Hiya guys...

I can spell.  What I cannot do is type.  So sorry.  Get over it.

It's been a looooong time since I posted much regarding economic stuff.  However, I listened to some idiots babble on the radio this morning about the Federal Reserve and "Quantative Easing" and I figure its about time to get up on the soap box and preach it some...

The economic situation as I see it:  The USA had a pretty good economic run in the late 1990's.  The tech stock bubble (which was insane) had lots of people really giddy about money they'd "made" on their investment portfolios.  Of course it was all a giant pyramid scheme and bubble.  Idiots actually thought that paying $100 for stock in a company that had NEVER made a profit was okay, since some other idiot would buy that same stock tomorrow for $120.  The bubble burst, and people lost money.

Somehow people thought that the economic situation DURING the bubble was somehow where we should be economically.  Greenspan and the Fed decided to get the economy into gear and try to get us back to the bubble years (think about that:  How realistic is it to expect we can live in a perpetual bull market?).  They deliberately encouraged massive borrowing.  They lowered rates and encouraged massive amounts of consumer spending.  Remember the post 9/11 timeframe when our government tried to convince us that it was our patriotic duty to spend money???  We got govt checks and were told to spend 'em.

Well, Greenspan's plan worked wonderfully - for a while.  Americans borrowed like crazy, spent like there was no tomorrow, and basically consumed all of 2009, 2010 and 2011's income back in 2006 and 2007.  We had a housing market that exploded, and people treated homes they didn't actually own (if there is a mortgage on it you don't own it.  It's the bank's house until you hold a clear deed) as ATM's withdrawing massive home equity loans against artifically high home values.  We know this story:  Like all bubbles, this one popped too.

So we are back to a situation like the year 2000, with one big difference:  Our economy sucks, nothing is really moving, and now we have massive debt (personnally and collectively) on top of it all.  Greenspan is gone but there is a younger Greenspan-clone in his place.  The economy is in the shitter, and americans are screaming for 'relief'.

Think about this for a moment:  We apparently want a return to the bubble-like bull markets.  Is that realistic?  I have an analogy for you.  Pretend its October.  You want to live well and be extravagant at Christmas, so you take out $50,000 worth of new credit.  Come November you go nuts shopping, buying all kinds of stuff.  You book vacations, eat in restaurants, the works.  You aren't actually working any harder, nor are you actually making any more money.  You are simply borrowing and spending.  Christmas is one of the coolest on record -  or perhaps the warmest since you spent the holidays at a  5 star resort in the Carribbean.    This is life as you'd like to live it.  Sooner or later December ends, January rolls around and then "they" come:  The dreaded credit bills.  The fun is over, the gifts have been given, the tan is faded and you are left with a 12 inch high stack of credit card bills.  Its not so fun now.  Your natural inclination?  "I WANNA GO BACK TO CHRISTMAS! ".  THis folks, is what is happening.  We borrowed and spent and got used to living beyond our means.  The party is over and the bills have come due.  And rather than admit stupidity, we (collectively, as a nation) want a return to the pre-Christmas shopping days.  We don't want to pay the bills.

In economic terms we want a return to early December, where we spend money we didn't have and live beyond our means.  Somehow we think that short little spending spree is the way our lives should be, and that somehow that six week pre-christmas period is what "normal" is.  This is where we are now:  We are in January, wanting a December lifestyle we aren't entitled too.

Our government  - the same idiots that actually planned, encoruaged and supported this stupid mess BTW -  is desperately trying to figure out how they can extend the preChristmas shopping buzz through January and into February.  They did that.  They shuffled some bills, played a giant shell game with federal funds, and now its April.  They problems didn't go away (do credit bills ever just disappear?).  They just got bigger.  No one actually tried to pay off any debt.  We just borrowed from  different sources  (took additional lines of credit) to temporarily differ the pain.

It's April people.  And our situation is dire.   We have loads of outstanding debt.   Just as credit card companies put limits on borrowing, our creditor nations are starting to limit us.  THey realize we (not just Obama, but all democrats, republicans, senators, congressmen and regular schmucks on the street) haven't got a clue and are likely to be a bad credit risk.  As a result they don't want to lend us yet more trillions.

The Fed realizes the shell game is up.  They'd already robbed all the Peters to pay all the Pauls, and there  aren't any more resources left.  They cannot lower rates anymore (they are already so low as to be meaningless).  They cannot stimulate the economy much more.  How can they get us back to the pre-Chrsitmas shopping spree days???

The answer is increasingly looking like it may be quantitative easing.  THis is remarkably simple:  Some institution owns $100 Billion in US treasuries.  These treasuries are not particularly marketable since everyone on the planet know we suck and are economically irresponsible.  The Fed then says "hey, I'll buy those treasuries.  Here's $100 Billion".  Fair enough.  Now there is 100 Billion in circulation,  and that money can be used to buy more cars, buy more machines, and otherwise help encourage more spending (which BTW is the same damned 'answer' that from the same damned people that us into this mess in the first place!).

Problem:  Where did the Fed get the $100 B to buy those treasuries???  Simple:  They made it.  Poof!  Instant money.  It's like this:  Imagine you are in those post Christmas credit problems.  Its April and the problems have gotten worse.  This kids are screaming for new phones, cell plans, and running shoes, and the Mrs. is threating to go completely crazy if you don't drag her to Aruba for Spring break.  The choices are to tell everyone to get stuffed and live with it OR you can go to the garage, fire up your own printing press and make a few pictures of dead presidents in various denominations.   The counterfeiting operation would certainly make life easier for another month of two wouldn't it?  However, does ANYONE here think that this kind of solution won't have some sort of eventual consequence?

