RATIONAL THINKING FOR AN IRRATIONAL ECONOMY

Readers, before reading, please take into account I wrote this in July of 2008, but it is relevant as can be and it is what I believe is currently on the minds of the Federal Reserve right now, anyway enjoy:

It has been all too apparent as of late that the severe breakdown in the global economy has and will reach further protraction as Central banks around the globe socialize mal-investment and punish the laboring sources around the globe. There is no doubt in my mind that further masking of the real problem will only exacerbate the inevitable result of socialization over the free market economy. The Central banks around the globe have raced toward moving everyone toward the Japan style of “lost decades,” and risk the stabilization of the United States as well as other global economies. We sit here and watch as the biggest spectacle since the great depression, to wreak havoc on Americans and others across the globe as what our fore fathers have warned us especially Thomas Jefferson,

 “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." 

This is exactly what is going on today. This is no longer about money, this is about an outright treasonous act of government and business to transfer risk from the private enterprise that brought us here, onto the taxpayers who are dumb enough to accept this falsehood.

The real mistake is letting the Federal Reserve commit fraudulent activities and bankrupt our citizenry for the profit of those businesses with the closest ties to Washington. We sit here and we watch as Trillions of dollars are being wasted on projects and priorities that nobody knows about and that not even the GAO can track. We willingly agree to Billion-dollar stimulus, to alphabet soup programs like the TARP, TALF etc. behind the veil of “if we don’t the economy will parish.” Well I haven’t met one economist worthy of making a decent prediction of future events; we needn’t look any further than Goldman’s own Abbey Joseph Cohen. Anyhow nobody knows what’s going to happen, nobody can say for sure, but there are a few things that I do know for sure and that is our economy will suffer the same fate as every other deflationary, over indebted, over speculated, under regulated and corrupt cronyism economy does and that is “lost decades.”

Congress cannot act, because they seem to be powerless, they seem to still believe that there are party line affiliations that Republican and Democrat mean something, well people they mean nothing but more cronyism, smooth talking, rear kissing rhetoric, just to get reelected. That’s it, is there no one in our corrupted government out there watching as their neighbors lose their jobs, as America sells out to this baloney globalization, which is doing nothing but transferring standards of living from here to around the globe, why? So, we can assume the exploitation of labor, period. This has been going on for thousands of years and it is no different today. Those in control of business, control government, control prosperity and control humanity.

It is time to stand up for our country and dismantle the old rules, the old laws and allow for the power to return to the people. We cannot sit around like a bunch of auto bots slaving away everyday pretending that things are just dandy when millions are starving, millions are on social service and our government and Obama can simply just say, well we will extend more services. America is not about welfare and helping the deprived that is a byproduct of a failed government. America is about opportunity and allowing those with spirit to thrive and take risk, to then be rewarded for the hard work and effort. I see no rewards in welfare, socialistic societies other than autobot slave wage status. This is lunacy and it needs to stop. 

The answers are clear and the road is long, but we cannot continue to sell out future generations for current policy mistakes. We first need to let democracy and the free market work and stop interfering with the natural laws of the universe, especially in business. We cannot go from lending to anyone with a name to lending to nobody. As time goes on more and more ruinous activities will occur, they will snowball, more job losses, more distressed asset sales, more crime, and more punishment. This is a natural cycle and nothing that has occurred already will stop this from progressing. We need to stop kidding ourselves and stop rewarding those that take advantage of the system and start rewarding all the people of this great land, with some honesty. Congress, government, stop what you are doing and start over, hit the refresh button. Recall all the money that was lent to all the banks, stop backstopping these idiots that took excessive risks and let them fail, wipe them all out, for the phoenix will raise from the ashes and the real green shoots will emerge.

We can start by allowing interest rates to rise as they normally would in times like this. Artificially lowering rates so that borrowing costs can move lower, only adds to the worsening debt problem. This may work for the short term, but the longer this remains, the good will be erased by hoarding of money, for you are allowing free money to be created without taking risk elsewhere, this is causing an outright blockade to normal business activity and this only raises costs and leads to inflation, I don’t care when inflation comes it will come, it doesn’t have a choice, you don’t print money, give away free riskless arbitrage creation of money and not expect it to want to be paid interest in the future. Where will all the money be coming from to pay for all this interest that will be garnered? That’s right you will have to sell assets, or print more money. This simply leads to a concentration of wealth to those that have the keys to the party. This is socialism and cronyism, not free market enterprise.

Secondly eliminate socialized programs such as TARP, TALF etc. let banks and hedge funds and levered speculators fail, new ones will emerge, ones that have the resources to come out of this, but cannot because you won’t allow for the natural cycle to take hold. Nobody will play a rigged game, if the government is in there picking and choosing, that means there are insiders that means avoid risk, get out and stand aside. You will get more respect that way.

