The actions of the Obama Administration are becoming evermore difficult to understand rationally. Halfhearted nationalisations were the bread-and-butter of the outgoing Bush Administration, something we remembered that President Obama promised to change. However, these actions (which are painfully similar to that of the Hoover Administration in the 1930's) have not ceased. If anything, we have the suspicion that the situation has become even more problematic.
An excellent demonstration of this is the situation between the Federal Government, and the deathly duo of General Motors and Chrysler. Although the relationship between the three parties is rather wiggy at best, we consider it a de facto nationalisation. Our evidence is simple: President Obama has ousted General Motors' CEO without consulting the dying company's Board of Directors. If GM isn't a nationalised company, we don't know what it is.
The shake-up of the CEO is, in a way, some muscle-flexing. The Obama Administration is perhaps making sure that the car companies know which side their bread is buttered. In a nutshell, the Government has its car manufacturers in hand, mostly. Like the formation of the National Railroad Passenger Corporation (better known as Amtrak), the formation of a national car company is probably in progress.
The next step toward such a company - let's call it AmeriCar - was taken by the Administration today. All new vehicles sold by Chrysler and GM with warranties will have those same warranties guaranteed by the Treasury Department. From whence the money to pay out these warranties shall come is immaterial; the important point lies elsewhere.
Setting aside the questions of moral hazard (20-year/1,000,000-mile warranty, anyone?), the potential implications of this arrangement are deep. If indeed the U.S. Government is to insure these warranties, it must make secure the supply of the parts necessary to keep crappy American automobiles scraping down the road for the duration of the warranty. The logical conclusion to this is that, the companies which make the parts necessary to fulfil those contracts cannot be allowed to go out of business.
Backing the Warranties may allow the Federal Government to nationalise (sotto voce) parts manufacturers for the American car companies. If it does indeed do this, then the foundation for AmeriCar are firmly set. If Amtrak is any indication, the products of this hypothetical car company will be horrifyingly wasteful and unreliable.
Tuesday, March 31, 2009
Monday, March 30, 2009
Bring Back Bank Branch Laws
In the present popular discourse, a great deal is said about how to clean up the financial mess, but not much about how to prevent a future financial catastrophe. Vague calls of "more regulation" fill the air, but not many concrete proposals can be found.
Our very concrete proposal is to return banking to a fragmented industry where the preponderance of financial assets are held by tens of thousands of institutions instead of a few global behemoths.
In the past, fragmentation was enforced not by heavy-handed regulation, but by a simple principle of law: a bank could have only a few branches, or even in the most restrictive jurisdictions, just one.
For example, from 1870 to 1967 in the State of Illinois, banks were not allowed to have even one branch in addition to its home office. In 1967, banks were allowed to open a separate drive-through building, so long as it was withing 1500 feet of the main office! Gradually the law was liberalised, and by 1993 Illinois banks could open an unlimited number of in-state branches.
In 1994, the US allowed interstate branch banking for the first time, and since then banks have expanded and consolidated across state lines. As a result of this 'reform', there has been an enormous concentration of banking assets in the hands of the nations largest institutions.
Interestingly most of the problem assets currently involved in 'rescue' schemes are held by these largest institutions. In other words, these super-huge banks that have grown up over the past few decades have made terrible investment decisions, blown their capital, and are now giant purse-sucks on the US taxpayer.
The whole housing bubble fiasco and consequent Depression might have been avoided if the Branch Banking Laws had not been 'liberalised'. It is true that a fragmented banking industry is more expensive in theory, but in practice the de-fragmented industry has turned out to be vastly more expensive.
Our very concrete proposal is to return banking to a fragmented industry where the preponderance of financial assets are held by tens of thousands of institutions instead of a few global behemoths.
In the past, fragmentation was enforced not by heavy-handed regulation, but by a simple principle of law: a bank could have only a few branches, or even in the most restrictive jurisdictions, just one.
For example, from 1870 to 1967 in the State of Illinois, banks were not allowed to have even one branch in addition to its home office. In 1967, banks were allowed to open a separate drive-through building, so long as it was withing 1500 feet of the main office! Gradually the law was liberalised, and by 1993 Illinois banks could open an unlimited number of in-state branches.
In 1994, the US allowed interstate branch banking for the first time, and since then banks have expanded and consolidated across state lines. As a result of this 'reform', there has been an enormous concentration of banking assets in the hands of the nations largest institutions.
Interestingly most of the problem assets currently involved in 'rescue' schemes are held by these largest institutions. In other words, these super-huge banks that have grown up over the past few decades have made terrible investment decisions, blown their capital, and are now giant purse-sucks on the US taxpayer.
The whole housing bubble fiasco and consequent Depression might have been avoided if the Branch Banking Laws had not been 'liberalised'. It is true that a fragmented banking industry is more expensive in theory, but in practice the de-fragmented industry has turned out to be vastly more expensive.
Sunday, March 29, 2009
It's Not Just the Bankers Who Destoyed Western Civilisation
Ah, the Bankers, how they have garnered the wrath of the world. Between the growing public anger vented on their villas, and the recommendation that bank employees wear their "civvies," it's not a happy time to be associated with a bank. Especially a bank whose name is recognisable by a large number of people. The violence is growing, and we don't doubt that things will be getting worse for the world's new collective whipping boy.
It's not without some truth: the world's major banks designed, packaged, and sold various schemes which - intentionally or not - was the poison pill for the world's economy. The question is whether or not the pill contained sufficient poison to kill the economy, or merely give it some serious health problems. It seems that the latter is true, as the world economy is in a flaming tailspin, as the numbers seem to suggest.
However, we feel the bankers have gotten more than their fair share of the blame for destroying Western civilisation as it is presently understood. On the Times Online's list of 'ten people who should be most hated,' we see ten faces very deserving of anger. There is, we feel, another clique of individuals who have an equal - or perhaps greater - share in the collapse. They should get their fair share of the anger. These persons are the realtors and developers of the United States.
No, really. The reason we level our finger at these recently unemployed persons is simple. They are the architects of the great suburban build-out in the United States, the mortgages for which is a goodly part of the toxic crap now causing the world's economy to keel over in convulsions. The build-out was strongly popularised at the end of World War II, through such legislation as the G.I. Bill. A house in suburbia became the Holy Grail of the average American, as evidenced by the last sixty years or so of rapid suburban construction.
It was a seemingly endless source of money, and it became enshrined as part and parcel of the so-called American Dream. Great amounts of money have been made selling dreams, and so the developers built suburbia, the realtors sold it, and the bankers financed every step of the process.
From this unwholesome ménage à trois the poison pill was crafted. To and from suburbia flowed the sub-prime mortgages, the credit cards, the automobile loans, and the like. All those forms of debt were sliced and diced into many new and interesting forms; other, even more exotic expressions of High Finance were invented to slice and dice further. Put simply, the bankers are indeed to blame, but they had very willing assistance in their quest for more money.
It's not without some truth: the world's major banks designed, packaged, and sold various schemes which - intentionally or not - was the poison pill for the world's economy. The question is whether or not the pill contained sufficient poison to kill the economy, or merely give it some serious health problems. It seems that the latter is true, as the world economy is in a flaming tailspin, as the numbers seem to suggest.
However, we feel the bankers have gotten more than their fair share of the blame for destroying Western civilisation as it is presently understood. On the Times Online's list of 'ten people who should be most hated,' we see ten faces very deserving of anger. There is, we feel, another clique of individuals who have an equal - or perhaps greater - share in the collapse. They should get their fair share of the anger. These persons are the realtors and developers of the United States.
No, really. The reason we level our finger at these recently unemployed persons is simple. They are the architects of the great suburban build-out in the United States, the mortgages for which is a goodly part of the toxic crap now causing the world's economy to keel over in convulsions. The build-out was strongly popularised at the end of World War II, through such legislation as the G.I. Bill. A house in suburbia became the Holy Grail of the average American, as evidenced by the last sixty years or so of rapid suburban construction.
It was a seemingly endless source of money, and it became enshrined as part and parcel of the so-called American Dream. Great amounts of money have been made selling dreams, and so the developers built suburbia, the realtors sold it, and the bankers financed every step of the process.
From this unwholesome ménage à trois the poison pill was crafted. To and from suburbia flowed the sub-prime mortgages, the credit cards, the automobile loans, and the like. All those forms of debt were sliced and diced into many new and interesting forms; other, even more exotic expressions of High Finance were invented to slice and dice further. Put simply, the bankers are indeed to blame, but they had very willing assistance in their quest for more money.
Saturday, March 28, 2009
An Investing Quandry
The Depression is making investing decisions more difficult for everyone it seems. A friend of substantial means just yesterday said he wants to keep more money "in the mattress." We don't doubt the literalness of his words.
Even we, who have made a career of making decisions, find assessing risks very difficult. In particular, an interesting situation has come up that has us stumped. We have become aware of opportunities to purchase real estate at what seem to be very attractive valuations. But yet we are somewhat paralysed.
We ask ourselves: Is this a value trap? Are the neighbourhoods - though adequate now - doomed to decay? Are cities which are not very prosperous (or with large non-prospering segments of their population) at risk of social disorder?
In happier times, we would have assumed that having done our homework to select the best investment candidates, we could expect fruitful results. We have always done well 'buying the dips'. Under the present circumstances, it seems wiser to err on the side of caution. It grates against our indwelling optimism to resist any bargain, but with 'the world turned upside-down' that conflict is a state we will simply have to adjust to.
Even we, who have made a career of making decisions, find assessing risks very difficult. In particular, an interesting situation has come up that has us stumped. We have become aware of opportunities to purchase real estate at what seem to be very attractive valuations. But yet we are somewhat paralysed.
We ask ourselves: Is this a value trap? Are the neighbourhoods - though adequate now - doomed to decay? Are cities which are not very prosperous (or with large non-prospering segments of their population) at risk of social disorder?
In happier times, we would have assumed that having done our homework to select the best investment candidates, we could expect fruitful results. We have always done well 'buying the dips'. Under the present circumstances, it seems wiser to err on the side of caution. It grates against our indwelling optimism to resist any bargain, but with 'the world turned upside-down' that conflict is a state we will simply have to adjust to.
