Today’s selloff seems to have been a knee-jerk response to the claimed 30 margin on CME silver contacts but that was not a 30% margin rate increase, it was a 30% cash amount increase, from $5000 to $6500. The trigger was the three day rise of silver from $26 to $29 so the actual rate change was as computed below.

At $26.00, 5000 oz. of silver is $13000 of which $5000 is 38.5%. At $29.00, 5000 oz. of silver is $14500 of which $6500 is 44.5% therefore the rate increase was, at that moment, only 6%.

A truly factual report would have stated only that the dollar amount of margin had been raised. The rate, under any particular margin amount fluctuates with the price.

The following is how the proposal in the preceding post could be a stimulus for true economic recovery and generate enough tax revenue to offset the costs of the allocated unemployment benefits.

We are nearing completion of plans for a project to build a home that has a budget of $237,500 and which needs financing of $220,000. There is a cabin to be torn down so the utilities and septic are in place. If the bank requires the loan not exceed 70% of the appraised value of the completed project, that appraisal must be at least $315,000.

With a half acre of land on a county road just of #101 and 4 miles from town that should not be a problem except for the possibility that current sales may include foreclosures in the comps and the alleged market value will be less than the value needed.

What follows is a hypothetical situation.

If the appraisal came in $40,000 lower @ $275,000, then the maximum loan amount would be $192,000, a shortfall of $28,000, and the project would not be built.

I estimate the approximate labor costs for all the contracting cycles in building a one of a kind home at this budget at $40,000 for in house labor, $20,000 on site labor for subs and $30,000 at various shops and factories.

Now if every sub and off site producer had a third worker subsidized by this plan (assuming here that employers will be paying 50% more than the employee’s benefit) their labor costs would be reduced by 20% which is $10,000 that could be taken off the bids and prices. Our in house work would have new hires at a two to one ratio. That would have $27,000 of our labor costs reduced by $18,000. Costs are now down by the amount of the shortfall and the contract can be reduced accordingly.

The subsidy of $28,000 of UI benefit money, which would have been paid to those workers whether or not the project was built, would now enable $237,500 of economic activity to take place..

This is an 8.4X multiplier of the allocated subsidy followed by the economic expansion of the continuing spending by all the recipients of the project’s earnings, product sales and then the ongoing effects of their spending.

The additional taxes generated on the wages and incomes of the workers and businesses on the initial $172,000 activity would probably generate the 16% in taxes needed to offset the $28,000 benefit expenditure. After that, as the ongoing monetary velocity wave continued, it would be revenue positive.

This phenomenal economic growth leverage is created by using the stimulus funds to enable a prudently, 30% down, financed project to take place. It should be noted that the lent funds are at affordable bank interest, not 15% to 30% consumer credit and that the product far outlasts the term of the loan.

This is how true economic stimulus works. By financial liquidity permitting real product to be created by real people who than use their earnings to patronize more of the same.

© Peter Asher, 3 March, 2010

Putting Idle Hands to Work

If ever a situation existed to beneficially not “let a good crisis go to waste,” it is the current struggle by Congress to pass and pay for an extension of unemployment benefits. While they are doing this, they have the opportunity to “Make a Silk Purse out of a Sow’s Ear.”

In this gridlock over unemployment benefits and stimulus funds it should be realized that money itself is not a stimulus. It is the production that is enabled by money that is the real growth.  Unemployment benefits are (and have been) an ongoing stimulus shoring up the basic economy, Without those benefits, businesses providing basic needs would be observably under much more economic duress.

Envision if,  instead of job searching, competing with twenty to several hundred other applicants in an exercise in futility, unemployed people could use their time to create real product. While continuing to receive benefits for, say, six months, workers could be rehired by their former employers, who would pay them only the amount by which their former salary exceeded their current benefits. Several million pairs of idle hands could be put to work!

As so few of the unemployed are finding work, these benefit costs will be incurred whether or not such a program is implemented. This would be a grass roots stimulus, increasing profits and future productivity. It would also increase sales by making it possible for some businesses to lower prices. Greater monetary velocity, in a positive feedback loop, would contribute to rebuilding the economy. Extra workers on a production line would result in less cost-per-unit. Extra waiters or baristas would result in faster and better service. People could build storage facilities, set up a more efficient shop, or do whatever else might make for more productive utilization of labor. Employers could then be clamoring for workers, reversing the current hiring situation.

