Death by Debt by ~jessiechrist

I recently stumbled upon the exact figures of US Debt to the Penny which as of a second ago indicated that public debt outstanding was $11,043,588,980,678.90. The latest monthly report is available here. I was very surprised to see we still had such debt given this prediction to have the debt paid off by now. The FAQ encourages us, the private citizens, to help pay off this debt with the following statement:

“How do you make a contribution to reduce the debt?

Make your check payable to the Bureau of the Public Debt, and in the memo section, notate that it is a Gift to reduce the Debt Held by the Public. Mail your check to:

Attn Dept G
Bureau Of the Public Debt
P. O. Box 2188
Parkersburg, WV 26106-2188″

I must say that this is not an April fools joke because research a bit further shows that people do make gifts to pay off the debt. However, before you make your contribution, please note this news story which indicates that the bailouts and the various expenditures could total $10.8 trillion.

Also please note that although we are all patriotic citizens who want to pay off this debt (and even if the whole world jumps in to help), this FED report says that there’s only about $8.3 trillion around (M3 is no longer published) and that money is created from around $2 trillion (soon to be $3 trillion) of reserves (interestingly we have only about $900 billion cash out there). If you know how the total debt can be paid off with all of the outstanding money, please help me understand this.

I also cannot figure out if the gifts to pay of the debt count as charitable donations for tax deduction purposes.

Americans are very smart people. I believe I have just understood why they choose to spend instead of saving.

The Falling Capital by ~Latuff2

My friend sent me a funny link about CNBC that brought forward a few thoughts about assets. What I am about to write you can and should safely ignore as it is likely to have little to no impact on your life. If you know me, you already know I don’t know anything and carry my cross like everyone else in the world. If you don’t even know me, how can you take what I say as anything of value, anything to use as basis for even a simple decision. Please apply this test to all the noise that comes at you at hundred miles per hour from all the sources of your information. It is actually fun to find the hidden assumptions, the flaws in arguments, the hard-to-notice issues with the opinions given out so freely by everyone. Find issues with what I say, and I’ll thank you.

I only watch CNBC, keep an eye on the papers, and the Internet to gather clues about public feelings. Don Chu’s eloquent points about the fractal nature of humanity come to mind here because just as we have good days and bad days, so does the society. Our aggregate public feelings appear in media. As an example, jokes are only funny because we can relate to them. These feelings in today’s complex and constantly changing world cannot be internalized without one keeping both eyes and ears open and watching and listening on all frequencies. Often the clues are subtle, insignificant and sometimes I cannot even verbalize what I’m “hearing” but I don’t stop listening. My only limitation is time. CNBC plays its vital role in filling in the picture of public sentiment. All of the networks cater to their audiences so well, that we can easily approximate the mood of the audience by simply keeping an eye on the media catering to that audience.

Why did I think about assets? Actually, I don’t like that word at all. The reason is debt. Assets can be acquired with debt. It is not difficult to have significant assets balanced by significant debt. I like the word capital much better. Much of the media, your neighbors, everything you see screams “assets.” Assets are visible and quantifiable. Debt is a hidden, private matter. Of the various definitions of capital, I like this one “any form of wealth employed or capable of being employed in the production of more wealth.” This concept is too basic, I agree. However, often the very basic and simple ones contain more energy than complexities (who would have thought tiny atoms could produce so much energy).

The first challenge is the preservation of capital which encompasses everything we do to make sure that whatever capital we have does not turn into nothing as a result of everything that happens around us. Public sentiment is critical for this because after all the vehicles for storage of capital only work if someone out there is willing to accept them in exchange for something we need. I lived through a period when currency turned into nothing after the collapse of the Soviet Union. Every day I would take the money I earned with my friend and buy something, anything I could buy (cheese, butter, dollars, etc.) because the next day that money would buy less. To contrast that, I was speechless when I visited the Vatican and realized how the Roman Catholic Church had preserved its wealth throughout centuries, changing regimes, wars, and changes in public sentiment. It is a superb lesson in wealth preservation which even includes sovereignty. Contrast that with someone trying to hold on to their property during the gold rush. Keeping in touch with the world and public sentiments is critical for taking the necessary measures ahead of time to protect one’s capital.

