Tuesday, February 3, 2009

Random Musing

IMF issuing bonds?
Banks should be landlords
Pension Funds
Survival Prep
Deflation Arguments
Goldforum, Fekete, FreeGold and Goud.com
New Information?

IMF issuing bonds?

It seems everyone wants to print these days. At least anyone who can. We hear of California issuing it's own bills of credit, or IOU's, the Fed wants to issue its own bonds, and now the IMF wants to issue bonds. Issuing of bonds is the exact same thing as taking out a loan. So you can bet that anyone issuing bonds is hurting for money right now. And once issued, these bonds trade in the free market. But I ask, who would want to buy debt issued by the IMF in the secondary market, let alone the primary market? All I can say is don't be fooled by any of the various "derivatives" that will be popping up as this crisis unfolds. Put your capital into positive value like gold, not negative value like the debt of barbarous relics like the IMF.

Banks should be landlords

An interesting thing happened this week. The house on one side of me has been on the market for a little over a month. It is the same size as mine and the asking price is only 8.5% lower than I paid for my house 21 months ago. The seller is the homeowner. And just this week, the bank owned property on the other side of me, a slightly larger house, went on the market. It's asking price is 45% lower than I paid. This pretty much crushes the hopes of the seller to my right. So I got to thinking...

On CNBC the other day, I heard a banker complaining that one of the problems with the "Bad Bank" idea is that it will force certain assets into some sort of a market. And these are assets that as of now, have no market. So the smaller banks that can't take part in the Bad Bank scheme may be hurt by having to all of a sudden "mark to market" these assets.

This is just like houses. All sellers have to mark their house to market or else it will not sell. This includes the banks. And we all know that the market is at saturation level with all the bank owned properties. Incidentally, the house to my left is owned by Wells Fargo Bank.

In my very first post on this blog I predicted that the end result of this crisis will be that "most houses will be occupied by renters, not by homeowners, even in the nicer neighborhoods." And that "these same people will be enslaved to landlords rather than to mortgage companies." I still believe this is true. And I believe that these banks will ultimately be forced to expand their business model to include "Property Management". They will ultimately become our landlords.

I think that if the biggest banks were to take this painful pill now, and rent these bank owned properties at discounted rates, it would have a very positive effect on the economy. Not that it would solve all our problems, but it would be a good start. Think this through. I have thought this through quite far and I think it would have positive effects on the bank's balance sheets and on the housing market as a whole. It would also help to provide affordable (rental) housing for individuals in distress. The only segment that would be hurt would be the current group of landlords, as their market would experience a supply spike and rental prices would be driven down.

Pension Funds

I read a very good article in the February edition of Reason Magazine which talks about pension funds being The Next Catastrophe. I believe this is true, and that we will be hearing more on this subject in the coming months.

There is one prominent union pension fund that I know well, so I decided to dig in and do a little research. What I found is quite shocking. In their latest newsletter, Fall 2008, they give enough details for me to calculate the real truth.

First the fund assures its pensioners that all is well in spite of the bad economy. That they are managing the money well. But at the end of the newsletter they make some disclosures and disclaimers that are required by law. The law requires that all pension funds be 100% funded, meaning that their funds under management must cover the "cash out" value of all the pensioners. If a fund becomes underfunded, it must start making adjustments like raising contributions and lowering future expectations.

Well this large ($2.5 bn) fund reports that it was 60% funded at the end of 2007. And it also reports it's annual liabilities to pensioners at $170 million. It also reports that at current levels it has enough funds to continue paying liabilities for 14 years (as of 2 years ago). Note that the governments Pension Benefit Guaranty Corporation (PBGC) does not have to step in and take over a fund until it is insolvent by their definition, which is "can't even cover benefits for ONE YEAR". That's pretty darn insolvent.

Anyway, there were some more data points I was able to use to figure out how this fund is doing right now. My conclusion is that they are currently about 30% to 35% funded and that covers about 9.5 years of liabilities. Also, their formula as laid out in the newsletter is based on 8% to 9% annual returns from investments. So I am assuming that this fund's trend line will continue in the same direction for one or two more years at the bare minimum. And it doesn't really matter what happens after that, because at this rate, this particular fund will be insolvent within two years by any definition.

