Tuesday, December 7, 2010

I am in Love with The Great Depression

Perfection, of a kind, was what he was after,
And the poetry he invented was easy to understand;
He knew human folly like the back of his hand,
And was greatly interested in armies and fleets;
When he laughed, respectable senators burst with laughter,
And when he cried the little children died in the streets.

Epitaph of a Tyrant by W. H. Auden

I would like to dedicate the following thoughts
to my father and his father on this special day. Thank you both for being part of this country's greatest generation.

I am in Love with The Great Depression

I started gaining my affection for The Great Depression as The Tech Bubble was ending. My stock account was going to astronomical amounts. I bought my dream house. My financial life was fantastic in every way but in the back of my mind I knew something was very wrong. I soothed myself at night with investment books like The Intelligent Investor by Benjamin Graham and books of the Great Depression such as The Great Crash by John Kenneth Galbraith. I didn't read these books for knowledge or insight because I was very clear on the inevitable path of our country. I read them for purification and to calm my worried soul. Thoughts of The Great Depression have become my economic "Waldon's Pond" during this period of government mandated excess and speculation in our nation's financial markets.

As the 1990's were winding down I would compare the 90's to the 1920's. They are very favorably compared. The roaring 20's saw the advent of the radio, the auto and the airplane. The roaring 90's brought about home computers and the Internet. Both period's had massive speculation stoked with easy money by The Federal Reserve.

The 20's of course ended in The Great Depression. I had hope that the 1990's would end in the same way and that our nation would come to it's senses and stop living so far beyond it's means. I realized that our government and The Financial Elite would make the same mistakes as The Great Depression and turn a deep recession into a depression. But I also knew that the people of this country were resourceful and could come out of the ten year depression in 2009 with the same independent, hard working attitude that created my grandparents' generation.
My grandparents' and their contemporaries are considered our nation's greatest generation. I had equally high hopes for my own generation. I wanted to feel the same pride that my grandfather felt as he passed the economic torch to my dad.

But something odd happened after The Tech Bubble. There was just a very, very mild recession. There was practically no real unemployment. A pipeline was created between the government and the moneylenders. A pipeline full of gold that from the outside smelled of filth. No one noticed. No one cared. I can't compare it to anything that has occurred in our country before. One would have to go back to the times of Rome under Nero to find a similar totally self serving act. Our Empire is ablaze and our leaders are responsible!

A recession is a natural event. An economic Winter that follows an overabundant Summer. A cleansing that removes speculation and greed from the system and passes along fairly priced assets and a sound government to the next generation.

Business cycles have been recorded since the beginning of the industrial revolution and probably occurred even in primitive societies. Economies move from overproduction, excess and speculation to underproduction, prudence and saving. This cycle can't be regulated because it is tied to the avarice of being human.

Recessions will occur even in a tightly controlled society, as we are seeing today. The only difference is that in a free society everyone is aware of what is happening and can react accordingly. In the tightly controlled society The Financial Elite are able to mask the business cycle. This allows the Financial Elite more power and with this power the ability to choose the winners and losers in our economy.

Our Financial Elite have pilloried The Great Depression and made it a priority to protect us from recessions at all costs. The costs that we are presently incurring are massive debt to future generations and the destruction of sound government. This is the antithesis of the business cycle. It is not sustainable in the long run.

The reason that I love The Great Depression is that in spite of massive government intervention the people of this nation were able to survive and then prosper. The Great Depression forged a generation of fiercely independent, highly productive, family and community oriented households. This was the most productive body of citizens any nation has ever known. This was the Middle Class. My grandparents' generation.

The antithesis of my grandfather's generation is my generation. We robbed trillions of dollars of our children's inheritance to prop up stock values after the Tech Bubble which sent our housing market into a bubble. We are presently borrowing tens of trillions of dollars from foreign nations to prop up inflated housing prices that occurred during the housing bubble. We have created the biggest government in our country's history with borrowed money.

So we have spent the savings of our grandparents' generation and borrowed more. We have used this money to inflate asset values and create bigger government. We are passing the debt, the inflated asset values and the government boondoggle to our children. My generation will go down in history as this nation's most selfish generation. It is a very helpless feeling being carried by this ravel of avarice.

I don't blame our people, I blame the tyrants, The Financial Elite. They are far to cunning for our pampered populous. My lament is that we are appeased by bread and circuses as our country is being looted and then burdened with stifling debt.

I am very sure that my grandfather's generation would never have allowed this to happen. A generation that formed massive strikes against unfair employment, rallied against unjust government and to a man gladly sacrificed their lives to keep this country free.

My hope looks to the future as my mind dwells in the past. I await the glory that my children and grandchildren will feel as they slay this dragon of debt. Like my grandparents did before me. I bide time in between two great generations. "They also serve who only stand and wait".

A recession is a natural event. An economic Winter that follows an overabundant Summer. A cleansing that removes speculation and greed from the system and passes along fairly priced assets and a sound government to the next generation.

I am in Love with The Great Depression

Sunday, November 28, 2010

The Difference Between Real Mortgage Rates and Our Current Phony Rates Could Wipe Out Your 20% Down Payment

Speculators in the housing market have been the beneficiary of a once in 100 year event.

Over the last 25 years interest rates have collapsed from 18% to 4.5%. This has allowed home buyers to borrow 200% more than they could in 1985.

This is how the numbers work:

In 1985 a $1,800 mortgage payment would purchase a $150,000 home at a mortgage rate of 18% and 20% down.

Today a $1,800 mortgage payment will purchase a $450,000 home at a mortgage rate of 4.5% and 20% down.

The collapse in rates has directly caused a tripling of home values over the last 25 years.

It’s simple math.

This math works in reverse also:

Today a $1,800 mortgage payment would purchase a $465,000 home at a rate of 4.15% and a 20% down.

Tomorrow a $1,800 mortgage payment would purchase a $381,300 at a rate of 6% and a 20% down.

This $83,700 loss is due to mortgage rates changing from 4.15% to 6%.

What is the possibility that rates will go from 4.15% to 6%?

I would like to suggest that "real" mortgage rates are 6% now.

Over the last 2 years the government has used Fannie Mae and Freddie Mac to take over the mortgage market. 95% of the loans are government guaranteed. Also the Federal Reserve has committed to at least 2 trillion dollars of asset purchases to manipulate interest rates.

I think it is safe to say that today we don’t have real interest rates. They are being manipulated by the government.

What would they be if the government was not spending trillions of taxpayer dollars to manipulate the market?

One could argue that without the trillions of dollars of government intervention mortgage rates could be at 6%. This is far below the average over the last 25 years.

A change from a manipulated 4.15% mortgage rate to a “real” 6% mortgage rate would mean the immediate loss of 18% in purchasing power or $83,700 on a $465,000 home.

Add the 2% purchase costs to this 18% interest rate loss and you have basically wiped out your 20% down payment.

If you are purchasing a home now in a phony interest rate environment and plan to sell in 5 years at a real interest rate you have already lost your down payment.

There is one last variable to consider. It takes over 6 years of mortgage payments on a 30 year mortgage to gain enough principle to prepay the closing costs when you sell your home.

So if you buy today and sell in 5 years not only could you lose your down payment but you will also need to bring a $5,400 check to pay the balance on the $26,600 in closing costs to sell your home in 5 years for $381,300.

That’s the math, not including our nation's current deflation problem and the fact that housing is a depreciating asset.

Tuesday, November 23, 2010

The Destruction of our Last Free Market

I work as an accountant. I am not supposed to be innovative. Accountants are trained to follow the rules. Andrew Fastow of Enron or Mark Schwarz of Tyco tried to be innovative. They now reside in jail.

The opposite of accounting is economics. Economists must be innovative. Their job depends on inventing new theories. These new rules give their employers or their clients an advantage in the marketplace.

Over the past 15 years our nation’s top economists have been very innovative in coming up with new theories for our government and Wall Street to improve our nation’s markets. It is not surprising that most of these suggestions have enriched the pockets that employ these economists. It is also not surprising that these forays of crony capitalism have destroyed every free market that the government has attempted to control.

I only bring all this up because of the latest nonsensical plan that is being presented to save our country.

John Burns is one of our nation’s leading housing economists. He sees a new profit center for his clients. So he has come up with a new theory.

