Merry X-Mess! Happy 2,000,000,000,009!

I had done quite a bit of work on 2 articles that I seem to have a hard time completing.  The first was on the overgrowth of the financial industry, and the second was on the inequities of the 401k system.  My research led me down some cyclical roads that left me chasing my brains tail.  I will attempt to sum up both articles in an abridged fashion, rather then pour out my “going nowhere” data.  (Maybe I can someday get a grasp on how to better articulate my research, and put together a more complete overview?  The majority of my problem had to do with not having the raw data I needed, so my research was based on general/fictional assumptions… thus making my research more “theory” then “fact”.)  For now this will have to do.

The Financial Industry’s Overgrowth:

In its most basic form, producing goods and providing services are rewarded by creation of a consumer.  That consumer is given cash, credit, etc in exchange for that production or service.  Those are the nuts and bolts of your economy.  That’s it!  Everything beyond there is just financial engineering, mathematical widgets, speculative dreams (based on both reality and imagination), etc…  The prices, wages, growth, etc… are then set through the markets simplistically complicated “supply and demand” mechanism.

***(Sample1 – Mr. America works (producing/servicing) and gets paid $200.00 by the market.  He then consumes, saves and invests.  Let’s say he consumes 50% and saves and invests the other 50%.  He is hoping that the $100 that he saved/invested will outpace his ability to consume in the future (beating inflation).  That speculation has for too long come with the assumption of growth.  That $100 he places into the system then needs “servicing” of its own.  Someone to monitor, track, pay, hold, guarantee, insure, invest, etc…  In order to “service” that $100, we then need the $100 to not only grow above and beyond the expectation of inflation, but beyond the cost of servicing that item.  In the past, the servicing cost would be able to skim the top, (assuming there was growth) to pay for itself.  In Ponzi fashion, this “skim” has been masked through money creation (fraction reserve banking), thus creating a constant  inflow of cash which keeps perma-growth going.  The servicing is necessary!  …and the banks that provide this actual “service” do it at the cheapest means possible.  Bank pay is the worst in finance. 99% of your bankers border on being “underpaid” for the work they do.  …to be continued…)***

The Banking industry no longer just provides safekeeping for your cash.  As a custodian, they track and service millions of securities, for millions of accounts.  Just saying this, versus actually “understanding” this is where some people may lose track of how complex banking has grown.  The velocity of straight through processing has allowed facilities like DTC to process over $1.5 quadrillion in transactions per year.

***Sample2 – 1 share of ACME Anvils Inc. may be bought, and then sold.  The banks assure that the 1 share is in the right bucket (Mr. X credited 1 share, Mr. Y debited 1 share).  They also ensure that the cash was moved for payment.  (Mr. Y got paid, and Mr. X made payment).  That’s the simple part.  Here comes the fun.  ACME Anvils Inc has either dividend payments (DIV) or Principal & Interest Payments (P&I) that it makes monthly, quarterly, yearly, random, etc…  Determining who was the holder (of this moving target which gets bought and sold, bought and sold, bought and sold, etc.) at such given times, and then calculating the P&I factor, (and new amortized value) and DIV rate becomes slightly more complicated.  Vendors are hired to price these.  Accountants are needed to prove out.  …and paying agents are hired to make the necessary payments to the correct banks where the shares are currently held.  (Remember, there are likely millions of shares, held at many different custodians, which are changing hands daily)  As a service to the customer, banks generally credit you the money on the day you were expecting payment.  In actuality, the bank may or may not have received payment yet. (via wire, check, transfer, etc…)  These random payments come in from every direction, with good and bad instructions into income buckets, where they can “hopefully” be applied to the right prepayments you already received. 


Now, here comes the not so fun part…  Let’s say ACME doesn’t pay what you were expecting, or pays late/early.  Trying to apply those payments without correlating equal opposite moves is extremely laborious …and the norm.  (Forget the fact that Sprocket Corp, Widgets Inc, and MILLIONS of other payments are coming in from random directions, at random times, …and are all trying to find the right custodians of holders of those securities that have been bough and sold, bought and sold, bought and sold, in volumes of 250,000,000shs per day, by MILLIONS of investors, pension funds, mutual funds, brokers, ect…  Oh… now add defaults to the mix.  …and also Corporate actions & Class Actions…   and now bridge all of this to multiple countries that are all doing the same thing on their own, with their own clearers, paying agents, custodians, etc…   Add to that, currency exchanges for the trading in these foreign markets.


UGHHHH…   We haven’t even gotten to IT systems where every companies PC’s speak different languages, and want reports in differing ways, and use different account styles, and have differing rules/failsafes, …and we haven’t gotten to regulations from country to country, account opening documents, tax treaties, incorporating agreements.


All of this “servicing” of money now takes millions of workers…  Most of who are underpaid grunts.  (There is a very small middle class here.  It’s mostly servants and kings.)***

Now, returning to Sample1, where the $100 “invested/saved” dollars came into the system, that money needed to outpace inflation and the new “high price” of servicing that money (which was displayed in sample 2).  This is where the world of “Fractional Reserve Banking” stepped in.  (much the way “subprime”, “monoline”, “leverage”, “credit crunch”, “CDOs”, “derivatives” and “systemic risk” have gone from obscure financial words to “mainstream media terms”, I believe “fractional reserve banking” will become the next popular economic buzz phrase for the public to learn about in 2009.)

Fractional reserve banking has become the way to finance the financial industry.  No longer was that “skim” on the $100 able to pay for the burden of the industry.  Instead, that fractional reserve system became the new economy.  Money creation turned that $100 into multiples above it.  (In the US, I assume 10% reserve ratios are used.  Japan and China are apparently tighter, with ratios in the high teens, and Euro and UK apparently have little or no reserve requirements.  Any particular institution can set its own ratio, (as long as they don’t EXCEED their market’s cap) which doesn’t necessarily have to be as extreme.)  This money creation now funded the “servicing” which was necessary.

