Now, I haven't read the forum in a while, but upon browsing the recent Off Topic posts, am I correct that nobody's been talking about the global economic disaster?

Or maybe you all know something I don't (as always) and aren't worried about it?

I can only speak for myself, as I go out of my way to avoid looking at exactly how much money I no longer have. Luckily, all of that was tagged for far off in the future. I have some sympathy for people who were overinvested in the market relative to their risk profile, but you know they bought into the hype.

A lot of ink has been spilled on the topic. What's most interesting is what hasn't yet happened: dollar devaluation. In the market crash, stocks everywhere went down together, and the dollar has even strengthened against other currencies. My zillion dollar question is whether inflation will pick up in the U.S. and whether the Federal government will be forced to adopt austere, even draconian, budget and policy measures to deal with it. I've occasionally asked Google News for hits on stagflation. Two years ago? Almost nothing. These days? Lots more hits.

I think a real economics professor (Arjo Klamer) summarized it nicely on dutch tv recently: It's the financial markets that are in a crisis now, not the _real_ economy.

If you really believe that then I am afraid you are in for a bit of a nasty shock. The next three years are going to be as bad as 79-82. The markets crash is both a cause and a symptom of the fracture of the credit markets, which is by itself going to cause significant pain. That is overlaid by those economies where indebted consumers are going to have no choice but to rebuild their balance sheets as the value of their assets goes below their outstanding debt. It's going to be really ugly, really quickly, in the 'real' economy.

There was a similar discussion on Downsizer recently. I guess most of us don't really understand what's going on and feel powerless to influence events.

Where do you think the Federal Government got the zillion dollars they're pouring down the Wall Street rat hole? The same place they'll get the money to keep from having to adopt austere, even draconian, budget and policy measures: the printing presses are running overtime. I'm dead serious when I say that within a few years someone earning $60,000 a year will be saying "Would you like fries with that?"

Admittedly, I am no expert on economics, all I have to rely on is common sense concepts like you can't borrow your way to prosperity, and if you spend more than you earn you are heading for trouble. Maybe I'm hopelessly naive, but it seems to me that the root cause of the current difficulty is that a large percentage of the wealth of this country, of the whole world, is/was illusory. People thought they were wealthy because they had $400,000 in assets safely tucked away with Lehman Brothers. Lehman Brothers thought they were wealthy because they had a hundred billion dollars worth of assets safely tucked away in real estate mortgages. The person who owed the mortgage payment thought he was wealthy because he knew that his assets were safely tucked away in his overvalued house (assessed at three, five, or even ten times its replacement cost) that would always continue to increase in "value", and he had money safely invested with Lehman Brothers, ad infinitum. Even the people with real money tucked safely away under their mattresses will turn out to be not so wealthy, because all they have is green paper whose value will prove to be illusory just as did the "wealth" managed by Lehman Brothers, although hopefully (yes, even I can muster small shreds of the H-Word) that value will not fall to the same degree.

What we are seeing now is a global reassessment of wealth based on actual value. Contrary to popular belief, "value" is a more complex concept than the simplistic idea that something is worth whatever someone else is willing to pay; it must also be considered in terms of its true cost. This applies to services as well as material goods.

I have always valued goods and services in terms of "...how many man hours did it take to produce it?", with the full understanding that many (most?) man-hours are intrinsically worth more than mine on the basis of education, training, and skill. I question, however, the idea that an hour of Michael Schumacher's (Formula One auto racer for the non-gearheads among us) time is worth 70,000 times as much as mine. I mean if he could drive 70,000 times faster than I, he would be approaching relativistic velocities! (Those are not a made-up numbers, I did the math.)

Anybody who thinks things will get better before they get a lot worse is in for a rude awakening.

tanstaafl. (aka "Cassandra")

http://en.wikipedia.org/wiki/Amero

heh
As I drank in Fiddler's Green after the Fleet Week air show a Brit tried to convince me that W had already signed the Amero into being three years ago.

Actually value is defined as whatever someone else is willing to pay. There is no other way to value things. Think about real estate, houses in Detroit,MI are selling for very low amounts (like $1 on Ebay). It would probably be easy to find an example of a house there that is selling for less than material cost.

So the issue isn't that we are going back to some absolute idea of value, the issue is that the whole financial system is based on trust. Those with money trusted Lehman Brothers and others to be good stewards with their money and Lehman Brothers bought mortgages trusting those who said they were safe investments. That whole system of trust is now broken and it could take years for it to come back together.

No, they haven't printed new money. For one thing, most of that money is a guarantee, not hard currency. But most of the influx of money into the US has come from foreign investment.

