Calling all economic experts

[jtr1962]

Re: The Economy, What's your take

Paying bills and debt requres jobs, not just retail jobs, but manufacturing or decent technology jobs.

That's really the heart of the problem. It used to be that one person working could support a family, even put some money aside. That was when we had decent-paying jobs in industries which actually made tangible goods. Nowadays everything is service sector. Employees are basically middle men moving goods someone else made. There's only so much a service sector employer can afford to pay. Net result is both spouses work. This increase in employees further drives down wages.

As far as "retraining and re-education" being the answer, I know a bunch of unemployed PhDs under 35 years old with an education in various high technology areas.

Funny how I always hear the shortage of suitable employees being the reason US firms employ engineers overseas, yet many here with the proper qualifications can't get work. I think part of the reason is US firms are so used to paying service sector wages that the thought of paying $150K to an engineer makes them cringe. So the engineer ends up working at Walmart for $10 an hour, assuming they even hire him/her rather than tell them they're overqualified. I went through this nonsense upon graduating college in 1985. Never able to get an engineering job in my field because nobody was hiring. Any potential value my skills might have had to the economy was lost when I was forced to take menial jobs paying $6, $7, in one case $2, an hour just to pay my student loans as they came due. Multiply me by perhaps 1 million, and you begin to see the enormous effect the lack of suitable high technology employment has had on the economy. Add to that intangibles like feeling disenfranchised from society after being told 50 times that you're not economically viable. I'm actually telling young people to not bother going to college unless they can do so without loans, preferably with a full scholarship so their parents don't have to pay, either. The majority of jobs out there don't need college, and pay accordingly. A sixth grade education suffices.

Long term I wonder if I would have gotten a better deal moving to China.

 

[DonShock]

Re: The Economy, What's your take

Not all use of credit and/or debit spending is bad. For example, how many people could afford a house or a car if they had to save up all the cash first. And many small businesses are run on credit cards as a means of cash flow.

It's different in other countries. People aren't able to move up in society because they do have to save up the cash to afford things like houses and cars and it's almost impossible. Differences in the societies also explains some of the differences in the savings rates. In the US most people have relative stability in their lives and thus don't feel the need to save. Most people haven't exprienced catastrophic problems and thus don't feel a need to plan for them. Many other countries are much more unstable as far as the lives of individuals are concerned, so most people have had the worse happen to them or others they are close to. So they have seen catastrophes, plan for them, and thus tend to save more against a rainy day. People in the US tend to either invest or spend their disposable income. Although I haven't double checked the actual numbers myself, I've heard it mentioned that if you looked at invested money (like 401Ks) and savings together, it put the US about on par with the savings rates of other countries.

 

[WAVE_PARTICLE]

Re: The Economy, What's your take

For those interested, here's how it all started....the super summary version. I can write a book on this, but here it goes.

It all started with China. More specifically, when Hong Kong went back to Chinese rule. Probably more of a symbolic event, however, it really moved China more quickly on the road towards democracy. China's markets started to become more "open" and the communist controls were slowly, but surely being removed. Economic development and growth started to really take wind. Most people knew back then that China has the potential to be a huge player in the global environment in terms of trade and overall economic influence. One person who really noticed was some guy named Alan Greenspan. Turns out this Greenspan guy was the Chairman of the Federal Reserve and arguably the most powerful man on earth.

Well, Greenspan predicted that China is going to be a real heavy influence on the world stage and just might tip the balance of power (economic power) to the far east. To counter this, Greenspan had a master plan to "artificially" enhance growth in the U.S. by making sure there is plenty of liquidity in the markets and to keep interest rates low while balancing inflation to a specific target. The side effect of this was a bubble economy as the artificially cheap credit tends to favor certain segments of the economy over others. One significant bubble of note the big credit bubble that lead to the failure of Long Term Capital Management. This was a big burst which sent shockwaves around the world and the Fed and the goverment ended up with a bailout plan. Of course, Greenspan still had his masterplan going and insisted to micro-manage the economy. So a few years later, a Tech bubble was fueled... Now keep in mind that, nearing the turn of the millenium, tech was hot and didn't really need help in becoming popular.....but with credit so cheap and liquidity plentiful, the "hot" tech sector became a "wildfire". We all remember what happened in 2000.

At this point, I'd like to take a step back and make note that Greenspan had a few tools other than monetary policy to help him with his goal of keeping America competitive on the global landscape. He has endorsed sweeping changes in the financial industry that allowed cheap credit to exist. Couple examples that come to mind is the growth of the securitization sector which had the full stamp of the Federal Reserve. To aid in this end, Fannie Mae and Freddy Mac were also created to facilate a huge amount of liquidity on the mortgage marketplace by allowing these government agencies to buy and sell mortgages. In a short matter of time, mortgages became somewhat of a commodity as the securitization trend grew and allowed these debt instruments to be packaged and sold to investors. The Federal Reserve also backed and encouraged the innovation in the industry such as credit default swaps, hedge funds, structured products... as long as these instruments enhanced the liquidity in the marketplace. The complexity of the financial landscape rose exponentially, but the goal of enhanced liquidity was achieved. Unfortunately, it was at the expense of transparency.