Mr. Burn’s scheme involves the government hiring private sector companies to create a huge real estate investment trust. This Wall Street trust will take all of the underwater homes from the banks, Fannie Mae and Freddy Mac and rent them out.

He says that renting out these homes will prevent our nation's house prices from falling any further.

This is economic theory at its finest. There will be huge profits for Wall Street and the banks. There will be monstrous subsidies to be paid by the taxpayer. There will be limitless unintended consequences in the future. But best of all there are fat commissions for the innovative economist that can explain how this nonsensical plan can benefit the country.

So let me recap.

Presently investors that are entering our real estate rental market are not receiving subsidies, implied bailouts or tax breaks. They are not benefiting from the easy money from the Federal Reserve. So rental real estate is the only market that is not subsidized by the taxpayer.

Investors that are entering the rental real estate market are the only investors in this country that are receiving a fair return on their money. Today investors are getting a positive cash flow on their investment. This is in line with the historical return on investment. They are receiving a fair return because the government is not distorting the market.

This is possibly the only market that the government is not distorting.

Investors that are entering the rental real estate market are not using large amounts of debt. Most are purchasing with at least 30% down and some are purchasing with all cash. So these investors will not be a risk to be bailed out by the government.

Looking at the facts one could argue that the rental real estate market is the only free investment market in our country today.

John Burn’s intends to destroy our last free market, for a profit. He is a very smart man has a good chance of achieving his goal.

It is funny how economists preach the religion of free markets as they devise ever more self-serving ways to corrupt the system.

Tuesday, November 2, 2010

Warning Label on Economic Advice

I believe many people are confused by the role of economists in our society. They are very similar to the fortune teller at the circus. These charlatans sell their measurement of the future to the unsuspecting public. They are unconcerned with how their guess affects the outcome of their victim but laser focused on getting their paycheck from the owner of the circus.

Our government is the circus.

Our nation under the direction of our political economists has spent the last 25 years using debt to increase our nations total standard of living above the sustainable trendline. Soon our total debt to GDP will be triple what it was in 1985.

Most of this debt has been used to increase the size of the unproductive financial sector and the government. These areas are the major employers of economists. This public sector growth has occurred while our job producing private sector has stagnated. The private sector hires very few economists.

Our nation’s unsustainable growth trend of borrowing is a big worry for anyone with an ounce of common sense. But is of little concern for political economists. Their focus is on growing the source of their paycheck. Upton Sinclair said it correctly 80 years ago about our crony capitalistic system: “it is impossible to get a man to understand something when his job depends on him not understanding it”.

Our unsustainable borrowing is so unimportant to political economists that they have created very flawed models so that taxpayer debt can be overstated. These models have eliminated “total debt” as a variable. The models only include the “debt payment”. This flaw allows an unlimited amount of money to be borrowed if interest rates can be manipulated down to zero. To make matters worse the models don’t use any form of amortization, so in economic theory our nation’s debt never needs to be paid back. Borrowing $1 trillion or $20 trillion is the same to an economist because neither amount will ever be repaid.

As an accountant I feel that it is important for the taxpayer to understand the understated accounting and the conflict of interest inherent in the field of economics. There should be a disclosure notice similar to the warning on a pack of cigarettes attached to anything that is published by an economist.

Warning label to taxpayers:

Economists can only be relied upon to predict small insignificant changes in the economy. On average they have a moderate degree of success in predicting year over year economic growth of 3.5%. But as a group they have never, ever correctly predicted a major shift in our economy. Therefore the predictions of an economist of the future should never be relied upon in business. In a free market society the successful business owner is the only entity that has the ability to predict the future.

Economists are not accountants. They are not regulated by any authority and are never held accountable for anything that they say. If a private sector accountant overstates the numbers they will go to jail. If a political economist overstates the numbers they are hired by Wall Street, the goverment or by a universtiy to train other economists. So if you require accurate numbers always seek the advice of an accountant.

Taxpayers should understand that as more tax dollars flow into government, then the government will give large amounts of this money to Wall Street. Wall Street in turn uses this largess to train more economists which they send back to the government. Be aware that every time your taxes are increased, it indirectly allows the government to hire an economist that has a vested interest in increasing your taxes even more.

It is important that you understand as a taxpayer that any money the government borrows must be paid back by you. If you are a middle class family of four and the government borrows $1 trillion then that is an immediate debt to you of $26,667 plus interest.

It is important that you understand that the debasement of a nation’s currency has a cost. If you are of the middle class you are very likely to be negatively effected by the indirect effect of currency debasement. This is called “inflation”. Historically inflation has been used by tyrants to reward political favorites. Presently, our government has chosen to funnel most of the gains from inflation to the financial sector, speculators and the upper classes.

So, as a taxpayer, if the attached economic report deviates from common sense and suggests “unsustainable debt”, “a larger government”, “a larger financial sector”, “manipulating markets” or “debasing our money supply” then it is in your best interest to disregard the information.

Wednesday, October 13, 2010

Actually, We Aren’t All In This Together

This is the story of an average middle class town. This town could be the snapshot representing the American Dream anytime in history.

Anytime up until 25 years ago. This is when the town and all of its citizens found out that they wanted more than the American Dream could offer.

The story starts in 1985. A newcomer walks into Bernie’s, the local bar. This pilgrim’s name is Sam.

Sam had just inherited what seemed to be a limitless amount of income from a family trust that had been set up in 1776 by his ancestors.

Sam enjoyed the people and the town. So he stayed. He came to Bernie’s every night and bought drinks for the patrons. He made many friends.

Sam liked the attention he received from this generosity and through the years bought more and more drinks for the house. Eventually it became a ritual for him to pay for everyone’s drinks from 7pm until the bar closed at two in the morning.

He continued to draw more and more from the family trust that was set up to last forever.

By all rights, with prudent management the trust could have lasted forever because it was a vast amount of wealth.

Sam loved the attention. And everyone loved Sam. They voted him the figurehead of the bar. This came with a title. Whenever he entered the bar he was always affectionately hailed as Uncle Sam.

One day, Ms. Bair, the conservator accountant of Sam’s trust, started to become worried. Sam was spending a lot of money. If the spending kept increasing, the principle that was lovingly placed in the trust 200 years ago by his ancestors would start to diminish.

Ms. Bair said that she was proud of Sam for helping his friends but it would be best if he didn’t increase the spending any further. This prudence would insure that the trust could provide income forever.

“Besides”, the accountant added, “if you went broke, it would hurt your friends a lot more than one free drink each evening."

This made sense but it was a worry for Sam. So it became a topic of conversation among his friends at the bar.

One of his friends at the bar was a young man named Klugman.

Everyone loved Klugman, almost as much as Sam. He was handsome and articulate and a wonderful story teller.

Sam would buy the drinks and Klugman would speak of the prosperity that lay in the future.

Klugman was a dreamer. This attribute was perfectly suited for his trade as an economist. His job was to consult with business owners and show why they needed to borrow money to grow bigger.

That’s what economists do.

And for a time, the local businesses did grow bigger and bigger, thanks to Sam and Klugman and the bar.

As Sam spent money at the bar, the patrons spent less buying drinks. In this way everyone had more money to spend on other things, except for Sam of course. But he didn’t care.

This additional money flowed though the local economy. Everyone’s businesses grew. Everyone was happy. Everything was perfect.

But the problem with unrelenting perfection is that it eventually becomes average.

Over time the economy stabilized. Businesses stopped growing at a rapid pace but continued to borrow at the behest of Klugman.

At night in the bar Klugman spun even bigger tales of the prosperity in the future.

Because that’s what economists do.

And being an economist Klugman felt that this slowdown in business was becoming serious. His clients that borrowed money to grow their businesses were having trouble paying their loans. He felt the local economy had to be stimulated back to the growth trend that was established when Sam came to town.

He had a talk with Sam and explained that it was imperative that Sam buy more drinks in the bar. “Maybe you could start buying drinks at six o’clock instead of seven.” Klugman urged. "This would save everyone money that they could spend in the local economy."

Klugman promised that this would only be temporary. Local businesses only needed a temporary jumpstart to begin growing again.

The next day Sam explained Klugman’s theory to Ms. Bair. After she stopped laughing the accountant tried to suggest that buying more drinks for bad businessmen that incurred too much debt didn't seem like a viable solution.

"The businesspeople of this town need to live within their means today and not worry so much about tomorrow." Ms. Bair suggested.

