem Tim's markers at any time. The real question comes up, how much in markers does the Federal Reserve hold? I’m guessing, anywhere from 2 trillion to 10 trillion dollars. Just the management of Freddie and Fannie implies about 3 trillion right there. What they bought from the banks could be a rather absurd amount, possibly mind boggling. No saver has lost a bank dollar, but our government had to pony up printed dollars for the losses on all the failed banks' ledger sheets.
Look at it a different way, say you have one million dollars in the bank. Gee, that means you get 20k a year in interest. Let’s not all queue up at once to take advantage of this wonderful offer. It sucks so bad, why even put your dollars in the bank? Why not just spend it?
The government has printed money, borrowed money and spent every bit of it. The only reason there is no apparent inflation with interest rates is because the government has taken risk out of the market, all bank loans are insured against loss. Without risk, there is no need for higher interest rates. Of course one issue pops up. Gold had one hang up, it paid no interest. Today looking at long term, GOLD is better than holding government paper.
Ask yourself one question, where will the money come from to pay for all of the health care and Social Security benefits in the future? The money isn’t there; it will have to be printed. We couldn’t pay for it as individuals. What makes it more affordable as a government plan? Do we charge everyone a fair share for all of these new benefits? That doesn’t seem very likely. The absurdity of zero percent interest rates and a national debt towering over 13 trillion dollars should set off an alarm bell somewhere. Credit cards are charging 14 percent. No discount for taxpayers???--kind of figures doesn't it.
The thing we need to interpret from this mess, is that the information we are getting from our government is incomplete. The pieces of this puzzle are all there and they do not fit together as expected. Zero interest rates are similar to a hooker offering free sex. How you ended up in a closet nude, with your hands tied behind your back, is another story.
Copyright 2010 All rights reserved
And then we have the question will it be inflation or deflation. Out come the experts with all sorts of graphs and charts pointing to deflation. Meanwhile I went over to Wendy’s for my 99¢ bacon cheeseburger today and the price is now $1.29. That’s a 30 percent increase. And if that wasn't bad enough, my Gin went up a dollar to $14 for 1.75 liters (I'm not sure that at that price it is considered Gin, rocket fuel might be a better description).
The real question is this, the government borrowed 10 trillion dollars from all of us and we feel comfortable loaning it to the government for only TWO PERCENT INTEREST. I’ve heard of The Dumb Friends League, but investors aren’t dumber than pets, are they? What gives?
Borrowed money is one thing, printed money is another. When Ben buys one of Geithner’s T-bills, that is printing money (the Treasury sells Bernake a T-bill and the Treasury gets a bank entry for cash in the government account). No real dollars are printed; from there, the government just prints a Social Security check or an unemployment check. Of course, the government can tax and the Treasury can redeem Tim's markers at any time. The real question comes up, how much in markers does the Federal Reserve hold? I’m guessing, anywhere from 2 trillion to 10 trillion dollars. Just the management of Freddie and Fannie implies about 3 trillion right there. What they bought from the banks could be a rather absurd amount, possibly mind boggling. No saver has lost a bank dollar, but our government had to pony up printed dollars for the losses on all the failed banks' ledger sheets.
Look at it a different way, say you have one million dollars in the bank. Gee, that means you get 20k a year in interest. Let’s not all queue up at once to take advantage of this wonderful offer. It sucks so bad, why even put your dollars in the bank? Why not just spend it?
The government has printed money, borrowed money and spent every bit of it. The only reason there is no apparent inflation with interest rates is because the government has taken risk out of the market, all bank loans are insured against loss. Without risk, there is no need for higher interest rates. Of course one issue pops up. Gold had one hang up, it paid no interest. Today looking at long term, GOLD is better than holding government paper.
Ask yourself one question, where will the money come from to pay for all of the health care and Social Security benefits in the future? The money isn’t there; it will have to be printed. We couldn’t pay for it as individuals. What makes it more affordable as a government plan? Do we charge everyone a fair share for all of these new benefits? That doesn’t seem very likely. The absurdity of zero percent interest rates and a national debt towering over 13 trillion dollars should set off an alarm bell somewhere. Credit cards are charging 14 percent. No discount for taxpayers???--kind of figures doesn't it.
The thing we need to interpret from this mess, is that the information we are getting from our government is incomplete. The pieces of this puzzle are all there and they do not fit together as expected. Zero interest rates are similar to a hooker offering free sex. How you ended up in a closet nude, with your hands tied behind your back, is another story.
Copyright 2010 All rights reserved
Tuesday, August 17, 2010
The Impending California “Bankruptcy”
The State of California taxes its residents and provides services. The legislature which has a Democratic majority can’t quite come up with a two thirds vote needed to raise taxes (two Republicans need to vote with them). And of course since the Governor is a Republican, it’s all his fault. The State is running out of funds; expenses are greater than the incoming taxes.
One thing little noticed, in the last 20 years, because it has been so gradual, is the absurd rise in pay and retirement benefits for public employees. It used to be that you got your experience in the public sector and then moved into the private sector for a pay raise—government jobs used to be a joke.
Presently, we have a State that can’t produce a balanced budget without "creative accounting." The thing to remember is that California is supposed to pay education and bond interest first out of the tax revenues. Then there is this State retirement plan called CALPERS.
