The Long Cold Winter

[geekster]

You might want to have a look at this: (hehe, I missed the link in your post immediately before mine)

http://www.telegraph.co.uk/finance/comm ... serve.html

Entitled "Deflation: Making Sure It Doesn’t Happen Here", it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy.

The speech is best known for its irreverent one-liner: "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost."

...

Investors basking in Wall Street's V-shaped rally had assumed that this bizarre episode was over. So did the Fed, which has been shutting liquidity spigots one by one. But the latest batch of data is disturbing.

The ECRI leading indicator produced by the Economic Cycle Research Institute plummeted yet again last week to -6.9, pointing to contraction in the US by the end of the year. It is dropping faster that at any time in the post-War era.

The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7pc in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40pc in a month. This is a volatile index that can be distorted by the supply of new ships, but those who watch it as an early warning signal for China and commodities are nervous.

Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely because the Fed is soon going to have to the pull the lever on "monster" quantitative easing (QE)".

So it looks like the wheels might fall off the cart before March of next year.

If a Keynesian approach were going to work, it would have by now. Apparently the Europeans have realized that and are going to start restraining their deficit spending. If government tries to use the printing press as their way out of this, yeah, buy gold. Buy as much of it as you can afford.

This downturn was caused by the same thing the Great Depression was caused by: The evaporation of a huge amount of wealth that resulted in a debt crisis and then a liquidity crisis. SOME of Roosevelt's responses were correct. Some of them prolonged the Depression by some 5 to 7 years. Roosevelt's biggest mistake was in wage controls. That prevented employers from lowering wages when profits fell. As a result, they had to close their doors and put millions of people on the street unemployed. Minimum wages and union contracts do that today in our economy.

What the government should have done is bought the toxic mortgages and if the loan defaulted and went into foreclosure and if the home were older than 10 years, raze the building. Then put the property on the market as a building lot. This would not count as a home sale and so it would not depress the median home price in the area. It would reduce the supply of existing homes so as to offer support for the remaining home values in the market. Some cities are doing this wholesale (Flint, MI for example). The government could have done that with millions of foreclosed homes and removed a lot of inventory from the market and preserved the values of a lot of mortgages out there preventing them from going under and maintaining equity so that owners could refinance at lower rates.

Instead we are going to get the "incredible secret money machine" approach where the Federal Government just starts printing notes like crazy.

Welcome to Zimbabwe

[geekster]

And another thing. Has anyone else but me noticed the rate at which products are being removed from store shelves? It seems like every time I go to the store to get something these days, there is a place for it on the shelf but there is no product. And it sits empty. The range of products and stores this has happened to me over the past few weeks is really bugging me. Went to Target to get shampoo. It had a space on the shelf ... no product. Heads for the electric toothbrush ... same story. Went to Home Depot to get a drill. Had the demo ... none on the shelf.

Something is going on that nobody seems to be talking about. The products just aren't showing up on the shelves.

[geekster]

This is expected to be about 18 to 24 months off

I see nothing that says it will be that far out. So far, everything I am seeing points to the second quarter of 2011. Well, I take that back, sort of. The second quarter will be the start of the plummet so yeah, it might be 18 months before enough numbers are out out there. Next Christmas is going to be hard times if Obumbler doesn't get a grip on that spending. We don't need stimulus, we need less spending by the public sector and more by the private sector. Leave more money in people's own hands. Stop using housing construction to fuel the economy.

Want to help minorities? Give incentive to their primary employer. Know who their primary employer is? Themselves. More minorities are sole proprietors than work for any company in this country. Allow sole proprietors a tax break, they will hire people.

You can't spend your way out of this, it is just too big. It would require so much spending that it would enslave our kids under a mountain of debt that they can never pay pack. You can not grow an economy unless you produce something. Government doesn't produce anything. While we were the economic powerhouse of the world we passed regulation after regulation making it harder and harder to do business. We could afford that at the time. We can't now. We have made it so hard to do business that it is cheaper to ship a pencil or apple juice all the way across the Pacific from China than it is to make it here.

We don't even make plastic dog poop anymore.

[Trishntek]

One thing i've noticed is shipping times have slowed a bit. What used to be standard overnight at no extra charge is now 3 business days.

Stock on the shelf is less,,,, yeah i've noticed. Even Costco seems to run out of stuff they always had before.

