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alstry (34.92)

Finally, Someone is Getting IT!!!!

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January 17, 2009 – Comments (17)

From the WSJ:

WASHINGTON -- The U.S. government, recognizing that the banking crisis is far larger than originally thought, is laying the groundwork for a second phase of its rescue attempt, with plans to purge bad assets that are paralyzing the financial system.

Officials at the Treasury, Federal Reserve and Federal Deposit Insurance Corp., in consultation with the incoming Obama administration, are discussing a plan to create a government bank that would buy up the bad investments and loans that are behind the huge losses that U.S. banks continue to report, say government officials. Also under consideration is an additional and giant government guarantee of banks' assets against further losses.

The discussions, which are intensifying, show how the rapid deterioration of bank assets is outpacing the government's rescue efforts. Banks are now struggling not only with the real-estate investments that sparked the crisis, but also with the car loans, credit-card debt and other consumer debt that have taken a hit with the faltering economy.

This is what I have been explaining for the past year, that debt(money) was evaporating MUCH faster than the government was printing.  In other words, we are running out of money much quicker than we are replacing it.  By my calculations, around a ratio of about 3 to 1 and if you factor in asset depreciation, we are looking closer to 10 to 1.

This process will inevitably lead to a DEFLATIONARY depression as we let the cancer spread too far.  We will purge the system of bad debts which will set us up on a foundation for future growth. 

The patient has a very serious cancer.  We must apply chemo.  It will be very uncomfortable for a while.....VERY UNCOMFORTABLE!!!!!!....but Alstrynomics is getting optimistic about the future.

Alstry's guess...whatever something costs in 1980 is what it will cost in 2010.  Gold was $800 an ounce in 1980 and it is about $800 an ounce today.  A house was about 2X a person's income and it will be about 2X a person's income going foward.  If you think about recent wage cuts, we are not getting too far from 1980s wages in many professions.  Others are rapidly heading in that direction.

As far as the stock market, we are now in a globalized economy....so 2X or 3X 1980s values seems reasonable.

Is that the end of the world....not even close.....it just that getting there will suck for many.

17 Comments – Post Your Own

#1) On January 17, 2009 at 10:02 AM, djemonk (< 20) wrote:

Wasn't that the original idea behind the TARP plan?  I mean, before TARP was just Bernake and Paulson giving money to their friends?

 

Anyway, I'm coming around to the alstrynomics way of thinking.

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#2) On January 17, 2009 at 1:26 PM, alstry (34.92) wrote:

Its one thing to give a few trillion to your buddies.....it is a whole different thing to print the necessary tens of trillions to create inflation.

What few realize is how many tens of trillions were being printed by the creation of toxic debt over the past eight years.  Now....most of that printing has suddenly stopped.

I am still amazed how sophmoric the TMF analysis has been on this issue.  Gold skyrocketed in price because tens of trillions were being created by NEW debt....now that debt CREATION has pretty much come to a grinding halt....so has the rise in price of gold...

If you factor the recent "printing" by the Fed against the decline in the creation of new debt......money is contracting at an amazing rate....the evidence is everywhere and few seem to want to believe it.

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#3) On January 17, 2009 at 2:14 PM, HansHauge (31.88) wrote:

Officials at the Treasury, Federal Reserve and Federal Deposit Insurance Corp., in consultation with the incoming Obama administration, are discussing a plan to create a government bank

Sounds like a nationalization of the banking industry is on it's way...(if we're not there already)

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#4) On January 17, 2009 at 2:54 PM, amassafortune (29.41) wrote:

And once you split your bank into good bank and bad bank segments, you let the government bank take control of the toxic part and you no longer have to comply with TARP requirements such as salary caps.

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#5) On January 17, 2009 at 3:02 PM, socialconscious wrote:

I agreee Diemonk that is what TARP was sold as . Did not fool the house that's why they had to make an "end-around" to the Senate. Alstry thanks for the thought-provoking  posts. In parts of Florida houses are selling for about 2X the average income of $35,000-40,000 in good neighboorhoods so I concur that will only spread.

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#6) On January 17, 2009 at 7:47 PM, bullshiite (31.22) wrote:

"What few realize is how many tens of trillions were being printed by the creation of toxic debt over the past eight years.  Now....most of that printing has suddenly stopped."

Great quote that illustrates the problem but I have to disagree with your word choice of 'printed.' 

Where does money come from?

