Posts Tagged ‘deflation’

What kind of person are you?

2011/10/27

Do you think of labor in a factory to be a resource, or an asset?  Do you believe that it should be ‘every man for himself!’ or do you believe in community being worth investing in?  A pure capitalist would view labor as a resource, to be exploited to the utmost.  A civic minded person believes that the community is valuable, and well worth investing in.  Pure capitalism is self-destructive, as we have witnessed, because all of the wealth ends up in the hands of a few, and the economy comes to a halt, because no one can buy anything.

Part of the reason that the government has grown so large is because the community has had to band together to deal with the consequences of our capitalist society, which aims to use people up and throw them away.  If employers took care of their employees as if they were an asset, an investment in training, experience, and knowledge accumulated over time on the job, than government would not be needed to redistribute the wealth through taxation.  Health care, retirement, housing, all would be affordable, and available to all.

Every one wants a bigger slice of the pie.  Even though the pie is not getting larger, and there are more people wanting a slice.  Taking some from somebody else to have more for yourself is called greed.  Greed has betrayed capitalism in the United States, pushed rational thinking aside, and driven us right over the edge.  Instead of investing in the future, to assure that the future is the one that we desire, we have been enticed to spend everything, and more, right now.  In return, our jobs have been outsourced overseas, our taxes are buying less and less services, and everything is horribly expensive.

Only huge, economy-wide growth, on a scale never seen before, can pull us out of an economic implosion.  Asset deflation is likely to set in, as prices drop, values decrease, and people have no money to spend.  Deflation scares the wealthy more than anything else, because it steals away their wealth even through locked vault doors.   To avoid another Great Depression, a new set of rules are needed.

Investment has got to be with the intent of value increasing over the long term, not in order to pay today’s bills.  Cash dividends to stock holders is the single most damaging policy of all modern business practices.  It robs the future to allow luxury for a time, and corrupts the process of management.  Stock should increase in value, and be split, to reward its owners, as the company becomes more and more valuable.  But that can’t happen when the profits are being funneled into cash to pay to stockholders.

 

When did the bubble start? In the 1960’s?!

2010/04/07

There is a lot of loose talk going around right now about ‘bubbles’, the housing bubble, the bubble economy, the credit bubble, I almost feel like I am watching the Lawrence Welk show.  Contrary to popular belief, the economy was deeply into bubbles long before anyone had even coined the term.  It really started in the 1960’s, when consumer spending began to fall of, due to the fact that the consumers had spent all of their savings, and now were cutting back on purchasing stuff that they really didn’t need.

This was a crisis for the money barons of America, because they were dependent upon a certain level of consumption in order to go on accumulating wealth at the rate they believed was essential, as well as their right.  Instead of reshaping the economy to depend on production of advanced goods, or space exploration equipment, or high speed trains, the powers that be decided to maintain the economy in the form it was in, and encourage spending by making credit more easily available.

Through judicious advertising, the American people were gradually brainwashed from their old belief that credit was a tool of the devil into thinking of credit as wonderful thing, which they would have to pay for some day.  Credit cards appeared, only they were the mark of high society, because those folks couldn’t be bothered to carry cash, don’t you know.  Of course, everyone wanted one, and, within about 10 years, just about everyone had one.  Or two. Or three.

Consumer spending actually rose, as people were more than happy to spend what they had not yet earned on something which they almost certainly could live without.  Our lifestyles were profoundly influenced by television, which carefully showed us the kind of world that we thought we wanted to live in.  But what we were being taught was that we needed to consume in order for us to be valid persons.  Spending was our way of assuaging our anxiety over our popularity, which we just knew was based upon what kind of car we drove, where we lived, and our income.