[can't sit still]

Geekster, you must read the post by cowboy angel on the "screw the banks" thread. It's absolutely chilling. It's by John Kozy.
In the machine age, there is only need in manufacturing for a small number of humans. Few people are employed in production. Same for farming. This results in a very low amount of purchasing power from the aggregate body of producers. The service industries depend on income passed on from producers.
While it's true that spinoff industries like tractors and CNC machines create some jobs, there is a net loss. Killer efficiency.
Efficiency results in fewer jobs and lower prices. Years ago, we spent 33 % of our income for food. recently, in the U.S. , we spent 7 % and 14 % in Europe.
Since the banks have monopoly power on lending, they tended to acrete the wealth, mostly through interest. The producing economy got poorer. Wages stagnated and then,now, drop.
Machines have taken over the production loop. This has left US with less purchasing power. The wealth always transfers to the banks.
The world only needs a few manufacturers. China is taking over that niche. Obama is talking about creating jobs. Biden came out and said that those jobs are never coming back. The BIS said that the world must find a new method of wealth distribution.

"Social Credit" is one way. It appears that obama will adopt socialism rather than social credit. It has been well proved that socialism is a bust. If something like Social Credit is NOT adopted, the West will never have both motivation AND purchasing power.
The PTB aren't about to loosen their grip. We'll continue to crash until it becomes painfully obvious that our "business model" can't compete with China. We have far too many parasites.
http://news.goldseek.com/SpeculativeInv ... 820682.php

[geekster]

You have to be careful about falling into some rhetorical traps. For example, banks are the lubricant that keeps an economy going. Say I make plastic dog poop. Say I need to buy the plastic from which I make the poop. So I get a bridge loan to buy it locally or maybe a letter of credit so I can import the raw plastic. Then I make the poop, sell it to a distributor, replay the short term loan and have money left over to pay overhead and shareholders. Without that bank, I couldn't do that. This allows a company to put more money to work by buying machinery to expand capacity and not have to set money aside to buy raw materials each time. The amount of money I make from that expanded manufacturing capacity is greater than the interest on that loan so I make money, the bank makes money, my employees make money and my shareholders make money. Eliminate that bank and my plant is idle or much less efficient because now I must fire some employees and use that money to buy the raw materials at the cost of lower production rates because I have fewer employees.

Also note that by definition when you lend money you are someone's banker so yeah, the "banks" accumulate interest. If run properly, there is no way for a bank to lose money in a reasonable economy.

And China has their own set of problems on the horizon. They are undergoing wage inflation, are currently experiencing labor shortages in some areas, and some industries are already leaving China for even cheaper labor. I saw it put best a couple of weeks ago when it was said that China is going to begin exporting their inflation.

[can't sit still]

All true,, but, suppose that the banks don't want to lend you money to make poop. Suppose they lend it to someone to make something useless? The useful part of banking is to allocate capital wisely and usefully.
The DOT Com crash was essentially,,, abuse of capital. The forced funding of house building was abuse of capital. Because of a lack of purchasing power and credit-worthiness, there was a lack of demand for capital. The banks force-fed credit / capital to people who were NOT credit-worthy.
The whole Ponzi scheme of Keynesian economics depends on ever-increasing credit creation. Wages and purchasing power were / are stagnant. The only way that credit could comply with the keynesian mandate of non-stop expansion was to allocate credit to people and schemes that were not credit worthy.

The demands of Keynesian credit expansion had to crash because purchasing power was not growing at a rate that was equal to the rate of credit expansion. The banks force-fed credit into the economy knowing full well that it couldn't honestly absorb it. They securitized the loans because they knew that it would all crash.

In a finite world, they expanded credit infinitely. Wages have been stagnant since 1971. Credit has grown enormously in the same time period. People pulled money out of future earnings to qualify for credit. Remember when the longest car loan was 3 years? That wasn't enough to satisfy the Keynesian mandate so, banks shoved credit into every nook and cranny. The economy gorged on credit while it was starving for wealth.

The banks are guilty of abusing capital because it didn't satisfy their growth demands.
I'm not much for listening to rhetoric. I read stuff and extract the important parts;
http://theautomaticearth.blogspot.com/2 ... rs-of.html

[geekster]

Banks don't generally use what you are going to use it for as a criteria any more than a store cares what you are going to use the potato for that you bought last night. If you are a going concern and you have a decent track record and you have the cash flow, they will lend the money.

Banks need to lend money to make money but they take some risk in doing so. They know that sooner or later something bad is going to happen and one of their loans is going to default. What catches them by surprise is when millions of them default within a single year.

