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Another bailout, more credit… when will we learn?

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It seems that the tune to march to these days is credit o credit we need more credit.  Somehow somewhere we forgot quite quickly that credit got us into this mess.  If credit is expanding much faster than real economic growth the outcome will be instability in the economy.  That is like an individual taking on more debt while their income stays steady or worse is in decline.  At some point in the future the debt will become unmanageable.  Once debt is too great a burden that individual is going to have to either sell assets to pay off the debt, declare bankruptcy, increase their income, or default.  The one thing that makes the government lucky or so it seems is that they can increase “income” through inflating the money supply event hough it is really illusionary.  All they have done is take money from every taxpayer to service the ever growing debt burden.

I find it distressing that Bernake and Co. are talking about further fiscal stimulus to the tune of $150 billion dollars and Democrats want double that.  We are already over $1 trillion in debt for this year.  Where o where are we to find this money?  Perhaps a leprechaun will appear beneath the rainbow and we will be saved.  If the politicians and bureaucrats have their way this is exactly what will happen.  

American’s have no or very little savings to invest in capital goods.  We are laden in debt and attempting to service that debt.  If unemployment rises substantially then servicing that debt will become even more burdensome.  Another stimulus package will probably be used to payoff existing debt, which does nothing for stimulating growth.

So, what do we do…  Many have proposed various solutions.  

Why not reduce the size of the government for one. 
– Yes, people will lose their jobs.  However, with time they will find other jobs as that money can now be used for other things.

Reduce taxes, and the size of the tax code.
 —  Our tax code is way to complicated and confusing.  I would love to know the cumulative hours wasted on tax returns every year by companies and individuals.  Imagine if we had a flat tax of 10-15%…  get rid of tax incentives, credits, exemptions, etc…  Not everyone is going to be happy about it, but a reduction in the tax burden in actual numbers and time would enable people to use their money elsewhere and as they choose versus having someone decide for them where to best put it to use.   

Return our currency to one backed by a physical commodity — GOLD and SILVER
 — The government would hate this, but it would eliminate the major booms and busts and enable constant growth.  Money would again have a true value versus the value instilled by the gov’t.  Money’s value would be returned to the people and taken away from the money printers, and confiscators of our savings.

Bring our troops home
 — We don’t need to be the world’s police.  Occupying over 140 countries is absurd and very costly.  I agree that we need to have an army to defend the country, but it needs to be defensive and not offensive.  Our paws are in too many honey jars.  We are bound to piss off the bees, which we are continually doing and then blame them for getting upset at us.  Ironic don’t you think.

Remove all subsidies and tariffs
 — All they do is distort the market place and what people produce.  For example why do we have corn syrup in our soda, but in the rest of the world they use sugar?  Corn is highly subsidized, while sugar has many tariffs on it.  Corn Syrup is cheaper due to government policy.  Corn farmers love this, while it hurts all of us.  We pay for those subsidies, and also pay high sugar prices.

I’m going to leave it at that, but there are plenty more options.  People say that ignorance is bliss.  NO it isn’t bliss it is being LAZY.  Will you get out of a parking ticket or a speeding ticket if you claim ignorance?  Not unless you are really smooth with words.  

What happened to being responsible? If you take on too much debt then you have a problem.  American’s have a virus, and it is contagious.  We live beyond our means, and then when we get in trouble someone bails us out at the cost of everyone.  The one’s who really pay are the responsible ones who are living within their means.

Banks win with T.K.O!

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If I had to place a bet on who would win… The major banks or the taxpayer… The BANKS win!!  Hooray the institution is saved!  Round after round of talks end in someone getting bailed out or should I say supported or prevented from failing so the whole economy doesn’t come tumbling down.  The markets seems to be happy with the results of the weekend’s coordinated world-wide effort to support the financial industry.  The Dow is presently up 585 points and we are green across the boards.  

