Is hyperinflation coming?

Some say yes. Shadowstats.com has a March 2011 report titled "Hyperinflation Special Report." It states:

"GAAP-based (generally accepted accounting principles) accounting then showed total federal obligations at $50 trillion—more than four-times the level of U.S. GDP—that were increasing each year by GAAP-based annual deficits in the uncontainable four- to five-trillion dollar range.  Those extreme operating shortfalls continue unabated, with total federal obligations at $76 trillion—more than five-times U.S. GDP—at the end of the 2010 fiscal year.  Taxes cannot be raised enough to bring the GAAP-based deficit into balance, and the political will in Washington is lacking to cut government spending severely, particularly in terms of the necessary slashing of unfunded liabilities in government social programs such as Social Security and Medicare."

Even if our government taxed every penny of wealth of every citizen in the nation, it wouldn't meet this obligation, estimated at $70 trillion. And even if all Americans were willing to go to work for the government without getting paid, to pay off our national debt, we know this would just encourage further spending sprees by those in Congress.

I'd heard that even if the incomes of everyone in the United States making over $100,000 were seized, taxed at 100%, it still wouldn't cover the budget deficit for this year at $1.6 trillion.

Propping up the Ponzi

The vast amount of money owed isn't a problem if the Fed simply buys up the government's debt, using freshly minted (or created into existence digitally) dollars.

The Treasuries that the Federal Reserve buy allows Fedgov to keep on functioning, despite the huge gap between tax receipts and expenditures. The gap is growing as receipts decline, due to massive tax breaks, and expenditures increase due to unfunded wars and "entitlements."

The scheme does break down when interest rates go up, or a sovereign debt downgrade happens. In their debate Tuesday over extending the debt ceiling, some members of Congress actually cited the S&P's reports on the possibility of a reduction in our nation's credit ranking, an event which would overnight make borrowing much more expensive.

If a debtor, even the size of our government, has too much debt then its creditors will react. Most often lenders demand more interest income in exchange for accepting the higher risk level associated with government debt.

If interest rates for government debt go up, other forms of debt issued by the private sector must necessarily go up. The reason for this effect is simple: if the government can print money to pay back its creditors, there's no credit risk at all. In reality, no matter how much debt Fedgov sells, it can simply print up the cash when they mature. On the other hand private corporations and states must actually accumulate the revenue by which they pay back their bondholders.

The relationship between the Fed and the banks creates a negative status quo, allowing the US government to borrow far more than other debtors ever could, given the total amount owed and questionable ability to pay it back, except through printing it. The method that allows the borrowing to continue unabated is when bond proceeds are rolled over, reinvested in the new debt.

Purchasers of US government bonds often use maturing AAA Treasuries and agency debt to buy newly issued AAA government debt. This replenishment function allows the debtor to keep borrowing, and disguising to the creditor his dependency.

The creditor in this situation becomes co-dependent, nurturing the debtor's habit to the point they feel obligated to continue to invest in Treasuries, or else bad things can happen. Of course there's the possibility that a financial entity choosing to cash out could be "Lehman'ed" or denied the privilege of borrowing new money from the Federal Reserve. Keep funding government through purchases of its debt--whatever its attractiveness--and your place at the trough will remain assured.

Another risk inherent in cutting off the debt addict is the possibility that the entire debt could become worthless, a write-off. As it is, the tax receipts drawn through the government offer enough to pay off the interest. US government borrowing in this respect is an interest-only proposition, as the total amount of debt--revalued to net present value--exceeds the ability of the US to repay.

Bad debts considered good

One way to cope that a lender can cope with debts that can't be repaid is to deny it. The best example of this might be from Japan's banks. From the beginning of the so-called Lost Decade, Japanese banks steadfastly refused to write off bad debt they were owed, largely from established clients in with huge investments in soured commercial real estate.

Rather than cut off their clients, the banks opted to preserve relations--a euphemism for looking the other way. It was easier on the bank's strained balance sheets to maintain the presumption that the bad loans weren't bad. If the loans were revalued to their market value, the losses would impact the banks' profit and loss statements and their stock market performance.

In some cases the banks went so far as to actually make new loans to their existing clients no matter what their creditworthiness. Better to preserve the illusion that their biggest clients were the best than to put into question the quantity of debt they'd lent, an issue that would reflect very poorly on the bank.

