Bone-headed Move

 

 

So tell me. What would you be doing today if you woke up to the news that your country has just seized up to 10% of your savings account from your bank? That is the decision that Cypriots are making today. And they are doing the logical thing, taking their money out. It is called a 'run on the bank'.

 

This is having a far-reaching effect. All across Europe, the idea has taken seed that it could happen anywhere. First Cypress, then Italy, then Greece, followed by Spain and Portugal and perhaps then Ireland. By then there would be a cascading effect and all of Europe would be in a downfall and soon thereafter, America, etc. The warning sign will be huge when the banks declare 'Bank Holidays', a closing of the bank to prevent people from coming in to make withdrawals.

We see our governments do stupid things and we feel relatively helpless as there is so little we can do. But when our bank account is tampered with, we can do something.

We put our money in the bank because we deem it to be a safe thing to do. When it is apparent that it is not safe, we withdraw. When enough people do likewise, the bank and the banking system collapses.

Today's markets, as of this writing, reflect a nervousness, mainly due to the banking sector taking hits. After all, if your mutual fund portfolio has bank stocks, and you think the banks could collapse, would you not withdraw?

It will be interesting to see where this leads. I have always maintained that it will take some seemingly insignificant event to start a ball rolling that will trigger a massive crisis in the world's finances. It could be something like this.

The Coming Fiscal Cliff

 

Since the election, the big story that is grabbing the attention of those of us who are political is the impending doom of the "fiscal cliff". This is the self imposed deadline for hitting the debt ceiling for the nation of the USA.

 

Let's say you are operating your household on a line of credit from your bank. They have given you a credit limit and you have gone right to the limit of that credit. But you are in debt, the bills are due, and that Cancun vacation is coming up soon. What to do? Normally, we would stop spending, try to earn more, or sell one of our children to the bank.

 

But the USA is not normal. They are 'out of control government'. What they need is not cuts, but a severe amputation, somewhere just below the ear lobes. What they are going to do is squabble about tax break expiration's, spending cuts and which social programs and 'defence' budgets will be cut as well as just how severely they can tax the rich without driving them all to Central American countries with their assets in a carpet bag. We are being assured that the lawmakers in the nation's capitol are hard at work hammering out a solution. 

 

Well, here is the solution as it has been 74 times since March of 1962. They will raise the debt ceiling. They have no choice. Well, actualy they do, but it involves pain.  

 

But here is the kicker. Getting back to the example above, where you as a homeowner have reached the debt ceiling, the ultimate call will be made by your lender, your bank. He will call your loan. For the USA, the lenders are Zhou Xiaochuan, Governor of the People's Bank of China, Masaaki Shirakawa, Governor of the Bank of Japan, and Abdullah bin Fahd al-Mubarak, Governor of the Saudi Arabian Monetary Authority. They will, in the not too far distant future, make the call on the debt ceiling and nothing will be like it was.

 

          The party will be over.    

 

 

Unexpected

Display in Roozengaarde, Mount Vernon Washington.

I still follow the happenings in the economy but thought I would give writing about it a rest until I had something positive to say. It has been a long while, but I read something this week that is encouraging.

It seems that some manufacturers are coming back to North America where ..... are you ready for it, the cost of producing goods is lower. Apparently China, who stole most of our manufacturing jobs with cheap labour and overhead are heading down the same road we did a few years ago as a result of their booming economy. The wages have gone up dramatically and it is difficult finding people to do the mundane grunt work when they have the choice to assemble iPhones. Housing and food are through the roof and some say that it is cheaper to live in the USA now than in China. 

When you factor in transportation costs of produced goods, it is looking more and more attractive to keep those jobs in the USA and Canada. This may be the beginning of a turnaround.   

Greek Tradgedy

What will become of those poor Greeks? Yet again, there was another bailout proposed for the beleaguered country of Greece on the weekend. In return, certain austerity measures were demanded by their creditors. It is too little too late, but what will happen, and hence all the riots, is that the minimum wage will be reduced and the civil service will be cut back dramatically. 

