There was a decrease in the money supply during the great depression, it did not help things one bit. Did it cause the depression? No it did not. Did it deepen it and lengthen it? Yes, I think it did. Does expansion of the money supply in a total fiat money system add wood to the fire that will destroy our current economy? Yes. It's so stupid that it has to be intentional. One reason I can think of to cause a crash is to enable the purchase of land, capital equipment and people on the cheap, because the prepared will still be liquid after the crash.
One thing that helped lengthen the great depression was a contraction of credit, it was intimately linked to money supply but it’s not exactly the same thing. The fed did actively discourage capital investment. FDR in his mad dash to centralize economic planning and federal power drafted legislation and regulations that did even more to hinder a recovery.
If my understanding of things is off, please tell me. I am only now starting to do some reading about FDR and the great depression.
Not to bad AP... and welcome back by the way.
I think its a little more simple than that, as far as what FDR did to drag the depression out.. I mean.. he continually took more and more and more out of the private sector, and moved it to the public where it could do no good.
TVA
You might of missed the comments I added to the last ATF post. They're about coffee. I waxed pedantic. Don't want them to go to waste.
And thank you for welcoming me back.
Lead, the new Gold.
“There was a decrease in the money supply during the great depression”
You’re sort of right. There was a decrease in hard money, meaning gold and silver coin. People started hording good money and were reluctant to accept bank notes. As people held their hard money deposits, banks were unable to lend more (thus constricting credit), and some banks were unable to meet depositors demands to withdraw gold.
You almost need to do a study in traditional banking (pre 1929) to understand how sound banking was done. We don’t do it anymore, at least not any FDIC or State banks or credit unions. FDR tried to fix a problem he didn’t understand by listing to a man who didn’t understand the problem (Kaynes). Had we remained on gold @ $20.67 per oz, we would have suffered through about a 3 year recession. (I don’t remember the rational for that figure but I believe it to be sound)
Remember that prior to the great fed money machine, consumer prices tended to follow a more deflationary cycle. Capitalistic competition tends to reduce prices to equilibrium on the producers production supply chart. When S=D in the market than UMC tends towards UMP at the point where P equals maximum unit marginal profit.
The market would have realigned it’s self with demand, but profits would have been lower.
hey.. it's easy to guarantee money when you can just print more.
It's easy to steal your depositor's real assets when all you do is create money out of thin air and then "loan" it to them.
Well... I mean... when you put it in the "Evil Genius" context... at least it's funny..
Can't you just see snidely whiplash rubbing his hands together?
"I'll print up this money see... then I'll give it to the rubes... and they'll use it to build houses see... then I'll stop printing up the money see.. and I'll take the houses away! Mwahahahaha!"
I thought one of the principal reasons for the great depression was to drive smaller banks out of business, leaving just the Fed.
Yes I've looked into the deflation concerns. Prechter himself sees the last 200 years as one big Bull market. I find those ideas a little strange. The market IS reacting to rate concerns when it sells down, it could be that Greenspan wants to get rates back to a point where he can start cutting them again, who knows. The Fed is inherently inflationary by nature, I knew that. But deflation, I don't see it going down like Prechter does, but I could be wrong. I think everyone thinks they're living in the times when the sky finally falls. I'm not so sure that those times have arrived, yet.
The long term interest rate yields are the concern. They're still low, and that hints at deflation, if those numbers continue to drive lower, then deflation is coming down the road, and that will be real bad for the world economy. That to me will also be a key driver in the destruction of the nation-state system. But it will just make way for new changes, Very Bad Changes...
On bond yields too, I've come across Prechter discussing the long term view there as the key support for his deflation outlook. Credit inflation is reaching its limit, supposedly. I'm off to bed now, but does anyone know where you can find long term charts of the yields on 10 year money? I'd love to see how they've progressed since the 90's.
JamieR,
Why do you see deflation as bad?
If economics is cyclical by nature than we shouldn't fear the down cycle. It may be a key part of fixing the centeral planning problems we now have.
Lets see... the money I have.. will purchace more...
Hrmm...
Nope.. Nope... I don't see the problem there.
"there as the key support for his deflation outlook."
This depends on the your economic theory whether this is good or bad. Most look at inflation as part of the engine of progress ie the printing of money to sustain the economy. They look at the economy as an engine that keeps excellerating by increasing wealth through inflation. Looks good on paper, but in reality is the death nail of economic security. China for example is burning too brightly and their monetary control is looser than ours. The world economy will collapse eventually, it is just part of "the rythm".
"I think everyone thinks they're living in the times when the sky finally falls. I'm not so sure that those times have arrived, yet."
