Buying Jobs for Christmas…and Reelection:
Good Morning to all of you semi-sane people out there in the land of gross psychosis; your King of Simple News is on the air.
I want to cover a smattering of issues this morning, the most important is that it’s 5 below zero here this morning and I don’t like it one bit. So whoever is in charge of global warming; do what you can.
Congress is so pleased to have saved $200 Billion from the stimulus plan, that our president is suggesting spending it on jobs. Someone told Obama that a lot of people don’t have employment and our young inept leader came to the only obvious conclusion possible; he’ll buy them a job for Christmas. So much for a Harvard education.
Japan is getting ready to launch their 8th stimulus plan, proving that Einstein’s theory was correct. “The definition of insanity is doing the same thing over and over again and expecting different results”.
It’s important to remind everyone that forging through everyday life, and at the same time comprehending all that is happening to us from a political and economic standpoint, is nearly impossible. That is why I wrote Show-Stoppers. I wanted to produce something semi-short and sweet to demonstrate the impossibility of our current economy to continue.
It isn’t important to understand the inner-workings of healthcare and social security. It isn’t really important to know exactly how the banking world works. The complex nature of Wall Street doesn’t really make that much difference, nor does the dark world of those in power need to be totally understood.
What is important is to have a firm grasp on the very real fact that none of these former mentioned will last all that much longer in their present form. Eventually we will run out of stimulus funds, Social Security funds, Medicare Funds, Bank bailout funds, etc., etc., and the chickens will come home to roost.
I received an e-mail from King of Simple News friend and commenter, “Colorado Kid.” It went like this: “Mike You’ll find this interesting: Two years ago I rented a house in Green River, Utah that was on the market for 150k. Bankruptcy took it back to Bank of America. They finally relisted it at 68k. I offered them 25k. It’s a neat old bungalow, needs work. It’s now down to 35k. I may offer 10. This is where our bankers have led us and it’s gonna get worse (though low housing is good, but losing it isn’t). The owner bought it in the 90s for 30k. She refinanced thru BOA for 102k. Spent the money. She made 25k as a librarian there. BOA had an offer for 38k but it fell through, the buyers were promised financing by BOA but when the bank saw the inspection, they wouldn’t touch it. Ironic as heck, since they had done the refinance .”
The burning question regarding the classic true story written above is, “what went wrong?” Let’s apply a little Mikeronomics to the problem. I’ve stated a hundred times that inflation is built into our system of Capitalism. It’s not a question of whether things go up in price; it’s how much they go up in price. This rise in pricing is termed, “the rate of inflation.” If we don’t see prices rising, the term used to describe the condition that soon exists is, “recession,” followed by the term, “depression.”
Our leadership as a whole aren’t great thinkers, actually many of them don’t even suspect anything. Therefore, they are under the misguided notion that history repeats itself in a timely fashion, regardless of circumstances.
Historically, when home prices rise, wages rise to pace that inflation and there is a close correlation between the rate of inflation and the earning power of the individual. When things cost more, you make more. That’s simple enough. But what if wages don’t rise? What if they actually decline and jobs begin to be lost rather than gained?
That is exactly what happened to the housing boom and the outcome is the example that Colorado Kid provided above. Librarians aren’t making more money and government was counting on rising wages.
The element that government failed to predict was “overshoot.” That point when there would be more people than jobs and the law of supply and demand would control wages.
Government can attempt to overrule the law of supply and demand by buying jobs for those who have been displaced by universal law. But regardless of the great power of the fiscally irresponsible and insane; there are limits and we have slammed headlong into those confines.
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Mike,
We’re in the middle of an 18″ blizzard this morning. Every year I add to the calendar, I hate winter a little bit more.
You have hit on a very important point-fake real estate values MUST decline to the point that buyers can justify borrowing money to pay for the property. That means the rental property has to cash flow easily, or your wages will cover the payments easily or the land will generate sufficient income to easily service the debt-after a healthy down payment. All these efforts to prop up unrealistic values (basically to make the banks appear sound) will fail in the end.
