The Fed Drops Rates To Help SPECULATORS, Not Housing

May 21, 2008

Elaine Meinel Supkis

I was fooling around with a bunch of graphs while listening to Mahler's Symphony #6. And then had some revelations. We have to understand how the Fed interfaces with mortgage rates and housing bubbles. The chart below makes it crystal clear: the Fed causes these things to happen because of the SPREAD between its rates and bank rates. Also, the Congress is holding hearings this week about speculators driving up the value of many important commodities at a mad rate that hasn't been seen since, since...since Volcker had to raise interest rates to 18% to stop them back in the 1980's. Time to read the testimony at that hearing and I hope to hear from readers about this riddle. Thanks!

Click on image to enlarge:

When I drew up this graph and began to color it in, I noticed several things. One was, the interest rate charged by the Federal Reserve doesn't match the mortgage rates offered to homeowners by the banks. Indeed, there is virtually NO match! What the hell is going on here?

I noticed that only twice did the Fed rate rise above the rate the banks charged for house loans. Both were due to Volcker's attempts at killing off inflation! Between each dragon-slaying event, housing BOOMED. But so did inflation. After the second surge by the Fed, Volcker was thrown out of office and we got the Greenspan/Bernanke regime. Note how each time the Fed dropped interest rates, the banks DIDN'T FOLLOW SUIT. They merrily charged far more for mortgages than the Fed's ongoing rates! But every time the Fed RAISED rates and the mortgage and Fed rates merged, housing COLLAPSED. And this time around, from 2006-2008, is no different!

Anyone who tells me the Fed drops rates to 'save housing' is NUTS. Or listens to propaganda. The central bankers are born liars. They lie about nearly everything and anything. If you gave them a lie detector test, they would cause the needle to jerk right off the chart.

The question is, if rates have barely changed between 2000 and 2008, why has housing had this sudden boom and even faster bust? Who had money burning in their pockets and were eager to give it to anyone and everyone so long as they promised to pay back at the rates that were more than 350 basis points higher than the money the Fed was shoveling into the member banks? Eh?

Sometimes things hit me like lightning. I was going to do a different story but needed to review some statistics so I went off to the Fed and fooled around in their graphs section. This chart is very much a revelation to me! For I added the percentage of rise and fall in value of the housing stock. Then and only then, did it become crystal clear: the rate of interest for mortgages did NOT cause the housing bubble! Not even slightly!

No, the true nature of this beast was the action of the tentacles of the Federal Reserve: all of its member banks. They got the cheap loans, not the homeowners. They had cheap money that HAD to do out the door, fast. A huge amount of cheap loans that HAD to be quickly turned into 'money' as it had to become the tar baby for some human somewhere who would use FUTURE labor to pay for the money handed out via the central bank to the member banks!

The Hunt for the Chump was on! As this easy money that was so tempting poured into the accounts of the member banks, so long as it sat there, it was a DEBIT, not an asset. To change it into a plus money making asset required giving it out as a loan in the housing markets. The pool of 'good people' who could put 10% down was limited. The funds the Fed made available was unlimited. So all the member banks dropped requirements to the point of 0% down and no certification of income or anything at all. I remember when a person couldn't get a loan for housing unless your income could support it.

But during this bubble, that was thrown out the door. People could buy 2, 3, 10 properties. People in prison bought and traded properties! Anyone including a flood of illegal aliens could buy a home with no money down. When the 350+ basis point difference became too difficult for the increasingly ill-funded purchasers using this flood of Funny Money™, the banks willingly shoved even the payment of interest into the future with their new 'teaser' rates and the 'don't bother with the interest and let it become part of the principal' games.

In other words, the rate drops were NEVER for the homeowners. Who always needed a sudden flood of Funny Money™? If I drew a chart showing Wall Street collapses, there it is: EVERY DAMN TIME THE FED DROPS RATES IT IS FOR GOLDMAN SACHS AND JP MORGAN!

And shockingly, guess who founded the Fed? Eh? Of course, readers here know I hate the Fed and wish it ill. The main thing here is, the manipulations, the gyrations our interest rates undergo, the wilder and wilder surges we all go through are not due to the Fed 'tightening' or 'loosening' money. It is due to the Fed doing this on behalf of a bunch of pirate speculators! Who have only one desire: to enrich themselves as fast as possible. Greenspan let the cat out of the Fed bag by muttering something about 'irrational exuberance' except Goldman Sachs and JP Morgan are not irrational at all.

They play with the toys Santa gives them. And cheap loans is the biggest gift Santa has! I was very angry last fall as Cramer was running around foaming at the mouth about 'blood in the streets' but every time the Fed dropped interest rates, stocks would shoot upwards to new records. Now, rates are dropped and stocks...hey! They shoot up! But yesterday, these pirates learned there will be no more rate cuts for JP Morgan or Goldman Sachs and the stock market crashed. They blamed it on record oil prices. But I saw in the news all last week when stocks were rising, that this was due to higher oil prices and since oil companies are on the stock market ticker, this drove UP stocks!

In other words, stocks are ENTIRELY dependent on how low interest rates are. Why is this, I ask.

HAHAHA. Are these clowns using hard-earned savings to play the markets? OR ARE THEY USING LOANS? The answer is painfully obvious! We know there is a lot of loans out there right now because they are being used by speculators...in commodity markets! The cheaper the loans, the more they make commodities climb. THIS IS CAUSING INFLATION.

