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The Demise Of The Dollar And What To Do About It
NOTE: This is a econ post so it if you aren't into that sort of thing, it's not for you.
If your wallet feels a little light lately, you aren't alone. Nope 300 million of us have a currency that is decreasing and will continue to decrease over the course of the next few years. The dollar has dropped roughly 36% over the past 8 years against the EURO. Mind you the Euro includes "powerhouses" like France where their economy sputters along and unemployment is at 10%. So why is our money declining in value? Well the biggest reason is that Americans do nothing but spend and the big countries of the world finance our credit by buying dollars and trading with us. (In fact we have a -1% savings rate, the lowest in the world) Thus we run a current accounts deficit that is off the charts. Of course those of you with credit cards realize you can keep borrowing----until you can't anymore. That time is coming. The dollar is losing value b/c the realization among countries like China is that they need to diversify their holdings into other currencies and aren't buying them. Meanwhile the strong dollar policy that this country had for decades is gone as Bush became President. What does it mean for you? For one it means asset inflation which is what you are seeing right now in the Stock Market. The DOW has been up 24 of the past 27 days as I write this. That hasn't been seen since 1927. Ring a bell. Then as in now the liquidity of the money supply some 18% worldwide compounded year over year has to go somewhere. For a while it was housing which is now puking its guts up. Now it is in asset prices....Secondly if you haven't noticed the prices you pay for foreign goods are going up and will continue to do so. So putting off that vacation to Europe isn't a bad idea. So how can the FED reserve stop this? Easy by raising interest rates a lot and protecting the dollar. The problem is the economy is actually decreasing quarter over quarter and the housing market will get worse with a rate increase. So the FED is stuck.... What should you do. Well if inflation is going to get worse one of the main things you should do is lighten up on stock holdings for the foreseeable future. Contrary to the rah rah crowd on CNBC, they have a vested interest in seeing you fully invested...The best natural hedge against inflation is buying gold. Not easy to do but if you can buy the physical, 1 ounce Gold Eagles at 7 dollars over spot price(which currently is about 685$) you should do alright. Always buy in cash and find a safe place to store it...not in a safety deposit box. OR--if you do want to invest in the market, buy mining companines which mine precious metals. Tickers AU and GOLD are my two faves right now.....OR if you want to buy into gold but can't store it, its easy. They have a Gold ETF(exchange traded fund) which tracks the spot gold price in NY. Ticker is GLD. Either way, there are a bunch of bright people around here. Just realize what a declining dollar means and how its going to affect you. You'd think it was a great thing according to financial news b/c companies here selling overseas get a benefit.....But its a short lived benefit. And higher prices are on their way, from cars to the grocery store----just keep your eyes open. You will see it. Randall |
I'm way ahead of you. Good read.
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Heavily invested in euro markets. Doing very well.
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Don't forget to look at how you're planning, too. Since my stuff is almost entirely long-term retirement money, I'm a fan of dollar-cost averaging (putting in a fixed amount every month). When the market is doing poorly, at least I'm getting a better price on what I'm buying. I dread the idea of another huge depression, but since I'm still 30 years, minimum, away from retirement, the stock market taking a hit doesn't have me in a panic. Closer to retirement, yeah; I'd be worried.