To put it simply most money that has entered into our money supply was not printed at all but in fact created by banks and ourselves.  For example, I get approve for a 5K credit limit and charge $100 to it.  I have just created $100 and added it to the money supply.  This can be true when real estate appreciates.  I believe this is what alstry means when he states 'few realize the tens of trillions created by toxic debt.'

So what happens when something like real estate depreciates?

For one, we can call it 'toxic debt' because the money that was lent out and will not be repaid.  Meaning the money supply that the bank had been increasing now decreases.  

What has happend to the money supply?

The total money supply for the US is about 13.5 trillion dollars and the estimated loss (depreciation) of all real estate after 2006 is about 6 trillion dollars.  Essentially the money supply has been cut in half within two years.  In addition, credit lending has been reduced, which slows the future growth of the money supply. 

So when somebody says they are worried that printing more money will cause inflation, beyond the hedonic-inflation rate of 3%, I'm inclinced to disagree.  IMO, the government is trying to restore the money supply to what is was before 2006.

On a side note:  The government benefits from inflation.  Therefor with all the government's debt, deflation would be very counter-productive to the government's effort to repay it.  IMO this has a significant impact on how the government plans to solve the current financial crisis.

Statistical Clarification:  When I mentioned that real estate has lost 6 trillion dollars in two years, which it turn reduced the money supply, I assumed a direct correlation between the two.  However, I speculate, that depreciation would only affect the MS if A) all those depreciated properties foreclosed and B) if the property was purchased mostly through loans, making it a very unprofitable foreclosure for the bank.  Since that is unrealistic, it is likely that the real estate depreciation of $6 trillion, which has lead to the surges in foreclosures, may reduce the MS by $1-$2 trillion, or maybe less.  If anyone has some information on this I would be greatly interested in it.  

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#7) On January 17, 2009 at 10:08 PM, kstarich (30.62) wrote:

Bullshiite

I like your explanation.  However I just don't see how restoring the money supply is going to solve anything.  Prosperity is created by hard work and savings not borrowing and consumption.  It just seems to me that government should be cutting spending and taxes to help restore wealth to the people who are creating it.  The creators will then invest it and use it to advance themselves with goods and services provided by others who will also benefit.

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#8) On January 17, 2009 at 10:41 PM, Jimmy2008 (< 20) wrote:

I am a chemist. Therefore, I can not predict what is in store for us, inflation or deflation. alstry's posts are very informative. However, there is something that has not been discussed much. That is, the supply of goods and service might go down as a result of credit crunch and the US dollar might depreciate. Both could contribute to inflation. I am pretty certain of deflation for the next few months but really don't know which force is bigger, inflation or deflation in the next 2-5 years.

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#9) On January 17, 2009 at 11:37 PM, bullshiite (31.22) wrote:

kstarich,

I agree with you 100% that American's don't work hard enough, save enough, they borrow too much, and consume in a wasteful manner.  I agree with you about the government too, they spend too much and budget horribly.  

All that being said, we must treat each debated topic separate from previous debated topics so that are decision are not influenced by bias.  Yes I think the government spends too much, but when a problem comes along that requires spending in order to fix* it then we shouldn't omit that solution because of a bias we formed in the past.

I am going to play a cheap card to illustrate my point:  Since most that are against the 'stimulus package' argue that free market economics will fix the problem* by letting banks fail and homeowners enter foreclosure.   I want to say that, 'you are right, eventually it would fix the problem.'  The only conflict preventing 'nothing from happening at all' is the notion that maybe government intervention can help to fix the problem quicker and with less catastrophic effects on our economy.* Allow me to illustrate that cheap point I foreshadowed earlier with a recent disaster that is more tangible but also required government intervention:  

Hurricane Katrina would have taken more lives if the government did nothing (some would say it did close to nothing) but the crisis would have resolved itself with no direct-costs to the taxpayer.  Yes more old people would have died* but the younger generations would have survived to start a new life.  

So my challenge to you, assuming you think the government should intervene in disasters like Katrina is, if the government is expected to intervene when disaster takes people's food and people's water; is it a stretch to ask the government to intervene when disaster takes a person's house or a person's job?

Then again, perhaps the banks failing is the best thing to ever happen to America.  This seems like a good time to end with a Thomas Jefferson quote, “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.” 

*1 (yes I am assuming this problem requires government spending to fix, anyone have a better solution?) 