Now when we have a problem where reserve requirements get jacked up, we suddenly don't get any lending until they raise more capital for reserves. Lets say you needed enough reserves to cover 1% of your loans. Now the government says you need enough reserves to cover 10% of your reserves. You need to stop lending until you have accumulated 10 times more reserves than you had. When the banks stop lending, people can not import goods. Factories can not expand, they can not get short term bridge loans against accounts receivable to meet payrolls.

This administration reminds me of the fireman that goes around starting fires. They seem to take every action they can to make things worse so they can come to the rescue. It looks like that plan is that by next year, the country will be so totally borked that the people will allow Obama to do whatever he wants.

He was given a bunch of money for a "stimulus" plan and spent it on things that were pretty much guaranteed to make things worse. He increased government jobs which increases deficits in coming years. He accelerated programs that were going to be done anyway resulting in a crash after the accelerated programs were complete and there were no new programs. He accelerated home purchase by people who were within about $10K of purchasing one anyway resulting in a crash in home sales after the program is done.

But the real problem comes next year. With the passive-aggressive move of simply allowing a series of tax cuts to expire, they are going to do this economy the greatest harm since Carter's "windfall profits tax" nearly destroyed the US economy.

[geekster]

I ran across an old article of an event that happened before many of the people who frequent this site were born. Back in 1986 there was a terrible drought in the Southeast. Farmers' cattle were dying. We didn't need government programs. Farmers in Ohio got together on their own and organized a convoy of hay to the farmers in the Southeast. They didn't ask for a dime. There was no "program". There were no bureaucrats involved.

But that isn't the whole story. What to me is the real story is this:

http://news.google.com/newspapers?nid=8 ... 62,1029726

Two years later, the farmers in Ohio were hurting. The folks in the Southeast payed them back with interest. A convoy of hay trucks 7 miles long returned the favor even though they were not having a great year themselves. And these were the NASCAR rednecks everyone likes to make fun of. We don't NEED government to take care of each other. It is my opinion that too much government "help" actually weakens and eventually destroys our social fabric because we get the notion that we no longer need to rely on each other, we can have the government FORCE people to help us.

That's when people stop helping and stop caring.

I had no idea about the return convoy until I tried looking up the original convoy in a discussion with a friend tonight. It was an example of something that happened when I was younger that refreshed my faith in the human spirit. And then I found the article of the return convoy and I am telling you, I got goosebumps. I remember those years. I remember when the economy sucked ass for 5 years or so and mortgages were near 20% interest rates and unemployment was near 10%. By 1986 we were a completely different country. We had turned that economic corner. Our spirits were rising, we had a government that was lowering taxes, reducing the size of government and people were going back to work. The American spirit was a lot different then than it is now. These days it is closer to 1979.

[Trishntek]

When I lived in Wyoming, I was on the county search and rescue squad. We donated our time after a blizzard isolated thousands of square miles of cattle ranches in Montana.

Local ranchers pooled their hay, 400 tons of it was flown to snow-locked cattle and airdropped. The local privately owned aircraft service donated the use of a C130 which did it all in 17 loads.

Gubmint wasn't involved in that either. And that is one reason why nobody ever hears much about the bitchin' winters in that part of the country, they take care of their own. The other reason? The population is so thin the rest of the world really doesn't give a shit.

[can't sit still]

CITI let their capital reserves drop to 1.47 % while they were making no-doc loans. Lehman Bros survived a dozen wars and recessions / depressions. They couldn't survive liar loans. Criminal stupidity for ignoring qualifications.

[geekster]

What absolutely chaps my ass is that you have Democratic Senators railing about "Wall Street greed" when at the time, they saw that "creative derivative" market as enabling more loans to low-income buyers by providing a market for those loans. They were all for it at the time and *refused* to regulate it when it was pointed out to them how dangerous it was becoming. Then when the house of cards collapses, they want to point the finger at Wall Street. Its nuts.

Here is how I believe you go about fixing the problem:

The situation now is that you have large numbers of people holding "under water" mortgages and they can not refinance because they have no or negative equity. So the result is that people are staying in homes that they can barely afford or can't afford because they can't sell them either. So what the government could do is come up with a program that allows an underwater loan to be refinanced with the capital value being the current selling price of similar homes in the area +15%. Then a special lien is placed on the deed that says if the house is sold for more than the mortgage amount, then any gain goes to the lender up to the difference between the original mortgage and the new mortgage.

