They are celebrating at the Fed. They have slayed the evil dragon called deflation, for now at least.
Deflation is a horrible thing for people in debt, because it quickly can increase the amount of debt that is felt...or to put it another way the dollars you owe suddenly are worth more.
We are debtors, both individually and as a nation. Our debt burden is high, although currently sustainable, it grew at a rapid pace last fall when the dollar began climbing against almost everything.
The Fed set out to kill this deflation, because it is bad for business.
They invented some money for the banks. Doesn't really exist, never did. If you really understand the banking industry, the banks were allowed to invent a bunch of money on paper (never printed) to replace a bunch of money they lost on paper which never really existed in the first place.
The government didn't give them money, they gave them permission to commit monetary fraud. Nothing being paid back ever, they called it a capital injection...funny.
They had the luxury to do so. With all of the money being burned up suddenly in the subprime meltdown, they could "print' a huge sum of money at once, and never have a tremendous effect through inflation because you're only printing what's suddenly been lost.
I think America lost their outrage against this giveaway when we remembered that we have no clue how a bank works, how the Fed works, how the system works. We are clueless, and we have too many people shouting confusing things in our ear each day that we just shrugged our shoulders and turned our attention back to other stuff. Do you believe that America would care about the bank bailout if they found out all that happened was just a little erase/rewrite allowed on the books of specific banks?
We did it again, America, we let our elected leaders play economic god. They decided which banks get their money back (or more) from a mess most of them created, when a bank that might not have created the mess goes under as a consequence. We let them do it.
So they are blowing party horns and popping the champagne, because the dollar in your pocket is worth less than it was a few months ago.
Here's betting that they'll slowly let inflation get out of control, to the point that everyone's starting to get worried, and then they'll pull the emergency brake on the economy (with severe and quick increases in interest rates) which will stop the inflation, and they'll hope they do it quick enough to keep the economic momentum going.
This is what they are planning. They want to slowly make your money be worth less and less, so fewer people are underwater on their mortgage, so we owe less money to China and Japan (and social security recipients). If they do it long enough, wages will start to increase, because it will cheapen the cost of labor for American business.
It will work, only because most people don't know what's going on under their nose. I have faith in this, because of how many times we have let them get away with it. Paul Volker was the Fed chief under Reagan, and he was the one to quickly and dramatically raise interest rates. It killed the inflation from the late 1970's. This same man, Volker, is the chief of Obama's Economic Recovery Advisory Board. Their job, is going to be to decide how much to inflate and when to stop.
Inflation is a hidden tax on all of us, and if we keep letting our leaders put more and more burden of this tax on our shoulders, they will eventually overload us and this world will collapse.
I mention that our current level of debt is sustainable, which is to say that the debt we've already written as a nation could be paid off eventually, if we suddenly decided to live within out means as a nation and stopped borrowing altogether.
Our debt burden as a nation is (rounding down a little, I believe) about 10 trillion dollars. Takes your breath away, but think of it a few ways.
Our debt - 10 trillion
Our population - 300 million
That leaves each of us owing 35 grand or so in debt, as our burden of being part of this nation, I suppose...or our negligence in electing whom we have...you pick.
35 grand, we could pay this off in a few years. I'm not saying we will, but it could be paid back. That is, if we quit borrowing.
The truly scary thing is not the current size of our debt, but the rate at which it is increasing. If we keep up at this pace, we are going to witness a complete economic failure, not only in the United States, but the world. A complete collapse, a shutdown.
Another way of looking at our debt, compare it to GDP, our country's "salary' in layman's terms.
National debt - 10 trillion
Payments on the national debt each year - 164 billion
US GDP - 14 trillion
Compare this to a family bringing in $140,000 per year having a total debt of $100,000 (including home, cars, everything) and having monthly payments (interest only) of $136 per month.
This isn't an unbearable burden, yet, but at the rate we're letting it grow, it will eventually be unbearable.
