We are not doing anything special here; Only destroying fundamental market practices

[konkon]

*You can skip the first three paragraphs to get to my main point...

Nearly everyone seeks wealth. Nothing wrong with this, but it does depend on the system provided to support and sponsor this goal. It once made a lot of sense for banks to provide a certain amount of liquidity to finance different types of investment goals (property, stocks etc). The gold standard, that allowed a certain amount of money to be printed (maybe squaring a certain value of gold - $100 of gold might provide $10,000 of printed money for lending). This placed a lot of restrictions on investments, and most people don't want to go back to a gold standard.

But the norm today and the future tends to be central banks printing a non fixed amount of money for banks/markets, and lending criteria over the years (and not necessarily the last few) is incredibly lax. One of the principles behind investing in previous decades, and even centuries, was that you would, in principle and practice, be able to pay-off the net amount of the loan + interest etc in a fixed amount of time. Lifestyle, family etc expenses and other financial commitments would also be factored in. If you couldn't 'show' that you can pay off the loan then you probably wouldn't qualify for it or that amount. There are exceptions, but this would have been the general rule.

Following a traditional and conservative investment model like this basically 'sucks' if you want to make some relatively quick money (through eg. capital gains), especially if the opportunity was there. And it often is.

Along came leveraging for the masses, and not just small to big business. But this is where many have gotten themselves in all kinds of trouble. This is where we've crossed the line from relatively 'safe' borrowing/investing to the destruction of the capitalist model. And it is occurring here in Australia just like it destroyed markets overseas.

You have to ask yourself why our lending and investment practices are 'better' than what they were doing overseas. The main difference here is our banks have not pulled rank or cut supply on big mining investments and thus have yet to pull rank on us. They haven't cut supply on the Australian consumer, overall, but this may occur in the future as the potential economic problems here might end up being worse than the US example with subprime, on a per capita basis. I'm not saying we have a sub prime issue here. It's a different dynamic, but one riddled with uncontrollable and hidden debt reinforced by continuous and largely non challenged speculative behaviour over the last decade.

HERE IS WHERE THE CAPITALIST SYSTEM HAS BROKEN DOWN IN AUSTRALIA. Refinancing is a real problem in Australia. There are several individuals and companies (small and large) that have resorted to loans to pay-off loans. So the fundamental practice of repaying a loan with generated revenue or cash is no longer in use for many individuals and businesses. Remember, this was a contributing factor the US subprime crisis; investors couldn't repay loans. We're repaying loans now with other loans (and more than one). This practice has largely gone unnoticed by our regulators and the banks don't seem to care. This is a far greater problem than in the US, per capita, as our loans and debts far exceed those in the US. Remember, many of the loans in the US were $200,000. Compare this to the debts here, per person. They wouldn't have refinanced these loans with layers of loans like we have.

Most in Australia are far ahead in their gains and repayments and any downturn would not really affect their net wealth to a large and painful extent. But the same goes for those in the United States or Europe. The problem came as a result of what the crisis did to a margin of investors not most. The same potential problem will eventually effect a margin of investors here in Australia. It has already begun in many cities throughout Australia.

One of the key differences here compared to the US or Europe, is our bigger banks (mainly the top four; although ones like Westpac might feel the pinch a little more having acquired some potentially risky assets/banks) will not suffer or need a bail out. Three main reasons for this is: 1. they are generating a lot of their revenue from long-term and safer investments (residential etc) 2. business with large and successful mining companies couldn't be better! and 3. the set-up of complex loans will favour the banks as they will collect on collateral etc when bad investments go under. So the bank's bottom line will still look good as they will cash-in the security placed on these poor investments. We just don't hand over the keys when we can no longer repay the loan.

But this is enough to cause a serious problem in Australia as a large proportion of consumers will be priced-out. They will no longer be able to invest in the broken-down model of heavy leverage or even in the traditional or sound model of paying off an investment in a set amount of time with revenue or cash, and not borrowed money to pay-off borrowed money.

 

[konkon]

Re: We are not doing anything special here; Only destroying fundamental market practi

Actually this practice of paying-off debt with debt is commonplace in the world. Europe got itself into trouble this way and the US Federal Reserve is issuing debt for the United States to pay-off debt. It's being doing this for decades, but it has escalated severely over the last decade and there's no end in sight.

Layers of debt is the norm, but what does it mean in the long run for the world's economy if just about every nation is doing it?

So much for the zero-sum-gain theory if this is occurring on all fronts. We know who's losing, but who eventually wins?

