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- Aug 30, 2007
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How will we get out of this ecomomic slowdown? Through government spending on infrastructure, bailouts, and lower taxes! What does that mean: increased money supply, and as a result, much higher inflation!
Since 1971 when the gold standard was completely removed by President Richard Nixon and replaced with the current (fiat) currency we have seen significant inflation as politicians are able to continue printing money and increase the money supply. This WILL continue to be the case in the future as governments continue to provide billion dollar (even talk of trillion dollar) bailouts. It is also a way to deflate the international asset bubble and to reduce “real” government debt.
Why did this economic slowdown or recession happen?
a) It is not a failure of free market capitalism. It was social housing policy gone bad. Under Clinton, in the mid 1990’s it was edicted that banks lend more to people who shouldn’t or couldn’t afford one to get one. Thus, home ownership increased .. an intended consequence .. see chart. The UNintended consequence, after the tech bubble burst in early 2000, when Greenspan lowered the interest rates significantly, so called sub-prime loans were made available - leading to a huge housing bubble and overleveraging by too many home owners and speculators. The unintended consequences of these good ideas lead to a house price collapse, followed by securitized mortgage re-pricing, lending freeze, bank and sub-sequent stock market collapse and thus a worldwide economic recession of proportions not seen since the dirty 30’s ..
b) Overlevered investment banks (Lehman Brothers, Goldman Sachs, ..) which were allowed to be levered 40:1 instead of 12:1. This works well in good times, but when thing start to unravel as they did in 2008, they do unravel fast. Thus, we saw a stock market drop of well over 35% in about 2 months from late Sept. to mid Nov. 2008, as banks, mutual funds, hedge funds, “investment” banks and individuals stated to sell stocks by the billions, and fled into T-bills with 0 interest rates or money market funds. (This is called: Reward free risk, btw !)
c) Unregulated securitization of loans and mortgages and lenient loan rating agencies. Many institutional and private investors made investments based on a credit rating system (i.e. AAA or AA grade bonds), trusting these ratings given to them without conducting any further due diligence. A total lack of transparency and regulation made investor due diligence much more difficult. A NINJA mortgage is not AAA. (NINJA: No Income, No Job or Asset .. as many mortgages were such in the US)
d) Risk was priced much too low! As an example, think of risk as an insurance premium you would pay on your home. For the system to work, the price must reflect both the likelihood that the event will occur (i.e. house fire, flooding, etc) and the cost of its occurrence. In the finance world, lenders and investors were collecting too low of a premium (i.e. interest rate and loan amount) for the risk they took on when lending to individuals and companies that were not likely to pay them back. The system is now correcting itself to re-price risk accordingly.
This financial calamity we’re going through now will lead to the demise of those who were reckless and stretched too thin. The benefits will ultimately accrue to those who kept a little something in reserve for just such a rainy day.
Read this article on inflation: http://www.financialpost.com/story.html?id=1123647
Or view this video: http://www.chrismartenson.com/crashcourse/...er-10-inflation
Greed and avarice will be replaced by thrift and integrity. Just like it`s been in the past at other points in our history, saving will become an honorable concept again. And that will become an important part of the recovery process if for no other reason than history shows until you have credit going up instead of down, you can`t have growth. Risk aversion will rule for a long time. People, and indeed entire industries, have learned their lessons the hard way this time around. That suggests that dividends and income paid by companies engaged in real products with real cash flow will once again resume their rightful place among the most important investments people can make.
"The financial crisis is like an extremely low tide. Until the water runs out, you can`t see how much crap needs to be cleaned out of the harbor."
Inflation will be huge going forward: Why ? As long as we live in democracies, with elected officials that have to respond to "the people" stating "bail me out", "build me a new hospital", "provide me with cheap child care", "lift my RRSP savings, i.e. the stock market", "don`t let the car industry fail" .. we spend and spend .. and thus, to make the pain easier we print more money to deflate the debt. Money supply is up hugely .. and they stopped publishing it .. estimates are 17% to much much higher like 50%+ in 2008 over 2007 ..
So, this means that either interest rates will rise hugely .. or the US dollar will plummet .. and since high interest rates kill the economy the US dollar will slide ..
