Bush’s Depression

As of the day that I write this, the national average price for gasoline is $3.55 per gallon in the US. When gas was under $1.00 I predicted that it would go to $3.00 per gallon. Here we are well over $3.00 per gallon, and I am now convinced that gasoline will reach $6.00 per gallon in the United States at some point during 2009.

In a nutshell, the causes for gasoline reaching $6.00 per gallon next year are supply, demand, and the value of the dollar. You can read the full article on the website. Please visit to find out about Gas Prices: Why Are Gas Prices So High?

I happen to feel very strongly about personal responsibility. I do not want the government being my nanny. Yet, I realize that many people feel exactly the opposite. They don’t want to take care of themselves and are always crying out for the government to “do something” about whatever it is that is causing discomfort in their lives.

Unfortunately for all of us, those cries for the government to “do something” do not fall on deaf ears. Politicians are always eager to buy more votes for themselves by “doing something” in the name of helping people.

When government action is applied to the field of economics and prices, just about every action the government takes is going to cause more pain and discomfort than it solves.

The free market, with honest weights and measures, is the most efficient means available to humanity for providing the highest standard of living for the entire population of the globe. Inevitably, if some outside force, such as government, interferes with the free market, it will cause everyone to experience a lower standard of living (with the possible exception of those who directly benefit by the government action, but even then, that is not always true).

I’ve said it before, and I will say it again, prices are merely the free market’s method of finding a balance between supply and demand.

I’ll use an example of extreme prices on a new Lexus in order to explain my point. Suppose that the cost of a new Lexus, in today’s dollars, was only $10.00. Yes, ten dollars each. How many would you buy? I’d probably buy 50. That would cost about $1,000.00. I would only be limited by the space it required to store them. Everyone would surely want to buy more than one, and many people would want dozens of them for that price.

So it is easy to see that a low price will encourage great demand. The reverse of that is also true. If a new Lexus cost $50,000,000 each in today’s dollars, the company would sell very, very, very few of them. The exceedingly high price would greatly discourage demand.

If the price is too low, there is too much demand and the manufacturer can’t keep up. If the price is too high, there is too little demand and the factory goes idle for long periods of time.

So prices too low will encourage too much demand, while prices too high will greatly curtail demand. This also applies to profit. If one company is making a high profit by manufacturing an item, other companies will see this and decide to manufacture a very simmilar product. This results in more competition and greater supply. The effect of an increase in supply will be a lowering of prices.

Price is like a thermostat that regulates supply and demand. If anyone forcibly plays with that thermostat, it is going to upset the balance of supply and demand.

What typically happens with government is that the central banks print too much currency. All the well connected insiders get the fantastic benefits of the new money by the billions. But as this new money gets spread out into the economy, the value of the money gets diluted. It is like taking one gallon of milk, pouring it into two containers, and adding a half a gallon of water to each. Magic, presto! Now you have two gallons of milk.

Except that you don’t. You have one gallon that has been watered down by 50%.

So the central bank creates new money by the billions. Then the effects of that inflation are felt by the population several months later in the form of rising prices. As this process continues, at some point the public will cry out for the government to “do something”.

And those wonderful policticians will indeed take some very visisble actions by limiting price rises. This is price controls. The problem with this approach is that instead of making the population more comfortable with steady prices, it will heap more misery and a lower standard of living on the population.

The population cries out for relief from misery, and the government delivers more misery as a result.

How so?

Well, supply, demand, and profit. Let’s go back to our example of the Lexus. Let’s say that a new Lexus sells today for $50,000 dollars. Let’s also assume that it cost the company $40,000 to manufacturer it. As the central bank dilutes the value of the currency, the price to purchase that Lexus goes up to $60,000 and cost to make it goes up to $50,000. More central bank printing of the currency further dilutes the purchasing power and the price to purchase that Lexus goes up to $70,000 and cost to make it goes up to $60,000.

