We're All Gonna Die Broke

[Tomorrow]

That's a fine article...and to my point. Good find, Dave.

But there is a problem. We currently have a stuffed job market. Unemployment is at a (recently) historical low. Spending is up! Dangerous financial shadows lurk in the form of investment. Market earnings are up because of international investments. Many non-U.S. analysts are publicly warning clients to dump all U.S. stocks because of our weakening dollar. Note our current dynamic market swings from record highs to almost record drops.

I get the mitigation of the inflationary pressures. I even like the apparent market wisdom of the new Fed chief, Bernanke. But these inflation slowdown practices may be too little too late. Several dozen billion dollars were released last week by the Fed to relieve interest rate rise. The amount was similar to what was released after 9/11. (But that was an unforseen, essentially one-time event.) That is one of the inflation causing tools the Fed can use to stabilize the U.S. economy...by this philosophy of "salvation by devaluation". Another is manipulation of the prime lending rate. That has been held steady, but nervously so. The prime rate is begging to go up. And fast. (Not down. Sorry borrowers.) But that's a hallmark of inflation whose presence is much feared.

You can't just print money to feed into the economy and not have some ringing consequences. A straw-man economy is being built that leads to either inflation or collapse. Investor and consumer "confidence" is what the Fed wants to protect. And consumer spending is up! Unfortunately, so are defaults and bankruptcies resulting from too much unwise spending/investing. Those kinds of numbers are what make the markets shaky.

My only question is whether or not the dollar is being devalued quickly enough. Canada started a similar Greenspanian process a decade before we did, and it apparently worked for the Canadian dollar which enjoys some solid strength today. And I'm far from knowledgeable in these global fiscal matters. But I enjoy a historical perspective that causes me to quiver at the echoes of 1928.

 

[Davemcc]

I have a few thoughts on these issues, but I can't write too much tonight. I have a headache, my wife is blasting Disco while vacuuming and I have to go to work in an hour. I'll just leave notes here to remind myself what I wanted to say, but that may be enough to get the idea across.

Many non-U.S. analysts are publicly warning clients to dump all U.S. stocks because of our weakening dollar.

Not a bad idea for foreign investors. They have to weigh the potential investment returns against the devaluation of the dollar to achieve their net return in their native currency. Once skittish foreigners are out of the market, I think it will be a perfect time for domestic investors to pick up some solid undervalued stocks in manufacturing and venture capital funds which stand to gain nicely in the fallout of the devaluation process.

Several dozen billion dollars were released last week by the Fed to relieve interest rate rise...That is one of the inflation causing tools the Fed can use to stabilize the U.S. economy...by this philosophy of "salvation by devaluation". Another is manipulation of the prime lending rate. That has been held steady, but nervously so. The prime rate is begging to go up. And fast. (Not down. Sorry borrowers.) But that's a hallmark of inflation whose presence is much feared.

I think the money supply has to increase to promote the devaluation of the currency. I think there is too much American currency hoarded in too many foreign national treasuries to properly devalue the dollar, as much as $350-400 billion in China and near that again or more in Japan. I'm wrestling with the connection between the currency release and interest rates. In theory, expanding the money supply should promote inflation, increase market activity and lead to higher interest rates to cool those market and inflationary pressures. I suspect that the connection here is between the money supply and the currency reserves of domestic banks. A shortage of currency reserves in domestic banks would cause them to be unable to float loans, so higher interest would prevail in a market short of a loan supply. That's just my suspicion, but the money supply needs to match the demands of the market. A shortage of cash in the system could lead to its own problems.

You can't just print money to feed into the economy and not have some ringing consequences. A straw-man economy is being built that leads to either inflation or collapse.

See above.

And consumer spending is up! Unfortunately, so are defaults and bankruptcies resulting from too much unwise spending/investing. Those kinds of numbers are what make the markets shaky.

I would expect consumer demand to rise until the inflationary pressure begins to take full effect. More people are working, yet imported products are still relatively cheap. It's still a transitional period.

My only question is whether or not the dollar is being devalued quickly enough.

It is a resilient bugger due to the inherent strength of the American economy, but a slow devaluation, or a least a pause now and then can mitigate the downsides.

Canada started a similar Greenspanian process a decade before we did, and it apparently worked for the Canadian dollar which enjoys some solid strength today.

It worked for Canada while the American dollar was being propped up. The Canadian manufacturing sector relied on currency exchange for profit, rather than updating equipment and productivity gains. Now that the Canadian dollar is nearing parity with the American, the cost of manufacturing in Canada is not nearly being offset by any productivity or cost advantage. The Canadian manufacturing sector may be headed for a tailspin as jobs flow back to the U.S.