And yeah, diversifying. :) Apparently, the popularity of the President also affects the dollar's strength- check it out: http://www.slate.com/id/2165579/nav/tap2/ A loose correlation at best, but entertaining reading, anyway. Thanks for bringing this up, Randall. Short term things don't look good. Long term? Well, the Great Depression led to all kinds of changes in policy that created a strong middle class. Took a long time, but most worthwhile things do. Sometimes we need to get slapped pretty hard to start focusing on really changing things. Though I hope it won't come to that. |
GRisk,
That's an interesting chart....Bascially from the end of Clinton on the dollar has weakened. A rally here and there, but the decline is staright down....Notice the high popularity of Bush was b/c of September 11th. It makes sense that a terroist event would lead to an increase in strength in the dollar. It is a "safe haven." But less so than ever before. Last month when tensions between Iran and Britain were high the dollar did nothing at all. Oil went up, but the dollar just sat there.... Even more interesting is that some countries are starting to buy oil off the open markets in Euros. That's unheard of. If the world moves away from the U.S. as its currency of choice for things such as oil pricing, the spillover effect is fewer dollars held in foreign banks....The point to this whole thing is that the rest of the world is tired of our collective shopping spree in this country and can put an end to it in a heartbeat if they want to. If China sold 10% of their U.S. reserves, the dollar would drop another 15%....Keep taming that tiger Fed Reserve. B/c the rest of the world has us by the balls when it comes holding our debt. |
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Interesting points you make. Do you have any idea what each penny increase per gallon in gasoline prices really costs? Or what the cost of a 2 trillion deficit war policy costs? Or what the collapse of the housing market costs? Some do. Some don't. After seeing Queen Liz and the Smirker at last night's "white tie affair"...shucks...."Let them eat cake." We're screwed! So are our kids, and theirs, and theirs. Good luck! |
From Minyanville Today: (an excerpt)
"1. Give the Consumer Credit You have to give the consumer some credit. No, seriously, you have to. Because that's apparently how they're paying their bills. Consumer borrowing increased in March by the most in four months according to the Federal Reserve's Consumer Credit figures. Consumer credit (non-mortgage loans) to individuals increased $13.5 billion, or 6.7% at an annual rate, to $2.425 trillion, the Fed said. Economists were expecting a more modest increase of $4 billion. Use of revolving credit, primarily credit cards, rose at a 9.2% pace in March. That was up from a 2.9% growth rate in February and was the biggest increase since November. Perversely, this is good news for the economy because it shows consumers are willing to do whatever it takes to keep on paying their bills and buying stuff, even if it means turning to higher interest credit cards. According to the Associated Press, consumer borrowing is a sign of "resilience." "Consumers boosted their borrowing in March at the fastest pace in four months, showing resilience in the face of rising energy prices and a painful housing slump," the Associated Press reported. While using the term "resilience" to describe a jump in consumer borrowing largely made up of credit card debt itself violates most tenets of logic, that was only the beginning. "Consumer spending is indispensable to a healthy economy," the AP rightly said. Then the article followed the "consumer showing resilience by borrowing at the fastest pace in four months" observation with this: "The economy grew at an anemic 1.3 percent pace in the January-to-March quarter, the weakest in four years." So consumers "showed resilience" by borrowing at the fastest pace in four months... while the economy grew at its slowest pace in four years? Huh? We don't think this is resilience at all. It's desperation. " http://www.minyanville.com/articles/print.php?a=12773 |
I agree about the point regarding savings, or lack thereof in America. We save the lowest in the world and it will continue to hurt us until that changes.
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Sometimes the dollar weakens and it has nothing to do with domestic factors. It happened in the mid and late 90's mostly due to the very high growth of the Japan and European economies, especially Germany. It's a different part of the world these days, but the concept is the same.
And when the dollar is strong, it's not correct to generalize that's 100% positive. When the dollar is hot, it makes it more difficult for US corps to compete in foreign markets. With increased globalization of world economies, this tempers the effect of a weak dollar. A weaker, or weakening dollar also make US investment more attractive to foreign markets. It's hard to generalize. But I do agree that it makes a lot of sense to be increasingly invested in certain foreign markets and in securities of US firms with larger exposures to foreign markets. I have no idea why people save so little in the US. With all the bills people have to pay it's insane they do not pay themselves first (savings). I don't get it at all. |
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I also think the worst day's work Reagan ever did was deregulating the credit card industry. As soon as the credit industry no longer had a maximum amount of interest it was permitted to charge people, we got barraged with credit card offers galore with late payment rates comparable to that of loan sharks. I have a friend who got slapped with a 30 percent interest rate on her oustanding balance because she was late witih ONE payment. And of course, the Republican-led "Bankruptcy reform" of a few years' ago made it much harder for people to declare bankruptcy. Over half of people who declare bankruptcy do so because of a medical situation that, because of our f*cked up health system, drains them of any and all assets. So, we have a society told every day we have to spend spend spend (hell, it's what Giuliani told New Yorkers to do the day after 9/11. No kidding. "Go shopping" was his response to what we should do) and a credit industry that makes it just about impossible for people with limited financial resources to ever get themselves out of debt. |