 

[konkon]

Re: We are not doing anything special here; Only destroying fundamental market practi

I'd like to see how hyperinflation is going to be avoided around the world; which is initially a slowish (perhaps hard to gauge) process that operates at different speeds. It seems as though the Federal Reserve is continually helping us get there. This will not effect all countries though. But I'd like to know how it will be avoided.

The Fed's announcement to (hopefully) hold interests rates very low up until 2014 has spurred-on the sets of speculators who want to park money in commodities. This is an obvious pricing-out effect for the masses around the world and including the USA. But the USD will (I think) firm up again, as this is not a formal QE3 or formal equivalent. The Fed, I think, is desperate to reintroduce another round of quantitative easing. There is growing opposition to this and there should be; it will make everyday things more expensive in the United States, as a falling USD and higher commodity prices (much higher in $US) would have a double-whammy effect on those in the USA. So a QE is the last thing the USA needs! It really is time to reorganize the Federal Reserve!!

The demand for many raw materials is not there, as suggested in the Baltic Dry Index (BDI), which is at 784; its historical average is around the 3,000+ mark. Copper, for example, use to be around $4000 a tonne prior to the GFC. The BDI was around the +4,000 mark back then. A different measurement, but the ratio would have been around 1:1, with fluctuations of even 1:2. The ratio relationship was quite low.

BUT copper being at around $8,400 a tonne today and the BDI being at under 1,000 (784). the ratio is approaching 1:11. Yes, that's one to eleven!

I keep hearing that the newer ships being used are bigger and there are more. But surely not five to ten times bigger/more! Speculation in the commodity markets is rife and with the Fed's easy printing stance, money just has to find a home; especially with record low deposit yields that put off investors. So the Fed, whether it's intentional or not, is sponsoring the increase of commodity prices world-wide at a time when debts are high and revenue is low for the middle classes.

Beware of so-called demand destruction though, as there really isn't such a need for many commodities. Demand destruction as a function has partly collapsed though, I think. 'Cheap' money has to find a home, and commodities are included. But I wouldn't look the other way for too long! Money can, and has, come out of commodities just as easily and will continue to do so. I'm expecting more volatility in these markets.

There are several varying definitions of hyperinflation. Wikipedia http://en.wikipedia.org/wiki/Hyperinflation has it as "hyperinflation is inflation that is very high or out of control". and "inflation is an increase in the Money Supply without a corresponding increase in real output causing an increase in general price levels".

And again: "This loss in value is usually exacerbated by an increase in the velocity of money (how fast it is spent) as people rush to exchange (or spend) it for almost anything else. In extreme cases this can cause a complete loss of confidence in the money, similar to a bank run".

Having said this, I still don't think the USD will be a hyperinflation play. The risk is to other currencies around the world. Many other views from other people will differ. But I still see the USD as oxygen to us all, that is supportive of (world-wide) asset classes, financial models, instruments etc, and keeping the whole 'thing' in place (for now, perhaps).

It seems like modern-day world domination, without links to a gold standard (which eventually has to break-off or collapse), is over a long period of time a self-destructive mechanism. The fact that Nixon got off the gold standard meant that the USA needed to print more USDs to pay for present and future budgets (back then). It was also necessary to increase the volumes of money so as to be in a position to inflate markets, that you control, and price-out the (non capitalists) communist Russians; one of Reagan's legacies. Also perhaps brilliantly orchestrated by Nixon. Even with all the criticisms, he would have had visions.

The purists in the economic world that think that a system of money supply, backed by 'expert' opinions, so-called evidence, theories etc, have probably underestimated that the financial and monetary systems (and the opposing schools of thought that reinforce them) don't have to work! I think we're seeing this play-out. But it's best to keep this system in the controlling hands of those that really do give a #$% about the future of the United States and all of its people.

The gold standard was destined to be removed to pay for debt obligations and to increase the supply of money. But it was also destined to be removed for the ability to promote and reinforce oneself as the the strongest nation on earth; I don't have a problem with this as I'm glad its the USA. Just look at the alternatives! But a gold (or any other fixed) standard was destined to fail or collapse.

Having said all this, I still think it's a great idea to get rid of those controlling the Federal Reserve System and put in those that really do care about the United States of America and all of its citizens. Just yesterday, professional US forces risked their lives and freed hostages from a foreign country; one of the hostages was not a US citizen too! Amazing. Now obviously the special forces guys are better suited to their professional military roles and objectives. But that's not to say that those with similar national objectives and patriotic obligations, that have expertise in economics/banking/finance, shouldn't run the Federal Reserve System. Key advice on these matters can be outsourced too. Get rid of all those shadowy (and to some extent, foreign) Federal Reserve representatives and allow US defense or a legally separate entity to it, to control and run the Fed, with obvious strict guidelines, rules, oversight etc. The communist Chinese have their own military controlling different aspects of their economy. China Construction Bank, for example, which is the second biggest bank in the world (the first being a Chinese bank too), is run by communist military personnel; as is their whole economy! It really is time to wake-up!

