Zimbabwe or Bust

$100 000 000 000 banknote with three eggs, a sample of what it could purchase

 

Matt wrote:  Couldn’t the government send me a $1,000 rebate check with my IRS return to make-up for the rising cost of fuel for example?

 

Matt,

 

Thanks for the question, but why stop at $1,000?  Why not $1,000,000?  If the government gave everyone a million dollars then wouldn’t that solve everything?   All you have to do is look at the current situation in Zimbabwe.  Everyone in Zimbabwe is a millionaire.  In fact, it has been proposed to raise their minimum wage to Z$100 billion.  Are they better off?  Of course not.  The country is going through its worst economic crisis in history.  There is 80% unemployment and widespread shortages of food and other basic essentials.  So even though they are all millionaires (even billionaires), that is still grossly inadequate to meet even the most basic living expenses. 

 

The key is in understanding the simple laws of supply and demand, the basic fundamentals of economics.  If you increase the supply of money that would in turn increase the demand for goods (i.e. gasoline) which would by law cause prices to increase.  So to answer your question, No, the government giving you $1,000 would not help make-up for rising fuel costs because that extra $1,000 you would get would be offset by gasoline costing $1,000 more.

A Simple Explanation

Why should you care about the failing banks?  Wall Street?  The government’s bailout bill?

                                                                                                                        

Many of you don’t understand what is happening or don’t even care.  Why should you?  It doesn’t concern you, right?  Wrong. 

 

The actions currently being taken by your government are making you poorer.  You only need to understand one word.  Dilution; Webster defines dilution as:

 

1.               To make thinner or less concentrated by adding a liquid such as water.

2.               To lessen the force, strength, purity, or brilliance of, especially by admixture.

3.               To decrease the value of (shares of stock) by increasing the total number of shares.

 

You see, all this bailout money is being printed.  Whenever the government prints money, the money supply is being increased and, as a result, diluting all your money that you have in your wallet, your bank, your investments, etc. The more the government dilutes the money the weaker it becomes and the less you can buy with it.   That is why, if you haven’t noticed, prices are rising.  Gas is more expensive, food is becoming more expensive, clothes are more expensive, cars are more expensive, and movie tickets are more expensive.  The list goes on and on.  Other than a select few; your incomes are not rising at the same rate.  So you simply are able to buy less (a.k.a. you are poorer).  That’s not very fair, huh?

 

That’s why you should care.

You Thought Wrong

Paulson Goes “All In”

The Government has just decided to go “all in” and bail out every institution with financial exposure to the toxic U.S. mortgage market. Simply put, Americans will not be allowed to visibly suffer losses after the greatest asset bubble in U.S. history. But make no mistake, the losses are real and Americans will pay one way or another.

 

By committing trillions of tax payer dollars (not the “hundreds of billions” that Paulson predicts), the plan will save commercial and investment banks from certain bankruptcy. In his statement, Paulson made clear that Congress must pass new legislation to allow the Government to acquire even those loans too poorly collateralized to currently qualify for GSE or FHA absorption. The losses baked into these mortgage products, which Wall Street has been reluctant to even estimate, will now be borne completely by taxpayers.

 

In the press conference, Paulson assured us that this plan was designed to safeguard our savings. But in typical government fashion, the plan will have the reverse effect as savings will be wiped out through inflation. Paulson’s distress and confusion was clearly evident when he fielded questions from reporters. The first asked Paulson to describe his fears regarding the probable economic consequences of government inaction. Paulson provided no answer and promptly exited stage right.

 

While it is dizzying to predict how this plan will be implemented, it is fairly simple to foresee the macroeconomic consequences. The U.S. dollar will be shattered beyond repair. The government simply has no means to make good on the trillions of new liabilities. Interestingly, while both Paulson and President Bush acknowledge that the plan will put “significant amounts of taxpayer dollars on the line,” they did not mention any tax increases. Given the politics, no such move is forthcoming. The printing press is their only solution.

 

Further, since its likely the plan will apply to all mortgage debt, U.S. taxpayers will also be on the hook to bail out foreign institutions that loaded up on the financial sludge. However, once the government takes them off the hook, do not expect them to re-invest the windfall back into other U.S. dollar denominated assets. This get-out-of-jail free card will likely scare them straight. The global mass exodus from the U.S. dollar and Treasury debt is about to begin: do not get caught in the stampede.

The U.S.S.A

By nationalizing nearly 80% of AIG for $85 billion, the Fed is doing a lot more than simply flushing taxpayer money down the toilet. The greater wrong is allowing the agency that has the power to print money to take control of a private enterprise, especially without the approval of the company’s shareholders. The move represents the largest lurch toward socialism that this country has ever seen, and signals the end of the vibrancy of America’s once revered free market economy. Since there is no limit to the amount of money the Fed can create, there is no limit to the number of assets they can acquire.