CALPERS assets dropped from 260 billion to 180 Billion in a span of one year. At the time, 260 billion was sufficient; dropping to 180 billion ought to set off an alarm somewhere. The implication here is that the State guarantees your retirement even if the investors at CALPERS screw up. These money managers bought boat loads California Nevada and Arizona real estate paper. All we need now is a stock market crash and CALPERS will be sucked down a drain. It is assumed the taxpayers of California will be responsible to make up the shortfall of the CALPERS fund. Profits belong to the retirees, losses belong to the taxpayers. That’s not quite right.
Two questions arise. CALPERS took some horrific losses; are these losses automatically insured by the California taxpayer? If the cities/counties declare bankruptcy, is the State liable for their incurred losses? The answer is no in both cases.
Here is where things could get quite peculiar. Bankruptcy laws don’t cover States. California as a State can’t file for bankruptcy (it doesn’t have to), but every city and county in the State can. Bankruptcy is a tool used by many to avoid paying their debts. Stating matter of factually that the State cannot file for bankruptcy kind of implies that the State is on the hook no matter what, and that is a very wrong assumption.
States can repudiate their debts, it happened in the 1840’s. The real issue is state sovereignty. The concept of bankruptcy revolves around the settlement of debts through the courts. The courts can’t force the State to do anything. The 11th amendment prohibits citizens from suing the State.
California created a retirement fund that guarantees benefits according to the wage earners salary and not on what the fund has available to pay out. These two facts point to the obvious, you can’t have it both ways. That and the 40 billion dollars that the State needs to keep going next year means that California is at the end of its rope. California will run out of money soon.
If the State is short of funds there is no bankruptcy dodge, it can decide who gets paid and when. California doesn’t even have to repudiate the debts; it just doesn’t pay them all. Investors will find out what the implications are, when loaning to a sovereign State. You can’t sue them. Plus if you’re a city in trouble, file BK and give your debts to the State, chuckle, chuckle.
With CALPERS, California will contribute its designated percentage for this year’s wages to the fund. But from there, CALPERS is toast. The State is not obligated to bail them out. So a lot of these 100k retirement plans now have some issues. The item that amuses me, does CALPERS have sovereign immunity just like the State?
Things are getting a little dicey; reality and retirement are on a collision course. It reminds me of the airline pilot who use to email me, he had a future 80K pension and bought a 300K house just before retiring. When his airlines came out of bankruptcy he had a 40K pension and lost the house.
The Great Depression of 2006—seems like a start, and it is 2010 and the show has hardly begun—everyone is dragging their feet, and I don’t blame them. I hate to contemplate what's next.
Karl Denninger has also written some material on this. Here is a link to it.
One thing little noticed, in the last 20 years, because it has been so gradual, is the absurd rise in pay and retirement benefits for public employees. It used to be that you got your experience in the public sector and then moved into the private sector for a pay raise—government jobs used to be a joke.
Presently, we have a State that can’t produce a balanced budget without "creative accounting." The thing to remember is that California is supposed to pay education and bond interest first out of the tax revenues. Then there is this State retirement plan called CALPERS.
CALPERS assets dropped from 260 billion to 180 Billion in a span of one year. At the time, 260 billion was sufficient; dropping to 180 billion ought to set off an alarm somewhere. The implication here is that the State guarantees your retirement even if the investors at CALPERS screw up. These money managers bought boat loads California Nevada and Arizona real estate paper. All we need now is a stock market crash and CALPERS will be sucked down a drain. It is assumed the taxpayers of California will be responsible to make up the shortfall of the CALPERS fund. Profits belong to the retirees, losses belong to the taxpayers. That’s not quite right.
Two questions arise. CALPERS took some horrific losses; are these losses automatically insured by the California taxpayer? If the cities/counties declare bankruptcy, is the State liable for their incurred losses? The answer is no in both cases.
Here is where things could get quite peculiar. Bankruptcy laws don’t cover States. California as a State can’t file for bankruptcy (it doesn’t have to), but every city and county in the State can. Bankruptcy is a tool used by many to avoid paying their debts. Stating matter of factually that the State cannot file for bankruptcy kind of implies that the State is on the hook no matter what, and that is a very wrong assumption.
States can repudiate their debts, it happened in the 1840’s. The real issue is state sovereignty. The concept of bankruptcy revolves around the settlement of debts through the courts. The courts can’t force the State to do anything. The 11th amendment prohibits citizens from suing the State.
California created a retirement fund that guarantees benefits according to the wage earners salary and not on what the fund has available to pay out. These two facts point to the obvious, you can’t have it both ways. That and the 40 billion dollars that the State needs to keep going next year means that California is at the end of its rope. California will run out of money soon.
If the State is short of funds there is no bankruptcy dodge, it can decide who gets paid and when. California doesn’t even have to repudiate the debts; it just doesn’t pay them all. Investors will find out what the implications are, when loaning to a sovereign State. You can’t sue them. Plus if you’re a city in trouble, file BK and give your debts to the State, chuckle, chuckle.
With CALPERS, California will contribute its designated percentage for this year’s wages to the fund. But from there, CALPERS is toast. The State is not obligated to bail them out. So a lot of these 100k retirement plans now have some issues. The item that amuses me, does CALPERS have sovereign immunity just like the State?
Things are getting a little dicey; reality and retirement are on a collision course. It reminds me of the airline pilot who use to email me, he had a future 80K pension and bought a 300K house just before retiring. When his airlines came out of bankruptcy he had a 40K pension and lost the house.
The Great Depression of 2006—seems like a start, and it is 2010 and the show has hardly begun—everyone is dragging their feet, and I don’t blame them. I hate to contemplate what's next.
Karl Denninger has also written some material on this. Here is a link to it.
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