Friday, March 27, 2009
Back-Door Protectionism
An article from the Globe and Mail caught out eye: Ms. Janet Napolitano, Secretary of the Department of Homeland Security, has stated that the U.S./Canadian border will be treated like "a real border," as she put it. “I've never actually spent much time on the Canadian border,” admits the Secretary, adding that she had commissioned a study to help educate her on the - dare we say lengthy? - subject.
This move by the Secretary is an ominous one; as the Globe and Mail put it, this is a "tariff-in-all-but-name." It is a bad precedent to set, as it is effectively an aggressive, protectionistic stance against the United State's far-better-off northern neighbour. Canada has a sounder banking system, and a sounder economy as a whole. The Secretary, in isolating the United States from the valuable asset that is Canada, is doing a very terrible disservice to her employer: the Citizens of the United States.
At the same time, though, we are not surprised by this new policy from the Obama Administration. If the Administration is indeed serious about creating jobs for Americans - any jobs will do - at all costs, then the relative soundness and functionality of Canada no longer seems like an asset for an ailing nation. Instead, Canada begins to look more like a threat. As the 2007 Depression continues, we would not be surprised if more anti-Canada policies, like this border-tightening, continue to appear.
In closing, we wish to repeat what the Globe and Mail observed at the end of the article:
This move by the Secretary is an ominous one; as the Globe and Mail put it, this is a "tariff-in-all-but-name." It is a bad precedent to set, as it is effectively an aggressive, protectionistic stance against the United State's far-better-off northern neighbour. Canada has a sounder banking system, and a sounder economy as a whole. The Secretary, in isolating the United States from the valuable asset that is Canada, is doing a very terrible disservice to her employer: the Citizens of the United States.
At the same time, though, we are not surprised by this new policy from the Obama Administration. If the Administration is indeed serious about creating jobs for Americans - any jobs will do - at all costs, then the relative soundness and functionality of Canada no longer seems like an asset for an ailing nation. Instead, Canada begins to look more like a threat. As the 2007 Depression continues, we would not be surprised if more anti-Canada policies, like this border-tightening, continue to appear.
In closing, we wish to repeat what the Globe and Mail observed at the end of the article:
"It seemed to be another lesson learned: when it comes to national security, the Obama administration's policies are often consonant with its Republican predecessor."
Thursday, March 26, 2009
U.S. Leadership: Innocent or Guilty?
In his weekly editorial on Monday, James Kunstler laid out his belief that President Obama is a man able to provide the leadership necessary to lead the United States to what he sees as the future of the country: de-industrialised regional agriculture. His view is that, although the President may or many not have an understanding of the situation, Mr. Obama will rise to the occasion when needed. To quote:
No, we fear that Mr. Kunstler is hopeful, and not in a good way. He accepted the rhetoric of President Obama at face value, and is perhaps unwilling to address the lack of corrolation between Mr. Obama's words and the actions of the Administration. We feel the President is not the great bringer of change... but, we could be wrong. For instance, we though Geithner's new plan would crash the markets, but lo! it went up! So much for our omnipotence...
But seriously, the same questions we ask about the Administration are beginning to appear in more mainstream sources. Here is an article from, of all sources, the Rolling Stone - Mr. Kunstler's former employer - and from the pen of Mr. Matt Taibbi:
"I think, he is going along, for the moment, with a consensus of wishes to prop up life as we know it at all costs.... I also think that circumstances will force Mr. Obama's hand before long -- specifically that a moment will arrive when he goes on TV and tells the American public that things have changed way beyond the scope of what they even imagined when they pulled the levers last fall and voted for an uncharted future."Perhaps Mr. Kunstler is right, but we think not. The actions of the Obama Administration do not seem to be the actions of a "team" working towards legitimate, rational solutions to the present economic catastrophe. For example, Treasury Secretary Geithner's latest brainchild is eeriely familiar; we think he might have just ripped off some notes that former Secretary Hank Paulson left in the desk drawers.
No, we fear that Mr. Kunstler is hopeful, and not in a good way. He accepted the rhetoric of President Obama at face value, and is perhaps unwilling to address the lack of corrolation between Mr. Obama's words and the actions of the Administration. We feel the President is not the great bringer of change... but, we could be wrong. For instance, we though Geithner's new plan would crash the markets, but lo! it went up! So much for our omnipotence...
But seriously, the same questions we ask about the Administration are beginning to appear in more mainstream sources. Here is an article from, of all sources, the Rolling Stone - Mr. Kunstler's former employer - and from the pen of Mr. Matt Taibbi:
"The real question from here is whether the Obama administration is going to move to bring the financial system back to a place where sanity is restored and the general public can have a say in things[,] or whether the new financial bureaucracy will remain obscure, secretive and hopelessly complex."We know which side we believe; it only remains to see if the Administration can put its actions in line with its rhetoric. Frankly, we don't think it ever will.
Wednesday, March 25, 2009
Getting Off the Road to Ruin
The Metropolitan Life Insurance Company recently released a study of the effect of the current economy on American's finances. The study came up with some disturbing facts, such as that that about three-quarters of the population has three months or less of savings to draw on in the event of unemployment.
The most interesting thing we found in the study was the conclusion that Americans are shifting away from Consumerism toward a more balanced view of what will make them happy. We see this as a tremendously positive development. Among other benefits will be an increased savings rate and the potential to have both households and the economy as a whole on a more secure footing.
Over fifty years ago in The Affluent Society, J.K. Galbraith predicted that if the Great American Marketing Machine was unable to manufacture ever more consumer wants to keep household debt expanding, a depression would ensue. We suspect that his prediction may have finally come true.
The most interesting thing we found in the study was the conclusion that Americans are shifting away from Consumerism toward a more balanced view of what will make them happy. We see this as a tremendously positive development. Among other benefits will be an increased savings rate and the potential to have both households and the economy as a whole on a more secure footing.
Over fifty years ago in The Affluent Society, J.K. Galbraith predicted that if the Great American Marketing Machine was unable to manufacture ever more consumer wants to keep household debt expanding, a depression would ensue. We suspect that his prediction may have finally come true.
Monday, March 23, 2009
Unemployment versus Contraction
We were reviewing the statistics at Shadowstats - a service that reports relatively honest economic data for the USA - and noticed a 19% unemployment rate (ouch!) and a 4% rate of GDP contraction (bad, but not that bad). Two points immediately leapt up: one, there is a fairly wide divergence; and two, this is divergence in an opposite direction from the Great Depression.
The divergence points to the chronic unemployment and underemployment that exists in the US. Even at the peak of the economy in 2000, approximately 12% of the workforce was redundant. If GDP is to contract in this Depression as much as in the Great Depression (50%), and unless there is to be 60% or more unemployment, more currently employed workers are going to have to take reduced hours or rates of pay.
The nation is faced with a highly problematic scenario. At some point in the not-too-distant future, the Federal Government will have exhausted its borrowing power to maintain welfare payments and its own operations. We have discussed in prior posts how both welfare payments and government salaries will have to be cut. We expect these to be cut through price inflation.
Many private sector organisations will be facing the task of whether to cast redundant workers into a fraying social safety net, or 'sharing the pain' by cutting hours accross the workforce. Self-employed persons will be facing involuntary 'part-time' status. Price inflation will also deliver pay cuts to the private sector.
The course the nation takes to adjust the population to lower economic output will have a decisive impact on how orderly the adjustment is. The more desperately 'turf' is defended and groups attempt to clutch onto their income, the greater the polarisation of income and the potential for social disruption. If there is a consensus to 'share the pain' - even if through inelegant methods such as inflation and higher taxes on the remaining productive elements - there is less potential for acute stife. Unfortunately, the more coercively the pain-sharing is achieved, the more long-term harm is done to the economy: inflation distorts investment decisions, and taxation inhibits productivity.
Clearly, the nation is still sufficiently affluent to handle some economic abuse - but there is a limit to how much. We are not optimistic that there is any collective will to institute a sounder basis for economic development. Alert individuals, on the other hand, will find even in a less benign environment adequate possibilities of prosperity.
The divergence points to the chronic unemployment and underemployment that exists in the US. Even at the peak of the economy in 2000, approximately 12% of the workforce was redundant. If GDP is to contract in this Depression as much as in the Great Depression (50%), and unless there is to be 60% or more unemployment, more currently employed workers are going to have to take reduced hours or rates of pay.
The nation is faced with a highly problematic scenario. At some point in the not-too-distant future, the Federal Government will have exhausted its borrowing power to maintain welfare payments and its own operations. We have discussed in prior posts how both welfare payments and government salaries will have to be cut. We expect these to be cut through price inflation.
Many private sector organisations will be facing the task of whether to cast redundant workers into a fraying social safety net, or 'sharing the pain' by cutting hours accross the workforce. Self-employed persons will be facing involuntary 'part-time' status. Price inflation will also deliver pay cuts to the private sector.
The course the nation takes to adjust the population to lower economic output will have a decisive impact on how orderly the adjustment is. The more desperately 'turf' is defended and groups attempt to clutch onto their income, the greater the polarisation of income and the potential for social disruption. If there is a consensus to 'share the pain' - even if through inelegant methods such as inflation and higher taxes on the remaining productive elements - there is less potential for acute stife. Unfortunately, the more coercively the pain-sharing is achieved, the more long-term harm is done to the economy: inflation distorts investment decisions, and taxation inhibits productivity.
Clearly, the nation is still sufficiently affluent to handle some economic abuse - but there is a limit to how much. We are not optimistic that there is any collective will to institute a sounder basis for economic development. Alert individuals, on the other hand, will find even in a less benign environment adequate possibilities of prosperity.
Sunday, March 22, 2009
The Government is Flailing
It looks like an increasing possibility that Mr. Timothy Geithner, U.S. Treasury Secretary, may be the first major sacrifice on the Obama Administration's altar of Grand, Empty Gestures. The more President Obama has to say he fully supports Secretary Geithner, and that a resignation of the latter would not be accepted by the former, the more we wonder what is really going on. To put it simply, me thinks he protests too much.
Admittedly, Secretary Geithner's track record has not been stellar. The last time he announced a "sweeping regulatory change," the stock market promptly went into a nose-dive. The destructive qualities of what the Secretary is planning now is breathtaking: who knows what sort of vague, wishy-washy claptrap he might release? Who knows how badly the stock market may crash this time?