Well, Quantative Easing is exactly like the garage printing press analogy:  Don't actually fix the problem.  By all means DO NOT tell people that they cannot life like its Christmas all year. Don't tell them to suck it up, sell the the Lexus and pay their fucking bills.   Instead, fire up the federal presses and simply print money.  Make it up.  Poof!  Instant answer.  This fixes the issue for year one more month.  If we are lucky we can make it to July before it catches up with us....

Problem:  Sooner or later people realize you are passing bad bills.  They won't take your phoney greenbacks.  Well, they sometimes do, but they don't take the big bills, and on principle, they charge you for for everything becuase you are a bad risk and you have a repuation as an asshole.  You don't get deals on stuff anymore.  You gotta pay the asshole premium.

Folks, this is happening right now.  See the price of gas has gone up?  A lot of that is due to currency devaluation.  The Canadians and Arabs don't want as much of our money.  Its worth less.  They demand more of these dollars for the same product.  As a result, prices go up.  If and when the Fed gets into wholesale Quantative Easing (which is DC-Speak for wholesale counterfeiting on a national scale) the value of our dollar will slide further.  It will take many more dollars to buy the same stuff.  This approach  takes the April bills and postpones them  until June or July.  However, they'll be bigger bills then, and we'll have even fewer options.....

This storm has been gathering power and intensifying for years now.  It's getting bigger and more intense.  And this nation of ours - especially the "leadership" -  has its collective head up its ass and refuses to acknowledge the real problem.  It's living beyond its means, has been doing so for years, and the creditors are kicking inn the doors.  Robbing Peter to pay Paul and trying to defer the bills won't make the problem go away.  Taking a new line of credit to pay off the old one doesn't fix the problem.  We are now resorting to national -scale counterfeiting, and this will critically deflate the value of our dollars.

I explained this, in simple terms, to my 13 year old daughter.  I didn't get half way through the explaination when she started replying that "this is crazy!  THe problem will only get worse!" and comments like "I'm really screwed aren't I !?".  If my 8th grader can see the big picture why can't adults?????

I know there are some here who think SHTF means nuclear war or zombie apocalypse and nothing short of end of the world counts as a SHTF event.  I'm one of the few who figure economics can be SHTF events.  Some of us follow FerFal's posts.  There are others.  To my mind gasoline at $28.55 a gallon and bread at $18.00 a loaf qualifies as SHTF in my book...  It feels like we are going to end up as teh United States of Zimbabwe....

Buckle up kiddies.  I suspect this is gonna be a rough ride.....

Great post.

This is much more realistic than a suitcase bomb. If this happens as it is beginning and then we are hit w/ a Zimbabwe style attacks then it will get crazy quick. We better have a 5 point harness cuz a regular seatbelt ain't gonna do.

Indeed.  I don't know what we can do. Both parties are equally to blame. I'm going to vote against the incumbents as much as feasible, just to get some new blood in the govt. But the odds of anything changing in a significant way is pretty darn low as I see it.

We're living within our means, have low debt (other than a rapidly shrinking mortgage and variable but high medical bills). I don't know what else we can do there.

We're reasonably prepped for hard times, still working on that. Don't have a lot of discretionary spending money, but still moving forward.

I really think my 2-year old son is going to grow up in a country that's really screwed up. We already plan to introduce him to the reality early on that his life is likely to be less free, more constrained, fewer opportunities than we had, and definitely poorer than our's. I feel bad about it, but I don't know what else a mere peon on the Corporate plantation that the US has become could have done about it.

I also don't see how things are going to get back to pre-2007 levels in my remaining lifetime. We have a nation in which nearly half the people don't pay Federal taxes, a gigantic entitlement mentality, out of control social spending, a "leadership" that WANTS to run this country into the ground so they can put in place their idea of a Socialistic utopia, and many people not not only lost their way but lost hope in our country as well.

Great post

I'm in north Texas , wher things are "better" than the rest of most of the nation.
Many older folks are suffering..... Trying to give help to their relatives, and community.
That and pay the ever riseing cost of taxes.

If this is good, or better than..... Joining the rest of the bad slowly..... Is going to suck.

Great post-

I'm 28 right now, have a pretty secure part-time construction/handyman job and have a small landscaping company on the side.

I have a fair bit of savings, both from a small inheritance and money saved.  Bought a house a year or so ago (with a mortgage; with the renters, it more than pays it's own mortgage payment every month).  

I see an economic SHTF as the most realistic "oh shit" type of situation that I will likely encounter....the last thing I want to see at 28 is everything I've worked for/have get wiped away b/c I have to pay way inflated prices for items such as gasoline/food or get have savings get wiped out due to horrific inflation or economic depression.

I'm currently in the process of both reducing my monthly expenses to as close to $0 as possible and producing as much of my own needs "in house" to avoid an outlay of funds.  

My goal is to live on half of my salary from my part-time job.

I've just really started in the prepping/food storage arena, like alot of folks I started with the firepower first...before I realized that the firepower wasn't going to last long if it's owner starved to death.

I'm just hoping I don't run out of time before the proverbial shit really does hit the proverbial fan...I feel like my alarm didn't go off this morning and now I'm rushing to get ready for the day......

The real issue is that business treats the US like some sort of bottomless market but doesn't provide the jobs to fulfill this expectation.  Salaries turned to equity turned to credit cards turned to unemployment benefits.  Sort of like the final fusion cycle of a star when the Hydrogen (jobs) runs out.  

I'll keep this real simple so there's a chance someone will catch on.