Also, you seem to be arguing that the way the government will avoid inflation is by creating inflation. The easiest way to cause inflation is by printing more money. This increases the amount of currency relative to the buying power of the economy, and makes the dollar worth less. Most of the sane bailout packages include things like buying mortgages at a loss or restructuring those mortgages. That keeps the loss of wealth contained within the sectors that caused the loss (or, really, bubble) to begin with. Printing up money to cover that just spreads the loss to everyone, and ends up hurting the poorer rather than the wealthier.

If you owned 100 shares of some company, they remain 100 shares. No matter the current market price. Presumably the averages, over time, will leave you with an upside.

However...

If you had purchased $1000.00 of Nortel stock one year ago, it would now be worth $49.00.
With Enron, you would have $16.50 left of the original $1000.
With WorldCom, you would have less than $5.00 left.
If you had purchased $1000.00 of Delta Air Lines stock you would have $49.00 left.
If you had purchased United Airlines, you would have nothing left.

But, if you had purchased $1000.00 worth of beer one year ago.
Drank all the beer, then turned in the cans for the aluminum recycling refund you would have $214.00.

Based on the above, the best current investment advice is to drink heavily and recycle.
This is called the 401-Keg Plan.

I guess the beer gut would be a downside risk?

Pouring the beer down the drain would still have been a better investment.

How so? Beer gut-wise, if you lost your job you could make it for like 3 or 4 weeks on your fat reserves.

This is my nomination for post of the year, in the Off Topic category.

Sorry. "... than having purchased any of those stocks."

That doesn't sound right. 21.4% of the cost of beer can be recovered by recyling?

Taking an Aluminium price of $2.20/kg (in bulk). That's 100kg of Al. I'll guess at $20/carton of beer (fairly cheap I think) so 50 cartons. That means 2kg of Aluminium per carton. No way...

To reverse it around: a can only weighs about 15g. 100kg of Al is ~6600 cans. 6 for a dollar?

Even aluminium has dropped from around ~$3/kg to $2.20/kg in the past few months.

Is my maths wrong?

Seconded!

This made me feel a whole lot better about being in between jobs, and little more than over weight at the moment

Cheers

Cris.

In many states, the cans have a $0.05 deposit on them that exceeds the price of the scrap aluminum.

So, even buying cheap beer on sale, $1,000.00 worth of beer would only net you $47.62 in deposits on the cans. Still competitive with the stock markets...

LOL "Is our children learning?"

Yes- I know you guys say 'maths' when we Americans say 'math'.
Just made me chuckle.

I think you misunderstand me, Bitt. The government is not going to avoid inflation. They are going to inflate the holy hell out of the currency as the only possible way of digging themselves out of the 11 trillion dollar debt they have already run up, more than 40 trillion if you take into account the "guarantees" they have promised like medicare, social security, and oh, yes, let's not forget interest on the debt. A perspective: The U.S. spends more on military than the combined totals of the next 15 countries and the military is by far the largest portion of the national budget. The interest we pay on that debt every year would fund nearly half of the military. The debt continues to rise at a rate of more than a million dollars a minute. Don't believe for a million dollars (oh, wait, minute) that there is any way out of this morass short of paying it off with fiat money.

tanstaafl.

Yes that's the ticket- collect a bunch of cans and bottles and drive to Michigan where the deposit is highest! Oh wait someone tried that and got arrested..

In a country with a GDP of $25 million dollars a minute. It would probably be advisable for the US to reduce its debt once it's out of the current recession, but current levels do not constitute a problem, much less a "morass", unless there are fears the US will default on some of that debt. Which there's currently no reason to fear, AFAICT.

Is it just the trillions that are unsettling you here? Suppose the US had debt of $13, thirteen bucks, was due to add forty cents to that debt this year, and had an income of $9 per year. Would you be as worried?

Peter

Here's what you said, with context:


So Dan asks "what will the government do to deal with inflation" and you respond "print more money". You cannot deal with inflation by printing more money; that will only worsen the situation, and would be likely to be the root cause to begin with.

So if that's not what you meant, what did you mean?

Agreed. Even economists who normally push for deficit reduction agree that now isn't the time to do it.

http://www.nytimes.com/2008/10/20/business/economy/20cost.html

My attitude to the whole thing is that it isn't my fault and the there's bugger all I can do about it. So why worry? If I lose my job there's still a massive freelance market with a great demand for the unique skillset I possess. Admittedly it's not 7 miles down the road like my current job, but it's no biggie.

I have very little in the way of savings (everything I have is in conventional savings accounts in high street banks and building societies). I still have 4 years of my fixed term mortgage to go and my credit card debt is shrinking rapidly.

Yea, likewise.

I have 10 years to go and no other debits. I just hope by the time I get debit free my taxes aren’t through the roof. I don’t necessarily expect to retire and do nothing but it sure would be nice to kick back a little.

You say tomato, I say tomato.... well that doesn't work here. You speak "American", I speak English

Had I not abbreviated it would you then say "Is my mathematic wrong?"