The second challenge is employing the capital to produce more wealth. I actually consider this an easier challenge than the preservation of capital but there is nothing easy about this. CNBC and millions of “advisers” are ready to give us that one perfect method that will surely increase our capital. They (referring to the money machine) even convinced a lot of people to borrow someone else’s capital (mortgage or margin put into stock market). They “help us” with enormous amounts of data (real-time quotes, hundreds of statistics, derived metrics, research reports, derivative instruments, etc.), with “education” contrasting investors with speculators (no real difference here), with language (buy and hold, dead cat bounce, MBS, ABS, CDS, etc.), and everything else one would ever “need” to turn capital. The US government wants constant turnover of capital because at every turn increases can be taxed. If capital is not turned (artwork passed from one generation to another), no worries as there are laws to tax the transfer. I still cannot understand how the capital gains are taxed fully but capital losses are only used to offset gains (+$3,000 break). People unfortunately do not often understand what capital is because we sometimes start out with negative capital (student loans, mortgages, etc.). By the time we create enough value to pay off these loans by helping someone else turn their capital, time (our most valuable resource) becomes depleted. CNBC, the mutual fund companies, the government, our friends, this blog, and nothing else in the world can tell you how to preserve and increase your capital. Once this became clear to me, CNBC and all forms of media and information took their proper place in my mind.

Federal Reserve by ~Venar

After years of focusing on nano-economics (too small to call it micro) of my little family, I went on a pleasant trip down the macro-economics lane today. At the end of it I realized that I must have slept through the undergraduate class on Federal Reserve monetizing the nation’s debt because I was “surprised” to see almost a trillion dollars of Treasury obligations on the asset side of the Fed’s balance sheet. Its Annual Report is about 400 pages but the numbers on page 315 are fascinating when contrasted with the numbers on page 322. This video provides a very basic overview of what money is, how it’s created and destroyed.

These are some simple observations:

1. The dollar is backed by debt obligation of our government – no debt > no dollars.
2. Gold mining could not produce enough gold to sustain the growth we needed giving way to the current system.
3. I understand the home mortgage deduction (and why it’s not a home mortgage full repayment deduction). Mortgages are good things as far as our system is concerned. The bank does not need a foreclosed house because that cannot be used as collateral with the Fed to meet the reserve requirements.
4. All other governments are married to the almighty dollar. For example, Russia had to spend billions of dollars in foreign currency reserves to defend its Ruble.
5. We pay thin air for the natural resources and efforts of other countries (oil from middle east, for example).
6. Our current troubles are in part from bad loans getting in the way of the money multiplier.
7. I would need another lifetime to begin to understand the current and past monetary systems, let alone make recommendations for changes.

In the meantime, I made the following comment in an e-mail yesterday:

I have come to think of money as some kind of a complex score in a game – and not much more. The higher the score, the better the player is at the game. Since the game rules are far out of my reach, I try to waste as few cycles as possible on changes I cannot implement but at least two elements bother me:

1. The devastation brought upon many people who fail in the game (real suffering from game “score” issues)
2. The incredible amounts of time (of our life – the real value which we cannot increase in any way) spent in playing the game for maintaining or increasing our scores

One more element bothers me but I did not mention it. People who are not the best at the game (myself in the list) sometimes feel that they are not good for anything. That could not be farther from the truth. My mother never had or paid attention to money and she was …. again searching for words to represent her true greatness.

When others say that time is money, I think the reverse. Money is time, actually. It’s the effort spent every day on earning a living. Here I have to say I feel bad for seniors who after decades of work got 50% cuts in their retirement accounts in the past year and are considering to continue working longer. They have every right to be mad at the system, the government, the brokers, the cheaters, the fund managers, and everyone else because time is what they have lost. Money can be created, but time cannot be created.

Unfortunately, time cannot be taxed (it would be a form of slavery). Therefore, it is converted to money which is then taxed. As a citizen of this great country, I actually like to pay taxes at all levels of government. The higher the tax bills, the higher our score and the better we’re playing the game. My earlier observation is not about the country but for the world as a whole.

