Bubbles and the Titanic Betrayal of Public Trust
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July 27, 2012 at 10:36 pm #8456
Robert Shiller, co-creator of the Case-Shiller index for US housing and author of Irrational Exuberance, has an interesting perspective on markets. Un
[See the full post at: Bubbles and the Titanic Betrayal of Public Trust]July 28, 2012 at 5:21 am #4875jalParticipant
There are not enough lifeboats …..
Therefore, only those picked from the 99% will be those deamed capable of rowing the lifeboats for the 1%.July 28, 2012 at 5:42 am #4876seychellesParticipant
Powerful metaphors in that last paragraph. Most are “fitting in” as they have been programmed to do, marching in step unwittingly to the cliff edge, stupefied by their dull, daily make-work grinds and educationally-induced uncritical thinking. And functionally illiquid owing to anchors of indebtedness and networks of familial interpersonal dependency. Even for the scattered malcontents, a serious impediment to action derives from not knowing how to formulate with certainty the mental image of a functional lifeboat.July 28, 2012 at 5:57 am #4877Lucas DurandMember
John Greer has made a case for a sort of slow implosion…
If I understand his argument properly, he suggests that, historicaly, the “complex centre” always finds a way to force the continuation of basic functions of the economy – slowing down what might otherwise be a rapid collapse into a slow, painful process of empovrishment.
But, myself, I when I consider the historically unprecedented complexity industrial civilization has achieved, the degree to which that civilization has over-extended itself, and the degree to which the natural world has already been plundered for resources, its hard for me to imagine that it won’t all unravel in a rapid collapse…
The complexity really is mind boggling – when the cascades start to occur in rapid succession, what tools could a government or other “high institution” possibly muster that might create Greer’s temporary reprieves within such a complex context?
I don’t see it… Is it possible that the world is so complex that such reprieves in the implosion might result from some type of self-organizing force within the chaos?July 28, 2012 at 7:50 am #4879Ken BarrowsParticipant
The current financial bubble has one different aspect from earlier ones, i.e. the actions and words of central banks. One can make a good case that investors still react to what the CBs say and do. What will trigger a negative reaction (falling nominal stock prices) to CBs that stimulate? Hasn’t happened so far.July 28, 2012 at 7:58 am #4880DubsMember
JMG certainly is of the opinion that our descent will be a drawn out process, although he certainly avoids providing more specific impirical reasons. I would be interested in why Nicole thinks an implosion is more likely? Barring worldwide contagion in the financial system as Greece and more importantly Spain head towards default (is contagion a foregone conclusion?), a drawn out descent characterized by fits and starts seems most likely.July 28, 2012 at 12:28 pm #4882NassimParticipant
Just as a historical footnote about the Soviet Union and the Stakhnovite movement.
As recently as 1980, when my wife was a medical student at Smolensk, students were forced to pick potatoes every Autumn for 9-10 weeks at some remote collective farm and neglect their studies. The first year, wife developed a severe sore throat and a persistent fever so she was excused these duties and allowed to do some menial work close to the university. The other girl-students were quite indignant and convinced that she had found a way around this arduous and unpleasant manual work. Afterwards, the students were expected to catch up with their missed studies.July 28, 2012 at 5:27 pm #4883gurusidParticipant
I think the idea of ‘lifeboats’ and other psychological palliatives such as Greer’s idea of a ‘long descent’ are simply not born out by historical examples; just look (for a long while) at the graphs at the beginning of the piece). I think the Titanic analogy holds true on one factor: only just under a third survived. They survived because they had access to an available resource, the lifeboats; but these ‘resources’ were themselves underused/not universally available because of the resource allocation ‘system’ (class/gender bias), and the ‘zeitgeist’ that the ship itself was unsinkable. In all likelyhood it would’ve made little difference if there had been enough ‘lifeboats’ – by the time ‘everyone’ realised the ship was sinking it was then going down too fast.