What folks fail to recognize is that this economic collapse has been DESIGNED by the USA's enemies within and without to destroy our country without ever firing a shot and turn it into a Totalitarian state, in this case a cross between possibly Cuba, South Africa and Venezuela.

This has been in the works for fifty+ years and now suckers it's about to reach a conclusion in the next ten.

[Now back to your beer and TV]

So much wrong with that post it's hard to start...



But the collapse junkies will eat it all up...



So here's a more accurate look at what happened:



1) The US has had a 'looming problem' in the housing market for decades, ever since the government started meddling with lending standards in the name of 'fairness', and operating unofficially government-backed mortgage banks with a political mission to 'expand home ownership' rather than make a profit.  These government banks also enabled the mass securitization (conversion to bonds) of mortgage loans



2) The .com bubble was a once-in-a-lifetime event, triggered by a massive technological shift (the adoption of interconnected direct-to-home networked data communications on a widescale basis). It has nothing to do with the Fed or monetary policy.



What it has to do with, is that (A) the internet opened the stock market to a HUGE new group of investors AND simultaniously made it possible to trade without a broker, and (B) these new investors were completely ignorant of economics & finance (kind of like our doomer crowd) and thus were eager to flock to anything with '.com' or 'Internet' in the name. There was also a similar trend in stocks that had anything to do with 'Linux' or otherwise had a 'novel' business model.



The problem is, these 'noval' internet business models were crap in many cases - run by folks with no business experience, there was no desire for anything but a higher stock price - and often no way to know HOW to produce anything else. Eventually the bills came due, and they couldn't be paid in stock...



The bubble popped - folks who got out when the getting was good had made their money, but a whole bunch of the 'new' investors that started it got hosed.



3) At the same time they were 'riding the economic wave' of the .com era, the Clinton Admin was pushing banks agressively on the subject of home loans - using every tool they had to force banks to lend to anyone with a pulse & a stack of paperwork.



The banks responded to this by (A) developing a wide range of exotic loans that could be offered to 'politically mandated' borrowers, and (B) packaging these loans up into bonds (securitizing them) and selling them off ASAP.



THIS is where the train goes off the tracks.



4) With the internet bubble gone, whatever 'fool's money' that was left from the .com bubble flowed into housing... Folks bought multiple houses trying to 'flip' them - often with no regard for fundamentals. Our ever-famous 'Internet direct' model that enabled the .com bubble, was ready and available to help anyone with money (knowledge not required) get directly into housing... The Bush administration was not as 'aggressive' as the Clintons - in fact, they actually saw some of this coming & tried to stop it, only to be shot down by Congress - even though it was probably too late anyhow...



Now, under normal circumstances, this would not have been a problem. CONTRARY TO WHAT THE OP SAYS, there is NOTHING wrong with cheap credit, the Fed's monetary policy, securitization of mortgages, or anything close to it - all of this works fine so long as the government DOES NOT FORCE THE MAKING OF BAD LOANS. All of the other 'issues' mentioned above have NO DESTRUCTIVE IMPACT so long as the people approved for loans are those who can pay them back, and the 'bad' loans are kept to normal proportions... But when Govt throws a wrench in the works, you break the machine - no matter what the interest rate is.




5) 2007/2008, the bubble pops. Loan resets are coming, people can't pay. The amount of bad debt issued on government mandate starts to become apparent. The 'bubble money' leaves, and for some reason flows into oil. We get a record run-up in the price of oil (well over 100/bbl), with no fundimentals supporting it. The 'Prophets of Doom' proclaim that it MUST be inflation (never mind that gas is so critical to the economy, that a fuel bubble will raise the price of everything else due to cost-of-production, not inflation). Except that it's not. It's another bubble.



6) As the oil bubble puffs itself up higher and higher, the actual damage done by the govt-forced bad loans and associated housing bubble spreads throughout the financial sector - wiping out a few well known firms & giving some others fire-sale priced merger deals... The damage, at it's worst, almost freezes the short-term credit markets in Sept 08. The bubble money leaves oil (resulting in a RAPID drop from the over 100, down to the 60/bbl range - and with it, the return of $1.99/gal gas) and heads for everyone's favorite recession-time asset-bubble: GOLD.



5) When this happened, the 'voices howling in the wilderness', who have been predicting the 'end of the American economy' for a variety of bullshit reasons, all latched on to the popping of the housing bubble. It's caused by the US not being a manufacturing economy anymore, some say... Others blame the Federal Reserve & offer their 'Gold-brand' snake oil as a solution... The 'Church of Populisim' blames the rich & the 'evil bankers' (who are no doubt doing this *on purpose* to hasten their Pinky-and-the-Brain style world domination conspiracy).... And still others blame consumerisim & claim that we are 'getting our just deserts' for borrowing instead of saving....



ALL OF THEM ARE WRONG - just like they've always been... Just like the Westboro freaks & their message that 'God is punishing America for homosexuality by killing it's troops', the 'Church of Doom' is equally wrong in preaching that the recession is 'punishment' for our supposed economic sins.



It's bullshit... But bullshit sells ad space & keeps the faithful buying books, beans & rice... Oh well...

Most all of your facts are right, but your interpretation of them is flawed as usual. The dropping actual value of the dollar is a major factor in the economic collapse I am watching in real time right now. You can pretend all you want.

The bubbles are not at all related. Not even a tiny bit. The money from the dot com bubble vanished. It didn't move to housing. That is absolutely silly. Easy credit created the housing bubble. Money that did not and never did exist.

50% of my industry is gone. We are talking about a pretty damn big industry. My company is growing, but I am watching many of the big boys in my industry getting ready to fail. Nothing you say can change the facts on the ground that I see all over the nation in my travels. You may need to realize how little you actually see of the real economy and not what you see on TV and hear on the radio.