If you or anyone you know is relying on a pension fund for your retirement, take note. The key is to cash out while these funds are still lying about their performance. Once they are forced to admit the ugly truth (I'm guessing soon after April 19th), your cash out amount will likely be cut by 2/3rds. And your monthly amount will likely be cut by 1/4 to 1/2. If the PBGC takes over it will be cut by about half and there will be no cash out option if I understand it correctly.

Survival Prep

There's a lot of advice being given out on the Internet regarding survival prep. It's easy to get caught up in this and to feel like you never have enough. Like there's always something else you need to do or get. Well, I'd like to add my two cents on this subject.

If and when the manure hits the wind farm, we'll all be in the same boat together, so to speak. And the key to survival is to simply be better prepared than most of the competition. This doesn't mean being TOTALLY prepared for every possible challenge. What it means is secretly having a little more of this and that so that you can outlast the group that will be trying to solve each problem that comes along.

A good rule of thumb is to have a good supply of stuff that is SO necessary for life that even gold may not buy it if supplies are short enough. For example, if clean water or food became rare enough, not even a ton of gold would buy some. Aside from those things, try to have enough gold (and some silver) to buy what else you may need. To prepare for EVERY possible scenario is prohibitively expensive. But if you buy gold now, you will be able to acquire those things that turn out to be necessities.

Deflation Arguments

I have read several convincing opinions on deflation lately. Almost enough to make me switch camps. But not quite.

The most convincing arguments center around the fact that bank created credit money is much more significant to the money supply than the relatively small M0, or monetary base that the central banks "print". And that it is this "large aggregate of money" that is contracting. Here is my response to one piece as I put in an email to a friend:

This is very good. When I read clearly stated pieces like this, I am tempted to enter the deflation camp. But I keep coming back to the same thing. And that is, I haven't seen a good explanation for existing known hyperinflation events that includes large money aggregates which come from bank lending and not from Central Bank printing.

Look at all the examples of hyperinflation, Weimar, Zimbabwe, Argentina and Brazil. In all the cases the economy was basically dead and so was banking. The hyperinflation was brought on by CB printing.

In my last post Gono states that Zimbabwe has lived without credit for 10 years. Yet they have hyperinflation.

I think that the explanation lies in the fact that those large money aggregates that come from Bank lending and debt flow into large assets, like Real Estate and bank created derivatives. When that source of monetary aggregate dries up, those things contract, deflate.... deflation.

But it is M0 which is generally used to buy necessities like food. In Zimbabwe, those assets that are driven by Credit money supply no longer matter. They are as irrelevant as the credit itself. All that matters is cash in hand (M0) and the price of necessities... survival necessities.

And I think we can come to that point quickly here. With food stocks around the country being only good for a few days (Just In Time economy), we could hit a shortage very fast if something happens to the supply chains.

If someone can show me a good explanation for the existing known examples of hyperinflation that includes credit money aggregates, I will switch camps. The explanation that "the US dollar is different because it is the world's reserve currency" doesn't suffice for me. I see that as an Achilles Heel, not a strength.

Goldforum, Fekete, FreeGold and Goud.com

If you haven't visited GoldForum.com lately, please do. I know for a fact that there are some very smart people reading this forum. I hope that more will start contributing. In my FreeGold thread over there I just posted a great new interview with A.E. Fekete.

The founder of GoldForum.com has kindly forwarded his domain FreeGold.com to this blog. It's easier to remember than the full URL. Also, I wanted to mention his other site, Goud.com (Dutch for gold), where he posts the freshest gold and economy related videos I have seen. It is a great place to stop by once a day.

New Information?

Lastly, I will leave you with these intriguing posts made this evening on the USAGOLD forum:

mikal (usagold.com 03February2009; 13:34)
New information
I’ve received some astounding, though not unexpected, new information that tells me definitely this year, possibly this quarter will see a brand new monetary system.
Almost 100% certain, and gold is beginning to dissappear again, for this and and a number of reasons, though it’s much more urgent that you all finalize your preparations, especially to make yourself and your family safe and secure in the coming transitions. I’ll return later this evening.

Golden Ratio (usagold.com 03February2009; 13:46)
Wow, you’re really going to leave us hanging like that?
So cruel.

Paper Avalanche (usagold.com 03February2009; 13:49)
@ mikal…
Please do share. I will be refreshing my browser frequently to see your news.


