Posts Tagged economic crises

How to get the US economy going again

By Hugo Salinas Price

ProsperityI am reading a great deal of alarming information regarding impending economic collapse in the US.

I feel sure that most of the predictions I read are based on facts, and ought to scare the living daylights out of all readers.

What I fail to see is an explanation of the causes of this terrible, atrocious situation in which the US economy finds itself.

Let me cut through all the dire warnings and offer readers a solution. However difficult it may be to get a solution in place, it is absolutely necessary to understand that there is a solution; if you want it badly enough, it is there waiting to be implemented.

HOW TO GET THE US ECONOMY GOING AGAIN.

In order to re-invigorate the US economy the following policy must be put in place:

The United States will only accept just as much imports from foreign countries, as foreign countries are willing to purchase from the US. (But the US will not resort to high Tariffs to restrict imports and protect local production.)

Question: Then you are saying, Mr. Salinas, that the US should not just import what it wants from foreign countries, and pay in dollars for those imports?

Answer: That is just what I am saying. Because, you see, if you pay in dollars, there is no need for local industries in the US. They are not needed – and in fact they have disappeared – because imports can be paid with dollars. What do you want: lots of Asian imports available at Walmart, but no jobs, and what jobs there are – at tattoo parlors and restaurants – paying miserable wages? Or do you want industries which will employ workers, pay higher wages and pay taxes to your government as well?

You see, what happened to your country, the USA, is that since 1971 the US has no need to pay for imports with EXPORTS – and exports require local industries to feed the export trade. Since 1971, the US has been paying for everything under the Sun, with dollars. And the result has been that US industries just dried up. They were unnecessary. The jobs disappeared. Detroit shriveled up, and the whole US is shriveling up, without industries. All this has happened because US imports can be paid with dollars, and exports are not really necessary.

This was great for China and Asia in general. It was party-time there! They sold everything they could make, and received dollars in exchange. The US had a party – for a while; until the industries died out and unemployment took over. All because dollars can pay for imports. Exports – forget it! The exports which sustained the industrial base – and the employment base – of the US are not needed anymore. And so the heart of the US has been rotting away – bringing with it unemployment and 47 millions on food stamps.

That’s where you are today.

So how do you solve the problem?

Very simple! I won’t say it won’t be painful, at first. But it’s the only solution:

GOLD MUST RETURN TO THE MONETARY SYSTEM OF THE US.

The US must declare that as of now:

  1. The US will pay for all imports either with goods and services or with gold.
  2. The US will provisionally initiate the re-industrialization of the USA with a gold price of $10,000 an ounce of gold.
  3. Exporters to the US will have their choice:
    1. Take their payment in US-made goods and services, or
    2. Take their payment in gold at $10,000 dollars an ounce.
  4. The US will not attempt to reduce the flow of imports by means of Tariffs. Tariffs offer no solution; in fact, Tariffs derail the only solution.

The definitive price of gold will be determined this way:

  1. As long as gold continues to leave the country, instead of goods and services, then the gold price must be hiked further, until the outflow of gold is stemmed and no gold leaves the country (because foreigners find American products more attractive than high-priced gold).
  2. If gold pours into the country, then the price of gold in dollars is too high and American exports are too cheap. The price of gold will be trimmed down, until the movement of gold is practically nil, with exports paying for the mass of imports.

The result of this measure will be an immediate rebirth of manufacturing in the US, with a return to full employment and prosperity.

The only solution for the dire circumstances of the US is a return to gold as the international money on the part of the US.

Let me make it perfectly clear: This solution – which is the only solution – will absolutely wreck the whole financial system of the US, without a doubt.

What is more important:

The recovery of the US as a productive powerhouse, employing millions of Americans in reborn industries?

Or keeping alive a rotten, insolvent, bankrupt and corrupt financial system?

Do you want an America that is alive, working and prospering at work?

Or do you want to continue in the present situation of decay and eventual collapse, which is inevitable if the solution is not applied?