Thirdly the FED needs to quit fixing interest rates and allow the market to adjust them to supply and demand. Interest rates that are 0% do nothing for the general consumer, the banks arbitrage risk free and make money and have no incentive to loan because of this. This also unwarrantedly punishes savers for doing what they were supposed to do and rewards debtors by not bankrupting them. If the savings rate is truly moving up, then raise the rates up and allow for the retirement age group who needs to live off of the money to earn more than a pittance. This is a joke, you want good old-fashioned growth, watch how a 6% savings rate climbs with interest rates at 7%, do the math, why the hell would any individual not want to save money and buy houses or buy goods when their savings are working for them. Hell, I would even go as radical as having an interest rate regulation where as if you are retired and older, you are entitled to higher rates of savings, perhaps a toggled interest rate based upon age or net worth etc. But this would have to be highly regulated as crooks would figure out a way to pool all the old people’s money to get the higher rates. This is the road to recovery, raising rates large enough to combat any inflation, to reward those invested in dollars and to strengthen balance sheets that are in good standing, not ones that have taken excessive leverage. What the hell am I missing?

The problem still is blatantly eye opening and that is our government and our congresses do not work for the American people, they work for business not middle America business but the financiers of the world.

Let’s look at a few numbers and see what we can do:

First we have the initial problem with our average American: US TOTAL HOUSEHOLD REVOLVING CREDIT DEBT = $928BN

Now what if instead of passing a phony $787BN dollar stimulus to save the banks rears, if we simply decided to send a check to every American over the age of 21 a voucher to pay any bank credit debt they had in the amount of $4000? Well considering there are around 230mln people over 21, that initial payout would cost around, you guessed it, $920BN almost equaling the entire debt load, with a small caveat, we are helping the people and helping the banks, not just helping the banks like the TARP does. There are no guarantees the banks will extend the money to the populace, but when you send it directly to the people in the form of vouchers payable, it does and you reduce debt, reduce the banks risks and extend credit to perhaps those that need it the most. That is a good way of spending Billions of freshly printed (quantitative easing) dollars and a more progressive reactionary forceful way. The way congress did it was they pilfered; pork barreled and used this to feed the hand that got them there. Sure, payment to the banks to make them whole, write off their debt and claim a tax loss then drill the consumer and try to double dip by demanding repayment, foreclose or else, meanwhile taking their money and doing what they want through the TARP. Nice, only if you are a FAT CAT.

Furthermore, if the AVG HOUSEHOLD CREDIT CARD = $7900 was true in my plan for a married couple their debt would be gone, assuming they had a job and a home, don’t you think their discretionary spending would rise, which would also then be economically bullish, from a demand point of view, come on eggheads, the real economy operates off of real aggregate supply and real aggregate demand, this will never change no matter what type of components one decides to put into the equation.

Ok now let’s assume since credit is the real problem, that the AVG HOUSEHOLD CREDIT CARD INTEREST RATE = 12.68% , if this is indeed the case and we have over $928BN dollars’ worth, that could potentially mean that payments in the amount of over $117.7BN dollars a year are earned or paid through INTEREST. 

How much affect would there be if consumers could save $117BN dollars a year? Granted with the issuance of vouchers, there would then have to be strict oversight and regulation of lending practice and usury. This is when regulatory bodies could then be formed to allow for oversight, rulemaking and regulatory practicing. To over regulate only after caught with one’s pants down, doesn’t do anybody any good.

Now let’s get to the biggest so-called problem, housing and mortgage debt. Has it not been apparent already almost 3 years after the housing high that the measures currently taking place are not exactly working? It has been our governments view that subsidizing housing for those not able to afford housing as their preferential mandate, ala the now defunct GSE’s and their corrupted practices now under the nuevo word Conservatorship, another BS way of saying we screwed up as parents and now our addict son and daughter lost everything and need to move back in and live by our rules. This does nothing to save housing or the like. In fact, not allowing them to declare bankruptcy has only added to the necessary retraction and prolonging of the adjustment period. New entities will not dare step into the secondary mortgage market, or provide home loans because the government is allowing the rigged game to continue. The government is the sole provider of housing finance, why, because it allowed this to happen because of their ineptitude to stop the worst subsidized program outside of social security. There is nothing free market about any entity called a “GSE”. Now we know why, once again keeping the addict under the roof but not under watch just allows more of the same now with the government in full control, lending has virtually been non-existent, because they can’t even refinance or clear what they currently own because nobody is willing to clean shop or look under the hood. I am sure many entities would crop up to support lending if the government would get the hell out of the way, hell if I am a 10 billion dollar hedge fund, surely I would be glad to run a billion dollars of mortgages or more, why not I don’t have to pay interest on my investors’ money and as long as my due diligence is good, I should be able to make a long decent return. But forget it, that won’t happen because the government is in the way. So instead let’s keep the game the same except let’s make it even better, we can lower our borrowing costs to virtually nothing and still keep interest rates at 6% and 7% so our spreads are wider and we can make back more money, what the idiots don’t get is that the game only works if there are players and when you do not extend the rates to your customers, they eventually have to fold, pack up and throw in the towel, (ask Las Vegas) how do you think it will look when 1 in 6 houses are in foreclosure and unemployment is 15%? Not very good, but that may be the path we are on if we continue are ill regarded ways. By the way the US TOTAL HOUSEHOLD MORTGAGE DEBT = $10.5TRN, I am not alarmed by this number, as long as the majority have a 30yr fixed rate in the 5’s somewhere, I think in time this is manageable, especially given its relationship to GDP.

