Now we are up into relatively modern times. I remember when Jimmy Carter was elected and I remember Ronald Reagan coming on the scene to supposedly clean up the mess(he tried, but failed).
Fannie Mae was also a quasi public entity(private stockholders with some government control) created in 1938 to help Americans buy homes. Basically a bank would loan someone the money to buy a house, then the bank would sell the loan to Fannie Mae and the interest and payments went to Fannie Mae until the loan was paid off. Freddie Mac was created for more of the same in 1970. As long as home values were going up(due to inflation) and people paid on their mortgages everything looked rosy.
Then under the Clinton administration new banking regulations were put in place that made non discrimination a part of the loan process. Banks had to have a certain percentage of loans to minorities. But since inflation was the rising tide that raises all boats the banks got away with this for a while. They loosened their lending standards and created things like "interest only loans" and "subprime mortgages"(low interest for a short period with a large gotcha at the end) so people with no income or ability to pay a mortgage could still buy a house. Then those notes were sold to Fannie Mae and Freddie Mac so they bank was off the hook. Another part of the trap was in place.
Because of many years of stability the US dollar had been the world's currency for many years. Because of this the Treasury could sell Treasury notes to the world to create the money the Fed loaned to banks(remember the banks loan out the same money 10 times). But in the last few years the Euro has gained strength against the dollar(because of the dollar's inflation) and is a threat to become the world's currency. This put even more pressure on the Fed to stop printing money and act responsibly. But like an alcoholic that goes back for one more drink, the couldn't stop printing.
Today the weak dollar with a deteriorating US economy(due largely to regulating and taxing business so much that costs are increased) has put us in a situation that can't continue. The banks have loaned out Billions of dollars 10 times over for property that isn't even worth what they loaned out on it. So if a bank has loans worth $10 million, but the property is only worth $8 Million they have lost $2 Million. But wait, remember they loaned out that same money 10 times, so they have lost $20 million. And once the panic starts, prices drop even more and starts the vicious cycle.
This is where we are today. Hopefully I have explained it well enough so that you see it is a direct result of improper(illegal and unconstitutional) government actions. Years of these actions for the benefit of extremely powerful and politically connected people have created a problem. So what is our government's solution. Give these rich people$700 Billion(today's estimate which works out to about $2500 for every man, woman, and child in the US)(what are the chances this government program will take more money that expected(over 100%))of US taxpayers money to keep them from taking a loss. This is a failure of socialism with more socialism prescribed as the cure.
So what should be done? The government should allow these companies to fail if they cannot pay their notes. Those failures will definitely hurt our economy and make life difficult for a while. But much of the burden will be on the rich and powerful who legislated the problem. Get the government out of the business of regulating banks and such and let the true free market work. Government regulation keeps out competition for the rich and powerful and enables them to outcompete the little guys for a while. Ultimately we should get back to the gold standard where we have a money that is worth something and can't be manipulated for the benefit of the rich and powerful. This goes along with returning our government to its constitutionally defined limits before it strangle the US.
What can you do to protect yourself? Well, hopefully you started years ago getting out of debt. It is real hard to accomplish much now, but get to work on it. Owning gold helps protect your value, but is difficult and impractical for many. The only things that truly hold their value in inflation are "hard" assets(real estate, precious metals, etc). Be at least somewhat self sufficient. Have cash reserves, both in the bank and real cash on hand. Pray that GOD protects you and guides you through this mess. It has the potential to get very ugly.
For more studies
Shadow Stats shows the US money supply over time and demonstrates what inflation really is and how bad it has been.
The Ludwig von Mises institute can educate you about how economics really works
Dave Ramsey can teach you how to get out of debt. I love his work, but some of his advice was only good in the past and I don't think is the best option in the future.
26 September, 2008
Financial Crisis Pt 1
I am tired of hearing news readers talk about how the current financial crisis is caused by free markets, capitalism, and greed and that we need the government to fix it. Free markets and capitalism have nothing to do with it. The United States government has created the problem(accidentally or on purpose) with influence from greedy anti free market business people. I will try to keep this short, but there is a lot of ground to cover.
First, I must define inflation. Every economist agrees with the basic definition of inflation, but their definition is different than what the government and modern media use. If you hear someone talking about inflation you think about rising prices; ie food, gas, clothing, etc. The prices actually rise as a result of inflation, they are not the cause. Inflation is defined as an increase in the supply of money. In the old days a ruler would issue gold and silver coins that would be used in trade. Periodically the ruler would want to spend more than he could afford and didn't have enough money. So he would call in the coins, melt them down and reissue them with the same stated value, but slightly less gold or silver weight(either by making them smaller, or mixing them with cheaper metals). This was inflating the money supply. You still had 100 $1 coins, but there was less gold than before.