You see, in Greenspans mind, as long as there was plenty of liquidity in the marketplace, the economy can absorb the minor bumps along the way. And these bubbles were just a minor irritance that can be sorted out on its own. Another big bubble that was slowly (and quickly) brewing before the millenium was the housing market. Many areas in the U.S. saw double digit annual gains in home values.... some areas at such alarming rates. Over the years, Greenspan insisted that this phenomena were isolated and pocketed events and that "there was no housing bubble at a national level". :shakehead Well....we know better now.

Anyways, we now come to September 11, 2001. A significant event in its own right, but also in terms of the financial landscape, it was a real catalyst of what is to come. Immediately following this event, the Federal Reserve kicked into high gear and started flooding the market with liquidity by reducing interest rates at every single FOMC meeting for the next 3 to 4 years....until the fed funds rate went well south of 2%. Borrowing became so cheap. Credit spreads became practically non-existant. The yield curve flattened out quickly (i.e. the cost of borrowing short term became the same as the cost of borrowing long term). Eventually, the yield curve inverted (cheaper to borrow long term than it was short term). Everyone loved it......everyone that is, except for the banks....who relied on a normal yield curve (low short-term rates, high long term rates) to make money. The banks were really stuck on an interesting situation where their bread and butter (long term mortgages) were not earning as much as what they are paying out in funding (generally short term). So the banks were forced to get creative and they focussed on volume lending as opposed to quality lending. And why not? Make a bad loan, you can always securitize it away! So lending standards were really relaxed as banks tried desperately to make up the lack of "spread" with volume. The banks also got really, really creative by enhancing spreads through leverage and then the birth of the SIV (structured investment vehicle) occured... You see, the banks figured out this brilliant solution in optimizing their use of capital. SIVs are a little complex and likely out of the scope of this post, but let's just say that billions of dollars of sub-prime asset backed paper (leveraged) were the main source of income. And what a juicy business that was! We're talking about tens of billions of dollars of NET INCOME going straight to the banks' coffers. After 9/11, we saw the stock prices of financials fly through the roof.....another bubble, fueled by cheap credit.

For a time, the banks didn't mind that 25% of their mortgage lending went to people who couldn't afford it. Hey....with the housing market so hot....where's the harm? The collateral (i.e. the property) was GROWING in value and more than enough to protect the principle. Besides, the more mortgages they do....subprime or not....they can build up another portfolio basket that they can securitize and make some money off of.

Greenspan, being the smart man that he is, realized what was happening at around 2004 and started sounding some alarms that lending standards were too relaxed and needs to be tightened up. Didn't happen. Even following the next couple of years of raising interest rates steadily at every FOMC meeting, the yield curve didn't move like he predicted. Short term rates were going up, sure.....but long term rates remained sticky and didn't move at all. So the yield curve inverted even more. I bet at around the turn of 2005/2006, Greenspan already knew that the monster that he created was loose and there is no bringing him back.

Sometime during 2006, the U.S housing market started to slow down.....it was inevitable. Prices on properties started to stablize. At this point in time, many people had multiple properties and even more people had less home equity than they did 15 years ago. People in general had overextended themselves....but the economy was still very strong....low unemployment, low interest rates, and healthy consumer spending. Even the poor had their own home and an SUV.

As the end of 2006 approached, the housing market started to contract. Home prices were no longer stable and were actually declining. The banks, with 25% of their loan portfolio being subprime, soon found themselves stuck with defaulting mortgages with collateral that became lower than the principle of the loan. The structure investments such as mortgage backed securities started having problems meeting cashflow requirements because the mortgage holders are not able to pay up. Foreclosures started to happen.....which is bad because all it did was add more housing on the market, which in turn puts even more downward pressure on housing prices. The domino effect has started.

Fortunately for Greenspan, his tenure was over and Ben Bernanke (the current Chairman of the Federal Reserve) had the buton. Bernanke also started to see what was happening, but he was more or less in denial and failed to see how embedded and systemic this problem was.

During the first half of 2007, the economy was still charging ahead at a healthy pace, but behind the scenes, certain financial deals and structured products were going sour. It wasn't really until Bear Stearns hit the market with its news about their hedge fund going bankrupt. Firms go bankrupt.....it's no big news.....however, in this case, we had financial instruments with AAA ratings being defaulted on. Not just one....but several. Now, for those of you who do not understand credit ratings, AAA is just slightly below the credit standing of the United States government. To have a AAA go under is almost like having the U.S government fail to make a payment on a loan. It is unfathomable. But then we started seeing another AAA deal go south......then another....then another.

BAM! :sick2:

With AAA instruments defaulting, the entire financial system ground to a halt. No wonder.....if you can't trust a AAA, then who can you trust? Time to hoard some cash. Liquidity disappeared in an instant.....