For their part, employers would agree to no layoffs for one year. When rehiring, they would give priority to subsidized workers. Workers who could not be accommodated by their former employers could link to, and be found by, other similar employers through existing employment programs such as “iMatch Skills” in Oregon. Costs of long commutes could be handled by cash reimbursements, tax-free to the worker but deductible by the employer. Any excessive commuting time could be credited to the 40-hour work week.

Unlike other jobs plans that are sector-specific, this plan spreads its stimulating boost across the broad spectrum of the economy. This could be the evasive, sought after “kick start.”

An estimated 2.7 million are due to run out of benefits by the end of April. Assuming $10,000 each for the six months, a 27-billion-dollar cash stimulus would create not just 27 billion dollars worth of new production, it would create the amount of product that would be generated by the implementation of 27 billion dollars in added labor. This far greater amount of productivity would generate substantial additional tax revenue to offset the costs.

The growth in GDP might even make it revenue-positive!

© Peter Asher, 1 March, 2010

Updated 14 October 2009

If all Mortgage, bank loan and credit card agreements had truthful warning labels they would read as follows.

“Warning!  The entity lending you this money may potentially lend so much of its product to so many borrowers that the inability of many to pay back their loans could trigger events that would cause you to lose your job or business income and become unable to pay this debt.”

Well they didn’t, of course, so where might the responsibility lie for those who now are unable to pay their mortgage or credit card debt because their job or business income has diminished or vanished due to the reckless lending of their creditors?

(The lenders product, of course, is not THEIR money; it’s the funds of savers, investors and bond holders. The defaults cause distress on both sides of the equation; lost earning ability for the producers and defaulted yields for the investor/savers.)

The two driving forces behind the lending policies that caused this debacle were the desire for more business and the ability to earn money on loan origination fees and then pass on the risk to others.

In ‘Atlas’ Francisco says:” Some day my friend you will learn that words have exact meanings.” Corollary: Actions have exact words to properly describe them

There is always talk of debt bubbles and credit bubbles but what transpired was actually a lending bubble. Giving credit is the act of lending money for profit. The definitive action that caused the economic debacle was lending entities investing more funds into the credit market than the quantitative economy could service. This was exacerbated by so much of the lending being given for consumptive activities in relation to that which was lent to facilitate production.

A normal economy sees lending investors getting their returns on income and the gross available capital for lending is consistently being replenished. When substantial lending capital is defaulted on, then the economy contracts and businesses earn less and jobs are lost.

Today, at http://www.globalresearch.ca/PrintArticle.php?articleId=15657        an article by Mike Whitney said in part:

<<<”Consumer credit is falling fast. In July, consumer credit plunged by $19 billion, followed by an August drop of $12 billion, a 5.8 percent annual rate. Credit card spending decreased by nearly $10 billion in August, while non-revolving debt, including auto loans, fell by $2 billion. Credit has shrunk for 7 consecutive months, the longest period of decline since 1991. The banks have shrugged off their commitment under the TARP program to increase lending to consumers and businesses. They’ve either deposited their excess reserves with the Fed, where they earn interest,or invested them in the equities markets for better returns.The bottom line: Credit is shrinking and the economy is slipping further into deflation.”>>>>

Any lender who has lent to unworthy borrowers, having debtors whose incomes have diminished due to events resulting from those reckless lending practices. has contributed to the debtor’s loss of income. It therefore follows that, if those debtors had been fully able to service there debt before their earnings suffered from their creditor’s actions, then those creditors could logically be required to reduce or eliminate the debt.

If, say, twenty million people, suffered an average loss of $50,000 dollars, there could then be a one trillion dollar class action lawsuit!

by Peter Asher © Feb. 8 ’09

Imagine the largest freight train ever assembled, careening down a mountainside without brakes and 90% of the cars, allegedly bearing gifts, are carrying lumps of coal. Should it be let free to plunge into the terrain below or should it be derailed?