“…where Ro equals the amount of Reality which fails to reach the Control Unit, and Rs equals the total amount of Reality presented to the system. The fraction Ro/Rs varies from zero (full awareness of outside reality) to unity (no reality getting through).” (From: “The Systems Bible: the Beginners Guide to systems large and small”, John Gall, 2006. P.46-7)
Your biggest ‘lifeboat’ is going to be that little ‘system’ inside your own head. What will work for you will be dependant upon your own unique situation, from forming community, growing food (sustainably e.g. Robert Hart, Masanobu Fukuoka, /Sepp Holzer) but also including facing the prospect of your own immanent demise. That, if nothing else will fuel much of the coming chaos. Now what was that saying… if you can keep you head when all about are losing theirs… hmmm something like that. IMHO I think most of the so called developed world will end up looking like most of the rest of the world, there will just be a lot less people around:
And this one:
The biggest Bubble of all?
SidJuly 28, 2012 at 5:56 pm #4884g-minorParticipant
Please comment on this piece by Paul Craig Roberts.
GJuly 28, 2012 at 6:15 pm #4885Otto MaticMember
Accountability lies at the heart of trust and trust lies at the heart of confidence.
Together they are the Venn Diagram that holds up any form of belief in fair exchange.
Max K as part of his ‘shtick’ coined a phrase years ago, partly in sarcasm and partly dead serious, “Should Crimes of Capital Get Capital Punishment?”
Well looky, looky, how life is beginning to imitate art.
That hypocritical Murdoch bastard child presstitute rag the Wall Street Journal ran a piece yesterday:
“Should Crimes of Capital Get Capital Punishment?”
Looks like a ‘deathbed conversion’ apologist/rationalizing piece by financial propagandists and collaborators in crime who now see the noose coming into view and the Bell for Thee beginning to Toll.July 29, 2012 at 1:34 am #4886TheTrivium4TWParticipant
My family has about equal money in both an IRA and a 401k money. Needless to say, this makes me uncomfortable. Since I’d probably lose about 60% of it by cashing out now, I’ve been playing a sort of game of “chicken.” I’ve left it in place gambling that I might lose my job before I cashed out the IRA.
While I’m happy to still be employed, especially after last week’s 10% layoff, I do get more nervous as time goes by.
I can’t get the 401k money out until I leave. However, I can start taking out IRA money – that is unless they change the law to prevent it.
Let’s go with a round number pulled out of thin air – $100k. Assume each account has $100k in it.
What would you do with it? The 401k money can’t be touched until our employment is terminated, so that’s off limits for now.
Would you take the 60% (possibly more) hit on the IRA money now or gamble for a lower unemployed style tax rate later? Would you mix it up – 30% IRA now, evaluate the rest when tax law for next year become transparent?July 29, 2012 at 1:37 am #4887TheTrivium4TWParticipant
If I short some stocks now (think hedge) and they ban short selling later (I expect this), will I be able to cover my shorts then or will they nullify the whole trade?
How did the short sale bank in Europe work out?
TIA…July 29, 2012 at 2:46 am #4888regionsworkParticipant
Has Mr. Shiller updated his views? 2008 was a long time ago.July 29, 2012 at 3:01 am #4889DespicableMeMember
Collapse, it’s the new black 😉July 29, 2012 at 3:31 am #4890
Trivium, I think you’re asking for comments about what to do with the $100k in an IRA account.
TheTrivium4TW post=4551 wrote: I’d probably lose about 60% of it by cashing out now […] What would you do with it? […] Would you take the 60% (possibly more) hit on the IRA money now or gamble for a lower unemployed style tax rate later?
We don’t see many specific “financial advice” Q&A’s on TAE, as the site seems to focus more on the bigger macro picture, and for good reason I think–the variables and risks are just so myriad, I don’t think any answer can possibly satisfy the asker. If “maximizing profit” is the goal, we’re almost sure to make the wrong decision 99% of the time. Just look at the investment grand-masters’ call on interest rates and how wrong they were:
I would never pretend to do any better than them…although, they were so tragically wrong in this instance, it would be hard to do worse.
Personally, I’ve re-trained my “investing” brain to think about these things a lot differently today. This has taken a while and is still not always easy–I’m only interested in preventing catastrophic loss; gains are secondary. I want to live to fight/garden/build/invest another day.