Ok. I will stop here.....because what happens after this point is an ever so complex series of events....each linked somehow to the subprime mortgage business... but so intricately linked and nontransparent that even the banks themselves don't know that they are sitting on billions of dollars of worthless assets that they need to writedown. The very fabric of the banking system was (and is) at risk......as.....somehow, the massive amounts of value that wasn't supposed to exist needs to be wiped out....cleansed. However, its not so easy because nobody knows where the exposures are.....as everything had been packaged up....divided up and sold ...and re-sold. And leveraged.

The monolines that I referred to earlier is just the latest in a series of shoes that are dropping. Rest assured, there are more shoes to drop.

I apologize for such a long winded post, but you asked for it.....hahaha!

WP

 

[AWGD8]

Re: The Economy, What's your take

Very informative! Thanks .Now I`m going to put all my money into B/S/T flashlights.
It seems like the B/S/T is always at it`s best ---> BULL MARKET :devil:

Flashaholics are everywhere...recessions doesn`t affect addicts.. :kiss:

99% of the general population do not truely understand what is going on behind the scenes. What most of you see is what's provided by the media and it takes a few weeks afterward for most to learn what actually happened.

The first two days of this week was a direct reflection of a specific problem in the financial markets. We're talking about bond insurers (aka monolines, aka guarantors). If you've been following the market closely, you will probably see names like ACA, AMBAC and MBIA flashing across the headlines. As an industry, the bond insurers provide guarantees to bonds and loans for a total of approximately $2.5 trillion. AMBAC and MBIA take a large share of the market with over $1 trillion. Until recently, these monolines held AAA ratings (which is the top credit rating possible). They use this high credit rating to provide guarantees (or insurance) to bonds so that these bonds will also get AAA ratings as opposed to the rating from the issuer. Having a AAA-rating on your bond issue is advantageous, because it opens up your target market signficantly since many pension funds and other regulated portfolios are mandated to hold only the top tiered debt. Unfortunately, these monolines also provided guarantees to assets related to subprime mortgages and high-risk, highly leveraged instruments like CDO's (collateralized debt obligations) which are also linked to mortgages. As we all know, the meltdown in subprime has caused a lot of these instruments to go south and being the guarantor, the monolines are contracted to step up and make these instruments whole. Needless to say, these monolines have suffered losses and writedowns in the billions. So much so that their very solvency is now at stake. The credit rating agencies have taken notice of the dire situation these guys are in, so they are stripping the AAA ratings by several notches. ACA went to junk status. The others, not so bad...yet. This is not the real problem. The real problem lies with the insured assets because once the guarantor is downgraded, the billions upon billions of assets that they insure all get a simultaneous downgrade as well... the credit rating of an asset is only as strong as its strongest backer. So, what does this mean? Well, I alluded to earlier that many portfolio managers around the world are mandated to hold AAA assets.....well, they will now be forced to sell in the market.....at the same time. This is what is called a firesale. If the entire monoline industry got downgraded, the losses that would be incurred will be catastrophic. Also, there are behind-the-scenes derivative instruments that would default because these monolines are also counterparties to these instruments. We will be the generation that will witness the first complete collapse of the U.S. banking system.

That was Monday and Tuesday. There has not been a firesale yet, because AMBAC only received a two notch downgrade (but still placed on a credit watch list) and MBIA has not been downgraded (yet!).

Late Wednesday afternoon (that's yesterday), we receive rumors that a bailout plan by the government and big banks was in the works. A bailout would entail an injection of billions of dollars of new capital into these struggling monolines so that they can make good on their obligations and get to keep their AAA rating. Just the rumor alone caused the Dow to do a 600+ point swing into positive territory. The New York State Insurance Department confirmed that bailout talks were, indeed, underway, but no concrete plan has materialized yet. But, obviously, this was good enough for the market, because a potential disaster beyond all comprehension is being addressed. Whether or not a plan is put into place will determine where our market will ultimately go. This is huge.....because we are talking about trillions of dollars at stake. All the writedowns to date relating to subprime mortgages totaled a little over $100 billion, and that cause a lot of heartache. Imagine a number 5 to 10 times that.

So there you have it. That's what happened over the course of three days. More volatility to come, you can count on it. The media is always the last to know things and they don't necessarily know the truth. But I do, because I am in the thick of the action in my day job.

As to how this downturn affect me here in Canada? Well, I am enjoying the volatility and have turned some profit in this ordeal as I have been betting on a serious downturn for the U.S. market. I've closed out my positions now and will sit on cash until I can see some stability in the market.

But to tell you the truth, guys.....if you can ride out the storm, then ride it out. Recessions are part of the economic cycle. They are as ubiquitous as taxes. The long-term investor is always rewarded. Just ensure you maintain liquidity through the process and you will come out alive.

 

[LuxLuthor]

Re: The Economy, What's your take

WP, a series of excellent posts....and it is not easy to give a relatively understandable explanation to current events. I agree with most of what you have posted, but belive it is more complex and unpredictable. You have to factor in the enormous impact of speculation/futures trading, international currency valuations, and politcal/nationalistic manipulations of various markets. This recent example of one of the largest banks in Europe losing 7B through trading fraud is an example.

