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Saturday, October 02, 2010

Debt-addicted economy on life support

{Newsflash: The FBI just raided the homes of antiwar activists in the upper Midwest and elsewhere. The lengthening shadows of tyranny cross our land. See the bottom for a warning to bloggers.}

In this atmosphere of hate and distrust, we've got plenty of reasons to be cautious about the economy. It's like our economy is the body and we're trying to pour more debt on the fire. Like an alcoholic, our body--the economy--reels with an overdose of alcohol. We crave the booze but it doesn't help the body to be an addict. Drinking more only postpones the Day of Reckoning when the alcoholic--like the economy--bottoms out.

It'll take a catastrophe most likely to break us out of denial. Americans are in denial that our country has so much debt. Look also at the frightful hypocrisy of the Republicans, who through the Tea Party are claiming fiscal conservatism. Imposters! We all know the GOP, with some Democratic help, launched the trillion dollar Pentagon budget. So how can they represent fiscal discipline?

With our head--the American body politic--confused and in such denial, it's a wonder our bodies haven't simply collapsed into the gutter like small town drunks. I won't get into how the mass media struggles to tell the grand lie of the Establishment--that thing are getting better. Don't look, but behind the facade of change is business as usual, all the way through the political and economic spheres.

So we'll have the crisis; the reason behind the last one are equally valid today. As long as the Federal trough keeps sucking enough blood off the host, we'll be getting weaker economically. More and more productive resources will be diverted to government coffers. And the price of maintaining so much debt grows, encouraging more money to be created out of thin air.

The Financial Complex controls our monetary policy. The real economy has succumbed to a shadow banking and derivatives scheme that uses fractional reserve banking and access to cheap money. The derivatives are still out there and the housing stock that serves as their asset base has further to depreciate. Can a crisis not occur?

Peter Schiff has been saying that CrisisTwo will occur. Judging from the movies I've reviewed, you can pretty much guess what I think. I wouldn't hold Peter to any precise prediction on when this event will occur. Nor would I discount his prediction simply because it hasn't occurred yet.

In economics (hardy a precise science despite the analytics), it's the direction that matters. Like the study of any science--which seeks to discover truth--the facts are vital to the truth. Judging by your willingness to come to the Web, to explore the facts free of interference, myths and lies.

The key to making predictions is making preparations clear. The Chinese have a character in their language which combines the concept of crisis with opportunity.

Now there's the whole gold thing. Gold's been up without inflation. As much as gold bugs like to talk of gold as a safe haven, the facts are that gold fell dramatically with the credit crisis. As asset values fall, they're worth less and the dollar is actually worth more by virtue of being able to buy more. It's a deflationary trend that offsets inflation, which is the opposite of dollar being worth more through a crash in asset values. I'd say it was the pre-crash market environment that was inflationary, and oil was zooming.

If you'd been reading me, you might have chosen silver like me. It's otuperformed gold this year and has been about the best thing out there. So it's been a good call. But I've been examining the rising prices of gold and silver with uncertainty. Yes, there's the potential for inflation. If inflation really were showing up--it isn't--then gold/silver would likely be higher. Oil isn't moving like in 2008, so an asset bubble rebuild (and likely burst) may not be forthcoming.

I hold silver but at $22/ounce, I'm beginning to wonder if the run is sustainable. Probably, in the short-term. (Not the answer you wanted to hear, I'm guessing.) Translation: I'd look to take some profits on it soon. Wait for a correction to buy? Certainly. But now? I don't know. I also don't know if my reticence to buy at these levels is the same as wanting to sell it.

Well it isn't my job to speculate but rather gather and present the facts so you, my reader, can choose what to do. Besides, I wouldn't recommend any security without understanding your specific financial situation. Most cookie cutter approaches to investment management are flawed. And recommendations that appear in millions of newspapers and magazines are hardly discoveries: by the time they make through production, everyone knows what they like and don't.

So where do you start? Well, not to give too much information, I'd make sure the insurance levels are good and accumulate a emergency fund of 3-6 months worth of living expenses. Why's that so important? Because you might lose your job. Things happen beyond your control. Appliances break and need to be replaced. Relatives need help from time to time too.

The key to investing is time horizon--the length of time you hold your investment. So why should the emergency fund matter? Well, chances are if you need money, let's say in the next three to five years, you'll end up cashing out too soon. Imagine having to dump a stock back in 2008, for instance. If you'd stuck around, kept your money in the market another 6-12 months, chances are you'd recovered nicely. Maybe you would have recovered not all your losses perhaps but a good chunk of them.