Relationship banking, with a price

Why is the Japanese example so important? An image-conscious industry, banks in particular are prone to bury their losses and misrepresent the credit quality of their holdings when it helps them. This is especially true for mortgage-backed securities. If the houses can't be sold for anything near their stated value, the banks have to recognize massive losses. Instead, it's easier to hide the scope of mortgage credit quality decline, and far more prudent as home mortgages provide the bulk of a bank's collateral. To qualify for government assistance, banks need to make home loans. The more mortgages a bank has on its books, the more it can borrow, then lend.

Home loans made in the past--many with a lack of caution--need to be preserved on the banks' books or they lose their chief source of collateral that allows them to draw more capital from the Federal Reserve and federal lending programs. Naturally, when the values of the mortgages unwind, so too does the stability of the bank's overall portfolio, as it needs to maintain a certain percentage of its outstanding loans in cash, a task made hard-to-impossible when the banks' main source of capital--mortgages--are constantly losing value.

This fear of marking-to-market may explain why banks are content to keep mortgages locked down rather than offer them for resale at prices far lower than the original mortgage, a process that would require them to recognize their losses. And considering the capital that they draw on from each mortgage may be levered nine or ten times, the amount of outstanding loans are vulnerable to capital requirements. According to the federal lending scheme, once the collateral banks use to borrow--the mortgages they lend--drop in value, vast portions of a bank's lending portfolio must be reevaluated based on the risk once the underlying collateral dissipates.

Banks borrow. Without that ability, they couldn't make money, especially in a declining real estate market like ours today or Japan's in the recent past. So it's the mechanism--a scheme really--that allows banks to borrow using mortgages as collateral that continues to threaten the economy.

Any effort to stimulate spending by loaning more to the banks has actually done nothing to help the economic recovery. Quantitative easing has failed to produce real economic gains; it may however have stymied even worse outcomes than slow growth we're now seeing in the U.S..

One big reason for the failure of so much easing to stimulate the economy is that the stimulus isn't getting into the hands of spenders. Nor is it going in to the purchase of new homes--new home starts have declined, there are fewer buyers as well. Where did the money go? To balance the books of the banks. The need to recapitalize was based on a decline in the real value of their mortgage holdings. With mortgages worth so much less, banks could only absorb the cash to cover tightening loan loss provisions--requirements imposed on banks in times of a deteriorating credit environment.

Back in the roaring mid-00's, Freddie and Fannie had no problem pumping vast sums into the mortgage market through the banks. Housing values were climbing, demand was higher, as evidenced by the number of starts. People were working and able to buy more house (more than they could afford in many cases.)

That all changed when the housing market went bust. To make matters worse, the decline of the financial economy meant the real economy went with it. Housing, you see, isn't just another industry; it's a bell weather of the general economy. Look around you and see how many people worked in housing at the peak of the bubble. Many are currently unemployed--most seem to have left the new home construction business permanently.

Of course the damage to the real economy carried over to the banks, who saw profits on mortgage-backed securities turn sour, and even worse, many of these debt instruments were/are impossible to value and thus illiquid, at least until Bernanke and the Fed agreed to accept them in exchange for AAA Treasuries, in what was a outright transfer of risk from the private sector to the public.

Of course all that crap the banks pawned off on the Federal Reserve is toxic. Just like the commercial real estate debt that the Japanese banks carried, the MBSs were concealed from public view, where the public or bank shareholders might give pause to what they were told about their valuations.

And now the Federal Reserve has to keep buying government debt to manage the completely unsustainable deficit. The mortgage securities they bought at the height of the financial crisis languish deep in some Federal Reserve vault, unable to be sold and thus unable to be valued.

An asset of indeterminate value is worth far less than a low price, meaning that the Fed and everyone concerned would be better off--although not in the short run--to open their books to the world and create a market for all the MBSs where price levels can be determined. Otherwise the motive to obfuscate will continue, and weaken the Federal Reserve's fiscal condition.

Finding religion

One area where help could be bestowed on this process is through the nomination of Harvard professor Elizabeth Warren to a post of power, a move which the Republicans and Wall Street have vigorously resisted. By putting Warren in charge of at least some of the much-needed regulatory reform, a new precedent concerning transparency can be set.

Without creating a means to sell these depreciated securities, the assets on which they're based, the houses themselves, become illiquid. Foreclosures become questionable. Even the banks' own MERS computer system can't identify the paper trail establishing rightful legal ownership of property. Apparently during the boom years, everyone was in too much of a hurry to actually follow proper procedure, as determined as so many issuers of the original mortgages were to sell them off. So vast numbers of mortgages were bundled then sold to anyone who'd buy them.