LOL
Your humor is calculated.

$6.50 for a dozen 12oz cans is more like it.

$1000/ $6.50/carton * 12cans/carton * $0.10per/can = ~$184

I'm not at all sure that $6.50/12pk is the cheapest that beer can be had for. Seems I often see the stuff for sale at prices less than that of soda pop.

As always, buying low is better.

EDIT: Or should that be "Buy Low, Get High"

I'm sorry if I wasn't clear... what I meant was that the government will go to whatever lengths it needs in order to avoid having to "...adopt austere, even draconian budget and policy measures." They (the people running the government) are spending junkies and they won't stop spending just because they are out of money. They'll print more. Lots more.

Dan's question was whether "...inflation would pick up in the U.S." and my response was not just yes, but Hell Yes. As the value of our currency drops because of inflation, U.S. goods become cheaper overseas (in the short term, until production costs adjust for the devalued currency) and the debts the government owes are paid with cheaper money. Sure, why not? The only ones who get screwed by this are people on fixed incomes and the countries who lent the U.S. the money in the first place, and since the latter can't vote and the former aren't that big a voting block the politicians feel safe for the next election which is as far ahead as any of them look anyway.

tanstaafl.

What is this fixation with GDP?

If it were NDP (Net Domestic Product) I would be less concerned. But when you have companies like Ford Motor Company contributing hundreds of billions of dollars to the GDP, yet running at a net loss of tens of billions of dollars, that doesn't go very far towards fixing the debt problem.

Why would the average family care what the GDP is when, in the end, their grandchildren will be footing the $80,000+ bill that is their share of the debt?

If I were, say, a doctor running a clinic where my expenses (staff, rent, malpractice insurance, etc.) came to $350,000 a year, could I buy that new Cadillac because my Gross Income was a very healthy $325,000 a year?

Sure, our GDP is high, because we're doing it on borrowed money. We've lived high on the hog for decades on other people's money, and now it's time to pay the piper.

tanstaafl.

Oh, quite right. Not because it doesn't need to be done, but right now it would be impossible. The resources to do it simply do not exist.

The depressing part for me is that, should we somehow stumble our way out of this crisis it will just be business as usual, the debt will continue to mount until it becomes so overwhelming that the next crisis will have no possible solution at all.

I take it as a given that you cannot borrow your way to prosperity. I dunno... maybe I'm wrong. The world will be a lot better off if I am.

tanstaafl.

Because the GDP is a measure of the productivity of the national economy, from which their wages are ultimately paid, and it's what reassures them that a debt of just $80,000 per family, with an essentially unlimited time to pay it off through taxation, is nothing to lose sleep over.

Peter

Because that's $80,000 that the government owes them.

Okay, only a portion of that debt is owned by private US entities, but it's a large portion.

According to this article 45% of US Government debt (Treasuries) is owned by foreign countries. So the government owes us $44000 actually. The rest is owned by other countries. On the surface that is scary because if the countries sold their treasuries at the same time the US would probably have to default. But that won't happen, if it did the entire financial system would collapse.

I am similar - no savings (so I didn't lose anything), and the only debt I have is my mortgage, which thanks to my bank being sensible is at a really low interest rate. Plus business is way up - this is the busiest my team has been in 8 years.

I'm just working as usual, that's all normal folks can do and wait and see what the government/investment bankers/media foul up next :-)

It's not impossible. You're on the right track though.

It's impossible to do with the current monetary and financial system. If we reform the system, then we could pay off the national debt within a few years.

The problem now is that the dollar (as well as every other major world currency) is debt based. Every dollar created, is created out of debt. What do I mean by this?

Dollars are created in two ways. The first way is by government bonds being purchased by the Federal Reserve Bank. A trillion dollars worth of bonds can be bought at once, in one fell swoop, and POOF, our money supply is increased in size by a trillion dollars -- as well as our national debt. Congress will approve this when it needs money.

The second, and much larger, way is through fractional reserve banking. Fractional reserve banking (as opposed to full reserve) is the practice of maintaining small reserves in a bank while loaning out much more than exists. Every time money is lent out by a bank, that money has been created out of nothing.

For example, Person (A) deposits $100 into Bank XYZ. Bank XYZ loans out $90 to Person (B). Person (A) still has $100 in their checking account but now Person (B) has $90 in their checking account. Bank XYZ has $10 in reserves. Ninety percent of our inflation comes from fractional reserve banking.