As such, if it were my IRA account, I would take most if not all of it out now, reflecting the proverbial 40,000 birds in the hand now are worth more than 100,000 birds in the bush later. From a “classical” investing point of view, this is TERRIBLE advice. But I don’t think we live in “classical” times anymore. I’m willing to take a loss today in order to hedge against what I see as a rather likely scenario–you’ll take a bigger loss tomorrow if you don’t. I’m sure “proper” advice would take into greater account what exactly is held inside your IRA account. But even cash might be hard to withdraw once the deflation ball gets rolling (cf. MF Global et al.). I’d still stick with the adage that you want to be liquid and you want to maintain that liquidity under your own control (having it stuck inside an IRA account is NOT in your control).
I can foresee a lot of pension/retirement fund accounts simply being frozen or greatly reduced or vanishing altogether. I feel lucky to get anything out now that I can–lots of people can’t get anything out because they have nothing but debt. I like Stoneleigh’s adage that the only people who “win” in a deflation are those who “lose the least”–it presupposes we’re ALL going to lose somehow, and I think that is accurate.
I’ve concluded for myself that if the worst does not transpire, and a collapse doesn’t occur, then we will return to growth, so I will simply chalk up the “bad investing” to a necessary choice given current risks and move on. At least in a “return to growth” scenario I’ll be able to get a job again. I’m not banking on a return to growth scenario, though. And I’m not banking on making many decisions that will increase my limited money in the near-term either.
Just don’t kick yourself (or me) if you realize in hindsight some other course of action would have saved you another 10 or 20 or 30%. Any money I preserve is pretty much a windfall, from my perspective. We’re all different though.July 29, 2012 at 5:47 am #4891bluebirdParticipant
Trivium, a few other things to think about.
1. If you are under 59 1/2, you will pay a penalty for withdrawing early, in addition to paying taxes on the larger amount of income.
2. If you are 64, and about to apply for Medicare, consider that the monthly premium for Medicare could be based on your larger amount of income from the IRA. It would depend on the timing of your age and when/if the IRA is redeemed.
3. Consider transferring the IRA to Credit Union or local small bank, and put it in a Certificate of Deposit with the shortest term, usually 6 months. Eventually, the banks will fail and credit unions too, but in the interim, the principal amount of the IRA will be preserved.
4. I have been told that if one has legal issues and could be sued, do not cash out the IRA. If one has an IRA, then no one can legally take it. Consult attorney as I’m not sure if I have said this correctly.
5. As you still have your job, in the 401k transfer the money to a Treasury Bill mutual fund to preserve the principal, if your company has that option.
6. If you do lose your job, immediately either cash out the 401k, or transfer it to IRA holding short term certificate of deposit.
P.S. I am not a financial adviser, so what was best for me, may not be best for you. This is free, you get what you pay for. It may be helpful to you or maybe not.July 29, 2012 at 7:00 am #4892JbParticipant
With all due respect to Mr. Greer, I share your frustration with his prognostication. I do not understand how there can be a “really spectacular financial crisis” followed by “a lot of poverty and suffering” globally without the social order breaking down.
Yes, I’m sure the government will nationalize the banks, oil companies, etc. It would not surprise me to see rationing as well as martial law declared in urban areas where things are sure to get particularly nasty. I think the “next round of temporary recovery” is unlikely to look like a recovery at all, more like a period of relative stability at best.
I am also not convinced that the US government will confiscate gold held by private citizens. To what end? Collecting and storing gold costs money! I think the US government would do this only if they intended to use it as money for settling international debts, or for buying oil or other vital raw materials.July 29, 2012 at 7:02 am #4893seychellesParticipant
Visions of Stakhavonite movement updated: As implosion accelerates, an ultimate patriotic act will be to invest in “financial war bonds”, voluntarily or involuntarily. These may be 30 yr Treasuries yielding -2% with a 20% early withdrawal penalty. Heroes are needed to keep America great, er,
keep the lights burning on Jerkyll Island. TPTB will not want any of their
capital depleted or illiquid on the rebound when 10 year notes will possibly yield in excess of 20%. Useful citizens will keep their retirement accounts intact and fully funded, hold their heads high and proudly display their gold “99” lapel pins. Oh yeah, minimum Federal inheritance tax on unused pension funds will be 95%.July 29, 2012 at 8:41 am #4894John DayParticipant
Financial bubbles are less interesting. The financial fractal appears to me to be a finer fractal upon the coarser fractal pattern of human species resource destruction. All of our creation is based upon destruction, releasing bound energy in the process and harnessing it to a lesser creation, upon which we place higher value. So forests become pulp for disposable newspapers.
