Jeremiah Johnson's weblog
For the last month we have seen our banker run government and media run a propaganda campaign about the financial fallout that will come if we don't give up more purchasing power and liberties to the hands of a few. On top of that they have continued to run a scare campaign to gain the public's compliance in the elections next week. This scare campaign has done an effective job of tightening up people's willingness to engage in economic activity which has resulted in an overall decrease in the total money supply due to the fractional reserve nature of our monetary system. In other words, if people aren't taking out loans, or 'even worse', paying them off, then the total money supply will contract and we see higher unemployment, and less economic activity until prices reflect their previous ratios of the total money supply.
Well, if you didn't quite understand that don't worry about it, we aren't discussing the intricacies of our fraudulent monetary system in this article. What I would like to examine is the stock market relative to commodities. Take your pick: silver, gold, oil, etc. When priced in these commodities we will actually see that the stock market has increased an average of roughly 16% over the last six months. Did you hear that? The stock market has INCREASED relative to commodities in the last 6 months! That means having money invested in stocks in the last 6 months will have seen an increase in overall purchasing power.
Why is this important? One must realize that you cannot eat dollars or use dollars to build a tractor. They are merely paper. The real things of value are resources and true capital. When you invest in something, you are attempting to increase your future purchasing power. To that goal people have had their purchasing power increase if invested in stocks over the last 6 months and even more so if holding U.S. Dollars.
At this time we see an imbalance of commodity prices. There are only three factors that can contribute to this affect:
Decrease in overall money supply
Decrease in demand for commodities
Increase in supply of commodities
All of these factors are at play right now. However, this imbalance like any other will rebound. There will be a readjustment very soon, more then likely after the November 4th elections and possibly after the first of the year. Before that time I would suggest transferring any investments or dollars into commodities soon to profit when they see a jump.
Categories: Finance, Media, Commodities, Economy, Monetary Policy, Trade
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If you are like most Americans your head is probably spinning right now after listening to all the attempted explanations in the news of what is going on with the economy. You are probably wondering if the pundits even understand what is going on. If this describes you I welcome you to read this article. We'll take a common sense approach so anyone can see what is going on and learn the lessons from this so we don't repeat history. This will help explain to the average hardworking American everything we need to know:
-How we got here;
-Where 'here' is;
-Who's to blame;
-If this bailout will succeed;
-What should be done;
Just when did this problem start?
To figure this out we will need to rewind time back to 1992. Congress had been pushing for affordable housing bills during this time. Basically Congress was looking at the percentage of Americans that owned vs. rented and wanted to increase how many people owned their homes. That year they had passed a new housing bill. This involved Fannie Mae and Freddie Mac being required to purchase loans from banks that included a certain percent of low-income first time home buyers. At first it was very strict. However, throughout the 90s and first part of this century Congress continued to expand this program so the requirements were lower. Sure sounded like a great idea at the time. But like with anything else, any time government gets meddling in the economy, it catches back up with us.
Every time one of these new loans are created, this involves a significant portion of that loan money to be created as well. However, this new money in the system does not mean there is more wood at the lumberyard, more oil coming out of the ground, or more corn coming out of the fields. Later we will see why this increase of the total money in the economy plays an important role in the problems that develop.
Through this bill more people were now buying houses that were not able to get loans before. These were people who didn't have money down and who didn't have a good payment history. More people buying houses created a higher demand for used houses. This higher demand caused people to be willing to pay more for a used house then before. And so used housing prices went up. So let's suppose you are average American Joe who had a used house during this time and it's half paid off. You see houses in your neighborhood getting bought up at four times what you owe on your house. You see your old neighbor at the store and he tells you he's living in a new house now. Might be worth checking into! So you go home to do a little research and find out that you could sell your old house and build a new house and still owe the same as before! So you and your spouse find a contractor and in a few months you are living in the house of your dreams.
So developers noticed their developments are filling up quickly and so they buy more land and build more houses. Every town in America had new housing developments going up.
At the same time, the high demand for used homes caused all homes to cost more. Lenders saw this and believed it would continue this way so they began loaning more people money on the 'equity' of their home. Basically, if you owed $100,000 but your house was now worth $125,000 you could get a line of equity for $25,000. People spent this line of equity on remodeling their houses, buying a new vehicle, or purchasing other consumer goods.