Now, trying to reestablish who actually owns the properties has become uncertain in many cases. Besides, since the mortgages are bundled and distributed to different buyers, no single security holder can claim exclusive ownership of any single property. Legally trying to foreclose can therefore become a thorny issue.

All the while Fedgov has done all it can to insulate the banks from excessive risk-taking and borrowing during the boom years. Of course, handouts from the Federal Reserve (which found their way into the central bank of Libya no less) just encourage more risky behaviors. Rather than punish those who took too much risk, the consequences are mollified, undoubtedly encouraging more poor decisions by bankers and more systemic risk as all those bankers start swapping derivatives among themselves, thereby allowing new bubbles to be created for short-term profit--precisely the problem that got us into the 2008-9 mess.

How can it not happen again? How can the perfect storm come apart? It's possible to make our dollars stronger if enough of them are destroyed. If housing gets bad enough, and homes lose value, it's possible to shrink the money supply--a phenomena that just happened. Money--or, to be more accurate, bank credits--actually disappear, making the dollars out there worth more, a deflationary happening. Couple the drooping housing prices with broad unemployment and you have a recipe not for inflation but deflation.

The other side

Mike Shedlock, writing in The Market Oracle, makes a compelling case that hyperinflation isn't happening, nor will it any time soon in his article "Hyperinflation Nonsense Continues."

Among his many salient points, Shedlock explains that "Currencies are fungible" thus it doesn't matter what currency countries want to trade in. Dollars are worth in other currencies what they're worth and the dollars don't need to be actually held. With financial transactions occurring simultaneously the only consideration of whether to trade in dollars or not is the cost of exchanging them for local currency.

Hyperinflationists might add that if the US dollar is constantly losing value it doesn't make sense to hold a stash of dollars but rather use the dollar for the purpose of calculating cross-currency transactions only. In this regard, it doesn't matter what the dollar is worth persay, only what it's worth at any given time.

In this respect the dollar isn't so much an international reserve currency as a entry field on a calculator.

Mr. Shedlock goes on to quote monthly CPI using the government's figures--a proposition that got me going to shadowstats, above. The numbers appearing there are quite different than the government's on everything from unemployment to GDP. Shedlock criticizes high inflation expectations, while ignoring the fact that the government can avoid billions by understating CPI, due to the higher yields it'd be forced to pay on its TIPS, not to mention Social Security COLA increases. Evidence of motive to understate inflation isn't the same as understating inflation but it isn't a leap...

The real meat of the issue is whether economic activity slows enough to forestall the massive devaluation of our currency. If housing values collapse far enough, the total measure of money shrinks. We saw this on the upside in the housing market when money supply increased as housing supply increased. Home loans allowed the increase in values to increase the money supply. The same mechanism works in reverse: when housing bottoms, people own less, and they can't borrow. Capital dries up.

Shedlock makes the point that the loss of so much capital will "act as an economic drag for a long time." If for instance people are deeply enough in debt, without jobs, or with mortgages of declining value, neither an increase in available credit nor increased government borrowing/spending will be enough to cause hyperinflation.

Shedlock ascribes hyperinflation to political forces not economic ones. He may be right but I think the Austrian school is correct when it states that Washington, D.C. is increasingly the central focus of our economy. With the federal government hiring so many, increasingly the American people's economic future is tied to the efficacy of government borrowing operations. To finance the unsustainable, Fedgov turns to the Federal Reserve and banks.

Paradoxically, it's the bankers and overseas creditors who might force fiscal discipline on Washington. By forcing Fedgov to pay interest on what it borrow, the value of the dollar might be preserved and hyperinflation downgraded to mere inflation. The IRS taxing scheme was set up to allow the US to pay its debts off. Without taxes, a Lincoln-era greenback might become the money of the land, a currency issued directly by Congress that bears no interest. So the banking constituency provides a constraint on federal spending. The interest rate mechanism of course means the more Fedgov borrows, the more interest its lenders make. Yet without interest, the borrowing could go on ad nauseum, kind of like it does today, with near-zero interest rates propelling the spending spree.

Chances are, until interest rates rise and punish the borrowers, fiscal restraint is impossible. In this respect, financing federal spending through the private Federal Reserve cartel may yet offer some protection to the value of our money. Even so, I'd say that the shock created by spending cuts--"starving the beast"--will bring sufficient social turmoil capable of generating a political force capable of bringing rise to hyperinflation. Once the people realize Medicare and Social Security cuts are coming, they'll look for scapegoats. Above all, politicians will for political reasons avoid the backlash and spend freely, essentially bribing the voter.

