Thursday, December 03, 2009

Government Bailout Index

The economy keeps declining and shedding jobs, yet the markets look great. Endless rivers of money keep flowing into them, as the actual corporations that the stocks represent, gasp for air.

Each quarter, the job situation looks better. The Gov keeps reporting that jobs are being shed at a slower rate, then later, quietly revise the figure to represent reality. Talking head economists are fooled again and again by this shell game, and gleefully report from the same script, month after month. they bathe and shower in the government lies, and wear those falsehoods with pride in public.

What a strange situation we're in. Well, it looks strange from whence we came. But everyday, we look more and more like Argentina. If there circumstances were a highway, Argentina would be giving us the finger for tailgating.

QueenBee over on Petropest Launchpad noted that folks keep calling for a correction that never comes. I've noticed the same thing. This is why I quit calling for one, some time back. The market continues to rise, as enormous sums of money keep pouring into it. After all, the market only goes up when more money is going in, than going out. And with jobs being lost at such high and consistent levels, it's not the public investing, that is keeping the market rising. At least not the public in the private sector. Yet, someone with big bucks is propping it up.

And there's really only one source of ever increasing money, in an economy going to shit, that can power such an amazing feat. That would be the Federal Reserve, printing new money at breakneck rates, and billing you and I, the taxpayers.

If you've kept up with the bailout news, you know that the bailouts never stopped. They continue in many forms. TARP was just one of the bailouts used. but it was well publicized. Making it one of the more expensive political stunts of our generation. Each quarter we've learned, the biggest banks report profits that are essentially made out of bailouts. Without the bailouts, none of the biggest financial institutions would be solvent today. Their business is the business of receiving free money. They are living off of welfare.

In today's news, Bank of America is paying off their TARP loan. 'Isn't that good news', you might ask? Well, not really. These repayments have been a shell game so far. I think I've pointed this out before, but I'll repeat it.

1. Gov buys preferred stock at an outrageously inflated price.
2. Gov reprices the stock at a deflated value.
3. Gov exchanges the stock with the institution for common stock at an outrageously inflated price.
4. Gov reprices the stock at a deflated value.
5. Gov gives the financial institution the money to buy the stock back.
6. Financial Institution repurchases the stock for pennies on the dollar.

In the mean time the Gov continues to give these institutions quarterly payments through the Federal reserve.

Now some folks are asking, why doesn't this lead to hyperinflation or just come crashing down if the Fed is producing money at such fantastic rates?

I think the answer is simple. The financial institutions are not sharing the money. They are not making loans. The big bucks make it to the consumer through financing. This financing puts money in people's pockets in a myriad of ways. There are business loans, payroll loans, construction loans, etc... These loans ultimately determine how much money is circulating in the economy where human beings live. Conversely, payments on loans suck money out of the human scale economy. Not only does principle get taken out of the economy, but extra money to pay interest is sucked out too.

The quantity of money loaned, must equal the money being paid back, plus interest, to keep this in a steady state. With our population rising, we need more money loaned. If we want growth, these loans have to be expanded further.

This is why we hear lip service being paid to the idea that we need the banks loaning more money. And of course, loaning money to people that can't pay it back..., because not enough money is being loaned...

The bankers aren't stupid. They get free government money for simply existing. They don't need to lose money by making loans. so the money they get, needs to be putting
into other investments. The stock market is one option for that money.

Now with the markets on the rise, I occasionally hear people talk about how they are making money on their investments. I think this is an odd way to view this. The money isn't made until you sell. After all, profit = (Sell Price - Taxes - Commission) - (Purchase Price + Commission). So to see profit, you have to not only buy, but you have to sell. Until you've sold, you've made no money. You've simply incurred costs. Ergo, Profit = -(Purchase Price + Commission).

So if the market keeps rising, the small investor can't keep making money on it. you can buy low and sell high once, but then what are you going to do after that? Buy higher and sell even higher again? You lose the money on commissions on every trade. and as the market rises, you lose ground compared to buy and hold strategy, assuming you can sell near the top. And if you trade all the way up, then you still risk missing the top and losing even more than the buy and hold investor.

The only folks that make money on a long term rising trend, are the brokers. They make money all the way, and all the way down. And the brokers with the big banks, are trading the taxpayer's money. So they don't need to worry about making bad trades. There's lots more money where that came from.

And there is one other source of money I haven't covered. That's gov pensions. Just one more pool of money for the banks to use to manipulate stock prices. After all the Federal Government is our biggest growth industry now. It's growing faster than the US population, and wages for Federal Employees are far higher than for the private sector. It's estimated that there are two Federal employees for each employee in the private sector and those Federal employees each make double the wages of the private industry counterpart. In my conversations with some Federal Employees on the train, these estimates appear to be accurate.