So lets say you have a $500,000 mortgage on a home that is selling for $200,000 in your neighborhood. You would get a new $230,000 mortgage and a lien would be placed on the deed for up to $270,000 if the house eventually sells for more than $230,000. The bank is allowed to write down the $270,000 now and will pay a special 10% tax to the government later if they realize money from the sale of the property. So now the loan is no longer "toxic" and the mortgage is a little bit underwater but not by an amount that would be impossible to overcome in a reasonable period of time.

Now lets say the person eventually pays the mortgage down to where they owe $100,000 and they sell it for $300,000. The bank gets $30,000 (the amount over $270,000 that the house sold for), pays $3,000 in tax, the homeowner walks away with $170K ($270K - $100K). So in other words, the homeowner never gets the benefit of appreciation over $270K but they DO get the benefit of any equity up to $270K that they might get from paying down the mortgage.

This takes away the financial incentive to walk away, it eliminates the toxicity of the loans, allows the banks to free up reserves and allows them to recoup some of the cash later if the market recovers, and it even allows a homeowner some chance at some equity for purchasing another home later. It allows people to sell homes they may no longer want or need. It basically revives a drowned real estate market and spreads the pain around so everyone bares a little bit of it.

[can't sit still]

This is a great article by Ellen Brown. http://www.huffingtonpost.com/ellen-bro ... 15813.html
A little bit of history; The bankers caused booms and busts in the early 20th century. In 1913, they convinced GOV that, if there was a central bank, the boom / busts cycle would stop. We got a central bank. 16 years later, we had the biggest bust of them all. The bankers were able to buy up the productive parts of the economy very cheaply.

Currently, the banks went into overdrive creating money. They created a 'bust" situation and then demanded $ trillions from GOV. They held onto those $ trillions rather than letting them flow into the productive economy. How else could they blow-out the productive economy?

Banks make DAMN sure that GOV doesn't print money debt-free. Debt-free money flowing into the economy would show just how bad the banker's debt money is for the economy. They'll give [loan] GOV all the money that they want as long as it accrues interest.
"In Australia during the current crisis, a stimulus package in which a cash handout was given directly to the people has worked temporarily, with no negative growth (recession) for two quarters, and unemployment held at around 5%. The government, however, borrowed the extra money privately rather than issuing it publicly, out of a misguided fear of hyperinflation"

Look at the rationalization;;; Debt money WON'T cause hyperinflation. Debt free money WILL cause hyperinflation.

Banks currently hold instruments nominally worth hundreds of $ trillions. They were conjured out of thin air so they essentially cost nothing. These instruments can NEVER be redeemed in their entirety because the physical economy is FAR too small. But, since they were created at almost no cost, they can be used to buy up the physical economy at a markdown of ?? 99 %?? and still be profitable.

There is something like $5 trillion in commercial RE that is going to be big problems. The price will crash and the banks can take possession on the cheap. Some years in the future, the money will start to flow again and the economy will be profitable again.
When WW II started, there was money from the banks flowing everywhere. it flows when they want it to flow.
The big banks are in the process of putting OUR treasury debt-money to work buying up their competition. When the time comes, they'll buy up the viable sectors of the productive economy. Countries like Argentina were just for practice.

Even though all the debt money was conjured up out of thin air at practically no cost, the banks will claim that they have a legitimate claim on damn near everything. Debt service will take 100 % of the GDP in a few years.

The country has debts of about $ 110 Trillion. Will GOV roll over and give the banks everything? Will we detonate the FED? Will Obama turn on the bankers?
The FED is currently printing money just as fast as GOV wants it. They know that there is NO future in that. Are they printing their money to keep the U.S. from printing U.S. notes as JFK did?

[geekster]

Beware of what you read at HP. There are occasionally some good articles there but there is also a lot of crap.

Note this in the quote from Business Week:

That means cutting public spending, laying off workers, reducing consumption, and increasing unemployment and bankruptcies.

That is true IF you are counting only government employees. If you cut public spending, yes, you will lay off government workers. Now if that will reduce consumption on a macro scale is purely opinion. It might initially, but the private sector is more efficient at employing people than the government is (any government). Employees in the public sector generally add more to the economy than they cost. Employees in the public sector are 100% economic overhead.

It also means shrinking the money supply, since virtually all "money" today originates as loans or debt.