Now as even Mr. Shedlock agrees, the economic damage create by political turbulence provides a more likely source of hyperinflation. At that time, it won't matter whether or not hyperinflation has begun. It will only matter if it's too late to salvage the empire's currency, once the empire has no more credit nor the political will to make the sacrifices necessary to stop spending too much. Printing money will simply become the great political expedient.

///

Recent comments at OpEdNews.com are here and here, with the latter being about the Executive branch power grab.

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.
/END COMMENT

LINKS
Signs of crisis:

http://www.alternet.org/economy/148295/20_signs_that_the_economic_collapse_is_already_upon_us/

http://www.opednews.com/Diary/19-Statistics-Indicate-Cor-by-William-Cormier-100929-161.html

www.survivalblog.com

PART II
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.

WARNING TO FELLOW BLOGGERS
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


PART III
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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Goldman indictment chopping at branches

Woke today to the news that Goldman Sachs had been indicted. Needless to say, with all my writing about Goldman Sachs, all of it critical, I'd felt somewhat vindicated. Yet at the time of this writing, I can't be sure whether the indictment will expose wrong-doing at the top rungs at Goldman, kind of like how the prosecution of a few "bad apples" at Abu Ghraib did little to expose "harsh interrogations" authorized at the top of the military's chain of command--namely by Rumsfeld and Dick Cheney.

Currently a single employee--a Goldman Vice President stands under indictment for fraud, misrepresenting a basket of securities he was hawking. This rogue trader kind of stuff reminds me of the $7 billion fraud allegedly perpetrated by Jerome Kerviel at Societe Generale, who'd been arrested in January 2008.

What's so interesting about both cases is how a corporate with a pattern of fraud offers up a scapegoat for massive losses brought on by mismanagement and greed. Far easier it is to blame a single rogue trader than a slew of traders, or the actions of an individual despite the orders and permissions he'd been granted by his superiors. For an idea on how broadly fraud was being perpetrated, I'd recommend Peter Schiff's 2006 address to southern California mortgage brokers and a recent lecture by white collar criminologist and former bank regulator William Black.

In the minds of investors and clients--who are the most likely to react in an adverse way to Goldman's indictment, it's easy to dismiss what are company- and perhaps industry-wide examples of malfeasance by attributing them to a bad apple. The bad apple--in Societe's example, a young computer programmer--could redirect distrust away from the company who'd created the circumstances through which fraud on an unprecedented scale (at least by a single individual) could be committed.

Another benefit to scapegoating is to mollify the size of losses that occurred because of bad decisions by the financial entity. Societe had lost billions on dubious derivatives, not coincidentally the same type of product hawked by the indicted Goldman executive. Derivatives are essentially debt instruments whose present value reflects a large degree of future uncertainty about the credit-worthiness of borrowers and value of the underlying collateral.

Misrepresenting the sale of an orange is one thing. It's a tangible, physical object. Not so with the derivative, a financial project based on little more than the promise to be repaid. So shaky were CDOs (Collateralized Debt Obligations) that
many were sold with insurance attached--the infamous CDSs (Credit Defaults Swaps.)

What's so interesting about the CDS--which Buffett has labelled "insurance fraud"--is the fact they were created to insure the purchaser against the risk of loss. This would be like saying, "Hey, wanna buy some super-risky asset?"
"No," the client might retort. "Well, then what if add--for an additional cost--a clause that will compensate you in the event of loss?"

The client might bite at the possibility of a higher return. This was--after all--the age when hedge funds were making easy millions by borrowing cheap and earning big returns. This Wall Street attitude was part of the culture of greed, a Gordon Gecko-type construct where making more was naturally assumed to be a healthy, constructive attitude. Bush was in charge and the money-grab was on. Ethics were secondary, or irrelevant.

I digress. Back to our story of the day, which is how Goldman Sachs is facing legal charges for its misconduct. I'd said I'd felt vindicated, but I do possess some doubts about the effectiveness of the charges. Purely civil, they don't incur any criminal penalties.

A case could be made that the prosecution of a single employee could relieve pressure on the company for its participation in other forms of wrong-doing, a virtual laundry list assembled on blogs like mine and by investigative journalists like Matt Taibbi.

I hope that investors and clients will wake up to the reality that they've been betrayed by Wall Street in this most recent fraud. More importantly, investors need to understand that they've been intentionally defrauded, as part of a pattern of abuses by investment banks.