When you have countries recently stepping in to support US financial institutions for various reasons, or Communist China manipulating trade and currency for various reasons, not everything will follow logical predictions. There are many events that could radically alter the dire predictions for the US economy and debt.

Just think for a moment if significant non-oil based energy changes & technologies were effectively developed. U.S. stores of coal and/or shale oil alone are each many times the total oil reserves of Saudia Arabia. If they, and/or nuclear, and/or hydrogen, wind, solar power could be used effectively, cleanly, and safely it would radically change the US economic predictions.

US legislative changes could curtail retirement & social benefits. New (currently) illegal and/or additional immigration policies could add significantly to the US population, thereby increasing the tax base and labor supply. This policy could result in a huge new source of revenue to reduce the national debt.

The world is currently choosing to overlook China's Communistic control in order to profit from their new growth & population market. However, if China invaded Taiwan, decided to nationalize foreign investments, or persists in manipulating trade and propping up their currency value, huge amounts of money and investment would be moved to more transparent vehicles in western democracies. The US currently has 1/3 of the worlds total economy, so it makes sense that it would benefit significantly.

I again stand on my earlier posts regarding the importance of the general population's perception (even if as a result of hype and misinformation) being a significant factor of what happens economically. One of the main purposes of the Fed's decreased interest rates, the legislative stimulus package, and Treasury Dept. steps is to alter the public's perception which is tantamount to keeping the US in a pro-growth, non-recessionary direction.

For those who speak of gold investments, you must view it in inflation-adjusted terms which exposes the poor return it has had relative to other investment vehicles. It should be obvious that $800/oz gold today is but a fraction (1/3 to 1/4th) of the 1980 $800 value... and as we saw then, it can spike down precipitously solely because of futures trading manipulation.

 

[9volt]

Re: The Economy, What's your take

Everythings Peachy!

I was hoping someone would say that. I need a bigger TV.

 

[js]

Re: The Economy, What's your take

Not all use of credit and/or debit spending is bad. For example, how many people could afford a house or a car if they had to save up all the cash first. And many small businesses are run on credit cards as a means of cash flow.

It's different in other countries. People aren't able to move up in society because they do have to save up the cash to afford things like houses and cars and it's almost impossible. Differences in the societies also explains some of the differences in the savings rates. In the US most people have relative stability in their lives and thus don't feel the need to save. Most people haven't exprienced catastrophic problems and thus don't feel a need to plan for them. Many other countries are much more unstable as far as the lives of individuals are concerned, so most people have had the worse happen to them or others they are close to. So they have seen catastrophes, plan for them, and thus tend to save more against a rainy day. People in the US tend to either invest or spend their disposable income. Although I haven't double checked the actual numbers myself, I've heard it mentioned that if you looked at invested money (like 401Ks) and savings together, it put the US about on par with the savings rates of other countries.

There is a HUGE difference between lending out REAL money that was EARNED in the first place, and creating money out of nothing and lending that out. Or creating money out of nothing and using that to bail out a bank or whatever.

A credit economy is different than an economy that offers loans and keeps track of peoples credit ratings. The first type of economy expands and contracts the money supply like crazy (mostly expands). The second type can't lend money out unless it is first taken from somewhere else.

An example of the first type would be the government just printing up money and using those bills to pay its debts. The second type would be taking tax dollars and using those dollars to pay its debts.

No modern economy should be without a way for entities to borrow money. But no modern economy can survive indefinitely on fiat currency created out of thin air.

 

[js]

Re: The Economy, What's your take

. . .

For those who speak of gold investments, you must view it in inflation-adjusted terms which exposes the poor return it has had relative to other investment vehicles. It should be obvious that $800/oz gold today is but a fraction (1/3 to 1/4th) of the 1980 $800 value... and as we saw then, it can spike down precipitously solely because of futures trading manipulation.

Lux, not to pick on your post in particular, but rather, I've been thinking of the general sentiment that people have that all "investments" should go up in value, should yield a "rate of return".

Where did that come from, exactly? It's a bit counter-intuitive. I mean, yes, if you think of your money as being used for capital, thus gathering interest, then there should be a rate of return because that's the agreement of the "borrower" in exchange for getting the money from the "lender".

That's not what's counter-intuitive. What's counter intuitive is this notion we have that money invested in something like a house, or real-estate, will just naturally increase in value -- somehow, some way.

SAY WHAT?

That just doesn't make any sense to me. Not in general, anyway. I mean, house DEPRECIATE in value. They need new roofs, new plumbing, new furnaces, foundation repairs, and so many other maintenance items. Houses do NOT just naturally get more valuable. If there are fewer houses sought by more and more buyers, then, yes, the price will go up due to simply supply and demand principles. And I suppose you could argue that the population is just increasing and increasing. But, it's not actually the population that matters, it's the production capability * population. A population of people who can only do menial labor is a whole lot different than a population of skilled and trained workers and engineers and tradespeople.

You MAKE money by work or intelligence that increases work efficiency. That used to be the old notion of making money.

