Financial topics

[abs]

Just reading the last few pages of posts, it's clear that despite efforts by the government the contagion has not been contained and, as we all expected, is getting worse and is not nearly done deflating/unwinding these bubbles.

So here is one big question - for the lucky ones who have been able to sell stocks and other assets and now may be sitting with cash or cash equivalents (CDs, money markets, savings accounts, etc.) From a practical standpoint, what is the consensus as to how to protect the cash? If we truly believe a new currency is coming, do we need to worry about the government seizing bank accounts (this did happen in Argentina in the past)? At the same time, some argue that US Treasuries are the place to be but they are currently very expensive so does it make sense to buy now or wait for them to get cheaper or don't buy even if they do get cheap? Is it a better to withdraw all the cash and hide it "under the mattress"? What about safety deposit boxes? I've also ready about special bank trust accounts, are these really any better? I am aware of the different approaches, just not sure what everyone;s consensus is regarding this question and now recommending . . .

Andrew

[John]

In a week or so, I'm going to split off all the posts in this thread
up to this point and move them into a new thread, "Financial Topics -
Sep-08 to Mar-09". Everything after this point will remain in this
thread.

Sincerely,

John

[mannfm11]

Your latest is quite interesting John. I believe bankruptcy and foreclosure wipes out debt, not repayment, as the money supply falls faster than the debt. Koo makes a point that what the system needs is employment not production as the employment to produce something merely increases the supply of the somethings that they already can't sell. This is the shortage in the compound interest equation. Thus the depressions are ended, not by government activity, but by debt liquidation. This is the very thing that Keynesian economics seeks to prevent. What eventually happens is what has happened, compounded debt crushes the capacity of the economy to expand more debt to sustain demand and repayment. Remember and never forget the FACT that when a bank lends a dollar it collects back a dollar and accumulated interest. Banks create all the money so they fail to create enough money to pay back the debts. Banks can take the losses until the supply of money get greater than their collectable debt. This is confusing because the problem is not enough money, but it is not enough money in the hands of those that owe the debts. Thus something like subprime or a stock market crash creates money for one group that owed and lost by another group. Throw in the hundreds of billions in bonuses paid Wall streeters and the trillions put into overvalued stock ($300 billion a year for the past 15 years and the market has never sold at real financial value since 1995), much of this borrowed and the imbalance of trade worldwide. It really isn't the US that owes China, but US consumers or money shifted around by banks. The real balances owed for the trillions owed China exist against American homes, cars, credit cards and corporations. If you concentrate on what the book The Bubble that Broke the world was about, it was really about access to money and international debt. There is something in China called hot money. The US might owe China a lot of money, but the US people and corporations and other countries have invested trillions into China and could want it back. You might recall that French entities decided they wanted the gold in the US and took it and depleted the capacity of American banks to meet calls for gold. This, despite the fact that France owed the US a lot of money.

There are a lot of different blames to go around, but the one that no one wants to own up to is the fact that the system naturally produces these type problems due to simple compound math. I attempt to tell people how simple this is by taking a calculator and compounding 1.01 to the 2000th power. you get an amazing number. I guess you get a double roughly every 72 times, so we are looking at 2 to the 28th power roughly. the answer is 439,286,205. This is what a dollar compounds into at 1% interest for 2000 years. Thus if we maintained a silver standard at $1 per ounce, it would take 439.29 billion ounces of silver to make up the compound interest at 1% over 2000 years if you started with $1000. $1000 would be enough to give 100,000 people a penny each, so it is clear that a system where the money supply is created out of banking becomes unbalanced and unsustainable very quickly. If you use 5%, the answer to the equation is over a quadrillion.

My point is that any solution that doesn't serve to liquidate unsustainable debt is no solution at all. The problem is that the money changers want to maintain the status quo where they have a lien on the world and their liabilities are wiped out as they naturally would be if they had maintained balance. Thus the game is rigged to the point that common man, even in a system where direct slavery is not allowed, is permanently enslaved by a money system, at least as long as the system can be maintained. If they forced liquidation of the world financial systems and distributed the remainder to the holders of the bank liabilities, the entire hierarchy of the world would change. Also, the system would renew and rebuild itself. It is the effort to maintain the financial status quo that lengthens these operations. In the classic case, the problems we had were systematic, but the problem is systematic. By that, I mean that we weren't faced this time with a contagion, as the entire system was and is a contagion that needs to be cleaned out. This wasn't a cause and effect, like maybe Citi going under in normal times. The whole financial system is rotten.