You are absolutely correct about the government being most of the problem.

"The banks responded to this by (A) developing a wide range of exotic loans that could be offered to 'politically mandated' borrowers, and (B) packaging these loans up into bonds (securitizing them) and selling them off ASAP.

"THIS is where the train goes off the tracks. "


The 'train came off the tracks' decades ago, but as usual, you can't see it.

I have issues with other parts of this post but I'll just pick on this one in particular. The Fed's ZIRP policy is decimating the ability of willing savers (individual, corporate, and institutional) to earn a reasonable reduced-risk return. This is especially devastating to fixed-income seniors who cannot earn enough from their savings to live on and are being forced to consume their capital at an ever increasing rate. Clearly the dufus factor in DC caused a distortion in lending practices. But don't think for an instant that there is "nothing wrong" with the Fed's monetary policy.

On a more SF related topic, I was reading that BoA has now decided to halt foreclosures in all 50 states because they forked up the paperwork in most of them. That's bad enough. But, since all the other major banks are in the same boat, it means that it could be years before clear titles can once again be established. And, it's entirely possible that since the big behemoths don't have clear title, and they can't foreclose, all those people who are underwater on their house might say "Molon Labe".  So, not only are the major banks going to take a huge hit on their current income, it's likely they will take a huge hit on future income AND their asset/capital base.

The other dirty little secret comes from this report from the gubbermint Office of Comptroller of the Currency Report on Bank Trading and Derivatives:

OCC Bank Trading Report 2nd Qtr 2010

What it says is that "Five large commercial banks represent 96% of the total banking industry notional amounts and 85% of industry net credit exposure." Care to guess the notional amount of derivatives for the industry? Try $223.4 TRILLION. That's right, enough to blow the world up several times over. If even a fraction of the mortgages that the big boyz screwed up on are deemed unenforceable, these derivatives, many of which are CDOs/CDSs/etc. on mortgage tranches, are going to seriously kick somebody's a$$, probably all 5 banks simultaneously. (Since most of these derivatives were sold to each other, the explosives are wired to take the whole building down.) This is why the FASB got threatened by Congress to continue to allow mark-to-unicorn fantasy accounting for "asset" valuation. And why the Fed is giving money to the banks to buy treasuries that then are deposited with the Fed as "excess reserves" which the Fed pays interest on to the banks. All with your money.

Oh, and who is now the number 2 holder of treasuries? If you said the Federal Reserve you would be correct. It would be if Mastercard were now the #2 holder of Visa debt. Ridiculous, and dangerous at the same time.

This is why I've been telling people I know to take some extra cash out of the bank and keep it someplace safe at the house. When the first kaboom happens, you'll know what's coming next. Until these issues are dealt with appropriately from a regulatory/legislative standpoint, we're all juggling bottles of nitroglycerin with oily hands. This isn't speculation, gloom-and-doom, tinfoil hat, or anything else–– it's fact.

 

Actually, NONE of this is speculation. The only real question is one of likelihood, as in, what is the likelihood that continued problems in mortgage lending, even after the the billions of purchasing of so-called toxic assets, will cause the implosion of one or more of the top 5? I say it's probably 50:50. You may say it's 10:90 against. I'm hoping you're right, but I'm preparing as if I'm right. Whether I store my FRNs in a bank or my home safe, the actions of the economy on the relative value of that cash is the same. Ergo, the comment about being behind the curve is incorrect. If one or more of the gorillas falls out of the tree, I'll actually HAVE my cash, at whatever value it may still have left, whilst many who didn't will be waiting for the broke-ass FDIC or a RTC entity created under Frank-Dodd bill to get their cash out.

Oh, and the Fed's policy of buying freddie/fannie paper (aka fraudie/phoney notes) is also "distortionary" (my new coined word) and bad policy and is/has contributed to the problem. Just to stir the pot some more....

Ok, so I've read through this and I gather that there are several trains of thought on this.

I understand most of the factors at hand, but am working on trying to break down where I think they lead to.  I'm very interested to read your debate back and forth.

I think I understand why INFLATION would be bad (for me anyway); money that I have in the bank will become less valuable and it's power will decrease.  Also, I imagine that the prices of oil and food would increase as well.  Probably there are a million other reasons why it's bad, and probably some reasons why it would be good...

My question:

Why would DEFLATION be so bad and why would the Federal Reserve be so worried about it?

Thank you for your replies...

place holder

Please bear with me, there is a moral to my story.
Maybe each of you may know someone with a similar predicament.

I work with a guy who became quite the land baron.
He owns vacant land  in CO an CA.
Closer to home he owns at least five properties, some with multiple dwellings for renters.

During the run-up to the housing bubble, he was wheeling and dealing properties,
going to Vegas and shooting craps, buying expensive gas-guzzlers and fancy toys.
His latest acquisition –– a thirty-year-old house that originally sold for 35K – for $650,000.
Every room is full, money grows on trees.
Life is good.

Fast-forward to present day.
No one has money, not many jobs, and many vacant rooms.
He is now dealing with shit-house foreclosure lawyers and he is trying to walk away from his obligations.
He also refuses to pay a dime, even tho he collects some rental income monthly.
He and his (unfortunate) wife have nothing in their retirement accounts,
maxed out all equity loans, numerous platinum cards,
but they still manage to drive their Suburbans and Escalades.
He has been trying to offload his CA and CO properties for 20 years w/ no takers.

To make a long story short,
he is so overextended and so much in debt,
that no one wants to lend him any money, for fear that they will never see the money again.
I don't know if he has been able to obtain any loans, but if so,
I am certain that the interest rate is quite high (get as much now before he defaults)

His predicament is too much debt, and virtually no light at the end of the tunnel,
all caused because of easy money and poor economic policies.