Sunday, July 26, 2009
Wednesday, July 22, 2009
Oil? Keep it
Won't it be nice someday to actually say...oil? No thanks, we don't need it. You'll see it, assuming you're going to live the next 20-30 years.
Oil is about to be marginalized...not discarded entirely...but greatly marginalized.
The main reason oil is so necessary is it's the most efficient way of running ICE's (internal combustion engines). It's easily made into a pumpable fluid, and packs a lot of btu's per weight.
Coal hasn't cut it for ICE's. It can be made to run through a liquification process, but it's not efficient. Coal worked fine for ECE (external combustion engines) like in coal powered railroad engines...but there's a limit to how small you can make ECE's and still provide some power. It doesn't work for cars.
Enter ethanol? Nah
Enter hydrogen fuel cell? Nah
Enter Energizer.
Batteries about about to solve a lot of problems with oil. If you could plug in your car at night, and run it for 10% of the cost of gasoline, wouldn't you? If you could run your car without thinking about the gas station, wouldn't you?
It's going to be possible. Electric cars haven't worked in the past because they haven't been able to store enough energy. They either had no power, and were slightly heavier than a golf cart, or had no capacity to run for long distances.
That has changed
http://www.teslamotors.com/
Tesla has made a car, albeit extremely expensive, that gives you power comparable to a sports car. Check it out.
We have just begun to see the potential for electic motors, because we have just begun to see the potential in new and improved batteries. Nanotechnology is starting to give us lithium ion batteries with 10 times the storage capacity as today's. That means that laptop you're using will have 40 hours of battery life, with a battery as heavy as the one you're using now.
The Tesla is using old technology...imagine what they'll be able to power when the get new technolgy to the market.
Oil will be just another resource just like coal or bananas in our lifetime. It's going to happen. It will lose its value as indispensible.
I personally won't miss oil, will you?
Oil is about to be marginalized...not discarded entirely...but greatly marginalized.
The main reason oil is so necessary is it's the most efficient way of running ICE's (internal combustion engines). It's easily made into a pumpable fluid, and packs a lot of btu's per weight.
Coal hasn't cut it for ICE's. It can be made to run through a liquification process, but it's not efficient. Coal worked fine for ECE (external combustion engines) like in coal powered railroad engines...but there's a limit to how small you can make ECE's and still provide some power. It doesn't work for cars.
Enter ethanol? Nah
Enter hydrogen fuel cell? Nah
Enter Energizer.
Batteries about about to solve a lot of problems with oil. If you could plug in your car at night, and run it for 10% of the cost of gasoline, wouldn't you? If you could run your car without thinking about the gas station, wouldn't you?
It's going to be possible. Electric cars haven't worked in the past because they haven't been able to store enough energy. They either had no power, and were slightly heavier than a golf cart, or had no capacity to run for long distances.
That has changed
http://www.teslamotors.com/
Tesla has made a car, albeit extremely expensive, that gives you power comparable to a sports car. Check it out.
We have just begun to see the potential for electic motors, because we have just begun to see the potential in new and improved batteries. Nanotechnology is starting to give us lithium ion batteries with 10 times the storage capacity as today's. That means that laptop you're using will have 40 hours of battery life, with a battery as heavy as the one you're using now.
The Tesla is using old technology...imagine what they'll be able to power when the get new technolgy to the market.
Oil will be just another resource just like coal or bananas in our lifetime. It's going to happen. It will lose its value as indispensible.
I personally won't miss oil, will you?
Where should I put my money?
I've been asked, by people who ignored my advice in the past, what they should be doing with their money now.
Well, right now your money should be in the market, since I recommended since February. We're experiencing a relief rally. We are toward the end of this rally, so it's probably too late to reliably buy back in right now...but there will be another serious buying opporitunity in the next 6 months.
I think this rally's going to peak at a Dow of around 10,000. It's scratching on 9K now, so I'm thinking by the end of August, we'll be there.
At this point, move stuff into more secure things. The Dow is not about to start churning like a steam engine. It's going to be up and down for quite a while still. Be smart.