This freight train that we are metaphorically standing in front of is, of course, The Stimulus Bill whose debt impact will sweep away $780 billion dollars of energy from the economy and deliver a tenth of that to replace it.

Those who have loaded this cargo lack the understanding and comprehension of the economic mechanics that have created this current debacle because they rely upon alleged historical comparisons that are in fact contrasts. They do not observe the empirical data that is before them. In the great depression, less than half the population had consumer debt; and in1929 that amounted to $7.6 billion

The Hyperinflation of Germany took place in the environment of “the banks extended their swollen deposits and bank notes almost entirely to small group of entrepreneurs,  for the most part the officers and directors of the cartels who frequently owned or controlled the banks themselves.” Also, this was a domestic, not global economy and barely recovering from WWI. In this case, there was an extreme shortage of goods and productive capability to be “chased” by the expanding money quantity. Neither example from the past could be a model for policy in the present

At the zenith of the recent boom, there was neither a shortage of jobs nor an excess of inventory; the economy had risen in a state of equilibrium. The capability to produce goods and services expanded to the money supply allotted to it. What followed was that the economy that had attained equilibrium on the advancement of purchasing power inevitably contracted when that advancement could no longer continue. What had expanded to fulfill the demand of earnings-plus-advanced-payment, is now contracting to the demand of earnings-minus-cost-of-debt-service. What for decades was an economy built on, “Buy now, pay later,” has become, “Pay now, buy later!”

The magnitude of the shortfall of purchasing power is only understood when all the factors contributing to it at the peak are recognized. The debt bubble is common knowledge but the transfer of spending power through asset turnover is not quantified nor recognized for what it really is.

From the earlier post: The amount of economic expansion built on advanced credit will be followed by an equal and opposite amount of economic contraction.

“The stock market crash is not just a loss of asset value; it represents a contraction of the spending derived from wealth transfer. Monetary velocity is a phenomenon of goods and services being delivered in return for currency; ergo, no commerce, no velocity. Velocity is slowed down due to falling asset prices because those wishing to sell assets (savings) so as to become spenders reluctantly remain savers. They do not want to spend their assets at a depressed value.”

Any economic activity suffering from insufficient income, absent increased sales or reduced costs of production, must look to reduce the cost of overhead. The two forms of consumer overhead are debt service and taxes. While cutting taxes would be a stimulus as future after-tax earnings become higher, spending power would only come from whatever future earnings continue to be generated. At this juncture, this would be too little, too late.

Cutting the costs of debt service, however, generates instant purchasing power and continues for as much as thirty years. Under quantitative analysis it is by far the most powerful re-boot! The way to create new purchasing power without creating new debt is to refinance existing debt at lower interest.

Senator Mitch McConnell proposed such a plan a week ago.

Quote — “Under the mortgage plan, any “credit-worthy borrower could get a government-backed 4 percent loan. Details were not available, but Republicans have talked about having the government guarantee the 30-year loans for a year or two. Thirty-year fixed rates recently have been around 5 percent.”

“McConnell estimated Saturday that under his mortgage plan, the average family would see its monthly mortgage payment drop by $466 a month, or $5,600 a year.  Over the life of a 30-year loan, that’s a savings of $167,760.” I posted an almost identical version on Newt’s American solutions on Dec 8th which can now be seen in the post ” A Stimulus That Keeps on Stimulating.I added there, “those who lost their jobs or had major business setbacks could be given a year’s grace by amortizing a year’s interest into the loan which, in McConnell’s plan, would only raise a 4% interest rate to 4.13%”

McConnell’s plan was immediately attacked by Harvard economist Ed Glaeser and others by “false flagging” it as a plan to re-establish the housing bubble. Then there was Gov. Mark Sanford, R-S.C. with the inane statement “In the long run, it ain’t going to solve the problem. You can have a loan at 4 percent, you can have a loan at 7 percent, but if you’ve got too much debt, at the end of the day, there’s going to be an adjustment.”  He dismisses it as irrelevant whereas in fact an ongoing $466 per month X 50 million households would turn the economy around in a heartbeat.

We have a lenders bubble! They, the lenders, have “invested” in debt instruments in such quantities that at the existing rates the systemic economy cannot repay them. As in stock market, housing and tulip bulb bubbles, when there is no longer new capital to sustain them they collapse.

