Category Archives: Economy

The US Dollar gaining? What?

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Hyperinflation, inflation, deflation, depression, recession, stagflation… well which is it? I have no clue, but there is a massive monetary inflation occurring, and a looming recession.  Hmmm so does this mean a inflationary depression?  Yikes.

Last week I took a break from overwhelming myself about the markets and the state of the economy. The timing wasn’t perfect, but I had personal reasons.

Before I start on the quest of exploring our present situation of the potententional…”ion”s I want to make sure we are on the same page. Therefore lets have a defining moment:

Money: Easily exchangeable, is relatively scarce, and is a store of value.

Inflation: An increase in the money supply
Deflation: A decrease in the money supply
Hyperinflation: A self-perpetuating unstoppable (more or less) state of inflation
Recession: A significant decline in business activity, mainly a contraction in the economy or slowing of growth
Depression: A long-term economic state characterized by unemployment and low prices and low levels of trade and investment
Stagflation: A period of time characterized by high inflation and recessionary conditions.

I’ve been looking at calls for the vaious scenarios and needed some clarification as to what happens in the various situations.  For the most part it seems obvious, but I’ve been struggling with the increase in the value of the United States dollar.  Our national debt is above 10 trillion and rising rapidly as the recent bailouts continue, and the most recent increase in military spending added another $612 billion that we have to pay for.

Why is the risk of deflation so frightening that the Fed, Treasury, governments, and foreign central banks will do anything to stave it off?  Deflation is like the grim reaper knocking on your door for a fiat currency.  A fiat currency survives on debt and inflation (credit expansion).  Too much inflation and it can become worthless, and negative inflation (deflation) and it gains value.  That sounds like a good thing but it isn’t.  As the currency gains in value debt becomes more expensive, and thus more difficult to pay off.  Imagine taking out a $100,000.00 loan with todays dollars and paying it off with dollars from 1930.  Good luck! During deflation prices also fall due to the decrease in the money supply and as there is no longer credit being handed out for people to use to consume and invest.  The whole system comes tumbling down and the reaper walks in the door to say hello!

When credit is created (a loan) that is an increase in the money supply, and when it is paid off that is a decrease in the money supply.  Say the loan is $100.00.  That is $100.00 of money put into existance with a very small percentage actually backing it.  Now I repay my $100.00 loan and that credit is erased and the money supply contracts.  This is the normal situation that occurs daily.  However, if people don’t want to lend or borrow then we have a problem.

No credit means no ability to borrow, which means no abilty to purchase goods and services.  Everything is based on debt today.  The change began in 1913 with the Fed, and the ultimate shift to fiat money was in 1972 during the Nixon presidency when we abandoned the gold standard and thus savers were punished from that day forward.

Okay this leads to me to the strengthening of the United States Dollar…  Why I ask is it getting stronger.  Many argue that it is because Europe is weakening, which may be part of the picture.  However, I read something that made a clear point that because European banks are required to hold dollars for various toxic debt they hold denominated in dollars they normally use the interbank markets based on the LIBOR rate.  However, that market is seized up and nobody wants to lend so they start using the EUR / USD credit swap market.  As they purchase dollars its value goes up.  Notice today that the Euro gained against the dollar when the Fed decided to start purchasing short-term commercial paper.  They are stepping in and becoming the new mainstay for that market: which one?  EVERY MARKET <Interesting…>

And tomorrow is a new day!

Why America Rocks!

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Many of us worry about our own personal bubble or world within.  We sometimes forget that we are part of a larger system.  No, I’m not talking about anything spiritual or religious, but a system as a whole… The Earth is a system and for everything on Earth to function there are interdependencies.  Those interdependencies begin to break-down when a system fails or is interrupted.  

For example: When people feel scared or helpless they look towards authority for the answers.  Folks, the answer is within yourself and everyone around you.  Why not talk to the person next to you at the street crossing, in line, on the bus, airplane, or train?  

CarrotMob came up with an idea that coordinates a group to make a difference or change.  I like the idea of giving a business, customers, in exchange for something.  In this instance it is a ton of customers for 22% of profits to go towards improving energy efficiency of the store.

Say on a normal day you pull in $2000.00, but on the day CarrotMob comes around you pull in $9000.00.  Okay so now you are taking 22% of your profits and putting them towards a long-term energy conservation program that is directly benefiting you the store.  

Let’s have some fun with numbers (these are only an example to illustrate a point):

Normal Day:
Sales: 2000.00 @ 25% profit margin = $500.00 Gross Profit

CarrotMob Day!
Sales: 9000.00 @ 25% profit margin = $2250.00 profit – 22% = $495.00
           == Gross Profit $1755 

Whoa!  Even after giving away 22% of profits they still made more in that one day than a normal day and they now have long-term energy savings.