The bubble is our lives, all of our many human lives. The peripheral depletion we have harnessed to drive this magnificent bubble of human population growth is oil. Look at the correlation over the past century.
At this point, the population will be dropped by drastic global warming if we use the known reserves of oil, and it will be dropped by lack of food, fuel, transport, AC, water, complexity if we don’t. This is really a case where we can have it both ways, and drop the human population deeper and longer. A non-bubble population is approaching, and it will be a big surprise to those raised on oil, with a very few exceptions.July 29, 2012 at 4:36 pm #4895
I disagree with most of that article. The US dollar is in no danger. It bottomed more than a year ago and has quite a way to go still to the upside. The flight to safety is quite real. Under deflationary conditions, the real rate of interest is always higher than the nominal rate. Those low nominal rates exist because no one is asking for a higher risk premium. Investors are prioritizing capital preservation.July 29, 2012 at 5:08 pm #4897
I certainly don’t think we are facing a decline that will be in any way gradual or smooth. Fractals don’t work that way. The next decade should be one of initially rapid contraction followed by years of grinding depression. However, this should only be phase one of the unwinding of such a large bubble. I would expect the overall contraction to last for decades, as we have seen before when particularly large bubbles have burst. Large contractions typically demonstrate sharp falls interspersed with periods of (relative) recovery of varying lengths, some lasting many years. As always, markets spend more time in upward mode, as rises are driven by hope and greed, whereas declines are driven by fear. Fear is simply a sharper emotion.July 29, 2012 at 5:11 pm #4898
Mr Shiller’s article is recent. The 2008 quotes come from our own work in the TAE primers. The Shiller article is the one called Bubbles Without Markets.July 29, 2012 at 5:37 pm #4900Golden OxenParticipant
stoneleigh post=4560 wrote: G-minor,
I disagree with most of that article. The US dollar is in no danger. It bottomed more than a year ago and has quite a way to go still to the upside. The flight to safety is quite real. Under deflationary conditions, the real rate of interest is always higher than the nominal rate. Those low nominal rates exist because no one is asking for a higher risk premium. Investors are prioritizing capital preservation.
With all due respect may I voice my objection to both your erroneous assumptions?
The dollar bottomed against what the Euro? Is that really a bottom signaling deflation and a rise in purchasing power for the dollar? Absolutely not!
As to looking for guidance from interest rates, the most manipulated and artificial rate that exists, that would be just plain foolish.July 29, 2012 at 6:13 pm #4901
Golden Oxen post=4565 wrote: The dollar bottomed against what the Euro? Is that really a bottom signaling deflation and a rise in purchasing power for the dollar? Absolutely not!
Well, obviously not just against the Euro. The US dollar has been gaining strength against the Kiwi dollar for the past year (with the Kiwi dollar attaining ever lower highs against the greenback since about September 2011).July 29, 2012 at 10:10 pm #4902
Yes, look to interest rates for a clear picture of where the fear is and where the fear is not.
Capital Flight, Capital Controls, Capital Fear (https://theautomaticearth.com/Finance/capital-flight-capital-controls-capital-panic.html)July 29, 2012 at 11:55 pm #4904Lucas DurandMember
“I do not understand how there can be a “really spectacular financial crisis” followed by “a lot of poverty and suffering” globally without the social order breaking down.”
I share your skepticism…
It seems like sometimes the gradual descent described by Greer might be possible if the processes of decline were strictly technical in nature – or not affected by the irrationality of a freaked-out populace…
“There’s too many men, too many people, making too many problems”
I’m not sure if it’s possible to know for certain, but it seems to me that any actions that might be taken by the state to establish control would be out of proportion to systemic risk – is it even possible to confiscate enough bullion to pay for more than just a few days or weeks worth “liquid hegemony”?July 30, 2012 at 1:56 am #4906PastTenseMember
Trivium, I mostly agree with Bluebird–except I think you should split your assets among at least three financial institutions–so do partial IRA transfers to these three local institutions.