The nonpartisan Congressional Budget Office estimated that about two-thirds of McConnell’s proposed bill, which included cutting 10 percent tax on income up to $16.700 to 5 percent, would pump money into the economy by Sept. 30, 2010. If my proposed amortized 1 year grace period were included we would recover in a much shorter time. Reportedly, McConnell’s plan would cost $135 billion a much more workable sum for us to pay down in the future.

If enough awareness is quickly generated to bring public opinion and understanding to bear on enough members of Congress we might be able to derail this Runaway train. Simultaneously, as a society, we will hopefully not “forget history and become doomed to repeat it.” A new, rational consumerism could unwind the unserviceable debt load and Take America Forward into an era of renewed prosperity.

By Peter Asher   © 3 Feb ’09

For $ 820 billion we could do one, easy to administrate act that would:

Instantly jump start the economy to the tune of 6% GDP.

Create absolute additional tax revenue equal to the median income tax paid on $850 billion plus the additional tax revenue generated by a high monetary velocity rebound of the economy.

End all homeowner foreclosures for a year and resurrect mark-to-market values of mortgage debt.

Increase mortgage capital and eliminate the need for refinancing, thereby freeing up all available mortgage funds for resuscitating the nearly dead housing industry.

How?

Every primary residence homeowner submits his mortgage documents to the stimulus fund and the fund pays 12 months of mortgage payments DIRECTLY to the bank or mortgage service entity.

Freed up from the major portion of homeowner debt service, people will have the funds to spend or invest across the FULL SPECTRUM of the economy. Nothing will need to trickle down, up, or sideways! Business and the stock market will rebound, rehiring will swiftly occur and depressed government revenues will grow again. The excess housing inventory will not be added to and will be absorbed to make way for new construction to be marketed. A re-occurrence of the housing bubble can be prevented by the stricter qualifications now in place along with enacting regulatory and tax policies to curtail “flipping” and most of all by making mortgage originators responsible for the loans they underwrite.

As people will no longer need additional credit to make ends meet or acquire new goods and services there will be less demand for lending and interest rates will fall creating additional stimulus to the broad economy.

Finally, the cost of financing the rescue package will be mitigated by declaring that the twelve months payments, coming from the government and not from the taxpayer, therefore do not qualify for the tax deduction on principal residence interest payment. What will help the plan be palatable is that those who are struggling with shrunken incomes will have little or no to tax to pay while those who are still earning well will be paying back their top income bracket’s percentage, but not until it is due. Meanwhile they will have put those funds through spending or investing functions.

Another, albeit small, bonus will be that the advanced payment will create an extra reduction in principal equal to the interest rate percentage times one half of the twelve months of interest paid.

If anyone sees any downside to this, (Other than that those behind the “Agenda” would fight it tooth and nail) I would really like to hear about it

I was reading Gary North’s Issue 827 – January 27, 2009
BEN BERNANKE’S WILD RIDE (AND OURS)

He states “This money has entered the banking system. There are two
things the banks can do with this money: (1) keep some or all of
it on deposit with the FED, where the public cannot get its hands
on it; (2) purchase investment assets from the public, which
means that the fractional reserve banking process will take over
and turn the monetary base into spendable money. If the banks do
the second, the money supply will more than double. Prices will
then more than double. We will go over Inflation Falls.”

Well, if they do the first, we will have, as he and I have and others have said, default, deflation and depression. So, they must and eventually will do the second but that will NOT cause inflation.

When they decide to lend, WHICH IS HOW THE MONEY SUPPLY BECOMES A MONEY SUPPLY, who is qualified to borrow?

THE CAUSATIVE FACTOR OF THE COLLAPSE IS DEBT SERVICE. A collapsed economy cannot inflate its way out of debt service because the income out of which to service the debt collapses with it.

There is no way that any significant amount of FURTHER consumer debt can be qualified for, even enough to offset the current collapse. To generate enough CONSUMPTIVE money supply to apply upward price pressure is empirically impossible.