Yes, the financial system has to go down the tubes. The National Debt and its 16.8 Trillions will be cut to about 1/7 of its present weight.

In exchange, Americans get life and opportunity; a way out of this miserable situation, which will become impossible sooner or later anyway.

This is the meaning of gold at $10,000 dollars per ounce for the average American:

A reborn US, bursting with opportunity and jobs for everyone.

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Inflation Propaganda Exposed

Economists who hold the popular view that expanding the money supply will provide the best medicine for our ailing economy dismiss the inflationary concerns of monetary hawks, like me, by pointing to the supposedly low inflation that has occurred during the current period of rampant Fed activism. In a recent blog post aimed specifically at me, Paul Krugman noted that the sub 2.5% increases in the Consumer Price Index (CPI) over the past few years are all that is needed to prove me wrong. In fact, Krugman and others have even suggested that the CPI itself overstates inflation and that the Fed would be better able to help the economy if less strict methodologies were used.  However, there is plenty of evidence to suggest that the CPI is essentially meaningless as it woefully under reports rising prices.

Magazines and newspapers provide a good case in point. The truth has not been exposed through the economic reporting that these outlets provide, but in the prices that are permanently fixed to their covers. For instance, from 1999 to 2012 the Bureau of Labor Statistic’s (BLS) “Newspaper and Magazine Index” (a component of the CPI) increased by 37.1%. But a perusal of the cover prices of the 10 most popular newspapers and magazines (WSJ, Washington Post, Time, Sports Illustrated, U.S. News & World Report, Newsweek, People, NY Times, USA Today, and the LA Times) over the same time frame showed an average cover price increase of 131.5% (3.5 times faster than the BLS’ stats). This is not even in the same ballpark.

Some defenders of the BLS may conclude that prices were held down by the availability of free online news content or the convenience of digital delivery. But that is beside the point. Prior to the digital age, the BLS could have claimed that newspaper costs were held down by public libraries that provided free access. It’s also true that online publications deliver less value on some fronts. Not only do many people enjoy the tactile process of reading physical newspapers or magazines, but they offer the secondary value in helping to kindle fires, housebreak puppies, pack dishes, and line birdcages.

Another stunning example is found in health insurance costs, which is a major line item for most families. According to the BLS we can all breathe easy on that front because their “Health Insurance Index” increased a mere 4.3% (total) in the four years between 2008 and 2012. Interestingly, over the same time, the Kaiser Survey of Employer Sponsored Health Insurance showed that the cost of family health insurance rose 24.2% (5.5 times faster). But even if the BLS had reported higher costs, it wouldn’t have made much of a difference in the CPI itself. Believe it or not, health insurance costs are assigned a weighting of less than one percent of the overall CPI. In contrast, the Kaiser Survey revealed that in 2012 the average total cost for family health insurance coverage was $15,745, or almost one third of the median family income.

If the BLS could be so blatantly wrong in reporting the prices of newspapers and health insurance, should we believe that they are more accurate on all other sectors? If the inaccuracy of these two components were consistent with the rest of the CPI’s components, inflation could now be reported in double-digits!

Even more egregious than the manner in which prices are currently reported is the way that CPI methods have been changed over the years to insure that most increases are factored out. Since the 1970’s, the CPI formula has changed so thoroughly that it bears scant resemblance to the one used during the “malaise days” of the Carter years. Main stream economists dismiss criticism of the changes as tin hat conspiracy theories. But given the huge stakes involved, it’s hard to believe that institutional bias plays no role. Government statisticians are responsible for coming up with the formulas, and their bosses catch huge breaks if the inflation numbers come in low. Human behavior is always influenced by such incentives.

The newer CPI methodologies are designed to report not just on price movements, but on spending patterns, consumer choices, substitution bias, and product changes. In other words, the metrics have been altered to track not so much the cost of things, but the cost of living (or more accurately, the cost of surviving). But if you simply focus on price, especially on those staple commodity goods and services that haven’t radically changed in quality over the years, the under reporting of inflation becomes more apparent.

