Friday, July 25, 2008

Word on the Street is....

photo: Thomas Kelley

Things arent looking so good, and the people are starting to notice. This picture was taken at a public bus stop not too far from my house in Tempe, AZ. Im sure it isnt the only message out there, and i hope one some people might be listening to. Id like to hear some of the solutions the people who posted this message want you to hear, and im sorry to say, i dont know. I can, however tell you what id like you to hear.

All government spending represents a tax. The government has no money of its own, none, it simply taxes citizens, and borrows against future taxes. The inflation tax, while largely ignored, hurts middle-class and low-income Americans the most. Simply put, printing money to pay for federal spending dilutes the value of the dollar, which causes higher prices for goods and services. Inflation may be an indirect tax, but it is a very real tax, as Fed chairman Bernanke admitted to Ron Paul on floor of the house last week. the The individuals who suffer most from cost of living increases certainly pay a “tax.” The reason this is only a tax on the consumer and investor is that the government holds a monopoly on the production of new money, therefor negating any real effect it has to itself, and allowing it to continue to do business even when its citizens cannot. It prints money by selling the debt of its citizens, this debt, even if it is not collected on, is paid by the falling value of the dollar, negating any financial gains that may have been made by private investors in the market, and subverting them to the government and the fed (which is still not a government institution, but a cartel under government license)

Inflation is inherent in a Fiat Currency, or type of money whose usefulness results, not from any intrinsic value or guarantee that it can be converted into gold or another currency, but only from a government's order (fiat) that it must be accepted as a means of payment, in turn this type of currencies value is decided by its Relative Scarcity in the market. Wiki

The problem with this value of relative scarcity bit is that they keep making more of it, all over the place. Not only was it printed out of air, its then given (lent at interest) to banks who opperate on a fractional reserve basis, lending out $10 for every dollar they actually have. But these loans arent just used to buy cars and homes, most of these loans are made to other Lending Institutions, who then use that same fractional reserve basis to shove out an additional $100 for every $10 they borrowed. Some banks, such as todays much talked about Fannie May and Freddy Mac, dont have the same requirements for capital, and in fact are lending out even more money for every dollar of capital they have on hand. Well, with all this credit flying around in the form of dollars lent, what just happened to our Relative Scarcity? Out the fucking window, which is about where it feels the value of those dollars have gone. Who would have thought this a good idea?

Credit isnt without its merits, it increases the free flow of money in an economy, and encourages spending in the form of active investments, which has been great to our economy as a whole. The idea is that while you are inflating the dollar, making all these prices rise in comparison to the value of your dollar, at the same time that you are dumping large amounts of future money (as debt) into your economy now, as in investment, which as technology and infrastructure is built which will improve the quality and efficiency of goods and services, simultainiously driving cost down, thereby limiting inflation. So as long as new technology is driving the real cost of goods down, the decreased value of the dollar is worth it, as overall your prices stay about the same. This balancing act has been running for generations, with only a few major mishaps

The problem today is that we have substantially more credit created than ever before, and it isnt tied up in the development of new technology, or in fact anything that might pay off and better the economy in the future thereby offsetting the inflation it causes. Nope, its tied up in houses, ordinary homes all over America bought up by an artificially induced housing bubble. 3 trillion dollars worth of debt tied to houses that in reality arent any more usefull than the ones you or your parents grew up in. So where does their real value come from, to generate such an increase in price? From the market, houses were selling so often that they were deemed more valuable as a virtue, but now that the market has chilled, where is that desirability? gone, along with any real increase in value that the house had with it. Unfortunately, the mortgage debt is still tied to the old value, and the banks, are being forced to pay for defaulted loans on houses that they couldnt sell for what is owed on them, and that no one could afford without taking out another mortgage.

The banks dont like this. They are being forced to enter into their books real debt that they owe, that has no real value attached to it. In turn they are being asked to pay debts that they formerly floated on capital from monthly payments that are no longer coming from thousands of families who no longer could afford to pay their mortgages in the face of rising (inflationary) prices for everything from food to energy and fuel. To put it simply, they are being asked to pay back money that never existed, that was lent out at a 10:1 fractional reserve and is no longer being earned and payed by interest paying Americans. As the money never existed, and banks certainly cant produce real goods of value, they are in quite a bind.

