Financial topics

Investments, gold, currencies, surviving after a financial meltdown
Higgenbotham
Posts: 7487
Joined: Wed Sep 24, 2008 11:28 pm

Re: Safe Money

Post by Higgenbotham »

Gordo wrote:
Higgenbotham wrote:US government default
I'm not sure I'm smart enough to follow that interview you posted about. Here's one quote from the interview:
"It’s stupid for people to hold currency. The Fed can simply print all they want at very low cost. Paper money is as abundant as leaves on trees"
I'm not sure how that squares with "deflation"?
I was also taken aback at first when I read that part, but then figured out what he really appeared to be saying. What I think he means is that if people decide they want to get their cash out of the bank and stick it under the mattress, the amount of currency in circulation isn't more or less fixed like the gold supply is. If someone wants to draw money out of the bank and the bank doesn't have enough cash on hand, the bank uses their reserves to buy the cash from the Fed. So in that sense "the Fed can simply print all they want" as long as there are reserves to convert into currency and there is demand from the public for the currency.

The amount of currency in circulation would increase by this process while other measures of money supply would decrease more, so it would be deflationary.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

Higgenbotham
Posts: 7487
Joined: Wed Sep 24, 2008 11:28 pm

Re: Safe Money

Post by Higgenbotham »

Gordo wrote:
Higgenbotham wrote:US government default
So can you explain how the US government CAN default when our debt is in dollars, which are backed by nothing and we can print any quantity of dollars we want at any time? The Fed just printed $2 trillion worth in the last 6 months, with no transparency at all. Congress just printed almost a trillion, with an almost equal lack of transparency.
When are they going to "run out" of money? They can print another $10 trillion and we will still remain below the debt to GDP ratio of Japan!

Yes, but won't that be inflationary?
I don't believe the government can default anytime soon under current conditions. In fact, since interest rates on the long bond have come down a lot recently, the probability of default has become less, as the government can lock in low rates on present borrowing.

I think the potential for default lies in a combination of things that are likely to occur in the future that will eventually result in a shortage of capital and higher interest rates. Demographics are one major factor. Productivity and profitability are another. This goes back to the Richard Koo argument that I did not comment on. What Koo is really saying is that if we can get the economy to cash flow everything will be OK and that the rest will take care of itself. That's the same thing Bernanke seems to be saying in so many words. But the problem is that you really can't stabilize debt and interest rate levels by shuffling money around if an economy is running at a loss overall. High debt levels (federal, state, municipal, corporate, personal, etc.) are symptomatic of that (an economy running at a loss while the reporting methods are somehow screwed up due to malfeasance or corruption--the bezzle mentioned by Galbraith as one example of that). What is needed to turn that around isn't more or unlimited borrowing, but appropriate cost cutting and productivity increases so that the economy can once again operate at a profit.

My guess is that more borrowing as it is being done at present could actually be deflationary because it sucks liquidity away from profit generating or potentially future profit generating enterprises and feeds it into loss generating or nonproductive enterprises. On the other hand, if some of Las Vegas got shut down and Obama could put together a program to create a more efficient electricity grid, that type of thing would be a net positive.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

The Grey Badger
Posts: 176
Joined: Sat Sep 20, 2008 11:50 pm

Re: Financial topics

Post by The Grey Badger »

One investment not mentioned which is within reach of us poor folks is "junk" silver coins. Real silver but not particularly collectible.My friend in Klamath Falls Oregon has a small stash of those against financial collapse, war, or just plain chaos.

freddyv
Posts: 305
Joined: Sat Oct 04, 2008 4:23 am
Location: Oregon, USA
Contact:

Re: Financial topics

Post by freddyv »

I got to looking around at that Mr Mortage website and came upon this stomach-turning story about Calpers, The California Public Employees' Retirement System:
http://mrmortgage.ml-implode.com/2008/1 ... -taxpayer/

"Calpers has lost almost a quarter of its assets since July 1, the start of the current fiscal year"

The crazy thing is that I live 40 miles north of California and hadn't heard a thing about this...why? because these stories are a dime-a-dozen now and unless you've found a way to make $50,000,000,000.00 vanish you really aren't front page news these days. After all, Paulson is tossing trillions of dollars around, so what's the big deal?