Long ago, I said all the yapping about the housing crisis was NOT the cause of the banking collapse. It was a symptom. The real cause is in the graph above: housing is crashing due to the banks ceasing the flow of money towards housing for the simple reason, the 350+ basis point advantage is GONE. They make NO PROFITS. But they do make profits if this money flows to...the speculators. They have an endless appetite for cheap loans! Considering the risks they are taking, a loan for less than 11% is cheap as hell.

If oil rises by 165% in six months, my god! The profits! Paying 10% on a loan from a bank to play that market: what a spread! This is why the hedge funds that finally dumped their toxic paper off at the Fed for a fist full of Treasuries ran off to the oil markets and plunked it all down on bids! As well as rice, wheat and a host of other things. No one is putting on housing. Housing is dead as a doornail since it is declining. We can be certain, when it begins to rise again, they will pour money into housing lenders again.

Right now, the spread between mortgages and Fed rates is around 250 basis points. In the news this week is the not-so-surprising information that the lenders are letting people buy houses with only 3% down. A ridiculous amount. This is in a desperate attempt to revive the housing bubble for political reasons. Too many people are poking around the smoking ruins of the housing/banking collapse. And the flood of Funny Money™ pouring into commodities is rapidly destroying our nation's economy, nay, the entire planet's international and internal commerce and trade!

Since the US is hugely responsible for this global inflation, we have to understand how it works in order to fix it. Below is the testimony of the people responsible for controlling the speculators who are running riot across the entire planet. To show how nearly impossible it is to rein them in under present circumstances is obvious. We shall talk about that in a moment:

Testimony of The Commodity Markets Council On Financial Speculation in Commodity Markets: Are Institutional Investors and
Hedge Funds Contributing To Food and Energy Price Inflation?

Before the Committee on Homeland Security and Governmental Affairs U.S. Senate

May 20, 2008

Examining The Role Of Institutional Investors And Hedge Funds In Commodity
Markets

CMC views the investment activity of institutional investors and index funds as legitimate “financial hedging,” but we recognize that it is passive in nature and not responsive to price levels or supply and demand fundamentals. In 2005 and 2006, CMC worked closely with the Commissioners and staff of the Commodity Futures Trading Commission (CFTC) to bring about a better industry understanding of the nature of index fund activity in futures markets. The result of this collaborative effort was the CFTC’s release of a new Commitment Of Traders (COT) Supplemental report showing index fund financial hedges as a separate and distinct category.

We believe the COT Supplemental Report provides much needed transparency to the market about the size and behavior of such investors. Despite being a relatively young report, it is already one of our industry’s most essential tools for analyzing markets. Although some organizations believe that the activities of large institutional investors in futures markets pose a threat, CMC believes that this is not necessarily the case. CMC recognizes that passive investment in the commodity markets may have had some price impact, but current evidence shows that market fundamentals generally support the current price levels seen in the futures markets.

The CFTC recently indicated that it will take a “go-slow” approach in expanding exemptions for this new class of investors. CMC supports this regulatory approach because it will allow the Commission and market users more time to thoroughly evaluate the potential this passively invested money may have on commodity markets. Given the many concerns in the commercial marketplace about convergence, CMC believes it is critical for market participants to have a clear idea and understanding of this new type of investor. It is important to note that this type of investment is new and different, but not necessarily bad.

My god. This is pure madness! This 'type of investment' is not new at all! It is a ghoul from a very musty, old grave. Time and again, the bankers create a mania of some sort. This is usually due to lending maniacs money to play games with tulips, Mississippi mud or South Sea froth. As for the harm being done by these speculators: it is immense. This commodity bubble mess is historic. I have seen this before: it was in the late 1970's and Volcker strangled it quite dead with his high interest rates.

This sort of brain-dead supervision by the people who should be taking things in hand is typical. For example, when Congress sits down to discuss the trade deficit, this same mealy-mouth, pandering talk is all we get. Only when the heads of the Fed talk with Ron Paul do we see any sign of life. The rest of the multi-millionaires in the Senate, for example, flee the room when Paul takes on the Fed. They don't want to hear about this at all. Nor do they really care about the trade deficit or they would all be yelling. They are a tad frightened about the massive bubble in commodities because this will destroy what is left of our nation! It can cause WWIII! No one outside the US is very happy with this mess except the Saudi Royals and Putin. And Chavez. And Iran, for that matter. I would think our Senators would look at this and flip out. Yeah.

A prediction: if oil hits $200 a barrel as the US threatens Chavez and Iran as well as Russia [with those stupid missiles in Poland!] this will be due to the speculators knowing this threatens the future of oil shipping so they bid up the price. And at $200 a barrel, our economy will collapse. Millions of Americans will have to go without heating, travel to work, food will be too expensive, our nation will collapse. And if the Fed feeds these speculators more cheap loans, it will get WORSE. Cheap Fed loans=>speculators using it to bid up oil=>total social and economic collapse of the US. I would think someone would put all this together and react.

Equally important is the distinction between passive investment and price-responsive investment. Typically index funds and institutional investors engage in passive investments. They take a position and hold it until a determined time. They do not change their position based on market movements. On the other hand, hedge funds tend to be more responsive to market signals and act as a traditional speculator. As such, hedge funds are subject to speculative limits which are appropriate.