However, treasuries are losing ground quickly and Jim Rogers is shorting them.  I took that position earlier, but was too early and also got out too early.  Live and learn right?  I plan to reestablish that plan shortly.  Additionally, I don’t see how this is the “bottom” of the current crisis.  At every point along this decline since last October every time there is intervention the market rallies and then continues in is downward trajectory.  

I’m not watching CNBC, but I imagine everyone is talking about how last week was bottom and we are off to the races.  For a bottom to be in place we needed much more despair and hatred towards the markets.  Regardless of the long-term outlook (just wait for earnings season to really kick in) there is no point swimming up a waterfall.  Therefore I closed out a large position of ultra short index ETFs.  My bias is still short, but I’m not going to be surprised if we see an intermediate rally followed by the final shit storm of destruction.  Remember the fundamentals haven’t changed, only the fact that the world’s leaders are trying to hold things together to avoid a complete collapse.  This weekend only restored confidence to get people lending to each other again, and to prevent runs on the banks.

And alas it’s my 30th Birthday!  What a month to have a birthday eh!  I couldn’t have asked for a more excited, and hairbrained ride…

Look at the Fed Goooooooooooooooooooooo

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I found this on www.chrismartenson.com and couldn’t resist posting it here especially after my post about the dollar.  How the dollar is going to survive after this much cash is pushed into the system I really don’t know.  A inflationary depression seems to be looking more and more likely.  It would explain why gold is so scarce on the physical market.  People are losing faith in fiat currency and want hard currency that has some store of value.  Paper is easily printed, and as Voltaire said

“Paper money eventually returns to its intrinsic value – zero”

Is it just me or is that line going almost STRAIGHT up.  If that isn’t a sign of complete and utter panic well I don’t know what is.  They are going to put as much liquidity into the system as possible.  Will this mean that you house will go back up in value?  Perhaps, but your purchasing power will decline severely.  Jim Rogers said the US currency is doomed, and I agree.  It is only a matter of when, and not if.

 

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!

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.

Disgusted

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Amusing yes, depressing yes… Therefore I ask are we just pawns in a game. A host to a virus that will keep us alive to survive. Do we go about our merry lives content with how things are and vote or not — knowing it doesn’t matter? Or worse voting and thinking that it makes a difference? If I am that absolved to complacency then I might as well live on the isle of Gauntlett, an ecosphere… self-sufficient, self-sustaining, and apart from all. Ron Paul lies it out all out in Revolution: A Manifesto, but as I’ve mentioned people don’t want to listen, and are complacent with being robbed and then blaming it on corporations when the culprits are government officials. I want freedom, personal rights, and property rights with a just law. Without those how can I plan for the future. What incentive do I have to invest if the rules are continually changing? 

If someone continually takes a penny from pocket at an ever increasing rate what motivation do I have to produce pennies or for that matter anything?  

Probable Future Outlook for the United States

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What concerns me most is looking at the highly probable future outlook…

The gov’t is looking to bail out the Freddie and Fannie (dependent upon congressional approval), which will help out new, but not existing home buyers. By adding their debt the gov’t is using our tax dollars and inflation adjusted dollars to secure them. However, we are projecting a $500 billion dollar short fall this year in the budget, and the national debt is at about 9.7 trillion, and growing ever so rapidly. If we tack on unfunded liabilities now we are talking anywhere from 50-70 trillion in obligations. Effectively the government is insolvent. Now what happens when the gov’t revenues begin to decline due to the slowing economy, baby boomers starting to take their retirements, baby boomers soon to be taking Medicare, and the continuation of the Iraq war / Afghan war / maybe Iran war?

I’m failing to see the light at the end of the tunnel.

Consumers purchased houses as money was cheap. Everyone felt rich so they purchased more consumables, which had no productive value. These weren’t investments into something that would have future economic value, but only immediate gratification and immediate depreciation. Look at who is producing and who is consuming… we in the USA are primarily guilty of the latter and it is all funded through the rest of the world’s savings. At some point the rest of the world is going to tire of this. Then after our HELOCs were maxed out we started to use our credit cards.

