Suppose you went into a bank, and wanted to borrow $10,000. The loan officer would say, “How will you secure the loan?” This is as it should be, if all were true, honest, or even logical. You then offer to secure the loan with a pack of cigarettes. The loan officer then becomes indignant, and asks, “How in the world can you possibly secure a $10,000 loan, with a pack of cigarettes?” You explain that cigarettes require a lot of effort to produce. They require farming the tobacco, aging it, shredding it, adding chemicals and flavorings, packaging it, shipping it, wholesaling it, and retailing it. Tobacco companies also do a lot of advertising, must comply with laws, and pay a lot of taxes. Actually, the price of a pack of cigarettes, is about what it costs the government to print a pack of hundred $100 bills.
The banker doesn’t have to have the $10,000 on deposit, nor expend any effort or incur any real cost. He doesn’t have to grow a product, or go through any of the stuff a cigarette manufacturer or tobacco farmer must do to get a product to market. When I was growing up in my Dad’s drugstore in Washington D.C. cigarettes were 13 cents or two packs for a quarter, and I guess they are now $5.00, or thereabouts. They are close to 35 times as expensive as they were in 1950. (Give you an idea of the amount of inflation we have had in 60 years?)
Dubya wants to spend $87 billion in Iraq, and the Congress will probably “give” it to him. “Give,” in quotation marks, because they are merely devaluing your dollars, and “giving” him nothing. The federal government, now has immediate debts of over $7 trillion, plus debts for Social Security and other nonsense, of tens of trillions. The income tax collections for the year 2002 were way down, and the explanation given, is that there was this depression, and hundreds of thousands were laid off. (They still are, plus more) This may be part of it, but word is out that 57 million have simply dropped out of the system, and aren’t going to pay any more. Eastman Kodak used to have 130,000 employees in the US and now has 12,000, as an example. Who knows? The entire system is so screwed up, as to make it actually ludicrous. Think about it for a minute.
The number of dollars in circulation increases by literally millions each and every day, thereby lowering the purchasing power of them. (It’s like taking a shot of bourbon, and endlessly diluting it with water or ice cubes. Eventually, you would have to drink 10 gallons of it to get a buzz.) Dollars now require almost a hundred, to buy what one bought 75 years ago. Iraq and Afghanistan are hopeless morasses, and sinkholes of dollars, with no end in sight. More and more baby boomers are applying for Social Security daily, as they get into the age 62 sector. There isn’t a silver dime in the Social Security “fund,” so claims will be satisfied with funny money. With every dollar “printed,” ( it’s a bit more complex than that, but the phrase sums it up pretty well), their value shrinks. The government is now buying its own bonds, when no one else will. This is a simple way of endlessly increasing the supply of dollars.
Abraham Lincoln thought that it would be a good idea for the federal government to print all it needed to pay its bills, and therefor incur no interest. If that had been done, it might be worse than it already is, because the Congress would have immediately begun spending like mad, 145 years ago. Dishonest Abe’s war, made the North’s “Greenback” go to zero, and the South’s “Confederate,” do the same. Will Dubya’s profligacy and the Congress going along with it, make the buck end up there also?
The unbacked paper money scam, has gone on so long, that at the last IMF meeting, one of the honchos said to the effect that the dollar might indeed crash into even less value if that is possible. Will the public ever wake up?
Manias
The NASDAQ was a mania, as was the tulip craze 400 years ago. People act strangely during a mania, which the stock market has yet to correct. They buy at the top, and sell at the bottom. Currently, the “insiders” are selling their stock, because the P/E ratios are wrong, they know what’s in the future, and Joe Sixpack is buying. The highest “insider” selling, is now going on, since April of 1987. Dollars are now in a mania stage. They are failing like there is no tomorrow, but the masses saving in them. From last Sunday’s Denver Post, comes an article with the headline reading “SAVINGS ACCOUNT ASSETS JUMP.” The story tells that Americans now have $3.25 trillion dollars in savings accounts, vs. $2.66 trillion a year ago. Dollar mania? All this, while a local bank here is paying .015% interest. Similar to ridiculous P/E ratios on stocks currently?
When we mistakenly invaded Iraq, the soldiers found three tractor trailers loaded to the gills with hundred dollar bills. No one said they were counterfeit. Not that it would make a difference, as counterfeit or not, they add to the supply. Imagine, three trailers loaded to the roofs with hundred dollar bills. A billion dollars? What happened to them? Who knows? Silent Cal (Calvin Coolidge) once said, “Inflation is repudiation.” Never one to mince words was he, but how true this phrase is, even 80 years after he uttered it.
Repudiation
Repudiation means that one will have nothing to do with something, or refuses to accept or support something. Like the value of the nation’s currency maybe? Does the federal government support a strong dollar? Is it trustworthy, especially in financial matters? When it constantly prints, and prints, and prints, as silent Cal once said, has it repudiated? I think so. Can a citizen believe in its currency? It seems to, and hasn’t repudiated it yet.
Interest rates are low, because if they were raised, the real estate bubble would collapse, as it probably will anyway. With low interest, people are tempted to buy homes. So far so good, with real estate, but for an apt comparison, look at auto sales, with zero interest. It did work for a while, but not now. Auto production has fallen, as have sales, even with no interest at all. Buyer repudiation has occurred in the auto industry. Credit card debt is at an all time high, as are bankruptcies. Low interest attracts home buyers for now, but what else do low interest rates do? They discourage foreign investors. Why would a nation buy another’s debts, if they couldn’t get a decent return on their investment? Why would they buy US debt, if the dollar is falling out of bed, as it has of late? Why would they buy a shaky currency, or debt in that currency, if the interest rate is miniscule, as well as the currency’s future being questionable? The one good reason, which so far has worked, is because they must buy US debt, so the US can buy their merchandise. China is deathly afraid of their bubble bursting, if their currency wasn’t locked with the dollar. So far, so good. But for how long? Will foreign investors repudiate the dollar and America, and sell their debt, or refuse to buy more eventually?
The Tipping Point
We all played on a see-saw when we were kids. The heavy guy makes the light one go up. Currencies can act the same way. There comes a point at which the heavy, out-lifts the light, and if it is economics, there is a point I call the “tipping point.” Picture paper money on one side of the see-saw, and gold on the other end. When the dot com craze went bust, the sellers were the heavies, and buyers the light, on the see-saw. The “tipping point” had been reached, when far more stock-holders decided these no dividend stocks were way over-priced, and they sold. For some strange reason, as always happens, millions of them decided, almost at once. This is the way it always is. There comes a point at which a “tipping point” is reached, and it all goes to hell in a handbag. Almost suddenly, people will repudiate belief, in what they had previously had faith. This is the “tipping point.” Regardless of what valuables they may have to exchange; be it merchandise, or tangibles of any kind, there will come a time, when the dollar, or even all paper currencies, will be repudiated by one and all, just as has happened with every single currency in history. The “tipping point” in paper currencies will have been reached. When? I don’t know, but it will happen. It has to, because a piece of paper is just that: A piece of paper with no intrinsic value. Will we get to Germany in 1924, when a wheelbarrow of Reichsmarks bought a loaf of bread? Eventually, in all probability. In the mean time, protect yourself.