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It's not up to anyone other than each individual to choose their own course. If you get sucked in by every commercial on tv or radio then you should watch no tv or listen to no radio. I would never agree that aside from being born into poverty that someone's problems are of the cause of/can be solved by some other than themselves. Don't go blaming Reagan for deregulation of credit cards. It's not true! The bill -- "Depository InstitutionsDeregulatory Act" (or something like that) -- was passed during Carter's term and Carter signed it into law. It was not Reagan. PErsonally, I think Reagan's worst day was when he signed the Agricultural Adjustment Act, which birthed Agri-business as we know it at the expense of the family farm. |
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And you know that guy making $18,000 a year because he wasn't born to a rich family who could put him through school who gets cancer? It's his own damn fault for thinking negative thoughts that gave him cancer. His kid? Eh, it's her own damn fault for being born to a guy who's going to die and leave her. He had no business having children if he wasn't rich. Kids are only for rich people. B, I do believe in personal responsibility- if you have sex without a condom and you get someone pregnant who doesn't want to abort, you should pay child support, for example. But I also understand that life happens- people who aren't rich get sick, or get in accidents, or believe a government that tells them the air down at the WTC is perfectly safe two days after the buildings fall. And credit card companies are there to offer borrowed money to handle life's problems and then there to insure that you'll never, ever get out of debt once you start borrowing from them, because they make sure not to tell you what happens if you miss payments or are late, except in very, very small print. Over half of people who declare bankruptcy do so because of a MEDICAL SITUATION. Explain to me how leaving their survivors in debt the rest of their lives because they got cancer is fair because hey, it's their personal responsibility. What would you have them do? Kill themselves before they get too sick so their families don't have to go into the poorhouse? Do they deserve to live the remainder of their lives in agony because they can't afford medical care and it's their problem? Is this what you are saying? Rich people can get their illnesses treated and f*ck the poor and their families because they don't have money to pay for health care or for an emergency fund that's of any use? Is that what you're saying? B, I have a dear friend whose husband lost his job in fracking Buffalo, which is not known for its excellent employment opportunities, right after she had a child. Wasn't his fault; the business was failing and he was let go. Despite her being employed full time, they were $27,000 in debt within a year-and-a-half and I can tell you, they have NOTHING. They were using credit cards to buy food, not movie tickets. And their debt soared because of the g*d*mn fact that the credit card companies can change the interest rate they originally set up with you because you're late with a payment and they can jack that rate up to levels associated with loan sharks. And so people owe more in interest than the original purchase. And those people are the ones who can't afford a 30 percent interest rate. It's disgusting. And it's driving more and more Americans into poverty but hey, it's my friend's husband's own g*dd*mn fault for taking a job at a place that five years later was going to fail, right? And for having a baby, right? |
goldismoney.info
lots of good info there.....ive read into ive been on physical silver the past few months |
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Frankly, unless you get drug tested for work, I can't think of one good reason not to hemp. You are way out there. Just stop blaming Reagan for the Credit Card sh1t. Do your friends believe the sh1t you talk? If your friends are having a hard time, tell them to get a second job. I did it for years. I missed nearly every Saturday and most Sundays with my wife and two kids for YEARS. Life is neither always fair or easy. It's the tough times frankly that make it worth living. |
goldbugs.
it's not legal to hunt and kill them so you just have to listen to their nonsense. someones been paying a little too much time on the am dial. all those who missed the big run up in gold the last 30 years still have a chance to get on board. i love the idea that a higher stock market always means it's 1929 again and a lower stock market always means the slide has just started. willian jennings bryant would have loved this. |
B-
No, my sense of personal responsibility is not limited to the male of the species, it's just easier in the case of pregnancy, for him to avoid it, as a woman dumb enough to let a guy stick an unrubbered penis into her when she doesn't want to get pregnant is going to be stuck with addressing the consequences one way or another whether she wants to be or not. I was limiting my example to fiscal responsibility. Lots of people don't know the first thing about how the credit card industry works. Because at no point in their lives are they taught how to handle money. We focus obsessively on 'readin' ritin' and 'rithmatic (all well and good) but I see a real dearth in education's attempts to teach things kids will really need as grownups. Those of us who were fortunate enough to grow up in middle-class households with parents who had middle-class parents who had the time to explain these things to us had a leg up, but it had nothing to do with personal responsibility and everything to do with being a member of the Lucky Sperm Club, as it were (a name I usually reserve for the hereditary wealthy, but face it, as Americans most of us are members of the Lucky Sperm Club compared to the majority of the world, especially if we're Caucasian, too). I've had to explain the difference between a savings and a money market account to friends with Master's Degrees. It's not easy, especially if you didn't learn it young. When it comes to the credit card industry, I have nothing but unkind feelings for the business- I see those tables out at college campuses every fall, nabbing every kid who stops for more than ten seconds, none of whom have any idea how to manage