Unemployment is not a leading indicator; it does not appear at the beginning of a recession. Companies hold on to their employees in the early phase of a slowdown. Job loss is being touted as the measure of the recession but it is somewhat downstream in the destructive food chain. Not only that but IT FAILS AS AN INDEX OF THE QUANTITATIVE DEGREE OF CONTRACTION AS IT DOES NOT ACCOUNT FOR THE CONTRACTION THAT RESULTED IN JOB LOSS FOR ILLEGALS!

The stock market crash is not just a loss of asset value; it represents a contraction of the spending derived from wealth transfer. Monetary velocity is a phenomenon of goods and services being delivered in return for money; ergo, no commerce, no velocity. Velocity is slowed down due to falling asset prices because those wishing to sell assets (savings) so as to become spenders reluctantly remain savers. They do not want to spend the assets at a depressed value.

So how much contraction are we now experiencing from this? Big sticker items are purchased from savings accounts or asset sales, most probably the latter. Here on the Oregon coast we are seeing $300K lot sales falling through due to depressed stock value and then the $600K to over a million dollar construction projects that the potential clients could then qualify for don’t get built. That’s a lot of de-stimulus that is not staticized.

Obviously, whatever job creation or tax relief does get into the system, it will not manifest itself in any significant “savings” going back into the equities markets. So, a major factor necessary to re-build the economy to a working equilibrium is nowhere in sight.

In April 2000 I wrote “One man’s savings becomes only a perception while simultaneously becoming someone else’s spending money. The fattening up of the economy through this via was facilitated by the easy money on gains taken and the perception of wealth in positions held. That easy money fed a purchasing frenzy and the perceived wealth made it easy to let go of any other discretionary income. Naturally, as the seemingly endless cycle of Buy low/Sell high came to an end, that impetus ceased to exist.”

That was when we were entering the last recession. Then, by early 2001 ‘they’ embarked on the easy money equity finance and credit cards for all; kids included, and kept the machinery running until recently. So, now what is being seen by our leaders as “Too big to fail” is actually too big not to.

It’s as simple and as empirical as the action-reaction law of physics. THE AMOUNT OF ECONOMIC EXPANSION BUILT ON ADVANCED CREDIT WILL BE FOLLOWED BY AN EQUAL AND OPPOSITE AMOUNT OF ECONOMIC CONTRACTION.

In early 2001, on the USA Gold Forum a major debate raged over the then inflating money supply causing Hyperinflation. The following two posts were my view of the situation at the time and have turned out to be accurately predictive of what is now occurring and where, depending on what “They” do, it will go from here.

Feeding Leviathan: Sunday 1/28/01 8pm

It is the size itself of the American GNP and infrastructure that is the source of the dollar being the global reserve currency. This recent boom of historical proportions has created an economic animal of gargantuan size and akin to a biological animal, it must be fed and maintained in order to survive.

Recently, I said I would build a case as to why this and successive interest rate cuts will not be inflationary. In embarking on this crusade, almost as an infidel against the established order, I find that the inter-connectivity of economic events expands far beyond the bandwidth of the largest of viable posts. So to the reminder from Robin “That’s what they invented chapters for,” here is #1

New Loans For Old.

A few weeks ago, I mentioned that we had been solicited by our recently acquired mortgage holder to re-finance at a lower rate. This is a large mortgage granted on the basis of an excellent credit record, an appraisal and two months of bank statements. That’s it. Then in only six months they are asking to do it again and pay off any new unsecured credit debt to boot. Well we properly surmised that some lending body was well aware of impending interest rate cuts and seeking to lock in prevailing rates. Also, that the regulatory folks were still bending over backwards to make it easy for everyone to qualify. — Why?

This economy has been brought to it’s present size by unprecedented liquification of purchasing power and is now depended on that quantity to maintain it’s existence. But, some of the factors that contributed to this growth are tapped out. The two most critical are the stock market wealth factor and the record amount of credit.

Over at the Hall of Fame (There’s no such thing as money in the market) I’ve expounded at great length as to how one man’s savings becomes only a perception while simultaneously becoming someone else’s spending money. The fattening up of the economy through this via was facilitated by the easy money on gains taken and the perception of wealth in positions held. That easy money fed a purchasing frenzy and the perceived wealth made it easy to let go of any other discretionary income. Naturally, as the seemingly endless cycle of Buy low/Sell high came to an end, that impetus ceased to exist.

