Guest OpEd: Crank Up The Printing Presses!

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Printing Money

US Mint in Denver, CO

The Equity Markets continue to roll gradually upward.. on auto pilot… without a meaningful correction.. as we are in the “sweet spot” of the Obama Administration/Fed-Tsy Dept’s economic recovery… at a very poor 2 to 2 1/2 percent average annual “recovery” GDP growth rate… while we are borrowing 8% + of GDP in order to fill the holes normally taken care of by increases in private economic recovery activity… so we can try.. and I emphasize try.. to maintain that piss poor and largely fictitious 2 to 2 1/2% GDP growth rate. Normally 5%+ GDP growth would be expected during a strong economic recovery.

We are borrowing approximately 4 times the amount we are “growing” economically each year… money we don’t have… from China or whoever will still buy our debt paper.. most of them have over-weighted dollar reserve allocations already… and when that doesn’t work.. we buy it ourselves.. by creating dollars.. out of thin air. This has been going on very aggressively since 2009.. and a majority of our elected Federal officials support and defend this activity… because in the final analysis.. they are deer in the headlights.. with no clue, collectively, what to do in order to stop it.. in a manner that allows them to retain their position and power. And.. by the way.. “we”, as voters, allow them to continue down this path… because.. ?

There is no, nor will there be in the foreseeable future, any “real” economic recovery in realistic terms (GDP & job growth etc.).

There does exist a somewhat successful attempt to “stabilize” the US economy by forcing low earning capital into risk asset classes (equity markets, selected commodities etc., and to a very limited degree, residential real estate) because, by design, there are no realistic or legal (with regard to pension funds etc.) alternatives. This has provided the Administration/Fed-Tsy with their singular “quantifiable” success since the Housing/Debt bubble burst.. that being to make sure the stock market goes up… because if peoples’ 401k’s/personal investments and insurance company portfolios/corporate pension accounts etc.. get destroyed… the goose is not just cooked.. it’s pretty well carbonized when combined with very large decreases in home values.

Additional “economic recovery” activities included subsidizing state budgets with borrowed/created Federal dollars in the form of unemployment insurance payments and other Federal grants.. like protecting union jobs (teachers etc.) and misguided efforts to promote economic growth.. like throwing $90 Billion down the shitter with Solyndra and other “alternative energy” projects evaluated, promoted and invested in by your Federal Government as directed by the Obama Administration. Please note the lack of pro-growth economic policies and tax reform etc., in the “economic recovery” mix… just moving bad private and corporate debt onto the Federal balance sheet via newly “created” dollars… with zip, zero, nada policy changes to promote actual, real economic growth.

In addition to making sure that the equity markets recovered.. and not only recovered but in some cases major indices have recently made not only new recovery highs but also new all time highs.. one of the other primary objectives of the Fed/Tsy [Treasury – Editor’s Note] “economic recovery” program was to stabilize/re-capitalize the banking system… not only domestically.. but providing assistance to foreign central banks as well. This was/is “justified” because foreign markets provide one of the few avenues of growth available to American corporations… as long as the dollar remains comparatively weak making our products and services attractive and price competitive.. and you just can’t have the whole thing on both sides of the Atlantic swirling down the shitter bowl at the same time.

The major “Money Center” banks are still the primary holders … … of bad residential real estate debt.. either in the form of collateralized mortgage derivatives and/or direct mortgages… and for those properties that have been foreclosed, the banks are holding them and are responsible for the physical property. This “liability” had.. and still does have the capability of wiping out a major portion of the banking system’s capital base.. if… this inventory were to be placed on the open market and “market values” established with resulting losses booked.

