Welcome to America’s Lost Decade

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…Or should that be Last Decade?

This morning’s decision by the US Federal Reserve’s Federal Open Market Committee (FOMC) is the final act in American global economic dominance.

If the US economy wasn’t already terminally ill, then this morning’s news from the FOMC has pushed it into terminal illness. But before I get onto that, more revelations on the Aussie housing bubble…

In yesterday’s Money Morning we wrote:

“I mean, hasn’t the Commonwealth Bank just completed a global tour spruiking the Aussie housing market, claiming that the income to house price ratios are nowhere near as bad as many claim?

“Seeing as the whole point of the tour was to get investors to buy the bank’s debt for as low an interest rate as possible, it must surely mean the bank has failed to convince those investors about the security of the Aussie housing market.

“Higher interest rates means higher risk. International investors clearly view Australian banks and the Australian housing market as being a higher risk than the banks and the RBA would have you believe.”

It turns out, as usual, we were spot on. Because Steven Munchenberg, chief of the Australian Bankers’ Association (ABA) admitted it.

The Commonwealth Bank (CBA) has had to increase interest rates higher than the Reserve Bank of Australia cash rate movement because international investors fear an Australian housing collapse.

Here’s what Steven “Baron” Munchenberg had to say as quoted by Chris Zappone at The Age:

“Over the last few weeks, we’ve had a lot of international investors asking very detailed and probing questions about why it is Australia thinks it doesn’t have a housing bubble. Bankers were grilled at length as to why investors should not be worried Australia has a housing bubble.”

We can only dream about what the bankers’ answer was. But I bet I can guess… OK, say it with me slowly, “Because… Australia… is… different!”

Whacko!

In fact we’re certain that’s what was said. You only need to look at the quote in the Wall Street Journal article titled “In Australia, Signs of Overheating in the Housing Market”, from Michael Blythe, chief economist at the CBA. He told the WSJ:

“It’s a legit concern [housing bubble] given what’s happened in other countries, but we just think…” wait for it… here it comes… “…Australia is a little different.”

Ha, ha, ha… what a clown!

And if you didn’t think the housing bust had started yet, think again. And if you’ve hung your hat on the idea that house prices won’t fall because Australians love their houses more than the foreign Hun, then, er, think again on that one too.

Today’s The Age runs the story that “Stressed home owners sell up”.

The article states:

“Matthew Tregent and Sarah Zajac are looking at selling their home in Deer Park. They are not suffering mortgage stress – far from it – but many of their neighbours are, and it is changing the character of their street.

“‘It looks like there is a bit of hardship in the area. There’s a lot of houses that are going up for sale,’ Mr Tregent said of their relatively new estate.”

“We’re pretty much surrounded by renters now. Other streets in the estate are as well.

“Why we’re planning on moving is because we’ve been taken over by investors predominantly. It’s becoming, I guess, less desirable to live here.”

The descent into slums and the rise of the slumlord is what you’re looking at here.

Look, as you know, with prices this high it makes sense to rent. But the fact is, renters will typically take less care of a home than owner-occupiers, for the simple fact that the property isn’t theirs.

A renter couldn’t give a stuff about maintaining the property. As long as it’s liveable they’ll be happy with it.

And as for the landlord, well, any landlord worth their salt knows that the building is a depreciating asset. Why spend money on maintenance when all they’re really interested in is collecting the rent money and hoping the land value increases.

If that happens they can eventually flog the thing to a developer and walk away with a tidy sum. That’s the theory anyway.

And if as we believe, house prices fall, then there will be even less incentive for landlords to maintain the buildings. If they’re getting a zero net income and zero growth how likely is it the landlord will scrub the place up or give it a new lick of paint?

That’s right, it’s not likely at all.

But, at least it’s pleasing to see another nonsensical Aussie housing myth is being bust in the mainstream press. We’ve argued for some time now that Australians have no greater attachment to a home than anyone else.

There’s no “love” for housing in Australia. Maybe there’s a love for a certain lifestyle, and in some cases that means having a certain kind of house in a certain area… but if the cost to maintain that lifestyle becomes excessive then tastes will soon change.

I know it’s not exactly the same, but think about how many people “loved” buying vinyl records thirty years ago… and how many people “loved” buying CDs ten years ago… “Oh, we could never give up our vinyl/CD collection, we love it…”

Now walk into anyone’s house and their record collection is stored in a machine five inches by three inches – an iPod or something similar – and there’s not a CD or vinyl record in sight.

As I say, it’s not the same, but it proves the point that people change their tastes and their habits over time to suit the circumstances.

Housing is no different. If it costs too much and the expected growth isn’t there, then guess what, people won’t buy, they’ll rent. And if enough people in a certain area rent, then you’ll soon see the place turn into a low-value ghetto… the South Bank area of Melbourne is one area to watch for this transformation. But nowhere will be immune to it.