All this pain, and for what. Only two things can possibly happen with debt. It can be paid, or it can be defaulted on. A bankrupt entity will eventually go bankrupt and Greece was bankrupt many years ago. When will they own up to it? If they do, then other countries such as Italy, Ireland, Spain, and Portugal will have to follow suit and this is the definition for 'a house of falling cards'. The European Economic Community will fall, as will its unifier, the Euro. With all of Europe on the brink of disaster, can the US be far behind? Its debt to GDP ratio is similar. How long will  they be able to print money to avoid the inevitable? 

The cost of the riots will only add to the Greek deficit so why does not everyone just go home, relax, and take their punishment like a man. After all, they are just paying for a few generations of lax productivity and over indulgence. Who, in the end, did they think would pay for them and their profligate ways. It is too late for austerity. That should have started many years ago when the first deficit budget was introduced in their parliament. 

And that goes for all of us.     

On The Dole

"Investment Business Daily" had some interesting things to say this week:

The American public's dependence on the federal government shot up 23% in just two years under president Obama, with 67 million now relying on some federal program. Housing subsidies, expansion to Medicaid and welfare, along with a sharp rise in the use of food stamps is to blame.

"Dependence programs" now account for more that 70% of the federal budget. In 1962 it was only 25% of the federal budget.

At the same time, fewer Americans pay income tax. 49.5% did not pay any income taxes in 2009. Back in the 60's only 12% of Americans escaped any income tax burden.

Here is the big one. In 2010, for the first time ever, average spending on dependence programs per recipient exceeded the country's per capita disposable income!  Government cheque recipients are now getting more money than wage earners and millions of those wage earners are working for the government in non-productive so-called jobs or are on the payroll of some industry that is dependent on federal spending, like health, education, or military.

That leaves the hard working earner or the productive business owner in the minority.

The problem is, everyone gets a vote. So who will vote to cut back on any kind of spending? And yet that is the only thing that will get America out of the red.

Having said that, the numbers are probably not that different for Canada.   

Why?

There was a time in our lives when we had a large mortgage, some other debt, very little work, and we (read "I") were worried. Out of necessity, we cut our expenditures by eating more cheaply, not going out for dinner or movies, wearing the same clothes forever, and driving an old vehicle. This was normal and was really the only solution. This is no longer the norm.

Today, a debt problem is ignored, or if, rarely, acknowledged, is met with indifference. Borrowing more to cover existing debt is thought to be a solution, when, in fact, it only makes the problem worse in the long run. The Queen's Diamond Jubilee is a case in point.

I am not an anti-monarchist but would state my opinion as more a mild indifference than anything else. Like a 60th birthday, 60 is just a number, not much change from 59 or 61. Why then, in a time of debt crisis, would we as a nation spend more than $8 million 'celebrating'? What does it really accomplish when we have special flags made and flown, commemorative medals for prominent civic workers, stained glass windows in the parliament buildings, and an anti-climactic visit from Prince Charles and his woman.

In the grand scheme of things, this is not a large amount of money for a country our size, but when considered together with hundreds of other little $8 million items that are trivial, we are soon looking at a large amount of money that need not have been borrowed. 

The committee that was struck two years ago to oversee the Jubilee Year say that this is not new money but funds that have been in the various ministries for just this occasion. This is pure nonsense.

If you have to make a mortgage payment with your last $800, but in your other pocket you have $800 that you put away a year ago for a little vacation, just how wise is it to still go on that vacation? I don't know about you, but I would forget the vacation and go buy some groceries.  

Boomer Trouble

Yes, I know Autumn was over and done with many moons ago, but this photo represents what I was reading about the other day. The red tree is a Baby Boomer (a.k.a. aging parent) living among a younger and more energetic generation. We have all heard about the plight of many young people and young couples these days who get themselves into debt problems, then lose a job, and consequently move back home to live with their parents. Apparently, we ain't seen nothin' yet.

This from Thursday's Wall Street Journal:

More aging Americans are doing something they never would have imagined: turning to family for financial aid. Some are even asking their children for a place to live.

The problem has been building as more Americans 55 and older have lost jobs or run through savings faster than expected.