But the market is up a few hundred points and I can already hear Cramer: Buy! Buy! BUY! The new bull market is here!!!

--Fred

John
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Location: Cambridge, MA USA
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Re: Financial topics

Post by John »

A lot of what I've been reading here doesn't seem to make much sense,
at least to me.

The price of gold -- in any given currency -- is determined by the
marketplace. Nothing else.

The value of a currency -- relative to another currency -- is
determined by the marketplace. Nothing else.

A country can devalue its currency relative to the dollar in the hope
of improving its export trade.

There are reports of a "race to the bottom," as different countries
try to devalue their currency.

In the past week, we've seen devaluation stories for the won, yuan and
dong. (I really wanted to write that sentence. It refers to the
currencies of Vietnam, China, and S. Korea.)

The dollar cannot be devalued in any similar way, because it's the
world's reserve currency.

If the US tries to devalue the dollar by "printing money," then the
only reaction of other countries will be to further devalue the won,
yuan, dong and other currencies.

China and other countries have a vested interest in a strong dollar,
since it helps their export businesses.

Since the US cannot devalue the dollar, there's only one remaining
choice, in case of a chaotic situation where the government can't pay
bets: Default on bond payments.

Geez, of COURSE the government can default. The supposed ability to
print infinite amounts of money would be unacceptable to other
countries for reasons just given, and if it were tried, the
government would end up defaulting anyway.

Of COURSE the government can default on bond payments. In a chaotic
situation, it's the only choice.
> I should mention that this situation is vastly different from that
> in the 1930s where the Federal Reserve Notes were backed by gold
> and since it is impossible for gold to default, it was impossible
> for Federal Reserve Notes to lose value in the marketplace unless
> the government came in and devalued them as Roosevelt did. Today,
> since the Federal Reserve Notes are not backed by gold but are
> instead backed by debt securities that can be defaulted on they
> are only as safe as the underlying securities that give them
> value.
This is utter nonsense, and it answers itself. Being "backed by
gold" is meaningful only if it's convenient to do so. As soon as it
becomes inconvenient, the President or the Congress can "devalue" the
currency by changing the price of gold -- which worked in the 1930s
because it was illegal to own gold. "Backed by gold" is totally,
utterly meaningless.
> And why would you accuse Thomson/Reuters of fraud for reporting
> analyst estimates? They can report on anything they want, even
> indicators that are notoriously horrible at turning points in the
> economy (analysts as a group always remain wildly bullish long
> into downturns, well they are normally bullish at all times
> anyway).
Anyone who wants to begin to grasp the debauched generational values
that have created the current financial crisis, or would like to
understand how almost an entire generation can be totally lacking in
morals and ethics, need only read this paragraph.

Sure, why not? An investment bank can sell any worthless securities
it wants, and lie about it. Who cares, as long as the sales people
get their fat commissions. Who cares if millions of investors, old
people, and local communities are totally screwed? Let them do
anything they want.

Or who cares if they collude with Moody's and other ratings agencies?
They "can report anything they want," as long as they get their fat
fees and commissions by providing AAA ratings for worthless crap?
Who cares if widows and orphans have to starve? I mean, screw 'em.
Let Moody's do what they want.

Or who cares if people like Madoff screw all their friends and
relatives, leaving them to discover that their lifetime savings -- 60
years of working and saving -- have been wiped out? Fuck 'em. If
these investors are so utterly stupid that they can't spot a simple
Ponzi scheme using two sets of books, then they DESERVE to lose their
entire life savings. Madoff can do anything he wants. Why not?

Or who cares if politicians and regulators don't want to say anything
about Fannie and Freddie because they're making so much money for
themselves on the fraud? Why not? Who cares if millions of
homeowners get foreclosed and have to live under bridges, as long as
Barney Frank and Christopher Cox get what they want? Fuck everyone
else.

The answer to your question is this: The same earnings estimates have
turned out to be wrong for five quarters in a row. Thomson Reuters
would have to be total morons not to have noticed this. "Fool me
once, shame on you; fool me twice, shame on me!" Well, they were
"fooled" five times. If it turns out that they didn't do enough due
diligence -- or that they looked the other way -- because they didn't
want to lose their fat commission and fee checks from the companies
they were reporting on, then it's securities fraud, and they should go
to jail.