What happens if the United States dollar loses its status as the reserve currency? Then everyone with dollars will flood the markets and purchase any tangibles possible. Money is a commodity just like gold and silver, but it can easily be created. However, due to the nature of its existence it is a exchangeable commodity and considered legal tender. As people want dollars the price rises and as people desire them less the price falls. Why would anyone want dollars when you look at the future for the US economy besides necessity and political reasons.

People are already losing their HELOCs because banks are worried that consumers won’t be able to afford them. Legal or not this is happening. I also heard from a Real Estate agent in Seattle that banks are asking for 25% down on new mortgages.

In an earnings call in late January 2008, Bank of America executives said credit card delinquencies in California, Florida, Arizona, and Nevada—states with high foreclosure rates—increased five times as fast as in other states, suggesting that consumers struggling with their mortgage debt are also finding their credit card bills hard to pay. “We’re focused on getting paid for the risk we take,” said Joe Price, chief financial officer. – US News and World report 2/28/2008 — Link to the story

The GSE bailout will help to prolong the issues that the financial industry is facing. The USG will do everything in its power to support the system through its tax system. It also gives individuals and institutions more time to pull their money out of the dollar. An immediate collapse would make that very difficult and costly.

And Gary North just posted this lovely article that illustrates that nobody has a clue as to the extent of what is really going on. Link to the article Unfortunately this is for members only, which I highly recommend subscribing to. I don’t get paid a dime on referrals.

I’m getting the sense that things could get a whole lot worse than any of us imagine. In that case I’d consider moving out of the county. Sure the dollar is rallying, and commodities are falling, but how long will this last? Peak oil has passed so we are biding our time before demand outstrips supply. Without oil or with really expensive oil life becomes much more difficult. Panic would ensue in the streets.

For those of us who believe in the concept of revision to the mean take a look at the Case Schiller index since 1890. Looking at the graph we have never seen housing prices rise so dramatically so quickly. Every boom period was followed by a bust or contraction and revision to the mean. We are beyond the mean… we are in outer space. Thank you Fed for the cheap money, and for removing banking reserve restrictions, and inflating the money supply. Hey it had to go somewhere and housing seemed the place to be. Then it went to commodities, which are now taking a fall as well. However, I see no reason that the long term forecast for commodities won’t be higher. The commodities I speak of in this case are precious metals, petroleum, and food. Essentially all the necessities to keep the world moving.

As for housing it will have to come back down to reasonable values. If we encounter a period of hyperinflation then housing will be a good asset to hold onto. However, if we have a depression I could argue the opposite. In a depression the purchasing power of your dollar increases. Depression means contraction of the money supply, which isn’t necessarily a bad thing. In fact part of the Fed’s charter is to contract the money supply when needed, but that hasn’t been the case as of late.


Full Story from Mises.org

And what’s next? Commercial Real Estate?
NEW YORK: U.S. commercial real estate prices are likely to tumble over the next 12 to 18 months as more borrowers default on their loans and regulators crack down on banks, pushing even more properties onto the market. Since the market’s peak in 2007, the availability of debt – the lifeblood of commercial real estate – has dried up and choked off sales.

Borrowers have resisted selling because of falling prices. Banks have not sold off their troubled loans, fearing a huge write-down of all commercial real estate loans. But it looks as if the clock is running down. “We’re going to see a whole lot more trouble going forward,” said Peter Steier, vice president of Inland Mortgage Capital in New York.
Link to the article

It continues:

Commercial real estate sales in the United States are expected to fall 66 percent this year from $467 billion to an estimated $159 billion. This is because debt, especially securitized debt in the form of commercial mortgage-backed securities, or CMBS, is either unavailable or prices are too high and the terms too strict for borrowers, Reis said.

“One of our biggest problem areas is pretty much the state of Ohio,” said Kevin Donahue, senior vice president Midland Loan Services, a CMBS servicer that steps in when a loan is showing signs of imminent trouble. “If we keep going, by the second quarter of 2009, I think the entire state of Ohio will become a subsidiary of Midland.”

I discoved this last bit from Chris Martenson @ www.chrismartenson.com.