Gold was the most common money supply in the history of the world. Paper money had been tried in the US by several states and the US, but had always failed shortly when money got tight and the printing presses started running. Soon you could only buy a loaf of bread with a wheelbarrow full of money. That is one of the reasons our Constitution gave Congress the power to "coin"(not print) money. OUr founding fathers knew that printing money would destroy us. The US was basically on a Gold standard up until 1933. Sometimes gold was used as the actual medium or exchange, and sometimes paper money was issued that was backed by gold. If you lost confidence in the paper you could exchange it for gold. US Dollars were virtually 100% gold backed until 1933, and were mostly gold backed until 1971. A $20 gold piece(about 1 ounce of gold) was worth pretty much $20 until 1933(it is worth about $880 today).
In 1913 the Federal Reserve Act created the Federal Reserve. The Fed is a private company(semi government controlled) that manages the US money supply. The Fed is the third attempt at a national banking system. The other two only survived about 20 years. The Federal Reserve and the fractional banking system it created are the root of today's financial crisis. The Fed basically has the authority to create money out of thin air. Basically the Fed authorizes the sale of Treasury Notes to supply itself with money. Then it loans that money out to banks. Then the banks are(legally) allowed to loan out 10 times what they have on hand. So the Fed creates $1 Million and loans it to banks, those banks can then loan out $10 Million. They theoritically only created $1 Million, but the money supply was really increased by $10 Million so your dollars are worth less than before.
The Fed was handcuffed by the gold standard. They could not really create money until 1971 when the US went totally off the gold standard. In fact, Congress and President Nixon made it illegal to own gold in 1971. From then on the Fed could do whatever it wanted. It wanted to print money. It really began to perfect printing money while Jimmy Carter was president, but it got out of hand and had to be reined in or the US would have been bankrupt sooner. Since then the Fed has walked a tightrope with a rate of inflation(money printing) that was slow and steady enough that most people wouldn't notice, but that provided a steady flow of money the the Fed and it's stockholders. Using official government statistics. What cost $100 to purchase in 1967 now costs $656, and what costs $100 in 1982 now costs $220. But government has continued to grow and this wasn't enough. The inflation has really been growing recently. In 2006 the US government quit publishing M3 money supply data which basically showed the results of the Fed creating money out of thin air and then loaning it to banks that loaned out the same money 10 times. See this chart for the results.
First, I must define inflation. Every economist agrees with the basic definition of inflation, but their definition is different than what the government and modern media use. If you hear someone talking about inflation you think about rising prices; ie food, gas, clothing, etc. The prices actually rise as a result of inflation, they are not the cause. Inflation is defined as an increase in the supply of money. In the old days a ruler would issue gold and silver coins that would be used in trade. Periodically the ruler would want to spend more than he could afford and didn't have enough money. So he would call in the coins, melt them down and reissue them with the same stated value, but slightly less gold or silver weight(either by making them smaller, or mixing them with cheaper metals). This was inflating the money supply. You still had 100 $1 coins, but there was less gold than before.
Gold was the most common money supply in the history of the world. Paper money had been tried in the US by several states and the US, but had always failed shortly when money got tight and the printing presses started running. Soon you could only buy a loaf of bread with a wheelbarrow full of money. That is one of the reasons our Constitution gave Congress the power to "coin"(not print) money. OUr founding fathers knew that printing money would destroy us. The US was basically on a Gold standard up until 1933. Sometimes gold was used as the actual medium or exchange, and sometimes paper money was issued that was backed by gold. If you lost confidence in the paper you could exchange it for gold. US Dollars were virtually 100% gold backed until 1933, and were mostly gold backed until 1971. A $20 gold piece(about 1 ounce of gold) was worth pretty much $20 until 1933(it is worth about $880 today).
In 1913 the Federal Reserve Act created the Federal Reserve. The Fed is a private company(semi government controlled) that manages the US money supply. The Fed is the third attempt at a national banking system. The other two only survived about 20 years. The Federal Reserve and the fractional banking system it created are the root of today's financial crisis. The Fed basically has the authority to create money out of thin air. Basically the Fed authorizes the sale of Treasury Notes to supply itself with money. Then it loans that money out to banks. Then the banks are(legally) allowed to loan out 10 times what they have on hand. So the Fed creates $1 Million and loans it to banks, those banks can then loan out $10 Million. They theoritically only created $1 Million, but the money supply was really increased by $10 Million so your dollars are worth less than before.