The banks also have a very convenient “back door” available to them via defaulted mortgages which carry a Federal HUD (Housing and Urban Development) mortgage guarantee. If a defaulted mortgage is HUD guaranteed.. and if the bank can’t sell it.. then they can just give it to HUD with instructions to “please send us a check” which, in a lot of cases, is larger than the outstanding mortgage balance.. because of allowable extra fees etc., and you and I.. as US taxpaying units… now own the house.. and are responsible for fixing, maintaining and hopefully selling same. Of course the Federal government, in it’s unending examples of fiscal efficiency, has developed and administers multiple programs to accomplish this task.. many of which are coming under much closer scrutiny and appear to have the makings of yet another Administration scandal. Lot’s of taxpayer bucks involved with this deal…

This (dumping housing inventory on the market).. of course.. is unacceptable in our current mode of avoid, obfuscate and paper-over the mistakes of our monetary and fiscal mismanagement. The Fed/Tsy has “fixed” this problem by requesting the banks to hold their housing inventory and related debt paper so as not to “disrupt” the markets.. and.. has allowed them to carry this bad paper on their books at inflated values so as to maintain their required capital base and reserve requirements. As the banks continue to foreclose on their mortgage debt holdings which are in default.. and release the properties for sale… and book the resulting losses… they maintain their capital and reserve requirements because the Fed/Tsy allows them to borrow what are, in essence, theoretically unlimited amounts from the Fed at around .25% interest and encourages them to purchase US Treasury debt yielding significantly higher rates.. like 1+% on 5 yr. paper and 2+% on 10 yr. paper… so they are making “real money” to offset their losses and maintain their capital/reserve structure. Nice work.. if you can get it.

The primary underpinning of this “economic miracle” as orchestrated by our Federal “keepers” is the Federal Reserve’s and U.S. Treasury’s ongoing and aggressive manipulation of the debt markets.. (forcing and holding interest rates at unprecedented low levels.. for a unprecedented period of time)… currently anchored in the form of QE (Quantitative Easing) 4, commonly known as QE to Infinity, which has the Fed currently purchasing primarily our own Federally issued debt paper to the tune of $85 Billon per month.

International Money

Monopoly Money

That number is low because Ben the Fed Man and Jump’n Jack Lew, who is the new Treasury Secretary – replacing Wee Timmy Geithner, occasionally see that $30-40-50- Billon (as needed) in dollar denominated reserves, or derivatives representing those reserves, make their way into the Euro Zone morass to help contain and slow down the ongoing economic and monetary deterioration occurring in that sphere of economic activity. The Eurozone consortium is farther along the timeline of this common degenerative monetary/fiscal disease and sicker than we are. Their monetary/debt house of cards is now constructed a full dimension higher than ours.. with the bad sovereign national debt of the weaker Eurozone countries now being consolidated at the ECB (European Central Bank) and IMF (International Monetary Fund) level. In the US we’re just moving bad personal and corporate debt onto the Fed’s balance sheet… and “paying” for it with amazing amounts of future taxpayer liability… in the form of “new” bad debt at the Federal level. The ongoing Eurozone debacle warrants continued close monitoring.

All these activities that our Federal “keepers” and the Congress have instituted and approved represents an effort to try and mitigate/stall/hide the massive amount of “deflationary” pressure (liquidation of assets to pay off debt) which has/is/and will continue permeate our domestic economy. This pressure is caused by unprecedented levels of bad debt at all levels of the spectrum… that being personal, corporate, state & municipal and Federal. Bad Debt being defined as debt that is unable to be serviced (payment of principal & interest when due) or realistically known to be unserviceable.. via either the interest and/or principal.

Just like playing switcheroo with credit card balances… when this bad debt comes due.. more bad debt is issued to pay off the old bad debt.. and if nobody wants to buy the new bad debt issued at the Federal level.. our Federal “keepers” just create more dollars with a few computer entries.. and arrange for the original “bad” debt to replaced with new “bad” debt… in increased amounts due to interest payments and increasing demand. It’s always nice to be able to print excessive amounts of your own money… for awhile.

These ever-present deflationary pressures represent the potential of a “deflationary spiral” (depression ingredients) … that being the situation where folks start selling assets to pay off debt.. which causes the supply of those assets to increase and the price level to drop… which means that other folk’s net worth and cash flow drops.. and they have to start selling stuff to service existing debt.. and round and round we go… until it stops… somewhere. This is especially true at the individual personal consumer level with housing… and the one area the Fed’s (who can create their own money) had to gain some level of control over to prevent a serious domestic economic meltdown.