Even the toffy areas will succumb to the same plague.

Just to repeat, we’re not having a crack at renters. We’re not saying they’re slobs or that they’re lazy. It’s just that they behave how they should behave towards property that isn’t theirs – they don’t care for it as much. It’s as simple as that.

The Aussie housing bubble deniers can carry on as much as they like, the fact remains Australian housing is overpriced and heading for a massive fall. The spruikers can scoff and gloat and claim that people such as your editor don’t know what we’re talking about, it doesn’t matter.

Ultimately, nothing the spruikers or bankers say will be enough to stop the housing market from collapsing once the fall gathers pace.

But that’s for all on housing today, back to the Fed and its dopey money printing scheme…

I tell you what, for a bunch of people who are supposedly super-bright, what they’ve done is nothing short of criminally comical.

Over the past few weeks the Fed has been grooming the markets. It has tried to find out what the market was expecting the Fed to do.

It has been like some sort of weird auction where there are no bids. Or like two shadow boxers not punching each brains out. Instead the buyers and sellers are just mingling around giving vague but obvious clues:

“Sooooo, just supposin’ we printed $500 billion what would you say to that? Not that we will mind you, I’m just like, kinda askin’… OK, what about, say, $600 billion, what would you say to that? Not that we will, I mean maybe it’ll be more, maybe it’ll be less…”

And so the sad comedy routine continued.

The upshot of the Fed’s ingenious cloak-and-dagger mind games was that according to Bloomberg News this week, “Fed Will Probably Start $500 Billion of Bond Buys, Survey Shows”.

This was from a survey Bloomberg had sent to a bunch of Wall Street economists. Funnily enough, the New York Federal Reserve had sent a similar survey to bond dealers and investors the week before.

So we can guess that the response the Fed received was pretty similar to the response Bloomberg got.

Armed with the results of this highly scientific and well-thought-out survey – remember that Fed chairman Ben S. Bernanke is a former “Princeton University economist who studied the Great Depression” – what did the Fed decide to do?

We can only imagine that they hunkered down, cracked open the sarsaparilla, turned on the popcorn machine and…

Knowing that the market was expecting the Fed to print $500 billion of lovely new cash, and knowing that anything less than this amount would disappoint the market, guess what they did… go on, have a guess…

That’s right, the Fed announced this this morning:

“The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.”

See, that’s the kind of tactic that only a Princeton edumacation can bring you.

The market expects $500 billion, here, we’ll give ‘em $600 billion.

That’s the extent of the brain power that’s gone into this. Trumping the market was the only goal.

If the market surveys had revealed expectations of $200 billion then the Fed would have given them $300 billion. If they’d expected $700 billion they would have given them $800 billion.

If the market had expected free cheeseburgers all-round the Fed would probably have given them two free cheeseburgers all-round.

So, what does this all mean? Are America and the rest of the world on the edge of a hyper-inflationary death-spin? Is it time to stock up on cans of baked beans and hotdogs?

Not so fast. That’s perhaps too obvious. Let’s pause and think about how this could all play out… I’ll get back to you with my thoughts on it tomorrow.

Cheers.

Kris Sayce
For Money Morning Australia

Kris Sayce

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.

Read more about Publisher and Investment Director Kris Sayce.

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84 Responses to “Welcome to America’s Lost Decade”

  1. Beauner

    Andrew Jackson is my favourite American President.

  2. cb

    Drew, Beauner – I have just come across this brief video segment on Celente’s site, right on the topic:

    Friday, November 5, 2010
    United States Economy Collapsing
    http://geraldcelentechannel.blogspot.com/2010/11/united-states-economy-collapsing.html

  3. Drew

    cb, what do you make of this video (and the one after it).

    http://www.youtube.com/watch?v=nH2-37rTA8U

    It makes fractional reserve banking sound a lot less sinister.

    But it does leave interest out of the equation which, based on what you are saying, is the cause of the system’s downfall.

  4. cb

    Drew – Yes, that is a very good explanation of the rules under which fractional reserve banking operates, and it makes if quite clear that a commodity based currency, such as gold or silver, still allow for tons of phantom money being created through the fractional banking and lending process. Under a 10% reserve requirement, a banker can create 9 times as much money in the form of loans than there in fact exists in hard, cold, physical gold.

    Most people do not realise this, but 9 out of 10 people, or 9 out of 10 coins people believe they have on deposit with the bank are in fact unbacked, and would not be able to get their coins out in a bank run when confidence in the bank’s ability to pay is shaken and everybody decides to take their coins out. So, the fractional nature of the monetary system is one source of uncertainty and potential trouble. You can see how disaster prone such a system is, don’t you? Clearly, the remonetaisation of gold and silver are hardly a panace for the volatility and uncertainty that is created by phantom money creation through the fractional reserve system.