This was the nature of an accountant. Today was more important than tomorrow.

Ms. Bair didn’t want to talk about tomorrow as Klugman worried about nothing else.

Sam needed another opinion.

He went to see his friend Mr. Hoenig who was the town banker. Mr. Hoenig seldom came to the bar and always paid for his own drinks. This made Hoenig the only man in the bar that didn’t take advantage of Sam’s kindness.

Sam posed his concerns to his friend. The banker tried to reply in a way his young guest could understand.

“Every businessperson has a place and a time in the economy” he stated. “Bankers live in the past. We are the caretakers of our town’s savings. This is the excess production that becomes a store of wealth. We use a businessperson’s history to determine if they are a suitable guardian of the town’s stored wealth. So we must always live in the past. I can only guess about the future, the same as you”.

Then he interjected “Accountants view the world through their balance sheet which is nothing more that a snapshot of the present. They are not as interested in tomorrow.”

“And, as you have surmised, our friend Klugman lives on the expectation of income. Economists sell business people risk in the future”

“But who can help me?” asked Sam.

“Well it appears you want a forecast” Mr. Hoenig said, “only Economists and Astrologers will give you a prediction of the future. Although some are better than others, I have found that in the aggregate both are correct about 50% of the time. So one could argue that a coin flip has similar predictive value at much less expense”

“But let me suggest that you talk with my friend Mr. Volcker. You will find him at the park everyday feeding the birds.”

“Can I ask one more question Mr. Hoenig? How come you never allow me to buy you a drink?”

Mr. Hoenig knew the answer would be hard for Sam to understand but he made this attempt:

"Sam, although I am happy to drink with you I cannot accept the cool aid that you and Bernie provide. Each free drink from you would distort my view of the market. If the small window for which I view the future becomes cloudy. Then I am lost. As I have said before, I live in the past."

Mr. Hoenig could see that Sam was even more confused so he made another attempt,

“Sam you are not a businessperson or an investor in this town. You are a disinterested third party in our economy. Very much like a government who’s spending is random. You do not add production or efficiency to the market. Production and efficiency is only added by the competition of the market participants. For an economy to work properly neighbors must be competitors. This is the only way in which scarce resources can be allocated correctly. This is only way that productivity can be created and then captured. And hopefully some of this captured productivity or 'savings' is given to me for safekeeping.”

He still didn't quite understand why Mr. Hoenig would not accept his generosity. But they were friends and that was all that concerned Sam.

The fact of the matter was that Mr. Hoenig was Sam's only true friend.

They said goodbye as Sam made his way to the park. Mr. Volcker was there as he was every day, feeding the birds.

Mr. Volcker, like Sam had just appeared in town one day. Mr. Volcker would never talk about his past or anyone’s past for that matter. He would only speak in riddles about the future.

Some speculated that he was a general who was a hero in battle. Others said he was a rich investor that gave up his wealth to live the simple life. There were other stories even more fabulous and truth be told, all these stories had some basis in fact.

Sam said hello and posed his concern to Mr. Volcker.

Mr. Volcker reiterated what Sam had already learned. Bankers must live in the past, accountants must live in the present and economists attempt to sell the future.

“But” Sam said, “Who is the best person to give me advice on the future”.

“Again, I must agree with Mr. Hoenig” said Mr. Volcker, “There is no one that can give you good advice about the future”.

“But do you know what lies in the future?” ask Sam.

“Of course I do son. But I will not tell you. There are others that could tell you too but they will be mute like me”.

“In the long run, a good businessperson is the only one that can accurately predict the future. And they will never tell you what they know for it would distort their market.”

He continued, “I am much like you, a traveler that came to take respite in this town. But I would like to note that I exist in this economy and you don't. Even though my fortune pales in comparison to yours. The fact is, I have earned it myself therefore it holds much, much more value.”

“If you ask me for advice, my suggestion is that you leave this town. You have no wants or needs that allow you to benefit this town or these people.”

“But how can I leave all of my friends?” cried Sam.

“These people are not your friends” retorted Volcker, “You do not exist to them, other than a free drink. You do not have a business, you do not invest for profit and you do not consume. You are only used by people that are incapable of surviving in the market. Therefore you distort the market. No matter how much wealth you bring to our town it will have no effect in the long run. When you are gone your wealth will be just a memory”

Volcker grew tired of the talk and focused on his wards, the swans.

Sam said goodbye and headed back to Bernie’s

Klugman was already at the bar holding court. Slapping backs and spinning tales.

Sam explained to his friend about his day and expressed his worry.

“Well Sam, I know that life is not worth living without friends. And we are your friends. And I also know that life involves risk. Speaking of which why is your capital placed in such ridiculously safe investments?” Klugman harangued.

As an accountant, Ms. Bair had always demanded that Sam’s money be 100% safe in the present. Ms. Bair told Sam that the local economy was very dependent on his spending so his money must not be tied to his neighbors. It must be placed in very safe bonds with a touch of equity in foreign lands.

In this way Sam’s money would always be there for him no matter what happened to the local economy. She had tried to explain that Sam was not a businessman or an investor and therefore not in a position to take risks.

“This is the crux of the argument” stated Klugman. Why can’t you take the same risk as your neighbors? Aren’t we are all in this together?"

But the fact was that Sam was not a businessman and he was not an investor or even a consumer. He was a disinterested third party that didn’t care what he earned or what he spent.

As an economist Klugman’s job was to sell his picture of the future to businessmen. So it was easy to convince a disinterested third party to do just about anything. Especially since this person considered him a friend.

The next day Sam told Ms. Bair what he wanted. She was to follow Klugman’s advice and invest his trust in the local community.

He loved this area and its people so it made sense to invest his money in the town.

And with this investment the local businesses and the economy boomed.

Sam began to make so much profit that Klugman suggested that Sam start buying drinks at 6 o’clock, then 4 o’clock then 2 o’clock. How could Sam argue, Klugman had been right before.

The wealth of the town grew at a phenomenal pace. Sam’s income increased so quickly that the bar was always open and drinks were always free.

The local economy boomed like never before. Businesses grew and took on new debt and then grew some more.

It was undeniable that Klugman was correct and Ms. Bair, Mr Hoenig and Mr. Volcker were wrong.

Klugman became a hero in the town.

(If you think like an economist, this is where the story ends. The short term is all that matters. As Lord Keynes said, “in the long run we are all dead”.)

(the story will continue for everyone else)


Actually, We Aren’t All in This Together – the rest of the story

(the story continues for everyone but economists)

There came a time when the local business growth started to slow. And because Sam’s trust was invested in local business equity and not in safe bonds his income stopped.

Sam started dipping into the principle of the trust that was lovingly set aside 200 years ago, the money that should have lasted forever.

Common sense told Sam that there was only one thing to do. He must reduce his spending in the bar down to the amount that the accountant had recommended. This was the only sensible long term solution. Local business owners would have to stop their excessive borrowing and get though this economic downturn by themselves.

Also, it seemed to Sam that some of the local business owners were horrible at what they did and shouldn’t be in business at all. They spent all their time at the bar as they borrowed more and more money from Sam.

If the bad business owners shut down, wouldn’t the other owners prosper?

And if they wanted drinks, Sam was happy to provide them in the evening. It just didn’t seem right that they should borrow money from Sam with no hope of paying it back as they spend all of their time in the bar.

When Klugman heard that Sam was considering slowing his spending at the bar, he became enraged.

Sam must keep up his spending. Everyone depended on him. It didn’t matter if some business owners were absolutely terrible at their trade; it was heartless of Sam to put them out of business.

“Remember, we are all in this together.”

So it went. Sam spent his principle as the economy stagnated. There were too many businesspeople servicing too few customers.

And everyone spent too much time at the bar.

As always happens with imprudent spending, the money disappeared as if it had never existed.

Sam lost the trust that was handed down lovingly for 15 generations.

He still comes to Bernie's everyday, but never drinks. He just takes his same old seat at the bar and stares off into the distance. He is mostly ignored by all except when stories of the boom are discussed.

He does not exist in the town’s economy today. And if you believed Mr. Volcker he never really existed in the first place. Except as a distortion in the market.

In the town, many of the local businesses that were created to feed the boom either closed down or moved away.

The local economy is back to average. The town is exactly as before.

Back to what our ancestors would call the American Dream.

When they get together at Bernie’s, the people who lived through the boom never seem happy. They long for the golden days of unbridled prosperity and of course they miss the free drinks.