And I'm far from knowledgeable in these global fiscal matters. But I enjoy a historical perspective that causes me to quiver at the echoes of 1928.

I'm no economist either and I welcome into the discussion somebody to tell me where I've gone wrong and why. I participate in these discussions to learn as much as anything else. I don't see a depression coming like the '30s unless the government does something to devalue the equity that backs the loans and investments. This was a key factor in 1929.

 

[Tomorrow]

Sorry, Dave. I don't have time to reply to your well conceived post. I think your ideas are spot on. But I would like to explore in more detail the possibility of serious financial collapse...sometime later.

Meanwhile, why are you using my cat for your avatar? LOL.

 

[Davemcc]

Meanwhile, why are you using my cat for your avatar? LOL.

Your little fella has much more dramatic side markings than my little Charlie. Charlie is more of a lighter shade orange with just a subtle hint of vertical stripes on his sides.

 

[annunaki]

"full close" lol

The China thing has to do with the bond market... I believe they hold billions of dollars in US bonds and made some stupid gesture/threat about taking our market down if we play hardball on trade issues.

Clint is correct here. The Chinese own 100's of billions in bonds. They have been watching this scenario carefully. If they were to dump our bonds we could see a major economic problem. They in some effect have a bit of financial control in our economy.

Some European financial institutions also have fairly large holdings here and it is affecting them as well.

 

[stratman]

Clint is correct here. The Chinese own 100's of billions in bonds. They have been watching this scenario carefully. If they were to dump our bonds we could see a major economic problem. They in some effect have a bit of financial control in our economy.

Some European financial institutions also have fairly large holdings here and it is affecting them as well.

You're right they have "large stakes" in our economy, so do the Europeans, nonetheless China nor Europe can't afford to have our economy go through a meltdown, It'll be just as bad for them as for us. Fellows we live in a global economy, where one sector suffers all sectors suffer.

 

[Mort Corey]

I dunno guys, if devaluing ones currency is such a good thing then you'd expect Zimbabwe to be in real good shape. Inflating/devaluing the currency is just another hidden tax and hinders savings and thereby capital formation......it is theft, pure and simple. I've heard this mantra of "it helps make our exports more competitive" for almost a half a century yet have seen our trade defecit expand each and every year. BTW, our dollar is and has been "free floated" on the world market since the early 70's and the end of the Breton Woods agreement. Borrowers (like the US government as the biggest in history and worldwide) like a devalued currency as they can pay their debts cheaper.....savers get eaten alive.

Let's just agree to add a zero to the end of everybodys dollar bills (or tens, fifties, etc) and we can all be rich

Mort

 

[Tomorrow]

I dunno guys, if devaluing ones currency is such a good thing then you'd expect Zimbabwe to be in real good shape. Inflating/devaluing the currency is just another hidden tax and hinders savings and thereby capital formation......it is theft, pure and simple. I've heard this mantra of "it helps make our exports more competitive" for almost a half a century yet have seen our trade defecit expand each and every year. BTW, our dollar is and has been "free floated" on the world market since the early 70's and the end of the Breton Woods agreement. Borrowers (like the US government as the biggest in history and worldwide) like a devalued currency as they can pay their debts cheaper.....savers get eaten alive.

Let's just agree to add a zero to the end of everybodys dollar bills (or tens, fifties, etc) and we can all be rich

Mort

Hi Mort. I feel your angst on saving. Since my disability hit me, we've not been able to invest in anything. What little we save gets eaten alive by inflation. (It used to be a LOT worse in the '70's.)

But I think I understand the situation differently from you. The Fed liberally puts billions upon billions of dollars into circulation vis a vis Federal loans. They just print up the damn stuff. Just Friday last, they poured 38 Billion with a 'B' dollars into the economy to keep it from collapsing (depression style!). This is not 'floating' the dollar. It's propping the dollar artificially and has the effect of devaluing it slowly...and thus slowly causing inflation. But it's not the action of the Fed or the federal government per se the devalues the dollar. It's the dollar's currency value related to international monies and exchange rates.

Like it or not, the U.S. is now a service country, and not a major manufacturing country. That is what has changed in the last 50 years. Businesses went off-shore to make cheaper goods, and thus pouring money into the economies of other countries. Our balance of trade will likely now be forever imbalanced with our trading partners because we primarily no longer make our own goods...nor sell them to others. (There are of course many exceptions.)

Devaluing the dollar is NOT a good thing. What I'm trying to get at is how can we minimize the possibility of a completely collapsed economy by this slow, dollar propping, inflationary money printing.