Also, more convoluted logic. The word "today" leads one to believe that this is something new when it has been true ever since Socrates borrowed a cock from Crito. ALL money comes from loans else there is no way to grow the supply of it. That is the entire purpose of currency and banks. You get a dollar, put it in the bank, the bank lends it out ... bingo, the economy has two dollars in it. I also fail to see how reducing *government* spending reduces the money supply. Government works by taxation. Every dollar it spends is either taxed now or borrowed from future taxes with a bond. Yes, there is a useful role for government to play but that benefit declines rapidly as the size of government grows.

The article itself is somewhat moronic in that they use M3 as an indicator of money supply. The money supply is NOT declining. If you include bank reserves the supply of money has skyrocketed. Look at M0 or in the UK MB. The government has injected a trillion dollars directly into the banks but it sits in reserve against underwater loans.

In fact, if they were to implement something like the suggestion in my previous post, they (the FED) would have to yank all that money OUT of the banks because no longer requiring that money to be held in reserves, the banks would flood the market with cheap loans possibly generating massive inflation. In fact, that is the worry right now. If the real estate markets recover, can the fed pull the money back fast enough to prevent it leaking into circulating money? Nobody is quite sure.

Consider the source. I would not consider Ellen Brown to be the epitome of economic analysis. She has her agenda that comes through in every single thing she writes. She is not providing analysis, she is preaching. She has already arrived at her conclusion and simply reports things that reinforce her notion of things.

If an article of hers validates your own conclusions, sure, it can be easy to hold it up as a corroborating data point but the analysis of hers relies on holding certain preconceived notions in order to make sense. The first being that government spending adds anything to the economy.

It doesn't. Roosevelt's programs succeeded because they DID add something to the economy. In the Depression we had projects like TVA and REA that not only put people to work, they also added something real to the economy. Electrification made a *huge* difference for a lot of people. A small farm can be much more productive if you can use an electric saw, welder, water pump, drill, milk cooler, refrigerator, etc.
The same goes for the huge dam projects out West and the system of "US" highways. Those projects added tremendous value to the economy.

THIS administration simply wants to pay people for sitting on their ass adding nothing to the economy. Half the "stimulus" spending went for jobless benefits. That spending added absolutely nothing to the economy.

[geekster]

A stimulus program that would work:

A national high-speed electric rail program powered by nuclear energy. A combined system of a national grid not unlike the Interstate Highway system for cars designed to get cars of freight and passengers coast to coast at an average speed of 100 miles/hour completely electrified using combined cycle power plants that would recycle nuclear waste into new fuel.

These railways would be publicly owned like the highway system. It removes the "right of way" barrier of entry to competition in the railroad industry. The rolling stock, just like highway transportation operations, would be privately owned. This would require great feats of engineering in the building of bridges and tunnels and put people to work building something that would add something to the economy.

It would improve the economic security of the country by providing a means of transportation that does not rely on fossil fuel and is immune to the disruption of supplies or changes in the availability of fossil fuels. When completed, we would have a much better transportation system allowing the movement of goods cross-country at lower cost as carriers compete with each other over a common infrastructure. It would employ people at all skill levels from the lowest skilled manual laborer to the most specialized engineers and technicians.


THAT is a stimulus program I could get behind.

[can't sit still]

Geekster, we disagree HUGELY. I'm going to leave it at that. I'm going to continue to post what I post.

[geekster]

Well, the sad thing is that no matter which of us is right, the end result is about the same.

We are both headed in the same direction, just taking different roads to get there.

Current policy is based on what I feel are a couple of fallacies. The first is that all government spending is equal. I don't believe it is. Spending for the sake of spending does not necessarily stimulate the economy and can actually enable stagnation if spent in ways that enable stagnation. The second fallacy is that increasing taxes raises government revenues. It doesn't. Look at the 50 states. The states with the lower taxes have the better economies and states with higher taxes have the worst economies. California taxed and spent its way from economic powerhouse to stagnation. Not all government spending is equal. Spending on things that increase the national wealth is one thing, spending on bread and circuses is something else.

As for posting what you want, of course! Wouldn't want it any other way. Just because people don't agree doesn't mean they can't hold a conversation.

[geekster]

Howard Davidowitz gets it. Listen to the interview:

http://finance.yahoo.com/tech-ticker/ar ... isaster%22

And the basic gist is that with the destruction of 8 TRILLION dollars worth of wealth, small community banks can not lend to small business. Small businesses make up the majority of employment in this country. We can prop up GM or Chrysler but they don't account for the majority of the jobs in this country. If you look at the latest jobs statistics, you will see a tiny amount of job creation in large business (>500 employees) a bit more in medium business (50 to 500 employees) but continued job losses in small business (<50 employees).