It has its roots in the days when gold was traded for goods. People would deposit their gold in a goldsmith's vault for safe keeping. The goldsmith would give out a receipt for the gold deposited. People began using these receipts to trade for goods, since it was easier than retrieving their actual gold, so these receipts were used like paper money. Well, the goldsmiths soon realized that only a fraction of people ever retrieved their gold at any one time. They only needed to maintain enough gold reserves to cover the small fraction of people who wanted to retrieve their actual gold. So they began to print out more gold receipts than there was actual gold, and lent these receipts out at interest, thus increasing the size of the money supply and inflating everyone else's gold receipts. It's an ancient fraud that is still perpetuated today.

As you can see, every single dollar created in our fiat (ie., non-gold backed) dollar is created out of debt. Whether it be debt owed to the Federal Reserve Bank, or debt owed to a deposit bank, every dollar represents a loan that must be paid back -- plus interest. Unfortunately since every dollar must be paid back, there are no dollars left to pay the interest! Foreclosures and defaults are an inherent part of the system. We're running on a system of credit. When the credit lines stop, dollars begin to disappear and the dollar deflates, and people default on their loans.

So, to review, the dollar inflates when credit is easy and the dollar deflates when credit is hard to obtain. This is our boom and bust "business cycle". In actuality it is a calculatingly caused cycle, not a "natural" cycle of business.

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

-Thomas Jefferson


Banks are in the business of dealing dollars. They want a deflated dollar because that means what they have the power to create is worth more. Unfortunately for them, every time they loan out new dollars, the money supply becomes more inflated. Thus it become necessary to conduct business for some period of time, all the while inflating the money supply. Then it becomes necessary to suddenly deflate the money supply to add value to the currency once again, while taking possession of actual wealth (eg., repossessions, foreclosures).

As you can see, the problem with inflation is not that "we're printing too much money." (Only about 5% of our money supply is printed on paper anyway) The problem is with the system. And not just the system, but those who control it. The wealth of our nation (and the world) does not simply vanish over night. (One must distinguish between wealth and money, which are direct opposites.) Wealth is transferred in such cases; not destroyed. Through a massive deflationary action (not a stock market crash), the Great Depression came about and the financial elite of western civilization gained possession of property and businesses for pennies on the dollar.

Who controls the value of money? The monetary authority -- in our case, the Federal Reserve Bank. (In the UK, the Bank of England. For the euro, the European Central Bank.) These are all privately owned banks. They all provide for an illusion of government control.

What is the solution?

a) Repeal the Federal Reserve Act.

b) Abolish fractional reserve banking.

As Thomas Jefferson (and many others) said, Congress should be in control of the money supply (and the people should be in control of Congress).

It's no coincidence that the Federal Reserve and the Income Tax were created in the same year (1913). The debt service on the national debt is the third largest budget item, after social security and defense.

The national debt can be paid off with debt-free dollars. (eg., newly created debt-free dollars, instead of Federal Reserve Notes. The operative word there is "notes", as in promissory notes.)

Congress will no longer need to borrow money from the privately-owned Fed, nor will they need to tax us nearly as much. Congress, being the monetary authority, can simply create new dollars to spend into the economy. This will serve to abolish (or significantly decrease) income taxes as well as increase the money supply at a healthy rate, such as 3% per year.

Commercial/deposit banks will no longer add to the money supply through fractional reserve banking. When Person (A) deposits $100 in Bank XYZ, then Person (B) borrows $90 from Person (A) then Person (A) will have $10 and will be owed $90.

We will no longer have outrageous inflation and taxes, and Congress will slowly inflate the money supply at a healthy rate by spending into the economy.

I was going to write a bit more, but I lost my train of thought because I helped the girlfriend with groceries and she dropped a jar of grape jelly.

For those of you who doubt the contents of this post, try reading (an easy read) Modern Money Mechanics, a document once circulated by the Federal Reserve Bank of Chicago.
http://landru.i-link-2.net/monques/mmm2.html

For a more in depth history, try Tragedy and Hope: A History of the World in Our Time, which is a 1350 page book published in 1966 and written by Carrol Quigley, a history professor at Princeton, Harvard, and Georgetown for over 30 years.

For a good online documentary video, try The Money Masters, produced by Bill Still circa 1995.

-Mojo

Hi. Fascinating reading. Who are you, again?

Again? That says "Posts: 1".

But I can answer your question: a Libertarian loon.

He'll go on and on about fiat currency, but even begin to suggest that gold is also a fiat currency (albeit one harder to produce more of), and he'll go off his rocker.

I don't really have a dog in this fight, but there is an opposing view.

I agree that gold has no utility (historically, except in modern electronics). I support a fiat currency. Colonial Scrip used by the American colonies is an excellent example, as are the Greenbacks created by Lincoln. Tally sticks were used in England for 700 years.

Reverting to a gold-backed currency will not fix the problems of fractional reserve lending practices and a privately-owned central bank.

In some cases a non-fiat currency can have devastating effects.

Don't get me wrong. I'm not advocating switching to gold. Note how the goldsmiths I mentioned were able to practice fractional reserve lending.

