Sunday, July 26, 2009
Saturday, May 02, 2009
It looks like the banks have off-balance sheet items which is odd to me as I was taught that a balance sheet is a spotlight on a businesses financial standing at a moment of time. So what is this off balance sheet thing? Why is it not included? If it would materially dwarf the details if brought in, then you can have balance sheet for the various entities and a consolidated balance sheet which gives the full picture. What is so reasonable about that? All publicly listed corps are supposed to be transparent. If you want to avoid that, then go private!
Off balance sheet = something to hide
The US national debt is being ramped up beyond the ability of the US government to pay. And yet more is being added to the debt. And what is the money being spent on? Is it something that will increase valuable final products? It seems not as I have not heard of new towns being built and new farms and new factories or the infrastructure put in to allow the current industry to produce more. I admit I am unsure of how this would be accomplished. Tendrils of thought come through that geothermal energy would be good, wind farms, solar farms seem a good idea. For California I would advocate a means to handle the potential water shortage. Desalination plants, water conservation schemes, would also help make it possible for production to occur.
Food. It is said that the USA could produce enough food to feed the world. But at what cost? I may be off the mark here, but my understanding is that monoculture is destroying the soil and GM seeds are producing food that is not biologically assimilable. If the fertilizer supplies fail (oil?) then so will the crops. Hence rotating crops is needed.
Water. Climate change is altering the distribution of water. For example, Australia is suffering droughts which are lasting longer than they used to. New Zealand suffered 4 severe drought seasons in a row. Therefore, desalinization and irrigation are needed. This is a type of infrastructure that will boost farming and food and also provide water for towns as a by-product.
This is the food for thought for now.
Sunday, March 29, 2009
The Bubble That Must Burst
by Michael S. Rozeff
by Michael S. Rozeff
The bubble that must burst is a very, very large bubble. It is worldwide. It is co-existent with most nations of the world.
Like all bubbles, for a time it appears rational. It even seems to work. The bubble seems to bring all gains and no losses, and all at very low cost. The returns seem very high and never-ending. They attract the resources and allegiance of many because the yield seems so high.
But like all bubbles it cannot go on forever, because it is based on greed and gain extracted from other persons against their wills. It is a bubble based on extrapolative expectations that eventually cannot be sustained by reality.
What is this bubble? It is the bubble of constitutional and representative democracies that lack the consent of all of those being governed. It is the bubble of states that promise more and more social gains and cannot deliver upon these promises. It is a bubble of governments that are chain letters and Ponzi schemes. It is a bubble built upon robbing some to pay others.
All of these bubbles must, by the dynamic of their intrinsic nature, come to an end. They all must, by the necessity of facing reality, be deflated. And, in the process, the peoples of the earth will have to come face to face with themselves and will have to fashion new social and political relations.
The constitutional and representative democracies cannot be saved by changing the leadership, because they are based on rules of force that must come to grief. They cannot be changed by voting. No stable economy can be reflated by a central bank, and no stable nation can be reflated by voting in new leaders. Counter-intuitively, the government bubble will burst when more and more people do not vote and withdraw their support from a government based on unworkable and unjust rules of force.
Democracy, as people are now exercising it through majority force throughout the world, is rotten to the core. It is common within these government systems for people to rush to take advantage of anyone else they can, in their greed. Democracy has become one big speculative bubble, as many people have placed bets on an ever-expanding gain for themselves at the expense of others. This cannot go on indefinitely, so it is a bubble that has to burst.
Chain letters must come to an end. Ponzi schemes must unravel. The music must stop and there will not be enough chairs for all to sit on. Speculative bubbles must burst. Governments built upon ever-expanding circles of greed and gain must fail. Trees do not grow to the sky.
Deep down, we know this. We only hope that we will not be the one left standing when the music stops. We only hope the system will last another 10 or 20 or 30 years or whatever life we have left. We wish our children and grandchildren well, but we are secretly glad that we do not have to confront the problems we hope will be deferred to them and not fall upon us.
Why must bubbles burst? Basically because they cannot pay off according to our expectations.
Take the housing bubble as an example, but a bubble in growth stocks works in the same way. Changes in expectations cause price changes. If we think houses will rise in price, we are more inclined to buy them. This makes the price rise. It reinforces our expectations and draws in new buyers. Many causes of changes in expectations are possible. In the U.S., we had lower interest rates and the authorities encouraged re-financing at lower rates. In some places, new house building was restricted as in California. House prices started to rise. This started a speculative move in which people started bidding house prices higher. This was concentrated in a handful of states. Some areas grew because they had a real business boom. The idea got around, from several sources, that prices were rising. People had extrapolative expectations. They thought that what was past was prologue. These expectations self-reinforced for a while, even years.
Eventually, the reality sets in, which is that the asset cannot rise too fast in price indefinitely. It sets in for a number of reasons. Builders build houses at much lower replacement costs, drawing demand away from the high-priced houses. They also build more of the high-priced houses than there are buyers. Rentals begin to look relatively less expensive. The market runs out of new buyers, because prices are high compared to wages and salaries. Other investments begin to look relatively more attractive. Interest rates rise. Speculators begin to sell out what they had bought earlier in order to take profits. The bubble bursts, as it has to.