This cycle continues until the price to purchase that Lexus goes up to $200,000 and cost to make it goes up to $190,000. At that point the cries from the public are overwhelming and the government steps in to “do something” about the problem. Instead of doing what it should do and create an honest currency that cannot be diluted (which would supremely benefit the people and put an end to the well connected insiders stealing from the system for their own benefit by diluting the currency), the government institutes price controls to stop the rising prices.

If the cycle of diluting the currency continues while price controls are in effect, it will bring about dire results. Getting back to the example of the Lexus. What if the currency is further diluted so that the price to purchase that Lexus should be $220,000 and cost to make it is $205,000, but the government instituted price freezes and Lexus is only able to charge $200,000 due to the price control laws? How long will Lexus continue to lose $5,000.00 per car they make? What if the central bank continues to dilute the currency, and the cost for Lexus to make a car goes up to $225,000?

You may be asking how the cost for the Lexus company could rise with price controls in effect? Well, Lexus doesn’t buy all their materials in the country where the price controls have been enacted. Therefore, their costs can and do go up. The result is that at some point they will stop making their cars, or at a very minimum, stop selling their cars in the country where the price controls exist. No company can exist if it costs it more to make their product than the product can legally be sold for. Therefore the company will simply stop making and selling their product in the country with the price control laws.

With price control laws enacted and a continuing of currecny dilution by the central bak, eventually most companies will not be able to function properly and will have to cease making and selling their product in the country with the price control laws. Taken to the extreme, the store shelves will become empty as no company will be making the itmes to restock the shelves.

This is not just some philosophical mental exercise. It is reality. Just lok back at the Soviet Union a little over a decade ago. Yes, the official price of sausage may be $1.00 per pound, but if there is no sausage available, what good did the official price do? The grocery store shelves in the Soviet Union were always empty. People would wait in line for hours and even days for the chance to buy what little might become available. 5,000 people lined up to buy 6 chickens. Is that the type of situation that the government wants to create by “doing something”?

Price controls bring about shortages. We will all suffer when price control laws are passed and put into practice.

Rather than cry for the government to “do something”, Americans should demand the elimination of the current dishonest system that only benefits the insiders. Americans should demand that government enforce the Constitution, and re-institute and protect honest weights and measures for the benefit of the people, rather than prevent honest weights and measures for the benefit of the few well-connected insiders.

America should wake up before it is too late.

I just read a story on the AP newswire about the Federal Reserve auctioning off more Treasury Securities to help the poor, troubled Wall Street ”financial institutions.”  You can read the full story here. Pay close attention to these two quotes:

“In exchange for the 28-day loan of Treasury securities, bidding firms can put up more risky investments, including certain shunned mortgage-backed securities, as collateral.”

and this one:

“In the four auctions held so far, the Fed has provided close to $158.95 billion worth of the Treasury securities to investment firms.”

In essence, the Fed is creating another $75 billion out of thin air to exchange for worthless structured finance, toxic, derivatives crap paper. Add that to the $158+ billion so far, and we are already at the point of over a quarter-trillion dollars in bailout money.

I’ve said it already, but I’ll say it again: this is going to cost over one trillion dollars. And who is going to get that one trillion? Well, the very same people who created the mess to begin with. Instead of prosecuting them for all their white collar crime, the Fed & the government are going to reward them by giving them a trillion dollars of freshly created money.

All of this newly created money that keeps getting injected into the system is going to dilute the value of the American Dollar. Get ready for $6/gallon gasoline. It is coming quickly. And get ready for a doubling of food costs.

Of course, neither will show up in the CPI “inflation” index, because volatile food and energy costs are not part of the “core” inflation rate. As if you and I don’t need food and gasoline in our daily struggle to survive.

As a country we need to demand honest accounting from our government, and demand honest money as well - not money that can be constantly diluted by a bunch of wealthy, fat-cat, elitist bankers for their own personal benefit.