I have to agree. I've been through all this before and some how it all worked out. Now that's not to say it will always do so, but making these kind of predictions is alway dicey. It's not a game of chess. You can't see all the pieces and the pieces move with too much chaotic disconnection to make anything but the most basic models.
But defation is better, no question. It's nature's way of righting the scales. Inflation is the goverment's way of preventing the scales from being righted. In deflations those who have money can still pay in real value for goods and services from those who don't have it. In inflation the value decreases until finally there's no liquidity, although human energy levels go up exponentially. The energy level is the most important. You have less production and more just trying to survive.
Imagine a farmer trying to work for barter in vegatables. They have a very quick shelf life. How do you get them into a city? The whole middle man thing, that is transportation and storage, is suddenly of dubious value because no one can easily convert anything to value.
Either the farmer goes to the city or the city comes to him. The more chaotic things become the less likely the farmer is to travel. The breakdown will look like every day life in Indonesia.
Actually EN.. you haven't seen this before... since a bubble of this size, in a market as important as Real-estate has never formed before.
"you haven't seen this before"
Yeah, that's a little hard to understand. I was referring to Jamie's comment that "everyone thinks they're living in the times when the sky finally falls". My point was that no one ever knows for sure what will happen. That's not meant to be negative or positive btw. I probably should have just left it at this:
"It's not a game of chess. You can't see all the pieces and the pieces move with too much chaotic disconnection to make anything but the most basic models."
Sounds like wishful thinkin' to me boys. I'm sure you know I'm no fan of this mess we call the world economy and I am certainly not a fan of our "Big Brother", ie the government.
Here's the problem with the bubble theory.
1) Intrinsic value does exist and land is the primary card holder in this respect. People throught ALL historical time frames have fought and died over this on item more than any other.
2) Bubbles are a extrordinarily new way of describing an age old problem, overvaluation, the name is fairly self explanitory. It was easy for the "bubble" to burst in the dot-com arena because they fit the descition perfectly, all air no substance. Real Estate, however, has this land thingy that backs up it's market value with intrinsic value. Now if we were talkin' about the purchase and sale of make believe parcels then a bubble could be formed and pop.
I guess to sum all this up I have to say that y'all are gonna have to find something other than this to hang you hopes of a global collapse and removal of the evil that now runs this world.
I'll be waiting and hoping with you until then.
"Bubbles are a extrordinarily new way of describing an age old problem, overvaluation"
That's true and overvaluation has a fix without the whole world coming to a standstill. Prices for realestate go down. I bought my place in 1984 at about $4000 less than the original owners paid for it. It's now worth about 4 1/2 times what I paid for it and I assume it's over valued, but it would have to fall by quite a bit to matter to me. I bought at the right time and I would be willing to buy other realestate if the price trends downward or holds even, for more than six months.
Nate, Heard this author interviewed on the radio last week. I am not an expert on the Civil War( the war of northern aggression).
The author's name is Thomas Carhart and his book is titled "Lost Triumph".
If you could do a book review, I would be interested to know what you think.
Read your Bible, and use it as a guide for your financial life. Save and Give. Save and Give.
Nate, that's probably the best financial advice I've ever received. You can't top that.
Well-done.
Welldigger
Ehen you don't own the land as it becomes more valuable the rent (property tax) goes up.. They have left us with no safe investment, except pet rocks. I say invest now!
When you own the land - it should read -
"If economics is cyclical by nature than we shouldn't fear the down cycle. It may be a key part of fixing the centeral planning problems we now have."
This is just part of a 25 year cycle, or around that - that's the way I see it too. It appears to be about every 25 years. It's just that this down cycle is coming on the back of increasing agitation in Europe to move away from the nation-state system completely, and the US appears to want to move in that direction too. That's the bad changes I'm thinking about. I could just imagine the sort of problems there with the risks spread in less and less places, and having gargantuan bureacuracies making even poorer decisions economically speaking.
Also, Prechter has some points worth thinking about even though I think he is a bit loopy about his economic cycle idea of 200 years. It's those long term bond yields that seem to be the only area of proof for potential deflation among traders now. And to think that deflation will destroy everything like Prechter seems to be hinting at, I don't buy that. It's just the changes to the nation-state system I fear.
"I could just imagine the sort of problems there with the risks spread in less and less places, and having gargantuan bureacuracies making even poorer decisions economically speaking."
Yeah, I think you're right. Our road to salvation is less, not more, bureaucracy that will drive off the cliff in lockstep. There will be less and less flexibility in the systems. Picture big ships trying to turn on small ponds.