"Fix the markets!" the rabble cries. "Stop the corporate bonuses!"
We don't quite understand why, with all this free money bandied about, anyone is getting upset over such a little thing like bonuses. The amount of money concerned is pitifully small, compared to the trillions which the Government and the Federal Reserve is pouring out.
Still, the Government is putting on such a show over corporate bonuses. The U.S. House of Representatives has approved a 90% tax on that sort of thing, applying to "high-income employees by companies getting big government bailouts." The furor over the AIG bonuses is frothing royally, even as it becomes clear that the Treasury approved these bonuses. The solemn ritual of lip-service to oversight, Government thrift, and responsible bailout-ing continues...
It seems clear to us that both the pointless furor over bonuses, and the ongoing loss of confidence in the Treasury Secretary, is part of a larger problem in the U.S. Government: a complete, utter lack of planning and foresight. It's painfully obvious that the Obama Administration is simply throwing money around in bailout after bailout, on a completely ad hoc basis. For instance, the $9.7 trillion pledged to bailouts (and the like) would have paid off 90% of all mortgages in the United States.
But alas, such a simple, child-like solution is apparently beyond the Government's collective mental capacity. Instead, Uncle Sam stands out on the street-corners like a prostitute, hawking his wares to hedge fund managers and bank CEOs. "Hey, you! Yeah, you. You need money? Here, take as much as you want," he shrieks...
Admittedly, Secretary Geithner's track record has not been stellar. The last time he announced a "sweeping regulatory change," the stock market promptly went into a nose-dive. The destructive qualities of what the Secretary is planning now is breathtaking: who knows what sort of vague, wishy-washy claptrap he might release? Who knows how badly the stock market may crash this time?
"Fix the markets!" the rabble cries. "Stop the corporate bonuses!"
We don't quite understand why, with all this free money bandied about, anyone is getting upset over such a little thing like bonuses. The amount of money concerned is pitifully small, compared to the trillions which the Government and the Federal Reserve is pouring out.
Still, the Government is putting on such a show over corporate bonuses. The U.S. House of Representatives has approved a 90% tax on that sort of thing, applying to "high-income employees by companies getting big government bailouts." The furor over the AIG bonuses is frothing royally, even as it becomes clear that the Treasury approved these bonuses. The solemn ritual of lip-service to oversight, Government thrift, and responsible bailout-ing continues...
It seems clear to us that both the pointless furor over bonuses, and the ongoing loss of confidence in the Treasury Secretary, is part of a larger problem in the U.S. Government: a complete, utter lack of planning and foresight. It's painfully obvious that the Obama Administration is simply throwing money around in bailout after bailout, on a completely ad hoc basis. For instance, the $9.7 trillion pledged to bailouts (and the like) would have paid off 90% of all mortgages in the United States.
But alas, such a simple, child-like solution is apparently beyond the Government's collective mental capacity. Instead, Uncle Sam stands out on the street-corners like a prostitute, hawking his wares to hedge fund managers and bank CEOs. "Hey, you! Yeah, you. You need money? Here, take as much as you want," he shrieks...
Saturday, March 21, 2009
Your Single Best Investment
The notion that housing is an investment certainly has a lot of egg on its face these days. But behind every bubble, is a grain of truth. The truth behind the housing bubble is that affordable, paid-for, owner-occupied housing in reasonable repair is an excellent investment for many reasons.
What was lost sight of in the recent bubble was the affordable part, and the paid-for part. The system's idea of making housing affordable was to wildly dole out loans no matter how large, and uncovered by income.
The simplest rule-of-thumb for defining what is affordable is the house value should be no more than twice the household income. This is a figure that doesn't get much air time. More typical multipliers are higher. They are propogated by bankers (who want people to borrow money) and real estate agents (who want higher commissions).
People often buy houses to live in at an affordable multiple, but then hang on when market-based appreciation takes the multiple higher. This seems innocent enough, but is actually a mistake. The primary reason is the cost of property taxes which, in most places, is proportional to market value. The cost of both insurance and repairs typically rise to some extent with market value as well.
If you live in an area where you can't find a decent house in a decent neighbourhood for twice your income (or less), move to an area where such houses abound or accept that you will be a renter. It is as simple as that. Don't compromise the quality of the house or the neighbourhood to find a house to buy in an expensive area.
The paid-for part is very important. It is not an easy thing for renters to save up two years of income to buy a house. Mortgages are indeed a great convenience when used wisely; but absolute poison if abused. Once taken out, the mortgage should be paid as quickly as possible. The indebted owner should consider a severe austerity until the mortgage is extinguished - perhaps applying as much as half the household income towards it. This will pay off a mortgage on an affordable house in just a few years.
And now to the reasonable-repair part. There are two ways of turning your house into a money-pit. One is buying a house with excessive deferred maintenance, such as the "fixer-upper" that should have been torn down or the house that "just needs a new roof." A professional inspection before purchase may save a world of hurt after the purchase. Never buy serious problems, unless you are a skilled construction worker, or the price is low enough that you can perform the repairs within the overall purchase budget.
The second way to turn your house into a money pit is to over-maintain it. Your house is not a piece of precision military machinery, so it does not need to always be in tip-top shape. A little shabby is not a bad condition for a house to be in. Let the municipality tell you when you need to re-side.
The chief advantage of owning the house you live in is that you have avoided paying for two significant costs: the bank and landlord's profit on renting to you; and the taxes on the money you would need to earn to cover said profit. As an investment, the owner-occupied house has the benefit of a guaranteed customer and a return more certain than every other investment.
The affordable, paid-for, owner-occupied house in reasonable repair is a great benefit to households, and ultimately to society as a whole. This latter benefit is perhaps at the core of the good intention behind the out-of-control promotion of 'home ownership' at all costs - the paver that led the world to a bit of economic Hell.
What was lost sight of in the recent bubble was the affordable part, and the paid-for part. The system's idea of making housing affordable was to wildly dole out loans no matter how large, and uncovered by income.
The simplest rule-of-thumb for defining what is affordable is the house value should be no more than twice the household income. This is a figure that doesn't get much air time. More typical multipliers are higher. They are propogated by bankers (who want people to borrow money) and real estate agents (who want higher commissions).
People often buy houses to live in at an affordable multiple, but then hang on when market-based appreciation takes the multiple higher. This seems innocent enough, but is actually a mistake. The primary reason is the cost of property taxes which, in most places, is proportional to market value. The cost of both insurance and repairs typically rise to some extent with market value as well.
If you live in an area where you can't find a decent house in a decent neighbourhood for twice your income (or less), move to an area where such houses abound or accept that you will be a renter. It is as simple as that. Don't compromise the quality of the house or the neighbourhood to find a house to buy in an expensive area.
The paid-for part is very important. It is not an easy thing for renters to save up two years of income to buy a house. Mortgages are indeed a great convenience when used wisely; but absolute poison if abused. Once taken out, the mortgage should be paid as quickly as possible. The indebted owner should consider a severe austerity until the mortgage is extinguished - perhaps applying as much as half the household income towards it. This will pay off a mortgage on an affordable house in just a few years.
And now to the reasonable-repair part. There are two ways of turning your house into a money-pit. One is buying a house with excessive deferred maintenance, such as the "fixer-upper" that should have been torn down or the house that "just needs a new roof." A professional inspection before purchase may save a world of hurt after the purchase. Never buy serious problems, unless you are a skilled construction worker, or the price is low enough that you can perform the repairs within the overall purchase budget.
The second way to turn your house into a money pit is to over-maintain it. Your house is not a piece of precision military machinery, so it does not need to always be in tip-top shape. A little shabby is not a bad condition for a house to be in. Let the municipality tell you when you need to re-side.
The chief advantage of owning the house you live in is that you have avoided paying for two significant costs: the bank and landlord's profit on renting to you; and the taxes on the money you would need to earn to cover said profit. As an investment, the owner-occupied house has the benefit of a guaranteed customer and a return more certain than every other investment.
The affordable, paid-for, owner-occupied house in reasonable repair is a great benefit to households, and ultimately to society as a whole. This latter benefit is perhaps at the core of the good intention behind the out-of-control promotion of 'home ownership' at all costs - the paver that led the world to a bit of economic Hell.
Friday, March 20, 2009
Debtoholics
This article from Maclean's shows the sorry state of a typical middle-class family with poor money management skills whose ambitions for affluence exceeded their income-producing capacity. Stories such as this one are becoming ubiquitous as ever more households suffering from job loss and overindebtedness careen toward bankruptcy.
At least one organisation - Debtors Anonymous - looks at using debt for spending as a seductive but destructive process. We wonder how much of the current economic woes result from people having a serious borrowing problem.
It was, after all, the sub-prime mortgage fiasco that set this whole Depression thing rolling. People become bad credit risks (sub-prime) because they don't manage their money well. Often that results from compulsive borrowing and spending.
We suspect that the damage to the borrowing class as a result of the Depression will be so dreadful that everyone now living will be very cautious about borrowing any money ever again. This development would be horrifying to the financers of consumerism and their minions (a.k.a. the Government and the Media), so we expect a tremendous push to coax the populace into perpetuating their spendthrift ways. The recent hatchet piece by Newsweek is a good example.
We hope that the people will not be so unintelligent. Happily, savings rates are rising, and household debt is falling. Unfortunately, there is a good chance that a false spring of recovery will get the masses borrowing again. But that will be the last hurrah for the debtoholics.
At least one organisation - Debtors Anonymous - looks at using debt for spending as a seductive but destructive process. We wonder how much of the current economic woes result from people having a serious borrowing problem.
It was, after all, the sub-prime mortgage fiasco that set this whole Depression thing rolling. People become bad credit risks (sub-prime) because they don't manage their money well. Often that results from compulsive borrowing and spending.
We suspect that the damage to the borrowing class as a result of the Depression will be so dreadful that everyone now living will be very cautious about borrowing any money ever again. This development would be horrifying to the financers of consumerism and their minions (a.k.a. the Government and the Media), so we expect a tremendous push to coax the populace into perpetuating their spendthrift ways. The recent hatchet piece by Newsweek is a good example.
