Do Not Be Fooled: The Dollar Is Doomed

Massive Reliquification Will Yield Massive Inflation

Bernanke bets otherwise: I hope he is right.
When the velocity of money returns: well, it won't be pretty.

Princeton Prof on Origins of the Financial "Mess"

Why Geithner Round II Will Suck

Axis of (Economic) Power is Shifting: Learn Mandarin, Learn to Farm

Our Government's Credit Card Interest Payments

The spreadsheet linked here shows the equivalent: promissory notes bought by foreign creditors, and the interest paid by the US. Now - given the new US deficit this year - either the monthly/yearly interest payment is going to sky-rocket (further ensuring larger deficits (because we cannot restrain our own spending, nor can taxes be increased sufficiently)), or we will see "quantitative easing" (increasing the quantity of the supply of money (inflation)).

You guess which. I have here already.

Pay attention to whether the forecasts offered by the Feds are done on an accrual or a cash basis of accounting. You'll noticed they are intertwined: when it comes to income, accrual basis; when it comes to expenses, cash basis. This is a systematically misleading reporting method. Now why would a government (or any organization) do that - unless it is trying to hide something? Umm, insolvency?

Investor to Farmer

What do you make of it when one of the most successful investors in the world is now buying farmland - and actually farming it?

You might want to consider this: Tiny Farm.
Not convinced? Think of this.
Not possible? What about this?

Gaussian Copula Function: How a Formula Destroyed an Economy

No really.
The formula can be reviewed here.
How it destroyed an economy can be reviewed here.

Prediction: Treasuries Will Lose Overseas

Foreign uptake of Treasuries will be choked off, by necessity. It won't be because they want to create havoc with the US, it will be because they will be forced to redirect their resources inward as their own economies collapse.

Prediction: GDP May Hit Defined Depression

More specifically: GDP will post a 12-month negative number. There is a decent shot we will see an official depression print before the end of 2009, defined as a 10% decline peak-to-trough.

Banks, Economy Much Worse Than Previously Admitted

I have said it before: things are going to get worse before they get worse. See this nice translation of a speech yesterday by Fed Reserve Chairman Bernanke.

If that is not enough to cause some pause, consider my next post on pensions, or the impending FHLB crisis coming: see here then read Roubini testimony here.

More Bad Mojo . . .

. . . but invest in the right commodities and be safe, even rich:

2009-2010 As Economic Disasters

So says Peter Schiff.
Listen and learn:



And:

"Most US Banks Are Bankrupt"

I wonder whether that should read, "Most LARGE US Banks Are Bankrupt."
See what I mean here.

Really, REALLY Cheap Houses This Summer

Since filings will only be getting worse next year. Currently:


Foreclosures are slowing now, but will get worse next year.

Seriously: On the Bailouts

Here is the question I cannot figure out: Why are the automakers treated so differently than the banks? Why must they cancel their dividends, but not the banks? Shouldn’t they ALL have to change their bonus and exec comp structure, kill the divvies, and start behaving like responsible bailout recipients? This confuses my simple mind.

Bad Real Estate Market to Get Worse

This time, it will be commercial real estate. That is, it will be commercial before it is residential again in 2010 (more on that later). View here.

What Are the Banks Doing With the Bailout Money?

The evolution of the economic crisis is getting very interesting. Increasingly, banks are buying government bonds. To a degree, the banks are getting out of the business of being like highly leveraged hedge funds. Instead they are loading up on government bonds. On the other hand, governments, in particular the US Government, are taking over the role of highly leveraged banks and high risk hedge funds. The source of new liquidity to the economy is leaving the private sector and being taken over by government. This is an interesting turn for the United States, a nation that was established on the principle of limited government. Continue reading . . .

Charity in Crisis

Human beings need to give charity in order to be happy. Expecting government to provide all social services and assistance robs those who are economically stable of the opportunity to help others and risks being inefficient, cold and even immoral. We must maximize a system most respectful of our God-given creative freedom and which allows us to meet the basic needs of our brothers and sisters.

Artificially Low Interest Rates Are a Big Problem

Government and mainstream economists have erroneously concluded that the key to reversing the financial free fall can be found in stopping the plunge in home prices. (I would offer the corollary that the key to reducing injuries in auto accidents is to suspend the laws of inertia). But to accomplish the improbable task of re-inflating the housing bubble, the government appears ready to announce a coordinated plan to push down mortgage rates to just 4.5%. Of course, this is precisely the wrong solution to the housing crisis, but when it comes to bad ideas our government has been remarkably consistent.

The plan would require the newly created Federal agencies of Fannie Mae and Freddie Mac to lower rates to 4.5%, and then require the Fed to directly buy the loans after they were made. The idea is that by lowering mortgage rates, current homeowners will be able to afford to make their payments, and new buyers will be more likely to qualify for larger loans, provided of course they do not have to come up with a burdensome down payment. If 4.5% is not enough to convince reluctant borrowers then look for the mandated rate to drop further. Perhaps there may come a time where the interest flows to the borrower instead of the lender. Anything to get Americans borrowing again.

But artificially suppressing mortgage rates will encourage risk taking and debt assumption at a time when consumers and lenders should be acting prudently. By setting rates below market levels, and buying mortgages that no private funder would want to touch, the government is creating a mortgage entitlement. Given the size of the home mortgage market, the program could eventually become one of the largest entitlement program on the federal books.

The most obvious problem is that the Government has no money. All it has is a printing press. So the more money it provides for cheap mortgages, the higher the inflation tax will be for all Americans. Higher inflation will cause the difference between where rates should be and where the government sets them to grow wider, and the entitlement to become more costly to provide.

Assuming $5 billion in mortgages are refinanced at 4.5% in an environment where the unsubsidized rate would have been 10%. The annual cost to the government in such a scenario would be $275 million. But the subsidy will have to be provided in perpetuity, as the minute it is removed, mortgage rates would surge and housing prices would plummet. Of course, the mere existence of the subsidy will continue to create demand for mortgage credit, which the government will be forced to provide by printing even more money. This would set into place a self perpetuating spiral of rising inflation and mortgage demand, with practically 100% of mortgage money being provided by the government. Ultimately the whole scheme would collapse, as run-away inflation would completely destroy what would be left of our shattered economy.

Some argue that since the government can now borrow for 30 years at 3%, issuing mortgages at 4.5% is a winning trade. There are three problems with this analysis. First, just because money is cheap does not mean we should borrow it - you think we would have at least learned that by now! Second, this analysis does not factor in default related losses. Finally, there is no way the government would be able to borrow that much money at the long end of the rate curve without driving interest rates much higher. The only reason long-term rates are so low now is that the government is concentrating its borrowing on the short end of the curve. So to pull of the trade, the government will have to finance it with treasury bills. If we turn the government into a massively leveraged hedge fund that cycles a multi-trillion dollar carry trade of short-term debt used to finance long term mortgages, then I think we already know how that movie ends.

In the final analysis the market must be allowed to function. If real estate prices are too high they must be allowed to fall, regardless of the consequences. Lower prices are the market’s solution to housing affordability. Government attempts to artificially prop up prices will have much more dire economic consequences then letting them fall. Until we figure this out, there will be no escape from the economic death spiral the government is setting in motion.

- Peter Schiff is the president of Euro Pacific Capital.