Now, it's this idea of just stuffing your money (even if you have to borrow to do it) into housing or stocks and just waiting. The credit economy, the fiat economy, has given us all this vague notion that all we need to do is invest a sum of money early on and wait 50 years and we'll be rich. I'm sorry, but this just isn't sustainable. This just doesn't seem sane to me. Maybe I'm just old fashioned.

Just like it's not sustainable for everyone here to turn into some kind of service worker or accountant or secretarial worker. You can't have an entire nation of service workers. Moving the means of production out of the country is a losing proposition.

Liquidity? Who the hell is that fooling? What does liquidity matter if you keep losing the means of production and keep needing massive quantities of oil to keep your country running?

Gold isn't supposed to yield a "rate of return". Gold is supposed to be something that can't disappear into worthlessness when the Fed dumps billions and billions of dollars of "liquidity" into the economy. It's a safe haven (relatively speaking) of value, and nothing more (or less).

As far as investment potential of various precious metals--looking for an increase to come--silver is probably a good bet right now. Gold, probably not so much. But anything that will naturally follow inflation (because of inherent value) is probably a good idea right now. You might not make any money from it, but that's not its purpose.

 

[WAVE_PARTICLE]

Re: The Economy, What's your take

No modern economy should be without a way for entities to borrow money. But no modern economy can survive indefinitely on fiat currency created out of thin air.

You have highlighted a particular vulnerability of our modern day economy that requires a separate discussion in its own right.

In today's economy, money is created out of thin air on a daily basis and not just by the central banks.....all thanks to the abandonment of the gold standard and the introduction of the Fractional Reserve Requirement (FRR).

 

[js]

Re: The Economy, What's your take

You have highlighted a particular vulnerability of our modern day economy that requires a separate discussion in its own right.

In today's economy, money is created out of thin air on a daily basis and not just by the central banks.....all thanks to the abandonment of the gold standard and the introduction of the Fractional Reserve Requirement (FRR).

Yes, indeed! I'd love to see a post from you detailing this! Let's have a separate discussion! I talked about this some in the other thread "Calling all economic experts" that is current in the CAFE right now. Maybe you might read that thread and we can discuss this there, as this ones OP pointed towards a more personal and less theoretical topic range?

 

[WAVE_PARTICLE]

Re: The Economy, What's your take

Yes, indeed! I'd love to see a post from you detailing this! Let's have a separate discussion! I talked about this some in the other thread "Calling all economic experts" that is current in the CAFE right now....

:thumbsup: .... I love these types of discussions!

 

[MarNav1]

Re: The Economy, What's your take

You can't base the value of gold on IOU nothings anyway js, I'm glad you pointed this out. The powers that be try to manipulate gold and silver in this way and it does not work. 1 oz of gold = 1200 FRN's or whatever the "rate" is right now set up in the London exchange, I don't think so. But most people think a "dollar" is the same as a FRN, this is part of the swindle as well. I think you see it and maybe a couple others, but I have tried over and over to enlighten people to the scam and it just doesn't compute. History has been rewritten very effectively and we have all heard the line about telling a lie long enough and convincingly enough and people will believe it. I think most people know that things are terribly wrong and don't know what to do about it so they have to go along with the system. Most of us have lived our entire lives under this "illusion" of wealth so we don't even think to question it. Yes there have been a few "bumps" in the road here and there but in general everything has been okay. This present system is close to the end but no worries, the bankers have a "fix" for that too. Regional and then one world currency is the goal and they are "very" close to achieving this reality I'm afraid. I would like to hear Wave Particles take myself as I have a feeling he knows what is going on as well.

 

[js]

Re: The Economy, What's your take

MARNAV1,

Most people don't know that things are terribly wrong. Most people don't examine the fundamental basis of their perceptions and conceptions. It won't be until the SHTF that people understand why you or me or whoever was talking about gold or silver or the real legal definition of the USD as "471.25 grains of troy silver.":

The U.S. dollar was originally specified by the Coinage Act of 1792 to be a unit of weight (471.25 grains of troy silver (about 30.54 g of silver)) and not one of money as it is thought of today. The value of gold or silver contained in the dollar was then converted into relative value in the economy for the buying and selling of goods. This allowed the value of things to remain fairly constant over time, except for the influx and outflux of gold and silver in the nation's economy. According to an evaluation of data from the U.S. Department of Treasury, the cost of goods and services remained relatively consistent between 1635 and 1913, around a level of roughly 25 times the buying power of the U.S. dollar in 2006

The misunderstandings of basic economic concepts are burried so deep that you and I should just go get that cup of coffee instead of spending any more time posting here.

Things are peachy, MARNAV1 !!! Just peachy!!! Or they will be. It's all good.

 

[LuxLuthor]

Re: The Economy, What's your take

JS, no problem with looking at this back and forth. A couple things I saw in reading your last response as my opinions....

1) There is a very real tangible and intangible value to the US that I'm not sure you are taking into account when you raise legitimate concerns about the Fed printing money and dumping it into the market. While it was easy to link the dollar's value to the US gold reserves when it was in effect, that assumed by agreement of the other nations that gold was the basis of international value.