In the last decade, futures markets, especially in the enumerated agricultural commodities, have grown immensely because of the relevance of their products to the commercial hedging, financial hedging, and general international and domestic trading communities – including hedge funds, index funds, and institutional investors. This increase in volume boosts liquidity, aids in price discovery, and enhances market efficiency.

Futures markets today reflect global economics and trends, not speculative buying power. Speculative activity in futures markets may influence day to day prices, but it is powerless in the face of larger, fundamental forces. If prices begin to retreat tomorrow, speculative activity will follow that retreat, not cause it.

My god. This guy is effing insane. He is mad as a hatter without a toupee. How on earth has flooding the commodity markets with a vast sea of easy loans, aid in 'price discovery'? It would be like when I go out to pump some gas in my car. I discover I am going to have no money for food! What a neat thing to find! ARGHHH. And 'liquidity': hey! I recall for the past six months, the bankers shrieking about the LACK of liquidity. And yet, when even one drop of liquid is squeezed out of the central bank's lemons, the price of all commodities shoots to the moon! What a shock!

Policy Recommendations To Consider

To address the concerns surrounding this new investor in commodity markets, CMC
recommends:

1. Monitor Index Fund Positions. To maintain competitive markets, exchanges and the CFTC should continue to monitor index fund participation and be prepared, if necessary, to examine the structure of the hedge exemptions granted to the funds. In the agriculture futures markets, volume grew immensely in the last decade and the increased liquidity benefited all market participants. Fund investment contributed to this prosperity, and CMC believes that the CFTC and lawmakers should move slowly when adopting measures that will discourage such participation in the markets.

2. Continued Product Innovation. As the markets evolve and learn to adapt to the changing supply and demand dynamics, CMC would support legislation and regulations that allow exchanges to continue to innovate and create new products to manage risks. [ARRRGHHHH! LIKE HELL!]

3. CFTC Study Of Alpha Trading. CMC also recommends that the CFTC initiate a study of the trend toward “alpha” or “enhanced return” trading by index and hedge funds. Because this type of investment is price-responsive and not passively managed, CMC believes it is speculative in nature and should be reported as such on the CFTC COT Supplemental Report.

Margin Requirements

With crude oil prices moving higher and higher, CMC shares the concerns of many lawmakers. We are confident in the ability of CFTC professional staff to monitor and evaluate trading in energy markets, as well as their conclusions about the impact of speculation on prices in the energy futures markets. [Sort of like watching the Titanic sink while appreciating how nicely the orchestra on deck is playing]

CMC is concerned about a provision in the Consumer-First Energy Act of 2008 that would require the CFTC to set a “substantial increase in margin levels for crude oil.” It appears the intent of the provision would be to lower prices; however, we believe that increased margin requirements would force many market participants off-exchange and into less transparent markets.

A margin payment, also called a performance bond, is the amount of money or collateral deposited by either a customer with a broker, a broker with a clearing member, or a clearing member with a clearing organization. A margin payment does not serve as a partial payment on a purchase, but rather serves to manage counter-party risk and ensure the financial integrity of the markets. Raising margin requirements will not reduce volatility or manage prices. It will increase the cost of futures transactions and potentially push speculative liquidity from the regulated exchange marketplace.

CMC Grain Futures Performance Task Force

With unprecedented challenges facing the US grain markets, CMC brought together exchanges and exchange-users to discuss futures market performance. The Task Force reviewed many market-related issues with the participants and the role of institutional investors and hedge funds was a significant point of discussion.

As CMC is still working to finalize our findings report, I can provide a general overview based on the dialogue the Task Force panel had with the participants. CMC will make the full report available to you as soon as it is complete.

The overriding concern expressed by participants is the financial impact of high commodity prices and increased price volatility – not futures market performance. Most market participants agree that current supply and demand fundamentals support high commodity prices. They do not believe that institutional investors or hedge funds are pushing price levels higher. Specifically, participants identified the following as the primary reasons for current price levels:

1. Strong economic growth in developing countries such as China and India resulting in increased demand for commodities.

2. Increased demand for commodities used for biofuel production and government mandates on biofuel use that result in inelastic demand for grains and vegetable oils.

3. Reduced yields in major producing regions due to weather events that are resulting in historically low world grain stocks-to-use ratios.

4. Export restrictions imposed by other nations.

5. A weakening U.S. dollar.

Meanwhile many grain and oilseed handlers face greater financial scrutiny as the sub- prime mortgage problems increase the pressure on lenders. This tighter credit creates an increased need for more consistent convergence between cash and futures markets.

Consistent convergence was the primary topic regarding technical futures market performance. While most participants agree that basis weakens in high price environments relative to more normal market conditions as grain and oilseed handlers’ increased risk is incorporated in lower cash grain bids, participants still expect consistent basis strengthening as futures markets approach expiration. Some Task Force participants have disagreed on why convergence has been inconsistent – citing either insufficient storage charges on futures market receipts and certificates; index fund and/or speculative activity in the market; or the multitude of external shocks hitting the market. Most of those interviewed by the Task Force urged Exchanges to not make drastic changes until the markets adjust to this new operating environment.

The panel discussed a number of proposals that might improve convergence, but no broad consensus emerged from the process. Nonetheless, the largest number of participants generally supported increasing storage rates. Participants also supported seeking CFTC approval to clear OTC grain swaps.

