With Obama's recent decision to send $250 checks to seniors (link) it is easy to conclude that his administration has about the worst grasp on economics imaginable. Sending this money out in the face of a falling dollar and more importantly in the face of falling confidence by our creditors (that we actually have the stomach to right our sinking ship) leaves many of us utterly speechless.
The Chinese have continually voiced their concerns over the value of their $800 billion of US dollars, as have other countries. The BRIC nations have reportedly held secret meetings about how to move away from the dollar reserve and now several Latin American countries are working on their own means of replacing the dollar (link).
As many shake their heads wondering whether the administration could get any dumber, it occurs to me that maybe this is not sheer stupidity. Maybe...this is intentional.
Consider the fact the our debt and future obligations now add up to well over $70 trillion. Consider next that our GDP is about $14 trillion and even that is not enough to cover our annual expenses resulting in a $1.4 trillion deficit this year. The long and short is that we literally have no conceivable way to pay this debt off, ever! Let me say that again, the United States of America has so much debt that it can NEVER pay it off.
What does this mean? It means that our only two avenues of escape are 1) an official default on our debt which is unlikely (call it national pride) or 2) paying back our debt in devalued or better yet worthless currency. Either process is really a default but the second option, while probably more infuriating in the long run, still seems to be the most palatable by our fearless leaders, and more specifically the White House.
So let's imagine that the administration has decided to pay off our debt by drastically devaluing the dollar. How would the US do this? Since we are no longer on a gold standard (thanks to President Nixon) we cannot simply devalue the currency by repricing gold, which is how Roosevelt did it in 1934. Without the option to directly alter the value of our currency, what options are left to Obama?
The answer is to destroy confidence. Obama and Geithner have repeatedly touted their commitment to a strong dollar, yet at the same time the administration approves bailout after bailout, all the while promising the Chinese that we will stop our reckless ways just as soon as we can.
Is it possible that Obama's administration is quiety working to destroy confidence in the US economy and therefore encouraging the international community to reduce their appetite for dollars? By doing so the dollar falls in value (now approximately 20% less in just the last 7 months). Furthermore the constant touting of the importance of a strong dollar may be an effort to buffet or slow the speed of the currency's collapse.
Is it possible the government is trying to be clever here?
If so they are being terribly naive about what will happen to the country itself if the currency becomes worthless. Think Weimar or Zimbabwe if you want an example. Pray that they are not being clever.
Saturday, October 17, 2009
Friday, October 16, 2009
Listen to your gut
I live in the San Francisco Bay Area and over the last several years my wife and I have watched housing community after housing community built in virtually every pocket of open space. We have watched friends upgrade their houses and even looked at many of the model homes ourselves for fun. And let me tell you these houses were beautiful! Granite floors and counter tops, massive entertainment systems, generous garages to accommodate a workbench and all of the tools I could find at Home Depot. Like everyone else we salivated like the modern Pavlov dogs that we are.
But in the end there was something that I just couldn't reconcile. The average new home in the bay area was upwards of $700,000 to $800,000 which meant of course that many we walked through were over a million. Yet as I began doing a bit of math I was startled to find that these houses required roughly a $4,500 to $6,000 monthly mortgage payment. Granted many of these were being purchased with exotic mortgages but I still couldn't get past a fundamental question, "where is the money coming from?"
Consider that $6,000 a month (net) means a salary just shy of $100,000 per year. This JUST to cover the house payment. When you add the cars, the vacations, the furnishings, the entertainment systems, the kids, the restaurants, you would need a pretax annual income of at least $200,000, especially since taxes increase with higher incomes. In other words you need a higher income to maintain your net spendable cash. The capper is that this assumes a significant down payment which of course we now know was a stretch.
$200,000! How in the world were so many people making that much money? After all not everyone can be a Vice President. So I started asking this question of people who would obviously know. I asked real estate agents who drove these clients around, I asked mortgage brokers who processed their paperwork, and I asked financial advisors who managed their money.
In the end, no one really knew. There were explanations about how some people made money in equity from their last house, or how their parents living in the upscale peninsula would pull money out of their equity to help their children, but in the end no one had a firm grasp on how this was possible across the board. Of course now we know. Interest only loans, fraudulent mortgages, and credit that was as easy to tap as your water faucet.
The question here is how did we let this happen? Sure there were the financially astute like Peter Schiff and Meredith Whitney that did see this coming, but while most of us are not well versed in economics or debt servicing, couldn't we feel it in our guts? While I am truly sympathetic to those buyers who were preyed upon, didn't they at some point ask themselves "If I couldn't afford a house last year, why can I suddenly afford one now?"