The mortgage plan I posted a few posts back would allow those banks to lend to small business again and get the economy going.

[can't sit still]

The economic war is heating up. S&P wants to downgrade Moodys.
http://blogs.telegraph.co.uk/finance/tr ... ice-versa/
The U.S. is trash talking the Euro. Now, the U.N is trash talking the dollar.
http://ml-implode.com/staticnews/2010-0 ... nback.html
The reason that you should worry about this is because the U.N. is rooting for the SDRs from the IMF. Pretty stupid when you consider that the IMF and the dollar are co-joined twins.
The countries with money prefer the BIS over the IMF... Saudi, China. OK, so, the debtors want the IMF. The creditors want the BIS. Nobody is going to give in easily. Instead of a crappy dollar, the IMF would give us a basket of crap partly based on the dollar. The dollar is backed by "The Full Faith and Credit" of America. Alternately, it's claimed that the dollar is backed by our manufacturing capacity. Both are on very weak ground. By backing the IMF, the U.S. wants the dollar to continue with the SDR as a sort-of proxy.

The creditor countries can hold out easier than the debtor countries. The debtor countries face serious and immediate deadlines for servicing their debt. I wouldn't be surprised to see a war of attrition between the IMF and BIS camps.
If the FED and EMU try to print "money" to outlast the BIS camp, the bond markets will shut down. There doesn't seem to be any escape from default.

Just as the U.S. tries to crash the Euro, the IMF will try to crash the BIS sphere of influence. Moodys would like to crash S&P. Just as the hedge funds turned cannibalistic, GOV and monetary systems are turning on each other.
What does that mean for the little guy? 3 guesses.
Old Indian proverb;
When the elephants fight, it is the grass that suffers.

[geekster]

Looks like a major player sold a bunch of gold, covered a major short position in the Euro, and parked the cash in Swiss Francs:

http://chiefio.wordpress.com/2010/07/01 ... c-liftoff/

[geekster]

If the FED and EMU try to print "money" to outlast the BIS camp, the bond markets will shut down. There doesn't seem to be any escape from default.

Just as the U.S. tries to crash the Euro, the IMF will try to crash the BIS sphere of influence. Moodys would like to crash S&P. Just as the hedge funds turned cannibalistic, GOV and monetary systems are turning on each other.

Well, if Europe decides to reign in the spending, things will change dramatically. This is particularly true if the current US administration continues to spend like a drunken sailor. Also, don't compare problems in other countries with problems in the US. Our problem right now is different. We have banks holding 8 trillion dollars of debt that was equity only 2 years ago. There are millions of people who bought a home for twice what it is now worth and the banks now hold those mortgages. You can not lend against "negative equity". The economic lubricant that the banks provide has become sand due to government meddling in the mortgage markets.

[can't sit still]

Henry Ford said "If Americans understood the banking system, there would be a revolution tomorrow"
I'll try to put some simple numbers to his idea.
If I deposit $ 100 in the bank for 5 years at 2 % interest,,,,, at the end of 5 years, the bank will have a debit to me of about $ 112.

The bank will take my $ 100 and pass it through the magic of fractional reserve banking. If they keep a 10 % reserve, they can loan out $ 900. At the end of 5 years at 6% interest, there will be a net debit to the bank of approximately $ 954.

Lehman Bros had reserves of less than 2 %. That same $ 100 multiplied by 50 would result in a net debit owed to the bank of $ 5194. It's obvious that every bit of reduction in reserve % results in much bigger returns.
Anyone who claims that the banks deserve interest on loans because of the risking of their capital hasn't looked at the complete profit picture.
In general, banks only create the principle, not the interest. The interest has to come from labor or natural resources or later loans. Keynesian economics requires a eternally growing credit mountain to satisfy earlier loans.

The money supply is growing at 6 times the GDP. Credit is [was] growing far faster. Wages are stagnant. So, wages can't pay off the ever-growing mountain of credit. Since the GDP is growing rather slowly, we can't liquidate natural resources fast enough to pay off the mountain. Only the creation of tremendous amounts of credit can pay off previous mountains of credit.
Greenspan's bubbles were just an attempt to prolong an unsustainable situation. There is nothing that can save the West.