…but then we have the non-servicing sector of the finance industry.  The speculators, the market makers, etc…  They guided money towards “profits” (and loses), but in actuality, they never were a necessity of the “servicing” world.  In affect, right or wrong, every dollar they made and lost, (for themselves or investors) and subsequently took out of the market, was not real money.  It was the “monopoly money” of the fractional reserve banking system.  (In the past, they were also able to be paid by the “skim, but their size has now absorbed a portion (or %) of the market.)  …and the fractional reserves helped become a multiplier in increasing their stake and effect in the market to the point where, they hold so much monopoly money, that they became the market.  In an economic stage of growth, the price tag and expense of the modern financial world can be paid.  Without growth, it is unsustainable.  In contraction, the size of the overgrowth is exposed, and creates a downward spiral so steep that is more accurately resembles a “void”.  (“evaporflation”???)

Now that we see this process unwinding, the top down bailout theory is that we can throw money at the top, and through fractional reserves, we can recreate new money with the same multiplier affect that worked in the past, turning that $100 into $1,000, thus limiting the amount of money that needs to be added to the system, to replace the monopoly money that was already “taken”, “earned”, “made” and to replace the actual money that isn’t being paid due to default, bankruptcy, etc…  There is a problem though!  The reserves that needed recapitalizing have had an equal multiplier effect that is continuing to grow every day that “growth” is not taking place.  Increased jobless claims, price deflation, defaults, etc have caused a death/debt spiral, in which a constant top down influx is needed.

In my theory (I created a pretty decent model economy), I have taken the fractional reserve system, and reversed its direction to see where the unwind goes.  I’ve modeled the interest the government lends cash at, against the interest earned by existing loans, and calculated 0-5% spreads (at 25basis point intervals) versus, money creation minus default.  (defaults varying from 0.5 -15% of overall debt repayment at 0.5 intervals)  Pretty much where I’m still at is…   not nearly enough goes to the bottom quick enough, and not a large enough packages have been added at the top!  This needs to be hit from both ends immediately and in a big way.  (By big, I mean in an equal amount to “at least” the amount monopoly money the non-servicing portion of the financial industry has taken from the system)  The way I see it, the multiplier effect on the default level could turn financially catastrophic.  Voodoo Economics are a crucial medicine and I believe an unfortunate necessity.

In the world of higher math and financial wizardry, there is no possible calculation or probability factor that can ever even come close to answering the immeasurable variables of risk that exist.  (I suppose this is like the “black swan” theory???  I haven’t read the book.)  Yet, we rely on this fictional world of numeric evolution as the backbone of our modern day economy.  This fictional world of cash then has its own place among the production/service cycle and transparency is the key to unlocking many of the current mysteries, but at our financial poker game, no one wants to show their hand.

My predictions on the “unwind” leads us down a road of eventual inflation, as currency intervention on massive scales is required.  If debt is not reduced, and cash injection approaches are increased, the inflation will increase at a rate comparable to the socialized costs expectancies that have been added through default.  (Somewhere between 3% and hyper, but closer to 3%)   I see Asian banks (preferably Japanese, since I don’t believe in Ch-Enron as long as free speech (whistle blowing) does not exist) being rewarded for tighter reserve requirements, and expect a higher safety level for wealth retention there.  I expect Japanese cash to start buying (or possibly leasing) valuable real estate, and loaning to growth oriented corporations, etc… in an attempt to put cash inflow/appreciation to better investment use. (this will level out when commodity/resources prices “level up” so that once again puts the low resource country at an equilibrium.)  I believe transparency issues may arise in the EU, where Fractional Reserve Banking may have expanded (to irresponsible levels) or been controlled (prudently) by different country banks at such various levels, that it may put a level of stress on the EURO that it has not yet experienced.  I have confidence in their ability to work through this, but it will come at a cost to the currency.  …and finally, I see oil in and around the $40-$45 range as the new expected price.  Deflation will press on and drive prices lower short term, (I “guess” $29 is absolute low) but ultimately, inflation and alternative prices will settle on the $40 mark.  I believe the oil nation cash will eventually make the necessary move of marrying their commodity and their cash to the green revolution.

401k – The Unleveled playing field.  (This will be very short)

In the modern day arena, we should not live with the current limitations to “our” investments.  When we are “blocked” into a group of 16 accounts to choose from, and have contribution or movement restrictions to a set amount per period, we are not allowing the everyday person to have the same ability to invest that the rest of the market can move with.  Those limited options that your HR representative chose are based on what “FINANCIAL RESEARCH” that your HR rep has done???  These are HR people.  They are not market gurus and strategists.  What the heck do they know about choosing your future’s savings investment vehicles???  (It’s likely that the 401k rep just sold them whatever “package” was hot.)  What about fee based unlimited transactions that allow savvy savers the same ability to play the markets that the money movers play?  Where are those options?  …we could go on and on…   but not today.

Thanks for reading, and wish you all a happy holiday season.  Now it’s your turn to speak.

All the best, Miss America, Rich Hartmann

p.s. I will be taking a break from posting for the holiday season.  I hope to return with Chapter 2 on Alt Energy.  Please feel free to add things you’d like me to look into, and I’ll do my best to add them into my research.  (Companies, sectors, theories, etc…)

23 Responses to "Merry X-Mess! Happy 2,000,000,000,009!"

  1. Greg   December 25, 2008 at 10:31 pm

    First – Merry Xmas Rich!

    • MA   December 26, 2008 at 10:49 am

      Thank you,Likewise.