Now, watch the video…


Carrotmob Makes It Rain from carrotmob on Vimeo.

 

Crazy right?  NO 
I think we have forgotten, but are starting to wake-up that as a group of individuals we have the ability to do anything. 

Let’s now take this to a bigger scale as CarrotMob does at the end of the video.  What if a hundred thousand people went to a solar manufacturer and said hey we all want solar for our houses.  If we guarantee 100,000 orders will you give us a discount?

This isn’t a new idea… collective pooling of money to make purchases.  However, what makes me excited is that this isn’t a Business – Business transaction, but a Group – Business transaction.  Sure there are more complexities involved when you are dealing with 100,000 orders versus a bunch of orders for one company, but it is possible.  

We are a nation founded on thinking outside the box to come up with innovative and new ideas.  The energy crisis that we are and will be facing isn’t outside the grasp of an entrepreneur.  Unfortunately there is a big BUT here…

What motivates an entrepreneur? :: wealth
What inhibits an entrepreneur? :: regulations and taxes

You say that regulations are necessary… perhaps, but what happens when there is a corn subsidy or ethanol subsidy?  – Money that may have gone towards an innovative idea is redirected towards corn and ethanol, which may not be the best solution.  I don’t know about you, but I highly doubt a few individuals are capable of deciding what is for the greater good, using public money.  There are unforeseen consequences of such actions.  

It is what we don’t see that concerns me.  What could be manufactured instead of ethanol plants?  We may never know to the full extent because the path of least resistance leads companies to produce ethanol.  If I’m guaranteed certain monies from the gov’t, if I do this (the entrepreneurial idea with no subsidy) or that (governmental idea with subsidy), of course I’ll do that because it is easier and has an implicit profit regardless of the profitability of the company. 

In looking at the present bailout package… my concern is what we are missing and not seeing.  If this package or a variation thereof passes what could that money have been used for?  $700 bn dollars is a lot of money.  We are going to be over a trillion dollars in debt after it is passed and that is only for THIS year.  

The bankers and government officials “employed” by the bankers don’t want you nor I to truly understand how the present system works.  Just take a look at my previous post.  

In conclusion I hope that you realize that as a group of individuals we can do anything.  Fear will keep us paralyzed, major traumatic events allow the Constitution to be thrown out the window, and the media feeds us a story they want us to believe.  We are a nation of entrepreneurs! You have a choice.

Ron Paul clearly states the situation…

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Fox News did a ten minute interview with Ron Paul and actually gave him the time to clearly state what is going on.  If the anchors were actually listening I don’t know, and frankly they need to.  The present situation is dire and people are only barely starting to take it seriously.  Given that Bernake is a student of the Great Depression he thinks the only way out is government intervention through bailouts and inflation.  The issue with that is we have a problem: Excess has built up in the system and it needs to be corrected.  By easing the debt burden on the banks the problem doesn’t go away, but only gets pushed further out into time.  

According to Austrian Economics whenever a bubble forms due to excess credit it must be deflated.  During the deflation excess inventory is bought at cheap prices, and the economy then moves forward.  This allows the economy to go though a minor correction and then move on.  The mortages need to be sold off and housing prices need to come down.  Our fiat monetary system only survives on debt and credit, which we are finding out has its limits.  

Instead of letting the system correct the taxpayer might be on the hook for other people’s mistakes.  Why is it imperative that house prices go back up?  Let them readjust to a point where people can afford them.  We will survive, and in the short-term it might be rough.  The dollar is at the brink of destruction.  A bailout will necessarily ensure that the dollar will be dumped because nobody wants to hold worthless paper.  

Warning:  If you see interest rates rising and the dollar falling this is a sign that major players are getting out of the dollar.  This is cause for concern.

Bernake, Paulson, and Bush are selling this proposal as a way to avoid a catastrophe. A necessary evil that if not enacted immediately will be the downfall of the United States and its citizens will suffer. Bush in his address to the nation did comment on the credit problem, but then went for the jugular and instilled fear just as Bernake and Paulson have been doing. He said that he believed in the free-market, but tough times call for decisive action. If he truly believed in the free market the Fed would not exist, there wouldn’t be sugar tariffs and corn subsidies, and I could go on and on. If you believe that we went into Iraq because of WMDs (Weapons of Mass Destruction) then go ahead and believe him on this one.