People are expecting a big profit, or a high yield from the house purchase. That is why they buy at high prices. They think they are going higher. When people count into their calculation of a high yield the expected future price gains, as in buying high-priced growth stocks or high-priced houses, they are pouring money into these assets thinking they have higher yields, and they are bidding the prices up so as to get those yields. In the process, the yields are falling. The whole price process is driven by what is in their minds because it's all what they expect will happen in the future.
Greed for gain comes to grief. Many people and institutions borrowed heavily to take advantage of the housing bubble. It was like the stock margin buying in the 1920s. All of those that used so much financial leverage should fail. We who did not should not be made to pay them for their greed and mistakes. All the ones that took out asset insurance from counterparties that had no assets – they erred in their evaluations too, and they also should bear their own losses or fail. Innocent people shouldn't be paying for the mistakes of others. All the ones that can't pay for their houses now and are under water should face the consequences themselves. They too blundered. No one should be made to bail out someone else.
This is not the way of most governments, however. Bailouts are the way. The attempt is to find chairs for those left standing. The chairs have to be stolen from those who were prudent enough to sit down earlier before the music stopped and the game of musical chairs ended. Governments today routinely violate basic human rights to life, liberty, and property.
Government bailouts are the government’s absorption of the housing bubble into its own social security bubble. This hastens the bursting of the government bubble.
Generations before us started the government bubbles that now rule us. They bet on government. They saw gains coming down the pike as they collected their Social Security and built their subsidized houses and drove on their subsidized highways and grew their subsidized crops, all through subsidized loans. They saw gains from favoring labor and executives and public schools. The bubble grew because shifting coalitions bid up the power of government and collected the gains. Voters psychologically buy into the government bubble. They have extrapolative expectations. They think that they will secure the gains that the earlier generation managed to extract. But those gains are in their minds. They are unpaid promises made by their officials. Who will pay for those gains? Who will pay for the bailouts, the health care promises, the retirement promises, and all the other trillions upon trillions of guarantees being liberally handed out? The bubble has to burst. There’s only so much gold in them thar hills before the price of extraction rises beyond its worth.
One can do no wrong by buying a house that is going up in price, or so it appears. And one can do no wrong by endorsing a government that provides a rising stream of benefits, or so it seems. Why not buy a second home or a third? Why not borrow to buy them? And why not expand the government and get more benefits? Why not have the government borrow to provide them?
Government in its current form is an overpriced growth stock. It is paying dividends out of contributions forced out of newcomers to the game and extracted in countless ways from the dividend recipients and obtained from borrowing. It is promising a rising stream of future dividends, while itself producing nothing of value.
When the value of the obligatory debts exceeds the value of the assets, the enterprise is insolvent. The owners walk away from the assets. When government debts exceed the value of the social benefits, people will walk away from the government. Many already have, in a variety of ways. Why pay more than what something is worth? Why invest any emotional capital in an institution one regards as unfit, unjust, inefficient, intrusive, irrational, unworkable, and ineffective?
Government is now an insolvent enterprise. Government is a Ponzi scheme. Government is a fraud. Government is a bubble that must burst.
That being the case and while there is still time to think without the pressure of rapidly changing events, we can only benefit by exploring and considering a wide range of social and political options that are in accord with basic and sound principles of peace, liberty, justice, and rights. A period of revolutionary reconstruction lies ahead of us. We should not be reflating the government bubble that will burst; we should not be reflating the forces of domination and greed exercised through and by coercive government.
We should be shaking off the myths, fallacies, errors, and wrong turns of the past. We should be stating, and reinstating, and advancing those principles that can shape societies along sound lines. There are sound ideas that came along with constitutional governments, but they have been shunted aside and diluted. Consent of the governed, all of the governed, is one of those principles. This implies a second principle: Government without claim over territory, or an end to the idea that a sovereign has a right to claim rule over a territory and every person and thing within it. No person can rightfully be made a citizen of a government without his consent and by virtue of the place where he happens to live.
The internet can be a model of what is to come with respect to getting to a much-reduced arbitrary and non-consensual governance and a situation where social interactions are freed from unnecessary coercive restrictions. People can freely join whatever societies of persons they wish throughout the globe in a way that surpasses the force-ridden idea of territorial domains. The internet has no such territorial borders, and such borders only reinforce coercion as well as being the product of coercion. The internet is breaking down those borders as it opens up communications.
The bubble governments of the present have vastly intruded upon social matters. They have made the social into the political in areas where they have not obtained the consent of all. There is a large enough and difficult enough realm of governance without government absorbing society. There are all sorts of disputes, conflicts, and crimes that require governance and justice procedures. Libertarians have thought long and hard about how to preserve and improve these governance systems, even as the non-consensual features of the present bubble governments fall by the wayside when these bubbles eventually burst. Libertarians have thought long and hard about rights, rule of law, due process, and property rights. This thinking needs to be continued, questioned, tested, ramped up, restated, refined, integrated, and understood even better. The government bubble is going to burst, and we will need this and more thinking in order to cope with the coming opportunities to remake social and political relations.