Jesse (usagold.com 03February2009; 14:30)
From Holland:
For me in the Netherlands it’s bedtime now, but thanks to your post I make an exception.


Ender (usagold.com 03February2009; 16:33)
Or oil for gold?

Sir Mikal, well done.

Crystal ball gazing… I would say by July 4th. that will be the day that we learn the value of the Euro. And, by Sept 20th there will be more than enough for all on earth to use them.

slingshot (usagold.com 03February2009; 16:35)
Sir Mikal
You have my attention.

mikal (usagold.com 03February2009; 17:01)
@Ender, Carpenter, Jesse, slingshot, Golden Ratio, PA
@Jesse - Go to bed! If you have gold, you should sleep well. I will be writing more later this evening as I said. It is all I can do to keep up with snowshoveling, spontaneous developments and research but I WILL have more to offer daily as long as this forum is here along with our fine hosts.
@Ender, slingshot, Carpenter- Thank you. You are very aware and unintimidated.
@Golden Ratio- You have not been raeding the forum? I have been making “cruel” predictions here for over ten years!

mikal (usagold.com 03February2009; 17:29)
Re: My prediction
This is nothing new to some.
I am not the first.
In fact I have been leaning strongly in this direction since last summer or earlier when top-level officials and academics began appearing in mainstream publications calling for gold-backed dollars and world currencies and broad reforms to the global monetary system, most of which appeared here at the forum as breaking news.
I also have been receiving information since then from what can be called “lunatic fringe” sources I cannot disclose just yet but which I know some of you here and some of the other forums I visit, access through the internet or radio.
So some people either openly or privately agree with my full conclusions.
Some are undecided as yet or completely skeptical. Some are moving closer to my position as evidenced by their concerns, observations and deep insights.
Keep up your excellent work. Its nice to know that there are people such as yourself who are aware of what is happening and are prepared to warn others.

I need not now rehash the many reasons for Another’s gold reserve thesis or validate the existance of a multi-trillion(actually over 1 quadrillion) derivative juggernaut or other content we continue to cover and expand upon.
For example, the political, social, financial, economic and other gold-relevant issues and news we’ve already covered is just part of our gift to one another and our preparation for even better things.
While the current crisis is accelerating rapidly, our preparations shield and reward new pathways both anticipated and as yet unknown- those whose details only upcoming developments will disclose.

Ender (usagold.com 03February2009; 18:20)
Oil is a currency with intrinsic value. Gold is a currency with intrinsic value. Exchanging the two could be fair trade.

Now, if there is no gold for oil to buy, what can oil do? And what will they do? Either, they ask for it directly, which immediately changes the world reserve currency, or they ‘back’ (a) currency(s) that commit to allowing the free functioning exchange for gold in that currency. In other words, as long as gold can be bought (some amount, not much) in the currency used by oil, that currency functions.

If Another’s words are true that dollars + some amount of gold have given us what we have today. And, if demand has removed the ‘some amount of gold’ from the equation, the dollar is not functioning for acquiring gold. The dollar would be on a short road to nowhere.

The Golden Warrior Sinclair has hinted recently regarding a US system that mimics the Euro. If I understand him correctly, gold will reenter the monetary system as a reserve ‘currency’ that will be treasured by governments – thus may not trade. It’s the people’s gold that will cover settlement. It’s the people’s gold that oil will have to bid for. In that bid we may find a world that’s willing to trade.

My fellow-metal heads, we are on the doorstep of discovery regarding the Euro. It’s very survival demands a settlement price of gold that functions. If they do not make it happen we may very well be faced with the hardest economic conditions imaginable. Stand strong. Gold is freedom.



JustiN_N_il said...

Excellent post!!! I loved the deflationary arguments. Very good point about how credit does not matter in dire times.

alek_a said...

Just an observation. Oil by itself is a commodity, albeit the most basic one. It is not equal to gold, neither technically nor financially. Oil is consumed in some qantity, generating growth, and tjhat oil is no more. More oil should be then extracted.

The promise for oil availability on the longer run is the thing which should be valued in gold. As Ender says, the fact that an exchange exists where gold can be freely traded will support the availability of oil on the long run. But that is not enough. It is necessary to have an instrument that will also guarantee the correct operation of such an exchange, just like JS's ideas of monetary gold non-redeemable paper currency.

FOFOA said...


"credit does not matter in dire times." That about sums it up.