This lament stops when Klugman comes into the bar. He spins tall tales of a future of growth and riches.

Because that’s what economists do.

Everyone brightens up and talks of tomorrow,

and the next boom that will be even bigger than the last.

The End

(If you are anyone but an accountant this is where the story ends.)

Thanks for reading


Actually, We Aren’t All in This Together – the rest of the story (for accountants only)

(accountants recap)

It is hard for one to gauge the size of the bubble that Sam created if one only listens to the reactions from the story’s participants.

Sam’s fortune was immense. Before its demise it was valued at 10 trillion dollars.

When Sam came wandering in, there were 10 bars in town. As Sam started to buy drinks at Bernie’s the other bars were immediately forced to close. Very quickly Bernie’s bar, like any other business that is subsidized by a disinterested entity, learned to raise it prices. Toward the end well drinks and beer were going for upwards of $10,000 a glass. But since there was no cost to the patrons, most drank the finest Champagne at $100,000 a glass even if they liked beer better.

Of course it is needless to say that billions of dollars of alcohol made its way out the back door to be resold in other towns, states and countries. This black market employed tens of thousand of people. Billions, perhaps trillions of dollars of income went untaxed.

Bernie’s bar ended up enveloping 4 square miles of the downtown area and could serve 300,000 people in an evening. So at the peak of the bubble, tens of billions of dollars could run through the bar in a night.

Obviously US Dollars could not be used to handle the transactions so everything was handled through credit with Sam’s expenses being sent directly to Ms. Bair’s staff of 1,000 accountants and wire transfers going back to the creditor’s offshore bank accounts.

With the growth of an economy than ran on debt, high interest was a necessity. 100% a week was not uncommon.

The town could be compared to gold rush Dawson City on steroids. Gas was $1000 a gallon, a meal in a restaurant was $10,000 and a room at one of the 1000 hotels in the area went for $50,000 a night.

Many that lived outside the 100 square mile area of easy commute while tipsy chose to move closer to the bar.

At the peak of the bubble this real estate had no value. There were not enough zeros on any number that could purchase a square foot of land.

As that is how it was sold.

Ms. Bair and Mr. Hoenig continually tried to get Sam to understand the enormity of what was happening.

Mr. Hoenig never did accept a free drink. But one must not feel empathy as his bank was making profits of $100 billion a year.

Mr. Hoenig could clearly see the problem and sold his loans to speculators before the bust for 500 cents on the dollar. Today of course all these loans are worth nothing.

Presently his bank is the only healthy one in the area.

Klugman never sensed that anything was wrong until the very end. His economic forecasting business still thrives.

Mr. Volcker is the only person in the story that never changed his lifestyle before, during or after the crash.

He continues to feed the birds in the park and enjoys going to work every day.

Friday, October 8, 2010

Once in a Lifetime Madness

On August 11th I commented on the historically low yield of 1.46% on the 5 year treasury bond. At that point it was 21% below the historic low of the past 70 years set back in 1954. Here is the post:

Now There's Something You Don't See Every Day

Well today the yield on the 5 year treasury sailed below the 1.1% mark which is 42% below the lowest yield in the past 70 years. This insanity by The Federal Reserve is being applauded by the stock market as the Dow spiked over the 11,000 mark today.

Investors have very, very short memories I suppose.

We are destined to have episodes of once in a lifetime madness every few months or so.

I feel it is appropriate to completely remove myself from the 50% long position that I accumulated during the market swoon to 1022 in the S & P in July.

It is very likely that the market will go up in the next few months driven by the speculative madness that is being induced by The Federal Reserve.

But for me the rewards at the end of this market run don't seem to warrant the risks.

The markets are being driven by rumors that our government will continue to sell our kids down the river with a never ending stream of currency debasement, market manipulation and intergenerational theft through massive unsustainable government debt.

We are trying to grow our economy by starting a currency war with the rest of the world.

By borrowing trillions of dollars that mathematically our government can never pay back.

By using this borrowed money to make the government bigger and thus starve the private sector.

By creating the most unsound investment markets in the history of our country.

By bailing out wild speculation at the expense of prudent savers.

And by funneling ever more money to the wealthy and away from the working classes.

All of this at the direction of our government subsidized political economists that don't understand what is happening, but are happy to suggest that ever more borrowing and speculation are absolutely the solution to our country's historically high level of debt.

Monday, September 27, 2010

We Need to Fire Our Economists and Replace Them with Astrologers

Once in a while in a news article I see the phrase “the science of economics”. It always makes me laugh.

Currently political economics is no more of a science than astrology.

It has no predictive value when extreme debt is involved.

Economists presently have no way to measure the unsustainable debt in our economy for four reasons:

1. Neoclassical(Wall Street) economists are not trained to look at total debt. They are only able to quantify the debt payment. Therefore if interest rates are placed at zero, then in theory our country can have unlimited debt.

2. To make matters worse, the public sector does not use real accounting standards. Neoclassical economists use Enron accounting to measure the public debt. Economists say that our federal government has about $13 trillion in total debt where in reality the liabilities of Uncle Sam are 4 times this amount.

3. To make this situation even worse, instead of comparing liabilities to income like an accountant, economists compare government liabilities to the total GDP in our economy. This avoids comparing the liability to the income that will eventually pay off the debt.

4. The craziest part of this situation is that Wall Street economists don't understand that the government's Enron liability must be paid off by the private sector in the future. It is indirectly a liability of the taxpayer.

The federal government has $60 trillion in liabilities and real income(without deficits) of $4 trillion. This is liabilities to income of 15 to 1.

Add this to the monstrous liability of our private sector and there is very little hope of taxpayers paying off this debt in real dollars.

This unsustainable debt is a problem. But the bigger problem is that our government subsidized economists don’t see it as a problem.

We are flying toward a mountain in zero visibility without an altimeter. We just asked our navigator how he is planning to circumvent the mountain.

Our navagator responds, “what mountain?"

Our navigator economists have no clue how to measure our nation's mountain of debt. They are blindly flying our economy straight into Mt. Fuji.

Economists are dead set on avoiding the pain of private sector deleveraging. This is exactly the policy mistake that Japan made 20 years ago.

Japan is experiencing 'death by a thousand cuts' instead of the debt amputation that would heal the economy immediately.

We are using the same flight plan. Our nation has incurred 3 years of moderate economic pain and only reduced debt in the private sector by 5%.

The government has increased its Enron balance sheet by 15%. This is trillions of dollars that the private sector will be required to pay in the future.

So after 3 years the mountain has grown larger and our airplane has not changed course.

Instead of looking at our private sector's mountain of liabilities our economists are dead set on keeping us from repeating the Great Depression.

Let me describe what happened during the Great Depression. We had 4 years of pain from 1930 to 1933. Most of the pain was caused by bad economic policy by our government. But even with the extremely bad government policy our private sector was allowed to deleverage.

This directly caused the greatest boom in our nation’s history.

From 1934 until 1953 our GDP grew a total of 580%. This was a compounded growth rate of over 10% a year for 20 years.

Our country has never grown that fast for that long.

Our incompetent economists are desperately trying to keep us from reliving the Great Depression. The goal is to become like Japan.

Their goal is 20 years of economic stagnation.

So instead of recreating the greatest period of growth in our country’s history our economists are intending to lever up our government 30 to one, without deleveraging our private sector.

This will slow the economy to a crawl so it will be impossible to pay off our government’s debt without destroying our currency.

Our private sector desperately needs to deleverage. Economists are manipulating markets to force people to borrow more money and spend it on speculation.

I suggest that we fire all Wall Street economists and hire astrologists to make policy decisions in the future.

Let us not forget,

Astrology worked out pretty well for Ronald Reagan.

Tuesday, September 21, 2010

Fine Tuning my Snap Trades

A year and a half ago I suggested that it was a great time to buy into the stock market as equities were making new lows. But I did suggest that I wanted to be out of the market by the end of 2010 as the stimulus started to run out and as corporate earnings peaked.

I have suggested that for at least the next 5 years there will be no long term gains in the stock market but there could be monumental short term volatility. In my post Snap Trading I suggested how I will manage my retirement account and my Virtual House Equity.


The market is getting close to the peak earnings so this current rally seems to be a good opportunity to sell my snap trading gains of the last few months and move to a market neutral position.