The “line in the sand” that the Government seemed to draw by refusing to bail out Lehman Brothers was erased in just two days by the very next wave of financial panic.

 

While Fannie and Freddie were arguably, not by me though, quasi-government agencies that deserved special protection, no such status exists with AIG. Where does the Fed get the authority to use the money it prints to take over private companies? Congress never gave such authority and, even if it had, it would be unconstitutional, as Congress itself has no such authority. What about the shareholders? Why didn’t they get to vote on this acquisition? Whatever happened to private property rights?

 

Where does this stop? What other troubled companies will the Fed nationalize, and how much will it cost? Why stop at troubled companies? If the Fed can buy into a sick company, why not a healthy one? Now that we have allowed the Fed to take over any asset it wants, private property rights are meaningless. When oil prices get really high, why bother with a windfall profits tax when the Fed can simply nationalize Exxon-Mobil with a few cranks on its printing press. Who needs Bolsheviks when you have the Fed?

 

AIG is not a bank; it is not even an investment bank. The “lender of last resort” power was supposed to apply only to banks, to prevent runs. It was not meant to apply to any company that had been declared “too big to fail”.

 

what you won’t hear is the Fed is trying to get around some of the more obvious illegalities by having the new AIG shares issued on behalf of the Treasury. What happened to the concept of an independent Fed? Here you have the Fed seizing a private company and ceding control to the U.S. Treasury. Rather then acting independently, the Fed and the Government are merely partners in crime.

 

On the economic side, the Fed expects us to believe this is a smart investment. Since when did the officials at the Fed and Treasury suddenly become private equity experts? These are the guys who missed both the tech and housing bubbles, and who assured us that sub-prime problems were contained.

 

The idea that this bailout was necessary given that the alternative would be worse should by now be fully discredited. All of today’s financial problems are the direct consequence of Fed policy that was designed to weaken the recession that followed the bursting of the tech bubble and the shock of September 11th. Of course, the tech bubble itself resulted from the Fed’s actions to sooth the pain following the collapse of LTCM, the Russian debt default, the Asian crisis, and Y2K.

 

The road to financial ruin, or in this case socialism, is certainly paved with “good” intentions. Fortunately, today’s historic surge in the price of gold still shows that at least a few investors are taking the road less traveled.

Take A Number

Extraordinary

The markets are on a wild ride again today in reaction to the announcement that there is going to be a massive systemic intervention by the government to try and stop the crashing markets.  The government announcement that they are going to provide insurance for money market funds is absolutely stunning.  That means that money market funds were in serious jeopardy of collapsing.  Moreover, they are going to provide a bailout by buying all of the bad derivatives that these banks and brokers have on their books.  The Federal government will now end up owning the toxic junk, leaving the banks and brokers with reportedly good assets.  This is unprecedented in the history of our country.  It goes vastly further than the Resolution Trust Program in the 1980’s.  In that instance, the government took over assets that had real value and simply had to liquidate those assets.  In this instance, they are buying assets that everyone knows have little or no value.  It may take thirty years to work this problem out.  In effect, they are prolonging the agony of this crisis. 

 

Another thing the government is doing is they have halted all short selling of 799 financial stocks.  That has essentially shut down that aspect of the market.  This is a negative thing to do and it is intervention in the market on an extraordinary level.  It basically forces short covering in that market and eliminates balance.  Massive intervention in markets has never been a good idea.  Moreover, the government in buying these various ugly assets will incur huge amounts of losses.  Paulson said they may run into the hundreds of billions of dollars.  With his track record, that is simply hogwash!  They may run into the tens of trillions of dollars.  It may throw into question the credit worthiness of the United States Government.  This is like the Weimer Republic inflation.  As a result we are seeing interest rates rise as treasuries decline.  Paulson also said they are going to have the GSE’s, Fannie Mae and Freddie Mac, increase purchases of mortgage backed securities and the treasury program to purchase mortgage derivatives of one sort or another will be expanded.  The details are conveniently absent.  Whatever the program ends up being, it requires congressional action.  No one knows whether congress can act quickly enough. 

 

Almost all of the analysts said this would not alleviate the problem with the banks.  There are likely to be massive failures among commercial and local and regional banks.  Paulson commented there are over five million houses that are either delinquent or in foreclosure.  None of the actions that are proposed by Paulson will do anything whatsoever to alleviate the problem in the mortgage default sector.   People have lost jobs.  More jobs are being lost every day.  With unemployment at 6.1% and perhaps rising to 7% over the next year, the economy will slow and make all of these problems considerably worse. 

 

it is difficult to have confidence in a massive government program such as this.  The reality is, the situation was graver than any of the politicians or market pundits have been willing to acknowledge.  The system must have been on the brink of an all out total utter collapse.  A problem that is that serious can’t be resolved quickly.

Save the Date (A Reminder)

In light of the recent events, I urge you more than ever to attend this.

A Nice Song

Eye Chee Wah Wah!