A historic change in attitudes was orchestrated by the makers of water heaters, shampoo, and personal hygiene products to convince people that bathing every single day was not only normal, but essential.  The single greatest luxury in the world, bar none, which many, many people have never even experienced, much less enjoyed very often, and Americans zip right through one every morning.  If you don’t smell like something that comes out of a bottle, or some kind of soap, you are a heathen, a barbarian, an uncouth lout, who will never get laid, promoted, or married.

So what if we are forcing our bodies to manufacture immense quantities of oil, we are consuming!  So what if our truck only gets 12 miles to the gallon on the highway, we are consuming!  The solutions to many of our problems do not require whole new technologies, like wind, and solar.  They are desirable in and of themselves, but we could slash our consumption of energy by nearly half, if we were to change our lifestyles, suffer some minor costs to our business, and accept that it is not our god-given right to be able to go anywhere we choose at the drop of a hat.

But the ones in control of things want us to go on believing that deserve all of these luxuries, and that we can pay for them somehow.  Even as they watch the tidal wave of payments coming due beginning in 2012, they ignore any thought of changing the basic tenants of our economy, our financial system.  There is no ‘tomorrow’ in most people’s way of accounting, just today.  Other cultures may have 5 year plans, we have 5 minute plans, subject to change if some kind of profit is to be made.

Well, here is something that you can plan on;  economic upheaval, turmoil, rapid, uncontrolled change, unemployment, hunger, homelessness, and bankruptcy.  The bubble is just about to burst, the shell game is finally going to end, and America will crash, because we are so greedy we cannot cope with any change which threatens our way of life.  Instead of allowing some change, a gradual turning away from dependence on consumer spending towards some other engine for the economy, our leaders have dutifully avoided dealing with the fundamental rot in the financial system.  They even agreed to remove the very regulations which were written to prevent the kind of situation we are in.

But nature always seeks a balance, even in unnatural systems, such as our method of compensating people for their work.  The lopsided distribution of wealth is a result not of  value honestly created by hard work, but by the manipulation of numbers in machines.  The people who know how to create real value by working with their hands, applying their craft, will still be comfortable.  Those who know nothing except trading, wealth management, and investment banking will be panhandling, because the wealth will be gone.

We have managed to spend everything that we are going to make for the next several years, if we don’t lose our jobs, which means that we are not going to be able to spend money on things that we can live without, like transportation in our own car, new clothes, and food.  Backyard lawns are likely to be turned into gardens, and community plots may become common.  All bubbles burst, and this one is absolutely huge, because it was planned this way.  Kind of.  Almost.  Would you believe, ‘allowed  to happen with foreknowledge of the consequences’?  Some people have made an awful lot of money in the last 50 years.  But most of us have just been going further and further into the hole, digging merrily.

Making money

2010/03/10

Your credit card company charges you for a late payment.  Your bank charges you for an overdraft.  A payday loan company charges you for borrowing money.  These are all examples of wealth creation.  The money that you are charged does not exist until the charge is made, and then it becomes numbers in computers.

This is the kind of wealth creation that the financial services sector performs.  This is the kind of wealth that evaporates overnight.  It used to be that banks made money by lending money that had been deposited with them to people who were going to build a company up, or to governments that were going to build bridges and roads.  That is how America grew into a large and wealthy nation.

But the pace of growth wasn’t enough to satisfy some greedy people.  They wanted to get rich faster.  So new methods of making money were developed, like bank fees, credit card charges, and payday loans.  Using these new practices, wealth was created at much faster rates.  But is it real wealth, or just an illusion.  The bank claims that you have the money it is charging you for the overdraft.  The credit card company believes that you will come up with the money to cover the late payment fee.  The payday loan company is certain to get your next paycheck.

But this money doesn’t actually exist until you earn it.  By calling debt real money, we have grown our economy tremendously in the last few decades.  However, we have not earned that money yet.  By claiming that the money I am owed makes me worth more, I can convince someone else to loan me money.  And so the velocity of money increases.  But what real value has been created?  What has been built, or paid for?