Because of our current fiat paper money system, I don’t believe you can ever stop deficit spending without dire consequences. And there are dire consequences if you continue. We are in a pickle, it would appear.
Hotrod,
You brought up an important point regarding real estate values. They must be predicated on today’s return, not tomorrow’s perceived value.
I used to use the 10% rule of monthly rent. If a home cost $100,000, it should rent for $1,000 per month. After taxes, insurance, maintenance, and vacancy set asides, this would produce a reasonable income for the holder of the property.
That all changed to the present system of negative returns today, in exchange for inflated values down the road. It also supposed that wages would rise at the same rate as inflation in order for there to be buyers available at the future inflated price.
How’s that workin’ out for us?
Hotrod,
You noted correctly that real estate values would have to come down to balance with wages.
There is yet another leg to this stool and that is the embedded cost of building a home or business. Materials continue to inflate (in general) regardless of wage stagnation. This condition is referred to as “stagflation.” Jimmy Carter became an expert on the subject.
At some point we must recognize that our base economic model was mathematically flawed and has failed. We need leadership that will point out this fact and change the course of this spaceship. But….I’m not holding my breath.
Mike,
I live in what has become a resort/retirement area and the economic development specialist has a powerpoint that says we are in for some real eye opening circumstances. He believes that in 10-20 years, when the baby boomers get tired of maintaining their $300-700,000 monuments to themselves, that there will be no buyers. Those poor, poor children who were waiting for their inheritance.
Hotrod, you identified one of the key issues that we are facing. If we stop deficit spending we are in real trouble; however, if we don’t, we are still in big trouble. It’s a classic catch-22.
We don’t have what I would consider any viable options. No matter what we decide to do it will be unpleasant, so we will probably do nothing.
At this point, delaying the unpleasantness may be the best we can do. Trying to force a change might make things worse. There are too many uncertainties in trying to engineer the future, we would probably screw it up. I think the best we can do is to adapt to circumstances as they arise.
Greg,
You also brought up an important point in saying, “No matter what we decide to do it will be unpleasant, so we will probably do nothing.”
I agree. We will allow status quo to rule until such time that circumstances dictate differently.
You also stated that, “I think the best we can do is to adapt to circumstances as they arise.”
I also agree that this will be the case for most people. However, we do have the power to change our individual circumstances.
Regarding adapting as circumstances arise, I was thinking more about society as a whole. I think Individuals still have options, but collectively we may be too far gone.
I don’t see us having enough affordable energy (fossil fuel), resources, money, or time for an orderly transition to a less energy intensive society, which of necessity, would need to be a large scale endeavor.
We had our chance forty years ago and passed on it. We now need to settle for doing what our limited resources will allow.
Greg,
Well stated, “I think Individuals still have options, but collectively we may be too far gone.”
On that matter you will find me in complete and total agreement. As you said, our leadership had a chance 40 years ago and passed.
Mike,
Whats you take on this? I don’t recall that you’ve written about fractional reserve banking. The email you described “lends” to this idea. I look forward to some great articles while your stuck inside during the snow storm. It’s not all bad.
Fractional reserve banking works like this: If 1,000 people each deposit $100 in the bank the bank has $100,000 in reserves. The bank is only required to hold a fraction of what it lends. That fraction is 10%. So with this $100k, the bank can loan out, AND collect interest on, $1M ($100k/.10). At 10% interest they make $100k ($1M*.1) in one year while only risking $100k (original reserve).
In year two the bank has $200k in reserves and can loan out, AND collect interest on, $200k/.1 = 2M. Year two earnings = $200k, year three earnings = $400k, Year four = $800k, etc. All this based on the original $100k. Yearly profit goes up exponentially and risk goes down exponentially.