  2. Guest   December 26, 2008 at 9:40 am

    Rich,Interesting post…I for one look forward to Chapter 2 on Alt Engergy..I had a question as far as your view on the market. Are you still leaning towards the approach of buying when Dow is @ 8000ish and selling @ 9000ish?I wonder if we/when we are going to experience new lows (I’m assuming it would be sometime in Q1) because I cannot see news being anything but gloomy the entire quarter. Any thoughts?Thanks,Danny

    • MA   December 26, 2008 at 10:46 am

      Danny,I’m not optimistic right now. Everything hinges on (for lack of a better catch phrase) “more of the same” or “change”?Depending on what the new administration does, “top down” / “bottom up” / or from both ends, is what leads me to decide which way the market goes.In “more of the same” (top down) camp, I see a recessive cycle that will really ratchet up in Q1, as the household economy will destrot the retail and small business economy by Q4. That will be coupled with a continuous “outflow” of cash. Redemptions will outpace Subscriptions, and the difference will not be made up by the current “small” injections ($700bill) because that money is being used to recapitalize the multiplying factor of defaults due to Fractional Reserve Banking. (Default/Bankruptcy are currently small. When compared to who “is” paying, to who “isn’t”, it would seem that these losses should be minor. They aren’t due to their multiplier effect. In a real downturn, felt by the “bottom”, a 5-10% default would annihilate the economy. (or the dollar)If “change” takes place, and the bottom gets immediate help, I’d still buy the DOW at 8000. …but that “help/stimulus” needs to roll/sustain. If its small lumps, invest accordingly, as the float only lasts as long as the cash is available. If “change” is slow, they risk allowing the downward spiral to claim another level down. (I’d hate to try and estimate that DOW figure? Somewhere between 6,500 and -35,000 depending on the speed at which outflow demand for obligations would be met by freezing credit. The “negative” DOW is at the current moment a “fictional” term since “0” is the bottom… but the reality of current debt is so large versus existing cash, that I like to use the “negative DOW” as an amplifier. Especially since, the gov’t loans aren’t that much different than an individuals credit card. If an individual has the ability to have negative savings through access to cash they don’t have… Then the DOW and it’s companies may also in affect become “negative value” in relation to what they’re worth versus their gov’t debt.As far as Alt E 2, let me know if there are any specific areas you’d like me to look into. I’ll give you my best unbiased analysis.good luck… and hopefully things will “change”.MA

  3. ptm   December 26, 2008 at 12:21 pm

    Thanks MA.Thank you for describing the intricacies of the bank servicing industry. Perhaps another layer of complexity arises (in cases like Enron and WorldComm in the past and many more to come) with class action lawsuits. The stock holders during a discrete time period must be identified, enrolled, and judgments dispatched many years after the fact.I’m a sucker for a good conspiracy theory, and the gold-bugs have many to share, but I prefer your description of a similar outcome by using the A) fractional-reserve lending (i.e., debt as wealth), B) hubris, C) economic modeling as a crutch, and D) a Zeitgeist of unsustainable financial industry profits (i.e., follow the herd or be crushed).But you come down on the same side as NR in wanting to save the system with trickle-down cash infusions (plus some undisclosed amount of bottom-up spending). It seems to me to be such a high risk approach with severe long-term consequences if it does not work.Have you tried to estimate a no support scenario? What would happen if Wall Street evaporated? Could we not continue to function with the 1000s or solvent local banks and credit unions? Yes, it would be painful for a relatively short period of time, but the results would be concrete and there would be a clear path to recovery?

    • ptm   December 26, 2008 at 12:29 pm

      Oh, I see it now, $2 trillion of government spending in 2009 :-)

    • MA   December 26, 2008 at 3:09 pm

      @ PTMZero intervention means implosion. No ATMs. Your local banks, which were feeder banks for the larger ones, would not in return receive the credit they need. Effectively, the would freeze and die immediately, and runs on every small bank would’ve happened.That’s just my opinion.In terms of necessary evils… the big banks/institutions/etc… have the capitol to create the efficiencies of modern day banking. Individual banks just don’t have that kind of capacity. (or the workforce, coordination, etc… Just try and regulate thousands of smaller institutions, rather then 20 large ones. In addition, corruption would be much worse. It’s human nature.)To Quote JFK, “the hottest places in hell are reserved for those who in a great moral crisis maintain their neutrality” …I believe this also applies to our current situation. To “not” do anything, when “something can” be done, would be wrong. For me, it’s the motive and agenda behind what’s being done that I have faults with.I am not a socialist. I like to think that I am a free market capitalist. …but some times we need to step away from our own beliefs for what we know deep down will be for the greater good of society. I am prepared to get less and give more. Not because I want to. Not because I have to. …but because deep down at my core, I know that the current conditions that I did not ask for, will cause suffering for other people that they did not ask for the current conditions either. …and it upsets me that people benefited from this… and there are those that continue to benefit. …and I will continue to throw my daggers at those people/companies/institutions/governments as long as someone is willing to listen.WHOOPS!!! Sorry about that semi-unrelated Dennis Miller-esque rant. It was not in any way directed at you. I guess I was just defending my stance of “necessary intervention”. I guess I feel I need to defend it, mostly because I don’t really believe in it, but see no other rational solution. (The devil you know versus the devil you don’t)All the best, Miss America

  4. aerial view   December 26, 2008 at 12:26 pm

    Good post MA-I admire your efforts! As someone who solves puzzles as a hobby (a puzzologist), I have found that unless one has most (75%) of the correct pieces, an accurate analysis is very difficult. When the banks dishonetly tell Congress that they don’t have a mechanism to track and evaluate all of the mortgage bundling and leveraged financial instruments, then no one really knows the full extent of the crisis. (Imagine if we told the IRS the same thing when they questioned something on our tax return). Theories based on assumptions and guesses enter into the process which lead to mistakes and unintended consequences: delaying a recovery or creating new problems. I can only repeat my mantra as a solution: until we have complete transparency and standard accounting procedures overseen by honest, incorruptible people, we shall continue down the road of bigger and more devasting bubbles until revolution becomes the only option. When people can no longer trust the government with their money, people (worldwide) will no longer give the goverment their money!(bartering anybody?) Happy Holidays!