Sincerely,

John

gtate
Posts: 5
Joined: Sun Sep 21, 2008 9:53 am

Re: Financial topics

Post by gtate »

John,

Couldn't agree more with your assesment of recent postings...I think everyone is searching for reasons why 'individuals' are acting the way these people are acting based on an 'individual's/org' behavior rather than the behavior of a 'generation' of people....

With my family over these last few weeks I have noticed that a very intelligent conversation can turn ugly when the mere suggestion that it's the behavior of the entire generation that is questionable. People have a natural tendency to focus on their immediate circle of friends and business associates. I wonder what the circle of friends and business associates of Madoff, Fuld, Massillo, Local Banker, ect. thought of their individual behavior.

So I reflect on my 20 plus years in the Financial Services industry and think what about my personal behavior? or the behavior of others around me and can report with confidence that ' corners ' were cut for the sake of a $$ or two. Little acts that don't warrant criminal charges per se, however when you add them up you can see a generation of behavior that is not that impressive and quite embarassing!

Sincerely,

GTate

Higgenbotham
Posts: 7487
Joined: Wed Sep 24, 2008 11:28 pm

Re: Financial topics

Post by Higgenbotham »

John wrote:
> I should mention that this situation is vastly different from that
> in the 1930s where the Federal Reserve Notes were backed by gold
> and since it is impossible for gold to default, it was impossible
> for Federal Reserve Notes to lose value in the marketplace unless
> the government came in and devalued them as Roosevelt did. Today,
> since the Federal Reserve Notes are not backed by gold but are
> instead backed by debt securities that can be defaulted on they
> are only as safe as the underlying securities that give them
> value.
This is utter nonsense, and it answers itself. Being "backed by
gold" is meaningful only if it's convenient to do so. As soon as it
becomes inconvenient, the President or the Congress can "devalue" the
currency by changing the price of gold -- which worked in the 1930s
because it was illegal to own gold. "Backed by gold" is totally,
utterly meaningless.
I'll just take this statement apart piece by piece.

"I should mention that this situation is vastly different from that
in the 1930s where the Federal Reserve Notes were backed by gold"

In 1931, as concerns were mounting over the possible ability of the Federal Reserve to make good on its gold backing of Federal Reserve Notes (and gold ownership was still legal until 1933 after Roosevelt took office) there was a disparity between the market perception of what the Federal Reserve Notes were worth in terms of gold and what the fixed price was ($20.67 per ounce).

"and since it is impossible for gold to default, it was impossible
for Federal Reserve Notes to lose value in the marketplace unless
the government came in and devalued them as Roosevelt did."

Since politicians are always slow to act versus market forces, foreign Central Banks and individual US depositors who were holding Federal Reserve Notes decided to act on their difference in perception versus where the US government had pegged the price. The only way for the individual US depositor to do so was to go to their bank, get the Federal Reserve Notes, and then convert them to gold directly, which was still legal at the time. This also contributed to the initial runs on the banks. Turned out the marketplace was right as gold moved quickly to $35 after Roosevelt unpegged the price in 1933 (my best recollection).

"Today, since the Federal Reserve Notes are not backed by gold but are
instead backed by debt securities that can be defaulted on they
are only as safe as the underlying securities that give them value."

Today, we could (and I repeat could) be seeing a similar situation with Treasury Bills instead of gold since Treasury Bills are what are most directly interchangeable with Federal Reserve Notes under the current monetary regime. That's why I have said many times (not here) that the run into Treasury Bills is equivalent to the bank runs of the 1930s. Since the Federal Reserve has put all manner of potentially worthless securities on its balance sheet through the various credit facilities (debt securities that can be defaulted on) in exchange for more liquid collateral, that is what may be precipitating the demand for Treasury Bills. Although, as I state before, the debt securities that are being taken onto the Federal Reserve's balance sheet from the banks are technically only based upon loans of treasury securities that were previously on the Fed's balance sheet.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

freddyv
Posts: 305
Joined: Sat Oct 04, 2008 4:23 am
Location: Oregon, USA
Contact:

Re: Financial topics

Post by freddyv »

freddyv wrote:I got to looking around at that Mr Mortage website and came upon this stomach-turning story about Calpers, The California Public Employees' Retirement System:
http://mrmortgage.ml-implode.com/2008/1 ... -taxpayer/

"Calpers has lost almost a quarter of its assets since July 1, the start of the current fiscal year"

The crazy thing is that I live 40 miles north of California and hadn't heard a thing about this...why? because these stories are a dime-a-dozen now and unless you've found a way to make $50,000,000,000.00 vanish you really aren't front page news these days. After all, Paulson is tossing trillions of dollars around, so what's the big deal?