Some lenders even offered loans where the buyer only pays the interest for the first ten years. Sounds crazy, huh? They did this believing the value of the house would keep increasing and then the buyer could sell it after 10 years and upgrade to a bigger house and make money in the process.
There were also loans being made that had an initially lower rate and then after a year or a few years the rate would go up. However, Congress had spelled out that if the initial monthly payment was equal to 40% of the income of the borrower, then Fannie Mae and Freddie Mac would still be required to purchase it.
All of these things happening caused a demand on Wall Street for new markets to form such as derivatives, credit swaps, etc. These were really only a symptom of the problem and are not the problem so we will not focus on those. 'Whew! So you mean I don't have to understand those to understand this crisis?' Correct. Warren Buffet has even stated he doesn't understand these. If you are like 99% of Americans, you don't have any money in them and they really don't affect you in anyway. Now we'll start to look at the downhill part of this story:
The suppliers of building materials began to notice their supplies were getting low. This caused them to raise their prices so they wouldn't run out of materials. Prices rose nearly three times as much on building materials. Also, the new demand for consumer goods caused them to get scarce and their prices rose too. All of these goods had gotten dangerously low. This in turn causes their prices to spike up. However, that higher price will cause people to stop purchasing that good or service and this will cause the supply to refill and as this happens prices will ease back down. A higher price on oil, for instance, causes people to not buy as much oil. This allows for the oil extractors and refineries to catch up their production so the amounts on reserve are back to safe levels. As these resource reserves become replenished, the prices ease back down.
Three factors played a very important role in bringing the party to a halt, so to speak.
1) Too many houses. Before this, Congress kept gradually expanding the affordable housing until virtually anyone could buy a house. However, when there was no one left to sell a house to, the housing market finally began to come back down to reality. Without the demand for used houses, the market dries up and prices come back down.
2) The rising prices of building materials and the lower demand for used houses caused it to no longer be worthwhile to sell your used house and build new. Developers were still going full gear ahead building but we were no longer buying. When we can't sell our used house for enough, we can't buy a new house. And so these developers are stuck with a bunch of empty and half built developments.
3) A large number of these new home owners stopped making payments on their homes. For a financial institution, this is bad news. Without going into much detail on the way banking works, this means that they won't be able to loan out much more money and may even mean some of them will go bankrupt. Also, since the value of all houses fell, then few people still have equity in their homes and so they can't give out lines of equity. So with Americans having less money on hand and looking at higher prices for everything means they will be consuming much less.
Where does that leave us at now?
We are now in a situation where there are too many houses and too few resources. We can know there are too many houses many ways. First, take a drive through any neighborhood and count how many "For Sale" and "For Rent" signs there are. Second, just watch the trend of house prices. They are coming down. This means that there is a higher supply of houses then there is a demand for houses. So the price is adjusting to reflect that and, when it does, then houses will move again.
Also, our resource reserves have gotten dangerously low. All that new money injected into our economy did not create more building materials, oil, labor, services, or consumer goods. All it did was cause people to spend them up until there was hardly any left. This caused the prices to spike big time, first with building supplies, second oil, and third consumer goods. We all remember going to the pump when it was over four dollars a gallon. Likewise, those prices will ease back down in that order. However, they will not come back down to the previous prices but instead will settle at higher prices to reflect the new amount of total money in the economy.
This leaves our financial institutions in a position where they can't loan out as much money.
So who is to blame?
Who do we point the blame at for these things? We can point fingers at people but it's not people that are the problem. The problem is that any time force(government) is used for anything other then defense of our individual rights, property, or person, it is fundamentally criminal and will result in a bad outcome. The belief that force is the answer to all our needs has created similar problems in countries all across the world ever since governments have existed. Congress did not have any authority to mess with the housing markets. Though they may have had good intentions, the intentions do not stop the natural consequences that come from policies not authorized in The Constitution. The contract that allows for Congress to even exist forbids them from doing anything outside of that contract in the tenth amendment.
Henry Paulson(Secretary of the Treasury), Ben Bernanke(Chairman of the Federal Reserve), and their colleagues had taken actions that had furthered this problem throughout the last two years. They were only looking at the results and not looking at the whole picture. They only saw the increase in the stock market and consumer spending and did not factor in that our resources are limited and having too many houses will pop the housing boom. So when things began to turn down, they increased the incentive for borrowing by lowering interest rates. This made more money but did not make any more resources. This only accelerated the problem. People borrowed more money and the party went on a little longer. But this made our resources even more scarce and made the prices rise even more. This only made more houses and caused the price of housing to push down further.