Nothing.  And that is why we are in such a bind right now.  Most of what is being called wealth is merely numbers in computers.  There is no bridge, or road, or building, or house, or airplane, or anything else, to back up the numbers in the computers.  It is a house of cards, a shell game.  We can claim that we are wealthy even when everything that we earn for the next year is already spoken for.

2010/03/07

What happens when government shirks its responsibilities?  If the US government had decided not to play a part in opening up the American west, how long would the process have taken?  Without some kind of assistance, the railroad companies would not have been willing to risk millions of dollars to build a railroad from St. Louis to San Francisco.  Without government involvement, aviation would still be primitive, limited to short hops with few passengers.

One of the primary purposes of government is do that which the private sector can’t, or won’t do, when the results would be very beneficial.  The interstate highway system could never have been built by the private sector alone, because of the high cost.  Many people in rural areas would still be living without electricity if the Rural Electrification Act of 1915 had never been enacted.

Investors are constantly seeking ways to make more money.  Without leadership from government investment, they will put their money into whatever seems to offer the best returns.  Thus, we had a period where money was invested into financial derivatives, real estate, and leveraged buyouts.  Several trillion dollars of investor money poured into making more money, but the investments were not sound, and over 1 trillion dollars disappeared because of that.

It is my belief that the government refused to invest in what should have been the most rewarding technology we have ever discovered, choosing instead to focus on weapons technology and extending American influence into energy-rich parts of the world.  Without clear leadership from the government, investment capital was thrown at any idea which might possibly pay off.

Now, we are seeing the consequences of that lack of leadership.  The American economy is collapsing, our industries are moving overseas, and debt is choking growth.  America is creating very few things that the rest of the world wants, and is forced to sell off land and infrastructure to purchase what we do not produce here.

It didn’t have to be like this.  In the 1970’s and ’80’s, the US could have been creating the infrastructure of the next industrial revolution.  We had the know-how and resources to pave the way for wealth creation on a scale that dwarfs anything that has gone before.  Instead of using the most advanced technology in the world to open up the next frontier, we choose to squander it.  We could have been building space stations, more advanced versions of the space shuttle, and exploring the Moon.  We could have been learning to process materials in zero gravity, creating products which can not be made here on Earth.

Had we taken the path into space, investment would have followed.  Private space stations would have been built, private expeditions to the Moon launched, and real wealth would have been created.  Investors would be putting their money into new industrial techniques, new transportation systems.  Products would be available that would revolutionize life on Earth.  Right now, we have no idea what can be done out there, just as no one could have conceived that aviation would completely alter the world.

So, instead of creating new wealth, investors are chasing imaginary wealth, wealth which evaporates overnight.  Instead of building the next generation of spacecraft, which would be in use for generations, we are retiring the only working spacecraft that we have.  Instead of expanding our world, we are watching it shrink.

Future money?

2010/02/24

We live in a country where it is legal to borrow something from somebody, then sell that thing to someone else, for less than it is worth.  Then, when the price for that thing has gone down even more, we buy it back, and return it to the owner.  Of course, it is worth much less now, but that is not our problem.  That is the process of short selling, a financial gimmick that lets people profit on other people’s misfortune.

This is comparable to borrowing somebody’s car, keeping for a while, and then returning it all scratched up.  And I have to wonder, does the person who owns the share know that it is being borrowed for the purpose of short selling it?  Or are the shares being ‘borrowed’ coming from a broker who is representing the owner?  I don’t think that I would lend something to someone with the knowledge that they were going to try to decrease the value of what I was lending them.

The American financial industry seems to have lost all semblance of morality, a reflection perhaps of the greed that it represents   Our materialistic society puts so much emphasis on wealth that people will go to any lengths to have it.  Wealth supersedes family, friends, community, physical health, spirituality, and self-respect.  How can you have self-respect when you know that you will do anything for money?