[can't sit still]

This is something that came in mail that I though deserved a separate post.

Dear Mr. Walkom,


I note that your academic background is in economics. The abject futility of world leaders' attempts to solve the problems of financial debt, etc., is assured so long as they continue to hold that the primary purpose of economics is to create work (i.e., "jobs") and they fail to understand the nature of exponential debt accumulation. The purpose of production is not to create work. Any rational person would surely recognize that the purpose of economics is to produce consumer-desired goods and services with absolute maximum efficiency--which means the most rapid replacement possible of human labour with evermore refined technology, which latter is vastly more efficient than human effort. Politicians and economists base their policies on a completely false assumption that the price-system is self-liquidating--not seeming to realize that it is increasingly less so with every advance in technology where capital becomes a growing factor of cost relative to labour. The price-system generates financial costs and prices at rates which far and increasingly exceed the rate at which it distributes, in the same cycle of production accountancy, unencumbered consumer incomes. Without any apparent other means of compensating this inadequate consumer demand we are provided only with the option of mushrooming consumer debt. This may transfer some, or even all, of the goods, but does not cancel the production costs inasmuch as consumer debt is a charge upon future cycles of production. Hence, the notion of the desirability of "balanced budgets" is an inanity--such balancing is a mathematical impossibility in the context of the present defective financial system and flawed national cost accountancy. A balanced budget under the existing financial system that creates money only as debt can only mean that businesses can no longer recover their costs from consumers and economic ruin is the inevitable result.

A balanced budget under existing financial conventions means: 1. That the economy is static (economic restriction, i.e., sabotage), 2. That we consume all of our real capital in current cycles of production accountancy (a patent absurdity because as a mere glance will confirm, capital has a variable long life extending into the future), and 3. That the issuers of credit, i.e., the chartered banks, because of their falsely claimed right of foreclosure under conditions which they have the power to create through imposition of credit restriction, own all real capital (an absurdity in consideration that the banks did not create such real capital). The essential problem is, that the consumer is charged in final prices, properly, with capital depreciation but, quite wrongly, not credited with capital appreciation which latter greatly outstrips depreciation. In the modern technological society we capable of abundant production we should be enjoying rapidly declining prices, increasing access to final production without the need for aggregate consumer debt with the option of increasing freedom from toil--i.e., increasing Freedom, Abundance and Leisure. Such lunacies as the assumption that we live on our exports and that a favourable balance of trade is exporting more wealth than is received merely to capture external credits, so as to compensate a completely unnecessary deficiency of purchasing-power in the home market, would become an anachronism having no credibility whatsoever. Tyrannical and illogical notions such as a state policy of maintaining "full-employment" (the cornerstone policy of both communism/socialism and fascism) would fall by the wayside, recognised as the incarnate evil they are, and discarded into the dustbins of history. We need National (Consumer) Dividends and Compensated Prices administered under a revised and actuarially sound system of National Accounts.

As the British author Eric de Mare asked in his book "A Matter of Life or Debt" (Onalaska: Humane World Community, U.S. ed., 1991), are we to vanish from this earth without a whimper merely because we cannot get our money sums right?

For your possible interest, I attach some PDF documentation which points the way toward a viable and sane financial and economic system. We don't require some megalomaniacal nightmare scheme for "World Governance" (i.e,, world tyranny) to solve our problems. We need policy based upon sound philosophy incarnated through sane finance.

Sincerely
Wallace Klinck

[much2naughty2]

geekster, regarding your posting about store shelves being empty. Over the last few months, Wally world has reset their store. Where once the isles were vey close togther, 6 feet, I'm guessing a lot of them are 12, and the main isles are like 20. The shelves that used to be so high you couldn't reach the top products, most are now about 4' high. No tall shelves at all. Where items like summer fans once were stacked 10 high, they now occupy shelf space 10 wide, one high.

Over all I would estimate way less than 50% of the product they used to carry, as is brand choice. o one probably knows more about business futures than they do, and I've wondered if it wasn't the first sign of some really bad times ahead.

[geekster]

I will give an example. My daughter loves spaghetti. I buy the sauce from the store but I modify it a little. I like a combination of Ragu Garden Combination Pasta Sauce and Sautéed Onion & Garlic Pasta Sauce. I put a jar of each together and that makes it about right for our taste.

About a month ago the "Super Chunky", "Garden Combination" and several other varieties disappeared from the shelf of our Safeway.