Simultaneously, the credit expansion having gone where no loans had gone before, tapped out at 125% mortgages and lending criteria that expanded to where there probably wasn’t a sane underwriter left on earth. That flow too is no longer in play. Therefore: My view is that these flows must be replaced and that the lowering of interest rates will perform that function rather then expand or inflate the economy.

Consider: While all that raging hormonal spending power was feeding the beast we did not have rampant inflation. I have maintained that the exact cause of price inflation is the “power to command price” by whatever means that power can be obtained. The “Textbook” claim that this power derives from “too much money chasing too few goods” is simplistic, misleading and out of context to the whole.

Now, if ALL increased Money Supply were loaned to consumers to purchase EXISTING Goods that would be true. But economics is NOT a static event. Price direction will be determined by the net differential resulting from the effects of all outstanding supply and demand factors. This can be clearly visualized by looking at the mechanics of jet and rocket propulsion. The term “For every reaction their is an equal and opposite reaction” is a ‘law’ of physics but does not describe the phenomena. When combustion take place in a chamber with a hole in it, there is equal pressure on all the surface of the chamber EXCEPT the hole. It is the pressure on all that surface that moves the chamber AWAY from the direction towards which the hole is facing, not the jet going out the hole.

So, a multiplicity of causes and effects are constantly in play and the resultant creates the price direction. What appears to happen is that a particular excess is observed to have taken place and is then assigned as the “Cause : of some phenomena that is synonymous to the excess. A perfect example is Mundell’s claim that European money flooding into our stock market created our economic boom. (European’s ‘invested “purchasing rights” are transferred to American stockhlders to spend.) Now, he may have concluded that without that inflow we wouldn’t have had the boom but the boom was a result of the summation of ‘all’ the factors. It was also created by the !00-125% mortgages, but those were not ‘the’ cause either. If the Government had locked the doors of Microsoft and the economy crashed, would that have “Caused”it, or simply altered the balance enough to offset positive flows existent at that moment?

The Hyper-inflation of Germany took place in the environment of (as recently posted) “the banks extended their swollen deposits and bank notes almost entirely to small group of entrepreneurs ….for the most part the officers and directors of the cartels who frequently owned or controlled the banks themselves.” Also, this was a domestic , not global economy and barely recovering from WWI. In this case, there was an extreme shortage of goods and productive capability to be “chased” by the expanding money quantity.

Fast forward to today and you see acres of manufactured homes, John Deeres, Caterpillers,— Stuff! INVENTORY! Financed by debt and seeking consumers funds. We have a domestic and global PIPELINE filled with goods that can clamor for the dollars in the float. Even the exponential energy costs are mainly transferring purchasing rights from Walmart shoppers to Fuel suppliers; that is as long as every one keeps the job that enables them to service the debt.

The “Big Turkey” that can be targeted to keep Leviathan fed is the composite of holders of debt instruments. “New loans for old” may cut down on their spending but no production line shuts down unless in a market niche that is selective to that demograph..

In the above Mortgage situation the offered re-fi at a lower rate, as the early loan did also, would free up purchasing power for us and the paid-off lender would have to re-loan his funds at a lower rate of interest earnings. Given the principle is unchanged, no new money is created but we the producers are liquefied and they, the interest owners have their belts tightened

A nation of tapped out debtors, asset rich and stressed to service debt would all benefit from Hyperinflation. However, Asher’s Third Law of Ecodynamics states “Any activity that creates gain without production can empirically only benefit a minority.,” Therefore in this current endemic situation, the ratio of buying power to available goods, necessary to inflate, cannot exist.

If the food-chain necessary to sustain this behemoth falters, then — Contracted buying power, lot’s of debt, no sales, need to raise cash, nation wide garage sale; =Deflation!

Waiter: “…and for you, sir?”
Uncle Sam: “We shall have the hyperinflation.”
Waiter: “Sorry sir, we’re out of the ingredients to make it.”