their credit because A) they're 18 and B) no one has taught them this. Then they run up debt and spend the rest of their lives trying to dig out from under it. I read about how they target the elderly, whose comprehension skills are already declining, due to age. They are bad news, as most loan sharks are. Hell, I pay off my balance every single month. You know what the credit card industry's term for people like me is? "Deadbeat." Thanks. Thanks a lot. But do you think the credit card industry would support educating its consumers? The same industry that targets people who have declared bankruptcy with credit card offers (the other fun story my friend has to tell about her experience with debt- getting bombarded by offers from Visa, etc., AFTER they filed). Please. They want people not to understand because then people will continue to give them record profits. It's deceptive and it's wrong. Personal responsibility is well and good, but it needs to start from a level playing field, at least where information is concerned. This industry is doing everything it can to keep Americans dumb and indebted. Apologies- yes, deregulation did start under Carter's administration (he has to work with a Republican Senate, yes? ;) ) and continued through Reagan's culminating in the lovely Savings and Loan scandal (remember that one?) which resulted in all of us paying for rich people's taking advantage of an idealogical belief in unregulated capitalism. Reagan presided over the largest tax hike in the last years of his Presidency, remember? |
As for the spending thing (and then I'm off the soapbox for the day, I promise)-
Yes, I agree there is a huge amount of PR (personal responsibility) involved in spending habits. But I think it's easy to dismiss the pervasiveness of advertising and the thousands of small and large ways we're pressured to buy buy buy as having no effect, when in fact, I think they are hugely influential on our natures, especially when we're young. I was a (pardon the pun) a huge fattist for quite a while- I considered obesity the height of personal weakness. As a small female, I got fed up with fat people spotting the empty seat next to me on the bus, plane, whatever and taking advantage of the extra space my small frame afforded them, so I spent many a ride jammed up against someone else's sweaty, smelly excess abdomen. I feel the trade-off for me not being able to reach things on high shelves is that I don't fill up the entire seat on a bus and I never have problems with "leg room," whatever that is. ;) And so I found it unfair to be squished because someone else can't keep her hands out of the Ding-Dong box. But you know what? Obesity ain't that simple. Admittedly, I don't buy the "genetics' argument because obesity rates have tripled in the past 30 years and we just don't evolve that quickly. But we are surrounded by food. Surrounded. And it's pushed at us relentlessly. And we don't evolve that fast and our bodies and brains are, I think, hard-wired to remember a time when we spent most of our lives starving (heck, obesity was once the height of beauty because it was rare). And I think advertising, etc., takes advantage of that and eventually most people give in. And once fat, I think it's really hard, a lifelong struggle, in fact, to address it. I think losing a large amount of weight is harder than quitting smoking (you still have to eat, after all) and props to those who manage to take off a large amount of weight and keep it off- that's a war they never stop fighting, and in a society where they are surrounded by images and messages saying "eat this! eat this! eat this!" So yes, body health is a personal responsibility, but I think our culture makes it as difficult as possible to stay healthy- little access to exercise in our car-dominated culture, sedentary jobs and endless push push push of foods that have little nutritional value. Hell, I just had chocolate and wheat thins for breakfast. Mmm! Healthy! Well, I did have a glass of milk, too... And that carries over to our consumerism. It's a high to buy something. I remember sitting in front of the TV as a kid, listing the things I wanted for Christmas-- in June. I lost that acquisitiveness somewhere in the wake of my mom's death, since you can't buy anything to make THAT feel better, but you know, a lot of kids aren't as lucky as I was to have their mom die. (said with sarcasm. I can't believe I feel it necesary to explain that, but again, people can surprise you with what they don't understand) Personal responsibility is all well and good and essential, but it's not the entire answer when your entire society is built on a system (advertising) designed to keep you spending more than you have. Is there an easy solution? Gads, no. I'm a believer in regulated capitalism, and a business has to advertise a product. But I think now, in our negative-savings society, we're seeing the effects of unregulated advertising and the thing is, when it comes crashing down, all of us, even those who are saving what they can, will feel it. Just as we had to be the ones to bail out the Savings & Loan crooks. And I think, in a society dominated with a command to buybuybuy it's wrong to permit unregulated lending. It's wrong. It allows wealthy corporations to take advantage of the weak and the poor and that's as close to evil as I can find. Oh- I forgot- my friends didn't move from Buffalo because my friend's husband's mother was (still is, I think) quite ill and he is her entire support system. Though I imagine your response would be that he shouldn't have had a mom who got sick, right? ;) Or she should have been tough enough to take life without any family around her, right? I'm also not sure where they would have found the money to move. It's expensive, moving! Done, promise. I have a play to get written today (not on economics; on aging. With zombies! And cupcakes!) and actors to rehearse. Carry on with your unkind comments without me, hi_Im_god. My heart breaks to think of your low opinion. I'm cut. Really I am. You too, STS. Can you see the virtual tears spilling on my keyboard? And STS- I worked three jobs in college, along with full-time classes. Nothing like an 8:30AM to 11PM day five days a week and an 8:30-6PM on the other two to really make a girl depressed. So yeah, I know from hard work. Did your wife work, too, while you were working two jobs? What did she do? In my friends' case, he had to limit his search to a night job, because she worked full-time (which was six days' a week, by the way) during the day and they had no money for day care, duh). What did you do with your kids while your wife was (I assume from your tone) working, too? Or wasn't she? It was a happy ending at the end, though- she was able to switch jobs and found one that also included health insurance, but it took a few years of looking. He's working now, too. But it took time; it's not a magic solution. You have to find the d*mn job. |