The moral of the story:
This country is in the same boat.

I don’t think anyone in their right mind can say that what is happening right now can keep going. The easing, the huge no budget programs, the money owed and none coming in.
It all has to change, no matter what.
We can’t compete with 3rd world countries at anything-until we become one.

Everyone should realize that the Gov knows this and they are not going to get the finger pointed at them when the real changes have to made. It will not be debated, it will not be voted on.

They need an event so the drastic changes can be slammed down everyone’s throat and be done so we all don’t blame “them”.

It will take an event, soon, but what will it be?

There are C0mmvnists in the Wh!te H0use......

Deflation can be bad in two respects. First, it compresses profit margins for companies that have to lower prices to sell their goods and services. Less profit == less future investment in capital equipment, durable goods, etc. and also less current income for people who spend money like proprietors and shareholders. Second, as companies try to cut costs to maintain their margins, people get laid off. Wages can also be lowered in this scenario as well. BUT, if prices reduce faster than personal incomes, that can actually be good since it allows people's money to go farther.

What we seem to be having right now is simultaneous deflation, inflation, and stagnation. Deflation in the sense that SOME prices are falling and margins are being compressed (like in housing). Inflation in volatile commodities, many of which are necessities (food, gasoline). Stagnation in that unemployment remains stubbornly high and if you exclude gubmint cheese, the economy continues to contract or stay flat. Traditional economist's heads explode with the thought of these 3 things happening simultaneously but the data clearly shows it is. This is what makes policy-making decisions hard for the eggheads that only understand academic lever pulling at the macro level. And yet they continue to intervene in all manner of places as though they know what they're doing. Empirical evidence clearly shows they do not.

Just find the nearest brick wall and start pounding.

Some people here are right and some think they are right.  Usually the two aren't the same person.

There is a minor point you are missing to an otherwise very good post.

When the fed talks about QE, they are not talking about buying debt that is already in the hands of someone else and thereby buying off that debt. they are talking about buying US treasuries from the US treasury because nobody wants the amount of US treasuries we need to pawn off in order to fund the current debt refinancing and the budget deficit.

In your case, the QE eliminates some debt, what is really happening is that the debt doesn't get eliminated, and the hole just keeps getting deeper because we keep spending except the fed has to buy the treasuries, because no-one else will.

And, the Fed has bought not only treasuries, but Fannie/Freddie paper and some commercial paper (early in TARP). I'm guessing part of the reason for doing this was/is to keep interest rates lower in both the general financial markets (if they didn't buy treasuries, the .gov would have to pay higher interest rates which would drive up the deficit faster which would necessitate more treasury note issues, rinse, repeat) and the mortgage interest market (to try to stimulate home buying from the abyss it's in). In the case of housing, the moral hazard is already here in that .gov has become the lender of ONLY resort, not the lender of last resort.

My question is, Other than preparing as best we can, is there actually anything we mere mortals can actually DO individually or collectively to help fix this problem? (Voting in conservatives that have a clue not withstanding.)

Apparently Bernanke is a doomer idiot also

And Greenspan is a doomer idiot

I'm not going to quote Dave, as it makes a long and torturous thing to read, but to his point about cheap credit not being bad.  It's not bad at all, but when credit expansion is allowed to far exceed GDP, problem arise, as we now see.  The FED is supposed to operate under a mandate to keep credit expansion in liine with GDP.  They failed miserably.  Now we have a credit bubble to deal with.  

What's the answer to too much credit in the system?  More credit, of course.  This will not end well for some.


To another point, there is absolutely wrong with securitization, as long as it is done legally.  The forclosure debacle going on right now proves that when securitization is done outside the law, bad things happen.  The banks should be made to eat every bad loan they made and securitized, especially if something illegal was done in either process.


The gov't may have impicately forced loans to be made to those that can't afford them, but the banks had no problem in collecting the $Billions in fees to make and securitize the loans, boosting profits and handing out huge bonuses.  They made their bed as much as the gov't did.

Deflation does 3 things that make it economically FATAL:



1) The value of money goes UP.



2) The availability of money and credit go DOWN (the simplistic definition of 'deflation' is 'a decrease in the money supply, all other things remaining equal').



3) The value of everything else (physical assets, equities, etc) goes DOWN.



Most Americans have their 'net worth' in their physical products, NOT in bank accounts or packed in cigar boxes...



Further, most American businesses that are NOT pure intellectual-capital/service based, have an inventory that they must purchase in advance of selling it - usually on short-term credit.



So:



A) Deflation harms the value of the stuff people actually have



B) Deflation cuts off credit that businesses need to operate



C) Deflation cuts the value of business inventories, making it harder (or in severe cases, impossible) to turn a profit, since inventory is bought at pre-deflated prices, loses value while it's held, and then by the time it's sold, the market won't bear the same price it would have earlier on.



D) Due to (C), deflation results in higher unemployment.



IAW, Deflation absolutely obliterates the 98% of Americans who don't save large quantities of cash, and depend on the modern economy to make their way.
 

Thanks for your replies on Deflation....scary thoughts.

Your say 98% of americans would be fooked because they have no savings...I imagine that those of us with savings, would just sit back and use our saved money sparingly, but as we needed (as we lost jobs, prices went up, etc.)?

I'm far from an economist, but I've lived in the real world for a few years (I'm 28, been out on my own since early 20's) and think I'm a pretty smart guy.  Not a physicist or anything, but I can think critically now and then when required.

None of this shit makes any sense to me whatsoever.