Hi, thanks. I'm Mojo!

So you think that we should switch to fee-based banking? Why would people want to put money in the bank? It would save them money to keep it under the mattress. Paying for the convenience of instant access to your money is reasonable, though.

But how would people borrow money? Or should they just save up in order to buy a home?

You realize that's a joke, right?

Prisoners have since adopted the mackerel standard.

Because everyone one knows, mackerel is the real prison currency.

Oh, goodie. When can I expect my check?

tanstaafl.

Heather! It's been a long time since we've heard from you. I'm glad to see that you're still around. We've missed you!

tanstaafl.

We should switch to full-reserve banking instead of fractional-reserve banking. Since banks will no longer be able to create money, their services might involve housing funds for a fee, or brokering loans between entities.

People will still be able to buy a house with credit. Their borrowed funds will come from individuals or entities with actual funds, as opposed to borrowing from a bank that creates the funds out of thin air.

Overall, we will have a more stable money supply and economy.



Well it's not as much fun if you point it out.

I don't understand. The basic premise of fractional-reserve banking is that a bank accepts deposits from customers and then uses those funds to invest with. Limit "invest with" to "offer mortgages" (as with S&Ls pre-1980-ish), and we have what you just described.

Bitt, I appreciate this extenuation....

...but thanks for the setup!

Check's in the mail!

So if I understand you correctly you're suggesting that no-one can borrow money unless that loan is 100% covered by deposits ?

So bank A has 100 customers each depositing $10 into savings (and presumably they would have to keep additional funds for their daily needs which can not be lent out). 5 people come along and each borrow $200 to buy a house.

Where does the sixth person go for their mortgage ? Where does the local storekeeper go to get his trade financing ? Oh look, here comes Intel who wants to borrow $2000 to build a semiconductor plant, which they will pay for out of future cashflows. Guess they will just have to go offshore to a sensible banking system and take those jobs with them.

Seems like a good way to derail an economy.

I think I finally deciphered what you're getting at. The problem is that the problem you're describing is not fractional-reserve banking. It's excessive leverage.

If a bank accepts $100 in deposits and loans $90 of it, and accepts interest on that loan, it is not "creating" money. It is performing fractional-reserve banking.

However, if a bank accepts $100 in deposits and loans $110 of it, it is "creating" money. But that's not a feature of fractional-reserve banking. This is only really possible when trading debt directly, because if you were required to purchase a commodity, a payment is required. (Think of a mortgage. The bank loans you money and they give you, or, really, the seller, actual dollars. Yeah, it's usually a check, but you could go trade that for real greenbacks.)

But fractional-reserve banking is irrelevant to that. In fact, banking is irrelevant to that. Microsoft could, for example, decide to start making loans out of its cash reserves, and end up loaning more than it really has, but in no way is it a bank.

This is really the commercial equivalent of "You know I'm good for it." Yeah, an institution might have enough money to cover that individual debt, but you don't know how many other debts they owe, nor the likelihood of them getting returns from those debts.

This isn't a fractional-reserve banking problem, it's a regulation problem. If all loaning institutions were required to detail all of their loans, then there would be no opaqueness that prevents entities from seeing the risks involved. But the government continually removed transparency from the banking industry over the last 15 years or so, to the point where there were certain markets that couldn't be viewed at all, like the credit default swap market.

So I agree with you that this sort of supremely risky loaning should be curtailed. I totally disagree with your conclusion that the Federal Reserve Act and fractional-reserve banking have anything to do with it.

Bitt,

I don't think this impacts the point you were trying to make here.
But since no one has mentioned it yet, I wanted to remind everyone of the multiplier effect inherent in fractional reserve banking.

If someone deposits $100, the banking system doesn't loan out $90, it loans out $900 with a reserve requirement of 10%
and it loans out ("creates") $1900 with a reserve requirement of 5%.

(A disguised but quick digression on convergent infinite series.)
Person A deposits $100 in Bank A.
Bank A loans out $90 to Person B.
If Person B sticks the money in a sock and buries it in his back yard (as we all are often wont to do), then that's the end of the story.

Otherwise:
Person B deposits the $90 in Bank B.
Bank B loans out $81 (90% of $90) to Person C.
Person C deposits the $81 in Bank C
which then proceeds to lend out $72.90, etc. etc.

Converging to $1000 "existing" from the original $100 deposit.
Of which $900 has been "created" by the fractional reserve system.
(or $1900 created in a 5% reserve system!)


Also, Bank A, B, and C are allowed to be one and the same bank.

I think most people vaguely recall hearing about this in school,
so pardon the posting space for reiterating this.
I just wanted to bring it up since no one else has mentioned it yet.

But fractional reserve banking inherently creates money.
And tweaking the reserve requirement is one tool that is used to alter the money supply.