Around the same topic, I must remember my uncles living in a small village where my father grew up. There was one little non-functioning store there at the time. Their basic existence revolved around the bounty of the land and their animals which were loved like family members – no money, no tax, no government, hardly a road, no shopping malls, no technological innovation, no Internet, no computer, no indoor plumbing (in the earlier years), no gym memberships, no stocks or bonds, no fancy cars or elaborate houses, but still a pretty happy life.

fairytale house by ~Siska92

I bought a house for $150,000 eight years ago and had a loan of $120,000. The value of my house increased to $350,000. I took advantage of the situation and refinanced, being a conservative person, only borrowing $280,000 at a favorable 5.5% rate fixed for 30 years paying $1,600 per month for the mortgage and another $400 per month for real estate taxes and insurance. I was conservative and spent the $135,000 of home equity that I took out on improvement to my home (new kitchen, new bathrooms, hardwood floors, finished basement, and a small swimming pool for the little ones). This caused my tax bill to increase by $200 per month due to higher assessments. After a few years, the real estate market crashed and my house is unfortunately now only worth $180,000. I still owe $270,000 and have to pay $2,200 per month to live in “my” house. My choices are a) continue paying the high monthly payment with a giant negative balance sheet or b) rent a place for $1,200 per month, let the bank have the house and start from a clean slate.

I wish the situation was as nice as the above description. Here are a few additional realities:

• All my neighbors got foreclosed and my whole neighborhood has been downgraded whereas before I thought I lived in a decent part of town.
• My town is unable to meet budget demands and has to increase taxes to pay its bills.
• I actually spent the money on Made in China products worth $0 today and a GM vehicle that’s lost a lot of its value instead of home improvements.
• My bank let me borrow up to 100% of equity so I borrowed the full $350,000.
• The loan I got had a variable interest rate and my payments are more than $2,200.
• The $30,000 stock portfolio cushion that I had is now only worth $15,000.
• I am about to lose my job even though I work hard. They say that the company has to cut back because of the economy.
• I also had a credit card balance of $38,000 and student loans of $24,000.
• Even though my wife really loves to shop, we just cannot afford to buy anything any more.
• I had never signed any contracts before buying this house, let alone the sixty thousand mortgage documents they made me sign at the closings.
• I’ve called the bank every month for the last six months asking for help or a way to get me out of this pickle.

What are my choices? I think I better let the bank have the keys, declare bankruptcy if I have to, move out into the $1,200 a month apartment and hope I can find another job so I can pay the rent before the economy gets any worse. How is any of this bull shit they talk about on TV going to help me this month? I voted for Obama to make a change but so far I see more of the same. There is little they can do to make me stay in this house given the reality I am facing.

NYSE by ~liquidsunshine1024

While reading a post from Daily Speculations, I thought of many reasons why the markets are so fascinating. I think it important to be fascinated for the right reasons. Here’s the partial list for me:

1. Markets offer a unique perspective on life and events. This perspective cannot be appreciated by those who do not follow the markets. Here I mean the stock, bond, commodity, currency, real estate and other financial and investment markets. At a basic level, these provide the vital signs (blood pressure, temperature, weight, etc.) for the state of affairs in the world. I believe everyone follows a few markets whether they know it or not. For example, people may follow the clothing or shoe markets, the grocery market, the cell phone market, the job market for a particular profession, etc. I find that these folks miss out on the unique perspective gained from seeing the interrelated cycles in the various financial markets across the globe.
2. One cannot know everything about every market which makes it very exciting to never run out of new knowledge to discover and learn. Time is the only limiting factor. I believe that “What has been will be again, what has been done will be done again; there is nothing new under the sun. (Ecclesiastes 1:9)” but it is our own discovery that makes the journey so exciting. Newton did not create the forces in mechanics, he simply explained them. Copernicus did not move the earth from the center of the universe, he discovered that was not the case. Similarly, in the markets there is always something new to discover, something that is obvious to another person or something that has been explained incorrectly in the past. The one difference is that the new discoveries, large or small, allow us all to affect the functioning of the markets. Imagine a long book where the sentences you have not read change as you read each new sentence.
3. Markets force the issues that people are otherwise unable to force through political, commercial, or not-for-profit means. I believe this is one of the reasons Soviet Union did not have such markets. They provide the environment for natural selection of the healthy from the unhealthy.
4. Markets provide the means for a very large and powerful industry capable of shifting massive amounts of wealth around the ecosystem. The mechanisms are so large and so complex that I think of these as not too dissimilar to the building of the pyramids. Millions of people go to work each day making infinite improvements to these modern day pyramids.
5. Markets provide the means to diversify and preserve purchasing power in the absence of an alternate method or mechanism to store and transfer purchasing power. Soviet Union could not afford to store purchasing power because of the overall inefficiency of the machine. What is amazing is that even those of us with little wealth, no stocks or bonds, participate in the markets in one way or another.
6. Markets provide the means to examine, learn and better understand ourselves. Some of us learn who we are. Some of us learn who we want to be. Some want to get ahead at all cost, others simply want want to preserve capital. I continue to learn a great deal about myself by examining my thoughts, actions, and results in the context of the never ending stimuli from the markets.

