Financial topics

[Marc]

We've had bubbles long before the federal reserve was created. The panic of 1857, for instance, and the South Sea bubble, Mississippi Bubble, and numerous others.

This is well worth noting. I know that it's become something of a mantra in some quarters today to shout "End the Fed," "[we need] sound money," and such. However, I'm pretty sure that generational forces would have taken over today to produce results that are as bad (or possibly worse) in regards to the abuse of credit and financial-bubble creation if there were no Fed. In fact, if there were no Fed, the results may possibly be worse due to every megabank possibly being allowed to act as its own Fed and really "print away," so to speak. Thanks for the insights. —Best regards, Marc

Yes, there were single bubbles like the South Sea Bubble and numerous others. However, having 3 bubbles in a row, using all 3 major asset types, is something only the Fed seems to have been able to do. Bonds are a bubble. After the bubble pops, it will be obvious that interest rates 2% lower than inflation was crazy bubble prices. Somehow it is not obvious yet.

Indeed, we've been on something of a roll with those three grand bubbles, for sure, and you're right, Vince, about bonds being in a bubble. But what fun is just three bubbles — we're gonna go for four...the education bubble...which could be one of the most creative, financial-engineering-wise, in the coming years, although maybe it can be creatively used as an anti-deflation tool —Best regards/Peace, Marc

[OLD1953]

There are a lot of ways things could work out, good or bad. With WWIII looking us in the face, we could see the next GI bill as saying "existing school loans for military members will have interest frozen and be paid down at a rate of 8% per year while the member remains in service". IOW, when they swell the ranks for WWIII, they'll want the educated, because those are the people who can use the new gear, it's complicated stuff. And that would pack em' in.

As for the impending collape of European banks vis a vis US dollar inflation, we tend to forget that although dollars and EUROS aren't really fungible, they are interchangable. How many will be bailing for dollars if Greek bonds are set in drachmas and EURO valuations are all over the place as nobody knows what to expect tomorrow? Severe deflation seems at least as likely to me as severe inflation. Gold is still dropping, and it looks as if people are leaving gold and either buying bonds or just holding cash. Gold has absolutely not lived up to the hype of the last ten years, check any gold site that kept their articles from 2000 on and you can find proof in plenty.

[Reality Check]

Gold has gone from the $200 to $400 dollar range in the 1998-2002 period to the $1500 to $2000 range in the 2009 to 2012 period.

I am not sure what the hype was, but that is on the high side of a 400% increase.

[Reality Check]

There are a lot of ways things could work out, good or bad. With WWIII looking us in the face, we could see the next GI bill as saying "existing school loans for military members will have interest frozen and be paid down at a rate of 8% per year while the member remains in service". IOW, when they swell the ranks for WWIII, they'll want the educated, because those are the people who can use the new gear, it's complicated stuff. And that would pack em' in.

Since the war in Afghanistan over 10 years ago all active duty military have had their interest on their student loans paid by the Federal Government and all payments of principle deferred.

In addition, the Federal government is loaning people money to go to undergraduate school on a virtually unlimited basis. All with no interest and no principle payments while they are going to to college.

Lower income students also get their monthly interest paid by the Federal Government while they are in school. Higher income students can have there monthly interest payments differed and added to the principle while they are in school

State governments have been massively increasing the tuition rates at state run schools to suck in some of that "free federal government" loan money that students appear to be ready to accept at an unlimited rate.

So they are already packing them in, it is the inability to pay those loans back in the future that is causing the Trillions of dollars in a new bubble.

[Reality Check]

The European Central Bank ( ECB ) apparently has an emergency fund that has been propping up the Greek Banks to the tune of over $100 Billion Euros over the last two months as deposits have been removed.

This a long standing fund not one of the ones setup in the last few years to deal with this crisis.

The long and the short of it is that this fund uses all the assets of the banks as collateral.

Like the FED propping up the U.S. banks by using the worthless toxic assets at 100% of their face value as collateral for zero interest loans this is effectively a bailout of the Greek Banks.