Be suspicious by the fact most people selling you financial products DON'T check your general financial welfare before they recommend something. Honestly, the lack of an emergency fund isn't a problem for the entity selling you a commissioned product on which they must earn a profit.

With loaded products, selling generates a commission as well, so the impatient investor gets not only insufficient time to let their investment recover but is also gouged by the broker for selling.

Commission costs do add up. Now those with discount brokerage accounts might disagree. Trades for under $10 may make a lot of sense, but evidence supports the idea that you do better if you have someone helping you make decisions (see search term "performance load versus no load".)

Yes, you have to pay for it and all, but over the long-term commissioned products tend to do almost as well as no-loads. The reason: the problem is you. Cocooning in your little world, you the investor might get the idea that you are the next Gordon Gekko, the next day trader extraordinary. This inflated ego typically strikes after you made your first big profit. Trust me when I say the the superior performance and the feeling of invincibility will end.

Now the stock market is more than a casino. It represents investment in America. Potential returns can allow people of moderate income to become wealthy. Making money and being rich are distinctly different, as the book Millionaire Next Door attested.

Of course increased risk comes with increased reward. The two are inseparable, unless of course you're a Goldman Sachs able to conduct millions of High Frequency Trades, or a Federal Reserve able to create money out of nothing. For those entities there's little risk, although the crash in 2008 seemed to put even the vampire squid in peril. Unlike the problem being your ego, the problem with them I see as their greed and egos.

The reason for the Lehman Brothers failure isn't that different from why you might fail (although Lehman was allowed to fail and the presumption is you might not fall down like that, or let you collapse like Paulson did that company.) If you've been following my analysis of how the money machine works, you know that turning off the debt spigot (new dollars into the Ponzi) will keep a financial services firm from lending. Lending, as it turns out, is the raison d'etre which these same financial entities turn to when justifying their bailout (another term for allowing them to borrow instead of fail.)

Lehman lost its ability to tap low interest loans which are at the heart of investment banking post-Glass Steagall. Treasuries were used to balance the deteriorating balance sheets and companies like Lehman who weren't selected for termination. The Fed took in Mortgage-Backed Securities of questionable quality and unquantifiable value in exchange for solid AAA (for now) Treasuries: our debt.

That's right, the Fed burdened our grandchildren with billions to bail out the bankers' failed derivative schemes. (I just read that Ireland will spend $41 billion to bail out its Anglo Irish Bank.) The transfer of billions in private sector liabilities to the vaults of the Fed puts the taxpayer on the hook for whatever decline in values those MBSs might have in the future. Our bonds, meanwhile, safely in the vaults of for-profit banks, are backed by the full faith and assurance of the US government--meaning taxes will be raised if necessary to cover them--and generate interest all the while, which further weakens the fiscal strength of our nation.

All banks, like Lehman, are at the mercy of the Fed, its rules, and cheap money. This may have been the message sent by allowing Lehman to fail: get too greedy, overcapitalize and speculate (on real things) with all the funny money we let you have and your firm might be purged.

The banks, who were quick to claim their irreplaceable value during the crisis, have chosen not to lend but to flow their new dollars back into Treasuries, or spend them to acquire smaller regional banks. The Fed can't be too happy with the lack of lending, but being comprised of the larger banks exclusively, must see TARP and the Fed Reserve spigot as benefitting their member banks, who get to borrow at subsidized rates.

Debt as money theory

We can't have a monetary system that constantly inflates. But at the same time our economy is dependent on new money, which requires new dollars to be lent. And each dollar represents debt, so more growth=more debt. More dollars and those out there are worth less (unless of course there's some deflationary blow-up, or high unemployment to depress--as in Depression--asset values.)

The dollars (or FRNs to be more accurate) out there decrease in value in proportion to how much new money comes in. Bernanke's recent push towards Quantitative Easing attempts to increase consumption by making dollars available to lend.

The money itself isn't the problem. According to the blog The New Arthurian, it's the extension of too much credit that created the conditions necessary for a collapse. This might explain why inflation hasn't struck. There's not too much money, in fact there may be too little to pay existing debt.

The lack of new money entering the real economy explains why we're experiencing such slow growth, what some would claim is a Depression.

I have a theory that the credit crash helped forestall what would have been mammoth price inflation back in 2008. If the bubble of easy money (monetary inflation) hadn't burst, speculation by large financial companies likely would have driven commodity prices even higher. I can't say for sure that the crisis was engineered though it was clearly predictable and predicted.