So what happens when the bank forecloses on a house with a $300k mortgage? The bank “created” $270k while “risking” $30k so the bank only stands to lose $30k in real terms but in foreclosure they get the house that was paid for with “created” money!
So they auction the house for $200k and still come out way ahead. $30k turned into $200k. They cannot lose. This is theft! First they steal from everyone by devaluing our dollar when the loan is created, then they get to keep the money that they magically created.
This is not a great system but it does motivate people to produce. I mean it gets people out of bed and off to work. That’s what our leaders want and that’s who created the system. So is it really broken?
Greg,
You said “Trying to force a change may make things worse”. Exactly. I am afraid that the soft corporate fascism we now enjoy would quickly revert to hard corporate fascism-especially when resources become scarce. Where, oh where, are the enlightened, influential individuals now to replace those who served us so well 225 years ago? I can’t think of more than a few, if any, in positions of power.
Sorry everybody for hogging this thread, nothing else to do while snowbound.
$200 billion will buy 1.7 million jobs for three years. That’s 1.7 million votes in 2012. Why does everyone think they don’t know what they are doing?
It is not broken until total resource depletion and Mother Nature say it is over. We are less than twenty years from both of these forgone conclusions. If you are a youngster, this may appear to be a long way off. If you are old like me, it is just a short walk down the trail. -bb
Econalmost, you used the word “theft”, as I recall, that is the same word Ellen Brown used in her book “The Web of Debt”, to describe what the bankers are doing. This is grand theft on steroids to the tenth power.
I don’t think we will ever reach total resource depletion. That’s because sometime soon the cost of taking the resources out of the ground will exceed the value of the resources. The remaining resource will stay in the ground, probably forever. Expensive energy,declining quality of ores and smaller concentrations will limit how much more we can extract.
Econalmost,
The bank in your example, does in fact borrow the mystically created money from the Fed and are required to pay it back with interest. That is why 160 banks have failed in the past two years. The real folly of fractional reserve banking is at the Federal Reserve level who simply books the losses as “Whoops, guess the taxpayers lost that one.”
In answer to your question, “So Is it [our economic model] really broken?” In short, yes it is.
That being said, this is not an all or nothing situation. It’s not unbridled capitalism or socialism. It’s not socialism or communism. What we really need is what Greg once called “Capitalism Lite.”
Capitalism allows us to own property and to start and control a business. It allows us to earn and keep profits. It allows us to borrow money to grow our enterprise and many other virtues that are not present in communism and socialism.
The flaw in our form of capitalism is your example of fractional reserve banking and compounding interest which messes up the game by requiring exponential growth of the money supply resulting in ever greater monetary inflation. It should also be noted that our expanding population base and immigration and trade rules have nothing to do with capitalism and all to do with expanding the basis for kicking the can down the road for the benefit of the Federal Reserve and to satisfy the growing appetite of compounding interest.
Greg #14, I believe that the condition that you are describing would equal effective depletion? Either way, the resources won’t be available to people from total depletion or a price-out structure.
That reminds me of a guy who once told my partner and I that he lost his eye in a black powder explosion. Another listener said, “I didn’t think black powder exploded, I thought it just burned real fast.” The one-eyed guy said, “You really can’t tell the difference.”
Is it possible for individuals to earn a profit on their money under any system without expanding the money supply? Is this even possible or is the argument simply about the rate of growth and not growth itself? No interest = no lending = no owning of property = no starting a business. Is this a good thing?
Mike, re: #16, I agree; however, the reason I make the distinction is because if you ever get into an argument with a Peak Oil denier and tell them we are going to “run out” of energy, or some other resource, they can quickly produce numbers to prove that you are “wrong.” And technically they will be correct.
The real problems are NPV and EROI. No mining company is going to undertake a project unless the net present value (NPV) is positive. As front-end exploration and mining costs increase, projects that once looked promising end up on indefinite hold. The issue is more complex than that, but in essence, the NPV of the project will determine what gets mined, not the demand for the resource.