As reported in our Global Investor Newsletter, we selected BLS price changes for twenty everyday goods and services over two separate ten-year periods, and then compared those changes to the reported changes in the Consumer Price Index (CPI) over the same period. (The twenty items we selected are: eggs, new cars, milk, gasoline, bread, rent of primary residence, coffee, dental services, potatoes, electricity, sugar, airline tickets, butter, store bought beer, apples, public transportation, cereal, tires, beef, and prescription drugs.)

We know that people do not spend equal amounts on the above items, and we know their share of income devoted to them has changed over the decades. But as we are only interested in how these prices have changed relative to the CPI, those issues don’t really matter. We chose to look at the period between 1970 and 1980 and then again between 2002 and 2012, because these time frames both had big deficits and loose monetary policy, and they straddle the time in which the most significant changes to the CPI methodology took effect. And while the CPI rose much faster in the 1970’s, the degree to which the prices of our 20 items outpaced the CPI was much higher more recently.

Between 1970 and 1980 the officially reported CPI rose a whopping 112%, and prices of our basket of goods and services rose by 117%, just 5% faster. In contrast between 2002 and 2012 the CPI rose just 27.5%, but our basket increased by 44.3%, a rate that was 61% faster. And remember, this is using the BLS’ own price data, which we have already shown can grossly under-estimate the true rate of increase. The difference can be explained by how CPI is weighted and mixed. The formula used in the 1970’s effectively captured the price movements of our twenty everyday products. But in the last ten years it has been quite a different story.

If these price changes in our experiments had been fully captured, CPI could currently be high enough to severely restrict Fed action to stimulate the economy. Instead, the Fed is operating as if inflation is extremely low. As a result, they are making a huge policy mistake that will come back to haunt us. During the last decade the Fed spent many years denying the existence of a housing bubble, even as a mountain of evidence piled up to the contrary. That error caused the Fed to hold interest rates too low for too long, blowing more air into the bubble and imposing enormous negative consequences on the economy. The Fed, now similarly blind to the inflation threat, is repeating its mistake, only this time the negative consequences will be even more dire.

Apart from the statistical problems that hide inflation, there are also macroeconomic factors that have helped keep prices down despite the quantitative easing. Massive U.S. trade deficits and foreign central bank dollar accumulation mean that much of the printed money winds up in foreign bank vaults, not U.S. shopping centers. As foreign consumer goods flow in, and dollars flow out, a lid is kept on domestic prices. In effect, our inflation is exported as foreign central banks monetize our deficits and recycle their surpluses into U.S. Treasuries. The demand has pushed down bond yields which has allowed the U.S. government to borrow inexpensively. Of course, when the flows reverse, bond prices will fall, yields will climb, and a tidal wave of dollars will wash up on American shores, drowning consumers in a sea of inflation.

Unlike Krugman and the Keynesians, I would argue that it is impossible to create something from nothing. I believe that printing a dollar diminishes the value of all existing dollars by an aggregate amount equal to the purchasing power of the new dollar. The other side takes the position that the new money creates tangible economic growth and  that real economic value can therefore be created by putting zeroes onto a piece of paper. I think that those making such absurd claims should bear the burden of proof. For more on the interesting topic of hidden inflation, see my video that I just posted.

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The Greatest Transfer Of Wealth Ever

A vast number of people think that what we’ve been through during the last four years is just another episode in the economic crises history of the United States.  They believe a president has the power to continue the trend or reverse it.  So they put their faith in the next presidential elections.  They think their favorite candidate, whether Romney or Obama, will bring about the change they wish for.  So they go and vote.  Then, if their candidate wins they expect miracles from their leader until yet another economic event hits them and the dream fades away.  And so it goes every four years while the giant Titanic is sinking.

The reality of it all is that it matters little whether Obama or Romney becomes the president. Why?  Because – contrary to what we’ve been told – since 1913 the president or congress has had no control of our monetary policy.  The central bank has such powers.