It's worth noting these same banks have crossed the threshold into positions of greater control and authority as a result of emergency reforms passed after the Lehman Brothers collapse. In what could be deemed a sweetheart deal, or example of disaster capitalism, Goldman and other investment banks were converted into bank holding companies, which greatly reduced their cost of capital. So excuse me for being somewhat cynical about the government's ability to reign in its close partners on Wall Street through a single indictment.

Now as long as Glass-Steagall remains de-constructed, I'd argue that the same risky behaviors and outright criminal deceptions related to the sale of derivatives will continue. And rather than interrupt the practices that led to the collapse of the credit bubble in 2008, a lack of criminal prosecutions for securities fraud will not only allow the practices to continue but actually foster greater acceptance for illegal conduct based on misrepresentation.

Wall Street, and not just the banks, should be particularly concerned about a loss of trust by the investing public. Any time a pattern of fraud emerges in any industry, it's credibility rightfully diminishes. And as a bursting of the credit bubble showed, it's not the initial losses that cause the most financial damage. Instead, it's the broader sell-off that occurs due to a loss of trust: the foundation of all relationships.

Sensitive to this PR damage, Wall Street responded by hiring the greatest of frontmen--Barack Obama. It funded our President's campaign to the tune of over $200 million and the pay-off has been large, with the first installment on the Obama investment a $308 billion loan to Citigroup (beyond TARP), made as the administration's first action, before even it'd taken office.

Don't blame the President exclusively. Congress has done its part to make sure Wall Street gains from the reaction to the crisis, or at least isn't hurt as badly as it would were the forces of non-intervention allowed to work their invisible hand on the marketplace. Instead we have a lame excuse for socializing the banks' losses--what Nouriel Roubini calls "lemon socialism."

It wasn't so long ago that everyone was acknowledging the importance of broad participation in stock market investing through mutual funds and IRAs in the 1990s. The investing public won, as did the brokerages, by increasing the pool of investment capital. Middle class Americans were investing, and we were all getting ahead.

Now we could say that the bursting of the 2008 credit bubble was different from past crises, but many of the conditions leading to it were easily preventable, predictable and predicted.

The end of the 90's bull market in equities came with the Dot Com Bust in 2000-1. What's far less widely known is that the SEC was in the process of investigating Wall Street for its role in fraudulently talking up Dot Com stocks. The investigations came to an abrupt halt on September 11th, 2001.

Numerous brokerages were being investigated by the SEC in 2001. The evidence ended up being stored in the SEC offices in--you can probably guess this--vaults of WTC 7, the third building at the complex to be destroyed on September 11th. Remember WTC 7 was the building whose collapse had been predicted twenty minutes beforehand, by BBC.

Add to that stupendous timing the fact that WTC 7 wasn't directly hit by any of the aircraft. WTC 7 also housed the operations command for the initial response--the Mayor's Office of Emergency Management. One witness, Barry Jennings, of the NYC Housing Authority actually stated that he'd heard bombs in the building. See his interview on his traumatic near-death experience at 911review.og. {Mr. Jennings was consistent with his testimony in the years after 9-11. He has since died. See the blog http://barryjenningsmystery.blogspot.com/ for more on his story}


Whatever you understanding of what went on 9-11, or your reaction to government reports on 9-11, it appears as if Wall Street has been unregulated and under-investigated for years. In the past two stock market corrections, we see the consequences of inadequate regulatory enforcement. Paradoxically, the financial damage from a loss of public confidence far exceeds the benefits granted to those who bent the rules to chase record profits like those at Goldman Sachs.

As I've written about, the company has so much influence with the White House, that a real investigation--one which expose criminal actions at the highest level--would be undermined or prevented. Therefore like the Valerie Plame investigation, we will see little more than a sacrificial lamb being offered for what are thoroughly illegal and criminal behaviors perpetrated at the highest levels. The result of the limited investigation will instill the attitude among Wall Street players that they are above the law, and therefore go on to commit additional illegal actions under the assumption they will never be held accountable.

For more, see wtc7.net

"Debunking NIST conclusions about WTC7..."
http://georgewashington2.blogspot.com/2008/08/debunking-nists-conclusions-about-wtc-7.html

"9/11 and the Greenberg Familia" by Jerry Mazza
http://onlinejournal.com/artman/publish/article_1261.shtml

"SoGen reels from record $7 bln rogue trade fraud"
http://www.reuters.com/article/idUSL2422020620080124

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