Why do we continually ignore our gut instinct; the human ability to sense when something is wrong or just not quite right? In nearly all cases of a system collapse something did not make sense on a layman level. Option ARM loans do not make sense on a gut level and now we know why. Spending far more than you make does not make sense on a gut level, and now we know why.
We don't need to be a financial wizard to see a crisis coming. Frankly most of the wizards never saw this coming and now seem to agree that more debt is the way out of our existing debt problem. They are the poster children for overthinking a problem.
More stimulus, more borrowing, more spending. Forget what the media and government says, does this make sense on a gut level?
If you're still not sure look below at the national deficit chart from the Treasury and ask yourself again.
But in the end there was something that I just couldn't reconcile. The average new home in the bay area was upwards of $700,000 to $800,000 which meant of course that many we walked through were over a million. Yet as I began doing a bit of math I was startled to find that these houses required roughly a $4,500 to $6,000 monthly mortgage payment. Granted many of these were being purchased with exotic mortgages but I still couldn't get past a fundamental question, "where is the money coming from?"
Consider that $6,000 a month (net) means a salary just shy of $100,000 per year. This JUST to cover the house payment. When you add the cars, the vacations, the furnishings, the entertainment systems, the kids, the restaurants, you would need a pretax annual income of at least $200,000, especially since taxes increase with higher incomes. In other words you need a higher income to maintain your net spendable cash. The capper is that this assumes a significant down payment which of course we now know was a stretch.
$200,000! How in the world were so many people making that much money? After all not everyone can be a Vice President. So I started asking this question of people who would obviously know. I asked real estate agents who drove these clients around, I asked mortgage brokers who processed their paperwork, and I asked financial advisors who managed their money.
In the end, no one really knew. There were explanations about how some people made money in equity from their last house, or how their parents living in the upscale peninsula would pull money out of their equity to help their children, but in the end no one had a firm grasp on how this was possible across the board. Of course now we know. Interest only loans, fraudulent mortgages, and credit that was as easy to tap as your water faucet.
The question here is how did we let this happen? Sure there were the financially astute like Peter Schiff and Meredith Whitney that did see this coming, but while most of us are not well versed in economics or debt servicing, couldn't we feel it in our guts? While I am truly sympathetic to those buyers who were preyed upon, didn't they at some point ask themselves "If I couldn't afford a house last year, why can I suddenly afford one now?"
Why do we continually ignore our gut instinct; the human ability to sense when something is wrong or just not quite right? In nearly all cases of a system collapse something did not make sense on a layman level. Option ARM loans do not make sense on a gut level and now we know why. Spending far more than you make does not make sense on a gut level, and now we know why.
We don't need to be a financial wizard to see a crisis coming. Frankly most of the wizards never saw this coming and now seem to agree that more debt is the way out of our existing debt problem. They are the poster children for overthinking a problem.
More stimulus, more borrowing, more spending. Forget what the media and government says, does this make sense on a gut level?
If you're still not sure look below at the national deficit chart from the Treasury and ask yourself again.
Thursday, October 15, 2009
Our Future will be our Past
What in the world has happened to us?
Several years ago I began looking around at the other cars on the freeway and something struck me...where were all the old cars? I don't mean clunkers spewing black smoke with a window covered in duct tape. I mean the cars that were ten or fifteen years old and ran well. I owned a car like this when I was 20 and I drove the hell out of it.
How was it possible to have a freeway full of new and barely owned vehicles? When I was growing up in the 70's I remember someone getting a new car as a major household event. In fact when someone drove a new car home the entire block ran down to see it!
When I was a kid we had one phone, in the kitchen with a 15 foot cord and for privacy you had to stretch it far enough to close the bathroom door. We had one television set with 8 VHF channels and both cars in the driveway were very used. I watched Saturday morning cartoons with my brothers and sisters and then we found something to do for the rest of the day until dark. That included books, board games, football in the street or walking a few miles to the movie theater for a matinee.
Today houses have three or four televisions, each with hundreds of channels. In their rooms kids now have their own TVs, DVD players, computers and playstations. My friends now fret over when they will finally buy their 11 year old her own cell phone. I'm not kidding. It seems that kids need a cell phone for emergencies. I can't remember having emergencies when I was 11. When I had a problem I had to either go the school office, or to my mom.
Houses today look like mansions with sparkling cars in the driveway. The kind of cars teenagers drive today are equivalent to what I'm driving as a 41 year old father. My friends' vacations beat out anything I had ever heard of as kid. And this happens every year.
How is this possible? Well the short answer is...it's not. Where we have gotten lost is not just in our materialism but in the belief that this lifestyle, and this level of prosperity, is "normal". In fact in the minds of the general public, this is not even normal, it's simply expected. This lifestyle is now some kind of benchmark for what people are expecting the future to be. To make matters worse affordability is no longer defined by whether you have the money to purchase something, now it simply translates to whether someone has enough left to make the monthly minimum payment.