    • MA   December 26, 2008 at 3:36 pm

      I love quotes. I love comedy. (I try my hand at both. …beilieve it or not, I spent my entire childhood with my desk in the hallway, or on detention, because I was always a class clown, mischievous type) I’ve got 2 quotes for you. One from the movie Tommy Boy, and another is a Rich Hartmann Original. (10,000 people may have said the exact same line before me??? …but I never heard it, so I’m laying claim for now.) I think they both answer the question of “transparency”. …and whether we’ll ever see it?From Tommy Boy: (Chris Farley)Tommy: Let’s think about this for a sec, Ted, why would somebody put a guarantee on a box? Hmmm, very interesting.Ted Nelson, Customer: Go on, I’m listening.Tommy: Here’s the way I see it, Ted. Guy puts a fancy guarantee on a box ’cause he wants you to feel all warm and toasty inside.Ted Nelson, Customer: Yeah, makes a man feel good.Tommy: ‘Course it does. Why shouldn’t it? Ya figure you put that little box under your pillow at night, the Guarantee Fairy might come by and leave a quarter, am I right, Ted?[chuckles until he sees that Ted is not laughing too]Ted Nelson, Customer: [impatiently] What’s your point?Tommy: The point is, how do you know the guarantee fairy isn’t a crazy glue sniffer? …”Building model airplanes” says the little fairy; well, we’re not buying it. He sneaks into your house once, that’s all it takes. The next thing you know, there’s money missing off the dresser, and your daughter’s knocked up. I seen it a hundred times.Ted Nelson, Customer: But why do they put a guarantee on the box?Tommy: Because they know all they sold ya was a guaranteed piece of shit. That’s all it is, isn’t it? Hey, if you want me to take a dump in a box and mark it guaranteed, I will. I got spare time. But for now, for your customer’s sake, for your daughter’s sake, ya might wanna think about buying a quality product from me.And here’s the Rich Hartmann original: “The only sure things in life are not death and taxes. The only sure thing in life is CHEATING! People cheat death and taxes all the time!”…that line actually surfaced during a lunch conversation with a friend of mine. He just got caught philandering again on his wife, and I was giving him silly excuses to bring home to his wife. (he did not use it.)Miss America

      • amacfly   December 30, 2008 at 7:32 pm

        No yours I love, thanks for the laugh!! :-)On the subject of 401k etc, I have just wrapped up my 08 taxes, and was appalled to find my pension contribution has been cut in half by the administration! (I’m a small Corporation with a defined benefit plan.) My CPA is equally horrified, but there is nothing we can do against the system, they say what goes, we just have to accept it, but it is completely wrong, and irresponsible – it is in effect forcing me to accept a lower standard of living in my old age.

        • amacfly   December 30, 2008 at 7:33 pm

          Now your I love I meant to say!

  5. Capone   December 26, 2008 at 12:38 pm

    Rich H, Merry Christmas! 401K lack of options is spot on.I personally had to get aggressive with my current employer to shake the trees and at least get an emerging market fund added. They denied the commodity fund request outright.I have not gotten fully into all of the predictions for 2009 so far. I enjoy the range of casino predictions from Najarian saying biggest “January effect ever” rally due to cash on the sidelines to Grantham in Fortune saying 40 or 60% lower ultimately compared to 74 and 82 respectively. Grantham confuses me later as he goes on to say high quality is worth buying today following a prior comment where he said from 29-32 you wanted to “go down” in high quality overpriced KO as it only lost 75% compared to going to zero… Barron’s last weekend was interesting to point out a dollar bought 1/35 ounce of gold from 33-73 and now a dollar buys 1/827 of an ounce.These are interesting times. The deflationary / inflationary Jekyl and Hyde economic and market prognosticator debate currently rages on… Unless, you are reading a book to your child, working, laughing, serving others, planting a garden, praying or listening to music, you seem to be risking something. In other words, any us dollars invested in this system in any way whatsover anywhere INCLUDING CASH appears to have a higher relative level of risk now than any other time.

    • MA   December 26, 2008 at 3:47 pm

      Jeff, What a bad time to have US dollars!Can you fathom that statement? …because even if you are lucky enough to own a pile of them… then you have to live in fear of how to maintain them.Sure, this has always been the case, but never with the same degree of stress.I hope your spirits are high for the new year and I look forward to another year of posts from you that are mixed with great analysis and raw sinicism. Don’t lose you humorous angle! (Those Cubbies have trained you well! How could they let Kerry Wood go??? He was a clubhouse heart and soul type.)Miss America

      • London Banker   December 27, 2008 at 1:43 am

        @ RichI enjoyed this. I was explaining to some folks not long ago that the historic norm is for financial intermediation to be about 5 percent of the economy. The past decade it grew to 30-40 percent in US/UK. At that level it strangled investment in the productive economy and the economy sickened and withered. Now there is too little productive economy to support the bloated financial sector and it will have to shrink back to 5 percent or so. In the meanwhile, we all suffer economic dislocation and insecurity.Happy new year to you and your family. We’re catching a plane tomorrow to new challenges, new adventures. Wish me luck.