Yeah, that was all in Economics 101 when I studied it back in 1983.

Cheers

Yeah, but real people don't take out a loan to put the money in the bank; it's a losing proposition. Only banks do that, and it's that sort of opaqueness that needs to be regulated.

No, they take out a loan to pay someone else. And that person puts the money in the bank.

Exactly, music.

Bitt, I refer you to Modern Money Mechanics.
http://landru.i-link-2.net/monques/mmm2.html

This document was written by the Federal Reserve Bank of Chicago. Check out the sections "Who Creates Money", "What Limits the Amount of Money Banks Can Create?", and "Bank Deposits - How They Expand or Contract".

Here's an excerpt from the section "How Much Can Deposits Expand in the Banking System?"



We need a debt-free dollar. We've had it before, and we need it again.

This is what I have been pontificating for years with my Cassandra-like whining, but you state the case much more authoritatively and with better referrals than I. All I have to rely on is my intuition, you seem to actually have some education in the matter.

As I said earlier (in this very thread, actually) I feel (yes, intuitively, not from any real study of the situation) that our problems are compounded, possibly beyond the point of solvability without enormous world-wide suffering, by the fact that most of the "wealth" of humanity is/was illusory and it isn't likely that anybody is in any better shape than we are to bail us out of our (or their own) trouble.

Some interesting reading here that is an elaboration of the point that Music made earlier.

tanstaafl.

For an interesting (as in the old Chinese curse) analysis, there is a "Global systemic crisis Alert" from Europe2020 titled
Summer 2009: The US government defaults on its debt.

Oh, come on. Superpowers NEVER default on their debt!
And even if they did, what's the worst that could happen?

If the US did default on it's debts a lot of other countries would too. If you don't believe me look what happened with Europe- a couple days after the US announced the bailout they were saying things like "the US needs to get it's house in order, we are insulated from this event etc etc.." then Iceland imploded and Europe collapsed too. It would be financial armageddon if this happened.

And you still think it won't? For years I've... no. I've said it over and over, no more.

tanstaafl.

Not speaking the name... Is unlikely a useful tactic.

Is it bad that I can't understand any of that? Expansion? I think finance is well outside my skillset. As long as the number in the bank is above zero that's all I need to know.

Ah, but that's the problem, isn't it? Do you think that a bank with assets of, say, a million dollars, has a big vault filled with thousands of $100 bills?

No, they have maybe 10% of that amount, the rest of their assets being promises from the people they lent the other 900 thousand dollars to that someday they'd pay the money back. But it gets worse -- that $900K dollars is likely to get recirculated through other (or even the same) bank and re-lent to the point where the original million dollars is magically transformed into ten million dollars (more or less) and the only tangible backing for it is the original $100K held as reserve at the beginning. Go back and read Music's post from a few days ago in this very thread, he explains it much better than I. When the promises backing the other 90% are supported by mortgages on seriously over-valued real estate it's possible we could have problems in the financial world. Oh. Wait... Didn't I see something not too long ago in the newspaper about that?

tanstaafl.

I think what they're saying is that if the system collapses and the bank folds, then your number is effectively zero.

It's a system of trust... but we're trusting gamblers.

"Armageddon" isn't an exaggeration of what it would be like for the U.S. government to truly default on its debt. I'm hardly a financial sage, but I can safely predict that trillion-dollar bailouts are going to run into something of a brick wall. You can't keep allocating that kind of money without doing something extraordinary, like cranking up taxes, deleting the Department of Defense, printing money like it's Zimbabwe (i.e., hyperinflation), or whatever else. Since none of those steps are in the slightest bit palatable, the only other solution is to let things run their course. That could mean a recession or maybe we get lucky and have a recovery of some sort.

The collapse of oil prices has dropped gas costs in a huge way, which will have a variety of positive effects on the U.S. economy. For oil states (or wind farm speculators), not so much.

Unfortunately the high price of gas didn't last long enough to make lasting changes in American driving habits.

The nascent threat that oil prices could yet go back up may yet have a lasting impact on the cars Americans drive. When even BMW is advertising its cars as being gas efficient (seen yesterday in the airport), you know things have changed.

When I was in the states a couple of months ago I remember seeing an advert for the right to exploit more the US' oil and gas reserves. In it a man is seen filling his car up at the petrol pump and he says 'If I'd known the price of gas was going to go up so much I would've thought about buying a more efficient car'.

Hello!?!?! Would someone really go to car dealers and say 'Excuse me, could you show me the car that gets the shittiest gas mileage?'.

They wouldn't go and say that exactly, but a lot of people really didn't factor fuel efficiency into their buying decision at all. Dealers wouldn't bring it up either, and next think you know, the streets are filled with 1 star crash rated 5 miles per gallon truck built SUVs that have exploding tires and like to roll over. A lot of people were just concerned with keeping up with their neighbors in suburbia, and had to run out and buy a bigger vehicle when Bob came home with a shiny Hummer.