From my perspective, we seem pretty fooked.  Seems like we're maxing our national credit line (and just increasing it when we reach it, I know the congress has voted several times to do that over the last few years).  Also, it seems like most of the country runs their personal financial lives like the Government does, living beyond their means.  

It would also seem to me, that the country won't get back on it's feet unless the Citizens shape up their financials (pay off debts, spend less money, start saving some) and the Government does the same.....just be responsible about it.  I don't know if I can really see that happening.......Too many people I work with or deal with on a daily basis are living paycheck to paycheck and just one bad situation away from total financial disaster.  Seems like the USGOV is in the same boat.

So what does that mean for the minority...the ones who do save a little bit, don't live beyond their means, etc?

I suppose the simple answer is...."That's why we're here, in SF.  To get ready for when the feces hit the air circulation device".  There really is nothing we can do, except prepare ourselves and our family's for the bad times.


Eeesh.

The "modern economy" depends on an infinite ability to expand credit.  Too bad reality doesn't support that concept.  You're seeing the results of that right now.

Credit expansion has to be managed.  It has to reflect the underlying economy and it's ability to service that credit and produce stuff.  It doesn't reflect that now.  The reversion to the mean, meaning the return to normal credit expansion rates that reflect the real economy, is what is happening now and what the FED is doing its damnest to prevent.

This concept escapes alot of people, including the ones running the economy right now.  The only answer they have to a credit overcapacity issue is more credit.  The alternative is too painful and politically damning for them to even consider.

Some of the comments above about deflation are just flat wrong.

Deflation does indeed make the value of money go UP. However, that is both a GOOD and necessary thing at certain times during economic cycles. If you are living on a fixed income, for example, deflation allows your money to go further. Inflation takes that away (as it has been doing for decades now). If you are working and prices fall faster than wages, again you win. Periods of contraction (recession, etal) is when deflation is SUPPOSED to occur to counter those boom periods with inflation. The Fed's moronic ZIRP inflation-inducing policy has managed to keep prices up while real incomes fell. This is why your money is buying less even though the gubmint shills are saying inflation is "under control near zero". Who is this bad for? The 98% of Americans who work, those that don't, and generally anybody that lives, eats, spends, and consumes oxygen. The Fed is chartered by law to try to maintain "stable prices". Stable does not mean "always going up", i.e. INFLATION. Where deflation can bite is if wages fall faster than prices. The same is true if prices rise faster than wages.

The availability of money and credit is NOT directly tied to inflation/deflation and is much more tied to interest rates. As one poster above indicated if credit isn't managed properly bad things can happen (bubbles happen or growth is retarded, both of which have happened recently). Interest rates affect the cost (and subsequent availability) of money and credit. If you want to see the disconnect between reality and what the Fed has screwed up, look at the M2 over the last 5 years and compare that to the other indicators in the economy. Some people also seem to confuse PRICES and VALUES. If I live in my house, it has a certain value to me relative to other things I could be spending money on. That does not change regardless of how much (or how little) somebody is willing to pay me to sell it to them. Deflation does not cause VALUES to go down (which are relative, not absolute), it causes PRICES to. (Also, during deflation, your money assets are worth MORE, not less.)

There is a basic tenet that I try to repeat as often as I can about government dabbling in the economy:

The economy slows BECAUSE of the government, the economy grows IN SPITE OF the government.

Dave, I doubt Frozenny is going to get sucked into your trap.  You type this long post that essentially agrees with Frozenny, but for different reasons, and you also add much data that is also correct but you conclude he's wrong?  You are here to stir things up and you know it.

Often, Dave's facts are absolutely correct. His conclusions are usually silly. He buys the bullshit government line most of the time. Even when it comes directly from statist politicians.

 

Agreed.  He's all theory, no application.

Stalin/Lenin got it partly right...

Historically scary link...

http://en.wikipedia.org/wiki/Useful_idiot

"Useful idiot" is often used as a pejorative term for those who are seen to unwittingly support a malign cause through their 'naive' attempts to be a force for good."


Sadly, this country is FULL of folks who can't think beyond what they are told or read/hear in the media.

Look at the whistling, groveling, cheering crowds singing  Ki-Umba at the rallies for politicians who are stealing the USA right out from under those same blind brainwashed stupid present day groupy 'useful tools'.

 

Monetary Policy *is* all theory...



With that said, the application is simple enough:



98% of the population - including most of our major corporate interests - benefits from a steady, low rate of inflation...



2% does not benefit, and might actually benefit from deflation...



Guess who's for dinner, and who's eating?
 

I suppose that there's little point in debating application of economic theories when some folks have a fundamentally flawed understanding of the US economy.

First, and foremost, "stable" is not "ever increasing". Period.

If the "oft quoted" claim about the dollar losing 95% of its value is correct (not saying it is or isn't) then you would need to have real incomes increase by 500%, not 300%, to keep pace. So, IF that claim is true and IF real median income has only risen 300%, then the median American has been losing ground to inflation for nearly 40 years. This is why deflation, occasionally, is absolutely MANDATORY at certain times in an economy. Again, the Fed's charter is for stability of prices and full employment. Debasement of the currency does neither. And when is it ever the Fed's job to cover losses on PRIVATE transactions such as mortgage defaults? (Hint: NEVER) Furthermore, since our economy is almost completely dependent on foreign imports, clobbering the value of our currency relative to others hurts EVERYONE (or, at least 98%). Who's having whom for dinner, again?

And you continue to advocate a ZERO GROWTH economic policy - artificially created 'boom and bust' cycles, due to an insufficient money supply.



It's this false premise, that undermines everything you post.