  6. economicminor   December 27, 2008 at 1:49 pm

    Thanks for your sharing.I agree with aerial view that it is extremely difficult to plot an outcome without all the correct data, which I believe is not available to anyone, which is a huge dilemma for all of us.One set of incomplete data that I keep going back to that is the graphs on debt to GDP that I have seen posted on various sites and commented on by many people. The debt to GPD shown for the peak in 2007 is not quite double what was estimated for 1929. Knowing that both periods had a lot of debt off the books and this period has not only lots of corporate debt but government debt off the books, I can only imagine that this time is much worse than the previous period of extreme excesses.So to me, this period and what is ongoing appears to be more of an insolvency problem rather than a liquidity problem.So how does insolvency get solved with more debt created? I think that the old trick of consolidating and refinance only works when your income is not decreasing and you canmake the payments. The graphs on income to debt suggests otherwise. Which also doesn’t take in to account the huge disparity of incomes now the norm in the US. We have institutionalized poverty and serfdom.The process being used so far, thru the fractional reserve banking system, is to re-liquefy the banks so that they can lend more. To whom? To the business interests who are staring at lowering sales or already over indebted consumers? How does the money get into the hands of the consumer if consumer debt is already beyond sustainable levels?The process of to much and to easy credit went on for years and years. It extended from governments to stocks (corporations)to institutions to autos to housing to credit cards and buying appliances all with nothing down. I just don’t see this starting back up for years. Seems to me that we need to write down a whole lot of non productive debts first. I see consumer spending decreasing and savings increasing for a long time and many more bankruptcies and foreclosures. I see commercial real estate and corporate debt going down next as it was all based on unrealistic growth in consumer spending. We have a few years worth of supply for housing sitting empty. With the numbers of unemployed, it will take more years than normal to use up this inventory. Most consumer products are over produced so there is a lot of re-aligning still to do but that will mean many fewer employed.Then we have the demographic tsunami of Boomers who will have little or no retirement income. Many because they didn’t save, others because they put their money in stocks of companies that pay no dividends and have taken tremendous beatings. Others because their money has been managed by the Madoffs of the industry. Few actually saved for their working lives and managed their own accounts for security and safety. Many will just be in trouble because their pension funds were *invested* in all this garbage and would be insolvent now if we had real value of MtoM.Most likely the money the FED/Treasury have injected that isn’t lost in new rounds of leveraged debt collapse will go not to new lending but to their in house traders who will try to re-inflate the commodities bubble. This will destroy many more overly indebted consumers as the price of what they need goes back up.I just can’t see how what the FED/Treasury/government are doing or planning will do much positive in fixing the underlying problems.So in conclusion, even though the FED/Treasury/government are attempting to re-inflate the monetary system, the money is only going to maintain minimum liquidity the banks need to keep their doors open. The losses from leverage appear to be way to great and the next round of losses on commercial defaults hasn’t yet started and the Option ARMs are still out there to be dealt with. Plus the foreclosures are continuing and have no signs of stopping. Obama’s programs will be to little to late and will only start to be effective in a year, maybe keeping us from sinking into an abyss. Maybe. No government program starts tomorrow. They all take loads of time to go from funding to planing to accounting to contract letting to organizing the project to hiring the people to any kind of resulting activity. Besides the projects on the table currently aren’t the future, they are repairing the past. That may put some money in circulation but doesn’t get us forward on changing directions. That will be in 2010 or 2011 or 2012 if there is any money available to do anything by then. At some point we will be forced to just print it and then the fun really begins. Talk about our standard of living receding… quickly!Our future looks bleak unless we change directions quickly but that never has happened before. I don’t look forward to hyper inflation which would be the logical outcome of current events. I just don’t think we get there as quickly as you do. I feel for our citizens who had placed a false faith in our government’s caring or ability to keep us safe and secure. Unfortunately I think we are in for a severe lesson in paying attention to what’s important.Again, thanks for sharing your thoughts.

    • MA   December 31, 2008 at 10:03 am

      Eco minor… at some point you should think about changing to Eco-Major!My apologies on not getting back to you earlier as I have been quite busy in work and personal affairs. As I stated on NR’s blog, I agree with much of what you say, and scream it from whatever rafters I can. (I was always the “wild child”, life of the party type, but have turned into quite the party pooper.)With “Transparency”, you and I can’t see the big picture… but the Gov/Treas/Fed (aka TPTB) do. The “street” through credit needs has been forced to show quite a bit of its hand. This theory has been much of my basis for my predictions on where the market would wind up. (my call was for DOW 10,700-10,100 …and when the wheels fell off 8,500) This is heavily based on losses being “fixed income losses”, which can “reasonably be calculated”. I speculated that those “fixed losses” would spread to equities through losses of credit and credit spending, thus less net buyers by equal or worse proportions.I think you’re dead on about Comm-Re being one of the next shoes to drop, but I’m not well enough versed in that to give any evidence/data/ or real predictions. Reggie Middleton, whom was a blogger and is also now a poster for the RGE (and also has his own website), has infinitely more background on this area. (my knowledge is what I read of his)Where I’m at right now, is a gut wrenching confidence that the US will experience an extreme “consumer’s revolt”. I have no data, nor do I trust birth/death dogmatic models which inaccurately state the true state of the economy. Their revisionist lag will be the death of many small companies whose margins are way too thin, debt too high, and deflating assets too many and costly. Consumer freezes will cause a MASSIVE death/debt spiral that is not factored in at a high enough level. (which Is why I’m so adamant about rolling stimulus to the consumer.)Lending will happen. Banks are being “forced” into it. It’s a bad business model to intentionally loose money. With rates so low, and operational costs so high, stationary money loses money for the bank. Their hands are being forced to move the cash… but without a real “value play” there’s no where to move money to. I suspect, green/alt energy will be a “sure thing” due to the forced investment…. But I also speculate that if TPTB were to perform principal reductions, the portion written down (held as open receivables) could become that new investment??? (looked upon as an investment into our own debt) Once again, I don’t like all of this financial engineering, but I do find it to be a necessary evil.Happy new year, and here’s hoping 2009 is better then I foresee!!!Miss America