Since we went off the gold standard, it simply became one of many things that are relied upon now. There was never anything inherent to Gold (or Silver) that automatically made it the original basis of value except a limited amount and everyone agreeing. It could have started out that diamonds or platinum were the agreed upon "currency," my point is that inherent value and currency of trade are all by common agreement.

The US has value beyond their gold/silver reserves. There is enormous tangible value in our national resources, our real estate, our cities, our buildings, museums, artwork, highways, bridges, waterways, coastlines, minerals, agriculture, educational/industrial/military institutions and complexes, and many other physical assets that do not exist elsewhere.

There is the incalculable value of our intangible assets such as the leadership of our democracy, freedoms, trading markets, corporations (represented by their traded stock value.), employment opportunities, technology, educational experiences, charities, trusts, NGO's, military power, and many other unique public and private services that contribute to our world leadership.

All of these have a very real value that is in addition to the nearly obsolete quantities of gold bullion sitting in our bank vaults. The US Dollar represents the value of our entire set of values and assets, so in many ways it never made sense to link value to something like ownership of gold and silver. A more accurate instrument of currency today is oil...but as new energy sources come online, that too will be rendered obsolete.

I am not saying that there is an endless value to the US that justifies endless quantities of dollars to be printed....only that you must expand and include all the value that people grant to the United States. The dollar represents all of it to the rest of the world.

..... lol..this is one of those long posts...oh well.....

2) You questioned the notion of an investment needing to increase in value. I don't think that is an absolute, but it depends on how you define investment. You could consider a dog an investment in your happiness, but it is not going to increase in value (unless you get into breeding).

Generally, the idea of investments implies a value that is intended to increase, or at least there is that expectation. I contrast the expectation of buying a house or condo with that of buying a car, refrigerator, lawn mower, or light bulb. There is a value to each 'investment' but only an expectation that a home/condo will increase in value.

Mostly what creates an increasing value to anything is demand outpacing supply. If more people want to live in New York City than Iowa or Bangladesh, then a relative value ensues. There is no guarantee that anything will keep or increase its value. If a catastrophe befalls a geographical area, its value will fall.

Diamonds are only valuable because DaBeers has been very effective at stockpiling the world's supply, and creating a demand through advertising and marketing.

Real Estate (by which I include homes, businesses, other developments, and undeveloped land), especially in desireable locations is one of the things that has a finite, limited supply. The usefulness of real estate and its limited supply creates an expectation of an increasing value....especially in a world with a steadily increasing population.

While parts of a house need to be upgraded (need a new roof), there is enough total value in the investment even discounting for wear and tear, that it is not seen as leading to an inevitably worthless value as you would view an appliance or car. A home (some type of shelter) is one of the most important priorities that people have in our modern society, and demand for a nice home outpaces the supply. In the "Old West" it was likely more valuable to have a good horse and gun.

Thus, I don't see it as counter-intuitive to consider a home as an investment likely to appreciate over one's lifetime. The idea of depreciation as it applies to structures is an accounting/tax notion. There are many many buildings in my area that were built in the 1800's and early 1900's that are still standing and being used to this day. Land that sold for a few dollars over a hundred years ago can now be worth millions now based upon location and changes in community locations creating new demand.

3) I don't agree with your linkages between types of jobs/workers (i.e. unskilled vs. higher skilled) and production remaining in this country to having a sustainable future, but that is a complex topic in an already bloated post that probably only you are reading. LOL!

4) Your notion of what gold is supposed to be is based upon the obsolete gold standard. It literally is no longer supposed to "be" anything other than what remaining traditional/historical/industrial demand remains for it. What I am saying is that gold now has more of a "collectors" value than a national value. You may not like that, but it is the reality since the gold standard was ended. See my #1 for what is the new value standard of a nation.

5) I don't agree with your idea about investing when we have a credit economy. It is very sensible to assume that buying and adjusting your investment portfolio as the times change over a 50 year period will yield an increased value over someone who bought gold at $800/oz in 1980 and then just left it sit in their home safe. You would have lost 2/3rds of your investment even if you waited until last week's peak value to sell it. I'm not saying to buy land next to a toxic waste dump as an investment.

Without some fundamental anticipated demand outpacing the supply of gold, there is no reason to waste your money buying it...especially when it is subject to ridiculous speculative manipulation. The Hunt brothers demonstrated the risk in relying on such commodities with any expectation of future value.

It is important to diversify when investing, and pay attention to changing times and trends. If that is beyond your interest or ability, then finding a quality mutual fund that has a diverse investment portfolio and track record is a sensible alternative. In any case, I would buy a dirt lot in a reasonable location than 20 bars of gold if I wanted a better predictor of value. They don't trade dirt lots in good locations on commodity futures markets subject to all the risks that entails. And nothing in life is guaranteed.

 

[js]

Here's a nice bit of info I just found on wikipedia:

In 1995, over US $380 billion were in circulation, two-thirds of which was outside the United States. By 2005, that figure had doubled to nearly $760 billion, with an estimated half to two-thirds being held overseas.