The domestic deflationary pressures we have faced and continue to face are primarily concentrated in the residential housing area.. but there is still a very large amount of credit card and other personal debt out there… like $1 TRILLION in student loan debt that is questionable to say the least. Some analysts place the combined domestic personal consumer and corporate debt (combined they equal “private” debt) at $42 TRILLION… a very large and long term unmanageable amount.

The “private” level of bad debt is the key to understanding the overall problem facing our domestic economy. Approximately 70% of the US domestic economy (GDP – Gross Domestic Product – the $ amount of goods and services produced domestically and generally accepted measure of “economic growth”) is due to personal consumption and the resulting demand. That’s beer & cigarettes, tires, toenail fungus stuff, ammo, jet skis.. all the things we buy to conduct our lives in a manner we can afford… and in some cases.. at levels we can’t afford. Corporations are consumers as well but represent a much smaller piece of the consumer pie… but they too get in over their heads and have to merge, sell or otherwise liquidate due to excessive debt.

The point being… if the individual consumer is pressured by excessive amounts of debt.. which is the case.. and if that consumer represents 70% of our domestic economy.. then the demand for goods and services by that consumer will be reduced until such time as that debt service burden is significantly reduced.. by being paid off, defaulted on or by declaring bankruptcy… and, additionally, until such time that the “confidence” of that consumer is restored to the point where they are will to acquire new debt in order to purchase additional goods and services. This situation makes it impossible to expect a “robust” economic recovery anytime in our foreseeable future… no matter what our Federal “keepers” do… or say. There is no clean end of a turd.

One of the tactics employed by our Federal financial gurus which has allowed us to now reach the “sweet spot” of the current economic “recovery” is the tacit approval of allowing defaulting homeowners to remain in their homes (sometimes for 2-3 yrs.) while not making mortgage payments. This “new found” cash has been finding its way into the economy.. and has helped increased overall consumer demand.

The demographics of this equation are not encouraging and, additionally, dictate a reduced demand curve for quite a few years into the future… regardless of any given economic situation. The population of the US is a little over 300 million (plus or minus 12x million illegal aliens) and approximately 140 million of those folks are of “working” age. 70 million of that group are members of the “baby boom” population bubble (born between 1946 – 1964) and are starting to “retire” at the rate of about 10,000 a day. These folks, as a general statement, worked hard and saved some money, bought a house or three, put their kids through school.. and expected to be able to retire in some form or another.. sometimes with the help of an inheritance from their parents. In other words they played by the rules.. paid their taxes and expected to be able to enjoy their grandkids.

What they didn’t count on was that their elected officials, both State (with some exceptions – like Wyoming) & Federal, spent not only everything in their respective treasury’s.. but went well beyond that and spent $TRILLIONS of dollars they didn’t have in order to buy votes and stay in power. This combined with a series of economic “bubbles” our financial “keepers” allowed, and in some cases promoted… like the dot-com bubble in 2000 and most recently the housing/debt bubble which former Federal Reserve Chairman Greenspan certainly facilitated.. has now got the “baby boom” generation scared shittless.. and if you think they are going to spend a lot of money unnecessarily and create additional demand.. you are mistaken.

To add insult to injury.. the Fed/Tsy’s policy of holding interest rates at artificially low levels is causing those folks who played by the rules, saved & invested.. and as per standard investing principals.. started preparing for retirement by moving their investments from riskier equity (stock) positions to the more “safe and conservative” debt (bond) investments are faced with their 6-7-8% yielding bonds (retirement income) being called/redeemed or reaching maturity and are being forced to chose between savings accounts yielding .25 to .5 % and CD’s a 1+%.. or bonds yielding 3-4%. While prices are rising these folk’s income is being reduced.. and they are being forced to consider (again, by design) going back into riskier asset classes… or just start spending the principal to meet their needs. This does not inspire confidence and/or facilitate increased economic activity.