During the last four years Mr. Obama has followed the policy of the Federal Reserve.  His major campaign contributors during 2008 elections are listed here.  If he wins, he will continue the same policy.  If Mr. Romney wins he will take over the torch because the money that funded his presidential campaign accepts no opposition.

I bring this up not to be political but to demonstrate to my readers that our next president won’t have the ability to fix the economic crises.  Therefore we should not rely on the government to make our lives and/or our children’s lives better. It is up to us to learn, assess, and prepare for the future by making educated decisions, while we still have the ability to do so.  Let me explain.

Sound monetary policy is vital to the economic recovery.  That is because it is the bad monetary policy that caused the problem, not once, not twice, but throughout history according to the Austrian School of Economics.  Asset bubbles form due to artificial expansion/inflation of money supply.  This is the key, this is the underlying cause.  When newly created (by the Fed) money – out of thin air – finds its way in the economy it flows into assets such as real estate, commodities, or securities.  The result is artificially inflated assets.  This is not sustainable.  If it was we would be trading houses today in the millions of dollars. It is not sustainable because in such a scenario the market forces would lead to a currency collapse.  If the bad monetary policy continues we will eventually end up with a dollar not worth a continental.

Since the real estate bubble burst there was no good monetary policy.  Money supply is still being expanded via bailouts and QE’s.  There was no good policy before either.  Such policy helped to induce the bubble.  A good monetary policy means stopping the creation of new money.  It means stopping the Fed’s printing pres, which in turn would cause the interest rates to go up.  Corporations would go bankrupt.  People and the government would be forced to live within their means.  Produce a lot, spend a little, and save more.  It would be painful.  Even though it would be temporary it would be necessary for a healthy recovery.  But again, it would be painful.  It means experiencing the withdrawal symptoms after years of addiction.  No politician wants to have that happen on his term.  Thus, the politicians will continue to kick the can down the road.

The question is what could potentially happen as a result of the failed monetary policy?  At least two problems.  Currency collapse and/or astronomical rise in the interest rates.  Both are conducive to loss of purchasing power for the average man.  Both require a pro-active approach in lieu of the common reactionary one.  I would not expect such approach from the government.  So, it is up to the average Joe to take the matter of his finances in his own hands.

I titled my article “The Greatest Transfer of Wealth” because such event is ongoing now.  Bad monetary policies destroy the working middle class.  It happened to the Romans leading to the collapse of the empire.  It happened to Weimer Republic in the early 1920’s leading to the rise of Hitler.  It happened to France, China, Russia, Argentina, Mexico, and most recently to the wealthiest country in Africa, Zimbabwe.  For a history on money and governments out of control read Daily Reckoning’s “Fiat Currency: Using the Past to See into the Future“.

Still not convinced?  Consider your net worth during the real estate boom and before the 2009 collapse of the stock market.  If your net worth is higher today you deserve to be congratulated.  You are in the 5% bracket.  If your net worth is lower today then you’re in the 95% bracket.

Within a few short years there’s a reasonable likelihood that the middle class will only keep its name.  In real life it will be partially or fully dependent on the government.  Being dependent on the government comes with strings attached.  Working a 9 – 5 job will not make the average Joe independent.  To get in the 5% minority bracket one must be truly visionary.  He must live his life unlike the 95% majority.  He must think like a contrarian and he must invest like a contrarian.

Because I spend my time helping people finance commercial property I get to be exposed to unconventional ways to increase wealth.  Whether they are in real estate equities or debt, in commodities or the stock market, the driving criteria is to buy when the majority is selling and to sell when everyone else is buying. There is an incredible opportunity today to buy quality real estate at extremely low prices.  Yet, the real estate market activity is supported mainly by investors.  Part is domestic and part being the citizens of other countries.