I'm so comforted to know that 1/2 to 2/3 of the USD in circulation are being held overseas. That's just so great to know. Gee. Those FRN will never come home to roost. Of cousre not. The US has the most freaking super great and impressive economy in the UNIVERSE. Where else would people put their wealth if not in our economy. We're so cool !!!!!!! People just love these little bits of paper! They're nice and green and black with good ink and good fiber in the paper. Yeah. They'll never try to get actual real goods for them. Why would they? These notes are just so darned pretty that people just want to hold them for their own sake, and are willing to trade iPods and circuits and socks and shirts and running shoes and endless other things for them. Yup. And they're willing to work 12-16 hours a day, 7 days a week in a factory away from their family for months or years so they can have these nice Federal Reserve Notes.

It's all good. It shouldn't worry anyone the 50 to 66 percent of the USD in criculation are being held by foreign entities. No worries, mates. No worries.

 

[bimemrboy318]

Re: The Economy, What's your take

This may sound crude... but I'm not worried. I've been taking a hard look at some very large purchases. One being a new home, and the another a rather large boat. Both I expect to get fair deals on due to other people's financial situations.

Although I do feel bad and can empathize for those less fortunate... not too long ago I was the mis-fortunate one when everyone else seemed to be at an all time high with life in general. I find it ironic how my lifestyle seemed to be down in the dumps during the "good" days and is what it is in the now "doom" days.

 

[WAVE_PARTICLE]

Re: The Economy, What's your take

.....that things are terribly wrong. .....

I hate to say it, but this is actually an understatement.
Things are downright #^*/!$ up!

Without going into specifics, I will say there there are huge structural problems in the financial system now. Many of these problems never existed in the past....so to say that this whole debacle will blow over like before would be a naive statement. There are a lot of new things happening here.

The problems will work themselves out through the system in time, but not without significant casualties. There will be some hard lessons learned.

WP

 

[WAVE_PARTICLE]

Re: The Economy, What's your take

....The US Dollar represents the value of our entire set of values and assets, so in many ways it never made sense to link value to something like ownership of gold and silver...

This statement is wrong on so many levels...

 

[js]

Re: The Economy, What's your take

JS, no problem with looking at this back and forth. A couple things I saw in reading your last response as my opinions....

1) There is a very real tangible and intangible value to the US that I'm not sure you are taking into account . . .

The US has value beyond their gold/silver reserves. There is enormous tangible value in our national resources, our real estate, our cities, our buildings, museums, artwork, highways, bridges, waterways, coastlines, minerals, agriculture, educational/industrial/military institutions and complexes, and many other physical assets that do not exist elsewhere.

When setting up a commodity currency, the commodity can be any number of things. Precious metals are ideally suited because they are fungible, permanent, and infinitely divisible. But whatever the commodity is, it doesn't need to have any economic "relevance". Gold doesn't need to be "in" or anything. Money REPRESENTS value. It needn't be gold to do that. It doesn't even need to be a commodity money like oil or land, to do that. I understand that. I've pointed it out before. But that isn't the strength behind a commodity currency. The strength of that economic money system is that the government can't make money out of thin air.

So, I do agree that the USDs in the form of Federal Reserve Notes REPRESENTS value, the value of the entire "economy". (Of course, gold and silver could do the same thing! The idea was never that the "value" of the gold must = the "value" of the economy!) There's lots of stuff of value here in this country, of course; lots of tangible stuff. And soon more and more of it will be owned by foreign entities because $400 or more billion USD are being held in reserve by these entities because they think they are a good place to put their wealth. When they realize that it is NOT a great place, they will dump the FRN for tangible assets--like all the things you mention. This will drive the prices of things way, way up, but you and I won't have any more USD to draw on to follow the inflation up. Hard times, those will be.

There is the incalculable value of our intangible assets such as the leadership of our democracy, freedoms, trading markets, corporations (represented by their traded stock value.), employment opportunities, technology, educational experiences, charities, trusts, NGO's, military power, and many other unique public and private services that contribute to our world leadership.

All of these have a very real value that is in addition to the nearly obsolete quantities of gold bullion sitting in our bank vaults. The US Dollar represents the value of our entire set of values and assets, so in many ways it never made sense to link value to something like ownership of gold and silver. A more accurate instrument of currency today is oil...but as new energy sources come online, that too will be rendered obsolete.

I don't think we can say that gold is obsolete.. As a medium for commodity money it will always be able to serve admirably. It can REPRESENT value just fine, no matter how much or how little there is of it.

Plus, a commodity currency system has a natural way to regulate the money supply. As gold becomes more precious due to expanding economy vs. stationary money supply, then mining and gold extraction become more profitable, and thus more money enters the economy through free-minting of coins. Thus the deflation is offset naturally, and not because some guy at the Fed decides to "inject liquidity" into the economy.

As for the "incalculable" value of all our various intangibles like freedom and democracy and leadership and charities and what not, well, I think that a great many other countries would pipe up at about this point and say that they want our form of government like they want a hole in the head, and that they wish we would stay the hell out of their business and keep our "leadership" to ourselves. These things are "incalculable" because they are not economic quantities and we can't trade on them (or, more importantly, bank on them).