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I am hardly a gold bug and currently own no physical gold whatsoever so get your facts straight. I'm not comparing this to 1929 at all. The comparison was to the market being up for X number of days in a time period and that time happens to be 1927. Just a fact....Now most of my post deals with the dollar, nothing else...Our economy isn't going to fall into collapse at all....But if you don't think it has a major effect on inflation you need to look again. |
great read Randall I just got around to it, it will be only a matter of time til the dollar roars back as markets in Asia start a downturn as investments start to tumble, alot of Austrailian backers in those sectors will start to see a sharp decline.
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the original post in this thread was very good
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You aren't wrong on stocks but realize that investing in the stock market isn't saving. The idea that stocks go up indefinitely is simply wrong. That's why buy and hold is a fallacy. Those who invested in Cisco in 2000 may get even in 2012 if they are lucky. Also consider that as the value of the dollar gets debased, you need to make a higher % stock gain to offset the decreasing currency. But if you are lucky enough to make money in the market---- most people end up spending their paper gains in stock. Heck, if your stocks are up 10 grand, you feel comfortable to spend 5 grand on a vacation. Meanwhile you haven't sold a thing or saved anything. The only years with a negative savings rate since '32 and '33 were 2005 and 2006. Part of this is unquestionably the wealth effect which in '05 made people spend based on the increased value of their homes. But as home prices have started to decline, you can't cash out on your home anymore and those with ARMs as loans are really feeling the pinch. I guess my point here is that rainy days do happen. So a negative savings rate is really rolling the dice. |
A Bump
Yes, a Randall sighting. I post only on economic message boards as I've gone back to really what my background is. Love the ponies but I'm transfixed by what a cluster**** situation the economy is in.
This thread was started on May 8th of '07. Since then the dollar has weakened another 8.5%. Oil has gone from 65 to 100. And gold has gone from 680 to 870. The XHB, Homebuliders Index is down by half. All this has happened in the span of 7 months. The pundits like to point to an up market for '07 which is ridiculous. Use the gain against inflation+dollar decline and you'll see you lost money and purchasing power in '07. I have a deli I go to everyday to eat, one of the best in New Jersey. The owner is a close friend. In the span of 6 months his wheat prices doubled. This is unheard of, he's never seen anything like it in his entire life. Look at eggs, milk, etc... The grocery store story I used in my original post simply came about far faster than I ever thought was possible. And realize the rosey inflation figures they like to give you ex out food and energy. Why? Well who wants to hear what real inflation is. Plus, the cost of living increase in Social Security each year is partially based on government figures for inflation and wage earnings....Quite a nice reason to lowball the numbers, right? The rest of the world isn't stupid which is why they are selling the dollar like there is no tomorrow. So what's next? Well you saw unemployment tick to 5% this morning and the market tank. First let me say, I hate using the stock market as a proxy for the economy. Because it is figured in nominal terms, so much of economic weakness is hidden. Plus that unemployment rate is artifically low. Many people have stopped looking for jobs. The birth death model puts about 125,000 new jobs a month to keep up with population growth. Thus, when people get goosed by a decent jobs number they should take that into account. Where do you go from here? Well people scream for rate cuts, mainly to save housing, because people used it as an ATM machine and a negative savings rate with a declining home value = death....That bailout plan on subprime was laughable by the way. It will help very few and simply slow the process of foreclosures. It also makes banks not want to lend with the government able to fix rates whenever they feel like it. Now to the banks. Their balance sheets are an absolute joke. Back in August when TSHTF some of these banks chose to give writedowns in dribs and drabs. Citigroup for instance had an earnings report which literally looked like an Enron sheet, complete with a complete lack of transparency for the amount of derivatives tied to subprime loans. Since August they've gone down the shitter. And who knows what their writedowns will be going forward. I don't. You can hope that the Middle East guys flush with cash will keep cash infusions going to these banks. Give them a floor? Maybe, but its short term. And its not like they'll keep doing it when their investments continue to go down in value which they have. Bank of America gave Countrywide an infusion in August based on an 18 dollar share price. Seemed like a good deal at the time, right? Well now CFC is 8. Not a good return on investment is it. So going forward: The FED cuts but that's not the problem. It isn't a lack of money, its a lack of lending. Who wants to lend from bank to bank when you don't know if you'll get paid? Meanwhile the cheaper money floods the system and raises everything from wheat to meat to oil to gold to fertilizer etc. etc. Truthfully, I am bumping this(and making an appearance) because it is still so important that people realize what is going on in the economy...So if you feel like talking economics with me, I'm looking forward to doing so. It affects us all, no matter what you do for a living. Randall |
Thanks for the post Randall. You have my vote for president.