But the 95% doesn’t get it. They continue to keep their retirement with their stock broker.  They would rather have their hard earned money invested in the artificially inflated stock market.  They are now comfortable that the Dow Jones – and their retirement account – is getting close to the levels pre-2009.  Never mind the cost of living jumped up.  Never mind that there are investments in hard assets today which are considered by a few (the 5% bracket) less risky than the stock market.  Never mind that such assets produce a monthly stream of income better than most of the dividends paid by corporations. They won’t take the risk, or at least this is what they think.  In reality the risk is in following the conventional wisdom and maintaining the status quo.  American writer, Lillian Smith once said “When you stop learning, stop listening, stop looking and asking questions, always new questions, then it is time to die.”  So will be the faith of the average retirement account.

My goal is to share economic news with my readers.  Then, present them with possible solutions. Please note that any type of investment represents a risk.  It is your responsibility to research, learn, and evaluate whether any investment presented on my site is right for you.  At your request I put you in touch with the representatives of the companies I promote.   You should evaluate the company, the projects, and ask questions.  You should visit the property.  You should also seek advise from your accountant and/or a professional you trust before investing in any of the investment opportunities offered on my site.

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My Warning to Women: Get Your Questions Answered Before the Crisis Hits

By Gary North

In the United States, women outlive men by at least four years. In most cases, wives are several years younger than their husbands are. Combining these two statistical facts, we reach an inevitable conclusion: today’s wives are likely to spend more than half a decade as widows.

The reality of widowhood is that a woman will become dependent on somebody other than her husband unless she is fully in control of her faculties and her finances.

A woman who wants to remain independent in widowhood should understand from the day she gets married that she must learn the basics of family finances. The better she gets at handling money, and the better she gets at making money, the more likely she will retain her independence during the inevitable years of widowhood.

The problem is, people discount the future. They assume that the future will take care of itself, and that the future will be mostly positive. The trouble is, the older we get, the less likely that our future will be positive. The clock is ticking.

It is common in the United States for women to control the household budget. Couples should work together to establish spending and savings, although I don’t think this is as common as we like to believe. These days, programs like Quicken make it relatively easy to budget and to track a family’s spending patterns. It is easier than it was 20 years ago, and surely easier than it was 30 years ago. It is common for wives to handle the Quicken accounts. The question is this: Do wives have equal input on how the money comes in, and do they have equal input on what should be done for the long-term support of both of them in their retirement years?

We think that people act in their own self-interest, but we find that people prefer to defer. They prefer to kick the can down the road. They prefer to imitate Congress. The trouble is, the decision of Congress to kick the Medicare can down the road guarantees that the vast majority of women who are alive today will spend their final years as complete dependents on their children, and that they will probably be destitute.

There really is no escape from this statistically. We know the Medicare system is going to bankrupt the government, and therefore we know that the Medicare system will be modified so as to break the promises the politicians have made regarding the last years of our lives. There is no escape from this. It is going to hit every Western industrial nation. No one who looks at the numbers expects anything else.

Nevertheless, the vast majority of wives in the United States and the West do not begin to assert co-authority over the spending patterns of their households, despite the fact that they will be alone in their final years. They refuse to make decisions today that might give them a degree of protection in their old age.

One of the reasons why I favor the purchase of investment real estate is this: in people’s old age, the houses are owned free and clear, and the rental money is gravy. A person who owns half a dozen homes free and clear is going to make enough money to have a comfortable middle-class lifestyle in retirement. I realize that not everybody can own half a dozen homes, but everybody who subscribes to this website can.

One way or the other, wives are going to have to make decisions over where the money goes. They can begin to make these decisions in joint consultation with their husbands today, or they can wait until their husbands are dead.

Twenty-five years ago, Mark Skousen’s wife JoAnn published a newsletter for women. It focused on investing. The newsletter did not gain enough subscribers to stay in business, and so she ceased writing it. It was a very good newsletter. It was quite relevant. It didn’t matter, because she couldn’t get enough women to subscribe.

About that time, I interviewed Charlotte Foehner. She was the author of a very good book called The Widow’s Handbook. Her targeted audience was women like herself. Her husband had died unexpectedly, and she knew virtually nothing about investing. She had enormous responsibilities, and these responsibilities hit in a time when she was most psychologically vulnerable. Her husband was dead, and she had to put his affairs in order. He should have done this before he died. She should have insisted that he do it before he died. He didn’t, and she didn’t.