The malaise affecting the United States right now is the result not of loose regulation, but of the greed of Americans.  Because we are a materialistic society, we equate our self-worth with our wealth.  To have more is to be more worthy.  We do not attach worth to spiritual affairs; a person who is deeply spiritual, with many friends, who has no money, is considered a poor man, of little import.  Helping others, sharing what exceeds our needs of what we have, giving our time to another, these are considered signs of weakness in our culture.

The more we define ourselves by what we own, what we possess, the less likely we are to believe in ourselves when we lose those things.  No one can take away your spirit, your ability to give, your strength.  We surrender those things with our association of wealth with superiority, defining ourselves with qualities that come from outside of ourselves.  To believe in one’s self means to know that you are strong, that you have much to offer those around you, and that you have value by being who you are.  That is where true security comes from, and this is why wealth is false security.

Our beliefs have been manipulated by the greedy, so that we have turned away from the things that made our forbears strong.  We have sacrificed practically everything to promote the accumulation of wealth, while doing little to implement the creation of new wealth.  Short selling a stock does not create new wealth, it merely produces the illusion that wealth has changed hands.  But the value of the stock has declined, which means that wealth has disappeared.  Is this how we are going to make our money in the future?

Losses from profits

2010/02/23

How much profit should there be in a system?  How much money can we extract from something before it stops working?  We have seen what happens when too many people are trying to extract too much money from the system, and push prices to unsustainable levels.  But what about health care insurance?  Should substantial profit be allowed from providing access to health care?  Because that is what the insurance companies are doing, is controlling access to health care, while making a  profit.

And, in order to make a profit, they must first cover all of their costs, which include the people who process the claims, the bookkeepers, the managers, the janitors.  As the insurance industry has grown in size, the percentage of the proceeds from selling insurance going into overhead has probably increased, which means that rates must be increased in order to provide a steady level of profit.  These profits are necessary so that the companies can pay their shareholders dividends every quarter, as well as their own salaries.

Calls for larger dividends mean squeezing more profit out of the system, which usually starts with raising rates.  I would really love to know what the total cost of health care is minus the costs of insurance.  Just the amount that the doctors, the hospitals, the labs, the technicians charge in a year.  By comparing that to the total cost of health care for that year, we could perhaps gain some understanding of what the real cost of health care insurance is.  And, of that cost, how much is pure profit.

Personally, I find it difficult to believe that we can ever reform our health care system as long as the insurance industry is such a major player.  By incorporating their costs and profits into total health care costs, we see a steady increase in what we pay, even though the providers of the health care are not seeing a corresponding increase in their income.

Maintaining large profit margins has other negative effects, such as outsourcing jobs.  Why is this a negative?  Because the people who used to do the jobs that have been outsourced frequently lose the ability to buy the products that they used to make.  This reduces the market for the product, which lowers profits.  Yet, the justification for outsourcing the work was to increase profitability.  Not merely to maintain it, in most cases, but to increase it.

Repeatedly, I have seen American companies managed right into the ground, as profits have taken precedence over quality and service.  What have been thriving businesses going broke because the owners took too much of the income for themselves.  Companies which manipulated their books to appear more profitable than they really were, to keep their stock price up.  Corporations which have ignored sustainable practices in order to maximize profitability.

Unfortunately, there is not enough profit in the economy for everyone to quit working, which is what seems to be the goal these days.  Nobody is interested in doing a job that they can take pride in, they don’t want to even work.  Somehow, being useless, a drone, has become fashionable.  Working for a living is looked down upon, a sign of poor financial sense.  Well, if we keep on pursuing extravagant profits, no one will have to work, because there won’t be any jobs.

The view from debtor’s prison.

2010/01/18

Debt.  Credit.  Lenders and losers.  Somehow, the world economy has morphed from saving to buy to borrowing to buy.  Lending has been so lucrative that banks have made credit a normal way of doing business.  It wasn’t that long ago that state and local governments only borrowed money by selling bonds, companies sold stock to raise money, and individuals only borrowed from friends.  The one exception was the mortgage used to buy a home.

