Posted on 11/08/2007 7:57:14 AM PST by Hydroshock
Seems reasonable. However, we both know that companies are not going to let large sums of cash sit idle for any appreciable length of time. Where will it go, or where has it gone? That’s what I can’t figure out.
Looks like I’m just another “doomer and gloomer” helping the Vast Left Wing Conspiracy talk down this wonderful, inflation-free, strong-dollar, cheap energy, deficit-free economy.
I guess I’m just too dumb to see how much our current economy mirrors the 1950s when we GDP was based on ever increasing production and manufacturing and we exported our goods worldwide in a near monopolistic fashion. I’m just not very smart, am I. I’m just a tool of the Vast Left Wing Conspiracy, talking down this wonderful, powerful, completely perfect economy.
I mean, it is not like we have an economy that is 70% dependent on consumer spending, most of it supported by consumer debt. Oops! we do. Hmmm... Must be some evil Left Wing Plot to fire up the “doom and gloomers.”
Yep, the perfect quote for this thread. Thanks for the timely reply. The Perfect Quote. How true it is. I think a lot of people think the FED can rescue this economy, or failing to do so only intentionally. Little do they know...
This has to work itself out by itself. You can’t make lenders lend money to companies they fear. You can’t make companies make investments into assets with completely uncertain values. You can’t make people borrow money if they don’t think they will have consumers to sell to.
But then, what do I know? I’m just a brain-dead tool of the Vast Left Wing Conspiracy talking down this ironclad economy.
In principle, I agree with you. But capital does not always have to work. Ideally it should, or you are actually losing money. So your basic assumption that companies have to be putting this money to work somewhere is basically sound, IMO. But there is an alternative.
Some times, when preparing for bad times, companies are not looking to make money, but are looking to preserve capital. The goal is to NOT LOSE money. We may be at that point.
I think the flight to safety and quality is where the liquidity in the system is going. I think companies are seriously in “Preserve Our Capital” mode. New liquidity may not be needed. What is the point in borrowing only to buy bonds? Short term liquidity that expires is only going to service outstanding debt.
I don’t see companies taking massive liquidity to invest and to grow at this time. I don’t think the Fed rate cuts are going to do jack.
"If recession should threaten serious consequences for business (as is not indicated at present) there is little doubt that the Federal Reserve System would take steps to ease the money market and so check the movement."
---Harvard Economic Society, October 19, 1929
"Let me issue and control a nation's money supply, and I care not who makes its laws."
~~Mayer Amschel Rothschild
"I am one of those who do not believe the national debt is a national blessing... it is calculated to raise around the administration a moneyed aristocracy dangerous to the liberties of the country."
~~Andrew Jackson, letter, April 26, 1824
"If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered."
~~Thomas Jefferson, letter to then Secretary of the Treasury, Albert Gallatin, 1802
A lender such as a builder grants a mortgage out of current operating funds to a buyer at a fixed rate and then sells that mortgage to another lender obtaining some of the interest in advance in the form of a ‘markup’ or ‘premium’ and avoids having to ‘service’ the loan themselves.
The proceeds of reselling that original mortgage plus the ‘markup’ are then used to finance additional new homes and the builder has no worries about forclosure or declining property values. By dumping the mortgage early, the builder makes an extra profit with little exposure for loss.
A similar thing happens in insurance where the insurance compainies sell the policies to other ‘re-insurance’ companies thereby lowering their own exposure in return for a smaller immediate profit.
In both cases, an immediate profit is made and long term risk is eliminated. Long term gain is also eliminated, but the near term immediate gain is what is wanted.
As a new home buyer, I expect that in a very short time I will receive offers to refinance the house from other lenders at a lower rate than what the builder is offering. In this case, the refinancer doesn’t pay a ‘markup’ or ‘premium’ to buy the note, they just pay it off and issue an new note.