Thirty-nine percent of adults with parents 65 and older reported giving parents financial aid in the past year, according to a September Pew Research Center survey. Some parents may have trouble acknowledging it: 10% of parents 65 and older reported receiving aid.

So let me get this straight. The 'Boomers' who are doing well are supporting their kids, and the kids who are doing well, are supporting their 'Boomer' parents. It would follow that not that many people, over all, are doing well.

The 'Boomers' were doing OK until the credit bubble of 2008 when they took a hit on their retirement nest eggs invested in the markets. Since then they are still way down. It will not get any better because their old age security can no longer be regarded as 'safe' because it is the government who backs the pensions, and we all know they are in such a deep borrowing hole that there is no turning back.

Just thought I would give you a 'heads up' so you can clear out your basement and start building that suite down there.

Yes, those are American figures, but what goes around, comes around.

Sinking Ship

I met this fellow at Mill Lake one day. His ship was sinking, literally, so he brought it back to shore (it was motorized with a remote control) and knew exactly what the problem was and how to fix it.

I thought of this as I listened to a fascinating interview a few days ago, with the President of Iceland. After the world economic crash in 2008, his country was more or less written off and it was predicted that it would be the first to default its national debt, even before Greece. It would become the Cuba of the north. After going to a referendum with his citizens, he undertook a plan that went against all current so called wisdom in the world of economy. He presented it to his debtors, England, the Netherlands and a handful of other EU countries. Under threat of having their international assets frozen, as well as other severe sanctions, he went ahead and let the three major Icelandic banks go bankrupt.

Since that time, there has been a rapid recovery of their economy, the IMF has pulled out, and they are projecting 3% growth for 2012!

Since "going to school" on the subject, I am convinced that this is exactly the route other nations should have taken at the time. "Too big to let fail" is an excuse that flies in the face of a true market economy. Look at where it has brought us.

Less, not More

There are still a few folks around who do not realise the grave state of affairs in the world economy. It is easy to spot them. What is really scary is that many of them are politicians. How do you recognise one of them? Listen to them. Do they use the word "more"? Or, are they one of the few who are understanding the causes of our woes. Listen for them. They will use words such as "less" or "value for the money" or "better efficiency".

When governments of any stripe are in debt, anything they spend beyond a balanced budget comes from borrowing. That is called debt and there is interest to be paid. When you keep on spending more than you take in, your debt gets larger and larger. And thus, the woes we are in.

Next time you hear an advocate for teacher's unions, or more funding for health care, or more money for reducing carbon emissions, you will know that those calling for more need to be educated. These people should be held to account, and we should not be demanding more from our politicians either. Would it not be refreshing to elect the political party that made the fewest and least expensive promises? The party that promised less spending and more efficiency, and then actually delivered? Only then will we begin to recover.  

Generosity

I warned you. I am extending Autumn well into winter.

The annual giving statistics for Canada were released this week and for the ninth year in a row, our community has ranked #1 in giving. In fact we are triple the national average! There is probably a good explanation for this 'feather in our hat'. We are, on average, a wealthy community and most of us can afford to give. But what I think is the biggest factor is the that we are a christian community. By that, I mean that we have a very high ratio of churches and above average church attendance. Christians, who are following the Biblical mandate will give 10% of their income without question. Not all do, but you can imagine that even if a small percentage of them do, it will boost the averages.

This begs an important question. If this giving is in large part as a result of Biblical principles, another principle from the same Bible must be considered. The words in the 'Good Book' are clear that when we give, it will be given back, running over and in great abundance. The question then is: Do we give because we are wealthy, or are we wealthy because we give? Not that getting should influence our giving, but something for those who are 'cheaping out' to consider.   

History: The Great Teacher, or Not

Summit Point at the Lake

The following is a small excerpt from a recent article in the Vancouver Sun written by Frank Giustra, a Vancouver business executive involved in the mining and the film making industries and a noted philanthropist.

To get a proper understanding of the current situation, we should start by ignoring all the noise propagated by the experts, media and elected officials.