But the market is up a few hundred points and I can already hear Cramer: Buy! Buy! BUY! The new bull market is here!!!

--Fred
I guess I know I'm getting too opinionated when I start replying to my own posts but I really want to hammer home the point that these types of stories are popping up all over the place. I believe this gets right to the heart of Generational Dynamics and how the entire generation of people in charge of things now really doesn't have a clue about right and wrong. I see this personally as young women I know have never been taught that they should have some respect for their bodies and young men refuse to work because they can live off of the girls who are so desparate for a man who will stay the entire night. I have noticed in the past few years how young people seem to be drawn to me and I think it's because I don't live that way. I am some kind of weirdo these days because I don't say fuck every other word and I don't have any bastard children being raised by someone else and I work hard and am honest. If I think back to what people were like as a boy I would fit right in but my generation changed everything and it was not for the better. Our parents wanted so much to make us happy that they made us into something rather ugly and disgusting...greedy, selfish and self-absorbed, unable to see or care that we are selling our children and grandchildren into slavery with the debt we are leaving them.

What a deep recession/depression will do is to instill respect for hard work and saving and carrying ones own weight instead of living off of someone else. If Paulson and Bernanke and Obama manage to forstall this period of hardship they will not be doing us any favors, and in my opinion, will be sealing the fate of this nation. In this I disagree with you, John, I think that a 1930's style despression is not 100% certain but I think that if it is avoided it is certain that our greatness as a nation will be lost and will likely never be recovered.

--Fred

StilesBC
Posts: 121
Joined: Sun Sep 21, 2008 9:44 pm

Re: Financial topics

Post by StilesBC »

>>> And why would you accuse Thomson/Reuters of fraud for reporting
>>>analyst estimates? They can report on anything they want, even
>>> indicators that are notoriously horrible at turning points in the
>>> economy (analysts as a group always remain wildly bullish long
>>> into downturns, well they are normally bullish at all times
>>> anyway).


Anyone who wants to begin to grasp the debauched generational values
that have created the current financial crisis, or would like to
understand how almost an entire generation can be totally lacking in
morals and ethics, need only read this paragraph.

Sure, why not? An investment bank can sell any worthless securities
it wants, and lie about it. Who cares, as long as the sales people
get their fat commissions. Who cares if millions of investors, old
people, and local communities are totally screwed? Let them do
anything they want.

Or who cares if they collude with Moody's and other ratings agencies?
They "can report anything they want," as long as they get their fat
fees and commissions by providing AAA ratings for worthless crap?
Who cares if widows and orphans have to starve? I mean, screw 'em.
Let Moody's do what they want.

Or who cares if people like Madoff screw all their friends and
relatives, leaving them to discover that their lifetime savings -- 60
years of working and saving -- have been wiped out? Fuck 'em. If
these investors are so utterly stupid that they can't spot a simple
Ponzi scheme using two sets of books, then they DESERVE to lose their
entire life savings. Madoff can do anything he wants. Why not?

Or who cares if politicians and regulators don't want to say anything
about Fannie and Freddie because they're making so much money for
themselves on the fraud? Why not? Who cares if millions of
homeowners get foreclosed and have to live under bridges, as long as
Barney Frank and Christopher Cox get what they want? Fuck everyone
else.

The answer to your question is this: The same earnings estimates have
turned out to be wrong for five quarters in a row. Thomson Reuters
would have to be total morons not to have noticed this. "Fool me
once, shame on you; fool me twice, shame on me!" Well, they were
"fooled" five times. If it turns out that they didn't do enough due
diligence -- or that they looked the other way -- because they didn't
want to lose their fat commission and fee checks from the companies
they were reporting on, then it's securities fraud, and they should go
to jail.