 

[Johnd]

What I'm trying to get at is how can we minimize the possibility of a completely collapsed economy by this slow, dollar propping, inflationary money printing.

I think the first place to start is right at home.

Stop the conspicuous consumption. The "I gotta have yesterday on my already maxed out credit card" has to stop. If you don't have the money...you simply can't afford it.

Stop the junk loans...which pretty much occurred back in January when the new guidelines took effect. Thankfully, many of these junk loans (politically correct "sub-par") have been bought out by greedy investors from overseas. Either way, it sickens me the way these used car salesmen were pushing these notes through the back door with that fast food mentality...many of these borrowers would now have a difficult time obtaining a secured credit card, let alone a $250,000.00 note...and that is as it should be.

Bottom line. I say stop blaming the other guy. Tighten the belt, keep it tight, and hold on for the ride.

 

[Mort Corey]

But it's not the action of the Fed or the federal government per se the devalues the dollar. It's the dollar's currency value related to international monies and exchange rates.

I think we're kinda singing the same tune only in a different key Tomorrow. The quoted statement I do not agree with however. Each time the Fed (as an arm of the US Government) creates more dollars it devalues those already in existence....regardless of what other countries may or may not do with their currencies. Their (the Feds) latest escapade injected more liquidity (ie credit/dollars) into the system and in effect they were RE-colateralizing the CDO's that were/are causing trouble.

IMO, it was the Fed that created this whole problem in the first place by taking interest rates down to 1% in 01 and 02. The market became awash in easy money looking for a home.......in just happened to be real estate vs dot coms in this round for those jovial counterfeiters at the Fed.

Yep, I remember all to well those glorious days of yesteryear of the 70's and inflation that turned to the then newly coined term of stagflation. One cause then, as now, was fighting a war with borrowed money.....the Chinese weren't lending then so we just borrowed it by printing/counterfeiting more in house.

Back to the topic of us all going to die broke, I guess when that time comes I just won't care

Mort (hoarder of the 3 g's just in case)

 

[Davemcc]

There is also a danger in an over-valued currency. I think the dollar has been over-valued for some time. As the de facto world standard, national reserve banks have been stockpiling dollars for decades, particularly China and Japan. Coupled with relatively low interest rates creating high demand for dollars, American consumers shipping their Wal-Mart dollars overseas by the boatload and American lenders financing manufacturing expansion overseas, you have a situation where the supply of dollars cannot meet its demand, raising its value but artificially so.

The recent infusion of dollars seems to me an attempt to "right-size" the money supply with the demands of the economy without raising interest rates, which would cool demand but restrict the capital supply required for the economy to prosper. In a sense, raising interest rates would be right-sizing by reducing the economy to match the money supply, yet still doesn't address the trade deficit nor the over-valued currency that is in itself a limitation to domestic economic stability.

 

[Tomorrow]

Mort (hoarder of the 3 g's just in case)

LMAO!! I hope you DO get to take it with you, Mort! (I'm hoping I can take along my pocket knife...MacGyver fashion.)

I actually think we agree completely, but are expressing the causative factors a bit differently.

 

[Mort Corey]

As the de facto world standard, national reserve banks have been stockpiling dollars for decades, particularly China and Japan.

Yeh, and now they're starting to realize that it just might not have been such a good idea. When the "reserve currency" can be manipulated so easily by its creators the deck is stacked against you. Many countries, as well as the two mentioned, have started to diversify their reserves into a "basket" of currencies and/or commodities. Before his not so recent fall from grace, Saddam Hussien was going to price his country's goods in Euros (at least that's what I've read).....that sure didn't go well.

We live in interesting times......to say the least.

Mort

 

[Tomorrow]

There is also a danger in an over-valued currency. I think the dollar has been over-valued for some time. As the de facto world standard, national reserve banks have been stockpiling dollars for decades, particularly China and Japan. Coupled with relatively low interest rates creating high demand for dollars, American consumers shipping their Wal-Mart dollars overseas by the boatload and American lenders financing manufacturing expansion overseas, you have a situation where the supply of dollars cannot meet its demand, raising its value but artificially so.

The recent infusion of dollars seems to me an attempt to "right-size" the money supply with the demands of the economy without raising interest rates, which would cool demand but restrict the capital supply required for the economy to prosper. In a sense, raising interest rates would be right-sizing by reducing the economy to match the money supply, yet still doesn't address the trade deficit nor the over-valued currency that is in itself a limitation to domestic economic stability.

I think you hit another bullseye on your analysis, Dave.