And Happy Australia Day to us all.

 

[konkon]

Re: We are not doing anything special here; Only destroying fundamental market practi

An addition to the above:

A bit on inflation: more and more dollars or the currency in one's own nation are needed to buy goods and services over a shorter length of time.

The 'real' rate of inflation (all things considered, and not just the configured and skewered data provided) is much higher than stated around the world.

The Federal Reserve doesn't have the best interests of the people in mind. As for the Treasury? The same set of clowns appointed to influence and lead many (not all!) positions in the Federal Reserve System have come from similar banking backgrounds as those appointed to head the Treasury. I wouldn't go around trusting many in either institutions.

Having the capacity to control, even print from nothing, the money supply to the United States can be a catalyst to a bigger, brighter and more prosperous future. This responsibility should be in the hands of more responsible entities, yes, like defense. Many current technical aspects to the way the Federal Reserve functions can and should change too, to accommodate the necessary changes too. So the fact that the Fed does this or that might not matter all that much. Some of it does matter, of course, but some of it won't matter. The newer system can be and must be configured to accommodate the necessary changes.

 

[konkon]

Re: We are not doing anything special here; Only destroying fundamental market practi

Some more additions and clarifications to the earlier posts.

US defense's care factor of the United States of America and all of its people is far greater (an understatement!) than those that control, run, belong to, are employed by etc etc the current and largely past Federal Reserve System. The Fed Reserve system doesn't have the same sets of mandates to protect the United States and its people and systems (at all costs) like all defense organizations in the US.

Ask your average person in the United States and around the world why they are paying more for day to day items, goods and services, soft/hard commodities (indirectly even) and this will quash the construed data that economist etc like to parade. As was suggested previously and in other posts by me, this (even anecdotal piece of evidence) is far more conclusive than skewed economic interpretations, no matter how valuable they might be to economists and even the Fed.

When the Fed implemented the rounds of QE, the price of commodities in $US and in other foreign currencies went up with the QEs. These prices didn't exist in some vacuum; the price of everyday items, utilities etc went up and sometimes with a higher margin (with 'middle-man' or equivalent expenses, taxes etc factored in). The case in the US, for US citizens, was dramatic; the round of QEs weakened the $US, but the price of commodities in $USs went up! Doesn't take a brain surgeon to work out that this has a 'pricing-out' effect on US (and even world-wide) consumers, especially when wages either remained the same or dropped. Let's not forget the tens of millions around the world that have lost their jobs too in the last few years or during the rounds of the QEs.

QEs are a totally irresponsible mechanism to implement on US and even world-wide consumers. I'd even go as far as to say 'it's cruel!' An attempt to implement an equivalent mechanism like a QE, even indirectly, is just as cruel. The Fed is trying to do this even with its so-called transparent meetings, like the one the other day when he stated that interests rates would remain at close to zero in the United States up until 2014. The price of commodities went higher and the USD went lower, and the Fed must have know that this would have happened; semantics aside!

So people's net exposure or positions is far worse than what various Fed etc data is suggesting; hence the construed data and results to suit certain (presupposed) outcomes, by the Fed and even by economists.

Incorrect macro, world-wide (including the US) interpretations and more to the point, skewed data that would necessitate a (presupposed) outcome or conclusion, can be made to look like a reflection of what's going on. Anybody can do this and several organizations thrive and survive on this false representation of what's going on, in this case, around the world economically or specifically in the USA.

If you think that the cost of living hasn't gone up drastically around the world and including the USA over the past decade and more, then you're probably living in a different world to mine. The construed definitions of 'inflation' and the data that tries to 'prove' that there isn't any, is no comfort to those that have to pay a lot more (than 2% per year!) for all day to day expenses. This includes all those struggling to make ends meet, around the world.

Wage increases or the lack of them just can't keep up with many of the payments, repayments etc! People's individual circumstances change, for the better or worse, and this cannot be factored into the conclusions some economists or even the Fed make. There are more dynamics that can't and aren't factored in, to formulate the type of conclusions the Fed, for example, makes, no matter how sophisticated the methodology behind obtaining that data is.

Why do economists, for example, think that Economics or the study of this discipline, is one of the most challenging fields? Sure, defense can source from the top universities, just like the other agencies do. But at least they'll be able to pick who they think are the right representatives to head and team-up with the newer 'Fed Reserve' entity.