For another lender to come in and ‘refinance’ the house is profitable for them because all the risk analysis has been done by the original lender. Once the buyer has proven his ability to make the monthly payments on time, the refinancer can ‘reasonably’ expect to carry the loan until maturity with reduced risk of foreclosure. A new home is more likely to retain it’s value than a used home which may shortly need repairs.
For a lender who may have purchased the original loan from the builder or original lender at a markup and then has the loan paid off early, refinance is a very bad thing because they have already paid the ‘markup’ to the original lender and they are now deprived from recovering their investment.
This also contributes to the current lending crunch because expected long term revenues in the form of interest for the life of the loan never come in and any markup or premium by the original note purchaser is never recovered.
From the buyers point of view, to be able to refinance at a lower rate cuts the monthly mortgage amount and the additional interest paid over the life of the loan.
If a person intends to only keep the new home for a short period of time, the cost of refinancing may never be recovered. On the other hand, for a person such as myself who intends to keep the home for another 20 to 30 years, it is well worth refinancing anytime a significant reduction in interest rate occurs.
For some people who took out ARMS that are becomming due for rollover to higher rates, it is extremely desirable to refinance into fixed term loans and obtain a smaller fixed interest rate.
The lenders who lent the loans for the ARMS looking forward to the rate increase never realize their expected profit if the buyer refinances and are often stuck with foreclosed property if the buyer can’t refinance.
Much if not most of the current credit crunch is due to buyers speculating in the appreciation in housing values and taking out the ARMS in hopes of making a quick profit. Once housing values started declining due to being overpriced to begin with, the ARMS couldn’t be refinanced due to insuffficient equity and the foreclosures started hitting fast and furious.
Your example of Japan is perfect.
I am also reminded of the Dot.com collapse. Fed rates almost want to zero, yet the S&P still took 7 years to come back to par, and the NASDAQ never did come back to par, being half of what it was at peak.
Yes, the easy money created a horrendous housing bubble that the economy is now poised to pay for, but the rate cut never had the positive affect on the rest of the economy or the markets that people thought it would have.
Aside from the housing bubble and the massive increase in consumption caused by that wealth and that debt, what did the Fed’s slasing of rates really help. Nothing so far as I can see. Now we seem to be entering a period of high inflation, yet wages have been stagnant.
If the Fed’s easing has had such a positive effect on growth and GDP, then why doesn’t this show in wages? Unemployment is reasonably low, but they are lower paying jobs being added, not higher wage jobs. Lots and lots of Latte makers out there.
http://etext.lib.virginia.edu/etcbin/toccer-foley?id=JefCycl.xml&images=images/modeng&data=/texts/english/jefferson/foley&tag=public&part=2&division=div1
It is a litigated question, whether the circulation of paper, rather than of specie, is a good or an evil. In the opinion of England and of English writers it is a good; in that of all other nations it is an evil; and excepting England and her copyist, the United States, there is not a nation existing, I believe, which tolerates a paper circulation. The experiment is going on, however, desperately in England, pretty boldly with us, and at the end of the chapter, we shall see which opinion experience approves: for I believe it to be one of those cases where mercantile clamor will bear down reason, until it is corrected by ruin. —
Thomas Jefferson is one of my heroes. Sure he is imperfect, but still an amazing and admirable man. I’m so grateful I finished high school in 1976. I would be much worse off to be in grade school today, taught only during some short break between Martin Luther King and Caesar Chavez about how Jefferson raped his slaves. I am so grateful I escaped to adulthood before the era thought police.
Jefferson was truly amazing. But you don’t need me to tell you that.
The failure of some stock gamblers and some other circumstances, have brought the public paper low. The 6 per cents have fallen from 26 to 211-4, and bank paper stock from 115 or 120 to 73 or 74, within two or three weeks. This nefarious business is becoming more and more the public detestation, and cannot fail, when the knowledge of it shall be sufficiently extended, to tumble its authors headlong from their heights.