Seriously, they are desperate to stop the OIL speculators. But NOT the entire system which is totally out of whack. Examining where this mysterious speculative money comes from is literally life and death. The Japanese carry trade is where the lowest interest rates on earth are. And we have to confront the Bank of Japan about all this just like we have to bang on Bernanke's bald head about all this. Damn. They have to stop the merry go round of easy lending to the big speculative banking houses, the founders and owners of the Fed itself. JP Morgan and Goldman Sachs. We have to clip their wings before they fly off with all the wealth in the world.

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Comments

[Michael]

Elaine,

You won't find anyone in financial regulation roles anywhere on earth who EVER wants to limit markets for trading things like stocks, bonds, commodities, and of course, layer upon layer of derivatives.

That's because the regulators are financiers themselves, and (with the exception of a few quaint now-extinct bankers in the 1950's) financiers are "gamblers with other people's money." They get their gambling money by borrowing, and they leverage that borrowing as far as they possibly can. They have only one thought at all times: "I'm going to get rich (richer) (richest)."

Of course, they expect our central banks to bail them out when their gambles go bad (and guess what?). And they consider themselves proven to be superior beings when their gambles pay off, and conduct themselves accordingly.

Naturally, when the systemic effects of all this trillion-dollar gambling turn ugly (as they always do from time to time), the regulators sniff and will carefully tell you it was "fundamentals" that caused the hyper-inflation or great depression, not speculation.

[Elaine Meinel Supkis]

100% right, Michael. Thanks for saying it so clearly. This is all making me very sad since our politicians are, this week, pushing very hard for war with Iran. Which is making oil impossibly expensive. I see something really horrible in the future.

It is too sad.

[Rosco]

All our politicians have known for years that the 'financial services industry' is borrowing money (our collective future earnings) to gamble with and have said nothing to the Public about this crime.

This makes them accomplices to this grand theft and destruction of the US.

They are guilty of treason.

The public however keeps re-electing incumbents at a 95%+ rate, re-electing in effect traitors and thieves.

It's hard to sympathizes with someone who lights their hair on fire and then tries to put it out with a hammer.

That is the 'Merikan Public in a nut shell.

They have become strong as a fox and smart as an ox.

The rest of the world hopes we choke to death on our own stupidity.

We will not disappoint them, we aim to please.

[Karmaisking]

It's taken you a while but you're getting there. If you understand how the banking fraud of fractional reserve banking REALLY works, you will understand stocks and inflation and the importance of gold.

The cycle is simple: Bankers make a mistake. They secretly swap bad loans for good money with the Fed. Interest rates drop. Banks immediately have to lend again.

Imagine having a blank check for 24 hours, but you couldn't give yourself the money, you had to create a loan from which you had to GUARANTEE yourself a steady income stream in interest payments forever. What would you "invest" in (who would you lend to)?

Something people HAD to have. You would want to ENSLAVE you neighbor to guarantee payment of interest no matter what. You've got one chance. Just one lump sum amount. So you would encourage your neighbor to borrow to buy shelter.

Remember the hierarchy of human needs? Food, water and shelter. And health. And (arguably) education and the safety of your children.

As banking crises erupt, each one of these essential needs inflates to levels that do not allow the working classes to survive without borrowing and killing themselves to pay the interest. Why? Because in desperation once the stockmarket dies and they cannot speculate into that, the bankers inflate that which people will kill for. A nice house. Good food. Good education for their children.

At the end of the day, when all is said and done, the bankers simply stand between man and his essential desires and puts out his Satanic hand and says "promise to pay me INTEREST first - or die".

And you pay. Or you die. Or you fight for your life and you children's lives and you kill the bastards.

It's as simple as that.

[Carli]

Karma,

There is a guy named James Pence who puts what you just said in a very eloquent and pointed manner, but with a twist. Put on your Critical Thinking cap.:

http://www.youtube.com/watch?v=G1EXKLVgEx0

[Bear of Little Brain]

Re: your interest rate "conundrum".
I don't know if I'm right (I am "of little brain"), but it seems to me that the fractional reserve system, variations in the reserve requirement, and the inherent leverage should be in there somewhere (unless I missed it). Given a big enough reduction in the reserve requirement, wouldn't it be possible to outrun an increasing base rate? As a bank, I may have to borrow from the central bank at, say, 1% more, but if my reserve requirement drops by, say, 50%, doubling my leverage from, say, 10:1 to 20:1, I could still make money from loans, possibly even with a lowering of my own loan rate. Or is that total nonsense?

Re: commodity markets and speculators.
This is a free market/central control issue, and hence an ideological issue, to some extent. Futures serve a very useful purpose for producers and users. Also, in the futures market, every contract has counter-parties; if I make a "bet" on a higher price, someone else has to "bet" that I'm wrong. However, a dominant group can control that market to the detriment of the other party (silver seems to have been subject to this over the years, and the imposition of the power of big agri-business is attempting to destroy independent farmers). My take on it is that speculators (of which I am one, from time to time) simply provide the lubricant that prevents a "seizure" (in both senses of the word) in/of the market. Margin and leverage (which I avoid, but may be impossible to eradicate totally without destroying the market) will exacerbate volatility, but we must have a mechanism for the market to respond. The price of wheat may or may not have become extreme (it is now down about 30% from its peak), but it has certainly alerted the world to a supply problem. I suspect that we will not outrun Ug99 stem rust, population growth, and water shortages, but higher grain prices have sounded an alarm that a price-control regime may have hidden until it is too late. In extremis, governments need to intervene, but not as a matter of course. We live in an imperfect world, so, as they say, "Be careful what you wish for, lest it be granted".