    But that is only an element of uncertainty, that disaster may strike any moment the herd is spooked. But, so long as the sheeple trust their banker and the system, no disaster need to come from this feature of the system.

    But an inevitable disaster is built into the system from another feature of it, which is the usury, the interest and bank charges that are due on the borrowed money. Pushing that example to its logical boundaries under the rules, under ta 10% reserve requirement and with 10% interest payable per annum on all borrowings, how would we be doing, year after year? Let’s see:

    0: The initial conditions, or: The yearly summary of the situation:

    0.1 — 1,000 gold coins have been put on deposit to start with. They are the only gold coins or real currency that there are.
    0.2 — However, through the fractional reserve banking and lending process, the money supply was boosted to 10,000 coins, 9000 of which are phantom coins that were simply lent into existence under the rules out of sweet nothing, but which were put on deposit by those workers and contractors who earned them for the goods and services they provided.

    Nominally, the depositors now have a total claim to 10,000 coins against the bank, even though there are only 1,000 coins in existence. It is nothing short magic, it seems. By expanding the money supply, the banker’s credit has set off an economic miracle rivalling Jesus feeding crowds from a couple of baskets of bread and a handful of fish. Suddently, everybody seems to have gotten wealthy.

    But not so fast. This is obviously a setup for a 90% disappointment rate, should anyone be insane enough to ask any probing questions, let alone blink. There are 10 times as many claims against the underlying physical than what in fact exists. But still, so long as nobody panics, everybody can go about their merry lives, hardly noticing the sword of Democles is hanging overhead of each and every one of them. For the time being, the depositors are a happy bunch of savers, who are being paid 6% interest (600 coins per annum) by the banker for the use of their money. Indeed, in their eyes, the banker is nothing if not a hero.

    So, that is the happy, if delusional, world of the savers and depositors under the fractional money multiplier system. Not everyone considers it sinister, even though there are grave reasons why they should, and should not trust their luck not running out at some poin, because that seems quite a clear possibility.

    But it also gets worse, because now here come the borrowers, and we cannot forget about them. What is their story? It is this:
    0.3 — They have borrowed heavily. They have borrowed 9,000 coins and they are paying 900 coins to the bank every year for the privilege. They better do well with their businesses, you could say, or the whole happy house will come down around everyone’s ears, and not many would be happy about that!!!

    Anyhow, what about the banker?
    0.4 — Pity the banker. He starts with nothing. NOTHING. All that gold that he has been handling and counting belong to other people. But he is a hopeful and shrewed fellow, and he reckons he can make a modest dollar of the whole thing. Why? Simple: Because the rules are stacked in his favour, and so long as he can avoid the misfortune of being struck by lightning, or run over the bus, he has much to gain. In fact, he plays for keeps, and he is playing for everything. Yes, you read that right: EVERYTHING. It will take a little time, but he is not going anywhere. He is here to play and WIN!!!

    So, let us now run the numbers for the results, anniversary by anniversary. To start with, all the gold, all the currency belonged to the people, the savers and depositors who earned it fair and square, and 90% of it has been lent out to circulate through the real economy, while 10% of it is being held in reserves by the banker. The borrowers pay the banker 900 pieces per year in inerest. The banker then pays the depositors 600 pieces in interest and keeps 300, which is his spread, or the payment for his genious and trouble. So, at the end of the first year, the actual physical distribution of the currency between the productive economy and the financial sector is as followes:

    Year 1:
    MS ( for Main Street) = 9000 – 900 + 600 = 8,700
    WS (for Wall Street) = 100 + 300 = 400 [300]

    The figure in brackets indicate the banker’s profits, which he now uses as he pleases. For, once these profits are paid out in salaries and bonuses, the people have no claim over this money, if anything should go wrong with the money machine. It is important to keep this in mind, for what we are trying to get clear about through this simulation is the question of who, at the end of the day, is going to be left holding the can when the brown stuff hits the fan. Anyhow, we move on to consider the next anniversary.

    Year 2:
    MS = 8,700 – 900 + 600 = 8,400
    WS = 400 + 300 = 700 [600]

    Year 3:
    MS = 8,400 – 900 + 600 = 8,100
    WS = 700 + 300 = 1,000 [900]

    Year 4:
    MS = 8,100 – 900 + 600 = 7,800
    WS = 1,000 + 300 = 1,300 [1,200]

    Year 5:
    MS = 7,800 – 900 + 600 = 7,500
    WS = 1,300 + 300 = 1,600 [1,500]

    Year 6:
    MS = 7,500 – 900 + 600 = 7,200
    WS = 1,600 + 300 = 1,900 [1,800]

    Year 7:
    MS = 7,200 – 900 + 600 = 6,900
    WS = 1,900 + 300 = 2,200 [2,100]