So…. what’s all this mean ?

It means that we continue to finance this “economic recovery” with unprecedented amounts of fairy dust (more bad debt) and ignore the basic principals of what needs to be done within a consumer based capitalistic system when faced with excessive levels of unmanageable debt. The “current” Federal deficit (not including all the un-funded liabilities.. like Social Security and Medicare) was $10 Trillion in 2008.. and that’s from the beginning in the late 1700’s. We are now approaching $17 Trillion. That’s a 70% increase in 5 years. Very dangerous.. and evidence of a Federal Government that is fiscally out of control… economic emergency or not.

Government Debt

Infographic from Visuall.ly Designed by Elefintdesigns.com

Our economic and political leaders have arrested the deflationary “free fall” that started in 2008-2009.. but instead of moving on.. and instituting policies that promote economic growth, at least in selected areas that obviously offer that opportunity.. like domestic fossil fuel energy development… they have chosen the path that Government is all things to all citizens (and especially to a lot of folks who are not citizens) and nothing happens unless the Government wants and/or makes it happen.. all under the guiding principal of “fairness”. Basically the current administration is giving the finger to the private sector, which is the economic engine of this country. Seen much evidence of efforts to create real new jobs in the private sector lately?

Hey… if “we” are creating all this new money.. why don’t we have a serious inflation problem ?

I’ve got to give credit to the Fed and Treasury for that one. They have done a outstanding job in keeping this situation contained within the Federal Reserve banking system. This process has been facilitated by a significantly reduced demand for credit.. allowing the banking system to retain these funds in the form of excess reserves along with other “bookkeeping” methodologies… and its worked pretty well. The potential for a aggressive inflationary problem certainly exists, however.. and could be accelerated if the demand for credit picks up and interest rates rise. That’s not likely to occur in the near term.. absent a “external” financial accident.

Well… what am I supposed to do with my house ?… I still owe more than it’s worth.. and the kids are almost all gone… and I don’t need this anymore..

That’s the proverbial $64,000 dollar question (ask an old person.. they’ll know..) I can’t tell you because I don’t know. I can tell you that the residential housing situation is not “fixed”.. and that any “housing recovery” data/pontification you see or hear must be considered in the full context of the situation. Always remember.. all real estate is “local”… and market conditions vary.

Let’s use Las Vegas as an example. Housing prices are up 25%+ since the bottom. Normal available inventory for purchase is running 1600 to 1700 units as compared to 3,000+ at the peak…. but… 54% + percent of the homes in the Las Vegas Valley (about 800,000) are still underwater value wise (down from over 70% at the bottom) and 70,000 +… yep.. that’s 70,000 + homes/households in the valley are at least 30 days delinquent on their mortgage payment… AND.. 50,000 of those dwellings are classified as vacant.. which is bullshit.. because 1/2 to 2/3 of those houses have people living in them, either “back door” renters or the original owners.. which is a generally good thing as the houses are being maintained at some level while the banks/mortgage companies pursue foreclosure proceedings at what ever pace they chose… or are “allowed” in order to be “politically correct”.

You have to make the decision. Do you feel that a housing purchase at this time will continue to appreciate ? Evidence of flipping is starting to emerge (bubble stuff) at the same time some of the large institutional/private equity investors who had been buying 50-150 houses at crack (because they had very limited places to put money that would produce decent returns) are now starting to reduce or shift their residential housing portfolios.

To answer your question.. if it were me.. and I wanted to unload a house that’s too big.. and too expensive.. I would tend to lean towards putting it on the market now.. with plans to rent for about a year or more. I say this because it is highly unlikely.. if not impossible.. to continue to see anywhere near the type of appreciation in the residential housing we have recently experienced. In addition.. the banks would like to reduce their “holdings”.. regardless of what the Fed/Tsy/HUD/Administration thinks.. and in the final analysis.. they own it and can do what they want… so one has to expect a steady supply of houses for sale.. if not an increase.