~~Thomas Jefferson, letter to William Short, 1792
It was impossible the Bank and paper mania should not produce great and extensive ruin. The President is fortunate to get off just as the bubble is bursting, leaving others to hold the bag. Yet, as his departure will mark the moment when the difficulties begin to work, you will see, that they will be ascribed to the new administration, and that he will have his usual good fortune of reaping credit from the good acts of others, and leaving to them that of his errors.
Thomas Jefferson to James Madison, Jan. 1797
Jefferson on paper money and fractional banking:
The crisis of the abuses of banking is arrived. The banks have pronounced their own sentence of death. Between two and three hundred millions of dollars of their promissory notes are in the hands of the people, for solid produce and property sold, and they formally declare they will not pay them. This is an act of bankruptcy, of course, and will be so pronounced by any court before which it shall be brought. But cui bono? The laws can only uncover their insolvency, by opening to its suitors their empty vaults. Thus by the dupery of our citizens, and tame acquiescence of our legislators, the nation is plundered of two or three hundred millions of dollars, treble the amount of debt contracted in the Revolutionary war, and which, instead of redeeming our liberty, has been expended on sumptuous houses, carriages, and dinners. A fearful tax! if equalized on all; but overwhelming and convulsive by its partial fall. Everything predicted by the enemies of banks, in the beginning, is now coming to pass. We are to be ruined now by the deluge of bank paper, as we were formerly by the old Continental paper. It is cruel that such revolutions in private fortunes should be at the mercy of avaricious adventurers, who, instead of employing their capital, if any they have, in manufactures, commerce, and other useful pursuits, make it an instrument to burthen all the interchanges of property with their swindling profits, profits which are the price of no useful industry of theirs. Prudent men must be on their guard in this game of Robin's alive, and take care that the spark does not extinguish in their hands. I am an enemy to all banks discounting bills or notes for anything but coin. But our whole country is so fascinated by this Jack-lantern wealth, that they will not stop short of its total and fatal explosion.
~~Thomas Jefferson to Dr. Thomas Cooper, 1814
There have been whole bookshelves written on the subject, but simply stated it all hinges on the fractional reserve banking system and fiat(paper) currency we and all other economies use.
Excessively simply stated:
If a bank has $1, and the banking reserve requirement is 10%, then the bank can lend $10 based on the $1 it has “in reserve”. In essence, the bank has just created $9 by loaning out $10 on the $1 it has.
Add in velocity - you, the borrower, now go spend that money on a new widgit, and the seller of the widgit then spends the money on paying his suppliers, workers etc etc and so on - and money is used over nd over again is some time frame.
So, the created money can then “make” more money because it can be used to underpin more loans, etc etc.
Every time you pay back the bank you “destroy” money until the bank lends again.
Read thru the site http://www.mises.org on credit and banking and get a great education. Ludwig von Mises and the Austrian School of Economics are great unravellers of economic topics.
Yep. Von Mises is one of my all-time-favorite reads.
Jefferson on paper money and fractional banking:
The crisis of the abuses of banking is arrived. The banks have pronounced their own sentence of death. Between two and three hundred millions of dollars of their promissory notes are in the hands of the people, for solid produce and property sold, and they formally declare they will not pay them. This is an act of bankruptcy, of course, and will be so pronounced by any court before which it shall be brought. But cui bono? The laws can only uncover their insolvency, by opening to its suitors their empty vaults. Thus by the dupery of our citizens, and tame acquiescence of our legislators, the nation is plundered of two or three hundred millions of dollars, treble the amount of debt contracted in the Revolutionary war, and which, instead of redeeming our liberty, has been expended on sumptuous houses, carriages, and dinners. A fearful tax! if equalized on all; but overwhelming and convulsive by its partial fall. Everything predicted by the enemies of banks, in the beginning, is now coming to pass. We are to be ruined now by the deluge of bank paper, as we were formerly by the old Continental paper. It is cruel that such revolutions in private fortunes should be at the mercy of avaricious adventurers, who, instead of employing their capital, if any they have, in manufactures, commerce, and other useful pursuits, make it an instrument to burthen all the interchanges of property with their swindling profits, profits which are the price of no useful industry of theirs. Prudent men must be on their guard in this game of Robin's alive, and take care that the spark does not extinguish in their hands. I am an enemy to all banks discounting bills or notes for anything but coin. But our whole country is so fascinated by this Jack-lantern wealth, that they will not stop short of its total and fatal explosion.