Answers can be painful. Answers increase the level of personal responsibility. Nobody can claim ignorance if someone has answered a major question. People think that they are better off by remaining in the dark, because they assume the problems are not going to hit them, and they might as well not think about it.

This is the attitude of the vast majority of Americans today. If they had any idea of what will happen to them, statistically speaking, more of them would start asking questions. But they don’t know, and even if they did, they would not like the answers. The answers would force them to restructure their lives. Answers would force them to restructure their dreams.

The fact that women become dependent on their husbands early in their marriages, because women have to take care of the family, gets them into a mentality of dependence. It is easy to become dependent upon the husband’s decisions. This has been the traditional approach throughout most of history. But with the vast increase in the division of labor over the last century, and with the increased life expectancy of women, this tradition is now a liability for women.

A woman has got to face statistical reality. She is going to be a widow in the final decade of her life. She is going to have to make her own decisions, and if she is incapable of doing this, either mentally or financially, somebody else is going to make her decisions for her. Traditionally, this has meant her oldest son and her daughter-in-law. She may trust her oldest son, but she has to face the reality of potential vetoes by her daughter-in-law.

A woman who is determined not to be dependent upon the judgment of her daughter-in-law should face reality early. She has got to have an independent stream of income, and she has got to have somebody other than her daughter-in-law making the decisions about how this stream of income is going to be allocated, and by whom.

Anyone who does not have an independent stream of income is inevitably going to be dependent. Any woman who does not want to be dependent upon another woman, especially a younger woman who resents the added expense of a mother-in-law, had better take great care in building a separate estate for herself in her old age.

Look at the median net worth of American families. Adjusted for inflation, it has not risen in 20 years. Most of this wealth was in the family’s home. That’s why it peaked in 2007.

This includes all age groups. Older people have more money. Whites at age 65 probably have about $225,000 in net worth. It was higher in 2007. Then the housing bubble popped.

http://www.agingstats.gov/agingstatsdotnet/Main_Site/Data/2010_Documents/Docs/OA_2010_Updates_123010.pdfThis is the measuring rod. Each family should assess its net worth.

How long will you last in retirement? In calculating this, add to expected expenses the replacement of Medicare, which on average pays $900 a month per household member. That was in 2009. It’s higher today; medical costs keep rising. Figure $1,000 per person per month. Two members means $2,000 a month. That is what it will cost to stay alive and healthy after age 65 when Medicare goes bust, which it will.

Who will be able to afford this? For how long?

If a person sells his home to pay for medical costs, where will he live? Add another $1,000 a month for rent. But medical costs will not decline.

Preparing for retirement is not easy. It involves asking questions. Any woman who does not ask questions is basically saying that she is content to live under the jurisdiction of her daughter-in-law in her old age. She had better have a financially secure daughter-in-law, and that daughter-in-law had better have her mother-in-law’s best interests at heart.

It is better to ask questions now than to be told what to do later.

Note:  Gary North is one of the most brilliant men I know.  He is a virtuoso in the field of economics and investing.  Check out his website at http://www.garynorth.com/.   Also, if you’re thinking of investing in real estate click HERE to read the criteria for my Turnkey Real Estate program.

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The Three Requisites For A Real Estate Recovery

If your life revolves around real estate you’re probably wondering when will the real estate market bounce back. And even if you’re not directly involved in real estate you’re most likely wondering when will you be able to sell your property for a price above your loan balance.

So, if you’re like most people and listen to the news you would have heard this. The Federal Reserve has lowered the interest rate to revive the depressed real estate sector.  Low rates would get people to buy and others to refinance.  Buying would lead to more housing demand thus helping builders and realtors.  Refinancing would help consumers increase their net disposable income.  Therefore, these folks would start spending which in turn triggers demand in other consumer areas and blah, blah, and blah.