As to withdrawing the funds I frankly don’t understand how you can lose so much money–I think it would be the top income tax rates you pay plus 10%. (say 28% + 10% = 38% (plus your state rate)). But I would only withdraw if I had a very good use for the money.July 30, 2012 at 2:21 am #4907JbParticipant
Agreed. Government responses to restore order during a cascading series of global defaults would be disproportional to the risks. We have plenty of modern examples such as the Rodney King riots, the failure of FEMA post-Katrina, the overthrow of governments in the MENA, etc. to appreciate the dangers of non-linear events. Further weaken these governments through unmanageable debts (Spain, Greece, Michigan, etc.) and you can forget any kind of meaningful response.
One thing that concerns me is that companies that make products that I might find useful during or after such a scenario (wood stove for example) might go out of business due to debt / lack of access to credit. It would seem prudent to purchase or stockpile those items ahead of time.
BTW, I should have mentioned that my quotes came from Mr. Greer’s current post.
My gut says, that since gold is not in circulation as ‘money’ the government won’t confiscate it in order to re-value the currency against it (again). Only the perception of gold’s value against the dollar (which is gaining in strength) represents a threat to the Fed.
The wealthy international billionaires, who contribute heavily to political campaigns, stand to lose the most if it’s confiscated. Besides, Bernanke will have to explain why gold is suddenly no longer just a ‘tradition.’ https://theautomaticearth.com/components/com_kunena/template/default/images/emoticons/wink.png
In the meantime, central banks around the world continue to buy, ship and store this little tradition at great cost…July 30, 2012 at 4:26 am #4908FrannyMember
If you decide not to cash out the IRA, you certainly should make sure that it is not located with an institution that engages in prop trading, a la MF Global. There are other providers — I would stay away from banks and credit unions, they are leveraged too. I use Vanguard because it is owned by it’s customers via it’s funds. Less motive for theft. I also have some in a self-directed IRA which for low fees allows me to store gold in a depository near where I live. Make sure the depository will agree to security procedures to preclude the admin from stealing your gold without the depository’s collusion.July 30, 2012 at 5:28 am #4910CandaceMember
My understanding is that Greer’s long descent does not look like this
but looks more like this
Not a slow steady decline, but some big cliffs, with smaller cliffs, with smaller recoveries and some periods of stability. These drops, cliffs, recovery and stability will happen in different degrees in different places at different times. So for purely for illustration…
Where I live…. Where Greer lives…
1980. __/– -_
2000. -/_ __
2020. | —-
2040. | ^—–_/_^______
2080. — ________. (reached long stasis in 2040)
Different places will have forces that may mitigate decline in some instances, i.e. I live in a place where rich people (and poor people) will spend large sums of money for medical care, JMG lives in a place that has already experienced major economic contraction, but still has infrastructure that links it to other regions. When resources become so scarce that certain medical procedures won’t be available to anyone, my area is likely to see a strong contraction, JMGs area may even experience some growth, due to certain things being redeveloped in the US because it is too expensive to ship things from over seas. All areas are likely to experience various types of social disruption as well depending on how vulnerable they are to international, national, and regional changes. A populist demagogue might make headway in Minnesota, but Maryland might stay fiercely independent of group movements.
That’s my understanding at any rate.
CandaceJuly 30, 2012 at 5:28 am #4911DubsMember
Pat of the difference between Greer’s calculation and the dominant opinion on this site is largely, I believe, due to focus. JMG seems more interested in the oil et al. side of the discussion, regardless of the interplay of energy and finance. TAE, of course, is more concerned with finance. One primary difference is that one is tangible, while the other isn’t, but for the impact it may have.