~~Thomas Jefferson to Dr. Thomas Cooper, 1814
The enormous abuses of the banking system are not only prostrating our commerce, but producing revolution of property, which without more wisdom than we possess, will be much greater than were produced by the Revolutionary paper. That, too, had the merit of purchasing our liberties, while the present trash has only furnished aliment to usurers and swindlers.
~~Thomas Jefferson to Richard Rush, 1819
The bank mania is raising up a moneyed aristocracy in our country which has already set the government at defiance, and although forced at length to yield a little on this first essay of their strength, their principles are unyielded and unyielding. These have taken deep root in the hearts of that class from which our legislators are drawn, and the sop to Cerberus from fable has become history. Their principles lay hold of the good, their pelf of the bad, and thus those whom the Constitution had placed as guards to its portals, are sophisticated or suborned from their duties.
~~Thomas Jefferson to Dr. J. B. Stuart, 1817
It is a litigated question, whether the circulation of paper, rather than of specie, is a good or an evil. In the opinion of England and of English writers it is a good; in that of all other nations it is an evil; and excepting England and her copyist, the United States, there is not a nation existing, I believe, which tolerates a paper circulation. The experiment is going on, however, desperately in England, pretty boldly with us, and at the end of the chapter, we shall see which opinion experience approves: for I believe it to be one of those cases where mercantile clamor will bear down reason, until it is corrected by ruin.
~~Thomas Jefferson, letter to J. W. Eppes, 1813
I have ever been the enemy of banks, not of those discounting for cash, but of those foisting their own paper into circulation, and thus banishing our cash. My zeal against those institutions was so warm and open at the establishment of the Bank of the United States, that I was derided as a maniac by the tribe of bank-mongers, who were seeking to filch from the public their swindling and barren gains.
~~Thomas Jefferson to John Adams, 1814
I am an enemy to all banks discounting bills or notes for anything but coin.
Thomas Jefferson to Dr. Thomas Cooper, 1814
The failure of some stock gamblers and some other circumstances, have brought the public paper low. The 6 per cents have fallen from 26 to 211-4, and bank paper stock from 115 or 120 to 73 or 74, within two or three weeks. This nefarious business is becoming more and more the public detestation, and cannot fail, when the knowledge of it shall be sufficiently extended, to tumble its authors headlong from their heights.
~~Thomas Jefferson, letter to William Short, 1792
Like a dropsical man calling out for water, water, our deluded citizens are clamoring for more banks, more banks. The American mind is now in that state of fever which the world has so often seen in the history of other nations. We are under the bank bubble, as England was under the South Sea bubble, France under the Mississippi bubble, and as every nation is liable to be, under whatever bubble, design or delusion may puff up in moments when off their guard.