If you're looking to park money long term, Caterpillar is the best option for you. With the stimulus money being thrown around, as well as the stimulus the Chinese are going to throw...it means more roads, more bridges, and more heavy equipment to build them with. Get it?
I'm not sure what will really bring the snap back in the markets...perhaps a rash of bank failures related to the commercial real estate??? Probably won't be any large banks...they bailed from that industry a long time ago. It's the mom and pop banks taking this one on the chin.
Whatever causes it...the markets will churn back into reverse before 2009 is out, so don't get greedy.
Well, right now your money should be in the market, since I recommended since February. We're experiencing a relief rally. We are toward the end of this rally, so it's probably too late to reliably buy back in right now...but there will be another serious buying opporitunity in the next 6 months.
I think this rally's going to peak at a Dow of around 10,000. It's scratching on 9K now, so I'm thinking by the end of August, we'll be there.
At this point, move stuff into more secure things. The Dow is not about to start churning like a steam engine. It's going to be up and down for quite a while still. Be smart.
If you're looking to park money long term, Caterpillar is the best option for you. With the stimulus money being thrown around, as well as the stimulus the Chinese are going to throw...it means more roads, more bridges, and more heavy equipment to build them with. Get it?
I'm not sure what will really bring the snap back in the markets...perhaps a rash of bank failures related to the commercial real estate??? Probably won't be any large banks...they bailed from that industry a long time ago. It's the mom and pop banks taking this one on the chin.
Whatever causes it...the markets will churn back into reverse before 2009 is out, so don't get greedy.
My crystal ball
I can certainly go into more specifics, but as for what I see for the economic future for this country, and this world...
First, hold on and get ready for a ride...the next 20-30 years are going to blow your mind. The computer boom will be viewed as history as a small event compared to the materials advancements that are about to be made.
We're crossing over an age, in our lifetimes. From bronze, to iron, each time man has been able to make a material harder, stronger, or more useful than the period before, it represents a serious jump.
This serious jump that will change the world, is commonly called nanotechnology.
Without going into a great amount of scientific jargon, nanotechnology is the ability to build materials molecule by molecule, placing each one in the exact position to make material to the exact specifications.
Nature has been keying us in all along...that by building something with smaller materials and controlling how you build it, you can make things much stronger. A spider web has, pound for pound, greater strength that humans have ever built...or at least until recently.
I'll certainly go into greater detail about nanotech and what it will mean for your money later. What it will mean for society will be even greater. Imagine being able to build an airplane from material stronger than tool steel and lighter than aluminum? Imagine being able to fly a commercial sized airplane with only a battery. It's coming.
Carbon nanotubes are the first real usable application, and they're under serious and vigourous development as you read this...but it is only scratching the surface.
There is also going to be an enourmous explosion in systems biology, which will basically be treating patients and developing drugs using computer technology...since computers will eventually be able to map out a human body protein by protein.
I'll stay out of the gritty details...but this is where our world is headed. I hope America has enough genius left not wasted by public education to be able to take the lead in this scientific revolution.
First, hold on and get ready for a ride...the next 20-30 years are going to blow your mind. The computer boom will be viewed as history as a small event compared to the materials advancements that are about to be made.
We're crossing over an age, in our lifetimes. From bronze, to iron, each time man has been able to make a material harder, stronger, or more useful than the period before, it represents a serious jump.
This serious jump that will change the world, is commonly called nanotechnology.
Without going into a great amount of scientific jargon, nanotechnology is the ability to build materials molecule by molecule, placing each one in the exact position to make material to the exact specifications.
Nature has been keying us in all along...that by building something with smaller materials and controlling how you build it, you can make things much stronger. A spider web has, pound for pound, greater strength that humans have ever built...or at least until recently.
I'll certainly go into greater detail about nanotech and what it will mean for your money later. What it will mean for society will be even greater. Imagine being able to build an airplane from material stronger than tool steel and lighter than aluminum? Imagine being able to fly a commercial sized airplane with only a battery. It's coming.