Of course they cant let that out, because then consumer confidence might plummet and there might be a "bank run" hundreds of customer who want to see if their money is among the 10% or so thats really in the bank, before its consumed by the payments these failing banks are forced to make to their Debtors. Not so funny when the foot is on the other foot, is it?

"I believe we have turned a corner and that our business is improving" - says disgraced and soon-to-be-arrested former IndyMac CEO Michael Perry, just weeks before his company collapsed and was seized by the US government, April 2008. This was the second largest bank collapse in the history of the United States, with people literally being turned away at the door when they asked where there money went.

And this week, Washington Mutual fell nearly 25% as investors and analysts seem to notice for the first time that "the Seattle-based lender's balance sheet is ``burdened with high-risk mortgage loans.'' As is our credit stretched, public debt backed economy. Burdened. Severely.
Politicians will tell you that your money isnt at risk, that your debit cards will still work, that even if the some 300 banks that Gerard Cassidy, an analyst at RBC Capital Markets, predicts will fail in the coming months, do fail, that your money is federaly insured by the full weight of the federal government. One little problem with this though: The FDIC has $52 billion in assets, used to insure $4.4 trillion of the $6.8 trillion deposited in America's bank accounts. One more time, the FDIC only has 1% put away to back the entire thing.

In the end, after the banks fail, and the tiny little FDIC premiums are swiftly blown away, the 'insured' deposits will still be backed up by the full weight of the federal government. that same government we pointed out earlier doesnt have any money of its own. But thats ok, because you-know-who will be called upon to cut the check.

Listen to Paulson to finally admit it - "The taxpayer"

Fannie Mae may be one of the most ill-fated welfare creations, ever, on the part of the United States government. Fannie Mae (FNMA or Federal National Mortgage Association), a government-sponsored enterprise (GSE), finances one of every five home loans in the United States. In Febuary they wrote 80% of the mortgages in the United States.

In February 2004, the Chairman of the Federal Reserve, Alan Greenspan, testified before the Senate Committee on Banking, Housing, and Urban Affairs:

Because Fannie and Freddie can borrow at a subsidized rate, they have been able to pay higher prices to originators for their mortgages than can potential competitors and to gradually but inexorably take over the market for conforming mortgages. This process has provided Fannie and Freddie with a powerful vehicle and incentive for achieving extremely rapid growth of their balance sheets. The resultant scale gives Fannie and Freddie additional advantages that potential private-sector competitors cannot overcome. Importantly, the scale itself has reinforced investors' perceptions that, in the event of a crisis involving Fannie and Freddie, policymakers would have little alternative than to have the taxpayers explicitly stand behind the GSE debt. This view is widespread in the marketplace despite the privatization of Fannie and Freddie and their control by private shareholders, because these institutions continue to have government missions, a line of credit with the Treasury, and other government benefits, which confer upon them a special status in the eyes of many investors.

The perversion here is that the rating agencies, and the financial markets overall, have interpreted the GSE status to mean that there is an implied government backing, and thus their securities have been priced accordingly, oversold, and overextended their mortgage debt creation all over the country. With mortgage defaults on a steep rise, Fannie May doesnt have the cash on hand to cover its day to day obligations. If Fannie May would default on its obligations, not only would it collapse, withdrawing several billion dollars worth of foreign capital from the US economy (379 billion in chinese funds alone) it would force the financial institutions as a whole to write down the actual dollar amount of the debts incurred as loans on homes that no longer could acheive the full value of the loans on them in a market that no longer has the financial resources to either push out the credit to purchase these homes at their default liabilities, or the market to move these houses in a severely chilled market in which everyone is dealing with the rising (inflationary) prices of everything from food to energy to fuel.

This instant loss of value in the american economy as a whole could cause a global dollar panic as both investors abroad and at home will be able to see exactly how much this credit rush has inflated the dollar in the several years since M3 was last reported. The resulting sell off of dollars will only further the amount of dollars in open circulation (by billions, if not trillions of dollars) and only expand the inflationary crisis.