  7. economicminor   December 31, 2008 at 8:07 pm

    MA, I am a minor. As much as I learn, I find there is always so much more to learn. No sane person thinks they know enough. I am very humble in my lack of knowledge. I can misinterpret and misdiagnos as good as the next person. Being humble can make one more cautious and that in itself can be a major draw back. I am a minor. I don’t want to be a major. I would rather be enjoying life in the back ground rather than being to out front.I’m getting ready to go out to friends for a N Y eve pot luck and Wii bowling tournament so this will be short til tomorrow when I think I will have more time. I enjoy interaction on these subjects. It is so easy to get inside of your own opinion and justify and reinforce it. I think that much of the PTB do this and only *talk* to others who think the same way. I believe this is their major problem. They really can not think outside their own boxes. This is our problem too as they control the system. But then this is the same as it has always been. In Rome and all other empires have had similar issues. Those in charge and in power can not step back and see the real picture.I am actually looking for a rational way out of this mess. My education, common sense and life experience suggests that the best way out would be a somewhat controlled crash, lots of work in the bankruptcy courts, quick write offs and a good plan but I am dreaming. Reality is probably much cruder, more human and less humane.My motivation for the discovery of a rational way out is purely self motivated. I would like to think I can see what is most likely to happen in a positive way and put some money down on it. I hate to make negative investments, like going for the kill of a downed animal. I would rather, be better for my Karma, put my resources towards a positive outcome..Only I haven’t come up with one. And I haven’t read one that I can’t drive a dump truck of garbage thru.I am a contrarian so I will see if I can poke some holes in your idea that the banks can be forced to lend enough to make any difference. I will go back to some of my recent emails to my friends and pick up some articles about commercial real estate to link for your perusal. My math says that many of these projects / sales were pie in the sky from the very beginning and based on some dysfunctional view of reality. I have looked at apartment building and commercial sites locally and for the last 10 years and none of the sale prices made any sense except for the 1031 exchanges that kept people from paying taxes. Otherwise they never made money except upon reselling to a greater fool. This is not a way to run an economy.But I will go into more thought and detail tomorrow.Have a fun evening doing anything you enjoy. Hopefully with people you

  8. economicminor   January 1, 2009 at 12:45 pm

    Rich,I guess in theory the banks can be forced to lend but that fixes nothing. I have a hard time thinking that it would do much of anything positive.Houses are still being financed. There isn’t a lack of money as far as I can tell, just a lack of ability to repay. For most families, housing needs to go down another 50% IMO to be affordable, considering all the other expenses that most families have or have to defer in order to have a place to live. IF you have a decent down payment and reliable income, there is money out there for you today. If you have real asset value to back up your borrowing, there is money to be borrowed. From banks and from private sources. This is not about lending, it is about faith. Faith that what you borrow on, isn’t going to be worth less before you get it to market. Faith that the insurer is actually real. Faith that the contract will be honored. Faith that you can even find a buyer. Faith can not be restored by forced lending.Nor can insolvency.Insolvency is the real underlying problem that can’t be fixed by forced lending which is part of why people have lost faith in the system. The system lent to people and businesses who could only make the payments by borrowing more… All based on some assumption that their inflationary actions would raise the asset values forever and that this whole insanity could be sustained forever…What kind of a system would do that? Lending to create insolvency for a fee and passing the debt on to unsuspecting other parties and lying about the quality of that debt… Insolvency and lies have caused this melt down and you can’t fix either by more of the same or forced lending.When a person or a business takes on more debt than they can service or pay, that is called insolvency. In the case of a person or a business, that can be resolved by cutting out all but the essentials and scrimping along and paying down the debt until there is unused income again. If that doesn’t work, there are bankruptcy courts to resolve the issues and write down or write off the debts. That person or business gets their hands slapped. The person gets to start over and the business sells its assets and goes away. There is a middle ground where debtors agree to take less and write down the debt. Yadi, yada,,,,, Our gubbermint doesn’t seem to like this process. To much debt to write down leaving way to many stranded. So they think they are taking the easy way out by trying to re-inflate the system.When an economic system takes on so many obligations that it can not service them all they are in effect insolvent. You can’t fix this with more debt. Governments seldom declare bankruptcy. In fact there aren’t International Bankruptcy courts. The system needs to do exactly what the person or business did, stop spending and pay down the debts. Except they don’t. They try and inflate. The Romans cut the corners off their coins. We just use the system to create more dollars. We’ve been doing this for 25 or more years. We have reached the point where this policy under our current regime has run to the end of its capabilities. More than my opinion. We have reached deflation. Roubini agrees.In our system inflating is done thru the use of fractional reserve banking. So the system gives the banks newly created money and tells them to lend it out. Create debt Except when you’ve created more debt than can be functionally serviced, especially debt not for productive purpose but just for past consumption, then, in 2007, the debt pyramid started collapsing. The banking system has failed and is a failure. People and institutions don’t trust banks and the only reason the deposits aren’t under the mattresses is because the GUBBERMINT guarantees the deposits…. Even though many now no longer trust the gubbermint either, at least they can re-print your money and give it back to you. The GE’s, GM’s or the Madoffs can’t do that.In your scenario of forced lending, here in lies the problem. To whom? To businesses and people who already have a problem… ???? Don’t have adequate income to pay existing debt services? Or to those others who have lost faith in a fair and honest system? Who is it that the banking system is suppose to lend to in order to create this inflation?In adequate amounts to over come the deflationary debt collapse? And doing this by creating MORE debt?You have to back way up to look at the entire picture. The system has to much debt to service and consequently these debts that aren’t getting paid are causing defaults, foreclosures and bankruptcies. Average debt to income ratios have never been this high before. Even though the debt that is collapsing is from less than half the population. It is from people and businesses who took on unreasonable risks allowed by an out of control banking system looking for fees.Lending to these businesses or people MORE money is not much different that throwing the money on a fire. It will not be put to productive purpose. It will just be consumed by them until it is gone and then the whole entire system is less viable because we just created more debt to service.This segment of collapse has become so insanely huge that it is consuming the system, causing a deflationary spiral downward of assets of all kinds and shapes making even those who were solvent, less solvent and much less secure. This then affects the psychology of the system looking for safety rather than anything else.So those who are solvent and might have borrowed under more normal circumstances are afraid to borrow. Besides borrow today for what productive purpose? Will there even be any one able to buy your products or rent your store front for today’s lower cost tomorrow? Especially when it appears that tomorrow it will be even cheaper. Add to this the lies about employment and incomes that most people know, even if they don’t understand. And the lies people have faced from the gubbermint about rising costs and lower wages and the benefits of off shoring our good jobs and ………ANDYou also have to go back to the reasons for all this insolvency. The reason that the debts are collapsing… Because a lot of the resources (money) wasn’t put to productive use, it was lent out for just plain old consumption.You buy an SUV because the gubberment gives you a tax credit for buying it. You buy on time. You put the fuel on the credit card. You buy a wide screened TV on time, you buy your new house on time. You buy your food on time. You take out a HELOC to pay down your credit cards and go on a vacation. More consumption…. All the while our corporations are shipping the real manufacturing jobs that actually make something off shore or out of country so they can make more profit selling you the same products to consume that use to be made here. We buy a large portion of our energy off shore, out of country. So we tell ourselves we are great because we are the world’s consumers, the drivers of the world economy… Blaa, blaa, blaa!Our idea of value added is to become money changers. We all take a fee creating more and more debts. Or we sell to those who do.We make our payments by borrowing more. This is all great until we have built this pyramid of debt so huge that we can no longer afford the payments and everything available has been used up or already belongs to someone else (leveraged to the hilt)…That is where many American have gotten to.. Went shopping to beat Terrorism?The system is based on the never ending borrowing to support consumptive activities and few actually have jobs making or doing anything that you could honestly say adds real value. Just a bunch of bureaucrats, debt servicers or debt creators or selling consumer goods to these people. Oh we still have some real productivity left, but inadequate to fund all this consumption or we wouldn’t have had to borrow on everything that was available to get to where we are…So who do the banks lend to? Who is it that needs a loan that can’t get one? The Big 3 auto makers who can’t produce a profit because the system has tied them to legacy costs that are totally unaffordable while not their competitors? The MacD worker so he can repurchase his half million dollar home? That he can’t afford to heat/cool or maintain? Or the retiree who wants to buy that big RV based on a pension income that is based on that MacD worker paying his payments on that McMansion he couldn’t afford? Or to the overly indebted soccer mom’s so they can buy a big SUV to drive endlessly around wasting imported fuel which they have to charge on their credit card they can barely make the minimum payments on?We have extremely unrealistic expectations backed up by lies or mistruths on almost all levels of our economic system and it can’t be fixed by inflation. Our system has become dysfunctional and needs the car to stop, no more steering and accelerating. We need to stop the lies, assess our assets and liabilities realistically, revalue our lives and our goals as a nation and quit screwing around trying to fix the unfixable and quit lying about everything. We need to do a totally honest and realistic SWOT (strengths, weaknesses, opportunities and threats) analysis of our country and get to the issues of making this a better place for everyone.And we need to address the income disparity that is partially behind all this. What’s with three tenths of a percent of the population owning over half the assets of the country? Isn’t that what we had a revolution about that ended in 1776? Another discussion.I am not an advocate of doing away with free market capitalism. I really think it is the best system ever thought up. It just needs to be kept under control so it doesn’t become the dog eat dog monopolistic system it became in the US. Innovation only works when there is an opportunity and when free market capitalism becomes monopolistic, it destroys that opportunity for most.Best regards and wishes to you for the coming year. Hope it is better than I think it is going to be. Then again this could be the best year for the future of our country as this could be the year when reason and sanity prevail over denial and delusion.