As we know, lending is the fundamental basis for the pyramid scheme known as the Federal Reserve Note, or FRN for short. FRNs, you see, aren't an asset but a liability. You are working for someone else's debt. When you make money, they pass you an IOU. Rather than come directly from the Treasury our money goes through a central bank middleman. This middleman is a banking cartel, the private, for-profit Federal Reserve. who has an exclusive monopoly over the distribution of our money or our FRNs.

Fortunately, we're not to the point we have a single world currency. No nation would let its money supply be so controlled (although the Euro's survivability attests to the willingness and ability of some nations to work together on this.)

Bretton Woods chartered a unipolar financial order after World War II that has come apart. The Chinese economy, destined to be the world's largest, will control its own money. So the order will be changed, whatever the Anglo-American axis used to think about the supremacy of the dollar and pound.

Following is a cross-post from activistpost.

The dollar won't get rolled in with currencies outside the Western Hemisphere. The Amero is destined to be created with the next big dollar devaluation. (Called crisis or disaster capitalism, this system of cronyism is already in place.)

The Amero will be introduced as a way to stabilize a money-based crisis, such as the resolution of a sovereign debt devaluation.

Evidence of a move to the Amero has been out a while. It would be a Canadian Dollar/US dollar/Peso mix. New debt would be issued in Ameros by all three governments.

Now Canada does have a large natural resource base which could solidify the Amero's standing. Essentially this means it has the power to tax extractive enterprises.

Meanwhile the US has comparatively less to offer due to its balance of trade and huge liabilities. Mexico I presume would offer its people.

I wouldn't say the dollar will be worthless. it'll just be worth less. But this could encourage the move to the Amero--if Americans lose faith in the purchasing power of the dollar.

Another heads up: I don't know if we can predict these events. There's been end times talk for centuries. It's better to prepare. Start now. Have enough water, food, firewood, and silver (maybe 100 ounces.) I'd recommend the 90% Kennedy or Franklin Half-Dollar. Or you could convert some cash into gold: more portable but subject to forfeiture...

Also, you need to know people to barter, an alternate to money. Connections will be key. No Mad Maxs or Elis can survive. Sooner you're prepared, the less you have to worry.

Remember also that crisis won't last forever. There'll be better times, so maintaining morale is vital, like any survival situation.

Signs of crisis:




Me and Money

Investing has been an area of interest for me since graduate school. My family always used to call me "money bags." Not because I won at Monopoly, mind you, although I often did but rather because money's always interested me.

I went to graduate school relatively soon after college: an exercise that taught me the importance of taking responsibility for one's financial future. Had my father not invested in blue chip stocks in the Seventies--at their bottom--I'd never been able to go.

After school, I worked in the financial services industry for several years. This combined my knowledge of investing garnered in school with sales and practical experience with how money works out in the real world.

Any client proposition involving investment, insurance, and money is likely a psychological battle more than one involving reason. I learned people are easily put on the defensive when it comes to their understanding and use of money. Most people clam up and stop listening when you talk about the principles of good financial stewardship. It's as if they been pre-programmed not to grasp the fundamentals but rather chase unrealistic returns like those seen during the dotcom bubble. (The financial industry's fixation on transactions encourages this.) The prospect of a twenty percent return or more sells so much more easily than talk of having a rainy day fund, or sufficient insurance, although long-term success in investing requires the latter.

Thanks to the bull market of the Nineties, I was able to work part-time despite the fact I only earned commissions, and very little at that as my sales skills--I would eventually discover--weren't that great. Thanks to my investments, I was able to devote a good deal of time to learning the art of money management. As a technical-type person, I was always fascinated in the details about investing, particularly mutual funds and the field of asset allocation, which built on my education in economics.

Coupled with a solid self-education in investing, sales experience has been invaluable going forward. It's amazing how much you can learn when you have to teach others about money. Rather than isolate myself to learn as much as I could, sales forced me to be more outgoing, to engage the world rather than shy away from it as was my tendency. As an introvert, I had to talk to people to try and earn a living. While I wasn't able to make a career with sales, I learned what I wasn't good at, which is a big part of learning what you could be good at.

I found I was motivated by my desire to learn. Offering an endless bounty of details, the investing business intrigues me. It's too bad that most everyone who goes into financial sales is first a salesperson and second an investor because I think the investing is much more fun. Now you of course do need some money to invest (others' if not yours), but I learned it doesn't take much to get started.

You do need a firm grasp over your compulsions to buy, which in a commercial-saturated world like ours are hard to override. Blown out of proportion by consumerism, every little want becomes a need and if you give in to the little things, chances are you'll be buying too much of what you don't need. That's where the concept of opportunity cost is so important to understand. If you reward yourself now--either through spending or, worse, borrowing--your denying your future you a reward. If you spend now, you can't spend later. I know these are obvious concepts, but it's so easy to want for yourself now what you'll need in the future.