Even as recent as eight months ago they were confronted on these problems by economists and constitutionalists. However, they said everything was fine and that the economy was in good shape. Today we can see that their assessments were not correct.
Historically when a government meddles in the economy and it comes full circle back on them, they perform an 'investigation'. Reading your history books, you will remember this investigation involves finding someone who has done something wrong so the whole weight of all our problems can be put on that person or people. It is really not about finding the core of the problem, but is about giving the people someone to vent their frustration on, as long as it is not the ones doing the investigation: the government. Once people feel a sense of justice, then government goes back to the same old, same old: business as usual. However, the core problems are not addressed and the same problems come back up down the road again.
So what is this bailout going to do?
It's important to note that the same people who drafted this bailout bill are the same group of people that helped get us into this mess. They also are the same group of people who remained in denial of the problem and kept throwing logs on the fire. Likewise, the economists who predicted the consequences of this all the way back in 1992 and who continued to point out the problem that was coming are not being listened to for solutions.
The plan that Bernanke and Paulson have drafted is basically more of the same. More government intervention so more money can be created. It is to pledge tax dollars for buying up the bad loans. First, there are trillions of dollars worth of these bad loans and they are pledging $700 billion. The reality is that they are not hoping to buy them all up, but that they are hoping that this will restore lenders and borrowers confidence to keep the game going. However, it does not address the underlying problems that are making us act the way we do. This only would grow the problem even more then it already is. In fact, a letter signed by over 400 top economists nationwide was sent to Congress saying that this bailout would increase the crisis, not lessen it.
They are only attempting to treat the symptoms while ignoring the disease. This bailout, if it works in creating more confidence, will only cause people to continue to consume a little longer which will further deplete our resource reserves and cause builders to continue to build which will make more empty houses needing to be filled. That kind of foolishness will only make the backlash much greater. It's like the kid with a scab who keeps picking at it. “If you don't stop picking at that it will never heal,” his mom would say. These elitists, who live far wealthier then any of us could ever imagine, need to leave our economy alone so it can mend from the damage they've already done to it.
If history repeats itself, when this bailout fails you can count on them trying a bigger one. When that fails they will try a bigger one. During that time the dollar will continue to lose value and significance in the global markets and will eventually go the path of every fiat currency that has ever existed.
If that hasn't gotten you stirred up, let me bring up some other problems with this bailout:
-it can be used to buy up the credit swaps, derivatives, etc. which are worthless
-it will be used to help foreign banks as well like Bank of Scotland, the Bank of China, and other foreign banks
-not only will we face the pain of the consequences from this folly, but we will be required to pay for it in taxes in the future
What would be a solution to this problem?
-As one person put it there is a four letter word: R-E-N-T. These people who cannot pay their bills on time or cannot afford a home need to go back to renting.
-The prices of housing needs to come down to reflect the total number of houses. Then these houses can get filled.
-People need to not spend as much for a short period until the resource reserves are replenished and prices on consumer goods come back down.
-The banks that made the risky loans need to go bankrupt and be bought up by banks that don't take such risks.
Will this mean a shortage of jobs for a while and tightened credit? Yes. But this cannot be avoided. We can either face it or prolong the agony. Like the drunk who binge drinks, we can either take another swig and risk our own lives in the process, or we can sober up, which is hard, and after a short while recover and see some true economic growth: not just booms followed by equal busts.
Some good news is that we already have begun the sobering process. The most painful part is already past. Oil prices went up and are coming back down. So are all other prices. Now we just need to let housing prices come down and the hardest part will be over. This also means the stock market will deflate, but most of this deflation has already occurred.
Many of those who found jobs in the financial sector, the housing sector, and the retail sector will need to retrain themselves and go into the exporting sector, manufacturing sector, and other sectors. The pain during that time is pushing us to redirect our activities toward things that will truly be productive for the economy as a whole. No government mandate or Act of Congress needs to be passed for this to happen. It's the natural course of the free market.
Categories: Finance, Federal Legislation, History, Philosophy, Economy, Monetary Policy, Trade
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