    • MA   January 2, 2009 at 12:07 pm

      Eco-minor…Take the complement of Eco-Major graciously. No one can know everything, but some may be better informed. I like to think I am better informed than the average joe, and much of your complaints/rants/theories parallel quite a bit of what I have said for quite some time. (So in my eyes that means you are more informed then the average joe, thus deserving of the “major” over “minor”)It’s kinda funny, as I read your post, I feel like I’m being yelled at. (or like what you’re saying is contrarian to what I say… which couldn’t be less the case???) Maybe I’m just reading it wrong, and you’re just emphasizing things that I also believe?As far as “insolvency” goes… It systemically does not exist. A system can NOT BECOME insolvent, when it has ALWAYS BEEN INSOLVENT. There have NEVER been as many dollars in the world as there is debt. Any existing “surpluses” are only an illusion of value, because no values are “fixed”. With this stated, growth through debt is the way things work. Controlling growth through debt is tricky as it has gotten abused for the last 25 years. That abuse may cause some/many to be “insolvent”, but not TPTB. As long as they can PRINT, and other service economies depend on our CONSUMPTION, a medium can be met that keeps us solvent. As a doomsday scenario, (and what has been the current course) I believe TPTB feel as though if we print too much, the dollar value crashes, and imported/consumer goods become more expensive. So the consumer contracts, forcing prices own through supply/demand deflation. Thus the approach of constantly feeding the credit side is done with confidence. They keep continuing to ease credit in (a hundred billion at a time). If it called for it, they could add a trillion at a clip. (but the ease in, allows inflationary pressures to get bogged down in consumer deflation through consumer debt controls.)Debt has created credit. The credit became equally cyclical, in that growth lead to more growth. This can “potentially” continue as long as population grows and resources can sustain it. (it is my belief that the markets will get another shock as consumers downshift to another gear, but it will never quite unravel. I think TPTB underestimate their ability to control the consumer, and they will pay for their underestimation.)I find all this growth through debt “in theory” to be flawed. (because of the speed at which it takes place, and corruption, and greed, and etc…) But it has worked. Will it continue to work??? Who knows? There are real investments in technology, energy, land, etc… that are useful. …and as long as 1 person in the world is starving, then we haven’t expanded enough. So we will have to continue to spend tomorrow’s dollars to see if there is a way to feed everyone. (Excessive greed will need to be wiped out to complete that utopia!)As far as forced lending goes… It will happen. A good deal of credit is on the sideline right now. It’s solid opportunities that are lacking. Once credit finds those opportunities, those without credit will want it to get in on those opportunities. The whole Alt-energy thing, regardless of how negative profit oriented it currently is, will be that place. (I also see lots of credit going to protecting the bond market) If banks don’t return to lending, they will continue to lose, thus forcing them to constantly recapitalize their base. This means, yes, they will again have to take “risks”. …but hopefully they will become better at assessing risk, and better at avoiding excess.Thanks for stopping in, Miss America