It may not be obvious to the untrained eye that our Keynesian anti-free market government and its media disciple have it backwards. What they don’t seem to understand is that in order for people to buy houses they must be financially able. Not only that but they also must have the security that their job will be there and their employer will still need them for a while.  When nine out of a hundred people (or more realistically seventeen out of a hundred) are jobless, the majority of folks don’t think about the “American Dream”.  They think about how they’ll be able to keep food on the table and keep a roof, any kind of roof, above their heads.

Then we have the Joe Smiths who may want to move and buy a new home but they can’t just seem to be able to sell their current ones.  Their homes are either under water or there is no demand to buy at the price they think is fair.  So the Joe Smiths will have not much of a choice but to stay where they are.

Reality is that few people today have a sense of prosperity.  As a landlord myself I see how my tenants are suffering through this economy.  As a commercial mortgage broker I can’t help noticing the challenges some of my clients experience. Heck, my work and my investments are affected by the people I work with, my tenants and my clients.  As you can see there is a Domino Effect that impacts all of us.  So, what is the solution then?

Get rid of Regulations

In order for the real estate market to get better there are some underlying fundamentals that must occur. First, we must see a business friendly environment encouraged by the government. In this case the government’s job is to slash most of the burdening regulations so that entrepreneurs can put their creative minds into action and bring new enterprises to life.  We definitely need the small business and the wonderful benefits of competition.  This will create employment and will fill commercial real estate vacancies.

Lower Taxes

Secondly, we need lower taxes not only for businesses but for all taxpayers. The businessman must profit in order for him to stay in business. Otherwise there is no incentive for him to take such challenge and risk. As far as the individual, he knows best how to spend his money, he doesn’t need the government to do it for him.  When the individual has more disposable income he can then direct the spending in the areas he finds it most beneficial.

Get rid of Moral Hazard

Then we have the all so predominant Moral Hazard.  The Wikipedia defines moral hazard as “a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk. Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions.”  What I am referring to is the corporate welfare which entails the “generosity” of the government when bailing out insolvent corporations.

This matters because when Fannie and Freddie get bailed out it doesn’t allow the market to work in its natural course of events. It matters because when the Fed buys the banks’ bad assets it takes away the banks’ incentive to efficiently discard those properties to investors for the prices established by the market.  Thus we have banks sitting nonchalantly on portfolios of foreclosed and non-foreclosed (but non-performing) assets.  Why such behavior?  Because they already sold their bad loans for a higher (than what the market dictates) price to the Fed.  They have the money in reserves so why hurry?  Ask a realtor who sells foreclosures or short sales what it’s like to work with the banks and you’ll get the real picture.

That’s it, folks, this is what must happen before we dare to even think of a real estate market recovery.  Without getting rid of regulations, without lowering taxes, and without eliminating the corporate/bank welfare I don’t care what the laymen journalists say or predict. It’s all wishful thinking.

A final note.  Implementing one or two of those requirements would somewhat improve the real estate market but in no way will bring it to a full recovery.

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The Real Cost Of Not Owning Gold

By Felix Moreno de la Cova
via GoldMoney

Bloomberg recently published an illustrative slideshow titled “The Real Cost of Owning Gold”.  As usual when dealing with precious metals, in an attitude that is widespread among the mainstream financial press, the tone is dismissive, disdainful and almost mocking of those that advocate ownership of hard assets – and especially gold.

The reasons for this hostility are fairly obvious.  First, ignorance: precious metals have been out of fashion for over 30 years, and financial analysts (average age 35) know little about them.  Most would have came of age, professionally and intellectually speaking, during the early part of the last decade – at a time when gold investors were the crazy-old uncles of the investment world: deemed irrelevant and backward-looking by fashionable opinion.

A large majority of these analysts will have Economics degrees from well-respected universities, where they will have been taught that gold has no role in modern economics. They will then have likely received masters and further financial and accounting qualifications that promote “Modern Portfolio Theory”, and the idea that the investment world starts and ends at splitting money between stocks and bonds – with young investors encouraged to sink most of their capital into stocks, while older wealthier individuals are pushed into the “safety” of bonds.