If left to market mechanisms alone, our descent would be drawn out as one energy source would be replaced by another with a slightly lower EROEI, and energy-intensive habits give way to more efficient/less costly ones. I think this will still provide the backdrop against which the contraction of over-extended credit will play out. Don’t forget, if cheap energy were actually unlimited, growing debt burdens would not be nearly as big of an issue. Financial turmoil will lead to some periods that are more difficult than others, of course, and likely cause more pain than otherwise, but the end game will depend first and foremost on energy and its accessibility. Who knows how much is left, but more than half a century’s worth seems like as reasonable a guess as any, which provides enough time to begin to adapt locally (for example rebuilding soil fertility).
What seems more important (i.e. unpredictable) than decline itself is how this will play out politically. When will food costs become unbearable? When will overly complex supply chains break down?July 30, 2012 at 5:45 am #4912
@Trivium, @PastTense, @Lucas, @bluebird, @Franny
This is interesting advice regarding Trivium’s IRA account conundrum. Not being a US citizen, I am completely unaware of all the IRA account nuances. But it raises the dilemma I have also wrestled with in Canada and New Zealand (where I live). Because absorbing the penalties and fees incurred by withdrawing cash out of the system can really sting. It reminds me, however, that one of the primary purposes of these penalties and fees is to DISCOURAGE PEOPLE FROM WITHDRAWING THEIR MONEY. Clearly, the system prefers that we do not, and indeed depends on the fact that we do not.
There is undeniably an element of political resistance in deciding to withdraw everything no matter the “price”. But that for me is only icing on the cake. I am actually more concerned about the fact that if it costs X today to get my money out, it will NOT be cheaper later and will almost definitely cost X*Y, if you can even do it at all. Having recently looked my bank manager in the eye as I moved money out of their institution, it was clear I was a bizarre anomaly–from her reaction, no one else is doing it really…not yet anyhow. I felt awkward and almost criminal, like she must suspect the worst (drug dealer? weapons dealer?!!!). She didn’t dissuade me, although she did gently inquire as to the reason. “Chicken coop”, was my answer. (In greater seriousness I admitted that I just didn’t trust the whole mess and she didn’t argue.)
There is tremendous resistance in the system and it’s deeply instilled within us NOT to withdraw our money. It’s actually incredible how powerful the psychological disincentives can be. (More than one financial analyst has written about their shock over how FEW Greek citizens were withdrawing their money from the banks given the risks.) I can only imagine how much HARDER it will be as the months progress . I’d rather do it sooner than later, as it will undoubtedly get more difficult and more expensive.
The advantage of waiting and changing your IRA or moving account-types is that you can see how things play out, and there may be last-minute changes to the rules you can work around. You might be able to maximize gains and minimize the penalties by timing things really well. But I am convinced that the risks grow daily and it will become harder and more expensive to get our money out. Certainly, you don’t want to be trying to do it when everyone else suddenly has the same idea. Better to do it while you’re still an oddity and your bank manager does nothing more than smile, a little bit perplexed.July 30, 2012 at 6:14 am #4913davefairtexParticipant
I agree that the flight to safety is real, and it reveals itself through bond yields. The core nations of the eurozone, plus the lower debt members all have 2Y bond rates lower than 0.25%, with Germany still having a slightly negative yield, while the troubled eurozone nations 2Y bonds are yielding 3.75% or higher.
I think a few years back in 2010, after the initial panic had subsided, the Fed probably did QE2 partially to monetize treasury borrowing, but that’s just not necessary today because of the flight to safety. Right now with Operation Twist the Fed is actually selling its supply of short-dated treasuries (and buying longer maturity stuff) and still the US 2Y rate is 0.24%.
It is important to differentiate between non-markets (like LIBOR, where rates were set simply by agreement amongst the co-conspirators) and the places where prices are determined by where the really rich people decide to put their money. The bigger the market, the more unlikely it is to be specifically manipulated. Where did all the money from the rich Greeks go when it left Greece? Likely, 2 year German and Swiss treasury notes.July 30, 2012 at 6:24 am #4914bluebirdParticipant
I previously held an IRA at Vanguard. It was the Money Market Mutual Fund holding only U.S. Treasury Bills, VUSXX
Although it was the safest Mutual Fund to preserve my principal, the main reason I transferred this IRA to my Credit Union holding a Certificate of Deposit was this…
1/27/10 Suspending Money Market Redemptions Is Now Legal;
SEC Approves New Money Market Regulation In 4-1 Vote
Zero Hedge discussed a month ago the disastrous prospects of what would happen if the new proposal contemplated by the SEC, which would allow the suspension of redemptions from Money Market Funds, were to pass. Well, in a nearly unanimous vote, Money Market Funds now have the ability to suspend redemptions, courtesy of the SEC’s just passed 4-1 vote.