      • economicminor   January 2, 2009 at 3:10 pm

        MA,Thank you for the complement, I do feel more informed than most others, at least I think I am, but I still feel very inadequate. Time will tell if we are correct and until then…I am Sorry that I come off as a yeller. I am not a trained or disciplined writer and am an emotional person, even though it mostly only seems to show in my writings.Please forgive me but do not expect me to be able to change my writing style as that appears to be a flaw in my character. I really do not mean to be yelling at you as I am in agreement with most of what you say.As a contrarian I don’t want to be married to a false belief so WHEN I come back at you, like over who are the banks going to lend the money to and can it be sufficient to make a difference, take it apart if it deserves to be taken apart and school me. The only way for me to survive this is to understand it and stay either on the right side or out of the way. That is what my motivation is. Personal for myself and my wife and if there is anything left, for the kids. I would like the world to be a better place but we as humans want to think we have evolved but don’t seem to be. The most aggressive among us are always in charge and they don’t get there by being magnanimous or worldly.I need to be criticized. Like you are doing… I am laughing about a system that has always been insolvent… It is funny even though I think it is only partially true. The Federal System can work that way forever, so to speak but state, local, business and consumers can’t. When I was young, there was little personal credit so it hasn’t always been this way.ANDThe part that matters today is consumer insolvency leading to business insolvency leading to lowered tax receipts and hammered pension funds. This all started off with consumers but has spread to small governments, to business, Wall Street and is now affecting states and multi national corporations and the wealthiest chip holders. All the machinations and tweaking done with the levers has maybe slowed down the deflationary debt collapse a little but hasn’t stopped it. And we have new debts to collapse in the near term. Option ARM, CRE and many retailers. This is a negative feed back loop that will stop when it runs its course.I do understand their theory. I just don’t see the common sense/logic of how it can continue any longer. Gross debt per income has never been this high. Debts have to be serviced or they aren’t debts, just printed money. Printed money becomes just paper after a while, look at Argentina, Zimbabwe or the Weimar Republic for an example.When debt servicing becomes to great for the ability to make the payments, debt collapse occurs. On a small scale this is absorbed but on the scale of what is happening today, it appears to be spreading and spreading as one event causes a chain reaction and that causes something else to default. And all the credit in the world can’t create an opportunity when the cost/reward structure is mired in so much debt.It doesn’t work for the top three percent to obtain all the assets and then lend them back to the population with interest. This is nothing more than indentured servitude. It worked until the inflationary effects of to much printed money started severely affecting the serfs ability to repay his debts. Then the system broke down. Greed corrupts and power and greed enabled is unable to be rational. Irrational actions can cause chaos and we are living in chaos right now.How I see this debt, other than the corruption and greed, is what is suppose to be sustaining those who invested their time, saved a little of that and gave it to someone to put to work to make a return. This went along fine until TPTB decided to goose the system for big fees and personal pay offs and to keep small corrections out of the system.This caused those with real earnings to have lower and lower returns on real productive investments. So their managers, who got fees from their ability to keep up, started using leverage to maintain the income desired by those who owned the money. But the gubbermint didn’t like the normal ups and downs of a free market so every time the market showed any weakness, they goosed it some more. Now more and more dollars were chasing fewer and fewer actual profits so the gubbermint decided to allow phony accounting to hide the losses (Enron, etc!).. And they decided that they would help fund thru tax gimmicks, the offshoring of jobs for profit. And they changed the way they counted unemployment, CPI., GDP and even got rid of M3 to hide what they were doing.Then after the lowering of interest rates and all the other gimmicks quit being effective, they totally deregulated borrowing and allowed shadow banks to create debt (inflation). When this was running its course, they allowed the only group left to keep anything similar to balance in the system, the credit rating agencies to be creators of engineered financial instruments for a fee…And the lenders lowered the qualifications for borrowers to the point if you could walk and chew gum at the same time, they would give you a loan…At that point, everyone who could possibility borrow, had. Corporations, LLCs, candlestick makers and MacD workers… All in debt beyond their eyeballs, just to keep the system from having a bad day. Risk wasn’t just mispriced, it was totally ignored. It was modeled out of the system… Except this was delusional!Then along came mid 2007 when the defaults started. They are continuing to get worse all the time. This debt collapse is still expanding and not slowing down, no matter how many trillions of dollars have been injected and unless I have missed something, will continue until much of the debt written on stupid consumptive behavior is written off.But this means that a lot of those real earnings that were suppose to pay for the retirement of many were wasted on consumption and can not just be replaced by printed dollars. If they do, those new dollars and the old dollars will just have less value in the real world.So this appears to be their plan except as dollars get less value, without COLAs and unions, private incomes will be decimated further, leading to an further increase in defaults, foreclosures and bankruptcies.Please, where you see holes in this logic, let me know.As for real investments in technology and energy, yes, to the limit of the cost vs sale price vs profit in a world of declining incomes… I just don’t know how to judge these. I think after the next round of earnings reports, neither will anyone else. And I’m not investing in a might be at this point in my life.As for land…. It costs money to hold land. Your money isn’t working for you, you have no access to that money without taking on debt that has overhead and you have taxes to be paid on it, and maybe insurance or fencing or caretaker or? In a deflationary cycle, land becomes cheaper the further in you go because people need to raise capital to pay off or down other debts and or are foreclosed upon…Land might be good near the bottom, if it can be put to productive enterprise. That means some environmental law or zoning law or water right law doesn’t keep you from using it.Same for energy and water and staples, near the bottom, they will be great buys because they will probably be offering dividends and stockholders might actually have something to say about the way the company is run. After we get rid of all the current Princes of Industry or they fall sufficiently from grace to actually be humble servants again.Have a great day and a good w/eBest to you and yours.

        • MA   January 3, 2009 at 11:17 pm

          too many drinks to write back… I shall reply on monday.MA

  9. hazleton   January 1, 2009 at 9:11 pm

    @economicminorYou are one of the few people who uses the word lying. Lots of euphemisms are used by people to make lying sound more politically correct.Fantastic post.

  10. pa   January 4, 2009 at 11:07 am

    IFRS, the new accounting rules – untested ? learning curves -more loopholes to exploit … how long does it take to educate and become a forensic accountant? How about turning the wall street unemployed into forensic good guys!