Here is a graph of the long-term price of wheat. Are we paying too much now, or has the farmer been paid too little for 35 years? Or is it just the market price?

http://tinyurl.com/65zewd

[Bear of Little Brain]

Karma:
Agree with you on the crime of fractional reserve banking, but cannot see that loaning others money has to be synonymous with enslavement. You have set up a false condition. I have no wish to enslave anyone, but I do have a little money which I personally cannot utilise. Why can I not loan someone my money for a useful purpose and be recompensed (reasonably) for enabling someone else to improve their lot? Can this not enrich us all? It's all a question of degree. Why can we not band together for our mutual benefit? Perhaps it is simply that we have been blinded to the alternatives by the lizard men, and been divided in order to be ruled.

[Yusef]

"Why can I not loan someone my money for a useful purpose and be recompensed (reasonably) for enabling someone else to improve their lot? Can this not enrich us all? It's all a question of degree. Why can we not band together for our mutual benefit?"

Lenders have the power of compound interest working for them while the same power works against borrowers. And, as Albert Einstein remarked, the power of compounding interest is the most underestimated power in the universe. If one group has it working for, and the other against,the two groups are soon separated in economic power to such an extent that the "mutual" benefit part of this scenario doesn't make sense.

I can borrow at -- 7 to 30 percent(credit card rates.)

I can lend at-- through my savings account, oh 1.5 percent or so.

I can invest borrowed money to get a favorable rate of return, in exactly the manner Elaine describes, but that's a problem for someone somewhere down the road, no "mutual benefit" there, all things considered.

I

[Bear of Little Brain]

Yusef:
The weakness – and strength – in my position is that it envisages one group working in its group interest, founded on a strong and practical sense of humanity, or respect, or moral obligation. Or whatever. That requires a different model. I have no detailed knowledge to offer, but what I have in mind are the Co-operative Movement, the Friendly Societies (Quakers, I think) and Mutual Societies. Others must have come up with better paradigms in less brainwashed, brain-dead times.
The dominant model is one of exploitation, a different mindset, and one reflected in your example. I note that you "can invest BORROWED money to get a FAVORABLE return". That is the lizard mind infecting you. I was talking about loaning MY OWN money for a REASONABLE return.
My idea of "mutual benefit" has no place for the banksters, or most of "the Suits", come to that. (I was a Suit for twenty-odd years, BTW.)
All the best.

[Elaine Meinel Supkis]

Compound interest works through CDs. When one has enough savings, one can buy CDs and Treasuries. Then one gets more money back without any labor. Someone else needs to work for that money to return to the saver. The saver saves because of the REWARD from compound interest. If there is no reward, the saver vanishes.

The US collectively has ceased saving during the long period of 'low interest rates'. This meant, savings could not get enough of a return on lending! So people ceased to put their savings in bank CDs and began to pile them into risky investments which then shot up in value: the stock market and housing market and commodity bubbles!

The PRICE OF HOUSING shooting up was borrowers wildly bidding on houses they couldn't buy except if they put 0% down. This money did NOT flow to the banks, it flowed to house sellers! The banks got the fees and handling charges. They also made a killing on the differential between the low Fed rate and the high rate they charged in relation to the Fed rate.

But all of this has nothing to do with compound interest. Compound interest is our FRIEND not our enemy. That is, if you are a SAVER. See?

Since the vast majority of Americans are drowning in red ink, they all dream of the 0%/0%/0% heaven. And that is pure hell for savers who will vanish even more. And that system is eternal depression. Trust me on this.

[Bear of Little Brain]

When no-one can protect the real value of their savings, the rational thing to do is to put it where it will be protected. Housing was a rational decision, initially. Gold and silver may be rational decisions for the present. A bubble grows out of a situation which, in its early stage, is utterly rational. Until it isn't. Real things become a sensible refuge when the currency cannot be trusted.
As to compound interest, The Reaper enforces the limit on that.

[Elaine Meinel Supkis]

I have paid off compound interest loans in my own life. It is not impossible at all. But then, I also lived for ten years in a tent due to stubborness about going into debt. So now I have a house and no debts.

People know there is always a way to do things but this often involves sacrifices. And people really don't like to do that part of the deal so they choose the easier way.

[Yusef]

A crucial distinction, I think, is that the particular debt which concerns us here is consumer debt - it is debt which has financed consumption.

Consumer debt is really nothing like business debt. In a business debt, one bets the borrowed money will make enough money to pay back the debt, the interest, and also return a profit. (Of course one can bet wrong, but that's a different subject.) The prospects for consumption debt are nothing like this...One gets some gratification of some sort and then one has a big financial problem on one's hands.

A good rule of thumb, and I think a rule which was once well understood by the vast majority of Americans, is to NEVER use debt to finance consumption.