The Fed was handcuffed by the gold standard. They could not really create money until 1971 when the US went totally off the gold standard. In fact, Congress and President Nixon made it illegal to own gold in 1971. From then on the Fed could do whatever it wanted. It wanted to print money. It really began to perfect printing money while Jimmy Carter was president, but it got out of hand and had to be reined in or the US would have been bankrupt sooner. Since then the Fed has walked a tightrope with a rate of inflation(money printing) that was slow and steady enough that most people wouldn't notice, but that provided a steady flow of money the the Fed and it's stockholders. Using official government statistics. What cost $100 to purchase in 1967 now costs $656, and what costs $100 in 1982 now costs $220. But government has continued to grow and this wasn't enough. The inflation has really been growing recently. In 2006 the US government quit publishing M3 money supply data which basically showed the results of the Fed creating money out of thin air and then loaning it to banks that loaned out the same money 10 times. See this chart for the results.
Money
The Bailout Reader - Mises.org - Mises Institute
I am planning on writing a blog entry about the government caused financial crisis and how the proposed $700 Billion bailout is the worst possible solution to the problem. Until I write my summary, the above link shows links to many articles explaining how the banking and financial systems work.
More Later
I am planning on writing a blog entry about the government caused financial crisis and how the proposed $700 Billion bailout is the worst possible solution to the problem. Until I write my summary, the above link shows links to many articles explaining how the banking and financial systems work.
More Later
01 September, 2008
Palin/McCain
See Vox Day's article about McCain's choice of Palin.
This is a brilliant pick by McCain. But remember it is McCain/Palin and not the other way around. As far as I know Sarah Palin is the kind of person we want in Washington. But, a VP has almost no power. As long as McCain is alive VP Palin would be a figurehead to make people that don't like McCain vote for him. It does not signal a change in McCain's way of thinking, just a political ploy to get votes. The best option now is that McCain wins now and then dies early in office. But I am still not voting for John McCain. Don't listen to what he is saying now, look at 20 years of his voting record as a Senator. That is the McCain you will get, not the one you are hearing now. If you think he will appoint good SC judges, just look at who he partnered with to defeat GW's mediocre judge selections. He might cut spending and he is at least somewhat prolife. But he is wrong on virtually every other issue. Here is Gun Owners of America's report card on Senator John McCain.
Chuck Baldwin 2008
Update 1: As I have processed this longer and more info has come out I have some new thoughts. I still think Palin was a brilliant pick for McCain. But, several things are bothering me. There seems to be a fair amount of feminism in Mrs Palin. While she was busy being governor, her 15 year old daughter was growing up and exploring her sexuality. Would having her mother at home guiding her have changed her actions? She was a 4 month old baby with Downs Syndrome. What is going to happen to him while she is campaigning and being VP? If Paul's qualifications for elder were applied to national candidates, would she qualify? Would any of them qualify? It is hard to imagine most of the women I know and respect leaving a 4 month Downs child at home while they are campaiging for VP. Yes most "Conservative Christians" are hailing her as a great choice. Her positions on the issues I agree with but I guess I question her priorities and commitments to family.
This is a brilliant pick by McCain. But remember it is McCain/Palin and not the other way around. As far as I know Sarah Palin is the kind of person we want in Washington. But, a VP has almost no power. As long as McCain is alive VP Palin would be a figurehead to make people that don't like McCain vote for him. It does not signal a change in McCain's way of thinking, just a political ploy to get votes. The best option now is that McCain wins now and then dies early in office. But I am still not voting for John McCain. Don't listen to what he is saying now, look at 20 years of his voting record as a Senator. That is the McCain you will get, not the one you are hearing now. If you think he will appoint good SC judges, just look at who he partnered with to defeat GW's mediocre judge selections. He might cut spending and he is at least somewhat prolife. But he is wrong on virtually every other issue. Here is Gun Owners of America's report card on Senator John McCain.
Chuck Baldwin 2008
Update 1: As I have processed this longer and more info has come out I have some new thoughts. I still think Palin was a brilliant pick for McCain. But, several things are bothering me. There seems to be a fair amount of feminism in Mrs Palin. While she was busy being governor, her 15 year old daughter was growing up and exploring her sexuality. Would having her mother at home guiding her have changed her actions? She was a 4 month old baby with Downs Syndrome. What is going to happen to him while she is campaigning and being VP? If Paul's qualifications for elder were applied to national candidates, would she qualify? Would any of them qualify? It is hard to imagine most of the women I know and respect leaving a 4 month Downs child at home while they are campaiging for VP. Yes most "Conservative Christians" are hailing her as a great choice. Her positions on the issues I agree with but I guess I question her priorities and commitments to family.
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