Since it is an emergency fund their is no transparency as to what assets or what terms the bail out was made.

Just like the FED and the FED's bail out of the U.S. banks they are trying to keep it all secret.

In the event this support is stopped the Greek Banks will be bankrupt over night.

[Higgenbotham]

This Fed induced bubble is vastly different from previous generational bubbles.

In addition to being one bubble, the South Sea Bubble, Mississippi Scheme. etc., only lasted a few months. The recent generational bubbles have been going on for at least 12 years peak to peak and 17 years from conception (using John's timeline).

The recent bubble is the first bubble in modern history to use all of the available borrowing capacity of governments to maintain the bubble, to the point that the credit rating of almost all governments worldwide has been compromised. And that is just what has already happened. This has been taken to such an extreme that there is a risk the world monetary system could unravel in a catastrophic manner (just my idea but of course shared by a few others).

The recent bubble is the first bubble in modern history where bankrupt/insolvent institutions have been kept afloat literally for decades (this is my timeline now going back to the 1980s) using usury, extortion, coverups, false accounting, hijacking of public office, revolving doors between corporations and governments, illegal bailouts, failure to enforce bankruptcy laws, etc. Some of these elements were present in previous bubbles but not to this length or extent.

And the list goes on. Vince is right about the bond bubble because only a compromised government and Central Bank can create one.

[Higgenbotham]

OLD, your statements about automation would obviously be true on the micro scale. Meaning, let's say a corp introduces a robot at a cost of $200,000 capital cost plus $10,000 yearly maintenance which replaces 1 worker at $70,000 yearly. Therefore, the payback is slightly over 3 years which is an excellent return on capital and therefore good economics. I'll just stop there for now instead of trying to assess further.

But here's what I do know for sure. Some say we have a lot of automation and a lot of productivity improvement and we are producing more with fewer workers and therefore unemployment is up but overall, it's all good. My rebuttal to that is: If the economic system as a whole were operating more efficiently debt would be decreasing, not increasing, costs would be decreasing, not increasing, etc. The point I'm making may have nothing to do with automation. It may have to do with inefficiences that are completely divorced from any effects of automation. Just one small example that may or may not be relevant but is near and dear to many on this forum. If a kid can't get a factory job out of high school because the robot took it and instead racks up several hundred thousand in student loan debt by going through 8 years of schooling and then can't find a job, we are probably not better off. We can't say that is an inevitable result of automation, but it is happening more or less. An old friend who lived through the Depression and died just 3 months ago at 96 has been telling me for years that we should outlaw automatic checkouts in the stores and replace them with manned checkouts.

Different subject and this is a bit of a repeat, but in different words. People ask, "Where are the prosecutions for the fraud?" Admittedly, it took me awhile to figure this out. It's because the bankruptcies have to come first because the bankruptcy procedures bring the frauds to light and people get angry because they've lost money and therefore demand the prosecutions. So it's my opinion that in looking for someone to blame for failures to prosecute, we want to ask who it is that has prevented the bankruptcies from taking place. Examples - Enron bankrupt, Kenneth Lay goes to jail; Madoff bankrupt, Madoff goes to jail; Bernanke bails out banks and nobody loses money directly due to banker fraud (but the average citizen loses indirectly), bankers don't go to jail.

[Higgenbotham]

So here we are again.

First, we were told JP Morgan had lost $2 billion in a bad derivatives deal. Now it's $5 billion. Isn't this the same way Bear Stearns started? First, it was a $6 billion dollar subprime hedge fund that was rumored to be in trouble, then it was more than a rumor and went to pennies on the dollar. Then were were told subprime was contained; 8 months later Bear Stearns was finished.