Once you stop trying to 'protect' the value of the currency long-term, perpetual growth becomes possible, which actually supports the value of the currency (by increasing demand for money as the economy grows, thus 'keeping up' with the increased supply).
 

I can't think of one significant recent .gov law, policy, or initiative that effectively contributes to MEANINGFUL job growth and INCREASING productivity to build wealth in the US.

All the .gov has done is passed laws to hamstring our economy, tighten restrictions on entrepreneurialism, strengthen enviowacko laws, and saturate political correctness/idiocy into every institution and person.

Among many other destructive policies.

When they relax regulations so that  jobs, mining, manufacturing, ag, etc, can begin to grow again, let me know.

Instead, they have passed regs to KILL our economy [and line their pockets while spouting disinformation and propaganda to influence their useful tools to reelect them].

They are succeeding BRILLIANTLY in killing our economy and destroying the middle class, MANY of us here will be next.

****[Sort of like a modern twist on the engineered famines of years past that were used to STEAL CONTROL over a country]

Think about it.

While HI-IQ Idiots are analyzing every piece of lint in their navels....

I think some folks may be confused between growth/shrinkage in GDP, growth/shrinkage in the money supply, and growth/shrinkage in prices and wages/income. They are distinctly different, and do and have changed at different rates. The US has had periods where the growth in GDP exceeded both the growth in prices and growth in money supply (as it's tracked by Uncle Sugar). Conversely, we have also had periods where GDP contracted yet their was significant growth in prices (e.g. during and after the arab oil embargo). Advocating a slowly growing economy over the long term (good) is not the same as advocating low but always positive inflation over the long term (bad). Please be sure to be more specific as to which type one advocates as it does make a difference.

Further, there has not been nor is their likely to be (unless some regulators are too busy porn surfing) a condition where stoopid, risky loan defaults would cause an economic collapse. One or more dumb banks might collapse, but systemic risk? BS. This myth has been perpetrated by the major Wall Street banks to con the ignorant into covering their losses. (Granted, it could be argued that these idiot-loans were encouraged by the .gov, but it was still up to the banks to assume the risk.) We've had 129 bank failures so far this year. Another group of 5 should not be holding the entire country's economy hostage. Advocating otherwise is saying you believe in oligarchy instead of a constitutional republic.

If one believes the Fed was buying mortgage backed securities to keep mortgage rates low to try to stimulate home buying (altruistic motive), that is certainly possible. If one believes the Fed was buying crap paper to prop up the banks (insider's motive) and you're OK with that, shame on you. Perhaps both reasons are the "why", my contention is that neither is a valid endeavor for the Fed. Oh, and defaults don't destroy money in the money supply since "credit" is not actually the same as "money" in the way it is tracked in the economy.

I think I may have gotten off-track relative to this thread, though. My apologies and I'll try to do better at keeping on topic. Hey, I didn't see any bank failures yesterday. WooHoo!

Something very simple and scary is about to happen.

The gov is all it’s nanny ways will have to buy up ALL home and property loans very soon. With their certain devaluation and the amount of bad debt there really is no other way. The gov is going to be all our landlord.

It’s just another step in the financial collapse of the US. We are all in the mist of a falling nation like many before us.

It hurts me to even write it but it’s true.

 

So what I'm taking from all this jiber jaber is that everything is fine and the government is doing a great job to save us all.  Trust the Federal Reserve and all will be well.

I think I need to go worship at the altar of Obama.

[grab some beer, watch TV, then let the TV watch you]

Is happening.

It's not just that people are sticking their heads in the sand, it's that they think they're secure, or that they'll get their cut and die before things get too bad.



Or as long as you don't take shortcuts and make mistakes that mean vast quantities of mortgage backed securities aren't actually backed by anything, and nobody can prove (to the satisfaction of the law) who actually owns the note on the house.  Although the availability of cheap credit can certainly be argued.. cheap credit does, after all, via the Fed, increase the money supply over time.  You can't just crank out as much as you want.

There are still other, bigger shoes to drop.  Regardless of when or how they come, the government will cease to exist before they allow deflation.  Even with inflation, they cannot possibly ever pay off our debts, they can only keep the game going a little longer.

I sort of feel bad for the "this shit doesn't make any sense" crowd.  It makes perfect sense, if you're the one making billions of dollars.  People responsible for this sort of stuff, and their descendants, essentially never have to work a day in their life.  Their lackeys are making out pretty good as well.

There will be no effective, coherent political response to this mess in the US because too many people simply have no fucking clue how the system we have NOW works, how it got this way, and why we're in deep shit.  People have lived their entire lives thinking they know the meaning of certain words, when they just don't have a clue.

So much fail, so little interest in correcting it. Inflation is never a prerequisite for growth. Period. Failure to understand the difference between GDP growth and inflation indicates a fundamental misunderstanding of the economy. Therefore, debate is pointless. Systemic risk isn't caused by fractional reserve banking, only exacerbated by it. Again failure to understand leads to a failure in appropriate corrective action. Actually, yes we have had 129 banks fail. And, by fail, I mean actually fail, not had a forced sale. The ASSETS were sold to other banks, and the FDIC had to cover the difference between liabilities and the "assets" which, when actually sold at market value, sold for far less than what the banks were claiming they were worth, sometimes to the tune of 40% less. In some cases, even offering a premium could not generate enough interest in buying the assets and customers of some of these banks and the bank was taken over by the FDIC as a receivership. If you have any doubts about this, read what the FDIC has published here:

Bank Failures (in the FDICs own words, BTW)

Debt is not the same as money, since debt is merely the promise of money at some future date. RIF.