The money supply shock .. if $6T is sitting in money market fund .. plus a few more $100`s of billion (of bailout money) on banks balance sheets .. sooner or later people (or banks) will realize that a 1% or 2% interest bonus isn`t all that great .. and will invest it in mortgages, bonds, equity, real estate, stocks .. or spend it !!
This is EXACTLY what the US (and many other nation`s) government is doing right now: flush out the $s into the economy .. thus force real estate values up or at least flat and spending or investing by massively devaluing the $ !!!
This is the main reason why we put our US purchases which we had envisioned as recently as fall 2008 ON HOLD for the time being ..
However, since many other nations are doing the same .. the US dollar might not get hammered quite as much relative to the Euro or Yen or Swiss Franc or Can $ or ... but money relative to REAL assets will get less an less valued .. so things REAL will go up: gold, real estate, oil, nickel, uranium, ... and that is called inflation !
Here`s an excerpt from a newsletter I received today .. and while I do not know if it is true .. let`s assume it is ..
In a single 30-day span, investors yanked $127 billion from U.S. stock and bond mutual funds, seeking the "safety of Treasuries and cash," according to the Investment Company Institute.
But the rush to cash didn`t stop there. Even with yields sinking below the S&P 500, the demand for Treasuries soared... all helping to drive the greenback up 21% in just five months.
All this has created what could be the biggest bubble in the financial world today... the bubble in the U.S. dollar! And now, that bubble is strained to the breaking point... even as investors the world over huddle in cash. It`s a disaster just waiting to happen... waiting for that "tipping point" event to set off the fireworks.
Consider... in addition to irrational global demand for the U.S. dollar, the Fed is expanding our monetary base by more than $11 billion a day since September, to nearly $1.5 trillion. That`s an increase of 79.02% since October of 2007.
Hence, buy anything REAL that you can hold .. gold has no value as it has no income .. it just looks pretty .. so buy a gold producer perhaps or a nickel producer or an oil company or a piece of real estate that has enough income to cover its cost !!
Note the word REAL in real estate !
As to buying (a vacation, retirement or income) property in the US: Probably wait until it stabilizes .. hopefully later in 2009 .. and then the currency might still work against you as a Canadian in 2010 ! Be aware of these complexities.
Your thoughts here ?
Since 1971 when the gold standard was completely removed by President Richard Nixon and replaced with the current (fiat) currency we have seen significant inflation as politicians are able to continue printing money and increase the money supply. This WILL continue to be the case in the future as governments continue to provide billion dollar (even talk of trillion dollar) bailouts. It is also a way to deflate the international asset bubble and to reduce “real” government debt.
Why did this economic slowdown or recession happen?
a) It is not a failure of free market capitalism. It was social housing policy gone bad. Under Clinton, in the mid 1990’s it was edicted that banks lend more to people who shouldn’t or couldn’t afford one to get one. Thus, home ownership increased .. an intended consequence .. see chart. The UNintended consequence, after the tech bubble burst in early 2000, when Greenspan lowered the interest rates significantly, so called sub-prime loans were made available - leading to a huge housing bubble and overleveraging by too many home owners and speculators. The unintended consequences of these good ideas lead to a house price collapse, followed by securitized mortgage re-pricing, lending freeze, bank and sub-sequent stock market collapse and thus a worldwide economic recession of proportions not seen since the dirty 30’s ..
b) Overlevered investment banks (Lehman Brothers, Goldman Sachs, ..) which were allowed to be levered 40:1 instead of 12:1. This works well in good times, but when thing start to unravel as they did in 2008, they do unravel fast. Thus, we saw a stock market drop of well over 35% in about 2 months from late Sept. to mid Nov. 2008, as banks, mutual funds, hedge funds, “investment” banks and individuals stated to sell stocks by the billions, and fled into T-bills with 0 interest rates or money market funds. (This is called: Reward free risk, btw !)
c) Unregulated securitization of loans and mortgages and lenient loan rating agencies. Many institutional and private investors made investments based on a credit rating system (i.e. AAA or AA grade bonds), trusting these ratings given to them without conducting any further due diligence. A total lack of transparency and regulation made investor due diligence much more difficult. A NINJA mortgage is not AAA. (NINJA: No Income, No Job or Asset .. as many mortgages were such in the US)
d) Risk was priced much too low! As an example, think of risk as an insurance premium you would pay on your home. For the system to work, the price must reflect both the likelihood that the event will occur (i.e. house fire, flooding, etc) and the cost of its occurrence. In the finance world, lenders and investors were collecting too low of a premium (i.e. interest rate and loan amount) for the risk they took on when lending to individuals and companies that were not likely to pay them back. The system is now correcting itself to re-price risk accordingly.