It’s really simple. We CANNOT have a sustained recovery in residential housing and the general economy until such time as the individual consumer’s debt load is significantly reduced… AND.. we have meaningful and continuing REAL job creation in the 220 to 250,000 per month range (..don’t hold your breath).

These are the conditions that will restore the individual consumer’s confidence.. resulting in increased spending and use of credit.. on cars and houses and furniture and clothes and all the stuff that makes our consumer based economy work. Until then (and it’s going to be awhile..) it is my opinion that we will be locked in a “trading range” of residential home values with the bottom end hopefully defined at the 2009 – 2010 low point… and the top end somewhere near where we are now.. ?

Ok. So much for housing. It is what it is. What about all the other stuff.. like Obama Care costs.. and all these scandals ?

Well… Obama Care is a disaster in so many ways I can’t begin to count them all.. starting with the cost. It started out at a projected cost of $900 Billion over ten years.. and now the CBO (Congressional Budget Office) is projecting cost levels approaching $3 Trillion over the next ten years… and they haven’t even finished writing the guiding regulations yet.

Democrat members of Congress are starting to bail and are scurrying like rats to find a politically acceptable way out. And then there’s the 14,000 new IRS agents that are being hired to “enforce” all (some yet to be written) the provisions of the law… the primary one being to insure that you.. as a taxpaying unit (or non-taxpaying unit, as the case may be) has health insurance… and just not any health insurance.. it must be Obama Care approved health insurance… or you get fined.. big time.. by your friendly IRS agent. An unmitigated disaster that will cost jobs and restrict what little economic growth we are able to attain.

Speaking of the IRS etc., .. the whole situation with the ever expanding list of Obama Administration scandal’s can be summed-up with the old proverbial question… and answer… “..why do dogs lick their private parts ? ….. because they can.” The IRS, by definition, is a almost irresistible tool/force that politicians from all sides of every isle recognize as a way to intimidate their enemies and achieve their personal and political objectives… and there’s always a willing and ambitious sycophant nearby to facilitate the politicians wishes. It is the inherent nature of the beast. They do it.. and they will continue to do it… because they can.

It is time to move to a Flat or Fair Tax consumption based Federal revenue system and abolish the Federal Income Tax and the IRS in its current form. This will do a couple of things. First.. it gets rid of 90% of the IRS and its inherently corruptible nature.. and secondly… it removes a considerable amount of power from the Congress to bestow economic favoritism to their political benefactors… which makes up a significant percentage of the current massive and unmanageable tax code. A good thing.. by any account. The current IRS scandal appears to have strong legs and we are just beginning to peel back the onion. Hopefully, as the investigation continues, public distrust of the IRS will increase to the point where an alternative Federal Tax structure will be seriously considered in Congress. Expect heavy Democratic resistance.

With regard to the NSA “snooping” situation… the “..because they can” answer is particularly relevant. 5+ Zetabytes of storage capacity housed in 1.5 million sq. ft. of space being put in place in Bluffdale Utah for the NSA’s use is massively huge… approaching cosmic. I would expect nothing less from our intelligence agencies… they are going to use any means available to them to complete their mission. Good for them.

The question arises in the details. For example, I don’t particularly have an issue with collecting all the phone numbers as to who called who, either foreign or domestic. I do have a problem if they are recording domestic only conversations and email traffic detail, without a case specific warrant and “warehousing” that data for a extended period of time… and making it available assuming a warrant being issued sometime in the future. Over and above the obvious Constitutional and privacy issues.. it smacks of prior restraint and other established legal precedents in my mind. I’m not worried about some miss-guided contract employee having access to a bunch of numbers.. but actual conversations and email traffic content disturbs me.

Yeah… that’s ugly.. and it reminds me.. what’s the deal with Israel and the bomb makers in Iran.. and Egypt.. and now Syria ?

Those folks, for the most part, are going to do whatever they’re going to do. The lack of leadership (which, in the case of Benghazi, borders on the criminal) on the part of the current Administration is morally reprehensible and tactically extremely dangerous.. resulting in a significantly increased threat to national security.