    Year 8:
    MS = 6,900 – 900 + 600 = 6,600
    WS = 2,200 + 300 = 2,500 [2,400]

    Year 9:
    MS = 6,600 – 900 + 600 = 6,300
    WS = 2,500 + 300 = 2,800 [2,700]

    Year 10:
    MS = 6,300 – 900 + 600 = 6,000
    WS = 2,800 + 300 = 3,100 [3,000]

    Year 11:
    MS = 6,000 – 900 + 600 = 5,700
    WS = 3,100 + 300 = 3,400 [3,300]

    Year 12:
    MS = 5,700 – 900 + 600 = 5,400
    WS = 3,400 + 300 = 3,700 [3,600]

    Year 13:
    MS = 5,400 – 900 + 600 = 5,100
    WS = 3,700 + 300 = 4,000 [3,900]

    Year 14:
    MS = 5,100 – 900 + 600 = 4,800
    WS = 4,000 + 300 = 4,300 [4,200]

    Year 15:
    MS = 4,800 – 900 + 600 = 4,500
    WS = 4,300 + 300 = 4,600 [4,500]

    Year 16:
    MS = 4,500 – 900 + 600 = 4,200
    WS = 4,600 + 300 = 4,900 [4,800]

    Year 17:
    MS = 4,200 – 900 + 600 = 3,900
    WS = 4,900 + 300 = 5,200 [5,100]

    Year 18:
    MS = 3,900 – 900 + 600 = 3,600
    WS = 5,200 + 300 = 5,500 [5,400]

    Year 19:
    MS = 3,600 – 900 + 600 = 3,300
    WS = 5,500 + 300 = 5,800 [5,700]

    Year 20:
    MS = 3,300 – 900 + 600 = 3,000
    WS = 5,800 + 300 = 6,100 [6,000]

    Year 21:
    MS = 3,000 – 900 + 600 = 2,700
    WS = 6,100 + 300 = 6,400 [6,300]

    Year 22:
    MS = 2,700 – 900 + 600 = 2,400
    WS = 6,400 + 300 = 6,700 [6,600]

    Year 23:
    MS = 2,400 – 900 + 600 = 2,100
    WS = 6,700 + 300 = 7,000 [6,900]

    Year 24:
    MS = 2,100 – 900 + 600 = 1,800
    WS = 7,000 + 300 = 7,300 [7,200]

    Year 25:
    MS = 1,800 – 900 + 600 = 1,500
    WS = 7,300 + 300 = 7,600 [7,500]

    Year 26:
    MS = 1,500 – 900 + 600 = 1,200
    WS = 7,600 + 300 = 7,900 [7,800]

    Year 27:
    MS = 1,200 – 900 + 600 = 900
    WS = 7,900 + 300 = 8,200 [8,100]

    Year 28:
    MS = 900 – 900 + 600 = 600
    WS = 8,200 + 300 = 8,500 [8,400]

    Year 29:
    MS = 600 – 900 + 600 = 300
    WS = 8,500 + 300 = 8,800 [8,700]

    Year 30:
    MS = 300 – 900 + 600 = 0
    WS = 8,800 + 300 = 9,100 [9,000]

    So, what we have here after 30 years is a situation in which the real economy, is totally bereft of ANY coins for doing its regular trading. and that includes, not only the real ones that people deposited at the bank, but also the phantom coins created by the banker through the magic money machine. In fact, if you think about it, the magic money machine is slowly but surely transferring the wealth out of the real economy into the financial sector. The parasite overdid a good thing, and killed its host.

    As a matter of fact, within a few short years, just a little over three years, and even though he started with abosolutely nothing, the banker has made enough money for himself on the spread to lay claim to all the physical cold in the system, and is already in a position to send everybody else to the wall. Given that he has now legally earned the right to do with his share of interest and profits as he pleases, he can simply hang onto all the gold coins he is entitled to keep for himself and take them out of circulation, while at the same time insisting that borrowers pay their yearly interest with real money, not in phantom money. But this would be impossible, given that there are still only 1,000 real coins and he has the lot of them.

    So, what happens if he does that? First, the borrowers go broke, and the baker claims their assets. Second, if any depositor wants to withdraw their money, the banker can legitimately claim that because the borrowers defaulted, the bank is broke, and there is nothing with which to pay the depositors. So, both the savers and the borrowers that make up the real economy are toast, while the banker can now go on a buying spree with all his gold, and pick up assets for pennies on the dollar.

    Remember, the banker started with nothing, and now he has, and can have, virtually anything and everything. Such is the nature of our wonderful financial system.

    Jesus promised the Earth to the meek and the poor.
    I think the bankers have other ideas, and you can see why. And, as if to leave nothing to doubt, they also, are claiming to be doing God’s work.

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