May 18, 2022

Inflation, Deflation or World Depression?

calculatorShould We Discount The Consensus?

The debate on the outcome of bailouts and money printing continues.  A review of some of the current thoughts on Fed and Governmental action predict different possible outcomes – none of them particularly desirable.   When the consensus seems unanimous, maybe it’s time to discount the consensus?

The Marc Faber Interview by Peter Schiff

Marc Faber explains why bailouts and fiscal stimulus don’t work and are counterproductive to economic recovery.  Inflating our way out of the financial crisis is seen as the only option by the government.  Higher inflation  will be negative for both bonds and equities.

The Marginal Productivity of Debt

New money creation will only cause a further drop in price levels and cause a further contraction in the economy since the marginal productivity of debt has turned negative.  Bernanke’s flood of new money may cause something far worse than a depression.

Bailout Economics

Are we destroying capitalism by trying to save it?  The diversion of capital to failed enterprises is a recipe for disaster as money moves to the weaker hands.  What types of reform would foster an economic recovery?

Barack Obama as Herbert Hoover

How one small unanticipated event can trigger another depression.

Obama’s Auto Plan Gets Mixed Reviews

The administration’s first effort at ending the endless bailout cycle gets mixed reviews.  Sometimes you just can’t win.

US Mint Suspends Production of More Gold Coins

For those seeking the safety of gold coins, more bad news as the US Mint further restricts the production of gold coins.  Is the US Treasury seeking to limit the exchange of paper money into  hard assets?

Money Creation and The Fed

Does the explosive growth in the monetary base imply future uncontrollable inflation?

Items Of Interest

Life Insurers Seek TARP Funds But Pay Little In Tax

Several of the biggest U.S. life-insurance companies are seeking a piece of the taxpayer-funded $700 billion federal bailout program, but pay little in income taxes themselves, securities filings show.

Consider Prudential Financial Inc., which last week announced that it is seeking an unspecified amount of aid through the federal Troubled Asset Relief Program, or TARP.

Despite reporting pretax profits to shareholders of nearly $25 billion over the past decade, Prudential has paid just $1.3 billion in taxes to federal, state and foreign governments in that period, filings show, for an effective tax rate of 5.1%. That compares with a statutory combined federal and state corporate income-tax rate of about 39.5%.

When you can pay good lobbyists, good things happen.  If they paid higher taxes, our life and car insurance premiums would cost more; can’t really get upset about this.  You can be certain that with the recent large losses the insurance companies have taken (plus probably more to come) that they won’t be paying taxes for some time due to tax loss carry forward credits.

Executive Accused in Mortgage Scheme

A financial executive used little more than a pen to alter credit scores and reclassify mobile homes as single-family houses, inflating the value of thousands of mortgages that were repackaged and sold to investors, prosecutors allege.

Mr. Gordon, a former director of residential acquisitions at Bayview, made more than $2.8 million in additional commissions by altering the value of 2,800 loans from 2001 to 2006, according to documents filed by prosecutors in U.S. District Court in Miami.

The worst part of this mortgage fraud was the ease with which it was carried out.  This is just the tip of the iceberg.  At the peak frenzy of the mortgage bubble, there were few controls or oversight, underwriting standards were a joke and everyone was too busy cashing their paychecks to notice anything.

Madoff Charged in $50 Billion Fraud at Advisory Firm

Bernard Madoff, founder and president of a New York firm that invested funds for wealthy individuals, hedge funds and other institutions, was charged with operating what he told employees was a long-running $50 billion Ponzi scheme in what may be one of the largest frauds in history.

This is truly off the scale.  Would this fraud have continued if not for the huge drop in stocks and other asset values?  Look for continued financial horror stories as the economy weakens.  Wall Street brokers are going to have a very tough time soliciting new customers.

Household Net Worth in U.S. Declines Most on Record

U.S. household wealth fell in the third quarter by the most on record as property values and stock prices tumbled, highlighting the tattered state of consumer finances even before the most recent slump in lending.

Net worth for households and non-profit groups decreased by $2.81 trillion, the most since records began in 1952, according to the Federal Reserve’s Flow of Funds report issued today in Washington. Real-estate-related assets declined by $646.9 billion, three times the prior quarter’s drop.

All of the wealth accumulated since the third quarter of 2006 has been vaporized and this does not include the horrific market sell offs that occurred in October and November which probably wiped out another $4 trillion in wealth.  Not surprising that investors are putting what is left into “risk less” treasury paper paying zero per cent.

Is America On A Downward Slope?

America has given indications that it has reached its peak and is on a downward slope. The U.S. government has taken measures in the last 11 months that appear to be a desperate attempt to keep our dysfunctional corrupt financial system propped up.

Exceptionally well written and thought provoking masterpiece, well worth the read.  You may not feel very bullish after reading this.

Fannie & Freddie May Waive Appraisals On Refinance

Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the U.S. government, are considering forgoing new appraisals on refinanced loans to help struggling homeowners, their regulator said.

This action, if taken, is equivalent to lending at a loan to value of over 100%.  Looks like another desperate attempt to prop up the property markets which won’t succeed.  If the government could have controlled housing prices, they never would have declined in the first place.  What investor in his right mind will buy mortgage paper going forward?  Without government guarantees, mortgage rates would be somewhere between the yield on high grade corporates and junk bonds.