I have been selling my equity investments and I am buying into ETFs: FXP, PST, SRS, SH and VXX.

I am almost market neutral. If the market goes up I will happily trade into a small short position to weather the economic storms ahead.

Today the stock, housing and bond markets are more dysfunctional and volatile than anytime in history thanks to monumentally bad government policy.

Anyone 100% long in any of these markets is a fool.

Thursday, September 9, 2010

The Desperation in the Housing Market

I talk to a lot of people about housing. Many that I speak with are frantic to buy a home. Also when I check the current housing stats, I see some buyers biding over the asking price on homes that have been on the market for months.

There is desperation in a number of people that are looking to purchase a home.

When I talk to people about real estate I will spend ten minutes explaining how our banking sector is insolvent and many of our nation’s households are insolvent.

How there is a historically high inventory of homes listed with an equal size shadow inventory held by the banks that are not even listed yet.

Also, there are tens of millions of families that will put their homes on the market once prices stabilize. We have double the amount of any previously recorded inventory levels, while home sales amounts are at historic lows.

I explain how buying a home in many areas doesn’t make sense because rents are historically low compared to house prices.

We are in the most unsound economy in our nation’s history as interest rates and markets are being desperately manipulated by the government to force many people into buying homes that will absolutely go down in value.

I will sometimes be honest and say that most of the people today that are buying houses are not financially qualified to own. The government has created another bubble that is allowing many people through government subsidized loans to stretch to buy a home. These are people that have no concept of budgeting or saving or anything other that living paycheck to paycheck. They are renters that are being pushed into buying overpriced real estate. So if we consider that their 3% down is wiped out with purchase costs, these glorified renters are starting out home ownership with less than zero equity.

If I have time I might say that as a nation our savings rate and taxes must go higher making it harder for families to afford a higher priced home. And that our nation’s debt is mathematically impossible to pay off.

There are the demographic issues of our aging population that must sell their homes to fund retirement. They will exit the market and won’t be back.

There are the mathematical issues that state that as interest rates rise home prices decrease proportionally.

So interest rates will be a severe headwind on home prices for many years in the future.

Owners will learn that the buying and closing costs for a home are at historic highs. They will come to realize that it could take 8 years of mortgage payments to repay enough principle to be able to pay the round trip purchase and selling costs in a stagnant market.

So many people in the future will be surprised when they are required to write a large check when they sell their home.

There are the funding issues that suggest that as home prices decline there will be no money for move up buyers to purchase higher end homes. For the next ten years people will have to save for home improvement costs instead of robbing from their home’s equity.

So the move up market is dead for ten years and the home ATM is gone forever.

Honestly there is nothing that could possibly drive the housing market significantly higher above its present overvaluation. But there are thousands of events that will force prices back to the fair value that was the normal trend before 1999.

The fact of the matter is that assets will ALWAYS come down to fair value after a bubble and many times they can trend below fair value for a while. To think that this time is different is utter delusion. To make a highly leveraged bet on a delusional assumption is madness.

The people will listen for about ten minutes with a glazed expression.

When I am done they become animated and tell me how excited they are at the prospect of buying a home. Sometimes it almost seems like desperation.

They say that they must buy now. Everyone says that it is the best time in history to buy a home.

I love to go on the Housing Tracker website. I can follow the listing prices of homes in most major metro areas. Listing prices everywhere are still falling lower. Every month like clockwork they go down.

Every week we get closer to fair value. Every week desperate people are less likely to buy an overpriced home.

Every week there is a new person that might look at the data instead of the salespeople. And honestly decide if owning a house makes sense compared to renting.

Honestly decide if they want to lock themselves into 30 years of debt payments with absolutely no chance of escape once interest rates start to rise.

And acknowledge the fact that home prices are still historically overvalued in many areas compared to rent and household income.

As a nation we need to question how long the government can continue to desperately rob money from our children to prop up overpriced housing.

There will be a point in the future where people start looking at what is best for their family, for our children and for the nation in the long run.

I am not anxious for a housing bottom. That will take many years. I am looking for the emotional bottom.

I am anxious for our nation to stop looking at the real estate market with desperation.

Like we did before 1999,

and the previous 200 years before that.

Saturday, September 4, 2010

Keynesians need a Class in Common Sense

I read Paul Krugman’s blog once in a while just to find out what the other half is thinking. Presently he is harping on the need to save our country from another Great Depression with more government stimulus.

So far we have been saved three times from big Great Depressions in the last 8 years.

The first time was when Greenspan and Bush saved us in 2002. The second time was when Bernanke saved us two years ago with 0% interest rates. And the third time was the bailout bonus for bankers.

There have also been little mini rescues such as the housing credit and cash for clunkers to name a few.

Also the government is planning to fund deficits of $1 trillion a year for the next ten years to continuously prevent various other great depressions that might come along.

It seems like preventing great depressions is the major government activity of late.

But Paul Krugman is adamant that this one is for real and we must borrow more money to prevent economic collapse. I assume that along with incurring this monstrous debt, he wants the government to waste the money just like they have done in all the previous rescue attempts.

Paul Krugman sees this as the end of the world but I see it as an opportunity.

I would like to suggest that we end this once and for all.

Let’s decide how much stimulus will stop great depressions for the next 10 years. Let's suppose it is $5 trillion. Then we divide $5 trillion 300 million ways and give $16,000 to everyone.

But for that $5 trillion I would need Dr. Krugman to sign a contract saying that he can’t ask for any more stimulus money for 10 years.

So Dr.Krugman will fund the biggest stimulus of all time.

It will be the most expensive economics class anyone has ever attended.

But he will get a lesson in real world economics. He will learn that:

  • Destroying a currency can't create long term prosperity.
  • Debt can't be eliminated with more debt.
  • Wasteful government spending doesn't create long term private sector job growth.
Some might say that spending $5 trillion to give Keynesian economists a class in common sense is ridiculous.

I say it is money well spent.

Saturday, August 28, 2010

The Most Expensive War in History

Our nation is wasting an incredible amount of productive resources to fight a battle that has become distasteful to many in our population. At one time this war was cheered as patriotic, but with the massive increase in expenditures and mind boggling waste, many are becoming resentful of our American government’s presence in an area where it does not belong. Even if we stopped the war now it will have a lingering effect for generations.

Of course I am talking about our government’s War on Affordable Housing.

Today many young families must purchase homes for 6 times their household income. This is compared to their parents that bought homes at 3 times their household income 15 years ago and their grandparents that purchased at 2 times their household income.

The government has spent trillions of dollars through subsidies, tax breaks and direct market manipulation of interest rates in an attempt to make housing prices unaffordable for young families that want to enter the real estate market.

Our War on Affordable Housing dwarfs the resources that are presently being spent on the War on Drugs or The War on Terror.

Many are starting to question whether this is the proper battlefield to expend the limited resources of our nation.

An assault that might be more justified would be a War on Unemployment, like Roosevelt funded during the Great Depression He employed millions of workers to build things. This program constructed Hoover dam and much of the infrastructure in our National Parks.

How about a War on Outsourcing? This engagement would fight all of the crazy tax breaks that allow companies to send jobs overseas and would replace them with subsidies to hire workers at home.

The only thing that we must consider is that if we stopped the War on Affordable Housing and used those resources to fight a War on Unemployment and a War on Outsourcing at the same time, it could cause massive problems in our economy. Our unemployed labor pool would shrink to zero as the sale of fairly priced homes would quadruple. This would cause the biggest economic boom in our nation's history. We would then be forced to start a War on Employment to counteract the unbridled prosperity.

The biggest problem with the War on Affordable Housing is that prices are always being pulled toward affordability. The market trends in line with historical fair value in the long run no matter how much money is expended to manipulate the free market in the short run.

On top of the trillions that we have already spent, our government will have to spend many hundreds of billions of dollars a year, forever, to continually battle the forces of the free market to keep homes unaffordable for new families entering the real estate market.

So the War on Affordable Housing appears to be an extremely expensive fight that we can never win.

Also, understandably, it is fast becoming an unpopular government policy for our younger citizens who can't afford to buy a home because of the high taxes they have to pay to continue fighting the War on Affordable Housing.

But the War on Unemployment or the War on Outsourcing would be supported by everybody. Either battle would only be temporary. And both are 100% winnable.

The best part is that our nation will be able to win a war for the first time in a very long while.