This financial calamity we’re going through now will lead to the demise of those who were reckless and stretched too thin. The benefits will ultimately accrue to those who kept a little something in reserve for just such a rainy day.
Read this article on inflation: http://www.financialpost.com/story.html?id=1123647
Or view this video: http://www.chrismartenson.com/crashcourse/...er-10-inflation
Greed and avarice will be replaced by thrift and integrity. Just like it`s been in the past at other points in our history, saving will become an honorable concept again. And that will become an important part of the recovery process if for no other reason than history shows until you have credit going up instead of down, you can`t have growth. Risk aversion will rule for a long time. People, and indeed entire industries, have learned their lessons the hard way this time around. That suggests that dividends and income paid by companies engaged in real products with real cash flow will once again resume their rightful place among the most important investments people can make.
"The financial crisis is like an extremely low tide. Until the water runs out, you can`t see how much crap needs to be cleaned out of the harbor."
Inflation will be huge going forward: Why ? As long as we live in democracies, with elected officials that have to respond to "the people" stating "bail me out", "build me a new hospital", "provide me with cheap child care", "lift my RRSP savings, i.e. the stock market", "don`t let the car industry fail" .. we spend and spend .. and thus, to make the pain easier we print more money to deflate the debt. Money supply is up hugely .. and they stopped publishing it .. estimates are 17% to much much higher like 50%+ in 2008 over 2007 ..
So, this means that either interest rates will rise hugely .. or the US dollar will plummet .. and since high interest rates kill the economy the US dollar will slide ..
The money supply shock .. if $6T is sitting in money market fund .. plus a few more $100`s of billion (of bailout money) on banks balance sheets .. sooner or later people (or banks) will realize that a 1% or 2% interest bonus isn`t all that great .. and will invest it in mortgages, bonds, equity, real estate, stocks .. or spend it !!
This is EXACTLY what the US (and many other nation`s) government is doing right now: flush out the $s into the economy .. thus force real estate values up or at least flat and spending or investing by massively devaluing the $ !!!
This is the main reason why we put our US purchases which we had envisioned as recently as fall 2008 ON HOLD for the time being ..
However, since many other nations are doing the same .. the US dollar might not get hammered quite as much relative to the Euro or Yen or Swiss Franc or Can $ or ... but money relative to REAL assets will get less an less valued .. so things REAL will go up: gold, real estate, oil, nickel, uranium, ... and that is called inflation !
Here`s an excerpt from a newsletter I received today .. and while I do not know if it is true .. let`s assume it is ..
In a single 30-day span, investors yanked $127 billion from U.S. stock and bond mutual funds, seeking the "safety of Treasuries and cash," according to the Investment Company Institute.
But the rush to cash didn`t stop there. Even with yields sinking below the S&P 500, the demand for Treasuries soared... all helping to drive the greenback up 21% in just five months.
All this has created what could be the biggest bubble in the financial world today... the bubble in the U.S. dollar! And now, that bubble is strained to the breaking point... even as investors the world over huddle in cash. It`s a disaster just waiting to happen... waiting for that "tipping point" event to set off the fireworks.
Consider... in addition to irrational global demand for the U.S. dollar, the Fed is expanding our monetary base by more than $11 billion a day since September, to nearly $1.5 trillion. That`s an increase of 79.02% since October of 2007.
Hence, buy anything REAL that you can hold .. gold has no value as it has no income .. it just looks pretty .. so buy a gold producer perhaps or a nickel producer or an oil company or a piece of real estate that has enough income to cover its cost !!
Note the word REAL in real estate !
As to buying (a vacation, retirement or income) property in the US: Probably wait until it stabilizes .. hopefully later in 2009 .. and then the currency might still work against you as a Canadian in 2010 ! Be aware of these complexities.
Your thoughts here ?