Holy Cow!  The biggest most powerful firms in the world are dropping like flies!  Have you protected yourself?  If not, why not?

 

Greenspan: Economy in ‘once-in-a-century’ crisis

In an interview Sunday, the former Federal Reserve chairman said that more financial firms will fail

 

WASHINGTON (CNN) — The U.S. credit squeeze has brought on a “once-in-a-century” financial crisis that is likely to claim more big firms before it eases, former Federal Reserve chief Alan Greenspan said Sunday.  Greenspan told ABC’s “This Week” that the situation “is in the process of outstripping anything I’ve seen, and it still is not resolved and it still has a way to go.” More..

Wilbur Ross sees about 1,000 bank closures: report

(Reuters) – Wilbur Ross, founder of private equity firm WL Ross & Co LLC, expects as many as a thousand U.S. bank closures in the coming months, CNBC said on its website on Monday.

 

The billionaire investor, who made his fortune making investments on distressed industries, said the closures will create opportunities for investors, CNBC said, adding that he is looking at picking up smaller distressed institutions.  “I do think a lot of the regional ones will (close), just as they did in the last savings and loan crisis in the 1990s,” the website quoted Ross saying.  More…

 

AIG Falls After Failing to Give Plan to Save Rating

Sept. 15 (Bloomberg) — American International Group Inc., the largest U.S. insurer by assets, plunged more than 60 percent in New York trading, its biggest loss in 28 years, as the company failed to present a plan to raise capital and stave off credit downgrades.

AIG, seeking to raise $20 billion in capital and sell $20 billion of assets, rejected investments from buyout firms KKR & Co., TPG Inc. and J.C. Flowers & Co., people familiar with the talks said. AIG instead sought $40 billion from the Federal Reserve, the New York Times reported, citing an unnamed person. More..

No Easy Answers

 Regarding “The New Shot Callers” post, Borderline Convert Byanca wrote:

 

Let’s say the government didn’t interfere. China and Japan get nervous…. Decide to pull out all of the money they have loaned….what then? Where’s our US dollar then…

 

There simply is NO solution.  Had the government done the right thing and not guaranteed Freddie and Fannie debt, we would now be experiencing an outright financial crisis. The dollar would be falling sharply along with real estate prices, gold would be soaring and the recession would be deepening.  But even in the midst of all that chaos, the dollar would eventually find a bottom and a new rebuilding period could begin.  This scenario, which is politically inconvenient in the short run, is the best long-term solution.

 

However, by choosing to nationalize Freddie and Fannie, the government has merely delayed the disaster. In hyperinflation, which is where we are headed, a currency can lose all of it’s value. This scenario might be more politically favorable in the short-term, but the long-term effects are catastrophic (i.e. Weimar Republic, Zimbabwe, and Argentina).  Thus this borrowed time will cost us dearly, as the day of reckoning will now involve much steeper losses for our currency.   

The Right P.O.V

Jim Rogers take: an excellent overview and explanation on what is happening in the financial marketplace…

Save the Date

If you live in the Southern California area, please try and go to this if you can.

Jim’s (Sinclair) Formula

This is a very important formula:

 

1. First interest rates rise affecting the drivers of the US economy, housing, but before that auto production goes from bull to a bear markets.
2. This impacts many other industries and the jobs report. An economy is either rising at a rising rate or business activity is falling at an increasing rate. That is economic law 101. There is no such thing in any market as a Plateau of Prosperity or Cinderella – Goldilocks situations.
3. We have witnessed the Dow rise on economic news indicating deceleration of activity. This continues until major corporations announced poor earnings, making the Dow fall faster than it rose, moving it deeply into the red.
4. The formula economically is inherent in #2 which is lower economic activity equals lower profits.
5. Lower profits leads to lower Federal Tax revenues.
6. Lower Federal tax revenues in the face of increased Federal spending causes geometric, not arithmetic, rises in the US Federal Budget deficit. This is also true for cities & States as it is for the Federal government.
7. The increased US Federal Budget deficit in the face of a US Trade Deficit increases the US Current Account Deficit.
8. The US Current Account Balance is the speedometer of the money exiting the US into world markets (deficit).
9. It is this deficit that must be met by incoming investment in the US in any form. It could be anything from businesses, equities to Treasury instruments. We are already seeing a fall off in the situation of developing nations carrying the spending habits of industrial nations; a contradiction in terms.
10. If the investment by non US entities fails to meet the exiting dollars by all means, then the US must turn within to finance the shortfall.
11. Assuming the US turns inside to finance all maturities, interest rates will rise with the long term rates moving fastest regardless of prevailing business conditions.
12. This will further contract business activity and start a downward spiral of unparalleled dimension because the size of US debt already issued is of unparalleled dimension.

Therefore as you get to #12 you are automatically right back at #1. This is an economic downward spiral.

“Socialism” American Style

Jim Rogers: “US more communist than China”