Sincerely,

John
Even though I agree with you on the overall sentiments you wrote here (that these people are the absolute scum of the earth; the dregs of society), I think your anger is somewhat misguided.

In order to understand exactly how these frauds were perpetuated, one need only look at the set of circumstances created by government agencies that allowed them to happen.

First, lets look at the credit rating agencies - Moody's, S&P, and Fitch. The accuracy of their ratings have been absolutely horrific for over a decade. So why did they not go out of business? Because their existence was mandated by government. The creation of the Nationally Recognized Statistical Rating Organization (NRSRO) was passed by the SEC in 1975. Previous to this, people who were buying debt securities would pay the rating agencies for their analysis. If they didn't like the work that was being done, they would go somewhere else. But after 1975, with competition concentrated on an ordained few, debt issuers now had to pay to get their securities rated. If they couldn't get them rated, they couldn't sell the security. So naturally, they would shop around the ratings agencies to find out which one would give the best rating. The agencies, all of whom obviously want to increase their fees collected, would inflate the ratings to attract more customers. Presto! You basically have a credit rating cartel, whose ratings are essentially meaningless. Not only that, but because their very existence was ordained by government legislation, they had to be mindful of political implications in giving certain ratings to certain companies, or even foreign governments.

This is closely tied with your griping about investment banks selling their garbage securities. Had the credit rating agencies been doing their job the way they should have been (compensated based on their actual performance), there is no possible way the garbage MBS, ARS, or CDOs could have been rated as high as they were. The geniuses working at Moody's would have caught (at least some or most of) the grossly optimistic assumptions those securities had used in determining tail risk. They would have known that things like VaR (Value at Risk) models were completely useless as evidenced years previous with LTCM.

LTCM played another important part in IBs being able to securitize and pawn off this garbage. It was made clear to them, that the US Government and Federal Reserve would do whatever necessary to ensure their survival in the event they were to take too much risk. And the leaders of the fraud would get off scot-free. John Meriwether learned this. He perpetrated an enormous securities fraud ring in '91 with Solomon Brothers and got off with a $50,000 fine. He started LTCM in '94, only to have it collapse in '98 requiring a bailout from the government. Now he is running another hedge fund, JWM Partners LLC. Decades of fraud going unpunished by a law that says it should will inevitably lead to a free-for-all. If Meriwether was put in prison back in '91 like he should have been, you can bet LTCM never would have happened. And the other clowns - Fuld, Prince, Mozillo, etc would have taken note.

A similar conclusion can be drawn when looking at the Madoff ponzi scheme. Here, it wasn't government ordained ratings agencies that slipped up, but rather the SEC. Madoff was such a "class act" that there was no way for him to do something wrong. So his buddies at the SEC always gave him the benefit of the doubt and a pat on the shoulder. Not only did this further embolden Madoff himself, but it comforted his investors to know that there was a regulatory body there watching over their money. What would have happened if there was no SEC? Well obviously, the investors themselves would have done a better job of asking questions. Or they would have hired experts to do their due diligence. It wouldn't have lasted more than a year and would have been a fraction of the size. He probably wouldn't have started doing it in the first place.

A common theme to all of this, is that without government's implicit guarantees, the victims of the frauds would not have been nearly as careless. And by extension, the risk premiums would either have been much higher (to the extent that they weren't economically viable) or the sellers would have been discouraged by the nosiness of investors.

Government stupidity and overregulation was the cause of all this fraud. The sickening scandals we have uncovered lately are an effect of the former.

Matt

StilesBC
Posts: 121
Joined: Sun Sep 21, 2008 9:44 pm

Re: Financial topics

Post by StilesBC »

And I'd also like to point out to all the GD readers that I have finally completed the final part of my 6 Part preview for 2009 on the financial markets and economy. Do take a look:

Part 1 - http://futronomics.blogspot.com/2008/12 ... eview.html
Part 2 - http://futronomics.blogspot.com/2008/12 ... tlook.html
Part 3 - http://futronomics.blogspot.com/2008/12 ... tlook.html
Part 4 - http://futronomics.blogspot.com/2008/12 ... tlook.html
Part 5 - http://futronomics.blogspot.com/2009/01 ... tlook.html
Part 6 - http://futronomics.blogspot.com/2009/01 ... ughts.html

I look forward to your comments.

Matt Stiles

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