Partly as a result of banks desire to be able to loan out their money faster, we have seen the world economy severely damaged by excess credit.  Banks which wrote mortgages used to hold those loans themselves, having to wait until they were paid off before the money could be loaned out again.  Then, someone had the brilliant idea of having the banks sell the mortgages to another investor, so that the bank could then turn around and lend the money out again.

Back in the 1960’s, many consumers had used up their savings, and they began to stop spending on unnecessary things.  In order to keep consumption up, a new financial instrument was created:  the credit card.  At first only available to those with the ability to pay off the balance each month, credit cards gradually found their way into the wallets of nearly every American.  Paying off the balance each month was no longer necessary, and often discouraged, as the lenders made more money on revolving balances.

Corporations climbed on board the credit train when they found selling stock inadequate to provide short term liquidity, such as making payroll.  They even began lending money to each other for short periods of time, creating what is known as commercial paper.  State governments saw this, and decided that borrowing to cover expenses while waiting for tax receipts to come in was a sound practice.

In less than 50 years, borrowing had changed from a dirty word to the accepted way of life.  Credit was widely available, to almost anyone, for a fee.  Saving became old fashioned, and consumption was getting higher all the time.  Bankers even encouraged people to borrow against the equity that they had built up in their home, so that the bankers could make even more money.  Its citizens too broke to lend it money, the federal government turned to other nations to borrow the money used to pay for weapons, wars, and welfare.

Now, we are waiting for consumer spending to resume to dig the economy out of the hole we are in.  The government is borrowing nearly as much money as the country makes each year, trying to keep the wheels turning.  Home owners are walking away from mortgages which are for much more than the homes are worth.  Bankruptcies and bank failures are happening faster and faster.  But everyone wants to believe that things will get back to the way that they were.

No where do you hear respected economists and academics calling for the tightening of credit, or for learning to live without it.  Credit has become so fundamental to our economy that people can’t imagine a world without it.  We had better start, because credit is not going to be easy to get for a long time.  How can a bank loan out money when it doesn’t know how much it has?  Many banks are carrying packages of mortgages which, if put on the market today, are worth about 25 cents on the dollar.  Writing off the value of those collateralized debt obligations, as they are known, would wipe out the bank, so they are holding on to them.  In the mean time, the solvency of the bank is questionable.

As the tidal wave of foreclosures engulfs us, those packages of mortgages are going to lose even more value, making credit even tighter.  The federal government has to borrow money to pay the holders of Treasury bills and notes when those instruments come due, which means that it is insolvent, surviving on the good will of China.  Many of the states are facing running out of money, and not being able to borrow more.

Welcome to Debtor’s Prison.

I can’t make you wealthy if I am broke!

2009/11/19

After consideration, I have come to believe that one of the worst practices that our modern financial system has adopted is the attempt to create wealth by charging large fees.  A late payment fee that is nearly as large as the payment only makes catching up more difficult, and when overlimit fees are added to the late payment fee, the fees are more than the payment.  Very quickly, the balance balloons far beyond the established credit limit, and keeps on climbing.

In accounting terms, the bank is getting wealthier, because it can show the money owed it as an asset.  But is this real wealth?  Is there anything tangible about this wealth, anything that has enduring value?  If I end up going bankrupt, what happens to the wealth that the bank says that they have?  Aren’t we creating an illusion of wealth, which has no substance?  Because debt is considered an asset to the lender, banks have been more than willing to extend credit, because it makes them look wealthier.

Watching a firm with billions of dollars in assets on the books go under should not happen, but when those assets are merely entries in ledgers, there is nothing to pay the light bill.  The worth of the United States has been exaggerated beyond all comprehension, as our salaries have doubled over and over again, the value of our homes shooting up without one lick of work being put into them, and our stock markets recording astronomical prices.  This balloon has expanded so much that no one is really sure just what anything is worth anymore, because we can’t get what we say things are worth when we try to sell them.