I find it quite convenient that we have major swings in the stock market and then this proposal comes to light. The banking crisis isn’t something new. Its been going on for over a year, and why now must it be passed right before Congress goes to recess. Fear will induce irrationality and it is imperative that this bill does NOT pass. I would rather face major banks failing then have the government try to sort this out.

Watch this video it is right to the point!

Copperfield & Houdini for Presidency!

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I’ve attended a few performances by David Copperfield and he has performed the unbelievable.  Before my very own eyes a group of thirty people vanished into thin air.  Where did they go?  I watched the unbelievable made real right in front of me.  How could this be an illusion created to fool me into belief?  I ask you… HOW?

David Copperfield and Harry Houdini would probably be a better pair to run the government at this point.  At least they would give us a good show.  The current officials in office make my gut wrench.  We have migrated from the land of the free to nationalization of private property in the name of free markets.  Whoa… okay let’s get something straight.  WE DO NOT HAVE FREE MARKETS… NOT EVEN CLOSE  

If we actually had a system that represented free markets the Federal Reserve (a PRIVATE bank made up of member banks that are also PRIVATE) would not exist, we would still be on the gold standard, and the government wouldn’t even consider a bailout of the taxpayer’s funding, and the United States Treasury would not be proposing this amazing relief package for those who are mainly responsible for getting us into this mess.  

So, I mentioned two masters of illusion… Why?  What is being pulled off at the moment is happening in front of our eyes and for some like me is atrocious.  However, for others they think it is essential to the integrity of financial markets, financial institutions, and YOUR house.  The entire bailout is being purported as a bailout for the helpless homeowner, the saver, the middle class.  

The problem is that nobody knows how much any of this debt is actually worth.  Say the government buys $700,000,000,000,000.00 worth of debt at $0.20 on the dollar, which is great discount.  If that debt is in reality worth less than that we have a problem.  When will these notes be paid back, and in what form are the notes?  

Chris Martenson managed to grab part of an article that later disappeared from Bloomberg that said:

“The Treasury’s thinking is to make it as big and wide as possible so they have the flexibility to act if need be,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, which manages about $108 billion. “There have been losses on a whole range of U.S. debts and as the economy deteriorates in response to the housing slump those losses could escalate.” 

Treasury officials now propose buying what they term troubled assets, without specifying the type, according to a document obtained by Bloomberg News and confirmed by a congressional aide.

This effectively means any type of debt.  Let’s take a moment to see what forms of debt exist:

  • Credit Card DEBT
  • Mortgage DEBT
  • Automobile DEBT
  • Bond DEBT

………. and the list goes on ………….

So, we have the United States government wanting to take on all this debt in the name of saving the financial markets.  Let’s just take the debt from the banks to clear up their balance sheets so they don’t have to write it off, which would cause them to have to increase their reserves because their assets are now below the minimum.  We could lower that further, but it has already been lowered to 3% of total assets.  That means they most likely loaned out the other 97%.  

As the Fed creates money our dollar is worth less and less.  Where is the Federal Government going to come up with $700 Billion dollars?  They will create it from nothing, which the Federal Reserve is great at doing.  Inflation will not solve the problem, only exacerbate it.  Newt Gingrich opposes it, and admits that if he is wrong in not supporting it that it is the lesser of two evils.  

If this bill passes please say goodbye to the dollar as we know it.  Foreigners might finally reach the breaking point to where they are afraid to purchase dollars and realize that buying them to keep their currency less expensive is futile.

Bernake admits financials out of control…

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In an article from the Chicago Tribune

“We have lost control,” said Hale, quoting Bernanke. “We cannot stabilize the dollar. We cannot control commodity prices.”

Hale is an economist who had a private meeting with Ben Bernanke several months ago. Now, we are finally feeling the full effect of the loss of control.

I really hope that many of you have hedged your portfolios already or gotten out of the markets. The dollar is next unless perhaps interest rates are raised as an emergency measure to prevent the fallout. Expect housing prices to continue their descent as liquidity evaporates.

The banking system is insolvent.

Stocks for the LONG LONG LONG term

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“The best therapeutic move for long-term investors is to turn off your TV so as not to get caught up in all of the sensational headlines. The stock market has been and will continue to be the best source for wealth creation over the long-term.”

–Patrick J O’Hare, Briefing.com

I love hearing that the stock market for the long term is the way to make money. Close your eyes and prey. Whoa… Did you close your eyes and watch the money flow into your pockets when you labored every day for what you have invested?

What happens if you are in individual stocks and some of them go bankrupt? The indices adjust and find another company to take the failed ones place. Yes, the market has gone up in the long term, but what if you invested at one of the tops before the crash and had to wait 16 years to get your money back? I don’t know about you but I’d rather sit on the sidelines and wait it out. There are ways to see the hurricane of in the distance, but if you are unwilling or unable it will hit you.