A major reason to defer gratification is also the return that investments provide. I believe the lack of understanding about how investment returns compound is a major reason why people don't invest enough. Einstein called compound interest the Seventh Wonder of the World. Given time, an income-producing investment will rapidly multiply.

A great many poor people needn't be poor. If they understood how quickly even small investments can grow--even at relatively low rates of interest--they'd have a way out of poverty. Perhaps the process might take some time-not in a few years time, no, nor even in their lifetimes. Yet what are the only options available to the poor other than investing? In this economy, I'm not sure if a solid education--the other way out of poverty--can provide an equally likely chance of building wealth. Plus the costs are simply too high and burden of paying off the student debt too steep.

That said, I'm of course a big fan of education but if you look around you'll see college graduates who aren't really worth what they think they're worth. And a lot of people acquire skills in college that may be available through real world experience on the job. Ask yourself: how much of what you learn in school do you remember? Or worse, how much of what you learned did you apply? Well, we go to school for more than empirical knowledge unless of course you can transition to a technical job after graduation; for that, the graduate has been trained more than educated.

So there's a place for a pure liberal arts education. Yet few employers in the world seem to understand that. Plus, it can take years for a liberal arts graduate to catch up with his more technically trained peer. Yet unlike the student who spend four or more years training, the liberal arts graduate has skills that will make him a better person. This may sound trite but trust me, you don't want to be surrounded by one-dimensional people. It grows tiresome.

So educate yourself. And the process never ends, which is what a well educated person (versus someone trained for industry) knows--you never stop learning. In a wildly gyrating economy, this is a key lesson. Even many of those who've trained for a specific career will find themselves changing fields. So I'd say try and learn for learning's sake, not just because you think that's where the money is. No, not all that you'll learn will be measured in physical capital--money--but rather social capital or goodwill.

Not all of man's achievements can be captured on a balance sheet. Chrisitianity espouses the concept of a divine list of sins and good deeds, which will be read when we die. Developing people skills--which is what the Dupont(TM) ad calls Hu, the human element. (BTW I need to enclose the TM--Trademark symbol because some corporations have begun suing bloggers over the use of alleged copyright violations. The legal firm is called Righthaven. See more on these insidious, politically motivated tactics in the blog DailyPaul.

Protect your right to free speech! Don't let FBI raids intimidate peace activism. They will get away with everything we let them get away with.

As a blogger you are not alone. It's good to know that there are real Americans standing up for their rights.

I received this e-mail from TheDailyPaul on September 30th.:

Righthaven Lawsuit Update

As some of you may know, the Daily Paul (i.e., me) is being sued by the copyright trolling firm Righthaven, which at last count has sued 144 bloggers - many of them small time operators who don't make any profit (and often have very few visitors). 

I found out about this about a month ago from Las Vegas Sun reporter Steve Green.  I have since spoken with 5 different lawyers (the first hour is free :), and have been studying the situation thoroughly. 

I've been advised by all of the lawyers to keep my mouth shut while the lawsuit is under way.  I'm sorry I can't share more about my case, but I deeply appreciate everyone who has offered moral support.  It has been a tremendous learning experience for me, and not an entirely pleasant one!

I was heartened to learn that the Electronic Frontier Foundation is fighting back on behalf of the Democratic Underground in a case that is very similar to mine.  Not only is the EFF defending the DU, they've filed a counter suit to put an end to all of them.  This is a very important case, as it goes to the very heart of defining the legality of the internet, including fair use and First Amendment rights, as we know it.

I have been following Steve Green's reporting on the topic daily at his Las Vegas Sun archive, and if you are interested in this case, I urge you to do the same.  More information can be found at the Righthaven Victims site at:  http://righthavenvictims.blogspot.com/. 

If you are a blogger, or know others who are...

I urge you to check this guide and take steps to avoid being sued!  If you have so much as a few paragraphs of an article from the LVRJ.com on your site (the Democratic Underground is being sued for 4 paragraphs!), you are at risk!  And it doesn't matter if you have only a few visitors, you are still at risk. 
/End excerpt

End of the world?

I've come across a few articles that explain all the signs (links above.) Like ancient times, people these days seem to want to see signs. (As a sidenote, the Bible cautions that people don't demand signs from God, which are deemed disrespectful and evidence of a lack of belief in God's existence.)