I suppose that's the difference between the UK and US. To me a 2 litre 4 pot is still a big engine.

To add to this a bit, heres an example of cost of fuel for people back when the SUV craze was going on. Lets take a Hummer H2 that didn't even have to publish the fuel efficiency numbers. And with that vehicle, lets take a drive across the UK, from East May, to Dover. Google shows 764 miles, and various reviews seem to average the H2's highway rate at 10mpg (23 L/100k). Fuel in 2003 when the H2 came out averaged $1.51 a gallon. So, a trip across the UK would have only cost $115. It took gas rising to nearly $4 to get people here to really think about fuel economy.

Ford dropped some of it's more gas-guzzling vehicles from production. I'd say that's a pretty big change in a lot of people's driving habits right there. In fact, a lot of the large SUV makers are cutting back on their biggest makes. I just bought a motorcycle. Admittedly, it was more about fun and less about fuel efficiency, but hey, I can go 160 miles on a tank of gas (3.4 Gallons). If nothing else, lower gas prices will help by bringing the cost of goods transport down. Who else has seen $1-$2 surcharges added to pizza delivery?

Of course, while food costs went up after fuel went up due to transport costs, don't expect it to go down. Food companies base their price largely on their compitor's prices. If no one lowers their cost first, no one has to ever. We HAVE to buy food.

Hey! Enjoy the bike!

On the subject of motorbikes being more economical, I've had a thought that I'd like to share.

Our current stock of production vehicles follow stringent safety rules and crash survivability testing. All of this adds cost to the car and weight, practically negating all of the technical advances that have occurred over the last 30 years (wrt fuel efficiency/performance). We have cars today that are more powerful than cars of yesterday and still only get the same mileage.

Yet more people are buying motorcycles with the intention of being more economical- foregoing the safety of a car.

Why can't we have micro cars that are not as safe as 'normal' cars, yet efficient enough to keep people on four wheels (or even three)? There should be a waiver that you get to sign when you buy a micro car that says, "I understand this car does not survive crashes like a Buick."
Then off you go to get 45+mpg with your 750cc, 1200lb microcar.

My first four cars were Honda N600 and AZ600s. Great little cars! Where is such a car today?

Wasn't there a Civic that could do 50+mpg back in the day? This is why I'm not impressed with the numbers being posted by today's hybrids.

Anyway, look at the Smart car. I'm starting to see them on the roads here in Seattle.

Yes, the Honda Civic CRX HF

We had a Nissan Sentra back in 1984 that got 40 mpg. 40 mpg is what my Prius driving friends say is about what they get, so where's the great advantage?

The thing about driving a bike is, I feel it's less dangerous than driving a micro car. The bike can go faster, stop faster, turn faster, and fit in tiny gaps. In my Sentra, I had none of this, and a weak body structure too.

I'd love to drive a tiny, efficient car, but not with moms in SUVs with kids and cell phones distracting her right behind me...

1. An accident in the Prius is, joule for joule, more survivable than one in that Sentra.
2. The Prius is more environmentally friendly than the Sentra in terms of emissions.
3. The Prius is more comfortable and quieter to drive, and has more amenities than the Sentra.

Edit: I know I'm playing devil's advocate against your point, which was the same thing I was espousing just a few posts up. That's just how I roll.

Which, since they didn't import the diesel version, doesn't get very good mileage. Well, it's good, but it's still less good than hybrids.

I picked up a 2009 Jetta TDI wagon. A nice size cargo area, and I am currently getting a bit over 37MPG (US) on my hilly commute. Best tank I've gotten was 42.7MPG on a relatively flat, all-highway run.

This is with the DSG automatic. Definitely not too shabby. The TDI has tons more power than a Prius and handles really well. Too bad there's no black smoke of death coming out the tailpipe. That's something I miss from my Benz diesel.

I have a bike too and love the 56 miles per gallon. I agree with all you've said about a bike's safety however when there is a Hummer on your ass it doesn't matter how fast I can stop when the guy in front of me slams on the brakes I'm road kill.

I do the speed up and slow down thing when someone is riding my butt (not rudely but just a little). Eventually they usually back off a bit.

Oh yeah, loving the bike. The only downside is I'm still burning about as much gas as I would in my car, but only because I always take the loooong way home just for fun.

Meanwhile, according to the New York Times, maybe we should be more worried about deflation, a vicious circle where prices are dropping, forcing businesses to lay people off, who then can't afford to buy anything, and thus pushing prices still further downward.

Favorite quote from the article:



For some reason, I find this to be less than completely reassuring. You're saying we can always devalue the dollar faster than the value of products can drop.