Our global financial system is based on the very simple and fragile concept of confidence. So you can’t really blame the policy-makers and politicians for not telling the public the “entire” truth; feeding us constant reassurances, peppered with a little mendacity. And to make things worse, it’s just human nature for us, the recipients of this information, to reject the idea that the worst can happen, hence our willingness to find reassurance in the misinformation we are fed. But folks, the worst CAN happen.

I doubt the citizens of Imperial Rome ever considered that their empire, which stretched from the Atlantic Ocean to the Caspian Sea, would eventually collapse on itself from the sheer weight of effort and resources needed to maintain it, or that 16th-century Spaniards ever thought their high standard of living, sustained by the plundered riches of the New World, would disintegrate once the supply of gold dwindled.

Or that the upper-class 19th-century Brits leading up to 1918 ever fathomed that the sun could cease to set on lands ruled by the British Empire. History has shown that when great nations mature and over-extend themselves, they revert to the paths of least resistance: borrow and/or print money. They all did it and they all failed; this time will be no different.

If Einstein’s definition of insanity — doing the same thing over and over again and expecting different results — holds true, we should move to have all of America’s and European policy-makers locked up in padded cells.

This hubris — holding on to time-worn ideas about what made a nation great in the first place, but ignoring the hard sacrifice that went with it — has prevailed throughout history and is as relevant today as it was for every great nation that came before America and the European Union.

What's Going On?

We shared this apple last week, the one and only apple we harvested from our two Red Delicious trees. Let's say it was anti-climactic.

Yesterday the markets shot upward dramatically. Do you know why? Do you care? You should because what is happening, with greater speed each and every day, will determine your immediate future.

We all know about the crisis in Euro country, and what happened yesterday, boosted the confidence of the markets because the perception is that a solution is afoot. The world's most stable currency and economy, that of the USA has intervened.* They are going to print a ton of money to help stabalize the Euro crisis. Of course, they do not call it what it is, printing money, the call it 'swapping', or 'easing', or 'recapitalizing' or 'saving us from the abyss' or 'bolstering financial markets'.

A bit of background is in order here. After the second world war, a prominent economist, John Maynard Keynes, proposed a global paper currency regulated by a central bank. Sound almost biblical, does it not? His plan did not fly, but out of the idea there arose the IMF (International Monetary Fund) and the World Bank. These institutions became nothing more than administrators of welfare payments to impoverished nations. But, the dream did not die.

The economies of the nations have long been lead by Keynesians, those who believe that the market by itself cannot create stability in the economy, but things such as interest rates and money supply, and inflation and deflation, manipulated by government, bring about a sound economy. The goals and dream of Keynes lives on and the creation of the Euro and its central bank were a step in that direction. This 'dream' has not yet been instituted because there has not, to this point, been a financial crisis of great enough proprotion to warrant such a thing.

Ben Bernanke, the head of the US Fed, is a dyed in the wool Keynsian and has unlimited faith in the magical powers of the US paper currency. The US has been interventionist, militarily, throughout the world, and now they feel it is in everyone's best interest that they interfere monetarily. And Ben has no qualms about fighting a debt crisis with more debt. If this latest move creates rampant global inflation, there is your crisis that will push us to a world currency.

This whole scenario is playing out very rapidly. Only two days ago, the markets fell dramatically because it was widely known that credit was drying up in Europe. Now a huge turnaround with the influx of US dollars. Mr. Bernanke has become the loans manager for the entire world. This is scarey because he does not know what he is doing. Or does he?

*Actually, the USA is, in some ways, in much more serious trouble than its European counterparts. It is the blind leading the blind.

Buy Now, Pay Later

As of today (Nov. 8) Greek bonds are yielding 200%. That is a good return if you can stand the risk. The quote on my photo, by Ambrose Bierce, is an indication of what has been going on there for far too long. But before we point a finger, we (Canada) do this too, but on a smaller scale. We trust our governments to borrow enough money to fulfill all their election promises, and they do. No problem. Our grandchildren, who do not even know what is going on, will pay it back. Why? Because they will have no choice. They will remember us fondly.