Carbon nanotubes are the first real usable application, and they're under serious and vigourous development as you read this...but it is only scratching the surface.
There is also going to be an enourmous explosion in systems biology, which will basically be treating patients and developing drugs using computer technology...since computers will eventually be able to map out a human body protein by protein.
I'll stay out of the gritty details...but this is where our world is headed. I hope America has enough genius left not wasted by public education to be able to take the lead in this scientific revolution.
What Just Happened?
Anyone else still left scratching their head because of the last year in economics. I think only a handful of people really understand what we just went through.
In short, what just happened was a severe and painful deflationary event. It's the first one we've felt since the 1930's, so it's not surprising that we were walking in blind.
Everyone's heard of inflation, right? It's when our money is worth less and less every year. Deflation, however, seems a more rare animal.
To understand why we experienced this sudden surge in the value of money, you have to understand fractional reserve banking...which is no easy subject to wrap your head around. I can sum it up very quickly.
Fractional reserve banking is how banks around the world do business. They are allowed to simply "invent" money that never really exists. For all of the money they claim to have, they only have to have about a dime on the dollar.
When you bought a house and took out a mortgage, the bank lent you money they did not have. They did this because other banks will take this money as payment, so it's as real as a dollar in your pocket. So you borrowed 200 grand to buy your house, but in reality the bank only really had to have 20 grand to invent that money.
Seriously...this is really how it works.
Fastforward us to 2003. We were still reeling a little from the dot.com crash, and the Federal Reserve had interest rates really low for a long time in an effort to stimulate a faltering economy through the housing market. In sum, they printed a whole lot of money in a really short period of time, and this drove the markets artifically high.
Eventually, all booms must end, and the housing boom began to fail in 2006, and really hit full momentum in the summer of 2008.
The suddenly falling property values, along with mortgages written by true blood sucking morons, caused a massive amount of mortgage defaults...people just walking away from their homes and their obligations to the bank.
The banks then suddenly became stuck with more and more homes, and less and less real money. They began scrambling in the spring of 2008 to unload as many homes, and as many investments tied to homes as they could. This resulted in a logjam, because you had so many sellers and no buyers, the mortgages were essentially worthless.
If you remember that banks must keep a dime to back up a dollar of fake money, many of these banks were getting perilously close to falling below this. When this occurs, the FDIC seizes the bank and it fails.
The result of all of these banks experiencing "liquidity issues" is the value of money begins to rise. Suddenly, banks were offering unthinkable interest rates on savings accounts, they weren't making any home loans. Basically, in a banking way of thinking, there wasn't enough money to go around.
The Fed was certainly throwing new money at the problem as fast as possible, even inventing the TAF...which is a faster way to print money for banks...but they could not get ahead of the problem.
This deflationary pressure finally popped a growing commodity market, which had the added bonus of popping the crazy oil prices (thank god!)
All of this deflation came to a head in late September/early October...when Lehmen Bros. finally failed. This was the first indication that the American public felt something was wrong.
So the President goes on TV and talks of grave danger, Bernanke's on TV, and so is Paulsen saying that we're moments away from disaster if we dont' do something quick.
So what do we get? A massive bailout package...followed by the expected outrage. How can they bail out so and so if they can't help me???
What was the bailout package anyway? In short, the Feds allowed banks to write more fake money into their books, so they wouldn't get below the dime on a dollar rule. Nothing else...we didn't ship massive amounts of printed money into bank vaults, we didn't give them gold bullion...the system doens't work that way. We simply gave the banks permission to fake it for the time being.
It's certainly more complicated than that...but in a nutshell, that's what occured.
Since then, we've seen a gradual return to normalcy. Credit unfroze in early December. The pain we've seen in the economy had nothing to do with the credit situation, but more teh result of everyone panicking at once.
I'll say it again...the recession we're in was simply caused by consumers panicking over a situation they didn't understand, they stopped spending and started saving in a hurry. This broke the camel's back for a lot of manufacturers already teetering.