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I regret that it took a while to find this thread because it is fascinating reading...even for an economic layman. The ticking time bomb in my World is the continuing devaluation of the RMB and the lack of focus that US retailers have given it. All major chains either refuse cost increases or hold "auctions" for low bids and keep assuming that Asia is a bottomless pit of yearly cost decreases. That is so over. The lead paint issues that surfaced this year are just the tip of the iceberg over what will happen in the next 3-5 years as China factories demand currency and labor cost equality. There are three supposedly "immoveable" parties here...the factory, the retailer and the consumer. One is about to give in a big way and everyone will feel the consequences.
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I expect exporters will have a good roll.
We have been the ultimate consumer nation for so long. Maybe this will cause us to save more and produce more for demand in other nations. Lots of technostuff we make much better than any other country. And I think we are just touching the tip of the techno iceberg. Little stuff coming. Nano-technology as one small example could have a huge effect on so many things. In the field of medicine no one touches this country. The number of new machines coming out to measure so many diff. medical problems. I see a big upside in our ability here. I could go on. I am a science guy and I have never seen so many incredible leaps (a few of which might actually lead to some technological advance.) I also see the economy of other nations causing huge environmental problems. China and India are going to experience serious health problems in their work force. They might looking for solutions we already have sitting but no reason to use quite yet. Oil and inflation could be a long term blessing in disguise. I feel this will lead to genuine ingenuity in energy. But I could be very wrong. Nice to see you post again. |
Randall,
Good stuff here and I'm impressed us pony lovers are smarter than I thought. I for one come from a manufacturing back ground and seen the quick demise in the USA as a real source of concern. The retailers i.e. Walmarting of America, are just too string and too much influence. However, for me the central issue is what will happen when the war is over. I believe that war spending is fueling our economy with goods and services for the military. The greatest increase in jobs is in the military. When it goes, and I hope it does, that's a whole lot of loot and a whole lot of action sucked out of what is already a weak economy. It's disheartening to hear our politicians speak nothing of the real issues. Seems like there are so many things going bad. Too bad for the children. Spyder |
The devaluation of the dollar could put the US labor force into third world price levels. Manufacturing will might come back to life.
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Nice to see you back Rand.
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randallscott35 is "day trader" economist. GenuineRisk is income redistributionist. GR, you can redistribute income all you want, but income earners will trample you if you attempt to redistribute their wealth.
1. US is still largest economy on Planet Earth. 2. All economics is cyclical. 3. Y = C + I + G + (X-M) Basic Keynesian theory still drives fiscal policy. 4. Money supply still drives economic growth and inflation. Fed still practices what Milton Friedman preached. 5. Dollar has more competition today, but still is world currency. I haven't been to a country yet where dollar isn't accepted by locals. 6. Gold and silver and other precious metals come & go. Hard currency advocates usually get their heads served on their own "silver platter." I am watching LSU dominate OSU. Roughing the kicker... another OSU oops! More economics at later date. GEAUX TIGERS! SEC RULES!!! |
Seems like as good a time as any for an update since a few weeks back.