I read a story today about bus tours being organized by real estate brokers in Las Vegas for the purpose of bringing buyers around to see all the foreclosures available. This comment in particular made me upset, “RE/MAX CENTRAL believes it is a great time to buy Las Vegas Real Estate or a Las Vegas Foreclosure – interest rates are at near record lows, buyers have lots of choices due to abundant Las Vegas foreclosure inventory and lenders have great government assisted programs,” said John and Ruth Ahlbrand, Co-Founders of RE/MAX CENTRAL.

Yup, typical sales job. Say anything at all that will cause the sale to occur. Truth and facts don’t matter. The only thing than matters is making the sale.

I take particular exception to the statement that “it is a great time to buy Las Vegas Real Estate.” Well, it is a great time to Buy Las Vegas real estate if you are currently homeless in Las Vegas, have the money available to buy, and don’t mind seeing the value of the property that you just bough continue to drop in value by another 30%. If those conditions appeal and apply to you, then yes, it is a good time to buy.

But if you are looking to buy when prices are nearing their bottom, now is definitley not a good time to buy. There is a lot more downside adjustments in prices to come. We are not even 1/3rd of the way through this mess.

Of course, I just heard on TV that the bottom is in. I’ve only heard that every week since the summer of 2007. Give the TV talking heads enough time, and eventually they will be correct.

But not yet.

The world’s financial system is as weak now as it has been in many decades. Federal Reserve Chairman Ben S. Bernanke has a huge problem on his hands: a very wide-ranging credit freeze up surrounding financial institutions. This is a problem that mere cuts in interest rates cannot cure.

The exceptionally low interest rates of the early and mid-2000s and the continual bailing out by Alan Greenspan of any Wall Street player that got into trouble created enormous temptations to speculate with borrowed funds and throw caution to the wind, completely ignoring risk. Why worry about risk when it’s not your money and even if you get into trouble you can get bailed out? This problem is called moral hazard.

Now there’s a problem. Those speculative derivatives do not have the value that the Wall Street salesmen claimed they had. There’s a desperate race to de-leverage at almost any price. Of course, buyers have grown scarce. No institutional investor wants to add more highly overvalued speculative package to his portfolio now that the true value of these packages is exposed in the light of day. We are in a liquidity crisis the magnitude of which we haven’t seen since before World War II.

Commercial and investment banks sitting on overvalued and illiquid assets such as mortgages and private equity loans can’t sell them because they are packaged with derivatives of highly questionable value (a polite way of saying that Wall Street lied about their true value and overpriced them by billions and billions of dollars). The net result is that they don’t have the cash with which to make new loans. This lack of liquidity is killing our credit based economy. Moreover, for banks and brokers to strengthen their balance sheets by de-leveraging, it would require banks to reduce the number of loans on their books. This would devastate the economy and make what might be only a bad recession into one far, far worse and longer-lasting. The signs that I am seeing now lead me to believe there is no way of avoiding it.

Hence the bailout by the Fed, in the form of longer-term financing at the discount window. What else can they do? Let the entire financial structure of the world completely freeze up? The Federal Reserve is lending cash to financial institutions while taking as collateral the subprime mortgages and related securities of highly questionable value that cannot be sold in the open market. The Federal Reserve is becoming the buyer of last resort. This is highly inflationary. The financial middlemen are supposed to take the cash borrowed from the Fed and lend it back out again, this time to higher-quality borrowers, but this is not happening. In theory, the way this would work would be a trickle-down effect.

I suggest a trickle-up effect. This bailout is going to cost at least $1,000,000,000,000. Yes, that’s one trillion. Instead of giving that one trillion in newly created money to the Wall Street fat cats so they can continue to speculate in derivatives causing more of the same problems that we are facing now, why not give that one trillion to the people of America and let it trickle up to the fat cats on Wall Street? Don’t you think giving every man, woman, and child in the US a check for about $3,200 would help stimulate the economy and get money flowing again? That would be $16,000 for a family of five.

Why not help the entire population instead of just a few well-connected, fat cat, white collar criminal insiders? Why should they be given a trillion dollars of new money?