…at this point, should there be another meltdown, money market investors will not, repeat not, be able to withdraw their money. As the SEC noted: “We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares.”
In other words, if one has a Money Market MUTUAL FUND, the SEC could deny access to withdraw any of your money.
Edit to add ZeroHedge first link about denial of access to Money Market Mutual Funds and more detail discussed about Money Market Mutual Funds…
https://www.zerohedge.com/article/government-your-legal-right-redeem-your-money-market-account-has-been-deniedJuly 30, 2012 at 7:34 am #4919pipefitParticipant
The current bubble is the one started by President LBJ in the mid 1960’s, ‘guns and butter’. The question is which item will go first, the guns or the butter? In order to extend ‘guns and butter’ Nixon took us off the gold standard in 1971, and pretty much insured that we would move to the point where we now find ourselves.
If it is ‘guns’ that collapses first, the USA dollar quickly loses world reserve currency status, so we will have a hyper inflationary crash. Quick. Blink and you will miss it.
If it is ‘butter’ that goes first, then the outcome is a little more difficult to predict. This outcome will feature the formation of a massive Lumpenproletariat. As one can see from the shadowstats.com unemployment numbers, this process is already well underway. As with the ‘guns’ first outcome, this one is featuring massive inflation. However, I think this collapse will be of a more gentle slope.
The dominant feature is not the defaulting of debt, as the deflationists would have you believe. Rather, the end game is being forced on the world by the end of easy to produce oil, and the greater and greater reliance on marginal farmland. Also, with the mammoth world population, drought in key agricultural areas, the present situation, are far more devastating that in 1988, when the same thing happened.
A store owner today told me that fruit, vegetable, and other grocery prices will be going up 30% across the board in two to three weeks. This is going to happen across the country. So you see, the Lumpenproletariat will be expanded greatly this year, but the sheeple won’t understand the underlying issues. Just the opposite, they will be goaded into begging the govt. to increase the defense budget, if I’m reading the situation right.July 30, 2012 at 7:47 am #4920
pipefit post=4585 wrote: A store owner today told me that fruit, vegetable, and other grocery prices will be going up 30% across the board in two to three weeks. This is going to happen across the country. So you see, the Lumpenproletariat will be expanded greatly this year, but the sheeple won’t understand the underlying issues. Just the opposite, they will be goaded into begging the govt. to increase the defense budget, if I’m reading the situation right.
Hm, let’s see. I buy about 5 tomatoes per week. In my outrageously inflated country, that costs me $7 USD. If it goes up 30% that’s another $2 USD per week or so. Let’s go for broke and say $3. It means over the course of the year, I’ve spent another hard-earned $156 on tomatoes. My entire average grocery bill will have “inflated” about $2300 per year. That’s a lot…especially if I’m already living hand to mouth.
But wait…the house I want to buy– [sarcasm] because in a hyper-inflation, land ALWAYS goes up [/sarcasm] — has dropped at least another 5% this year. Where I live, that’s about $25,000. The used car I was going to buy last year was $12K…this year the classified listing says NEWER models of the same vehicle are selling for $8K! That’s $4,000 less.
I could go on. If I’m only measuring my life in tomatoes (which the poorest of us are! and that’s important!) then I’m in trouble. Food prices really hit low incomes the hardest. It doesn’t mean we’re not in deflation though. Compared to the rapidly dropping prices of bigger ticket items–TVs, houses, cars, computers, oil, gold–over the past year, it sure looks deflationary to me. Just the house and car has deflated nearly $30,000 easily wiping out the $2300 annual inflation in my groceries.July 30, 2012 at 7:56 am #4921FrannyMember
Money market funds are definitely not a safe place. I keep my Vanguard cash in the shortest term U.S. Treasury obligation ETF available. For cash one may need soon that one is not willing to keep in the house TreasuryDirect is far safer than money market funds.July 30, 2012 at 8:03 am #4922PastTenseMember
Skipbreakfast: Trivium has retirement accounts.