We hope that the people will not be so unintelligent. Happily, savings rates are rising, and household debt is falling. Unfortunately, there is a good chance that a false spring of recovery will get the masses borrowing again. But that will be the last hurrah for the debtoholics.
Thursday, March 19, 2009
The Federal Reserve as Superhero?
The United States has a very long tradition of superhero worship. The ongoing popularity of superhero movies, such as The Watchmen and Hancock seems to justify what we see. There is, perhaps, nothing that the average American audience likes more than a plain schmoe who's a superhero and a regular guy at the same time.
In the past, we've seem to remember that the Federal Reserve was a plain and relatively straightforward organisation. Even under the much-maligned Sir Alan Greenspan, the Fed was pretty vanilla. No off-balance-sheet loan programs, no toxic mortgage debt... in a word, no mystery whatsoever.
Then Mr. Ben Bernanke came along, and then the crash in October 2008 occurred, and suddenly the Federal Reserve is looking even spookier than Goldman Sachs. Now, far from being a stoic, conservative organ of finance, the Fed has turned itself into a front-line warrior, running around like a berserker of old with monetary axes in each hand. Yet, it still lays claim on being a classic, responsible central bank.
Take, for instance, the recent news that the Fed will buy $300 billion of U.S. long-term bonds, as well as $750 billion of mortgage-backed securities. This, added to about $1.25 trillion of toxic assets with unknown -- probably zero -- value, around $1 trillion of government agency debt, and $2 trillion's worth of mystery, creates a balance sheet that would make a hedge-fund manager blanche.
Perhaps the cultural idiom of hero worship has gone to Mr. Ben Bernanke's head. Maybe he sees himself as the mighty superhero Helicopter Ben, successfully fighting off the minions of the evil genius, Deflation Man. We don't know for certain, since we've never met the man, but he strikes us as just an academic schmoe with delusions of grandeur. Whatever the case, though, Mr. Bernanke is putting what's left of financial stability in the United States at risk with his heroics.
In the past, we've seem to remember that the Federal Reserve was a plain and relatively straightforward organisation. Even under the much-maligned Sir Alan Greenspan, the Fed was pretty vanilla. No off-balance-sheet loan programs, no toxic mortgage debt... in a word, no mystery whatsoever.
Then Mr. Ben Bernanke came along, and then the crash in October 2008 occurred, and suddenly the Federal Reserve is looking even spookier than Goldman Sachs. Now, far from being a stoic, conservative organ of finance, the Fed has turned itself into a front-line warrior, running around like a berserker of old with monetary axes in each hand. Yet, it still lays claim on being a classic, responsible central bank.
Take, for instance, the recent news that the Fed will buy $300 billion of U.S. long-term bonds, as well as $750 billion of mortgage-backed securities. This, added to about $1.25 trillion of toxic assets with unknown -- probably zero -- value, around $1 trillion of government agency debt, and $2 trillion's worth of mystery, creates a balance sheet that would make a hedge-fund manager blanche.
Perhaps the cultural idiom of hero worship has gone to Mr. Ben Bernanke's head. Maybe he sees himself as the mighty superhero Helicopter Ben, successfully fighting off the minions of the evil genius, Deflation Man. We don't know for certain, since we've never met the man, but he strikes us as just an academic schmoe with delusions of grandeur. Whatever the case, though, Mr. Bernanke is putting what's left of financial stability in the United States at risk with his heroics.
Wednesday, March 18, 2009
Confidence and Legitimacy
Mr. Summers, the former U.S. Treasury Secretary and now advisor to the President, claims "what we need today is more optimism and more confidence." Unfortunately for this agenda, a crisis of legitimacy for the political and economic system is taking place, which dampens the citizenry's optimism and confidence.
The USA is looking more and more like a kleptocracy these days. The government sends trillions of the people's money directly into the hands of banks. Most Americans are neither major shareholders nor executives of banks, so this largesse is of little use to them. However, it is a great deal of use to said major shareholders and executives.
Meanwhile the masses whose money has been appropriated by the government are not doing so well financially. Banks are not helping the economy recover - in fact they are doing the opposite by raising interest rates on loans, cutting existing lines of credit, and making new loans harder to get.
The American household is under seige on many fronts, and the collusion of the governement and the banks seems a tad hostile. Perhaps the citizenry is docile and obedient, and will take the abuse without complaint. But in any case, they are not going to feel particularly 'optimistic or confident'.
The era of deluding the wage-slaves and debt-slaves into believing they have access to 'the American Dream' is over. The masses will either carry on like whipped dogs (our opinion) or rebel (Mr. Gerald Celente's opinion), but the optimism and confidence that ensnared them and ultimately enslaved them has flown forever and cannot be recovered by exhortations of the Administration.
The USA is looking more and more like a kleptocracy these days. The government sends trillions of the people's money directly into the hands of banks. Most Americans are neither major shareholders nor executives of banks, so this largesse is of little use to them. However, it is a great deal of use to said major shareholders and executives.
Meanwhile the masses whose money has been appropriated by the government are not doing so well financially. Banks are not helping the economy recover - in fact they are doing the opposite by raising interest rates on loans, cutting existing lines of credit, and making new loans harder to get.
The American household is under seige on many fronts, and the collusion of the governement and the banks seems a tad hostile. Perhaps the citizenry is docile and obedient, and will take the abuse without complaint. But in any case, they are not going to feel particularly 'optimistic or confident'.
The era of deluding the wage-slaves and debt-slaves into believing they have access to 'the American Dream' is over. The masses will either carry on like whipped dogs (our opinion) or rebel (Mr. Gerald Celente's opinion), but the optimism and confidence that ensnared them and ultimately enslaved them has flown forever and cannot be recovered by exhortations of the Administration.
Tuesday, March 17, 2009
Savings are Good
Newsweek had a blather-filled piece which got our attention the other day. The very idea that savers should not be saving, because the economy needs rescuing, is very confusing to us. If the economy is tanking, as we believe it is, is it not prudent to save as much as possible? Why should savers sacrifice their financial well-being on the altar of preserving appearances?
This is part of a disturbing trend which we've been watching develop: the propensity of the mainstream to blame savers for the economic woes of the world. 'Savers are ruining everything!' the press seems to whine, apparently forgetting that savers – as the backbone for the credit industry – have every right to stop investing, if their money isn't being well-treated.
It has been stated by others, but we will add our voice: one cannot become rich by overspending one's income. If one wishes to live comfortably in one's 'golden' years, for example, one must prudently prepare for such an eventuality. Savings, in their many forms (from certificates of deposits to gold bars), are the vehicle for this... or for starting a new business, or taking on an apartment building, et cetera, et cetera.
If memory serves, John D. Rockefeller once stated that, if one wished to be rich, one must save half of one's income. He, as the world's first billionaire – and those were silver dollars back then – is a high authority on such matters. He did not say to spend 150% of one's income; rather, he was living proof that the prudent savings of one's income was a road to financial success. So rich was he, that his descendants still live upon the vast wealth he accumulated.
So... who should one listen to: a writer for Newsweek, or the first billionaire? We know who we'd choose. Mr. Rockefeller may have been a bit... off... but he prospered in good times and bad.
This is part of a disturbing trend which we've been watching develop: the propensity of the mainstream to blame savers for the economic woes of the world. 'Savers are ruining everything!' the press seems to whine, apparently forgetting that savers – as the backbone for the credit industry – have every right to stop investing, if their money isn't being well-treated.
It has been stated by others, but we will add our voice: one cannot become rich by overspending one's income. If one wishes to live comfortably in one's 'golden' years, for example, one must prudently prepare for such an eventuality. Savings, in their many forms (from certificates of deposits to gold bars), are the vehicle for this... or for starting a new business, or taking on an apartment building, et cetera, et cetera.
If memory serves, John D. Rockefeller once stated that, if one wished to be rich, one must save half of one's income. He, as the world's first billionaire – and those were silver dollars back then – is a high authority on such matters. He did not say to spend 150% of one's income; rather, he was living proof that the prudent savings of one's income was a road to financial success. So rich was he, that his descendants still live upon the vast wealth he accumulated.
So... who should one listen to: a writer for Newsweek, or the first billionaire? We know who we'd choose. Mr. Rockefeller may have been a bit... off... but he prospered in good times and bad.
Monday, March 16, 2009
Peak Automobiles
CNN reports "Autos on U.S. roads set to fall." This is an unprecedented event. The automobile has been a defining aspect of American life. For most Americans, their first car is a right-of-passage. Likewise, most Americans consider their car indespensible.
The article suggests that the decline is mostly the abandonment of excess cars - moving from three cars in the drive to two. But it also hints at a decline of demand due to increasing unemployment.
Nowhere does the article suggest, as we do, that a permanent decline in incomes will produce a permanent decline in the need for autos. We don't think that view will ever make the mainstream. In the future, decline in auto use will mostly be reported as an increasing preference for urban life - or not at all.
In light of this development, bailing out U.S. automakers seems especially deranged. The industry already had excess capacity during the bubble years. Now it is even more questionable just how much manufacturing capability is needed. Certainly the U.S. Government is in no position to make this decision. Supposedly, that is what markets are for.
Oh wait, there is no market economy any more. If a big corporation with armies of lobbyists is losing money, the market can be swept aside, and Uncle Sam will pull out his teat.
Destroying economic value by perpetuating chronically loss-making operations was probably the main thing that did in the Soviet Union. Evidently nobody in Washington was paying attention at the time. Those who do not learn from history are condemned to repeat it.
The article suggests that the decline is mostly the abandonment of excess cars - moving from three cars in the drive to two. But it also hints at a decline of demand due to increasing unemployment.
Nowhere does the article suggest, as we do, that a permanent decline in incomes will produce a permanent decline in the need for autos. We don't think that view will ever make the mainstream. In the future, decline in auto use will mostly be reported as an increasing preference for urban life - or not at all.
In light of this development, bailing out U.S. automakers seems especially deranged. The industry already had excess capacity during the bubble years. Now it is even more questionable just how much manufacturing capability is needed. Certainly the U.S. Government is in no position to make this decision. Supposedly, that is what markets are for.
Oh wait, there is no market economy any more. If a big corporation with armies of lobbyists is losing money, the market can be swept aside, and Uncle Sam will pull out his teat.