Now let’s look at the effect of the real game plan and that is the total money supply and the affect raising rates will have upon this. If you really think deflation is the soup du jour than your cup of tea should be raising up interest rates, so basic egg head thinking will say that higher rates will cause a depression, tighten credit spreads and kill the economy, however I counter intuitively have already seen this zero rate from Japan and yes we are like them, a large over speculated, aged country, yet we have something that they didn’t and that is the respect of the reserve currency. Money finds a way to move toward the highest alpha with the lowest risk. Well since we are considered the lowest risk in terms of default and hold the reserve currency (for now) than the only answer is to shock the world and the other Central Banks and raise rates up. This will not tighten credit, for credit is already frozen and not moving, the velocity of money is already zero, so no risk there, but here is what it will do:

1. It will destroy all companies taking advantage of low short term interest rates (they are already in trouble, look at the commercial paper market, pretty nonexistent right now) and force them to become fiscally responsible with other people’s money, for their sole survival will depend upon it, hell considering the game is fixed, you could even let the big elitists in on the fix, I wouldn’t have a problem with it, swap all their short term debt for long term and hammer the swap guys, who will be forced to buy fixed and this should keep a lid on long rates, we then move to an inverted yield curve as the front end gets hammered, crushing all those not playing the game fiscally and morally responsible. So, what if they were that stupid to not see the end coming for their ill warranted laurels then so be it. 

2. The banks have enough free cash flow right now and are sitting on nearly $1 Trillion dollars, we then shift profits from the banking sector to the individual, which will then in turn raise GDP, create new businesses and invest in riskier assets like stocks.

This is what needs to occur, those that survive will be the bedrock of the new economy. With these new regulatory rules upon exotic securities will be in place Credit Default Swaps, Collateralized Mortgage Obligations and the like will be deemed insurance and regulated accordingly and new margin rules will be in play for all investment banks, banks, hedge funds, etc. The biggest benefit will come from the increased INTEREST earned by the saver, the guy who played by the rules and is now being unduly punished for such activity.

Let’s take a look at the difference in INTEREST using the current M2 MONEY SUPPLY AVG = $8.38 TRN lets say the current holder of all of this is getting the paltry 1% or $83.8BLN dollars a year, wow that’s great but that’s not even enough to cover our CREDIT INTEREST from our revolving credit, not to mention our INTEREST expense from our mortgage’s but let’s assume TBILL rates and short term rates move up to 5%, now the saver of this money will be making almost $419BLN dollars nearly four times more than our CREDIT INTEREST and a hell of a lot more money to do whatever it is necessary talk about paying our national debt back, paying for healthcare costs, people would not need the government for anything but protection from outside invaders, of which we currently have none, but apparently our defense spending which continues to balloon which this year is going to be around $515BLN. Which is insane and ludicrous, how many people do Raytheon, Northrop and the like employ? Certainly, nowhere near the entrepreneur, the mom and pop, the grocery store down the street, but that is the kind of ridiculousness we decide to live in.

RAISE THE INTEREST RATES UP AND YOU WILL SEE DEFLATION DISAPPEAR 

THEN WE CAN GET ON WITH OUR ECONOMY AND OUR LIVES, IF WE CONTINUE TO MAKE THE MISTAKES OF JAPAN AND THE OTHERS THAN GET READY FOR 8 MORE YEARS OF THIS MUDDLE WORTHLESS ENDEAVOR, BY THEN I AM HOPING THAT I WILL BE ALIVE AND READY FOR THE NEW CHANGE. IT IS UP TO US TO DO WHAT IS RIGHT WE CONTROL OUR FATE, BUT IF WE DON’T SPEAK UP, IF WE JUST SIT THERE AND TAKE IT LIKE THE AUTOBOT NATION OUR GOVERNMENT WANTS THAN YOU WILL ONE DAY WAKE UP WHERE YOU DESERVE AND YOU MAY NOT LIKE AND YOU WILL NOT HAVE ANY OTHER CHOICE BUT TO TAKE IT.

-Michael Agne July 2008

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