Most people never make a great deal more money than they will spend -- even before all this great and tragic accumulation of debt, most people were living from paycheck to paycheck and were really very,very close to insolvency anyway. (Back in 1999, I remember someone I respected telling me the average person was only one or two paychecks away from bankruptcy.) Under these circumstances, if you borrow money, you are doing yourself mischief...It's just that the mischief doesn't appear immediately...It's deferred mischief, so to speak. (In contrast to deferred gratification.)

But what gets me is that lenders know damned well that in getting all these people into debt they were getting them into mischief...It has to be part of the plan. There's not going to be a "rescue"...Who will mount the rescue? I don't know what the endgame is here, but I bet the lenders have bet that the probability of revolt is manageable and worth the risk in order to gain iron-handed control of the "citizenry."

[Elaine Meinel Supkis]

Correct, Yusef. Businesses can't grow unless they use some credit to create greater capitalist profits via upgrading the machinery, expanding markets, improving products, etc. But consumer spending is often a waste.

If, for example, we spend money on upgrading the heating system so it runs better or uses a cheaper fuel, the payback in the form of lower bills means the debt pays for itself via savings due to the installation of a better system.

But a debit is fixing the roof, for example. That just prevents future possible repair bills from rain, for example. Buying a car on credit is a loss for the first 6 years then after 10 years, the car finally is making up for the earlier losses, each year it runs after the first years paying it off, the interest rate losses are returned in savings from the value of the car. But it is never a profit. It simply keeps the losses down.

If one upgrades from an SUV gas guzzler to a 45 mpg car, the money spent on paying the interest on the loan is returned nearly instantly via fuel cost savings. So if one has an SUV today, it pays handsomely to go into debt to switch. This is NOT PROFIT. But it is certainly SAVINGS. If one takes these savings and then plows it into financing a system that creates energy generators, for example, then one can reap the PROFIT in the form of dividends, etc in the future. That is capitalism.

Anyway, the more you save the more you have saved. Which is an important lesson few seem to know these days.

[Bear of Little Brain]

Yes, Yusef, consumption debt has been part of some plan, but perhaps it will backfire. The "easy-come debt" of the amoral bankers may find itself up against an "easy-go" debtor who no longer feels he has any moral obligation to repay the debt anyway ("They shouldn't have been so stupid as to lend it to me."). Plenty of mortgage defaulters seem to have handed in their keys on the basis that "it was just a bad business deal" and there are even businesses in the US now that will assist the borrower in dumping his debt. What comes around, goes around. Maybe there are a lot of debtors who saw the game, cynically took the money on a "live for the day" basis, and don't give a flying f***. Whatever, they'll probably blame the lender for being so lax, and who could blame them? Not me.
A member of my family ran up an amazing unsecured credit card debt equivalent to several tens of thousands of dollars, which he could no longer even service. After a lot of hassle (all round!), he finally became really angry and just told them he would file for bankruptcy if they contacted him one more time. They wrote off the debt. (Now we know that they probably no longer even owned the debt - it had been packaged, sliced and diced and sold off - probably to some dumb-ass running my pension fund!) He told me that everyone he knew was in debt by several thousand pounds; it was part of their way of life. But this casual attitude to debt must cut both ways. I pay off my card every month. If it even looked as if I could not do that, I would destroy the card before paying those creeps one penny. It must be a generational thing (maybe).

BTW, it'll be interesting to see if this June 5 bank boycott will have any legs.

[Michael]

Great dialogue, folks. I wish every family, school, and legislature in America was discussing this subject.

You're making the correct and important distinction between credit (debt) for business investment and credit (debt) for household consumption. Note that there is a maximum rate of growth of business investment credit creation at any given time that is justified by the ACTUAL rate of growth of real (non-financial) business investment.

For the last 26 years (commencing at the end of the Volcker recession) the rate of growth of business credit creation has greatly surpassed the rate of growth of real(non-financial) business investment. All the EXCESS BUSINESS CREDIT CREATION has gone into the gluttonous maw of the financial industry, which has developed a daisy-chain of Ponzi loan-leveraging to the point where the financial industry is the biggest owner of "assets" in the country.

These "assets" - unlike houses for families and building and equipment for real (non-financial) businesses, are primarily equities, debts and their derivatives (the largest dollar quantity of which are credit-default swaps (justified as safety hedges, they now function as unstable speculation instruments). A society that promotes and bails out excess credit creation for the exclusive purpose of expanding the financial sector and making financiers richer than God, will end up facing hyperinflation and/or credit-collapse-based depression sooner or later.

Also note that compound interest does not normally have the same effect (in reverse) on the borrower as on the saver: When you are saving, the interest received (which by definition you add back into the total principle) causes the total principle owed to grow (the interest is "compounded" and principle increases without the need to add any more principle). When you are borrowing, the interest paid does NOT reduce the principle owed in any way, so there is no real reverse "compounding" process in which interest affects total principle. The one exception, of course, is the "negative amortization" mortgage in which the interest OWED AND NOT PAID is added to the principle owed, which keeps getting larger.

[Michael]

If you want to know why no amount of currency adjustments, tariffs, wars, or any other international processes can save America from itself, consider this:

Finance now consitutes 21% of GDP (and is growing rapidly); industrial production constitutes 12% (and is shrinking rapidly). Finance produces credit; industry produces goods.

If you're a creditor nation (you loan money to others), replacing industry with finance can work to your advantage; when you're a debtor nation (you borrow money from others) it can't. No one is killing us, nor do they need to - we are committing suicide.