Destroying economic value by perpetuating chronically loss-making operations was probably the main thing that did in the Soviet Union. Evidently nobody in Washington was paying attention at the time. Those who do not learn from history are condemned to repeat it.
Saturday, March 14, 2009
Bubbles and the American Frontier Mentality
In our experience, people seem to intuitively know when they are partaking of some great swindle or scam. An expression of this is a bumper sticker comes we seem to remember: "Please God, just one more bubble before I die," is how it goes in our memory. Also, the investors who gave Bernard Madoff all their life's savings often 'knew' that he was running a scam -- they assumed that he was operating on insider trading. Unfortunately for their belief in their own cunning, Mr. Madoff was running a swindle.
These are two isolated and recent -- in the case of the sticker, rather ephemeral -- examples, but the mentality is not far removed when semantics are considers. When things are moving up in a speculative orgy, the preferred nomenclature is a 'boom,' rather than a bubble. The movement only becomes a bubble after the fact, when it has burst and wiped out entire fortunes. After the burst, when the present-tense-boom becomes a past-tense-bubble, there is one question that is often asked: where is the next boom?
The United States, at its birth, was a tiny nation facing massive amounts of land of unknown qualities to the West. It was an experience wholly unlike anything that had been seen in Europe in recorded history. No one living at the time had ever enjoyed the experience of facing the sunset and thinking about the impossibly vast territory that lay beyond the borders of the Colonies.
It didn't take long for the nascent United States to figure out that great riches lay in the easily conquerable land. The infamous push westwards began, and with it a mythos was born: no matter what one's situation might be, one could always go somewhere else -- at the time, westward -- to begin anew. Fortunes could be made and lost, but there was always the knowledge that something else lay waiting on the frontier.
The focus on the West faded in time, but the sense remained that something was always out there. There was suburbia to develop, after all. Even if, say, the dot-com companies weren't the bubble -- sorry, 'boom' -- they once were, there was always housing in California. Now that the housing (ahem) 'boom' is over, the hoped-for next 'boom' is in green energy. And after that is revealed to be a bubble, it is assumed there will be another boom... and so on, and so forth.
Such a reliance on riding the bubble cycle is both illusory, and destructive. The illusion is that there 'will always be another boom;' the destruction is that such waves of exaggerated boom-and-bust is horrendously wasteful of natural resources. If Peak Just-About-Everything is past, or even nigh, the resources will no longer be abundantly available to perpetuate this frontier mentality. Attempting to continue this fetish with bubbles in the future will become more and more destructive of dwindling resources of all sorts. The peak of each bubble will never quite get as high, and the trough will be ever more miserable.
These are two isolated and recent -- in the case of the sticker, rather ephemeral -- examples, but the mentality is not far removed when semantics are considers. When things are moving up in a speculative orgy, the preferred nomenclature is a 'boom,' rather than a bubble. The movement only becomes a bubble after the fact, when it has burst and wiped out entire fortunes. After the burst, when the present-tense-boom becomes a past-tense-bubble, there is one question that is often asked: where is the next boom?
The United States, at its birth, was a tiny nation facing massive amounts of land of unknown qualities to the West. It was an experience wholly unlike anything that had been seen in Europe in recorded history. No one living at the time had ever enjoyed the experience of facing the sunset and thinking about the impossibly vast territory that lay beyond the borders of the Colonies.
It didn't take long for the nascent United States to figure out that great riches lay in the easily conquerable land. The infamous push westwards began, and with it a mythos was born: no matter what one's situation might be, one could always go somewhere else -- at the time, westward -- to begin anew. Fortunes could be made and lost, but there was always the knowledge that something else lay waiting on the frontier.
The focus on the West faded in time, but the sense remained that something was always out there. There was suburbia to develop, after all. Even if, say, the dot-com companies weren't the bubble -- sorry, 'boom' -- they once were, there was always housing in California. Now that the housing (ahem) 'boom' is over, the hoped-for next 'boom' is in green energy. And after that is revealed to be a bubble, it is assumed there will be another boom... and so on, and so forth.
Such a reliance on riding the bubble cycle is both illusory, and destructive. The illusion is that there 'will always be another boom;' the destruction is that such waves of exaggerated boom-and-bust is horrendously wasteful of natural resources. If Peak Just-About-Everything is past, or even nigh, the resources will no longer be abundantly available to perpetuate this frontier mentality. Attempting to continue this fetish with bubbles in the future will become more and more destructive of dwindling resources of all sorts. The peak of each bubble will never quite get as high, and the trough will be ever more miserable.
Friday, March 13, 2009
Growth in Household Debt: Paused or Ended?
In the United States, the last 60 years have been marked by the continuous expansion of household debt: mortgages, car loans, student loans, credit cards, and so forth. In the fourth quarter of last year, this party came to an end. In spite of Federal Government and Federal Reserve efforts to expand lending, more loans were paid off than taken on.
We believe this is not the result of the masses coming to their senses, but a constriction imposed by wounded banks and finance companies. If the current economic troubles were merely a 'recession', when banks were inclined to lend again, as they must sooner or later if they wished to stay in business, the populace would borrow willingly. We wish it were otherwise, but the consumer culture is very deeply embedded in the American psyche.
If this Depression turns out to be as truly nasty as we expect it might, substantial banking capital will be lost - and in spite of all the bailouts, it will be many, many years before banks and finance companies are in any position to expand lending. In this environment, as it was in the Great Depression, a culture of thrift and debt-aversion will arise out of survivor bias.
We recently asked an elderly friend how her parents coped with the Great Depression, and what they brought out of it. The answer was simple: they were very frugal; and they paid for everything with cash. These habits remained with them for the rest of their lives.
So, to answer the title's question: If the economy is in a recession, paused; if in a depression, ended.
We believe this is not the result of the masses coming to their senses, but a constriction imposed by wounded banks and finance companies. If the current economic troubles were merely a 'recession', when banks were inclined to lend again, as they must sooner or later if they wished to stay in business, the populace would borrow willingly. We wish it were otherwise, but the consumer culture is very deeply embedded in the American psyche.
If this Depression turns out to be as truly nasty as we expect it might, substantial banking capital will be lost - and in spite of all the bailouts, it will be many, many years before banks and finance companies are in any position to expand lending. In this environment, as it was in the Great Depression, a culture of thrift and debt-aversion will arise out of survivor bias.
We recently asked an elderly friend how her parents coped with the Great Depression, and what they brought out of it. The answer was simple: they were very frugal; and they paid for everything with cash. These habits remained with them for the rest of their lives.
So, to answer the title's question: If the economy is in a recession, paused; if in a depression, ended.
Thursday, March 12, 2009
The True Victim of the Depression
We read an article from the International Herald Tribune which we found laughably uninsightful. Mr. Stephen Schwarzman, CEO of Blackstone Group, remarks that the world has lost about 40% to 45% of its wealth. Our cynical side wonders if he is covertly commenting on his personal portfolio, but we assume he is being honest in his estimation of the drop of the world's 'wealth.'
Even if Mr. Schwarzman's number is accepted as reasonably accurate -- which we do -- his comment is purely nonsensical: the 'wealth' he refers to was never real. It was perceptual wealth; it existed only because at least two people at the peak of valuation said it did: the credulous buyer, and the less-credulous seller. This fast-evaporating 'wealth' was patently illusory, as it had all the substance and reality of a mirage.
Beyond this basic falsehood of Mr. Schwarzman's comment lies the big, black truth that no one likes to think about. Depressions are not necessarily about destroying wealth; rather, they destroy excess. Excess demand, excess consumption, excess space, excess production, excess capacity, excess valuation, excess credit. These are the things upon which a depression feasts; nothing so trite and pedestrian as perceptual wealth. The most destructive feat of a depression, though, is how effectively it can eliminate productive capacity of an economy.
Within this destruction, though, is a major problem. All depressions of the past have occurred when energy was not a limiting factor. The populace did not wonder where the energy to renew the economy was going to come from. It was tacitly assumed, and rightly so, the energy necessary to rebuild economic activity was abundant.
We opine such a comfortable assurance is not present in the 2007 Depression. Demand destruction in world-wide oil consumption is a given, and some have mentioned that it is an end to the Peak Oil debate. We beg to differ: this destruction has guaranteed Peak Oil is upon the world (whether from the limits of Nature or the limits of Humanity is immaterial). The oil industry -- from whence the lifeblood of industrial civilisation flows -- is in danger of irreparable harm, as Simmons & Company International reports.
With the severe downturn in oil use, many oil wells, rigs and refineries are being spooled down... permanently. Most of this equipment is utterly antique, and can never be restarted at any cost; it is too rusty and too run-down, and needs to be replaced. On top of that, vast swaths of the industry's ageing workforce are retiring, and there are not enough new workers adequately trained to replace this loss of hard-earned talent.
At some point in the not-too-near future, the hard and unyielding ceiling of oil production capacity will become painfully apparent. By Simmons & Co.'s estimation, it will take upwards of $100 trillion to rebuild the world's energy production facilities, and make them a viable entity for the future. We have the suspicion that the money, the interest, and the labour will never be found. Too many people seem to believe that the oil industry is a profit-squeezing monster - instead of the abused and starving industry in danger of utter collapse it is.
Even if Mr. Schwarzman's number is accepted as reasonably accurate -- which we do -- his comment is purely nonsensical: the 'wealth' he refers to was never real. It was perceptual wealth; it existed only because at least two people at the peak of valuation said it did: the credulous buyer, and the less-credulous seller. This fast-evaporating 'wealth' was patently illusory, as it had all the substance and reality of a mirage.
Beyond this basic falsehood of Mr. Schwarzman's comment lies the big, black truth that no one likes to think about. Depressions are not necessarily about destroying wealth; rather, they destroy excess. Excess demand, excess consumption, excess space, excess production, excess capacity, excess valuation, excess credit. These are the things upon which a depression feasts; nothing so trite and pedestrian as perceptual wealth. The most destructive feat of a depression, though, is how effectively it can eliminate productive capacity of an economy.
Within this destruction, though, is a major problem. All depressions of the past have occurred when energy was not a limiting factor. The populace did not wonder where the energy to renew the economy was going to come from. It was tacitly assumed, and rightly so, the energy necessary to rebuild economic activity was abundant.