I am not saying that there is an endless value to the US that justifies endless quantities of dollars to be printed....only that you must expand and include all the value that people grant to the United States. The dollar represents all of it to the rest of the world.

Indeed. The Fed has expanded and included "value" that wasn't/isn't there---hence the constant rate of inflation. This can't continue indefinitely without totally devaluing the currency.

. . .

4) Your notion of what gold is supposed to be is based upon the obsolete gold standard. It literally is no longer supposed to "be" anything other than what remaining traditional/historical/industrial demand remains for it. What I am saying is that gold now has more of a "collectors" value than a national value. You may not like that, but it is the reality since the gold standard was ended. See my #1 for what is the new value standard of a nation.

Well, I guess time will tell. But, in any case, whether it is an unfashionable notion or not has no bearing on the simple fact that GOLD DOES EXACTLY WHAT I WANT IT TO DO. Gold is, in point of fact, a commodity, with an inherent value. THAT is a reality. And I like that. And it's why I have gold investments.

5) I don't agree with your idea about investing when we have a credit economy. It is very sensible to assume that buying and adjusting your investment portfolio as the times change over a 50 year period will yield an increased value over someone who bought gold at $800/oz in 1980 and then just left it sit in their home safe. You would have lost 2/3rds of your investment even if you waited until last week's peak value to sell it. . . .

People keep harping on the last gold peak. Look, I wouldn't have bought gold at that exact time either!!! LOL!

I bought gold when it was $325. I think it was a good deal at that price. And I don't think I'll be sorry later on in my life about this investment. But more importantly, the gold trends over the last three or four decades do not reflect a "natural" trend, but rather also display some SERIOUS "unnatural" influence from the powers-that-be, whose interest it was to keep the price of gold in FRN's low. But they have lost their hold on it, and it is now rebounding back up more towards what it should cost per ounce. And it will stay that way--certainly above about $700 or $800 for the foreseeable future, in my opinion.

Still, I'm not advising anyone to buy gold. So, anyone reading my posts, please don't run out and sell off a bunch of stocks to buy gold bullion based on my account. I'm not an investment advisor and I won't take on that responsibility for anyone but myself.

 

[LuxLuthor]

Re: The Economy, What's your take

WP, if my statement was wrong on so many levels, then the Fed would not be able to print money as it has been doing, and at least up to now have the world buy into our economy. On a practical basis we now link our currency to what we believe the world will regard as our value, and what they believe is our ability to honor our debts and provide an acceptable return on their investment.

There is a very real value for a country like Kuwait or Dubai to invest their oil currency in a country that protects them, and it is not tied to any gold or silver bullion we have.

JS, just wanting to make sure you don't misunderstand fundamental differences in perceptions as ignorance on an issue.

My main point is on a practical basis is that we are no longer on a commodity currency system like we used to be. If I had a preference I would go back to the gold standard linkage. I'm also well aware that the gold or paper currency that represented the physical gold in bank reserves back then was a representation of the US value.

My whole point was based upon the reality that we are no longer linked to the commodity standards. If we were, the Fed would not be able to print the money it chooses to print, willy nilly. So I am presenting that currently the practical value of the USD is linked to the entire tangible and intangible assets of the US that I previously mentioned.

It sounds like you think we will go back on a gold commodity value basis as a result of the Fed and international banking system doing what it is doing. There is no certainty that I see to draw that conclusion....even if we both agree it would be a better system.

The risk of foreign investment being withdrawn from the US requires that there is a reliable and certain superior alternative. It ignores changes that our country could make, some of which I mentioned in my last post, and including changing our elected officials.

If wanting what we have "like a hole in the head" was accurate, we would not have tens of millions of illegal immigrants, after Reagan's amnesty, with tens of millions more behind these. How many tens of millions are illegally immigrating through perilous deserts to Mexico, Canada, Britain, France?

Despite the irrational Bush Derangement Syndromes I have witnessed over that last few years, and which will pass as elections occur and new policiies are passed, it was quite interesting to see the pro-USA political changes in France & Germany, as well as continued support from Britain....so I don't see the same negative foreign hatred as you suggest. I also take note that we represent 1/3 of the world's economy, so there is a lot of dependency on what happens here. Of course that could change over time, but that is an unknown.

I said (or at least implied) that gold is obsolete as the standard upon which national value is based, not that it is obsolete as a traded commodity. As a commodity it no longer has the same value as when it was the basis of our currency. Again, I'm not saying it is worthless, just that it is mostly moving in the direction of having a value based upon commodity trading markets.

As such, any value of such an item needs to be viewed from the risks associated with its trading, and appraised relative to other valued items, adjusted for inflation. There's the traded price of gold, and the inflation adjusted value of that price. The inflation adjusted value of gold is not an investment that has had a good return relative to other vehicles.

Inflation is also a complex issue, but has always existed to some degree. It is not just related to how many dollars the Fed prints, although that is a factor. What is more useful is to examine charts of the degree of inflation rates over time, relative to interest rates, world events, etc.

Anyway....it was fun for one post.