The second and perhaps most important reason for the press’s antipathy towards gold and precious metals are their advertising incentives. Financial institutions, brokers and the financial press simply do not know how to make money from selling, buying or trading gold. In fact funds spent on gold have little turnover and earn few commissions, especially compared to banks’ favored products. Gold is just too simple. It does not require a PhD to understand, it doesn’t respond to complex valuation models, and it doesn’t generate juicy IPO flow. It just sits there, making portfolio managers and financial advisers almost obsolete.

Thirdly, and it is difficult to gauge how significant this factor really is, there is a positive and fierce dislike of gold for ideological reasons. As Alan Greenspan himself recognized in his famous essay Gold and Economic Freedom, those with a disposition towards deficit spending and Keynesian economics find gold a huge obstacle in pursuing their agenda of wealth redistribution and central planning. This antagonism, even if not always conscious, permeates much mainstream economic opinion on gold and is made explicit in the writings of some prominent opinion leaders.

A common accusation and one that is repeated in the aforementioned slideshow is that gold investors (or savers) are some kind of cult or religion. The juxtaposition is always between “faith” or “belief” in gold, versus “reasonable” investments.  Gold owners are said to suffer from paranoia, or misguided and superstitious “gold fever”.

I would contend that the opposite is true. Knowledge of economic history, understanding of counter-party risk, experience of inflation, awareness of systemic risk and how it affects our interconnected global financial systems and a rational desire to protect wealth from all these factors is what eventually leads many investors to gold.  The irrational faith is that placed in central banks and fiat currency in spite of overwhelming historical precedent.  As James Turk once wrote, it is central banks that are the real barbarous relic, not gold.

The Bloomberg presentation does mention some aspects worth considering, such as insurance, transport, storage and appraisal.  A gold buyer must consider all of these aspects carefully, but no more than the buyer of any other “hard” asset such as a house or a valuable portrait must.  Unlike financial products that are often no more than annotations in an electronic ledger, real stuff needs looking after.  Gold is, however, quite a bit easier to store, transport, assay and insure than most real estate or fine art, and companies like GoldMoney make it even simpler and cheaper.

Other objections are so ridiculous as to hardly warrant a mention, but I do find it comical that Bloomberg should worry about gold holders suffering from “anxiety” any more than holders of any stock. Continue to read.

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FHA Loans In The Hands Of Elected Politicians

By Peter Schiff

Yesterday, for the second time in less than a year, I was
invited to Washington to testify in front of a Congressional
Committee that was contemplating regulatory moves to aid the
struggling economy. This time around it was the House
Subcommittee on In­­surance, Housing and Community Opportunity
that asked for my views on Federal Housing Administration’s
(FHA) policy in the apartment lending market. Although this
is a fairly narrow issue, I told them the same thing I did
last year when I testified about job creation.

Peter Schiff Goes To Washington – Round 1

Government programs don’t solve problems, they just create new ones. While I
thank the Committee for inviting me, I believe the congressmen may have gotten
more than they bargained for. I can apologize for shaking up what would have
otherwise been a sleepy and forgettable proceeding, but I won’t apologize for
trying to inject respect for the Constitution and free market capitalism into a
venue that has been doing its best to destroy both.

I have edited down the more than 2 hour hearing into a package of slightly more
than 30 minutes. This includes all of my testimony and some of the more
noteworthy exchanges I had with the congressmen. The seven other people who
testified besides me all represented the many interest groups who benefit from
FHA loans. I represented only the interests of U.S. taxpayers, a group that
congressmen usually don’t hear from when considering legislation.

Peter Schiff Goes To Washington – Round 2

This video should give all Americans a better idea of how insulated Congress
is from the American taxpayers who are being asked to pay for the government’s
spending and borrowing. If you share my concerns, share this video with a friend.
Viral videos have a singular power to influence the national conversation. Let’s
get it started.

The Real Crash: America’s Coming Bankruptcy—How to Save Yourself and Your Country

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