Since then, you had a hysterical display by Bank of America (my bank by the way) last week throwing good money at bad. In the last installment we looked at the fact that they bought into the company in August and after a 75% haircut they decided they might as buy the whole damn thing. The CEO had egg on his face for the purchase and this was a way to claim victory and call it value. Mind you since the announcement, CFC stock has gone from 8 back to 5.75. My call is that this deal never actually closes. BAC is taking on basically all the future litigation by states and individuals against CFC for an equity in a company in the death spiral. It makes zero sense and just shows that financial companies are still not coming clean about their problems. Understand the FED said "they were aware of the talks between the two companies." Translation = we are quite happy someone took CFC(the largest mortgage company in the U.S.) from going bankrupt. A wink and a nod and BAC and their shareholders take one for the team. Then we get to this morning with Citigroup who back in August showed a strange balance sheet. Well they write down some of their losses, not nearly enough, and the market laughs and chops another 7% off the largest bank in the U.S...Did I mention that on page 11 of their release they said they may have 230 billion is suspect loans to home borrowers. What did they write down, 10 billion this morning? This is beyond best case scenario. Sure they cut the dividend but they didn't cut it enough. This company is fighting for survival whether anyone realizes it or not. For the second time in months they needed a huge capital infusion just to keep chugging along. Realize something shareholders of these banks getting the infusion, they are giving equity(yours) and diluting the shares you own by giving % of the company away or giving notes worth high interest rates. I keep hearing how nice it is and this will stop the bleeding. No it won't. It prolongs the bleeding. The patient, especially in the case of a Washington Mutual and CFC are dead. You can plug holes and another one opens. What happened? CDO is a collateralized debt obligation and essentially means that there are supposed to be assets backing them(a range of assets with different credit qualities) and giving investors a return on their investment. The problem is these were rated as safe investments with superior AAA standings in some cases. Would you eat a filet mignon with a tiny piece of feces on it? Probably not, but people bought into these not realizing that piece of these were backed by mortgages that were bound to fail. And then you are screwed b/c they become worth less and less and banks can't price them because they don't know the ultimate end with regard to bad loans. They are guessing. No one wants them. The worse the housing market gets the more likely people with prime mortgages will default. Why? Not necessarily because they can't make the payments but b/c it makes sense. Watch closely the next 6 months and count the number of times you hear the expression "jingle mail" on TV or in the newspaper. If you put 50k down on your home and its lost 100k in value you have negative equity in your home. At a certain point you are better off mailing the keys back to your bank and taking the credit beating than holding onto your home. An ugly choice and not one I envy people making. An aside here for a second on the mortgage market. I have a friend who has given loans for the past 2 years at a mortgage company. He said basically if you had a pulse 2 years ago you could get 400k loan. NINJA--no income, no job, no assets.....no problem!! Haha. Well thats fine and dandy when prices go up but the effect when they decline is pernicious(SAT word). The market was kept artificially high by allowing anyone with a first name to come in and purchase a home with funny money. It is the opposite effect when people can't get financing. And this is why the magical rate cuts coming won't work! All they will do is weaken the dollar and cause commodities to go up even more. Banks don't want to lend and people don't want to borrow when a recession is coming and banks already have no idea what their ultimate damage will be on writedowns. Gold is talking here. Sure I took shots early in this thread for a call on a shiny metal. Made sense since it has underperformed for decades but times change and monetart policy gets dicey and bang...People aren't buying more jewelry, the price is going up because of inflation and nothing more. I am not a nut who thinks we will be paying for things in gold coins 5 years from now. You can't put the genie back in the bottle. I do, however, believe that taking your medicine and allowing some of the weaker financial institutions to go bankrupt is a better idea than pissing away people's savings through dollar depreciation. Make no mistake this is now and is going to be ugly. No, the sky isn't falling but a recession is not priced into the stock market or the general economy at large. And since I don't buy government numbers let your "soul be your pilot." You know what you feel and see, no matter what you do for a living. So think for yourself and be smart going forward here. For the record all this happening is good in the long run. Banks will be regulated and the ones that survive will be stronger...There will be a time to take on debt also. If you think that other than a short bounce in the dollar the trend will continue to go down there comes a time when you should take on debt. Why? Well because you will be paying back that debt, mortgage or other(not credit cards--bad!) with dollars that are worth less as time goes on. Good for you, not for them....But we aren't there and I wouldn't tell you to do it yet. I know this was a mishmash by the way…I'll stick to one topic next time since I was all over the place today. Sorry about that. I will tackle energy and more to the point "ethanol" and what a serious misjudgment this country made by promoting it. Long term consequences that people aren't talking about! Randall |
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I remember when I purchased my house we had to reveal almost everything about our entire lives in order to get a 10.5 % 30 year mortage. 1987... Paid off because of "lucky" (its good knowing people who have a job investing their family money) aided by good advice by the same person who nailed the fact that the stock market would rally after the Gulf War (1990). But I have lived through a lot of changes (48 years). My house evaluation goes up and down all the time. A house is not the same as a car. Cars almost always lose value. Houses fluctuate. So I got a bit of a problem giving up the keys because "the certain point is not defined". I also have never considered my house an investment. It may or it may not turn out to be a good return. It is a place to live. Its obvious a lot of people did not consider houses this way. And its very clear some people should get nada as they were trying to make some quick bucks before things fell through by buyn and reselling. The bailout for these folks is a bit sickening but no one seems to know for sure who did what. Further. If you can tell me what a recession is, I would appreciate it, as all the people that seem to understand economics have diff. definitions. Seems like a very scary word, but I have apparently lived through these before and did not realize it. And as C. Simon already indicated, those international stock funds have just busted loose with a weak dollar. Diversification really does work. Anyways, the dream of owning a home is a strong lure and people seem to think it is a right written in the constitution. I understand the desire, but it took a lot of hard work for me. Thanks for posting. I dont mind the rambling, it is interesting. I look forward to your views on energy. |
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Thanks for the posts Randall, rambling or not.