The current government solution is to prop up the institution by either garanteeing aditional credit (from the Fed, who again charges interest) or by an injection of capitol to delay the inevitable crash, to cover the day to day expenses of this failing system. A few Billion dollar injection of taxpayers money might not seem like a small price to pay, but it does not solve the problem of this artificial and expanded value to debt ratio, which does not have the value to back it up. Most likely, this injection of money (in fact the Government buying shares of its own GSE) will only be later used to convince John Q Taxpayer that aditional liability aquisition at a later date is an even better idea, as Fannie May will continue to fail to meet its expectations. A later immenent failure will be presented as "Either you can let it fail and write the entire 3,000,000,000,000 dollar Mortgage debt into the National Debt, or for a few MORE billion dollars, you can give the system the money it needs to keep functioning and in fact MAKE money" Sounds like even more reasonable measures until you realize the imposibility of the system continuing to function in the face of huge inflation and the negative value the housing market holds as a whole. In fact this will just be used to Federalize the entire Mortgage Market, and in turn roll all of it into the National Debt Obligation in whole.

Each and every man woman and child in the United States would be liable for their share of over 12,000,000,000,000 dollars, or the entire GDP of the United States as a whole.

Good Enough For Government work, eh?

Are things really this bad? Porter Stansbury had this to say when he was asked that question, and really, i couldnt agree more:

Well, let me ask you which do you think is more likely?

Scenario one: The U.S. government recognizes its severe financial mismanagement. It allows Fannie and Freddie to collapse completely and does not assume their liabilities. Mortgage investors take huge losses. Mortgage rates soar to more than 10%. Housing prices fall 75% – which makes housing affordable for millions of Americans previously priced out of the market.

In the meantime, the government cuts spending by 30% and reduces taxes radically to encourage economic growth (which, ironically, increases tax receipts, leading to a balanced budget). It restructures Social Security, moving the age of retirement to 75. And most importantly, the government gets out of health care completely, renouncing all of its Medicare obligations. Hospitals and doctors immediately drop their fees to meet the affordability requirements of a free market.

Scenario two: The U.S. government refuses to take responsibility for causing a bubble in mortgage finance. Rather than allow the bubble to deflate quickly, it bails out Fannie and Freddie. Mortgage losses build for five years, reaching more than $1 trillion. Housing prices stabilize in good neighborhoods, but risk-averse lending practices result in widespread vacancy across broad swaths of America.

Refusing to substantially raise taxes, annual deficits surpass $1 trillion in 2010. Total government debt begins to spiral out of control as our interest costs mount. Our foreign creditors lose confidence in the dollar and begin dumping it on the world market. Inflation surpasses 20% annually and prices for energy soar. Oil reaches $250 per barrel. The president alleges an international conspiracy to destroy America and threatens to attack China if it continues to sell the dollar. Price controls are instituted.

No paper currency regime has ever lasted. No government in history has ever repaid debts as large as those already assumed by our government (in terms of GDP). A default is not likely – it is inevitable.

Will Bush and Bernanke bring on global hyperinflation, collapsing the world standard currency, in a failing attempt to keep housing prices from falling as they must? What financial policy will their successors pursue? "This we know: the government with all its guns cannot repeal economic law. It can only hurt the productive even more, as in the Great Depression, which lasted 17 years in large part because of the attempts to keep prices and wages artificially high." or so states Lew Rockwell when discussing the issue a couple weeks ago.

Back then, rather than let one row of this house of cards fall, we forced a slew of financial gluedrops (all funded by taking chunks out of taxpayer cards on the bottom of the stack) to hold up a system that was not stable. We will be lucky, if this time, by taking the same approach, we dont see the entire house topple, right on top of those now weakened taxpayer cards on the bottom.

The solution? stop paying the tax, stop over extending the credit, stop hanging on to an inflating currency, and invest and trade in a stable, sound money.

Don't Buy Federal Reserve Notes.

The answer, as always, is with the power, inherent to the people. If the government wont take the action necessary, with power the people have granted them, the people must withdraw that power and use themselves, solve the the problem the only way most problems ever get solved.

From the Bottom UP.

Pecunia, si uti Scis, Ancilla est; si Nescis, Domina


chris horton said...

Great post Reverand! Many are STILL in denial of this dire predicament. Me thinks most are looking in the wrong direction. The Gov't.(the cause)

Jay21 said...

A little cynical idea: Lets ALL run up the 100-1 ratio and force the banks to collapse. the FDIC will default and severe financial strife will follow. To be honest i believe this is the route we are facing today, yet unintended. Another good post, fix your computer already to cut down on the turnover rates, i get most of my "news" from you and your posted links.