*2 (Which is ironic considering that was the policy that got us into this mess) 

*3 (yes I am assuming government intervention won't make things worse then if nothing was done at all) 

*4 (kinda parallels the seniors who want to retire in 09 but have lost their assets too) 

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#10) On January 17, 2009 at 11:47 PM, bullshiite (31.22) wrote:

Does anybody ever?

Get midway through a reply and then they realize, 'damn I am trying to summarize a complicated issue in one page.'  So you just start typing faster to get your points out and then you realize, 'damn this is so complicated that I see the pros and cons all across the spectrum of ideas.'  So then you say to yourself, 'F#%$ it I'll just conclude with something a dead president once said.'

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#11) On January 18, 2009 at 12:33 PM, edbbear (< 20) wrote:

A national bank is a great idea.  The private sector is insolvent.  You can't let them fail or else our monetary system will collapse.  Maybe a better idea is to national the banking system, let the insolvent banks fail (like we would any other mismanaged business), have the national bank lend to qualified consumers, and put the rest of the TARP money into the FDIC to bail out all the deposit holders. 

Of course, for this to work we'd have to vote out Congress, because the first thing they would do with a nationalized bank is start giving away loans to people who have no business getting them. 

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#12) On January 18, 2009 at 12:51 PM, kstarich (30.62) wrote:

bullshiite

I see your point on government intervention.  I would be on the same page with you if Thomas Jefferson were indeed the President. There is such a lack of wisdom and divine direction in washington that all this government intervention can't possibly go right with the average American.  This is why I feel it would be better to rely on spending reduction and tax reduction.

So far the billions in government intervention have done nothing.

 

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#13) On January 18, 2009 at 1:40 PM, kstarich (30.62) wrote:

I would like to hear the pros and cons of returning to the gold standard.  I hear speculation that the price of gold will go down.  It seems unlikely to me since all currencies seem to be falling apart.

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#14) On January 18, 2009 at 5:14 PM, bullshiite (31.22) wrote:

Kstarich,

This parallels my view on the gold standard.  

"This myth usually comes from a misunderstanding of what money is.  Any currency -- be it paper dollars, gold, or Indian beads -- depends upon public consensus.  People who are hung up on the gold standard see it as being more "real" than paper currency based on the value of goods and services in the economy.  In a way, this view is understandable.  Gold can be seen, felt, and heard (if it is dropped, for instance).  I suppose it could even be tasted and smelled, if one were so inclined.  However, it is not these tangible things that makes gold valuable.  Gold is only valuable because people perceive it to be valuable.  This is no different, fundamentally, than paper currency backed by the overall value of goods and services in the economy.  So long as people recognize that a Federal Reserve Note has value, and accept it in exchange for goods and services, it is viable as a currency."

IMO people have begun to look favorablly at gold because of the risk percieved from the rapid increase in the money supply.  I am not saying it is unwise invest in gold as a hedge against inflation, I am saying it is unwise to think going back to the gold standard would fix the financial crisis.  Returning to the gold standard would only shift inflation from paper currecny to gold-backed paper currency so that gold would inflate casuing the dollar would deflate.  In addition, I don't think the US has enough gold to back 13 trillion dollars worth of currency, which makes the gold standard debate redundant.  Only if a complete collapse of the financial system occured would there be a reconsideration of the gold standard returing.  The problem too with the gold standard in a globalized economy is ability for foreign nations, that have accumulated USD, to trade those in for gold and deplete our reserves; translation, a gold standard the exists in unisence with a trade deficit would not be self-sustaining in the long term.  That theory is reflected in Nixon's policy back in the 70s.

 

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#15) On January 18, 2009 at 8:59 PM, kstarich (30.62) wrote:

bullshiite

As Alstry and others predict the return of inflation to pay down debt at what point is it wise to get out of gold?

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#16) On January 19, 2009 at 12:16 AM, kstarich (30.62) wrote:

bullshiite

On a side note I just don't think the Katrina example is a good comparison.  In this case the governments Keynesian prescription to borrow and spend replacing consumer spending and investment is just not going to work.  There is going to be soom sort of collapse either way.  I believe it might be better to give every working American a stimulus check maybe as high as $5000.00 and cut taxes now.

This will not save everyone but it might help.

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#17) On January 19, 2009 at 12:31 AM, Jimmy2008 (< 20) wrote:

kstarich,

at what point is it wise to get out of gold?

Marc Faber said in a Youtube video that he would not sell his gold until there are long lines of people waiting outside of bullion shops to buy them.

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