[Bear of Little Brain]

Michael: the idea of excess business credit creation is interesting, but you say it all goes into financial instruments. Could it not also have funded an excess of all forms of production and distribution capacity and, in a sense, brought forward future production to meet a demand brought forward by excess consumer credit creation? Both bring forward future consumption (a "boom"), which ultimately has to be offset/foregone/compensated for when the debt level becomes unsustainable and has to be paid down (a "bust"). I suppose this excess production/distribution capacity is part of the malinvestment that has to be wrung out of the system (to be honest, and having an industrial bias, I'm at a loss as to just what the other parts might be; excessive financial services, perhaps?).
Just musing.

[Karmaisking]

Thanks everyone for the insighful comments. This has been a great discussion, very clean, very clear.

Bear of Little Brain, I understand exactly what you're saying, but you're missing the distinction between "true" banking and fraudulent frb.

When you have money saved you don't need and you give it to a bank for 2 years for a return of 5%, that's full reserve banking and NO ONE (even Murray Rothbard) would have any problem with that.

However, when a bank promises to pay you your money AT CALL, and then races off with this money and lends it "long", that's frb, that's fraud and that's the evil little game that causes all the problems. There is no material distinction between frb and embezzlement, once you really understand how frb works.

Check out this very clear piece from the great Murray Rothbard to get an understanding of the subtle distinction between "real" banking and "embezzlement" (frb) banking, which causes so many problems in the real economy:

http://www.lewrockwell.com/rothbard/frb.html

[Bear of Little Brain]

Isn't GDP a funny thing? A mother decides to go to work and pay for nursery care. GDP increases. The government brings in all manner of regulation requiring administration and inspection. GDP increases. The government wages war somewhere and used munitions and destroyed weapons have to be replaced. GDP increases. They find a simple herbal cure for all illnesses and dental decay. GDP collapses. Strange virus makes everyone peaceable and war and violence ceases. GDP heads towards zero. No-one is bothered.

[Elaine Meinel Supkis]

Thanks for all the discussion here. I don't know if other people here are speed typists....it takes trouble to write things!

I learn a lot here from readers and trust me, I click on all links and read them. This is how I get many great pieces of this big puzzle: how our financial systems work.

"Long' and 'short': time is money, Why is this?

I would say, we are mortals. Although money comes from the Cave of Death, we can't wait forever for it to 'mature'. We need it now to survive. When we are prudent, we have savings. We can use this for later in life if, god willing, we live that long. There is obvious risk of us dying before maturity. This is why all savings have to take into account 'risk': the risk of the saver dying!

This is why we have life insurance.

The breaking down of this system is due to people wanting wealth with 'hedges': NO RISKS. This is impossible and dangerous. Indeed, the problem is risk is being misunderstood by the central bankers who underestimate the true risks of death and destruction. We saw in China how swiftly the Grim Reaper can work. And He is hovering over the US.

So we have to press our bankers and financiers to correctly evaluate the risk of default, the risk of death. They don't want to do this. They want rosy scenarios.

[Michael]

Bear,
You're right, as usual. MOST credit creation ultimately results in some good or service outside the financial sector being produced somewhere; a cheap-credit boom produces a GDP boom (a large part of that GDP growth is the expansion of the financial sector itself, of course).

This like a "trickle-down" model, similar to the claim that if businesses in general make more profits by paying less taxes and having fewer regulations (like pollution controls), eventually they will create more jobs and workers will get higher wages. The American worker is still waiting for the wage raise (in inflation-adjusted money) that supply-side policies were supposed to provide this way (they HAVE provided STUNNING growth in business profits!).

Note the term "MOST credit creation" above. MOST, not ALL. The remaining credit is EXCESS credit, which can 1) exit the economy to be invested overseas, pay for more imports, etc. 2) be used by the financial sector to fund its own growth 3) serve as newly-printed money to fuel inflation in the price of everything. The real problem occurs when the RATE OF GROWTH (even from a small base) of EXCESS credit is faster than the RATE OF GROWTH of actual (non-financial business investment. This is what's been out of control and has produced all our economic problems.

You're also right that unsustainable debt produced by the expansion of a financial sector based on EXCESS credit creation is...well, unsustainable. Economic forces tend toward self-correction, regression to the mean, and equilibrium. Under benign conditions, this would mean the contraction of EXCESS credit creation (and EXCESS credit/debt itself) to zero (non-excess), so that ALL credit creation was for real (non-financial) business investment (with only as much going to finance as serviced real business investment growth. When there's been EXCESS credit creation for decades, and each time the economy has tried to correct itself by contracting credit, the Fed and Congress have stepped in with negative interest rates, bailouts, tax rebates, etc, to prevent the curative correction, it means that when a correction becomes unavoidable, the rate of EXCESS credit creation will have to be LESS THAN ZERO to return to equilibrium - which would require a SEVERE credit contraction in the financial sector, comparable to 1929-1933. That is what we are now facing, and NOTHING is as important to the Fed and the Treasury as preventing (or postponing) that collapse at this time.