How to Get Gas Prices Down

More back yard beauty.

I have long believed that there had to be a solution to the lack of competition in the gas prices in our neck of the woods. The prices rarely correlate to the world price of oil, or our fluctuating dollar. We feel helpless, but I think the answer is to boycott one of the major gas companies until they are hurting and then they will lower the price. That could start a competition going, not only to get back customer loyalty, but prevent a further boycott. But how does one get an operation like that up and running? Most people have heard of such an idea and would be willing to participate, but getting the consumer organized seems to be an insurmountable task ... until now.

In the last few days, there has arisen a movement spawned by the spirit of the 'Occupy' movement that proves my theory. Through social media and networking, a groundswell of anger against the big banks has translated to a massive movement away from them and into Credit Unions all across the USA. The numbers impressed me so much just that I am convinced it could work here with the gas price problem. In a matter of a week to ten days, 650,000 customers have transferred $4.5 Billion worth of business from the banks to the non-profit Credit Unions. And it is just starting. The Banks, in response, have already dropped a proposed $5 per month transaction fee for ATM withdrawals.

It works!

Greek Delight

The rains came today, but not before I caught this.

"The world is unfolding as it should". I do not who said this, but the phrase is familiar. It should read 'unravelling'. Do you feel the heaviness and sense of gloom in the world? Or do you bury your head in distractions because you do not want to hear the 'bad news'? The story of the Greek bailout is supposed to be good news, but I believe that ordinary people are finally catching on to what is going on here. There is a great uneasiness in Europe these days as the wealthy nations of France and Germany took a 50% hit on Greek bonds and every other Euro backed nation borrowed more money to prop up the failing Greek economy. What we are all catching on to is that you cannot solve a debt problem with more debt.

Think about it. You are maxed out on your credit, your bills are piling up, and your car is about to get re-possessed. How do you solve the problem? You go out and borrow more money. Well, actually, you would not be able to. But, if you are a nation, you can. Your citizens will pay it back and if they cannot, their children and their children's children will. Or......you go bankrupt and start over again. You see, the problem is quite simple. The reason the people in leadership do not 'get it' is because they are, for the most part, very wealthy people who have never had to run a small business or a household budget. Money is never in short supply and if you are in trouble you just call your accountant and then your lawyer. They sell a few assets, juggle the books, make a few phone calls, and the problem goes away.

Only this time it will not go away. Greek default is INEVITABLE. It is only being delayed and when it happens it will take other nations with it, Italy being the first.

Pensioners in Greece took a 20% reduction in their  pension cheques last month. This month another 20%. Do think the riots are around the corner? And that tends to make my Christian world view kick in. More tomorrow.

Good Work, Guys

Amaranth grain, native to South Africa, but somehow growing in our garden.

First, a quick up-date on yesterday's post. Last week the Occupy movement had moved to 640 cities world wide. Today, that number has risen to 1200 and on Saturday 20 Canadian cities will see Occupy rallies. Because we have a relatively healthy economy, I would suggest that the rallies, at least here in Canada, will attract a myriad of groups of activists with a myriad of causes. Protest for protest's sake.

But today we hear about two fellows who have been working for years in the field of economics. They have developed economic models to determine the effectiveness of government fiscal policies. Finance ministers, banks, and universities all over the world have been using their models.

“Central to research the two conducted separately in the 1970s were efforts to model and quantify cause and effect in economies,” explained the wire story, “including the complex interplay of state and central bank policy with the expectations of people and businesses.”

“One of the main tasks of macroeconomic research is to comprehend how both shocks and systematic policy shifts affect macroeconomic variables in the short and long run,” the Nobel Academy waffled on in a typically lofty statement. “Sargent’s and Sims’s awarded research contributions have been indispensable to this work.”

This not a joke. These two have had a hand in the biggest world wide economic disaster of the last century, and their recognition and reward? They have been awarded the Noble Economic Prize!
Reminds me a bit of a few years ago when Yaser Arafat won the Nobel Peace Prize.

It's Tough Out There

If you have a job, a thriving business, a reliable income, some hefty savings, or all of the above, be thankful. If you were an American, one in five of you would be unemployed.