Burping Leviathan
HYPERINFLATE THIS!
@ Perplexed, Turbohawg & tg

“Getting the money into the hands of the great unwashed,” requires lots of water (liquidity) and soap (low interest). Our recent foray into the “Carwash” that I referred to last month, pencils out as follows:

Two vehicles, one domestic, one foreign; were traded in for new ones. Both were similar to the old ones in price range and type (more bells and whistles) but still averaging only about 5% more for a median 4 year period. The loans had an average of a year to go to payoff with a balance due of $10,000, and the trade-in values, after negotiating and figuring in overheating- testing positive for hydro-carbons in the engine for one and multiple job-site dings on the other, totaled $17,000. After paying off the current loans that left us with a net credit of $7000. By signing some papers, no money out of pocket, we drove away with $52,000 MSRP, purchased for $46,000. Therefore after deducting the $7,000 of credit we were issued new loans totaling $39,000.

Now, the $10,000 dollars that was “destroyed” had been yielding its investors an average of 10.4% but the new $39,000 that was “Printed” is only yielding it’s suppliers %7.2. Furthermore, the old loans ran five years, and the new ones (Lease) run seven, the final four being at the lessor’s risk as we can walk away at lease end. Meanwhile, we have new upgraded vehicles, back on warranty with no threat of known and unknown multi thousand repair bills, new tires and two full tanks of gas. And along with all that savings of deferred maintenance and the comfort and luxury of the new vehicles, our net monthly payments are —–$60.00 LESS! The only ‘cost’ is what will be due after the dates the old loans would have been paid off. At that point we will have the new debt, but also newer equity. So there you have a microcosm, The money supply went up $29,000 and the cost of servicing debt went down.— It’s the future commitment that went up!

This is how Leviathan gets fed morsel by morsel. The new, cheaper money created, reimbursed Ford and Subaru for one unit produced. So far though, all this liquidity created has only resulted in giving the beast a good burp and he immediately asks for another helping.

The phenomena of msg#: 46783, 1/28/01,
>>> you see acres of manufactured homes, John Deeres, Caterpillars,— Stuff! INVENTORY! Financed by debt and seeking consumers funds. We have a domestic and global PIPELINE filled with goods that can clamor for the dollars in the float. <<< was confirmed by last week’s announcement that GM is shutting down 14 out of 26 production facilities till June or July because they “reached a crucial 100 day level of supply in the pipeline

The hard-core physical fact is that all that money washing around the inflationist’s ankles is not enough quantity to pressure the demand side of the price equation. The great millennium tool-up is still holding up Leviathan’s body weight and he is in need of more nutrients than he is receiving. These are not the ingredients for Hyperinflation Stew!
Possibly it is the high dollar that generates the import demand, driving foreign production to keep cranking out the stuff and sending it to us for the credits. Could it be that what is holding off the proclaimed “Run on the dollar” is that whatever state our economy is in, as regards it’s ability to service it’s fiat debt, we constantly stay more desirable then the Asians and Europeans and their travails.

We “Don’t have to outrun the Bear”, we just have to outrun all the others!

Even if the Government plan could restore the job count to its prior peak, the massive service of debt load that bled off consumer spending power will still be present. Added to that will be the new government debt for the stimulus. Until debt is paid off in FULL the monthly payments on most loans continues to drain consumer spending power at the same amount. Taxpayer funded spending, to the degree that it enables some of the current unemployed to spend and service debt, will at best, mitigate the downward spiral, forestall some loan default and then, only till the money runs out.

Any economic activity suffering from insufficient income, absent increased sales or reduced costs of production, must look to reduce the cost of overhead. The two forms of consumer overhead are debt service and taxes. Cutting taxes does stimulate as future after-tax earnings become higher but this will be too little, too late. Spending power evolves SLOWLY from whatever future earnings continue to be generated.

Cutting the costs of debt service generates instant purchasing power and continues for as much as thirty years. Under quantitative analysis it is by far the most powerful re-boot!

See “A Stimulus That Keeps on Stimulating” and other posts for more understanding.

Comments are encouraged: Much thinking and writing is generated by responding to the thoughts and observations of others.

The Prime Enabler — Ponzzi Paper — Written in 2000

Money can’t be “Printed” if no-one borrows it. The three basic categories for qualification are income, collateral and credit history. The income was the easy one. A few weeks’ pay stubs or a few months’ bank statements (formerly good for only high risk/interest) became the norm in lieu of two years of tax returns.