And for people like me who aren't big on numbers, here is a quick read on the differences between a million, billion, trillion, etc. http://www.tysknews.com/Depts/Taxes/million.htm |
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Awesome. Tis how I feel. |
Good stuff, Randall, though I'm heading more towards "the sky is falling" the more I read on the housing loan situation, which is now spilling into auto loan. I sure hope I'm wrong.
There is some theorizing that what we're seeing is the end of what has been considered the American Way of Life (really just for the past 50 years, but people get quickly adjusted to being comfortable)- interesting blog post: http://jameshowardkunstler.typepad.c...er****_nation/ I also found comments on John Cole's Balloon-Juice's thread, "We Are All Sub-prime, Now" interesting reading: http://www.balloon-juice.com/?p=9510#comments I don't know what I think about it- I'm not good at snap judgments so I have to mull most things, but I do think this is bigger than a year-long recession. And I don't think the gov't will leave things alone and let the industries that should fail, fail. They didn't during the junk-bond scandal of the 1980's- instead, they bailed out the industry and passed the bill along to you and me. Or rather, my parent, as I wasn't working yet, though I'm sure I'm probably still paying for it, as our DT'ers kids will be paying for Iraq. Borrow and spend, that's our Administration's way. And Americans adopted it as their own way, too. It's funny when I get accused of favoring "redistribution of income" because what we have now is just as much about redistribution of income; it's just that it's distributing it upwards, through corporate welfare, inflated executive salary, underpaid rank-and-file workers and an increasingly regressive tax rate. Who was it who said it was wrong that his secretary paid a higher tax rate than he did? Buffet? Gates? One of them. The US gov't has a great hand in redistributing income- it sends it to the top, where most of it stays. Hey, if you're satisfied with how things are going, great; you know how to vote in 2008. Me, I don't think that's right; I prefer a society with a middle class. And I don't think a higher top tax rate will lead to violence and rioting in the streets- Europe has a lot of riots, but I don't recall any being linked to the tax rate. The wealthy don't resort to violence; they don't have to. They resort to white-collar crime and bribing gov't officials. We've been redistributing income upwards for 50 years now, while at the same time telling middle- and lower-class Americans they can still have it all and not pay for it and now the cracks are really starting to show. It took us quite a while to get here, and it'll take quite a while to get back out. If we can- now we also deal with a world that is catching up to us, and is going to want their fair share of the resource pie. And that's not going to shift back in our favor- the US share of the world GNP is declining and it's going to continue. And as their purchasing power increases, we may see ourselves competing for the same cheap crap we depend on them selling us now. And we don't have the manufacturing jobs to make it ourselves. As for solutions? I don't know. Re-regulate the credit industry for one- put a limit on interest rates so Americans in debt have a chance to dig themselves back out. Regulate loaning. And yes, for once, let the companies that should go under, go under. But how do you tell Americans to save when the nation's economy depends on them going shopping? There are a lot of foreclosed houses in the neighborhood I'm in right now (I'm living out of town for a few weeks)- it's really depressing. I wonder if maybe the Baby Boomers are really God's chosen people- born after the Great Depression and most of them will die before the bill fully comes due for the easy life most of them lived, economically speaking. (No offense to the Boomers- very grateful for Civil Rights and Women's Lib and all that. The Beatles were pretty good, too. ;) ) Thanks for posting, Randall. Good to hear from you again. |
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