If your reasons for being fascinated with the markets are not listed above, feel free to mention them. I would encourage everyone at any age to pick up this subject. You never know… it might help you make or save a dollar or two in the process.

Firewood by *LadyRSanti

Growing up in an apartment building, we had a hallway that had four doors to four homes. My mother would always clean the entire hallway but for some reason our neighbors would only clean the small area between their own door and the hallway entrance. It would always puzzle and bother her why they only cleaned in front of their door. Did they think dust in other areas would not move? A few years later, when none of us had any heat in the winter, neighbors would gather together in one of the apartments to conserve firewood. After those days, somehow the hallway was also kept clean by everyone.

It is not uncommon to see entire neighborhoods full of foreclosed homes these days. Just a few days ago, I heard how a condominium association could not pay its bills because many units were empty under foreclosure proceedings. Towns with high foreclosures have similar issues of being unable to cover their expenses. Homeowners in such towns find themselves under greater burdens for town expenses and under heavy pressure of dramatically lower equity of their own homes. We have learned the lesson that when our neighbors become poor, we too become poor.

As we are witnessing right now, when consumers (that would be us and our neighbors) are unable to spend as much as we typically spend, companies that sell us stuff, sell less. When companies sell less, they need less workers and they invest in machines and equipments less; they also spend less. When companies spend less and we also spend less, there’s really no way to sell more than the year before. It’s all too obvious… When we do not sell more this year than last year, our economy doesn’t grow and we know that stock values increase when the economy and companies grow. As a result, we earn less money (remember inflation even if you get no pay cut), stock values decrease, we become more unemployed, and we spend even less. Bottom line, when our neighbors spend less, they become poor. When they become poor, we too become poor.

When our neighbors have no homes, we have more homeless people. When our neighbors have no money, we have more poor, unemployed people to help. When our neighbors are hurting, we are hurting. This is because we’re one and the same, all interconnected, affecting each others’ lives, hurting together, happy together. There are many examples of this starting from global warming (if we do not all cut our emissions, the results do not change) to local crime (if we do not all keep our neighborhoods safe, the results are unchanged).

America has a vibrant individualistic society with everyone in constant motion pursuing our happiness. As you chase your own dreams and fulfill your objectives, consider your neighbors and your community.

Monopoly by *Aldalambe

“Remember when we play Monopoly, there’s you, me, and the bank? Now imagine if there was another player (let’s say mama) who borrowed from the bank a lot of money to buy a property. So, you and I have some money, but mama has no money because she bought the property, and the bank has no money because it lent the money to mama. Now you come to pass Go, but the bank has no money, should we give the bank money?”

His initial reaction was no we shouldn’t because that’s our money. But then I mentioned to him that if the bank had no money, the game could not go on. It was fascinating to see his face as he internalized our conversation. He suggested some decent solutions one of which was to take some paper and make fake money with it.

This description is unfortunately not too far from reality the way I see things. The only solution that is being suggested is to basically print more money. Sure that may cause the game to continue but I fear that we’ll not only pay more in taxes to cover the massive deficits, but also we’ll pay in cut programs and jeopardized future initiatives, and most importantly in further dilution of our currency and our reputation. I won’t even mention the moral hazard issue and a number of other issues.

I understand that the alternatives are not easy. However, remember that the people who bought the houses and paid the incredible inflated amounts for them, paid these sums to another player(s) in this economy. Where did this money go? To be sure, some of it got invested in Lehman stock (and other instruments including houses with inflated values) and lost its value but certainly not all of it has been lost to depreciation of values. Take a look at this graph about the money supply.

I’m not an economist but in my humble opinion, if we print more money, we’ll simply dilute the value of the dollar in the long run even more (read groceries more expensive and retirement accounts able to buy even less) and we’ll perpetuate the bubbles exacerbating their effects. I have faith in Secretary Paulson and Chairman Bernanke and hope that they have excellent teams at their disposal. However, I believe Congress needs to take its time in crafting a solution to the fundamental issues. This decision is too big to be made in a week because this country is too big to fail.