We opine such a comfortable assurance is not present in the 2007 Depression. Demand destruction in world-wide oil consumption is a given, and some have mentioned that it is an end to the Peak Oil debate. We beg to differ: this destruction has guaranteed Peak Oil is upon the world (whether from the limits of Nature or the limits of Humanity is immaterial). The oil industry -- from whence the lifeblood of industrial civilisation flows -- is in danger of irreparable harm, as Simmons & Company International reports.
With the severe downturn in oil use, many oil wells, rigs and refineries are being spooled down... permanently. Most of this equipment is utterly antique, and can never be restarted at any cost; it is too rusty and too run-down, and needs to be replaced. On top of that, vast swaths of the industry's ageing workforce are retiring, and there are not enough new workers adequately trained to replace this loss of hard-earned talent.
At some point in the not-too-near future, the hard and unyielding ceiling of oil production capacity will become painfully apparent. By Simmons & Co.'s estimation, it will take upwards of $100 trillion to rebuild the world's energy production facilities, and make them a viable entity for the future. We have the suspicion that the money, the interest, and the labour will never be found. Too many people seem to believe that the oil industry is a profit-squeezing monster - instead of the abused and starving industry in danger of utter collapse it is.
Tuesday, March 10, 2009
Let the Economy Change
Words like 'decline' and 'collapse' are being tossed around with reference to the economy as if the economy were a static entity. Actually, of course, economies are very dynamic - with a continual stream of emerging and declining enterprises and industries. When the economy in the aggregate is growing, the emerging are growing faster than the declining are shrinking. When the declining are shrinking faster than the emerging are growing, the economy in the aggregate is shrinking, as is the case today.
Once upon a time there was a theory that if the declining enterprises were liquidated quickly, it would offer room for the emerging enterprises to grow. Imagine if you will, a forest fire burning out the dead wood.
Nowadays, the declining enterprises are given bailouts, and the forest fire of Depression isn't allowed to burn out the dead wood. If our analogy is accurate, this makes for bad forest management of the sort that led to the great Yellowstone Fire of 1988.
If current government efforts to stymie the Depression are successful, they will only put off a future, greater depression. The economy must change sooner or later to accommodate reality.
We do not know where economic developments will take society, but we opine that the rate of change is too slow. Bad operations like General Motors and AIG must be put down to allow the economy to readjust to the new realities. and the sooner the better.
Once upon a time there was a theory that if the declining enterprises were liquidated quickly, it would offer room for the emerging enterprises to grow. Imagine if you will, a forest fire burning out the dead wood.
Nowadays, the declining enterprises are given bailouts, and the forest fire of Depression isn't allowed to burn out the dead wood. If our analogy is accurate, this makes for bad forest management of the sort that led to the great Yellowstone Fire of 1988.
If current government efforts to stymie the Depression are successful, they will only put off a future, greater depression. The economy must change sooner or later to accommodate reality.
We do not know where economic developments will take society, but we opine that the rate of change is too slow. Bad operations like General Motors and AIG must be put down to allow the economy to readjust to the new realities. and the sooner the better.
Monday, March 9, 2009
The Coming Energy Bubble
In the present period, it seems that many bubbles have been pricked, and are contracting. It brings to mind some beautiful high-speed filming we've seen recently on YouTube: a person holds a balloon filled with water, and then pricks it with a pin. The rubber almost instantly contracts, leaving the person holding a shimmering sphere of water for the briefest of moments. Then, inexorably, the water descends, leaving the person very wet...
The bubbles in various markets have indeed burst, but the 'water' has still not yet lost its bubble-like shape. However, we are uncomfortable saying that the era of bubbles is completely over. Indeed, we have the suspicion there are a few more, even bigger bubbles out there, awaiting the funds of the tragically credulous.
In our opinion, one big bubble of the future will be energy. There is less and less of it in the world every day... although this is nothing new. We feel that, sometime in the near future, the average person will become aware of this increasing scarcity -- Peak Oil, Peak Natural Gas, and Peak Coal. This will mark a vast change in the perception of the common person toward energy: no longer will energy be a vague thing that 'might' become scarce in a century or so; rather, it will be perceived as a very real thing indeed.
Inexorably, the credulous will invest in their perceptions, and so will the market value of energy and the companies which produce it go up. Perhaps it will be a proportioned rise in value, as compared to scarcity... but we doubt it. No, we expect a bubble to rival, and exceed, that of the California real estate bubble, the U.S. dollar bubble, and whatever other bubbles one would care to mention.
The reason people will likely throw so much money into energy is simple: human civilisation subsists on energy. It's a good 'story,' and the credulous like to invest in a good story; one only needs to look at the internet bubble -- remember that one? -- of a decade ago. Don't get us wrong: we strongly believe that energy requires some serious investment. However, we expect that the sheer volume of return-chasing one will see will be far out of proportion to the need.
The bubbles in various markets have indeed burst, but the 'water' has still not yet lost its bubble-like shape. However, we are uncomfortable saying that the era of bubbles is completely over. Indeed, we have the suspicion there are a few more, even bigger bubbles out there, awaiting the funds of the tragically credulous.
In our opinion, one big bubble of the future will be energy. There is less and less of it in the world every day... although this is nothing new. We feel that, sometime in the near future, the average person will become aware of this increasing scarcity -- Peak Oil, Peak Natural Gas, and Peak Coal. This will mark a vast change in the perception of the common person toward energy: no longer will energy be a vague thing that 'might' become scarce in a century or so; rather, it will be perceived as a very real thing indeed.
Inexorably, the credulous will invest in their perceptions, and so will the market value of energy and the companies which produce it go up. Perhaps it will be a proportioned rise in value, as compared to scarcity... but we doubt it. No, we expect a bubble to rival, and exceed, that of the California real estate bubble, the U.S. dollar bubble, and whatever other bubbles one would care to mention.
The reason people will likely throw so much money into energy is simple: human civilisation subsists on energy. It's a good 'story,' and the credulous like to invest in a good story; one only needs to look at the internet bubble -- remember that one? -- of a decade ago. Don't get us wrong: we strongly believe that energy requires some serious investment. However, we expect that the sheer volume of return-chasing one will see will be far out of proportion to the need.
Sunday, March 8, 2009
The Ragged Future
What does a Depression look like and sound like? Obviously there are the abandoned houses, factories, offices, and stores. But even the occupied buildings are starting to look rougher, and the cars on the road are both looking rougher, and sounding squeakier. Yesterday we saw a first for us: a car with foam insulation blown into holes that rust had made.
We happen to live in a part of the world with a long Winter. A lot of maintenance is deferred over the Winter, and in the Spring things look pretty awful. A Depression is an economic Winter, and a whole lot of maintenance is not going on at present.
As the Depression grinds on for years, things will look pretty ragged. There will be few new cars on the road, and most cars will be rusty and dented. The roads themselves will become ever more potholed, and have grass growing out of cracks in the pavement. Abandoned cars will litter the highways, and twisted guard rails will go unrepaired. There will be more detours due to unsafe bridges, and washed-out culverts.
Occupied houses will go unpainted, with windows cracked or boarded-up, and roofs rotting. Their tenant's clothes will get more frayed, and their hair dishevelled. As government assistance programs become more meagre, people will also become quite lean, and their teeth will show more signs of neglect.
Just as growing old gracefully means accepting one's ageing appearance and avoiding the hair dye and plastic surgery, so growing poorer gracefully will mean choosing one's battles carefully in the fight against pervasive decay. It is best to give up on the idea of having more than a few new things. What you own can be patched, cleaned, and tidied to maintain mere shabbiness instead of decrepitude.
Shabby things can be appreciated as well their new counterparts, perhaps even better - was there a time in your childhood when you had a ratty old blanket that you loved? Newness of things destroys history. Society is entering an era where it will be living with a history which leaves its scratches and stains all around. This heightened experience of time will likely help burn deeper memories in these, the defining years of those now living.
We happen to live in a part of the world with a long Winter. A lot of maintenance is deferred over the Winter, and in the Spring things look pretty awful. A Depression is an economic Winter, and a whole lot of maintenance is not going on at present.
As the Depression grinds on for years, things will look pretty ragged. There will be few new cars on the road, and most cars will be rusty and dented. The roads themselves will become ever more potholed, and have grass growing out of cracks in the pavement. Abandoned cars will litter the highways, and twisted guard rails will go unrepaired. There will be more detours due to unsafe bridges, and washed-out culverts.
Occupied houses will go unpainted, with windows cracked or boarded-up, and roofs rotting. Their tenant's clothes will get more frayed, and their hair dishevelled. As government assistance programs become more meagre, people will also become quite lean, and their teeth will show more signs of neglect.
Just as growing old gracefully means accepting one's ageing appearance and avoiding the hair dye and plastic surgery, so growing poorer gracefully will mean choosing one's battles carefully in the fight against pervasive decay. It is best to give up on the idea of having more than a few new things. What you own can be patched, cleaned, and tidied to maintain mere shabbiness instead of decrepitude.
Shabby things can be appreciated as well their new counterparts, perhaps even better - was there a time in your childhood when you had a ratty old blanket that you loved? Newness of things destroys history. Society is entering an era where it will be living with a history which leaves its scratches and stains all around. This heightened experience of time will likely help burn deeper memories in these, the defining years of those now living.
Saturday, March 7, 2009
Another Face of Predatory Finance
In a previous post, we wrote about synthetic CDOs, the multi-trillion-dollar ticking time-bomb of financial doom. Those SCDOs are still out there in the financial aether, waiting for the right set of companies to go bankrupt, so that they may transfer an unknown, but vast, amount of money to major American banks.
This is predatory finance at its finest: create an 'asset' which has no basis in realty, hoodwink investors into believing the monster is a bond, set up a holding company in the Cayman Islands with a used office chair for collateral... and then wait. Sooner or later, the companies which trigger the SCDOs (General Motors, American Insurance Group, Fannie Mae, el al) will implode, and gift to the sponsoring banks a huge bag of money.