Things are improving, because people believe things are improving. Don't give too much credit to the meistro's that bailed out out banks...it was a cleverly orchestrated ballet, and we bought it.
"People often confuse economics with mathematics. In reality, economics is a study of psychology with a little math." Jzneff
In short, what just happened was a severe and painful deflationary event. It's the first one we've felt since the 1930's, so it's not surprising that we were walking in blind.
Everyone's heard of inflation, right? It's when our money is worth less and less every year. Deflation, however, seems a more rare animal.
To understand why we experienced this sudden surge in the value of money, you have to understand fractional reserve banking...which is no easy subject to wrap your head around. I can sum it up very quickly.
Fractional reserve banking is how banks around the world do business. They are allowed to simply "invent" money that never really exists. For all of the money they claim to have, they only have to have about a dime on the dollar.
When you bought a house and took out a mortgage, the bank lent you money they did not have. They did this because other banks will take this money as payment, so it's as real as a dollar in your pocket. So you borrowed 200 grand to buy your house, but in reality the bank only really had to have 20 grand to invent that money.
Seriously...this is really how it works.
Fastforward us to 2003. We were still reeling a little from the dot.com crash, and the Federal Reserve had interest rates really low for a long time in an effort to stimulate a faltering economy through the housing market. In sum, they printed a whole lot of money in a really short period of time, and this drove the markets artifically high.
Eventually, all booms must end, and the housing boom began to fail in 2006, and really hit full momentum in the summer of 2008.
The suddenly falling property values, along with mortgages written by true blood sucking morons, caused a massive amount of mortgage defaults...people just walking away from their homes and their obligations to the bank.
The banks then suddenly became stuck with more and more homes, and less and less real money. They began scrambling in the spring of 2008 to unload as many homes, and as many investments tied to homes as they could. This resulted in a logjam, because you had so many sellers and no buyers, the mortgages were essentially worthless.
If you remember that banks must keep a dime to back up a dollar of fake money, many of these banks were getting perilously close to falling below this. When this occurs, the FDIC seizes the bank and it fails.
The result of all of these banks experiencing "liquidity issues" is the value of money begins to rise. Suddenly, banks were offering unthinkable interest rates on savings accounts, they weren't making any home loans. Basically, in a banking way of thinking, there wasn't enough money to go around.
The Fed was certainly throwing new money at the problem as fast as possible, even inventing the TAF...which is a faster way to print money for banks...but they could not get ahead of the problem.
This deflationary pressure finally popped a growing commodity market, which had the added bonus of popping the crazy oil prices (thank god!)
All of this deflation came to a head in late September/early October...when Lehmen Bros. finally failed. This was the first indication that the American public felt something was wrong.
So the President goes on TV and talks of grave danger, Bernanke's on TV, and so is Paulsen saying that we're moments away from disaster if we dont' do something quick.
So what do we get? A massive bailout package...followed by the expected outrage. How can they bail out so and so if they can't help me???
What was the bailout package anyway? In short, the Feds allowed banks to write more fake money into their books, so they wouldn't get below the dime on a dollar rule. Nothing else...we didn't ship massive amounts of printed money into bank vaults, we didn't give them gold bullion...the system doens't work that way. We simply gave the banks permission to fake it for the time being.
It's certainly more complicated than that...but in a nutshell, that's what occured.
Since then, we've seen a gradual return to normalcy. Credit unfroze in early December. The pain we've seen in the economy had nothing to do with the credit situation, but more teh result of everyone panicking at once.
I'll say it again...the recession we're in was simply caused by consumers panicking over a situation they didn't understand, they stopped spending and started saving in a hurry. This broke the camel's back for a lot of manufacturers already teetering.
Things are improving, because people believe things are improving. Don't give too much credit to the meistro's that bailed out out banks...it was a cleverly orchestrated ballet, and we bought it.
"People often confuse economics with mathematics. In reality, economics is a study of psychology with a little math." Jzneff
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