[John]

From a web site reader:

> big surprise from SnP's Howard Silverblatt?

> The SnP earning spreadsheet was updated today and included this
> comment:

> "Q1 and full 2009 estimates have started to deteriorate"

> What a shock!

http://www2.standardandpoors.com/spf/xl ... EPSEST.XLS

John

[StilesBC]

John,

In regards to your latest post on Koo, I think you and he are missing the point. Government stimulus of any sort has a probability of zero in working. In order for one area of the economy to be "stimulated," resources need to be taken from somewhere else to pay for it. Even if the money is created, it is created as a future liability. This means that it is borrowed from future production. The perception of such a growing debt burden will disincentivize people from engaging in production - because they know taxes will be too high and demand will be subsequently too low. So although the debt does not need to be paid until a later date, its effect is apparent immediately. It messes with the "time preferences" of entrepreneurs.

I also disagree with the common logic that WWII ended the depression. "Time" and and low enough private debt levels ended the depression. A massive increase in the savings rate provided fertile ground for investments in new technologies like refrigerators and commercial aircraft - which in turn made us more productive and increased our savings. A 40% reduction in taxes probably didn't hurt either.

Economists have a terrible habit of assuming causation when only correlation can be proven. Koo is guilty of that, as are nearly all neoclassical economists (and even some Austrians I must admit).

As mannfm11 mentioned. The only way the rate of savings will meaningfully increase is through the destruction of debt.

Regards,
Matt

[John]

Dear Matt,

> In regards to your latest post on Koo, I think you and he are
> missing the point. Government stimulus of any sort has a
> probability of zero in working. In order for one area of the
> economy to be "stimulated," resources need to be taken from
> somewhere else to pay for it.

This is true in "normal" times, since government investment ends up
crowding out private investment. But in a balance sheet recession,
there is no private investment, so public resources do create jobs,
without costing jobs elsewhere.

> Even if the money is created, it is created as a future liability.
> This means that it is borrowed from future production. The
> perception of such a growing debt burden will disincentivize
> people from engaging in production - because they know taxes will
> be too high and demand will be subsequently too low. So although
> the debt does not need to be paid until a later date, its effect
> is apparent immediately. It messes with the "time preferences" of
> entrepreneurs.

I'm not aware of any support for this claim. If I have an
opportunity to earn a $1.00, knowing that 25 cents will be taxed away,
I would still want to earn the dollar if I learned that 30 cents will
be taxed away.

> I also disagree with the common logic that WWII ended the
> depression. "Time" and and low enough private debt levels ended
> the depression. A massive increase in the savings rate provided
> fertile ground for investments in new technologies like
> refrigerators and commercial aircraft - which in turn made us more
> productive and increased our savings. A 40% reduction in taxes
> probably didn't hurt either.

I would say that history contradicts you. I would point to Japan,
whose balance sheet recession supposedly ended in 2005, after 15
years of "time." But now it turns out that Japan's economy is
crashing because it depends too much on exports. A huge, bloody war
will turn all that around, I would imagine.

> Economists have a terrible habit of assuming causation when only
> correlation can be proven. Koo is guilty of that, as are nearly
> all neoclassical economists (and even some Austrians I must
> admit).

That's exactly what you did when you wrote, "A massive increase in the
savings rate provided fertile ground for investments in new
technologies like refrigerators and commercial aircraft - which in
turn made us more productive and increased our savings. A 40%
reduction in taxes probably didn't hurt either."

> As mannfm11 mentioned. The only way the rate of savings will
> meaningfully increase is through the destruction of debt.

That's kind of a cliché, but the only way to destroy debt is to grow
the economy. That's what fiscal stimulus is supposed to do.

Sincerely,

John

[StilesBC]

John,

May I recommend a few articles to read:

http://mises.org/story/3310 - Frank Shostak
http://mises.org/story/3194 - Robert Murphy
http://mises.org/story/3353 - George Reisman

Or just go to mises.org and use their advanced search feature to research any topic you want. Typing "stimulus" yielded over 100 articles. Koo's theories have been thoroughly debunked as total nonsense.