Debt money created by commercial banks is not hyperinflationary because new debt money is only created when assets swell enough to soak it up. A bank doesn't give you a million dollar loan for a house unless that house has swelled to a high value of $1.2 million. So this wide definition of money flows into very specific sectors. It is "earmarked".

Narrow money, or physical currency circulates freely without being tied to any specific asset class. It is much smaller in the aggregate than "debt money", but it also targets more pedestrian products.

Right now the wide debt money aggregate is contracting and so are the asset classes that it feeds. But our governments response to this will be to flood the market with narrow money, which will circulate freely. You can completely remove the banks and those "earmarked" asset classes from the equation and you end up with Zimbabwe. That's the way I see it.


FOFOA said...

Could this be what Mikal was referring to?
U.S. dollar devaluation on its way
US set for ‘big bang’ financial clean-up

FOFOA said...

Hat tip to SteveH for this link:

The US is presenting the world with the choice of continuing to lend in return for paper whose value will decrease, or not lending and seeing the value of their current $US assets fall. Both sides are locked together - the US and their creditors are tied together in a very uncomfortable embrace....

Whatever the final push, I now believe that we are on the edge and, as such, I will brave a timescale. I would now say with considerable confidence that we are within three months of the plunge. By plunge, I mean the serious collapse in either the $US or the £GB, either of which will shortly after precipitate the collapse of the other. I am not tempted to say how far they will fall, but it will be a dramatic fall over a period of about two weeks, sufficient that we will all look on in complete shock. I am not talking about 10% but tens of percent. Once the sell-off starts, I am not sure where it will stop.


FOFOA: We are at a key moment in time. The last 6 months have seen a tremendous push toward socialism and monetarism which is counter to the rules of capitalism. I believe that we will see a rebound or backlash, a revolt by the free market within the next few weeks or months. The free market capitalists value what capital they have left, and it is under massive attack by our governments who prefer the politically expedient response of favoring the debt-ridden at the cost of destroying much needed existing capital. This clash will have severe consequences in the currency realm. So, perhaps it's time to think about gold?

Anonymous said...

I'd like to address the idea of the Banks renting the houses.
The Banks should not be allowed to win this battle.
They should not be allowed to come out owning our country.
They made the mess our country is in.
They need to be put put of business.
The people should own our country, not the banks.
It is the fiat money/debt system that has bankrupted our country. The plan all along was for this to happen and for the Banks to be our owners.


FOFOA said...


Thank you for your comment.

Justice will be served to the deserving. It's not about the banks winning. And I'm not talking about forcing the banks to do this. I'm talking about the banks realizing and acting upon a favorable outcome for all. It's hardly a win when the bank ends up owning a $250K house for which it paid $550K and now must rent for $1,200 a month, not to mention the other hassles of being a landlord.

But the experiment of trying to make everyone a homeowner has apparently failed. So someone will eventually be the landlord to many. Would you rather it be Chinese conglomerates or Arab sovereign wealth funds? Or perhaps it should be the US government.

If a bank must fail it will fail. But those properties it owned will be passed on to someone else through liquidation. Right now the banks own a lot of houses. And in their rush to liquidate they are hurting themselves as well as private sellers.

I do understand the argument that the price of homes must keep falling until they are so low that once again everyone can afford to be a homeowner. I just don't think that the market will let that happen. At some point before prices get low enough for that to happen, they will hit a point where they will be a good investment as rental properties for those with existing capital. That point may or may not be close at hand. It depends heavily on the levels of unemployment we will face and the rental rates that will come from that.

I am simply suggesting a forward looking approach the banks could take that would help themselves, the housing market, the economy, and financially distressed families at this current time. An approach that I haven't heard anyone else mention.

The loan modifications they are currently pushing are deceptively dangerous for families, enslaving them to one house for many decades simply so they can call themselves "owners". As renters, they could live in an even nicer house, for less money, and have the option to move at any time. Ultimately they will be much better off.

Looking ahead, I believe that in a system with honest money, this ownership trend of centralization will be reversed. When people's money represents a positive holding, not a hole of debt, so too will their assets denominated in that money. The debt money system which leads to centralized ownership and control is what is dying right now. Unfortunately it may take 30 to 50 years for that trend to be fully reversed. In the meantime, we are looking at a "renter's paradise", with fancy homes offered for ridiculous monthly payments.


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