Of course I have to mention the Bible. It's the Word of God to some and many here in the U.S. believe what is written within to be written by God Himself.
We couldn't discuss crisis in America without discussing God. Religion plays a continuing role in education and politics.

This is because crisis is a matter of personal choice. Its boundaries are subject to personal interpretation. For thousands of year, this group and that group have foretold of the end of civilization. Some were nut jobs, of course, but many mostly rational people used numerology to determine end dates.

I happen to think sitting around and anticipating the Apocalypse brings it on.

Unlike the discreet nature of faith, the exercise of end times belief involves other people. To be in the end times, all that is needed is for enough people to believe we're in the end times. If enough people believe the end times have arrived, they'll most likely change their behavior--distrust, suspicion, etc.--to the point that the bonds between people begin to break down.

In this respect, the apocalypse represents an abandonment of Christian values, although some might be inclined to be compassionate, in the spirit of an all-giving Christ.

You could say the victims of Nazi death camps who gave away their food were the greatest examples of how to endure suffering. Of course they were the first to die, but I believe it was Victor Frankl who wrote about how important it was for these people to preserve their dignity, and if it required giving away their life-saving rations, so be it.

So self-sacrifice does have a role in how believers behave in the end times. We can't assume everyone--especially those with strong religious beliefs--will simply be whisked away. Nor will those Left Behind resort to evil, although by that interpretation those Left behind will be the unsaved, and thus given over to sin. The Earth then would become the Hell.

Exercising belief in the apocalypse is no simple prayer exercise. Dancing the apocalyptic masquerade doesn't require divine intervention. It accepts the world as it is, and defines our times as meeting the conditions necessary to qualify as the End Times

Some believers may succumb to the concept that their personages might go up to heaven with the end time, is as thought to happen in some interpretations of the Book of Revelation.

Now that book has been open to a variety of interpretations, at least outside those who take the Bible literally cover-to-cover. I know of one researcher who claims that John--who ostensibly wrote Revelation--was talking about events that occurred long ago, during the destruction of Jerusalem. According to that timeframe, the period when Earth has been under the rule of Satan is coming to an end.

I don't claim to have any knowledge of the scripture that can offer insights or interpretations, but I am open to opinions and not all are. Most would rather have popular fiction determine when the Apocalypse has arrived. (I use that word interchangeably with "end times," although the two may not even be the same. Armaggedon is another word, which is actually a physical place in northeastern Israel.

In the most broadly accepted cultural definition, the end times= Armageddon= Apocalypse, though these words may not be confused in their usage. It's easy for our imaginations to run wild when consider the concept linking these terms to an exercise in mass hysteria and fear. Movies and books reinforce the end times mythos. You can run the gambit from Mad Max to "extinction-level events" caused by seismic or celestial forces. Wherever the imagination can go, so too can we imagine this or that bad thing happening. So firm is this notion of an apocalypse seeded that we actually see it as inevitable. This is where the impact of manmade climate change roars its head: it's because we've screwed the Earth up that we're to be punished. Mystics and superstitious witch doctors blame various evil spirits for every predicament we've ever faced.


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  • At 6:17 AM, Blogger The Arthurian said…

    Hi, John -- Thanks for the link!

    We can't have a monetary system that constantly inflates. But at the same time our economy is dependent on new money, which requires new dollars to be lent.

    I find the matter confusing... and confused. Some economists talk about "base" money as the money that causes inflation; but much of base money is in the central bank, not in circulation where it must be if it is to affect prices.

    Some economists talk of M2 money as the cause of inflation; but again, most of that is in savings, not in circulation.

    I like to look at M1 money, which is our spending-money. And at our use of credit. These are the tools by which demand is expressed.

    And then there is the whole argument that since all of our money is based on debt, we had no choice but to fall into the quagmire we are in today. I have no counter-argument to that...

    But I know for a fact that the quantity of M1 money, spending-money, varies relative to the level of credit-in-use. Because I know this, I cannot bring myself to be concerned about the fact that our money is based on debt.

    Credit-in-use, of course, is measured as debt. My debt-per-dollar graph shows that the ratio varies. It also shows that high levels of debt (relative to M1 money) are associated with times of trouble for our economy.

    Perhaps if we better understood the nuances of debt-based money, we could solve these economic problems more easily. In the meanwhile, there can be no doubt that the balance between debt and M1 money is out of whack, nor that this imbalance must be corrected. And there can be no doubt that correcting the imbalance will, temporarily at least, solve the problem conceptualized as debt-based money.


  • At 12:05 PM, Blogger The Arthurian said…


    I said: "...much of base money is in the central bank, not in circulation where it must be if it is to affect prices."

    I have to check that.



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