Saturday, August 21, 2010

Economic Elitism is not the Solution

Last Tuesday we had what was called “The Summit on Housing Finance”. This was a get together of a group of individuals that were instrumental in the policy choices that caused The Housing Bubble, The Credit Crisis and The Great Recession. This is our “Economic Elite”. The government invited them to get together to figure out how to repair the system that they and others like them have destroyed.

Unsurprisingly the main suggestions from the event were that we need more unsustainable debt to taxpayers, more government control piled on top of our already dysfunctional markets and of course much more subsidies for the financial sector.

I looked back at all of the quotes from the economic philosophers of the past 2,500 years. And I couldn’t find any references that espoused unsustainable debt to manipulate asset prices, rewarding speculators at the expense of prudent savers or tightly controlling markets to reward government favorites.

No, actually there are a few economists that favored controlling free markets. Karl Marx is the most notable.

And I must admit there was a period where people felt that it was wise to give all of the resources of a country to a few very rich elite with the hope that this nobility would trickle some of the spoils back down to the rest of the populace. This “trickle down” economic period was called feudalism or more appropriately, “The Dark Ages”.

The tightly controlled markets of Karl Marx run by an Economic Elite of feudal lords sounds rather archaic. But that is how our economy runs today.

The Economic Elite have usurped our economy. Many of our markets are broken. The participants of “The Summit on Housing Finance” suggest that we break them even more.

The Economic Elite are saying that taxpayers must borrow ever more money and give it to the Government and The Financial Sector to waste, just like Japan.

But why do we want to emulate Japan? Japan’s economy is terrible.
Why can’t we emulate Germany? Or Canada? Or Australia?

Or better yet, why can’t we emulate the US economy at the point before our Economic Elite diverged from the philosophy of our forefathers?

Our country was based on free markets and rewarding good ideas. It was called capitalism. The market rewarded good ideas with wealth and power. The same free market severely penalized bad ideas with loss of wealth and power.

This freedom of markets has been removed and is now controlled by the Economic Elite through the government. Most of the people that ran our economy into the ground should be penniless and powerless. Instead they are put in charge.

This is not absolute tyranny but it is autocracy through subterfuge.

Economic doctrine has replaced free markets. This doctrine has become so complex, convoluted and conflicted that our economy doesn’t work properly anymore. Most of the policy we are using to solve our problems can’t be justified with logic, reason or common sense.

I feel that our economic policy needs to be simplified so it is in line with a time before our free markets were totally usurped by this failed experiment at government directed economic control.

The goal should be toward sustaining an economy with:

· A very large middle class.
· Free Markets for everyone where the government protects against collusion, monopoly and entities that become too large to compete fairly with the rest of the players.
· A government that runs like a business with a balanced budget.

I am suggesting that we replace the last 20 years of crony capitalism orchestrated by our nation’s economic elite with 200 years of successful economic governance by free markets.

I am also suggesting that no nation has ever prospered by:

· Tightly controlling investment markets to reward political favorites.
· Creating temporary bubbles to force an economy to grow.
· Robbing from savers to reward speculators.
· Robbing from future generations to live at a higher than sustainable standard of living today.
· Starving the productive private sector to create a bloated and inefficient non productive public sector.

Each of these policies would have been abhorrent to our founding fathers. They understood the nature of tyranny and economic elitism.

In the last 20 years we have thrown away a system that was put in place by our forefathers. It had worked perfectly for the previous 200 years.

We are refusing to emulate the United States of our grandparents. Instead the goal of our nation’s economic elite is to become an impoverished and feudalistic crony capitalistic version of Japan.

Sunday, August 15, 2010

Inevitable Impossibilities

Many economists are suggesting that our government continue pushing our economy in the same direction that caused The Tech Bubble, The Housing Bubble, The Credit Bubble, The Subprime Crisis, The Banking Crisis and The Great Recession.

As each of these economic events occurred these same economists were surprised by them. Each bubble or crisis was an outlier that was one of the last possibilities that they had expected.

Economists have stated that these outliers are “Impossible” to predict. This is ironic because, in my opinion, each of these economic events seems like the “Inevitable” outcome of bad government policy.

So in essence they are “Inevitable Impossibilities”.

As the government continues to push our economy in the same direction that caused all of our previous crises we are very likely to incur more “Inevitable Impossibilities”.

· The “Inevitable Impossibility” of increasing interest rates: Our nation’s interest rates have spent the last 30 years on a continuous trend almost straight down. A significant percentage of our nation’s economic growth is predicated on the continued contraction of interest rates forcing ever more gains from our extremely overvalued bond and real estate markets. Although it is an impossible event to economists, there is a distinct possibility that interest rates will increase in the future. Economists don't understand that as interest rates increase, bonds and real estate prices decline proportionally. So as our Federal Reserve is forcing rates artificially lower it is proportionally increasing the size of the inevitable crisis in the future.

· The “Inevitable Impossibility” of Living With-in Our Means: As a country we have been able to live beyond our means by borrowing resources from the future. We started by tripling our debt load to GDP over the last 30 years. When our individual credit ran dry we learned to use the government in our stead to borrow money from hostile foreign nations in the name of our grandchildren. Although economists feel that it is very unlikely, it is possible that during our lifetime we will be forced to stop robbing resources from our kids. As we continue to steal from our children it is just creating a bigger problem in the future.

· The “Inevitable Impossibility” of Free Investment Markets and Fair Wages: The government has usurped many of our formerly free markets. Interest rates are controlled by our political officials. The mortgage market is run by our government. Political policy sets most wages in the country with massive subsidies to the non productive sectors and huge tax burdens to the productive ones. Presently our elected officials have created a perfectly imbalanced economy where the financial sector earns twice and much as the government sector. And the government sector earns twice as much as the private sector. If the invisible hand of government stopped subsidizing the non productive sectors of the economy, then money would come flooding into the productive private sector. This would cause equally proportionate private sector employment growth with subsequent unbridled prosperity and possibly inflation. We are forcing more and more money out of the private sector. This is creating a bigger inflation problem once the flow of money starts to enter the private sector again.

All the examples above seem to be the most likely culmination of bad government policy because:·

  1. Interest rates can’t be artificially manipulated any lower than they are now.
  2. Asset prices can’t be artificially held above historical fair value forever.
  3. We can’t live beyond our means forever.
  4. In a democracy the government can’t control markets to reward political favorites forever.

But all of these logically “Inevitable” outcomes are not even among the “Possibilities” of our economic community. Economists say interest rates must be lower, asset prices must be forced higher, we must continue to borrow and spend. And absolutely the government is our savior.

For some reason, the most likely outcome of each of these “Inevitable Impossibilities” seems to lie far beyond the scope of our current crop of economic theorists to predict.

Wednesday, August 11, 2010

"Now There's Something You Don't See Every Day"

Something interesting happened yesterday. The 5 year Treasury yield sailed below its historical all time low. In July of 1954 the 5 year Treasury yield spent a month below 1.9%. This was a temporary one month vacation and the only time since the Federal Reserve has kept records that the government’s 5 year bond yield has been below the 1.9% mark. Until Yesterday.

As of yesterday the 5 year Treasury bond is carrying a yield of 1.46%. That is over 21% below the unprecedented all time low in July of 1954. The amazing part of the equation is that it is still trending lower. It is 21% below the record and still trending lower! It reminds me of the famous line delivered by Kathy Bates playing the unsinkable Molly Brown in the movie Titanic. From a lifeboat as she was watching the ship sink she deadpanned: “Now there's something you don't see every day”.

I believe that Molly Brown’s line is appropriate today. We are incurring many events that our nation has never seen before. But the problem is not the events that we are seeing but our reaction to them.

The artificially low rates should be a specter of warning to investors. We are entering a period filled with financial icebergs. The only way to survive is to slow down and be more careful than anytime in your life.

Unfortunately most people are not heeding the warnings in the economy. We have events happening that are unprecedented and many investors are ignoring them as high end real estate, most commodities and all long term bonds are in bubble.

As individuals and as a nation we are steaming full speed into a sea filled with icebergs on a ship that is horrendously overloaded with debt.

My only thought at the moment is that anyone that is stretching to buy a home in the "high end" real estate market is buying a ticket on the RMS Titanic Housing Bubble II.

Low interest rates are pushing people into buying homes that they can’t afford.