[Bear of Little Brain]

Karma: thanks for the courtesy. I would simply say that frb has been considered "real" banking by default since at least the establishment of the Bank of England, and, yes, it is embezzlement. I was just calling for a consideration of how to overcome or bypass this fraud. Please see my response to Yusef above.
It's all a variation on "What's so funny about peace and love and understanding" anyway. ;-)
I'll check your link in the morning. It's very late here. Thanks.
All the best

[Richard]

In the linked article, I provide the chart of the EUR/JPY, FXE:FXY, which is a proxy, that is, a measure of the yen carry.

It shows that massive, I mean massive amounts of money flowed through the Yen Carry Trade facility, since the Fed assisted JP Morgan buyout of Bear Stearns on March 18, 2008. The money went first into the BRICS, EEB, then after that topped out, money went into the commodity-gold currencies and into gold.

I belive that a financial emergency is coming for any number of causes, and given such, one may not have access to one's wealth in money market accounts and in brokerage accounts, therefore, I recommend that one buy gold at BullionVault.com.

Over the next three weeks; one may be able to buy gold at a lower price, as it's daily chart shows bearish engulfing at resistance, and its weekly chart, shows a shooting star at the middle of a broadening top pattern; these are bearish signals on gold.

Soon gold will be going higher tht is above $950, as investors have greater perception of the investment demand for gold, that has arisen this week, as can be seen in the chart of gold relative to stocks GLD:VTI, and as bankers and investment bankers make loans where the funds are used to buy gold; and as hedge funds and institutional investors continue to go to the well -- the Bank of Japan for 0.5% interest loans.

[Karmaisking]

No problem. I totally agree it's difficult (impossible?) to overcome the fraud now, after it was legitimized by the corrupt British government in 1694.

Gold has traditionally been used as the ultimate hedge against unfettered, "monster" frb. It is being used again.

There is no practical alternative, without a sea-change in attitudes regarding money. At the very deepest level there are only two solutions to our current dysfunctional system:

(1) The slow suffocation of frb by raising reserve requirements and real interest rates, whilst at the same time issuing debt-free fiat currency from Treasury (google Web of Debt, American Monetary Institute, Prosperity UK for lots of ideas regarding how this could happen); or

(2) Open the Mint to gold and silver (google Antal E Fekete, Murray Rothbard, GoldSeek, Richard Daughty or Ron Paul for lots of ideas on how this could happen.

This link contains the cleanest, most beautifully written synopsis of all these issues I have come across. I've never heard of Mike Hewitt but he's a brilliant writer. But that's often the way, isn't it?

Read it and weep in memory of the Consitution and honest money.

http://news.goldseek.com/GoldSeek/1192819378.php

P.S. Elaine, I'm a speed typist and also I'm supposed to be working - hence the numerous typos. Sssshhhhhh.......back to work now...

[Elaine Meinel Supkis]

Read my latest article that examines oil, inflation and FLOATING CURRENCIES.

It is amazing to go back in time and read old magazines. They weren't stupid back then. They could see what would happen. The present regime of 'floating currencies' where FX markets, not the gold markets, determine the value of currencies, was supposed to be a short-term VERY TEMPORARY thing in 1972-1973. To fix the sudden jump in oil prices!

Look at where we are now! OUCH. This is why I keep saying, we must go back to the older banking methods. They proved to be good. We must regain at least the 1933 system. At the very least.

[Richard]

Your research is timely, as the ever incredulous Henry Paulson spoke in CNN interview on 5-22-2008 that rising oil prices are not driven by market speculation but instead reflect tight supplies and growing global demand.

Mr. Paulson, former CEO of investment banking firm Goldman Sachs, also said in Orwellian way, that the long-term economic fundamentals are strong, and the United States remains competitive globally.

Paulson cited a need to bolster training and education of the U.S. workforce but didn't give details or any committment to do so.

He also insisted that the United States has a strong dollar policy, but I see no evidence of that; in fact I see just the opposite, as TAF, TSLF, and PDCF, only serve to debase the US currency, and lever up the price of gold which trades inversely of the US Dollar.

In summary, Mr. Paulson's communication is all Orwellian Newspeak, where words are twisted and are the exact opposite of reality.

[Elaine Meinel Supkis]

Correct, Richard, well said.

[GK]

Focusing on the news and various chatter is a total waste of time. Focus on one thing: THE FEDERAL RESERVE MUST BE ABOLISHED.

The US has already booted out 2 of them.

http://www.libertyforlife.com/banking/federal_reserve_bank.html

The Primary Owners of the Federal Reserve Bank Are:
1. Rothschild's of London and Berlin
2. Lazard Brothers of Paris
3. Israel Moses Seaf of Italy
4. Kuhn, Loeb & Co. of Germany and New York
5. Warburg & Company of Hamburg, Germany
6. Lehman Brothers of New York
7. Goldman, Sachs of New York
8. Rockefeller Brothers of New York
All the primary owners are branches of European establishments. Foreigners, almost entirely Jewish, control the United States Money supply. They literally own exclusive rights to the dollar and simply enter dollars into their banks books to make money which they then lend back to us at a profit. For them money does not grow on trees, it is simply a data entry into their account. Clearly the private ownership of the U.S. Dollar is by far The Greatest Crime of the Century. The owners of this bank have been responsible for instigating all the major wars and depressions in the last 100 years. They own the bank, they own the dollar and they own all the major media channels, the military industrial complex and most politicians, judges and cops.

Sometimes the bank pays an arbitrary 'franchise fee' to the U.S. government to keep the politicians paid off.