March 26, 2009
Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.
Copyright © 2009 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.Michael S. Rozeff Archives
So this lays out the theory. Now to lay out the practical of how to protect oneself and take advantage of the opportunity - in an ethical way.
Sunday, March 01, 2009
Please watch this.
So I did. And I decided to look into it a bit.... and replied...
That is an interesting graph. And I thought he should have been indicating a lower point on the graph as my understanding was that housing prices had dropped by 50%. If he is right then there is more pain to come.
I have chosen to not keep a track of housing. A friend of mine told me to not buy a house unless it is for myself. But he preferred that I rent while saving up to buy a house when the time is right.
My question is. Why are house prices continuing to fall? Well the average income is $50,000 per year as of 2007. Rule of thumb is to use 25% for purchasing a house =$12,500 = $1,000 per month. This applied to a 30 year mortgage is a house worth approx 150,000. This should be the average price of a house in the USA. Currently it is about $250,000 (283,400 per economagic.com)
The banks have loaned out approx $250,000 on something worth $150,000 possibly based on a false reported income.
So, yes, that graph does have to come down to half its peak as only then it approximates what the average person can afford.
Now what makes this more interesting is to find out how many homes are empty. Because that can depress the market even more. An excess of inventory will depress the asking price.
It does indeed look as if there is a long way to go. How can anyone try to fight such a market force? If inflation starts, then after wages increase, the two levels will converge, but right now, wages are being forced down by unemployment and voluntary salary decreases. So both graphs are heading downward.
It looks to me like someone needs to kick inflation into action. And they have already started it with a huge deficit budget. I have not calculated what portion is going into creating real value vs being re-distributed to the indolent. But there is certainly enough printing press money happening to start inflation counteracting the deflation! But that money is not yet floating into the economy so until it does, both graphs continue downward.
Now look what you got me into. An analysis and prediction model for Armageddon! I just might see if I can graph these and predict what the low point in housing will be.
Saturday, February 28, 2009
Money comes in many forms. There is the folding green stuff. There is your credit card. And there is your bank balance which can be accessed by checks, wires, debit cards.
This is the money supply. From this pool of credit (debt) and equity (positive bank balances) dips the commercial world. The more dips that are made, the better the economy runs. However, the flow of equity into that pool has not increased as peoples wages have been generally fixed. So to fill up the pool more, you had to convert th equity in your house into a loan and therewith bump up the account.
People are losing jobs. They have to cut their spending. There are fewer dips into the pool. So more people get laid off. And so it winds down.
Obama is supposedly stimulating the economy with this big spending package. But where is the money going?
Into banks is good as their cash levels need heightening as less money flows through the system. With a bigger cash reserve they can continue to open their doors and make loans etc.
Into welfare is a waste. Rather than promote businesses to create more jobs, it falls into the hands of the unproductive and buys no production. A better plan would be to fund a planting of a forest in the desert, or create a desalination plant off the coast so as to water crops.
Perhaps it is a difficult concept to grasp, but if you put money into the hands of a person who uses it to create more products (= more money) then you will get more jobs and more wealth in the economy which creates the jobs and wages that are needed. However, if you place the money in the hands of a person who spends it on food and clothes and fuel, it buys you nothing. It floats away into a million hands and creates nothing of value.
The USA is melting down. Useless industries are failing.
What is needed is the new industries that will retrain people into the new jobs of the future and create the facilities that will grow the economy.
There is more to this, but that will be later!
Friday, December 26, 2008
The economy is slowing down. This means that more people are holding onto their money and not spending it in the economy. Therefore sales are decreasing and firms are having to cut costs. Laying off employees is a very common way of doing so, except it might make more sense for the "down time" for the employee to be employed in promoting the services the company provides and emphasizing the value of the service, product, etc. This can increase cash flow.
The economy is slowing down. This also means that people are not willing to lend money to others as there is a greater risk they will not get it back. The receiver of the loan could go bankrupt, or spend the money on things that do not result in valuable, salable product. So there is a cautious atmosphere in the loans markets.
The above two factors are in themselves creating the pre-requisites for a "Great Depression". The more uncertainty there is in the market place, the more the brakes are applied to the flow of money. It is the lack of confidence in getting value for you money that creates the Economic Meltdown and the Great Depression.
So how do we engineer an economic recover? By providing items people have to have, at the highest price they can bear and by pumping the profit from your transactions into your business (more employees, materials, and promotion). This puts money into the economy in a constructive way. Money spent on TVs, cars, clothes, toys and gadgets is money lost to the economy as it does not directly provide jobs that create more value. it is not easy to think it through all the way to see how your product will create more value in the economy, but it does need to be worked out. In my next post, I will put in some examples of what could be good examples of ways to create more value in the economy.
Wednesday, October 15, 2008
If all went well there should appear above a book I recommend you get. The basics of economics should be well understood