The Obama Administration’s public and private display of disdain for the Nation of Israel and their national policies for self defense and national preservation is absolutely disgusting. Those folks have been catching the pointy end of the radical Islamist spear for the US for years. You think you have some concerns about the NSA et. al., listening to your phone calls.. think about where we would now be without Israel… considering the radical Islamist caliphate movement to bring salvation to all the worlds people.. in the form of Islam and Sharai law… or… get beheaded.. or… your homeland poisoned for hundreds (if not thousands) years with a dirty bomb just to get your attention and convince you that “they” are “right”.

Remember… this Administration has instructed the FBI that they are forbidden to run surveillance operations on Islamic Mosques.

This Administration deliberately and purposefully ignored repeated requests for increased security for the Benghazi diplomatic mission… and after the Consulate was predictably attacked.. and the Ambassador (the DIRECT representative of the President of the United States of America) was publicly sodomized, drug thru the streets and eventually murdered.. this Administration let two former Navy Seals die fighting for their lives for literally hours.. after they successfully rescued 20+ US citizens from the Consulate while under fire… because this Administration thought it would be “inconvenient” to involve themselves in such activities during the closing stages of a Presidential campaign.

Expect more of the same.

Well.. ok… Soooo.. what screws up the auto-pilot.. what’s the surprise that causes things to start falling off the cliff again ?

Let’s start with the weak areas internal to “the system”. A derivative failure of the credit default type still represents the best bet for an “internal” fuse causing an explosion somewhere within the US / Eurozone financial debt house of cards. Derivatives are still largely a unregulated market and the majority still trade off any type of exchange… and the size of the market is huge… like $550 Trillion in outstanding face amount… however, much of it is off-setting and workable in crisis situations.. if the counter party is locatable and willing to cooperate. Both the Fed/Tsy and the European Central Bank have been down this road before and have a much better handle on the situation.. but nothing is foolproof. It should be noted that derivatives are being used to “manage” the questionable debt of sovereign nations.. not just corporate debt paper. Not a good sign.

There are other “internal to the system” risks.. the most obvious one being that the Fed/Tsy makes the decision to start backing off the current aggressive Quantitative Easing [QE] policies and allow interest rates to rise. This will cause the equity markets some rather sever heartburn.. at least initially. The bond markets would not be appreciative either. This will happen sometime.. and it will either be under somewhat “controlled” circumstances.. or will be the result market forces outside of the Fed’s control.

Most of the rest of the potential threats are external and exogenous… like Egypt attempting to occupy the Sinai… or Israel attacking Iran’s nuclear facilities… or Russia moving troops into Syria.

The overreaching threat to the whole system is the losing of faith and confidence in the US dollar.. and its position as the world’s

REUTERS/Frank Polich

REUTERS/Frank Polich

reserve currency. Nobody wants this to happen.. so nobody is holding us to account in the marketplace as a result of the current QE policies and the continuing debasement of the US dollar. If this should ever happen.. the resulting world wide economic destruction would be massive and would be measured in hours and days… as well as opening the door for the Chinese Yuan to become the new world reserve currency.

Japan is, once again, attempting to extract themselves from 20+ years of economic malaise after their real estate markets blew up in 1991.  I mention the Japanese situation because there are a lot of parallels between how Japan approached the after effects of their real estate/debt bubble bursting and how the US is approaching ours.  Japan allowed their banking system to hold worthless real estate for years at inflated values, printed tons of Yen and refused to let the financial system cleanse itself via default and realizing losses.  We are following the same basic plan… and I see no reason not to expect similar results.  Not good.

I find most disturbing the lack of a end-game plan that can be articulated by the Federal Reserve and Treasury. All that being said.. the auto-pilot is still engaged and functioning.. the equity markets are probably going to continue higher (assuming no financial accidents) albeit with sharper and more frequent corrections… and the socialist agenda of the current Administration has been hampered significantly… mostly because none of it is working.

 

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