The government rescue of overleveraged financiers is still only beginning, and the signs that it will get bigger are everywhere. Real estate prices continue to fall. Loan funding is shrinking rapidly. First time home buyers are practically locked out of the mortgage market unless they have near perfect credit and a sizeable down payment. The vast majority don’t. The House Financial Services Committee has proposed letting the FHA underwrite up to $300 billion in loans to borrowers. The last time the federal government stepped so directly into the mortgage business was at the bottom of the Great Depression. Does that give you an idea of how bad this crisis is?

Right now we are on a path of hyperinflation. Creating a trillion dollars and injecting it into the economy is going to water down the value of our currency. Don’t buy bonds. The inflation driven by rising prices of oil, precious metals, raw materials and agricultural products has only just begun.

In business, there is always a need for proper planning. Toyota does this well, while US automakers don’t plan nearly as well. Toyota introduced high mileage hybrids just as the price of gasoline was begining to rise rapidly. Proper planning paves the way to greater success.

Personal planning is similar to business planning. Properly plan for the future and you’ll be much more successful. When planning a personal budget, future expenditures, or choosing investments, proper planning is essential for maximum success.

As of today, the US is engaging in a hyperinflationary path. The Federal Reserve is creating billions of dollars to loan to ailing banks. Remember, inflation is not rising prices. Inflation is the dilution of the value of money. And when Ben Bernanke, in his famous helicopter speech, says that the Federal Reserve can dilute the value of this country’s money at will, I’ll take him at his word. That’s no empty bluff.

I added a rather lengthy article explaining the Subprime Mortgage Crisis to the main website today. It is worth a read. This illustrates the choice between inflation and deflation. Either all these Wall street firms are going to get bailed out with newly created money (hyperinflationary path) or they are not and we’ll all experience cascading cross defaults and personal and business bankruptcies on a truly massive scale (deflationary path).

Currently, we are on a hyperinflatioary path. But do we have to follow that path to its ultimate end like happened to Weimar Germany in the early 1920’s? The answer is no. That was an example of a hyperinflation that continued to the point of the currency becoming totally worthless. In 1914 it took about 4.2 German Marks to eaqual one US Dollar. By 1920 it too about 39.5 Marks to equal the value of one US Dollar. By July, 1921, it took a little more than 76 Marks to equal one US Dollar. July 1922, 493 Mark to One US Dollar. July 1923, 353,412 Marks to equal one US Dollar. October of the same year, 25.26 billion Marks to equal one US Dollar. By November of that same year, 2.4 trillion Marks to equal one US Dollar!

By December the Mark was worthless and had to be replaced. This is a texbook example of a currency that was hyperinflated to the point of being worthless. More and more money just kept being created. More and more zeros were added to the paper money.

The question arises, do hyperinflations always have to continue until prices effectively reach infinity? The answer is no. The US was headed on an inflationary path back in the late 1970’s. The situation could have continued with ever increasing amounts of newly created money. However, the public mood was focused on the rapidly rising prices. Paul Volcker, the man before Greenspan, changed course from the hyperinflationary path this country was on.

Well, here we are, 28 years later, and again this country is going down a hypreinflationary path. Where will it stop this time? Will it continue to the ultimate end like Weimer Germany in the 1920’s, or will it be halted like it was in 1980? If it is halted, at what point will that be?

Those are very good questions that I wish I had the answer to. I read a news story today about riots in Haiti over rapidly rising food prices. Already, five people have been killed. Sometimes the public gets very upset with rising prices. Sometimes the public doesn’t. Sometimes hyperinflations are halted. Sometimes they aren’t.

At what point will the current hyperinflationary path change course? I wish I knew the exact answer. The public wasn’t complaining when home prices were rising rapidly (at least those that owned a home and could see its price rise).

A rising tide raises all ships. It is almost impossible to have rising home prices, with the price of food, gasoline, clothing, insurance, education, electronics, furniture, and everything else falling. Right now, my best guess is that hyperinflation will continue for a while. When the prices of homes start rising again, the public will likely view this as a good thing.

When there is rioting and deaths due to rising prices of food and gasoline, then the days of hyperinflation may be nearing an end. Stay tuned…