The collateral is where the miracle was performed: Paper Wealth! The phenomena of the brainwashed majority pumping their weekly and monthly savings through the stock markets, was the tide that raised all wealth boats. Also, the easy profits from the market money pump contributed to additional collateral via rising home prices. Home equity collateral was then expanded by 100-125% mortgages. This was the equivalent of the 10% stock margin leverage of the Twenties, just being collateralized with different security.

The expanding collateral loan base and easy qualifications liquefied the composite credit world so that almost anyone could subsidize income as needed by additional borrowing to service debt. All the folks “Good Credit “history then became the primary factor for loan qualification and for loan solicitation. This third factor has also applied to the whole world of credit cards, not just secured loans. Certainly, the advent of the derivative enabled all this loosening of loan qualification requirements. The thing is, a derivative itself is only as good as the ‘credit’ of its writer. If events cause the bulk of this “insurance” coverage to come due, those same events may include there being no money to pay it.

Now Steve asks “who caused it and what they stood to gain by it?” Before this last 10/12 year period, most mortgages stayed with the original lender. Suddenly, it seemed, mortgages were being sold and resold. Rather then being created for an income stream, mortgages are now most often created to be an instrument to sell at a mark-up. Declining interest rates are what makes this viable. Mortgage paper behaves as bonds do, when interest rates drop, the yield factor increases the asset value of the paper. Notice that the latest rate cuts have not spread into mortgages and other long term paper. As interest nears the bottom, the yield advantage of earlier written paper becomes less likely to hold into the future.

Meanwhile, though, the writers and subsequent sellers of mortgages are “off-the hook” as soon as the paper is out of their hands. Add to that the dominance of the market by large outfits with scores of loan agents only concerned with their commission and putting the most positive of ‘spins’ on loan applications sent to the underwriters, and you have the easiest money in history.

The conservative banker with his eye on the balance sheet has been replaced by Alfred E. Newman, the mortgage salesman saying “What; me worry!”

Allocation of Capital

Circa 1999/2000 a question was asked: “Do stock markets always allocate capital wisely?

How about first asking the question? What capital is being allocated other than that which is invested in IPO’s?

Other then the above, all stock market activity is as follows.

“A record breaking amount of discretionary income has detoured through the equity markets. Specifically, the earners of that income, instead of “saving” it or spending it on consumption or production capitalization, have decided to reimburse an owner of shares in a company. Then the seller of those shares makes the decision to consume, capitalize or spend. Ergo, money “flows through” the stock market rather then being “in” it.

—” money does not flow into “working capital.” What is lost on the multitude who think they are “Investing in a company’ is that “capital investment is only generated by the original issue of the shares and everything after that (99.99% of stock trading) is an after-market of reimbursement. While some insiders selling into the hands of the foolish public are officers of corporations holding large share positions, the majority of distribution is from speculators that are more connected and wiser than John Q. But all of this is money changing hands for the possession of corporate shares at , in most cases, prices bearing no resemblance to the intrinsic value of the ownership. —“stock shares are another one of the major currencies. —- spending stock market profits is, in effect, spending some of the investment money of the guy you sold it to. He doesn’t have it any more. It’s not “in the Market.” What is “in the Market” is what he gets when he sells it. So, in a sense, stock securities are a global currency like dollars, francs, marks and yen,” The stock market has become a ‘Money exchange’ and has become the new “Opiate of the masses.” Empirically, I would define it as “A betting pool wherein people trade equities in a competition for each other’s money.

Written 16/Jan on americansolutions.com. in answer to comments that were questioning these observations.

One more time on “Zero Sum.” Regardless of what is done with the capital, the market, at the moment of a transaction being executed, transfers purchasing power from one person to another (Minus the commission BTW) ALL that changes is what the new owner of the funds chooses to do with it. No new purchasing power has been created and the new owner of the funds was DEPENDENT on the ability and desire of the former owner of the funds to transfer them. If there are NO owners of funds willing and able to transfer them than those shares at that moment have no value! What I consider to be the SIGNIFICANCE of this is that a lot of planned expenditure is based on this technical DOUBLE ENTRY: that being that one party has the funds and the other party also perceives that he has them.