I also like kippers. The smoky salty food is like fish bacon. The store carried three brands of them. Then one day suddenly none but way up on the top shelf they had a box of the Brunswick brand. So I grabbed a few tins. The checkout didn't have them in the computer. I was charged what we both agreed should be a reasonable price for them. I did this three or four times and finally I noticed the kippers back on the shelf but only the Brunswick brand.

The shelves are now stocked with larger quantities of fewer items. The Ragu area of the shelf now is down to two dozen jars of only four varieties of sauce.

I believe the reason is financial. Businesses often get short term bridge loans to buy inventory which they repay when the inventory is sold. Banks are not lending and so the stores must fund this inventory purchase themselves. This results in fewer items bought in larger quantity in order to get unit prices down. That notion of bridge loans also goes all the way up the chain to the producer of the raw materials. A farmer might get a loan to buy seeds or sets which is repaid when the crop goes to market. A manufacturer might get a loan to buy materials used to process the product which is repaid when the product is sent to the distributor. The distributor gets a loan to buy stock which is repaid when the stock is sent to the retailer. If everyone in the chain must self-finance the inventory, they are limited in what they can purchase and stock. So while they save the interest cost, they potentially miss out on more profit.

Short term credit like that is an economic lubricant. It allows a distributor (and everyone down the line) to "bootstrap" the inventory. If you can't get those loans, your choices become much more limited.

[geekster]

Six months until the largest tax increase in American history:

[quote]
In just six months, the largest tax hikes in the history of America will take effect. They will hit families and small businesses in three great waves on January 1, 2011:

First Wave: Expiration of 2001 and 2003 Tax Relief

In 2001 and 2003, the GOP Congress enacted several tax cuts for investors, small business owners, and families. These will all expire on January 1, 2011:

Personal income tax rates will rise. The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed). The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise. Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates. The full list of marginal rate hikes is below:

- The 10% bracket rises to an expanded 15%
- The 25% bracket rises to 28%
- The 28% bracket rises to 31%
- The 33% bracket rises to 36%
- The 35% bracket rises to 39.6%

Higher taxes on marriage and family. The “marriage penaltyâ€

[can't sit still]

Obummer promised to cut the deficit in half by 2013. He wants the bond investors to feel secure that the U.S. will get it's house in order and their bonds are safe. Meanwhile, congress seems to be unhappy with ANY limitations on their spending. "We don't need no stinking budget" seems to be the mantra of the moment.
http://www.humanevents.com/article.php?id=37893&s=rcmp
The FED promised to stop buying MBSs on April 1. Since then, they've bought $ 45 billion.
It almost seems like congress is trying to spend like crazy and drive the FED into the ground. Meanwhile, there is "fatigue" appearing in the bond market for U.S. securities.

There is also speculation that the Euro is doing a turnaround due to the fiscal responsibility shown by European leaders at implementing austerity measures. Time will tell.

[Rabbi Dali Rick]

A Market Forecast That Says ‘Take Cover’

[quote]If Robert Prechter is right, one market analyst said, “we’ve basically got to go to the mountains with a gun and some soup cans.â€

[can't sit still]

“I’m saying: ‘Winter is coming" Hmmm, where have I heard that before?
Bob Prechter is good. A very important tool is to analyze the counter-arguments. "They" argue that stocks could never go that low. The U.S. has 5 times the retail space per person as France. When our economy adjusts to where it is commensurate with our earnings, we won't need 4/5 of our retail space. Our economy is commensurate with our present earnings piled on top of our FUTURE earnings.

We're slowly spending down our wealth. Look at Japan. Once you lose your job in the world marketplace, you just burn through your savings. The consumer economy is 67 % of the total economy. Much of the rest of the economy is financed by the proceeds and taxes from the consumer economy. Cut that back to the point where it is being supported by actual wages rather than future wages. I seriously doubt that you're going to see the free-flow of lending coming back.

As more and more automation is implemented, labor costs become a smaller and smaller portion of the cost of manufacturing. The biggest cost in manufacturing is capital. Taxes are second. 50 % of the cost of the average item is for finance. About 20 % is for taxes. GOV now spends 44 % of the GDP. GOV and banks are squeezing us through the wringer. To be competitive in manufacturing, we have to lower the cost of finance and tax to the levels of our competitors. Do any of you see that happening without a total economic meltdown coming first?

[geekster]

[quote]
“we’ve basically got to go to the mountains with a gun and some soup cans.â€