When Columbus was making landfall the natives didn’t see his ships because they weren’t part of their reality. If we can’t adjust our thoughts to accept something new or different then how are we going to prepare for a possible change of future direction?

Read the following article… There is a grim reality facing us all. Investment banks have used up their ability to lend to businesses. Considering that the growth of our economy depends on the ability of credit we are facing a MAJOR did I say MAJOR issue in front of us.

Money Central Article

I’m also hearing local news radio having discussions about what to do with your money to keep it safe. Last night I heard someone saying that this is the time to start thinking about buying. Sure there is the old adage that when there is blood in the streets buy. When if the blood is only at a trickle when it will be a river?

You just purchased AIG… Did you have a choice?

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The Fed is Heralded as a savior.  

 

 

 

I’d like to present a dissenting opinion and it will only take a moment.  The Fed is a quasi-governmental entity — read private bank.  It is a very large private bank that oversees the money flows between banks with the exclusive privilege of creating and destroying money granted per the United States government.  I don’t know when the destroying of money has actually ever occurred since 1913 when the Fed was created.  

Tomorrow (9/17/2008) will be a grand day for the markets as they celebrate the saving of AIG, which if left alone would have hurt a many people and companies.  In the long run it would have been better for everyone and helped people realize that the income’s of taxpayers aren’t for sale <pillaging> if they were left to fail.  It would also have prevented a precedent from being created that the Fed can and will purchase anyone if need or desire be.

However, the Fed is able to say they are “rescuing” AIG, Freddie, and Fannie all in a very short period.  Here is a thought to ponder…

If I am able to create money out of nothing or thin air then why wouldn’t I want to seem like a savior and help out distressed companies in the name of helping the economy?  I don’t have a great answer why I wouldn’t.  If I can shave a few cents off of everyone’s dollar who will notice?  At first it won’t be apparent, but eventually there will be consequences, and at the end of the day I will be the savior.  The consequences won’t be traced back to me.  Like committing a crime knowing you won’t be caught… do you commit the crime?

Revisiting the notion of buying low (through fictitious money that is treated as real money)… I’m the Fed and create $85 billion dollars to purchase 80% of AIG.  Great so now I own 80% of its liabilities and assets. No, not so great because nobody knows what the actual value of the assets are. <Remember I can create money>  For someone who can’t create money this is a problem, and the exact problem AIG ran into.  However, with the ability to create money I can now continue to add more “cash” to AIG’s balance sheet helping it though the crisis.  At the end of the day AIG, Freddie, or Fannie have been saved all though Monopoly money.  They will once again be players in the “free market”, but purchased at a unbelievably low cost. FREE  

Conclusion:  You and I purchased AIG, Fannie, and Freddie… however we will never see a dime of profit in return.  Do you see a problem with this?  Yet, the Fed will be treated like a king for saving the financial markets.  Perhaps the right thing to say would be using someone else’s money to purchase a failing company and then profiting without ever returning that money to the “lender”.  

That is Default. Fraud. Theft. Robbery. 

Final thought:

Do you think that income taxes are legal and necessary according to the constitution of the United States?

Lehman and the dollar sacrificed to save AIG!

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Taxpayers are bailing out AIG!

So, it looks like government officials are deciding to take a 80% interest in AIG, the nation’s largest insurer valued at about $85,000,000,000,000.00. Looking at these numbers it makes sense why the Fed or Treasury were unwilling to lend a helping hand to Lehman. They had to make a decision… if we can’t save em both who will rock the world’s financial markets more, AIG or LEH? The verdict is out and the 85 billion dollar answer is AIG. Do I have a problem that the taxpayer is now on the hook for another unknown sum of liabilities? Heck, at this point it is Monopoly money right?

AIG will pledge their $1.1 trillion in assets in collateral for the “loan”. What happens if their liabilities are greater than their assets? Doesn’t that mean they are bankrupt. Oh wait they are being supported… with money created out of thin air because last I checked we don’t have any surplus cash sitting around, quite the contrary.

Downgraded
After many talks to have private industry help AIG with their problems it came down to the USG. Once AIG’s rating was downgraded their ability to raise capital was further hampered. I sure wouldn’t want to lend them money. There are way too many unknowns with their sales of CDS – Credit Default Swaps and sub prime mortgage-backed securities holdings.