Pop quiz: in a deflationary/inflationary cycle like this, what's the optimum investment strategy?

I'm betting it's not WoW gold.

For deflation, cash. For inflation, real estate.

The deflation we're now experiencing is due to credit becoming harder to obtain, thus contracting the money supply.

I drive a tiny Mazda MX5 with a 2l engine that has been laughed at on a few occasions (for its size). In New England (Boston and surrounding States), people seem to believe you have to drive an All Wheel Drive 4x4 SUV Tank to get through the winter. Many of the middle States drive crappy huge cars because Detroit tells them to, Texas just doesn't get it (on many things - but it's a nice place to visit briefly), and California should know better.

That said, I am confident that the economic downturn will finally convince a few people here to care more about what actually matters - and size really isn't one of those things. Hopefully, one day we'll be proud to buy American cars, but until then Detroit needs to learn a hard lesson (bail out or no bail out, and if the former then it better involve reform).

Jon.

(please correct me if I'm wrong because I'm still trying to learn this)

In times of tight credit (~deflation), your investment dollar goes farther because less people are willing to invest/lend. This drives down the price of investments as people "cash out before they loose it all".

Legendary investor Warren Buffett has said "Be fearful when others are greedy, and be greedy when others are fearful." The former describes a bubble, when loan sharks and financial jackals are creating money and driving prices up - be fearful of the burst. The latter describes a bust, when people panic and sell, or hesitate to invest - snatch up the good deals.

Now may be a good time to buy into under-priced quality companies, both expecting their stock price to go up and expecting dividends from their earnings (though meager, the quality companies may still scrape together something).

Maybe buying into real estate is a good investment now. Get a condo and rent it out, planning to keep it long term or at least until the real estate market rebounds.

There must be ways to legitimately profit (none of this day trading, short selling crap) during a down market.

Buffet, as well as John Boggle (inventor of the S&P 500 index fund at Vanguard), are both suggesting that now's a great time to put additional money into the market.

My original "pop quiz" introduces a complication: we're clearly in a recession, and there's some evidence of deflationary prices (i.e., a vicious falling demand leading to falling salaries, layoffs, and falling prices). However, many of the possible fixes being contemplated involve spending an awfully large amount of money. Money that we don't have. That means the U.S. can either just print more money (= inflationary, effectively devaluing the dollars in all of our pockets) or borrow more money (at higher and higher rates in order to attract buyers for the less and less attractive bonds, forcing higher taxes to pay the bills, and thus creating recessionary pressures).

Holding currency (or money markets) over the past two months has been the only winning strategy. Everything else, except maybe gold, has been falling through the floor. The part that seemingly nobody expected was that there would be a "flight to quality" when the bubble popped and "quality" would be defined as the U.S. dollar. If the flight had gone elsewhere (the euro?), things would have turned out quite differently.

That said, the stock market is quite attractive these days. Likewise, if you have the stomach for junk bonds (e.g., debt from GM), the interest rates are nothing short of spectacular -- but you'd be a fool to loan money to some of these firms.

The dollar is definitely deflating. Credit has dried up and so the money supply is contracting. The Fed stopped publishing the M3 monetary aggregate in '06, so nobody really knows how big the money supply really is right now. But look at the price of oil: $50/barrel

Gold has dropped too.

Check out Peter Schiff:
Peter Schiff was right

Brilliant video, watching all these other experts dismissing Schiff out of hand when, in fact, he was largely right with his call on the future.

Ben Stein's recommendation of Merrill Lynch (MER) at $76.04 is worth $11.53 today. Tracy's pick, Goldman Sachs (GS) at $175.00, is now worth $67.42.

Another $800bn going into the market to try and help it.

Atlas Shrugged Updated for the Current Financial Crisis.

Looking for something on another forum, I dredged up an old (spring '06) discussion on confidence level of climate models, whether we are at or near peak oil point or not, costs of limiting emission of greenhouse gases, that sort of things, including an article in SciAm on "Solar Grand Plan". It strikes me that, compared to trillions to be spent on bailing out gambling operations going under the name of "investment banks" or car makers that just now awoke to the third millennium, 400-500G$ subsidies over several decades the article claims would suffice to wean USA from both import oil and domestic coal really sound as peanuts. Not to mention research budgets of ITER and similar.

I'm not an economist, and even if I were, I don't think I'd have any way to check the veracity of Paulson's claim, but you have to consider the source. The severity of a problem that, at that point, was affecting basically only banks and investment firms is bound to be viewed with great fear by a man who worked solely in that industry for over thirty years, and in many cases strongly promoted the policies that brought us to this brink.

These are the same situations that caused the Great Depression, and while that was extremely dire, it in no way led to a collapse of the government.

Still... wow. A half-trillion dollar run on the banks in the space of hours.

When/where was that?

In Tom's link.