Historically people will buy a home that is 3 times their household income. The low interest rates of today are allowing people to buy homes that are more than 6 times their household income.

I would like to suggest that this is 100% above the historical norm! So if you are buying a home today that is 6 times your household income you are making a highly leveraged bet that house prices will never come back down to historical fair value.

And I would like to add that there is definitely a possibility that home prices can go below historical fair value. It is happening in many, many lower end housing markets! Some markets are bottoming at historic valuation lows.

Because of our unsound economy and the historically low interest rates it is very, very imprudent to pay above historical valuation metrics for a home. Lower risk tolerances of investors in the future will lower prices. Higher interest rates will crush prices. Another recession will sink the boat.

The tried and true valuation metrics that you should follow to determine a prudent price of a home is 3 times your household income. And you should not buy a home that has monthly costs that are significantly higher than the monthly costs to rent the same house. Historically, the rule of thumb is not to pay more than 180 times the price of monthly rent for a house.

These are metrics for a normal economy. Presently we are living through the most unsound economy in our nation's history! Is this really the time to stretch your budget and borrow a million dollars to purchase an historically overpriced home?

There is still a flood of investors paying far above historical valuations for high end real estate. They are ignoring the economic warnings up ahead. They are ignoring the valuation metrics of the past.

To all of the speculators that are contemplating running full throttle into the purchase of high end real estate - Godspeed.

Sunday, August 8, 2010

Our Economic Shell Game

We are a nation of speculators that are being hoodwinked again and again in a confidence game run by our government subsidized financial sector.

We lost our savings in the Tech Bubble. Then we borrowed trillions of dollars to play in the biggest real estate bubble of our nation’s history. It was a highly leveraged bet that real estate prices would never come back down to historical average value again. This "fair value" is the average of the historical trend line so it the most likely outcome in the long run.

Of course this was an impossible bet. A shell game is driven by the profiteering of the operator and not the profits of the speculator.

Remember, this is not gambling. This is a shell game. There is no chance of winning.

The government and the financial sector sold our citizens on this impossible bet. Our job producing manufacturing sector that was the envy of the world has been dismantled as our nation’s resources are directed to the huge government run financial confidence game. Instead of growing our economy with increases in savings and productivity we live within the boom and bust caused by each new round of speculation.

The past two bubbles have taken our savings so now we are playing with borrowed money. We must go begging to China for the ten trillion dollars that will fund our next round of bets.

We have just begun the next game as our politicians have supposedly put the pea under the shell. The con is no different than before. We are betting that asset prices will continue to remain above historical fair value forever.

So far the game is exciting. Through massive unsustainable market manipulation by the government, high end real estate is being pushed back into a bubble as the cost to buy in many major metro areas is double the price of rent. Most commodities and many of the more speculative stocks are solidly in a bubble. Long term bonds are in a super bubble.

If the action slows then taxpayers fund bailouts to government shills to keep money in the game. The nimble fingers of the Federal Reserve pickpocket interest from savers to help foot the bill.

At some point in the future the shell will be lifted showing asset prices have come back down to historical fair value. As they absolutely always do, 100% of the time.

The suckers will be rolled yet again. Wall Street economists will call this inevitable loss a "black swan", or a "fat tail" or maybe a once in a 100 year event.

The outside observer must laugh at the fact that the most likely outcome is percieved as impossible by the speculators. This is all part of the "sleight of hand" in performing the con.

After the bust it will be time to go home and explain to our children that we have spent the last 15 years gambling at shell games instead of working and saving. Our money has left the job creating private sector to be wasted in this huge government subsidized financial con game.

I am sure our children won’t understand. But really what rational person can understand someone trying to win money in a shell game!

Our children will go back to just working and saving…

“Oh kids I almost forgot, China will probably be giving you a call soon about some money that you owe them ... "

“Double or Nothing?”

Sunday, August 1, 2010

A Heartfelt Appeal to the Unemployed

I am writing this letter as an appeal to all of the unemployed and underemployed people of this nation to contact your elected officials and demand that they vote for an extension of the Bush Tax cuts. We must help our government to make the difficult choices that will promote economic growth in the future. One of the most crucial decisions of Congress is to choose which sectors get heavily taxed and which sectors get heavily subsidized.

If you are an unemployed private sector worker, then I am sure that it is troubling to realize that your job was deemed unimportant by our politicians but you must understand this is all part of the “invisible hand” of government that will lead us to a higher standard of living in the future.

Quite frankly, no one in my circle of friends is unemployed. But I do read the Wall Street Journal so I understand the “rough patch” that our country is going through.

My friends and neighbors are highly paid government administrators, health care workers, lobbyists, university professors and Wall Street professionals.

We work as employees for the healthcare sector, the government sector and the finance sector. Our government subsidized salaries are increasing faster than GDP growth so we are the growth industries. Our pay is growing much faster than the salaries of the unimportant jobs in the private sector.

We must continue the Bush tax cuts because of the high salaries for the important jobs in government and the financial sector. Many of these employees are paying a lot of money in taxes. The workers in these growth industries will be the driver of consumption in the future. It is imperative that they continue spending lavishly.

I know that even with this perfect logic there are some naysayers.

My accountant Earl says that directing money toward rich government and financial sector employees does not create jobs. To create jobs we need targeted tax credits or direct subsidies for new hires in the private sector. Higher individual taxes and lower corporate tax rates will also promote job growth. He says in this way money goes directly to create jobs without rewarding people that don’t deserve it.

Now I ask you, who is he to say who deserves the money? I told him that even if he doesn’t want money to go to the rich government and financial workers, what about the rich farmers and the rich small employers? They create most of the jobs in this country.

Earl just blathers about how almost no small business owners in this country have wages of more than $250,000 a year, which is the lower income limit on the Bush tax cuts. Earl thinks that by lowering individual tax rates and raising corporate tax rates it just gives incentive for a handful of rich business owners to raise their own salaries and lower the wages of their employees – just like government administrators do as they ratchet up their own salaries and layoff police, teachers and firefighters.

I feel that Earl is just bitter and I take exception to his jibe against government administrators like me.

Earl is self employed in the heavily taxed private sector. He only makes $100,000 a year. Neither he nor his employees are subsidized at all. The government must feel that he has a very, very unimportant job. I have tried to explain this economic fact to him but he won’t listen.

He could make twice as much working for the government itself in a midlevel administrative job or four times as much in the government run financial sector. This pay would be remuneration for doing the same amount of work that he does now! Why would anyone choose to work in the private sector? It just doesn’t make any sense.

But Earl is very stubborn.

He talks about how if we removed the government subsidies from the non productive sectors there would be plenty of money for the productive ones. He says the government’s misdirected subsidies “crowd out” private sector investment. And that most of the small businesses that he works with could hire extra employees if the government got rid of some of the constantly changing and crazy financial, economic and regulatory laws that make it impossible for small employers to compete with the big corporate and foreign employers.

I think Earl belongs in the low paying private sector. He just doesn’t understand economics.

I would like to reaffirm to you little people that if you consider the extension of this gift to the rich, that in the long run it could create more jobs. Honey Poo and I are too busy with golf and “the club” to consider any new business endeavors. But with the continued tax breaks and my government subsidized salary increases my wife is planning to hire her own eyebrow and nail specialist and an additional au pair for Shitake, our beloved Shih Tzu.

This will be two new jobs to help the economy.

Also Honey Poo and I have made a pledge that we will continue to live well so that our spending will trickle down to help the people in need.

Thank you for continuing the Bush Tax Cuts.

Yours Truly,

Rich Administrator
Small Town, USA

Friday, July 23, 2010

A Complete History of Economic Thought

Economic thought can be broken down into three distinct periods. The first is lodged between the twenty two hundred years starting with the height of Greek civilization in 500 BC and ending in the early 1700s with the coming of the industrial revolution. This epoch is populated with the political philosophy of the likes of Socrates, Plato and Aristotle as they attempted to define liberty, justice, property rights and law. These ideals provided a theoretical foundation for economic thought in the coming years.

The second period of economic thought evolved because of the industrial revolution and ended in 2002. During this era Adam Smith, David Ricardo and Thomas Malthus combined the political philosophy of the Greeks with the new profit driven concepts of capitalism. This unwieldy combination of political ideals and financial concepts never evolved to become a science.

During this dark period philosophers believed that savings and increased productivity created a higher standard of living for future generations. It was conjectured that debt could increase a nation’s standard of living in the short term but must be avoided as a long term panacea.