Lender of last resort
Had the government not stepped in tomorrow would be extraordinary in comparison to last Monday. I actually had a dream the other night about the Dow dropping over 1000 points. Perhaps this latest intervention will prevent that in the short-term. However, for the longer-term all this does is prolong the continued de-leveraging in the credit markets. Is there a possibility of a soft-landing as people like to say? Perhaps, but if so it is going to mean a serious about of liquidity introduced into the markets. We know what that means… the devaluation of the greenback.

The market will prevail, the dollar will fall
At the end of the day the Fed will probably resume its monetary inflation as prices continue to fall due to a recession. Unless I have been hard of hearing there is much fear in the air and it is growing. Excesses will need to be cleaned out, and it is going to be a matter of when. The how is fairly obvious as the tornado of destruction is just getting going. Paulson pushed the matter of Freddie and Fannie to the next Presidency, while the present administration tries to ride off into the sunset with their ego’s left in tact.

Let the carnage continue… Who’s next? Washington Mutual (WaMu)? Wachovia (WB)? THE US DOLLAR!

After the Bell Part (2) – Paulson

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Secretary Paulson just issued his press release and I gained absolutely no confidence in the current situation.  Actually I’m more concerned than before as he said that the “banking system is safe and sound“.  Will someone please tell me how the banking system is safe and sound when major institutions are failing?  Bank of America was just downgraded, which shouldn’t be surprising as Merrill (MER) isn’t in good shape.

So, Paulson’s main theme of his speech was that confidence and resilence in the economy is strong, and that they are working to maintain the stability of the markets.  He doesn’t take lightly putting the taxpayer on the hook for private institution’s mistakes or overindulgence in risk.  So, taking over Freddie and Fannie wasn’t putting the taxpayer on the hook.  Well, there wasn’t anything he could do about that because they were part of the hand he was dealt.  It was a congressional charter that mandated that takeover.  I see…

He mentioned that we needed major authorities to wind down major institutions such as Lehman (LEH).  I’m not really sure what that means, but to take a guess it means that other institutions are going to eat those about to fail.  Okay that makes sense, but it is starting to all look really fishy.  How many institutions are going to consolidate?  And which ones are going to survive and who chooses?  This is not how a free market works.

He also mentioned that additional regulations and authorities will be needed in the future.  More government regulations!  Yippie I can’t wait.  We’ve seen how well those work.

And last but not least there was absolutely no mention as to how we got here even though the question was asked numerous times.   Not once did he mention the loose monetary policies or the relaxing of required bank reserves or increasing of the GSE’s maximum loan size.  

If this isn’t a RED flag waiving in the wind saying get out I’m not sure what is.  Be ready for flows of money to start leaving the United States as people won’t want to hold dollars.  Initially, we are seeing a rush to safety in treasuries as their interest rate is falling, but if this continues people will flee to other currencies and hard assets.  Why hold a piece of paper that isn’t worth anything?  Once the confidence leaves the system it may be too late.

Black Monday 2008?

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Black Monday?

Really bad news, and I’m going to the store to get some consumer staples, and cash. If the banking system collapses then cash may not be good for anything. I don’t know if everything is going to crash in one day, but the next week is going to be very interesting. My blood pressure is rising. The entire banking system may be frozen next week… yes this is extreme I know, but look at the facts:

I love how HUGE matters occur over the weekend, and particularly on a Sunday. The market was listless on Friday. As I watched it fluctuate from positive to negative I had a sinking feeling in my gut that I didn’t do much about. Something told me this weekend was going to be big as far as news went, and it wasn’t probably going to be good. Just watching the prices of financial stock you had to wonder that something might be amiss. Merrill Lynch last week took a big hit, which concerned me.

  • Well the Dow December futures are down about 300 points
  • The dollar opened sharply lower on ForEx markets
  • Lehman is insolvent, and nobody wants to buy them
  • Bank of America may be merging (saving) with Merrill Lynch
  • AIG is doing a reorganization, and may sell off it airline insurance arm as well as trying to raise $40 billion in additional capital.
I don’t know about you, but this looks like a major issue. Oh and I haven’t mentioned that the ISDA (International Swaps and Derivatives Association) is saying that if Lehman doesn’t file bankruptcy by midnight tonight that the trades in credit, derivatives, commodities, and currencies will be canceled.
Yikes! What does this mean?
Well, at the moment dealers who had agreements with Lehman are trying to match up with each other. Essentialy for every trade there is someone on the other side. So, I’m long and trading with Lehman and you are short also trading with Lehman if we don’t match up with each other by midnight our trade is now gone. Thus, effectively taking Lehman out of the picture and now those trades are with eachother and not Lehman. At least that is the hope as traders only had from 2pm till 6pm EST today.
Checkout the Bloomberg article.