In the meantime, we’ll just continue playing the Monopoly game on our kitchen tables, since there’s no room for us at the table where the real games are being played in our name…

Battle Over the Market by ~WesternWitch

The recent volatility in the stock markets around the world has put me on an emotional roller-coaster. The governments are doing what they can to prevent a global recession/depression but are they solving any fundamental issues? Absolutely not!

I think of every country as a family. The United States family has an enormous working potential and earns a lot of value for all the good that it creates every day. Every morning it wakes up, goes to work, creates new value, earns a salary and puts that into its “bank account” from which it pays its bills. Because of its hard work, this family has earned a lot and has invested a lot over the years. It is a generous family and provides significant aid to others. It invests in different initiatives to help the kids get better education and to provide decent health-care for most. It even provides some benefits for its senior members. This family also likes to live well and because it has a solid reputation, everyone lends it money. In the recent decades, the lifestyle of this family has required it to accumulate an amazing amount of debt. In the past few months, some of the family members have acted irresponsibly and this family is helping them out. However, since it already has a huge amount of debt, it must borrow more to help them out. This is how I see our current situation (in very simplistic terms). As long as we have major national initiatives with hefty price tags (Iraq war, Social Security, Medicare, MANY MORE….), as long as we spend as much as we spend, and as long as everything we buy is made outside the family, we’re perpetuating the situation.

The main question is how can this family get on a stronger financial foundation with a system that can withstand high levels of shocks and uncertainty in foreign countries?

First, we need to produce innovative new products, services, and technologies to be exported. These must be produced here in America. We need to produce new energy sources cheaply, new medical technologies cheaply, new drugs, new computers, new knowledge, and everything else that we can innovate and sell. We must produce these competitively here in the US! You ask how can we make something cheaper than in Asia/Africa where labor is much cheaper? We do not need to make it cheaper. We need to make it better. Let’s invent even better machines that can do the work. Then let us produce many things China, India, Russia and every other country wants to buy, let us buy less from them and more from our internal producers, let us innovate so we can be the cheapest producer in the world with the highest paid workforce, let us create jobs in research so we can invent the new energy sources, let us get rich as a family!

Second, we need to cut wasteful spending of our governments. This is a long-term issue. Outdated programs should be replaced with new innovative interesting programs that people need. Let’s make it an initiative to run the programs as effectively as possible with objectives and achievement bonuses.

Third, let us create incentives for people to OWN rather than pretend to own. Most people have a mortgage against their homes. Instead of having a tax incentive to have a mortgage (the home mortgage deduction) why not have a tax incentive to not have a mortgage? Instead of giving businesses advantages to go overseas for labor needs, let us reward those who have all-American teams. Instead of taxing people’s estates, let us come up with creative incentives for people to build estates. Let us fund financial education and discipline from middle school to graduate school, so people will not borrow when they cannot repay. Instead of promoting sales of cheap Chinese made products, let us have sales of American made products.

If you agree or disagree with anything I have said, feel free to comment. These are my humble thoughts and I know it would take an act of God for the government to agree. So, I will pray…

Unless you are working on an antique car that appreciates in value over time or fix cars for a living, I think any time you spend on the car is worth only the present value of your time. On the other hand, let’s say you spend time on your business, career, or investments, this time can and will certainly pay dividends later in life.

Almost weekly I cut the grass and every time I feel I’m completely wasting two hours because the future value of this time is about as close to zero as it gets. To have someone else cut the grass would unfortunately cost more than we can afford now. So, my challenge is to continue investing in activities that pay dividends in the future, so I don’t have to waste time on this every week. Time spent learning something new, on the other hand, can have huge benefits (often unforeseen) later and usually when least expected.

Next time you’re working on something consider if the object will appreciate or depreciate over time. That’ll help determine the amount of time investment you should make. Appreciation includes both financial appreciation as well as non-tangible appreciation such as physical, emotional, and spiritual appreciation. One lesson I’ve learned while writing this blog is how much of our days are spent on “noise” and how little of what we do truly deserves to be retold. I hope you make it your challenge as I have made it mine to fill up your life with what really matters and leave the rest to everyone else.