Well, Bear Stears and Lehman are gone. Countrywide is gone. $800 billion was thrown into the banking system we were told for the benefit of 300 million Americans. But not much changed. Except for one thing. The US government is now absolutely up to its eyeballs in debt and has lost its Triple A bond rating. I can see how that benefited Warren Buffett and Jamie Dimon but tell me again, how does that benefit 300 million Americans? All of those foreclosures in the pipeline that are taking years to process - who pays for that - taxes insurance, maintenance and utilities? The huge overbuild of branch offices by Bank of America and JP Morgan, etc. - who pays the overhead to maintain those offices? 300 million Americans? Wow, we should all be honored.

So when JP Morgan or the next financial institution hits the wall, then what? Take the credit rating of the US to junk? Let interest rates go to 20%? What about the 46 million on food stamps and scores of millions on the government dole? How do you issue checks on a bankrupt account? I think we're looking at a situation similar to when the Bardi and the Peruzzi blew to pieces but it's even bigger than that. It didn't have to happen. So will they play with fire and risk total bankruptcy and catastrophic collapse of the world financial system? You better bet they will because it's already been done.

NEW YORK (CNNMoney) -- One thing seems clear about JPMorgan Chase's $2 billion loss. It's no longer $2 billion. It's likely much higher.

The number being bandied about now is closer to a range of $6 billion to $7 billion, according to several people working on trading desks that specialize in the derivatives JPMorgan Chase (JPM, Fortune 500) used to make its trades and from two sources with knowledge of the bank's positions.

But the dangers are far greater for JPMorgan Chase.

"Part of the problem of what they were doing is that they were too big in the trade to ever be able to trade out of it," said Friesen, who is also a member of the Federal Reserve Bank of New York's advisory group.

http://money.cnn.com/2012/05/18/markets ... /index.htm

Geniuses.

[vincecate]

Vince is right about the bond bubble because only a compromised government and Central Bank can create one.

The Fed has made trillions of new dollars and used them to buy up bonds and drive the price of bonds up. Of course bond prices are artificially high at this point. How could they not be? Trillions with a "T" were used to pump up the prices. A huge increase in the money supply always eventually causes inflation. This will drive up interest rates and lower bond values. So not only have they driven up bond prices so high that yields are well below the current inflation rate (so crazy high), bond values are far too high for the inflation rates that are coming. Since Trillions have gone into making the bubble, the crash will be huge.

This bond bubble seems so clear cut to me. However, the market still has bond prices crazy high, so clearly the vast majority of people don't yet see it the way I do. I think part of the problem is that we have already had a stock bubble and a real estate bubble so the other 2 major asset classes are tarnished. So people are all scared into the 3rd major asset class, which helps make the bubble so huge. And related to this, people just don't know where else to put their savings. Eventually I think people will decide that the answer is "real money" or "gold and silver". But I think this will wait till after people realize how fast fiat money can be devalued.

[Reality Check]

The Fed has made trillions of new dollars and used them to buy up bonds and drive the price of bonds up.

Has the Federal Reserve Board really spent 1,000s of Billions ( Trillions ) buying up bonds ???

I realize they have spent Trillions of printed dollars loaning to banks at near zero percent interest to effectively bail out the banks. Said loans being secured against the toxic assets that the U.S. government promised to get off the books of the banks with the 800 Billion bail out ( and later the failed private-public partnership promise ), but which still remain on the banks's books despite the promises. The fiction of this being a loan, and not a bail out by the FED, proven by the fact that the toxic assets were valued at 100% of face value for loan collateralization purposes when they were really worth pennies on the dollar ( which is why the banks required bailing out in the first place ).

My question is as to the scope of the bond buying so far. I understood it was more in the 100s of Billions to a single Trillion range, not Trillions so far.

My point being, it will require Trillions, on an ongoing basis, if the FED has to step in and replace foreign governments and private investors as the primary purchaser of U.S. government debt.

This would of course be insane, but no more so than what the FED has already been doing with bailouts and, to a smaller extent, government bond purchases.

It can get worse and there is no evidence anyone is going to stop the FED spending Trillions more of printed money on buying Government bonds when interest rates start rising on U.S. government debt.