The greed has gotten out of control, and it is destroying us.  It does not matter how much you say is owed to you, what you have in your pocket is what there is to spend, because the likelihood of your getting what is owed to you is shrinking fast.

Trying to start an avalanche?

2009/11/18

For some reason, many banks seem uninterested in trying to prevent foreclosures, repeatedly losing homeowners paperwork, ignoring attempts at communication, and generally acting like foreclosing on a property is in their best interests.  That may have been so in the past, but we are on the brink of a tidal wave in foreclosures, which will put so many houses on the market that banks will undoubtedly lose large sums of money.

Perhaps it is easier to just use the accounting tools to write off the investments than to work with a homeowner, but how many investments will have to be written off?  If a glut of foreclosed homes brings the market value of all homes down, who is going to gain?  Expecting someone to pay several times what their home is worth when they are out of work, or struggling with underemployment is not rational.  Yes, it is the right thing for those homeowners to do, but who wouldn’t think “I can be putting my money into something that is worthwhile, instead of merely adding to the wealth of some bank.”  If we believe that we are unlikely to ever pay off a home, and that home has depreciated substantially since we bought it, what is the motivation to go on struggling to make mortgage payments?

Money has been made available by the federal government to offset the loses that would result in resetting mortgages, yet banks are dragging their feet in taking advantage of it.  They seem to think that they must stick to the original agreement or else they will seem like pushovers, or something.  We are not through this financial crisis yet, and perhaps the worst is yet to come.  Having the value of the nations inventory of homes fall considerably would wipe out tremendous amounts of wealth, irregardless of whether a homeowner has paid off their mortgage or not.

Expecting consumers to return to consuming when they are terrified of losing their homes is completely unrealistic.  If we do not create an atmosphere of understanding and flexibility, we are likely to experience changes completely beyond our control.  Dealing with change means looking ahead, recognizing what is coming, and planning for it, not denying that change is ever going to happen.  We may not be able to prevent change, but we have the option of guiding it somewhat, of minimizing its impact.  The alternative is chaos, as we try to cope with things without any preparation.

Lose a little, or lose it all?

2009/06/28

As the financial crisis has evolved, one subject that keeps causing contention is mortgage adjustment.  As people are losing jobs and seeing investments sour, their ability to pay their mortgage has dwindled.  Forecloseures are on the rise across the nation, resulting in more houses being put into a market which is already saturated.  This leads to home prices declining, which means that more people are holding mortgages that are worth more than the house.

Mortgage adjustment means altering the terms of the mortgage, either lowering the amount that must be paid, or extending the length of the mortgage.  These adjustments are made with the hope that they will help keep people in their homes, by preventing foreclosures.  But many of the investors who hold the mortgages are determined to avoid adjustments to those mortgages, believing that they will lose money.

True, if a mortgage is adjusted so that the amount owed is reduced, the holder of the mortgage is not going to get all of their money back.  But what happens when the the mortgage holder defaults, and the home is foreclosed?  It used to be that the mortgage holder could eventually get most of their investment back, through various legal means.  These days, the mortgage holder is in danger of getting little or no return on the investment if the homeowner defaults, because the price of the asset that secured the mortgage is shrinking so quickly.

The greed that got us into this mess is still with us, thwarting efforts to prevent things from spiraling further down. Demanding that a homeowner repay every penny of mortgage when the value of the home has decreased by as much as half is ridiculous, and is likely to lead to more bundled securities becoming toxic, as homeowners walk away from properties, or lose them in foreclosure.

Failing to realize that we are all in this together, and that no one is going to emerge whole raises the risk that we all will lose significantly.  Refusing to willfully downsize an invistment in light of the current economic situation increases the likelyhood that that investment will become practically worthless.  Who has more to lose, the homeowner, or the investor financing hundreds of homeowners?