There's another tool of predatory capitalism we've just found: negative-basis trade. Bloomberg has a good article about the subject, but we'll summarise. A bond-holder of a failing company -- say, Ford -- can purchase a credit default swap for their bonds, to insure against Ford going bankrupt. If Ford did indeed go bankrupt, the bond-holder would be reimbursed the full face value of their bonds, rather than what the market says the bond is worth.
With Ford dying of carbon monoxide poisoning as we type, it's looking more attractive to these negative-basis trading bond-holders to simply force Ford into bankruptcy. That way, the bonds will pay out their full face value, rather than the understandibly depressed value seen in the bond market.
Negative-basis trading is, above all, a tool of financial assassination: it allows holders of significant amounts of bonds to obstruct a company's reorganisation and force the company into bankruptcy. Investors who make their money in this manner have every interest in forcing as many companies -- no matter what the potential for recovery -- into bankruptcy. This is horrifically destructive to the economy: first and foremost, it is cannibalism; secondly, it is seriously damaging the economy's capacity to form investment capital for productive ventures.
On top of it all, this is the Golden Bullet for any and all banks waiting for their SCDOs to activate. With negative-basis trading, a bank can efficiently and legally 'kill' any and all companies which need to fail in order to trigger the $50+ trillion in SCDOs. It's akin to taking out jumbo life insurance policies on one's neighbours... and then killing them.
This is predatory finance at its finest: create an 'asset' which has no basis in realty, hoodwink investors into believing the monster is a bond, set up a holding company in the Cayman Islands with a used office chair for collateral... and then wait. Sooner or later, the companies which trigger the SCDOs (General Motors, American Insurance Group, Fannie Mae, el al) will implode, and gift to the sponsoring banks a huge bag of money.
There's another tool of predatory capitalism we've just found: negative-basis trade. Bloomberg has a good article about the subject, but we'll summarise. A bond-holder of a failing company -- say, Ford -- can purchase a credit default swap for their bonds, to insure against Ford going bankrupt. If Ford did indeed go bankrupt, the bond-holder would be reimbursed the full face value of their bonds, rather than what the market says the bond is worth.
With Ford dying of carbon monoxide poisoning as we type, it's looking more attractive to these negative-basis trading bond-holders to simply force Ford into bankruptcy. That way, the bonds will pay out their full face value, rather than the understandibly depressed value seen in the bond market.
Negative-basis trading is, above all, a tool of financial assassination: it allows holders of significant amounts of bonds to obstruct a company's reorganisation and force the company into bankruptcy. Investors who make their money in this manner have every interest in forcing as many companies -- no matter what the potential for recovery -- into bankruptcy. This is horrifically destructive to the economy: first and foremost, it is cannibalism; secondly, it is seriously damaging the economy's capacity to form investment capital for productive ventures.
On top of it all, this is the Golden Bullet for any and all banks waiting for their SCDOs to activate. With negative-basis trading, a bank can efficiently and legally 'kill' any and all companies which need to fail in order to trigger the $50+ trillion in SCDOs. It's akin to taking out jumbo life insurance policies on one's neighbours... and then killing them.
Friday, March 6, 2009
A Brief Lesson in Debt
Hyman Minsky (1919-1996) was a rather obscure economist who came up with an excellent theory of debt which seems especially appropriate to current events. In brief, he divided borrowers into three categories: the hedge borrower, who can make loan payments easily out of income and extinguish the principal; the speculative borrower who can make interest payments more or less easily out of income, but cannot repay the principal except by rolling over the debt; and finally the Ponzi borrower whose income does not cover even the interest on debts, and therefore needs an ever expanding supply of credit to service loan payments.
A clear example of the hedge borrower is the homeowner who takes on a traditional fixed mortgage, the payments of which are a fairly small part of his or her income. An example of the speculative borrower is the house buyer who takes out the interest-only mortgage hoping to sell the house at a profit. The ponzi mortgage borrower takes out the reverse amortisation mortgage, hoping the house will appreciate fast enough that he or she can refinance at a higher amount.
In the housing bubble bust of the last two years or so, most of the borrowers in the Ponzi category have already lost their houses. Most of the borrowers in the speculative category are 'underwater', and many have 'walked away'. An increasing number of mortgages in the hedge category are going delinquent due to falling incomes and rising unemployment. It is not pretty, and the situation will probably get worse. We expect, on the other side of this Depression, that hardly anyone will ever want to buy a house with a mortgage again.
Of course Minsky's model applies not only to mortgage borrowers, but to the banks that lend to them. Banks are completely dependent on continuously rolling over their entire debt structure. This is why they are the first to feel the strain of a credit crisis.
As things are currently unfolding, central banks and governments are stepping up to fund banks who need their debts rolled over. Banks are not as generous to their borrowers, and are mostly calling in risky loans, and mostly not expanding safe loans. This is hurting a great many businesses who rely on speculative finance, and will cause a great many to go under. We suspect a lot of individual borrowers who are getting their credit cards cancelled will also be forced into bankruptcy.
If the Depression continues to unfold along these lines, most speculative finance units (as Minsky would call them) will be euthanised. Exceptions will be made for banks, insurance companies, and public utilities. The consequences will be very dramatic: tens of millions of failed businesses and hundreds of millions, if not billions of downwardly mobile citizens.
We doubt this this process can be arrested until it is spent. If you are a borrower and you cannot pay your debts out of your income (and these days incomes are not so reliable), you will need to liquidate assets or default. The end result is that you will become poorer. So-called 'rescue plans' will be of little help. If you are able to service your debts - congratulations! - you will be fortunate enough to experience the down-not-so-much that is the new up.
A clear example of the hedge borrower is the homeowner who takes on a traditional fixed mortgage, the payments of which are a fairly small part of his or her income. An example of the speculative borrower is the house buyer who takes out the interest-only mortgage hoping to sell the house at a profit. The ponzi mortgage borrower takes out the reverse amortisation mortgage, hoping the house will appreciate fast enough that he or she can refinance at a higher amount.
In the housing bubble bust of the last two years or so, most of the borrowers in the Ponzi category have already lost their houses. Most of the borrowers in the speculative category are 'underwater', and many have 'walked away'. An increasing number of mortgages in the hedge category are going delinquent due to falling incomes and rising unemployment. It is not pretty, and the situation will probably get worse. We expect, on the other side of this Depression, that hardly anyone will ever want to buy a house with a mortgage again.
Of course Minsky's model applies not only to mortgage borrowers, but to the banks that lend to them. Banks are completely dependent on continuously rolling over their entire debt structure. This is why they are the first to feel the strain of a credit crisis.
As things are currently unfolding, central banks and governments are stepping up to fund banks who need their debts rolled over. Banks are not as generous to their borrowers, and are mostly calling in risky loans, and mostly not expanding safe loans. This is hurting a great many businesses who rely on speculative finance, and will cause a great many to go under. We suspect a lot of individual borrowers who are getting their credit cards cancelled will also be forced into bankruptcy.
If the Depression continues to unfold along these lines, most speculative finance units (as Minsky would call them) will be euthanised. Exceptions will be made for banks, insurance companies, and public utilities. The consequences will be very dramatic: tens of millions of failed businesses and hundreds of millions, if not billions of downwardly mobile citizens.
We doubt this this process can be arrested until it is spent. If you are a borrower and you cannot pay your debts out of your income (and these days incomes are not so reliable), you will need to liquidate assets or default. The end result is that you will become poorer. So-called 'rescue plans' will be of little help. If you are able to service your debts - congratulations! - you will be fortunate enough to experience the down-not-so-much that is the new up.
Thursday, March 5, 2009
Better Chicago than Detroit
It's happening, dear Reader: we're seeing more and more posts in the blogosphere which sound more and more like us. It seems that a --presumably -- growing number of people are coming around to something like our point of view. "What are the odds of a depression?" whines a piece from the Wall Street Journal; "How government prolonged the Depression" reports another WSJ article.
We feel nervous about all that; in order to be remotely accurate, we believe we should be saying the exact opposite as the rest of mainstream society. With all the hubbub about depressions and such, we wonder if we should be changing our tune... but we'll get back to that.
One thing we haven't seen the mainstream talking much about is the decay of the major cities of the United States. These cities were once America's leading centres of population and culture... now they tend to be more husk-like than anything. This is a significant trend in the United States, which we feel accurately reflects the decay in the quality of living conditions in this country. It's probably not changing anytime soon.
President Obama promised the Citizenry change, and change, of a sort, he will probably bring. But let us point out what he will probably do: he will do what he can to support the Chicago-isation of the United States. Let us be frank, here: Chicago is a town run for the comfort and convenience of the government workers; Mayor Richard Daley rules with an iron fist; every welfare recipient is a voter (who votes the 'right' way).
But -- and we have to grit our teeth here -- it's not that bad. We've visited Chicago, and we could live there, if we had to... and we probably wouldn't even become terribly suicidal. The way we look at it, things could be more like Detroit: no comforts and conveniences, no iron fist, no 'right way' voters. Add to that: no future. Chicago, for all its faults, is at least limping along as a city, and is a place a person could live. Detroit is a catastrophe, a city where people can't seem to leave fast enough.
To tie everything together, we still think the 2007 Depression has a long way to run. We don't expect to see a bottom anytime soon, but we are getting a pretty good idea of what it might look like: the United States will be run Chicago-style, and the Wall Street Journal will have the headline: "Will this Depression ever end?"
We feel nervous about all that; in order to be remotely accurate, we believe we should be saying the exact opposite as the rest of mainstream society. With all the hubbub about depressions and such, we wonder if we should be changing our tune... but we'll get back to that.
One thing we haven't seen the mainstream talking much about is the decay of the major cities of the United States. These cities were once America's leading centres of population and culture... now they tend to be more husk-like than anything. This is a significant trend in the United States, which we feel accurately reflects the decay in the quality of living conditions in this country. It's probably not changing anytime soon.
President Obama promised the Citizenry change, and change, of a sort, he will probably bring. But let us point out what he will probably do: he will do what he can to support the Chicago-isation of the United States. Let us be frank, here: Chicago is a town run for the comfort and convenience of the government workers; Mayor Richard Daley rules with an iron fist; every welfare recipient is a voter (who votes the 'right' way).