This from the Wall Street Journal:

 The income of the typical American family — long the envy of much of the world — has dropped for the third year in a row and is now roughly where it was in 1996 when adjusted for inflation.

The income of a household considered to be at the statistical middle fell 2.3% to an inflation-adjusted $49,445 in 2010, which is 7.1% below its 1999 peak, the Census Bureau said.

The Census Bureau’s annual snapshot of living standards offered a new set of statistics to show how devastating the recession was and how disappointing the recovery has been. For a huge swath of American families, the gains of the boom of the 2000s have been wiped out.

Earnings of the typical man who works full-time year round fell, and are lower — adjusted for inflation — than in 1978. Earnings for women, meanwhile, are a relative bright spot: Median incomes have been rising in recent years and rose again last year, though women still make 77 cents for every dollar earned by comparably employed men.

The fraction of Americans living in poverty clicked up to 15.1% of the population, and 22% of children are now living below the poverty line, the biggest percentage since 1993.

The article goes on to say that 46.2 million people are below the poverty line, more than any time in the last 50 years.

Around 70% of the USA economy is driven by consumer spending. How can these people be big consumers so the economy can get back on track? It just cannot happen. We are in uncharted territory when it comes to economics. The numbers show that we are not in a recovery, a slump, a recession, or a depression. I believe the correct word would be "a correction", where we have to re-think how to do economy. The old ways will no longer work, that is expansion through spending and borrowing. As soon as our leaders recognise this, we might be able to stop the free fall.

What's a Billion Here or There?

Today, I simply give you a link. It speaks for itself.

http://usdebt.kleptocracy.us/

As They Continue Down the Road

Was there ever any doubt? The bickering boys of DC in the once mighty USA are patting, no slapping, each other on the back in congratulatory adulation of the 'historic' agreement they have reached to raise the debt ceiling yet again. It is only historic in that it is history repeating itself, for the 94th time. A six year old can see through the sham. In the last two years, President Obama has added $2 trillion to government spending. Now, he has promised to decrease spending by $1.2 trillion .... over the next ten years! When will these people wake up and smell the coffee? My prediction is: when this house of cards (credit cards) comes tumbling down around their ears, and only then. The situation is beyond repair. The sad part is that we here in Canada will go down too, but maybe not as hard.

One can take a thousand snapshots across the USA that portray the real problem. Every picture will show waste, mismanagement, and debt, whether on a personal level, or some level of governance. Similar to an individual's financial situation, when every avenue of escape has been explored, when every source of revenue has been maxed out, when every structural re-financing has been used, the creditors will hound, the banks will foreclose, 'Bubba' will come with his baseball bat, and YOU WILL GO BANKRUPT! Your life will then be a nightmare for the next 10 years as you try, with great sacrifice to re-establish yourself. It will be painful, but possible.  

Debt Games

If you have not been following the little boys games in Washington these days, you should. It is political posturing at its worst. I am talking about the impasse between the republicans and President Obama over the issue of raising the US debt ceiling. The republicans cannot agree on a package to present to the president, and even if they do, the president says he will veto it unless it contains the elements that he wants, as a Democrat, of course. There is no doubt that the ceiling will be raised. The consequences of not doing so are too negative. Not only will the US government default on some of its payments (it writes 88 million cheques a month) but the credit rating of the US will drop from AAA (zero risk) to AA-. Of course, this erodes confidence in the dollar and may increase interest rates, the last thing they need with their increasingly faltering economy. The debt ceiling has been raised 93 times in the history of that country, but never has the situation been so grave.

I have an idea. Let the impasse remain and let the government default. A few seniors and some veterans, and some welfare recipients will not get their cheques, or at least will be promised that although they are late, they will come. What will happen then is that finally the citizens will awaken and take notice, and realize what is really at stake here. There will then be a cry for government cuts in spending, but on non-essentials, and there are many of those plus a multitude of inefficiencies that can be rectified. As long as Big Government can just get out another bigger credit card, things will continue on the path to ruin. The only difference is the rate of acceleration.