~~Thomas Jefferson to Charles Yancey, 1816
Jefferson on central banks: "This institution is one of the most deadly hostility existing, against the principles and form of our Constitution. The nation is, at this time, so strong and united in its sentiments, that it cannot be shaken at this moment. But suppose a series of untoward events should occur, sufficient to bring into doubt the competency of a republican government to meet a crisis of great danger, or to unhinge the confidence of the people in the public functionaries: an institution like this, [like today's Federal Reserve] penetrating by its branches every part of the Union, acting by command and in phalanx, may, in a critical moment, upset the government. I deem no government safe which is under the vassalage of any self-constituted authorities, or any other authority than that of the nation, or its regular functionaries. What an obstruction could not this Bank of the United States, with all its branch banks, be in time of war? It might dictate to us the peace we should accept, or withdraw its aids. Ought we then to give further growth to an institution so powerful, so hostile? That it is so hostile we know: 1, from a knowledge of the principles of the persons composing the body of directors in every bank, principal or branch; and those of most of the stockholders; 2, from their opposition to the measures and principles of the government, and to the election of those friendly to them; and 3, from the sentiments of the newspapers they support. Now, while we are strong, it is the greatest debt we owe to the safety of our Constitution, to bring its powerful enemy to a perfect subordination under its authorities. The first measure would be to reduce them to an equal footing only with other banks, as to the favors of the government. But, in order to be able to meet a general combination of the banks against us, in a critical emergency, could we not make a beginning towards an independent use of our own money, towards holding our own bank in all the deposits where it is received, and letting the treasurer give his draft or note, for payment at any particular place, which, in a well-conducted government, ought to have as much credit as any private draft, or bank note, or bill, and would give us the same facilities which we derive from the banks?
~~Thomas Jefferson To Albert Gallatin, 1803
Private fortunes, in the present state of our circulation, are at the mercy of those selfcreated money-lenders, and are prostrated by the floods of nominal money with which their avarice deluges us. He who lent his money to the public or to an individual, before the institution of the United States Bank, twenty years ago, when wheat was well sold at a dollar the bushel, and receives now his nominal sum when it sells at two dollars, is cheated of half his fortune; and by whom? By the banks, which, since that, have thrown into circulation ten dollars of their nominal money where there was one at that time.
~~Thomas Jefferson to John W. Eppes, 1813
It was impossible the Bank and paper mania should not produce great and extensive ruin. The President is fortunate to get off just as the bubble is bursting, leaving others to hold the bag. Yet, as his departure will mark the moment when the difficulties begin to work, you will see, that they will be ascribed to the new administration, and that he will have his usual good fortune of reaping credit from the good acts of others, and leaving to them that of his errors.
~~Thomas Jefferson to James Madison, Jan. 1797
The bank filled and overflowed in the moment it was opened. Instead of twenty thousand shares, twenty-four thousand were offered, and a great many were presented, who had not suspected that so much haste was necessary. Thus it is that we shall be paying 13 per cent, per ann. for eight millions of paper money, instead of having that circulation of gold and silver for nothing. Experience has proved to us that a dollar of silver disappears for every dollar of paper emitted; and, for the paper emitted from the bank, seven per cent. profits will be received by the subscribers for it as bank paper (according to the last division of profits by the Philadelphia bank), and six per cent. on the public paper of which it is the representative. Nor is there any reason to believe, that either the six millions of public paper, or the two millions of specie deposited, will not be suffered to be withdrawn, and the paper thrown into circulation. The cash deposited by strangers for safe keeping will probably suffice for cash demands.
~~Thomas Jefferson to James Monroe, 1791
The flood of paper money had produced an exaggeration of nominal prices, and at the same time a facility of obtaining money, which not only encouraged speculations on fictitious capital, but seduced those of real capital, even in private life, to contract debts too freely. Had things continued in the same course, these might have been manageable; but the operations of the United States bank for the demolition of the State banks obliged these suddenly to call in more than half their paper, crushed all fictitious and doubtful capital, and reduced the prices of property and produce suddenly to one-third of what they had been.
~~Thomas Jefferson to Albert Gallatin, 1820
Sounds like overkill, you are disabled, so you should be scaling back, not expanding your housing expenses. Your pension barely covers the mortgage?
I have two other sources of income which more than equals the pensions. The pensions alone will more than cover the house payments and the pensions are guaranteed for life.
Thats less than 50% for housing. I am retired with disabilities and all my children are grown up. I have 100% free medical coverage and no other expenses.
I may as well buy the best that I can get, really no other committments other than to enjoy life as much as possible.
This house will rise in value rather than fall and will provide future resources if needed which is unexpected.
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