For your normal salary you pay income tax on this salary. For retirement accounts the idea is you DO NOT pay income tax on this money before you put it into the account–instead you pay income tax after you are retired, when you take the money out of the account. Then you are probably at a lower income tax rate.
And as a discouragement for people to take money out before they retire there is a 10% penalty–if people didn’t want to save the money for retirement they shouldn’t have put the money into this type account to begin with.July 30, 2012 at 8:07 am #4923pipefitParticipant
skip-“It doesn’t mean we’re not in deflation though.”
According to shadowstats.com, consumer prices are up 5% yoy. That is inflation my friend. And that is going to go up a lot in the very near future, in my opinion.
The problem with your analysis is that you are relying on anecdotal evidence, which merely reinforces our preconceived prejudices. We know from shadowstats that inflation is the dominant feature.
The main problem with the deflation argument is the amount of time that has already passed since the start of the credit collapse in 1997. 5.5 years later, inflation is still roaring along. Obviously, there has been a lot of wealth destruction since then, but consumer prices keep going up, year after year. So there is something wrong with your model.
Instead of looking for a few outlier prices that are bucking the inflationary trend, why not focus on figuring out what is wrong with your deflationary model. Why isn’t wealth destruction on a massive scale resulting in a drop in consumer prices? The preponderance of the evidence indicates that it relates to key shortages that I mentioned in my prior post, but there are probably other factors as well.July 30, 2012 at 8:39 am #4924
pipefit post=4589 wrote: skip-“It doesn’t mean we’re not in deflation though.”
Instead of looking for a few outlier prices that are bucking the inflationary trend, why not focus on figuring out what is wrong with your deflationary model. Why isn’t wealth destruction on a massive scale resulting in a drop in consumer prices? The preponderance of the evidence indicates that it relates to key shortages that I mentioned in my prior post, but there are probably other factors as well.
Keep in mind that measurements and definitions of inflation and deflation are extremely contentious. There is no one measurement anywhere that I would conclude is definitive. I think it’s important to recognize that how YOU intend to spend your money is as important an indicator of inflation as anything. I am not picking a “few outlier prices”. I am picking the essential prices based on where I would spend my money. If one only has $10,000 per year to spend, then it may seem that one lives in an inflationary world as a greater and greater percentage of living costs is eroded by a rise in food prices. If one has $1 million per year, then one is living in an entirely different world and the broad inflation/deflation definitions do NOT apply equally. The individual with $1 million per year is NOT going to spend it all on groceries! The individual with $1 million per year couldn’t even spend the interest (where I live) on groceries if she tried. Therefore, what would the individual with $1 million spend it on? Pretty much everything that individual would consider buying is DOWN in price.
You could argue that the people with only $10K vastly outnumber the people with $1 million. You’d be right. Again, inflationary definitions apply differently to different people. Low-income or marginal income individuals will experience a squeeze in standard of living as basic essentials like food increase even a few percent in price. But it seems to me you are actually picking outlier prices (groceries) as an indication of inflation. And in fact, rising food price is a deflationary pressure, as there is less expendable income available in the greater economy for ANYTHING else.
Yes, yes, you’re relying on shadowstats. I don’t rely on them alone. I rely on a wide-range of measures, including the ones in my own life, which are the “least manipulated” and “most measurable” by me. I know how far my money goes on certain things in my own life. It’s going less far in food (a fraction of my spending) versus much farther in terms of bigger ticket items across the board, including travel, vehicles, petrol, land, etc.
EDIT: I should add that “prices of things” isn’t even a definitive indication of whether we’re in deflation/inflation. I think it’s a “practical” one though. The supply of money/credit is MUCH more influential in the long-term implications. Deflating money/credit is going to have a much more far-reaching implication for our lives than the individual price of tomatoes or cars.
EDIT 2: No I don’t have a million bucks per year to spend. But I have more than $10K per year. Just sayin’ in case y’all think I’m a Rockefeller.
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