I'm still not certain that the economy can be propped up long enough with Banker's Magic to overcome the instabilities. A correction is required for the over-valuation, and there are unknown sequilae awaiting. That trade deficit is like a huge blemish on the face of the U.S. economy. And I can't find any salve for that...including printing money. We don't make enough goods anymore. Steel, automobiles, agriculture, aircraft, etc, are industries that at one time propelled the U.S. to the pinnacle. American companies are mostly doing the Walmart dance that you mentioned. There's not much to export to equalize trade deficit when you just have services to offer. (Having said that, I just read that the trade deficit moved in the 'right' direction last quarter for the first time in many moons.)

Of course I'm making a huge over-generalization, but it is concerning. I look around at the U.S. government (all governments, really) and see massive incompetence. (Sorry, Mrs. Tomorrow...she works for the gov't.) I wonder if that same ubiquitous quality is at work in the Fed.

We'll see. I hope they're good...or lucky.

 

[Davemcc]

Steel, automobiles, agriculture, aircraft, etc, are industries that at one time propelled the U.S. to the pinnacle. American companies are mostly doing the Walmart dance that you mentioned. There's not much to export to equalize trade deficit when you just have services to offer. (Having said that, I just read that the trade deficit moved in the 'right' direction last quarter for the first time in many moons.)

Your examples above, particularly automobiles, illustrate the point. There is a reason why foreign automakers (Toyota, Honda, Mercedes, Hyundai) have begun building plants in the U.S. and are currently sourcing new greenfield sites to expand their capacity in the U.S. Astute automaker executives can see the potential profit from adding new production in America because as the dollar falls, their production costs relative to their native currency falls.

Two visible effects of this new production are 1) Jobs and the related spin-off effect, which I believe the accepted number is six spin-off jobs for each auto job, and 2) the trade deficit can be reduced by producing domestically, i.e. not importing. Every car that Toyota builds here instead of Japan reduces the trade deficit. Some of this foreign owned auto manufacturing is destined for export, which again, relieves the trade imbalance. This is one example of many that might help explain why the trade deficit is moving in the right direction.

On the other hand, I have a friend who has studied economics who is not worried about the trade imbalance. He reasons that America is a capital producing nation rather than a labor producing nation. A vast amount of the offshore goods that cause the trade imbalance are financed with American capital that returns as interest from the manufacturing nations. Thus, rather than worry about the trade imbalance, America should be more concerned about it's ability to generate capital. This will be the net effect of releasing the billions to bank reserves, while low interest rates continue to make borrowing capital for investment feasible. He also sees an erosion in the overall standard of living of American in the devaluation process, but agrees that the dollar was over-valued and needed correction.

Oh, what a complex web...

 

[Tomorrow]

Oh, what a complex web...

...and my brain is starting to cramp.

I wish I'd paid closer attention in school. (It may well be that I did but the '60's unhinged the synapses. )

 

[Davemcc]

...and my brain is starting to cramp.

Sooo...it's back to audio then?

I heard some Focal.JMLabs Chorus 800's yesterday for the first time driven by a Roth 13w SS/Tube hybrid stereo amp.

 

[Tomorrow]

Dave,

There are some mighty dark storm clouds brewing out there. I haven't had a chance to reread and digest this article...and now I have to go pick up the missus. It looks like it could use discussion. Till later.

http://www.msnbc.msn.com/id/20216643/

 

[Dolby CP-200]

I think you hit another bullseye on your analysis, Dave.

I'm still not certain that the economy can be propped up long enough with Banker's Magic to overcome the instabilities. A correction is required for the over-valuation, and there are unknown sequilae awaiting. That trade deficit is like a huge blemish on the face of the U.S. economy. And I can't find any salve for that...including printing money. We don't make enough goods anymore. Steel, automobiles, agriculture, aircraft, etc, are industries that at one time propelled the U.S. to the pinnacle. American companies are mostly doing the Walmart dance that you mentioned. There's not much to export to equalize trade deficit when you just have services to offer. (Having said that, I just read that the trade deficit moved in the 'right' direction last quarter for the first time in many moons.)

Of course I'm making a huge over-generalization, but it is concerning. I look around at the U.S. government (all governments, really) and see massive incompetence. (Sorry, Mrs. Tomorrow...she works for the gov't.) I wonder if that same ubiquitous quality is at work in the Fed.

We'll see. I hope they're good...or lucky.

She doesn’t work for the IRS does she?

 

[Tomorrow]

She doesn’t work for the IRS does she?

LOL, no. If she did I'd have to shoot her.