Also, EROI becomes a show-stopper even before it reaches 1:1. Why take oil out of the ground when it takes more BTUs to extract and refine it than the the finished product will give us? That will produce energy bankruptcy in short order.
The stone age didn’t end because people ran out of stones. The oil age won’t end because we run out of oil, we simply won’t be able to afford it and can’t maintain the rate of flow. And worse yet, there is nothing with anywhere near that energy density to replace it.
On second thought, don’t bother arguing, you would be better off trying to explain peak oil to your Border Collie, than a peak oil denier.
Econalmost,
You asked, “Is it possible for individuals to earn a profit on their money under any system without expanding the money supply?”
To answer your question comprehensively would take several pages, but I’ll try and condense it. If in fact the investment of that money created real value…then yes. If you are speaking of making money by collecting compound interest…then no.
If you have never read this article, please take a look as it goes to the source of the problem. http://mikefolkerth.com/2009/01/15/balance-we-dont-need-no-stinkin-balance/
Greg,
Thanks for the clarification. You stated, “And worse yet, there is nothing with anywhere near that energy density to replace it.”
M. King Hubbert, the renowned American geophysicist, stated that there is no replacement on earth for oil and gas.
When the guy on the Dodge commercial was asked by the driver in the truck next to him, “You got a Hemi in that thing?” He replied, “You’re about to find out.” Most Americans are “about to find out a whole lot of things that they don’t teach in public schools…such as peak oil.”
Mike,
Is it your opinion that raw materials converted into products is the only way to introduce new wealth into the system? As opposed to shifting paper instruments and selling insurance and real estate.
Peak Net Energy accelerated by our economy of exponential growth will bring about more change than the population on our planet has ever seen. Everyone will be able to witness Mother Nature at her peak. Unfortunately she will not be operating with our best interest in mind. We passed on that possibility in 1970. This is one of the things that is somewhat predictable. We have fewer than 20 years before this change of enormous magnitude will play out. At this point in time it is much too late to change the end result. -bb
Hotrod, # 21
Your question “Is it your opinion that raw materials converted into products is the only way to introduce new wealth into the system,” is difficult to answer without a very long diatribe…but in general, my answer would be yes.
We have to consider all of the supporting roles necessary to mine, grow, convert and transport products. We would also have to consider the supporting cast that makes our world tolerable…they too must have money.
I once wrote an article that asked if you could pick a team to start a new village, who would you pick? A Wall Street Bankster, A State Senator, A big time movie star, A big business CEO, An IRS agent, A personal injury lawyer? Hardly, you would pick someone to help you, not hinder your progress and become a burden to your enterprise.
Two over looked gems caught my eye in the discussions above.
1. Hotrod said: “Where, oh where, are the enlightened, influential individuals now to replace those who served us so well 225 years ago?”
I believe that those enlightened and influential individuals are still out there along the lines of Jefferson, Adams, and Washington. However, today there is are two political machines so closely tied in with Wall Street, Big Business, and Big Banks that no one with any genuine concern about “We The People” will ever be effective or successful in their political and leadership abilities. Only at the local level is there a hope.
2. econalmost said: $200 billion will buy 1.7 million jobs for three years. That’s 1.7 million votes in 2012. Why does everyone think they don’t know what they are doing?
I like your math Econalmost! So lets see we’re loosing 500,000+ jobs a month and have been for over 16 months. So the simple math is 8 million have lost their jobs. If 1.7 million jobs are created we still have a net loss of 6.3 million! Not to mention the overlooked by our government of 125,000 additional people or so that are added to the “employable workforce” each month.
This problem requires men and women such as our founders to right the ship and get back to the basics that made this country great again! If its considered revolutionary to get back to the basics then so be it. “Don’t Tread On Me”
What a thread this has been! I love it when that happens. I hate to lose the flow, so I have continued with a new article that goes to the same points. Thanks everyone!