In the "good old days", i.e. when things like Glass-Steagall were around to limit the potential risk due to fractional reserve lending, the limit to systemic risk was that interest rates were higher when there was a higher potential risk of default. When anybody with a pulse could suddenly get the same (or better) rate than those who had more skin in the game, that risk became higher, but still not systemic, since the majority of banks did not choose to participate in risky lending practices. Thankfully.

The question(s) still remains, however, how much worse is it likely to get, when, and what should we do about it ourselves (if anything)? I'd much prefer to hear opinions on that than debate other topics.

"The question(s) still remains, however, how much worse is it likely to get, when, and what should we do about it ourselves (if anything)? "


To answer your question, "how much worse" -is easy.

As anyone who has been paying attention to the ongoing destruction of the USA in every imaginable way can tell you, the enemies of the US will never give up, they are incrementally winning, their strategy is highly refined and it's working beautifully and we, collectively, are their greatest enablers.

We can prove that to ourselves by considering how many folks are going with the flow without a clue and how the .gov  consistantly makes policy that weakens us.

So, all else being constant, at some point we will likely wind up in a modern version of the Russian or Chinese revolutions with incredible misery and death. All the preps we discuss here are likely useless except in the very short term in such a senario.

Your other two questions, "when" and "what should we do about it" are much more difficult to answer and I don't have any.

Oh, SNAP!!!!  You went and used that Glass-Steagall word combo!!!!!

Beer and popcorn on standby.  This will be good.

The US is just one treasury auction away from china not participating anymore...sure it will hurt them too, but I'm not sure that will make the US feel better if it does happen.
That is the real threat of this quantitative easing, it relies on someone investing in our continual debt cycles.

If it causes bad juju and/or lack of discussion about the real topic at hand, I'll edit it out, I TAKE IT BACK, whatever. No, really, I do. (I'm guessing it's a hot button for somebody. Sorry if I tripped the Claymore, I'm a relative newb here, and don't know who gets wound up why. My bad. )

My speculation, let me say SPECULATION again, is as follows. I see two forks in the road as being possible:

- If the Redumblicans take control of both houses from the Demorats, there will be a change in attitude amongst the majority of people that will cause them to be more optimistic. The Christmas season will be better than last year but not drastically so. Unemployment will continue to rise and ultimately the Congress will start to take action on a number of fronts in January. O'Dumbo will veto a number of these attempts but ultimately some will be passed in spite of him. If the currency doesn't start to pick up by then, the price of imported goods will really start to rise rapidly in the first quarter. This will cause the summer next year to be much worse than this year. Since O'Dumbo wants power more than fame, the election season will get started in the fall of 2011. He will go along with more of the Repub agenda because he will have learned that there are more people NOT in a union than are and he needs regular people to fend off Hillary. Or, he may go all commie pinko when he sees his soulmates thrown out on their a$$ in the upcoming election. We'll either have .gov gridlock or the repub agenda will go forward, if watered down somewhat. Either way, the economy is NOT going to get better and will get somewhat worse between now and 2012. If we get a right-leaning Congress and White House after the 2012 election, the economy will pick up again in 2013. It won't be like the go-go decades of the past because we're saddled with a mountain of debt. But it will be better than it is now.

-If they do not take at least one house, many people will rightfully conclude "we are screwed". The Christmas season will be profoundly worse than last year. In January, there will be some major retailers and some other large firms go bust. If, by that time, the mortgage mess hasn't been somewhat worked out by then, the cash flow problems and off-balance sheet exposure will suddenly break ONTO the balance sheet of at least one major bank. I doubt this will cause a general bank run because by that time, a lot of people will have spent most of their cash, so it wouldn't do any good to run to the bank since there's nothing to withdraw anyhow. There will be rampant layoffs in January similar to what happened in Jan '09. Unemployment will go from a "reported" ~9.6% to 15% in the first quarter. A huge number of people will be coming off their 99 weeks of free money by the end of March. Tax receipts at all levels of govt levels will plummet (again). At least one state will go bust before April. If both houses are still socialists, they will try to get a bailout started for the states, but the money required would far exceed what the fed govt could afford or could fund via deficit borrowing. They will continue to try stoopid things like mortgage forgiveness, raising taxes, more mandates, federalizing state unemployment insurances (since many states are already borrowing from the fed .gov to fund their unemployment anyways), and other crap. All these will fail. We will begin to enter the 2nd Great Depression by the fall of 2011. If the country's economy survives until the 2012 election, it would be a certainty that Repubs will take both Congress and the White House and will begin to dig us out of the abyss. It will take at least 10 years to recover. Plan on massive cuts in the mis-named "entitlements". (My pet-peeve, BTW.)

As for what to do to protect ourselves, I would submit each person's situation is different. I think the oft mentioned suggestions that we reduce our expenditures, pay down debts, have the means to protect ourselves and our loved ones, having a store of cash to cover 2-4 months of expenses at home, 2-4 months expenses in a local bank or credit union, spreading your assets/investments across a broad base, including precious metals, having food/water stores to ride out any potential shortages/SHTFs, are all good ideas. I think in the worst-case scenario above, folks should really be looking at being able to get by on one persons income (in the case of a couple). Also in that scenario, folks should start thinking about what skills might be valuable to someone other than their current employer and/or what could they do to make money "on the side" if they lost their job. Because they just might.

My speculation, worth precisely what you paid for it. Zip.

"If the country's economy survives until the 2012 election, it would be a certainty that Repubs will take both Congress and the White House and will begin to dig us out of the abyss."


How are the repubs possibly going to do that?????

[Unless most of the laws hamstringing our productive capacity are repealed]

I'd really like to know how the repubs are going to work such magic.