Now if we continue to follow Argentina's lead, then we're just a few years from having those government pensions seized and given to the banks as gifts. If we continue to follow that line, then we can predict protests, while conservatives bash the protesters as being America haters on TV and radio. And the banks will post record earnings.

We're in a tight spot. Through reckless lending policies, Clinton and then Bush pulled forward demand to artificially inflate the economy. We can't stop our free fall without increasing lending. But everyone is so deep in debt, that it would be stupid to loan them money in a free falling economy.

The choice made by our government has been to sacrifice the American economy to save the banks. America has to die if Goldman Sachs is to live a while longer.

Some of the theories floating around as to why the dollar must fail, or the market must fail, revolves around the idea that a foreign power (China?) will take advantage of our plight and use it to hurt us. I've certainly been guilty of making such arguments in the past.

But that only works out if another nation really does have the upper hand. It looks like everyone is in the same situation and doing the same things. They are all acting as a herd. You only get ahead in capitalism by doing things differently. But as the Japanese like to say, the nail that sticks out, get's beaten back down.

If a nation did break out of this chain of bad decision making, then the banks would likely destroy them. If not through economics then by destroying the lives of the politicians making those decisions.

That is likely why the USA can't solve this problem. I can suggest an idea others have suggested, and I believe it would solve our current economic crisis, but it would also likely lead to horrible economic ramifications.

That solution would be some form of debt forgiveness. After all, only by relieving the debt burden, can we go back to borrowing.

I'm sure my readers can think of problems with such a solution. I'm sure many of my readers can think of things in this solution that they would hate. The conservatives sure likely to harp about how house flippers that are going bankrupt and need to pay their dues, or what about this or that class of people that they feel don't deserve compassion or a helping hand. Wait a sec, I get emails everyday from conservative bloggers that are already saying this.

And what if every nation did this? Or did something different? Wouldn't there be some serious risk of opportunities to make a quick buck in collapsing the world economies some other way?

So we're left with only one option, and that's to stick it out and hit bottom. We can't or won't do what needs to be done to flush the debt out of the system, so instead we'll keep scurrying about the deck as the ship sinks.

Enjoy the ride. I'll be maxing martinis in the galley if anyone wants to stop by.


At 9:17 AM, Anonymous Anonymous said...

Hi Weaseldog,

You are correct when you wrote:

The financial institutions are not sharing the money. They are not making loans...

However, I feel that making loans at interest isn't the answer, that is the maggot way. Money should be distributed to the people directly and the banks should be abolished and taken out of the loop. Allowing the parasitic banks to continue as before will bring more of the same. Making bad loans as a way of supplying the people with money is the unfaiest system of all.

At 9:27 AM, Blogger Weaseldog said...

I agree with you Edgar.

What your describing is the reason we have boom and bust cycles in our economy.

I don't think we have a prayer in changing the way our economy functions at this point.

However, the government is just giving money away. If we can't stop the gov from doing that, then why not redirect some of those wasted dollars and give a portion to the citizenry?

Give each citizen of a minimum age a $100k, and the economy will shoot off for another bubble.

But of course, soon after, prices will rise... but the smart folks would've paid down their debts and limited expenses. The less smart could pay down debts and then run them back up again. The dumb ones could blow it on gambling cruises and kitchen remodeling.

Who knows, such a plan might even get Obama re-elected...

It's still doomed to failure for the reasons you cite. But hey, it's the right price to buy me off for a bit. We're screwed anyway, I'd like to to get the last two monkeys off my back (mortgage and IRS), and that would very nearly do it after the gov taxes the $100k...

At 6:32 PM, Anonymous Anonymous said...

You wrote: it's not the public investing...

I think that's only partly true. We are investing in the sense that many of us still have the remnants of retirements and other accounts invested in the markets. In order to be strictly true, we need to cash out of these things before we do go the way of Argentina, For the record, I don't personally believe we have years left to reach that point.

I listen to a number of folks trying to figure out exactly how to cut their losses PDQ. Some are talking seriously of cashing out their 401-k's and pensions, paying off what debt they have left and literally walking away from the whole show. I guess the reasoning is that Government Sachs can sit there and fondle it's market all it wants but the people have had enough.

At 4:39 AM, Anonymous Anonymous said...

why not redirect some of those wasted dollars and give a portion to the citizenry?

I agree. Or, if we have to work within the present system, how about a $100k loan at 0% for everyone? Why do the bankers get free money but we must pay and pay and pay?


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