Along with these other misconceptions there was the delusion that the debasement of a currency by a wise and equitable government could create a misallocation of resources that rewards political “favorites”. Simpletons like Thomas Jefferson, Edmund Burke, and Alexis de Tocqueville wrote tomes about this government manipulation and suggested that it was a form of tyranny.

Today these well intentioned treatises are viewed as nothing more than Voodoo economics. Most of these “dismal” economic philosophers have been relegated to the dust bin of history.

The simplistic thinking of our ancestors changed in 2002 as our government and our financial system merged into a single entity. This symbiosis has allowed the science of government directed financial management to replace the theoretical “invisible hand” of Adam Smith. It is fostered by the bounty of the endless money that is created by our Federal Reserve and then funneled directly into our financial system.

There were a few master theorists that foresaw our current managed economy.

While Jefferson, Burke and de Tocqueville were writing about ideals, Karl Marx was using ideas to plan a future economy. He explained why capitalism can’t work and why the government must intercede.

Joseph Stalin commandeered Marx’s concepts and showed us a glimmer of our future as he managed an empire that had seemed unmanageable in the past. Papa’s deliberate style of management used his military to direct his populace through the emotion of fear.

Our elected officials have taken this egalitarian ideal one step further. Instead of using just the emotion of fear to direct an economy, our politicians utilize the fear and the greed of speculators to gently push our economy to new heights.

Today we take this government “stimulus” for granted. Stalin’s economic direction is replicated by economic enticements by our government run financial sector.

Thanks to the Federal Reserve money is constantly pulled from our non productive savers to create new bubbles of economic growth. This growth is not enabled by theoretical capitalistic ideals but with scientifically micro managed "free markets" run by Wall Street economists.

The government stimulus creates permanent economic plateaus very similar to the one predicted by Irving Fisher of Harvard in 1929 with accompanying economic moderation as predicted by Professor Bernanke of Princeton in 2004.

Only these permanent exuberant periods or “bubbles” as they are sometimes called will be the solid foundation for future growth.

The philosophy and ideals of the past have been replaced by hard science.

This economic renaissance is like a roller coaster with all of the falls eliminated and replaced with permanent plateaus supporting prolonged periods of prosperity courtesy of the economic science of our government run financial system.

Sunday, July 11, 2010

History Never Repeats Itself Exactly

Anyone except for perhaps the nation’s highest paid Wall Street Economists should be able to understand our nation’s present predicament. We are in a situation very similar to 1930. Our nation is carrying a historically high total debt to GDP ratio, our investment markets are jittery and we are looking to the government to somehow fix the problem.

During the Great Depression the major economic threat that most people feared was inflation. So the government used politics instead of common sense to solve the problem. Since people feared inflation then it was deemed that the government should abstain from "substantially" increasing the money supply.

Thanks to our unwarranted fear of inflation and with help from the Federal Reserve our economy was locked into 10 years of grinding deflation.

Today our nation has an abject fear of deflation because of the memory of the Great Depression. No matter what the alternative we will go to any length to avoid the dreaded “D” word.

It was this ridiculous deflation fear that caused then Fed Chairman Alan Greenspan to flood the economy with money in 2003. The Greenspan faux pas added to the supply side largess from the Bush Tax cuts to create the biggest real estate bubble in the history of our nation.

Even after the incredible debt, waste and excess of the housing bubble our nation still lives in abject fear of deflation. We are demanding another bubble from the government.

Of course they are happy to oblige.

Chairman Bernanke has removed the bolts from the base of the money fire hydrant and liquidity is shooting high in the sky. I have no idea how he is going to reattach it in the future. Money is gushing into the government and the financial sector faster than the oil spew coming from the Gulf of Mexico.

The high end real estate markets and our commodities markets are still in a bubble. And our long term bond market is in a super bubble. The unrestrained spending of the government and financial sector make Imelda Marcos’ shoe purchases seem frugal.

Although we are in a situation similar to 1930, bad government policy has created the antithesis of the Great Depression. Instead of runaway deflation and economic starvation we are incurring massive bubbles, horrendous waste and historic misallocation of resources.

Speculators are bailed out 100 cents on the dollar paid for by our savers. The highest paid government employees retire as kings at 50 while teachers and police are laid off. The financial sector is receiving record pay raises and bonuses for destroying our economy. Education and health care expenses are on a space shuttle trajectory to the moon. If the public sector was an economy unto itself, it would be in Zimbabwe style hyperinflation.

The private sector is affixed in a position antipodean in relation to the public sector. The private sector must hire illegal aliens and ship jobs to foreign countries to pay higher and higher taxes. Private sector jobs are extinguished with the massive subsidies required by this bloated non productive bubble creating bureaucratic behemoth.

But amazingly, the taxpayer is not upset at this monumental misallocation of resources as long as they are protected from the monster of deflation.

So our fear of the deflation of the Great Depression is driving policy in the opposite direction. Our government will fight tooth and claw against deflation even if it means living from bubble to bubble, creating massive borrowing and waste with the day of debt reckoning being pushed onto our children’s scrawny overtaxed shoulders.

Our highly paid Wall Street economists are telling us that we are on the verge of another Great Depression and that we must use extreme measures to avoid deflation at all costs.

My only advice is to be careful what you wish for.

Stagflation here we come.

Wednesday, July 7, 2010

Our Orwellian Economy

Our economy is in the final acts of an Orwellian drama. Just as in Orwell’s fiction, the individual and the truth are usurped by the power of the state.

· Our Ministry of Housing had a goal to make homes affordable for the lower class. Now that these homeowners are desperately underwater, rich investors are buying up the lower end real estate. Many members of the lower class that were helped by the Ministry of Housing are destined to rent forever.

· Our Ministry of Lending had a goal to make mortgages affordable for all. Now, the indebtedness of our total mortgage market is equal to the value of our mortgaged housing stock. So in the aggregate, anyone with a mortgage is just a high priced renter locked into a 30 year lease.

· Our Ministry of Jobs had a goal to increase employment. It has heavily subsidized the non productive public and financial sector jobs market. To pay for these subsidies the productive private sector was heavily taxed. And now, even more taxes must be levied on the shrinking private sector to pay the unemployment benefits of displaced workers as their jobs are shipped overseas or staffed by illegal aliens.

· Our Ministry of Free Markets had a goal to create fair and stable investment markets. It has manipulated almost all market conditions and gamed the system by bailing out some to the most egregious speculators. This policy has created two of the largest investment bubbles in our nation's history. Not to be outdone the current ministry is using even more extreme measures to create the biggest bond bubble in the history of the world.

· The Ministry of Sound Investing had a goal to manage interest rates for the benefit of investors. It is now punishing savers with zero percent interest rates and using the windfall to bail out speculators.

· Our Ministry of Sound Money had a goal of controlling prices. One dollar in 1950 is now worth 12 cents.

· Our Ministry of Sound Government had a goal to reward citizens for voting appropriately. For the past 15 years our politicians have used ultra long term debt to purchase votes in the next election. Mathematically it has become impossible to pay back these promises with future income, so by definition it has become a Ponzi scheme.

· Our Ministry of Sound Accounting has created bookkeeping techniques to hide the Ministry of Sound Government’s Ponzi scheme.

Presently our Ministry of Freedom is saying that we need to borrow large amounts of money from hostile foreign nations to increase our children’s standard of living and keep them safe in the future.

Debt and consumption are good. Saving is very, very bad. Our non productive government and financial sectors must be heavily subsidized to create economic growth. The productive private sector must be heavily taxed to create more jobs. Up is down. And left is right.

There are many allocation problems with our economy today that are creating a high level of unemployment. Non productive government favorites receive ever increasing pay, benefits, pensions and subsidies. This must be paid for by the ever decreasing pool of private sector jobs.

As an accountant I don’t understand the math behind our policy choices in the ministry over the last 15 years. Why do our comrades in government feel that more borrowing for more subsidies to the financial and the public sector will produce more private sector job growth? It has not worked for the last 15 years. After massive spending and subsidies we have less private sector jobs today than a generation ago.

The pay and job growth in the non productive sectors of our economy have exploded.

Alas, in the end we must listen to the Ministry of Fairness when they say, “all citizens are equal.”

And, as good citizens we must understand that, “the government and the financial sector are more equal than everyone else.”