Unfortunately this reality is warped and terribly unsustainable, and deep down anyone over the age of 30 knows it. Society is driving a car whose gas gauge is on empty, facing a hundred miles of desert, and just ignored the last gas station. What no one talks about is that sinking feeling deep inside, the sense that we have pushed things way too far and are going to pay dearly for it.
Sadly instead of turning the car around, the country continues forward. We continue forward with the pedal to the metal for two reasons; 1) we don't know there is a hundred miles of empty road ahead, and 2) we're hoping for a miracle. A magic formula which, while not yet discovered, will ultimately deliver us from our reckoning with little to no suffering.
Everywhere I turn people are all speeding happily along, consoling themselves by regurgitating economic opinions from the market pundits, opinions that they don't really understand but somehow helps them feel that this is just a big bump in the road. That while there may have been some splurging those problems are being ironed out and soon we will be back to running our kids to all of their activities, buying them expensive clothes, and going out to dinner three times a week.
If you surround yourself with people who are doing all the same things, you don't just feel normal, you feel downright knowledgable.
I remember a math teacher in high school once told us that the reason we shouldn't copy off someone else's paper was because the person sitting next to you is probably wrong too. Today everyone is looking at each other for answers and affirmation. But deep down we have gone completely off the tracks and we know it. If you close your eyes you can feel it.
The reckoning is coming. And it will be that our future becomes our past.
Several years ago I began looking around at the other cars on the freeway and something struck me...where were all the old cars? I don't mean clunkers spewing black smoke with a window covered in duct tape. I mean the cars that were ten or fifteen years old and ran well. I owned a car like this when I was 20 and I drove the hell out of it.
How was it possible to have a freeway full of new and barely owned vehicles? When I was growing up in the 70's I remember someone getting a new car as a major household event. In fact when someone drove a new car home the entire block ran down to see it!
When I was a kid we had one phone, in the kitchen with a 15 foot cord and for privacy you had to stretch it far enough to close the bathroom door. We had one television set with 8 VHF channels and both cars in the driveway were very used. I watched Saturday morning cartoons with my brothers and sisters and then we found something to do for the rest of the day until dark. That included books, board games, football in the street or walking a few miles to the movie theater for a matinee.
Today houses have three or four televisions, each with hundreds of channels. In their rooms kids now have their own TVs, DVD players, computers and playstations. My friends now fret over when they will finally buy their 11 year old her own cell phone. I'm not kidding. It seems that kids need a cell phone for emergencies. I can't remember having emergencies when I was 11. When I had a problem I had to either go the school office, or to my mom.
Houses today look like mansions with sparkling cars in the driveway. The kind of cars teenagers drive today are equivalent to what I'm driving as a 41 year old father. My friends' vacations beat out anything I had ever heard of as kid. And this happens every year.
How is this possible? Well the short answer is...it's not. Where we have gotten lost is not just in our materialism but in the belief that this lifestyle, and this level of prosperity, is "normal". In fact in the minds of the general public, this is not even normal, it's simply expected. This lifestyle is now some kind of benchmark for what people are expecting the future to be. To make matters worse affordability is no longer defined by whether you have the money to purchase something, now it simply translates to whether someone has enough left to make the monthly minimum payment.
Unfortunately this reality is warped and terribly unsustainable, and deep down anyone over the age of 30 knows it. Society is driving a car whose gas gauge is on empty, facing a hundred miles of desert, and just ignored the last gas station. What no one talks about is that sinking feeling deep inside, the sense that we have pushed things way too far and are going to pay dearly for it.
Sadly instead of turning the car around, the country continues forward. We continue forward with the pedal to the metal for two reasons; 1) we don't know there is a hundred miles of empty road ahead, and 2) we're hoping for a miracle. A magic formula which, while not yet discovered, will ultimately deliver us from our reckoning with little to no suffering.
Everywhere I turn people are all speeding happily along, consoling themselves by regurgitating economic opinions from the market pundits, opinions that they don't really understand but somehow helps them feel that this is just a big bump in the road. That while there may have been some splurging those problems are being ironed out and soon we will be back to running our kids to all of their activities, buying them expensive clothes, and going out to dinner three times a week.
If you surround yourself with people who are doing all the same things, you don't just feel normal, you feel downright knowledgable.
I remember a math teacher in high school once told us that the reason we shouldn't copy off someone else's paper was because the person sitting next to you is probably wrong too. Today everyone is looking at each other for answers and affirmation. But deep down we have gone completely off the tracks and we know it. If you close your eyes you can feel it.
The reckoning is coming. And it will be that our future becomes our past.
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