But -- and we have to grit our teeth here -- it's not that bad. We've visited Chicago, and we could live there, if we had to... and we probably wouldn't even become terribly suicidal. The way we look at it, things could be more like Detroit: no comforts and conveniences, no iron fist, no 'right way' voters. Add to that: no future. Chicago, for all its faults, is at least limping along as a city, and is a place a person could live. Detroit is a catastrophe, a city where people can't seem to leave fast enough.
To tie everything together, we still think the 2007 Depression has a long way to run. We don't expect to see a bottom anytime soon, but we are getting a pretty good idea of what it might look like: the United States will be run Chicago-style, and the Wall Street Journal will have the headline: "Will this Depression ever end?"
Wednesday, March 4, 2009
Extreme Capitalism
Enterprises go out of business mostly for one of two reasons: they don't make a profit; or they don't make enough of a profit. By enough, we mean not enough to attract investment capital. If an enterprise cannot attract investment capital, it more or less gradually goes out of business.
In this era of information technology, savvy investors, fine tune their portfolios at light speed to achieve the maximum return. They want big, fat returns and they don't care if they are buying or selling, or what sort of real-world undertakings are going on underneath their trading.
A lot of financial engineering (a.k.a. leveraging) that went on during the recent boom years, was an effort to sex-up rather prosaic businesses to make them more attractive investments to the hot money. Most of those efforts failed rather spectacularly and the hot money has moved on. Where to, we wonder? Wherever it is, money will be made, and capital will fall into stronger hands than the lumpeninvestor.
We suggest that if you are an investor, you take care that your investing strategy is as careful, rational, and sophisticated as you can manage. Just flinging your money into "housing" or "the stock market" isn't going to cut it any more. It was a great ride while it lasted, but it's time to move on.
In this era of information technology, savvy investors, fine tune their portfolios at light speed to achieve the maximum return. They want big, fat returns and they don't care if they are buying or selling, or what sort of real-world undertakings are going on underneath their trading.
A lot of financial engineering (a.k.a. leveraging) that went on during the recent boom years, was an effort to sex-up rather prosaic businesses to make them more attractive investments to the hot money. Most of those efforts failed rather spectacularly and the hot money has moved on. Where to, we wonder? Wherever it is, money will be made, and capital will fall into stronger hands than the lumpeninvestor.
We suggest that if you are an investor, you take care that your investing strategy is as careful, rational, and sophisticated as you can manage. Just flinging your money into "housing" or "the stock market" isn't going to cut it any more. It was a great ride while it lasted, but it's time to move on.
Tuesday, March 3, 2009
Diversification
We had a conversation with a friend the other day, about how to diversify one's portfolio properly. Despite how we may sound on occasion, we don't believe that having all one's wealth in anything -- even precious metals -- is a good thing. We're bullish, but we're not that bullish; when we start hearing 'sure things,' we get nervous... and we don't want to sound like the pushers for Bernard Madoff. The Uncle Bernie Affair is a good example of, shall we say, over-bullishness.
However, there is more to diversification than simply investing in multiple sectors of an economy. The likelihood of any one scammer, like Mr. Madoff, making off with one's life savings is decreased if one keeps any one investment to an acceptable percentage of one's total assets. We remember the stories of the people who gave everything to Mr. Madoff, only to lose everything... and we can't really feel sympathy for them. Greed got the better of them, and lo, the price of such greed was revealed.
We are often worried that, despite our best efforts, our investments may be in the loving arms of someone similar to Mr. Madoff. In the era of Peak Scam, one cannot be too careful. So, we are looking at more than just diversification within one economy: we are looking at multinational diversification, albeit on a small scale.
Why, you ask? Well, having all one's money is U.S. Dollars, or euros, or pound sterling, or Japanese yen, is effectively the same as giving all one's money to Uncle Bernie. It's betting the farm on that particular nation's ability to hold together and defend its national currency and economy. We are not at all confident enough in any one nation to have all our assets valued in its currency... and subject to its political caprices.
It's a question of scale, to be sure; one needn't have a ranch in Argentina, a fishery in Iceland, and a factory in Russia. However, we feel it is a prudent idea to at least have some assets outside of one's nation of legal residence. International diversification will be increasingly important in the years ahead, and, as we mentioned, it can be done on a small scale, even for the average individual.
However, there is more to diversification than simply investing in multiple sectors of an economy. The likelihood of any one scammer, like Mr. Madoff, making off with one's life savings is decreased if one keeps any one investment to an acceptable percentage of one's total assets. We remember the stories of the people who gave everything to Mr. Madoff, only to lose everything... and we can't really feel sympathy for them. Greed got the better of them, and lo, the price of such greed was revealed.
We are often worried that, despite our best efforts, our investments may be in the loving arms of someone similar to Mr. Madoff. In the era of Peak Scam, one cannot be too careful. So, we are looking at more than just diversification within one economy: we are looking at multinational diversification, albeit on a small scale.
Why, you ask? Well, having all one's money is U.S. Dollars, or euros, or pound sterling, or Japanese yen, is effectively the same as giving all one's money to Uncle Bernie. It's betting the farm on that particular nation's ability to hold together and defend its national currency and economy. We are not at all confident enough in any one nation to have all our assets valued in its currency... and subject to its political caprices.
It's a question of scale, to be sure; one needn't have a ranch in Argentina, a fishery in Iceland, and a factory in Russia. However, we feel it is a prudent idea to at least have some assets outside of one's nation of legal residence. International diversification will be increasingly important in the years ahead, and, as we mentioned, it can be done on a small scale, even for the average individual.
Monday, March 2, 2009
Ireland Blows Out
This article from the Telegraph speaks volumes. A few highlights: at one point during the boom, 1/5 of all workers were in construction; Ireland now has 350,000 empty houses (for a population of 4.2 million); house prices are expected to fall by 80%; there are 16,000 taxis in Dublin - a city of 500,000.
In high relief for all the world to see, Ireland's mania has gone completely to bust. The former tiger of the Eurozone is now a basket-case. If ever there were a case of classical economics at work, it is here: the Depression is a natural consequence of the mania that proceeded it; and the greater the mania, the greater the depression.
Just as the harlots enter the Kingdom of Heaven as the avant-garde, so Ireland will lead the nations that relied too much upon the FIRE (Finance, Insurance and Real Estate) Economy straight to economic Hell. In her train are the United Kingdom, and the United States. Perhaps Australia and Canada will escape the worst because they actually still produce things that people want - though this is looking increasing less likely since the world seems to be entering an 'all-fall-down' depression.
In high relief for all the world to see, Ireland's mania has gone completely to bust. The former tiger of the Eurozone is now a basket-case. If ever there were a case of classical economics at work, it is here: the Depression is a natural consequence of the mania that proceeded it; and the greater the mania, the greater the depression.
Just as the harlots enter the Kingdom of Heaven as the avant-garde, so Ireland will lead the nations that relied too much upon the FIRE (Finance, Insurance and Real Estate) Economy straight to economic Hell. In her train are the United Kingdom, and the United States. Perhaps Australia and Canada will escape the worst because they actually still produce things that people want - though this is looking increasing less likely since the world seems to be entering an 'all-fall-down' depression.
Sunday, March 1, 2009
The Dark(er) Side of Raising Taxes
As our co-writer noted in yesterday's post, raising taxes during a recession is a bad idea. Raising taxes during a depression is a very, very bad idea. President Herbert Hoover raised taxes during the 1929 Depression, and thereby helped dig a deeper pit for the American economy.
As President Obama's new tax regime is cranked up, it will turn a problem into a crisis. When -- if we are correct -- the U.S. dollar is devalued significantly, it will turn a crisis into a disaster. Let us explain:
According to the President, 'rich' is now classified as a couple making $250,000+ a year. At present purchasing power, only about 1.5% of all households are making that much money. So, by the numbers, these people are apparently 'rich.' Tax them!
But wait... what about all those bank bailouts, car-maker bailouts, insurance funds, synthetic CDOs, pension funds, hedge funds, ad infinitum? Surely the top 1.5% of households by income cannot support such largesse on the part of the government... so the money's got to come from elsewhere. We turn to Messrs. Ben Bernanke and Gideon Gono, as they know the answer: the printing presses.
With money flowing magically into being from the sky, those little financial concerns disappear in a puff of inflation. The question is how much inflation will happen: we posit a nice, comfy ten-times devaluation. In that scenario, today's dollar coin is tomorrow's dime.
Also in that senario, today's $250,000 is tomorrow's $25,000. Feeling a cold chill, dear Reader? We do. We'll work hard to preserve our modest lifestyle, but that means we'll be making more and more money -- nominally -- in order to keep up with inflation. At some point, we see no reason why we won't slam headlong into the 'rich' tax bracket... even though we're far from the classic definition of 'rich.' What's your income, Reader? And what tax bracket would you be in if you tacked another zero at the end of it? If you're not careful, you may become rich without even knowing it!
As President Obama's new tax regime is cranked up, it will turn a problem into a crisis. When -- if we are correct -- the U.S. dollar is devalued significantly, it will turn a crisis into a disaster. Let us explain:
According to the President, 'rich' is now classified as a couple making $250,000+ a year. At present purchasing power, only about 1.5% of all households are making that much money. So, by the numbers, these people are apparently 'rich.' Tax them!
But wait... what about all those bank bailouts, car-maker bailouts, insurance funds, synthetic CDOs, pension funds, hedge funds, ad infinitum? Surely the top 1.5% of households by income cannot support such largesse on the part of the government... so the money's got to come from elsewhere. We turn to Messrs. Ben Bernanke and Gideon Gono, as they know the answer: the printing presses.
With money flowing magically into being from the sky, those little financial concerns disappear in a puff of inflation. The question is how much inflation will happen: we posit a nice, comfy ten-times devaluation. In that scenario, today's dollar coin is tomorrow's dime.
Also in that senario, today's $250,000 is tomorrow's $25,000. Feeling a cold chill, dear Reader? We do. We'll work hard to preserve our modest lifestyle, but that means we'll be making more and more money -- nominally -- in order to keep up with inflation. At some point, we see no reason why we won't slam headlong into the 'rich' tax bracket... even though we're far from the classic definition of 'rich.' What's your income, Reader? And what tax bracket would you be in if you tacked another zero at the end of it? If you're not careful, you may become rich without even knowing it!
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