I'm not aware of any support for this claim. If I have an
opportunity to earn a $1.00, knowing that 25 cents will be taxed away,
I would still want to earn the dollar if I learned that 30 cents will
be taxed away.

C'mon. Are you telling me you wouldn't attempt to work less in order to avoid entering a higher tax bracket? The higher tax rate (of 5% like in your example) could be the difference between a productive business and a money-losing business. Profit margins for many companies are much lower than 5%.

I would say that history contradicts you. I would point to Japan,
whose balance sheet recession supposedly ended in 2005, after 15
years of "time." But now it turns out that Japan's economy is
crashing because it depends too much on exports. A huge, bloody war
will turn all that around, I would imagine.

The amount of "time" depends on a lot of things obviously. For one, Japan is a culture virtually devoid of the desire to bear children. But you of all people should know that it could take an entire generation for this to occur. A bloody genocidal war that reaches a climax is one way to expedite a first turning. But it has to occur near the end of 4th turning in order to be effective. If Japan had a bloody war in the mid 90s, I doubt it would have done anything positive for the economy - even by now. So is it the war itself that causes the recovery or is it the timing of the war? GD proves my point here.

That's exactly what you did when you wrote, "A massive increase in the
savings rate provided fertile ground for investments in new
technologies like refrigerators and commercial aircraft - which in
turn made us more productive and increased our savings. A 40%
reduction in taxes probably didn't hurt either."

Indeed, I did.

That's kind of a cliché, but the only way to destroy debt is to grow
the economy. That's what fiscal stimulus is supposed to do.

Huh? Bankruptcy doesn't destroy debt?

[StilesBC]

Just reading the last few pages of posts, it's clear that despite efforts by the government the contagion has not been contained and, as we all expected, is getting worse and is not nearly done deflating/unwinding these bubbles.

So here is one big question - for the lucky ones who have been able to sell stocks and other assets and now may be sitting with cash or cash equivalents (CDs, money markets, savings accounts, etc.) From a practical standpoint, what is the consensus as to how to protect the cash? If we truly believe a new currency is coming, do we need to worry about the government seizing bank accounts (this did happen in Argentina in the past)? At the same time, some argue that US Treasuries are the place to be but they are currently very expensive so does it make sense to buy now or wait for them to get cheaper or don't buy even if they do get cheap? Is it a better to withdraw all the cash and hide it "under the mattress"? What about safety deposit boxes? I've also ready about special bank trust accounts, are these really any better? I am aware of the different approaches, just not sure what everyone;s consensus is regarding this question and now recommending . . .

Andrew

Andrew,

There is no consensus. And if there ever was one, I would be very skeptical of it. I think the best answer is d) "all of the above." Have some in cash at a few different banks (large and small). Have some in CDs and some in chequing accounts. Risking illiquidity of savings accounts is not worth the paltry interest rates they give you. Treasuries may not be safe either. Have some cash locked in a safe at home along with a little bit of gold or silver. If you can, have some of your assets offshore - Canada or New Zealand, for example. If land prices were to fall enough, buying an arable plot in the countryside wouldn't be a bad idea. Have an exit plan for all of the above.

And understand that your own personal situation determines what would be best for you. Your age, your family status, your employment, your location, etc.

[sadhic]

I have now increased faith in this GD analysis. It would be better to observe the below point with an Indian perception. in the past 8 to 10 years the real estate price gone so high that is not at all accessible for general public. Mathematic can be worked out like this. 2400 sqft land in Chennai cost you around 160k USD where as it worth less than 60k. Here bottom line is this excess 100 k need to be evaporated from the system to see the wheels of the economy start moving again here. For 2400 sqft you have 100k USD excess. For whole on India this excess must running in to hundreds of trillion. I can’t imagine the excess in this whole world.

[umoguy]

I don't know why I watch CNBC, it kills me. I don't have bloomberg, I guess that is why. I Just watched Mark say "we were up over 20% so we are in a new bull market", and then Erin Burnett says, "only another 35% to go to get it all back!". Maybe it was just a slip up, but they say things like this all the time. How can they not understand the basic math that it would have to go back up another 80% not 35% because the percentage gain on 7,000 is much less than the same percentage drop on 14,000. ARGGG!