Digger,
If you think a 2 bedroom fixer upper with no land is worth 1 million dollars, simple because its in California, then frankly I'm not suprised that you don't understand the problem.
People aren't looking at the sale price, they are looking at the payment, which is artificially low due to the ridiculous rate at which we are increasing the money supply.
Now what happens when you 400,000.00 on a house, but suddenly no one can afford a 400,000.00 house payment?
This is particularly bad when you consider that so many people out there are now on ARMS. I don't know if you realize this, but it's estimated that 40% of the mortgages today are ARMs.
Ya know whats gonna happen to those folks when the interest rates finally go back up to normal (8-10%) levels? Think prison rape.
If you think a 2 bedroom fixer upper with no land is worth 1 million dollars, simple because its in California, then frankly I'm not suprised that you don't understand the problem.
Uh, Nate, you might want to do a quick "what was I thinking!" on this one. Any house, any where, might well be worth 1 million to the right person.
Your point about ARM's is correct, anyone that takes out an ARM and keeps the house for more than 3 years, 5 at the outside, is just giving away money.
"Any house, any where, might well be worth 1 million to the right person."
That's not a one shot example of an idiot blowing money dude. That's what they go for in the more "desirable" towns and suburbs in CA. That's the average for a tiny, piece-of-shit house.
I pretty much see it this way Nate, foolish people make foolish choices. Californians are famous for that very activity. I also don't buy the 8%-10% interest rates are the norm. 6%-8% is a much more equitable rate range. as a matter of fact until 1974 they never rose above the 8% mark. What the bankers got used to as far as crazy high rates is the bankers problem.
Don't get me wrong I'm sure that we will see the Carter legacy rates again. I am old enough to remember what people went through from the last year of that morons term until 1984. As I recall Greenspan kept the rates high through the last 4 years of Regans terms in order to "combat" inflation.
It really seems amazing to me that an amazingly bad 12 year period can suddenly make rediculously high interest rates the "norm".
Nate, I'm with Wes. Your advice is applicable to so many areas of life, but I had never thought of it in the financial arena. The only other thing I would throw in there is to hoard your ammo, but maybe that's just me.
That's not a one shot example of an idiot blowing money dude.
Nate, you're overlooking a fundamental economic truth; something is worth whatever someone is willing to pay for it. We see the exact same thing in DeeCee, people spend a million, or more, for a crappy row-home and are thrilled about it. We see the same thing in Noo Yawk, heck, even North Jersey has the same thing happening. In down-town Philly people pay a million bucks for a freaking condo. For them, having different values than us, being 10 minutes away from a job paying $200,000 is worth a million bucks (as opposed to commuting an hour each way or basing their life on something other than the size of their paycheck). BTW, you're absolutely correct about people looking only at the monthly payment, not the total cost. But, so what? It's how things work in a free market, and I think a stronger argument could be made that the monthly cost is what really matters anyway.
Doh! I rambled on for a solid paragraph and somehow never got around to making my point.
Since the homes in these "over-priced" areas really are worth A LOT of money, at least to some people, and since we know the market factors affecting their decisions, the real estate bubble can be unwound. It's still not gonna be pleasant, and IMHO, the folks at Fannie Mae and Freddie Mac should be lead out of their offices in cuffs with their coats over there heads (http://www.washtimes.com/business/20030609-
114506-2286r.htm). What needs to happen is that mortgage companies need to tighten up the requirements for these monster loans, that will put soft but firm downward pressure on home prices, and start a slow unspooling of the market.
"Bubble, bubble, toil and trouble.."
Oops, the link I supplied above should be;
Freddie Mac fires president over audit
“I bought my place in 1984 at about $4000 less than the original owners paid for it. It's now worth about 4 1/2 times what I paid for it and I assume it's over valued,”
But is it really? A little exercise I like to do is compare your base year value in 1984 against the official economic index for inflation. I don’t mean to turn this into a math lesson but you can get the official numbers here: http://www1.jsc.nasa.gov/bu2/inf...u2/
inflate.html
And do the calculations your self,
OR a much faster method can be found here:
http://www.westegg.com/inflation/
So lets say you paid $50,000 in 1984 and its worth $225,000 now. What cost $50000 in 1984 would cost $92548.59 in 2005, indexed for inflation only. 41% of your so-called value is strictly due to the inflation of the dollar. Without knowing anything about where you live or market demand for your neighborhood I can’t guess at the real value of your home other than to say you would have to sell it for at least $100,000 to break even after paying commissions and expenses, in terms of 1984 dollars.
When you talk about buying gold, do you mean buying coins and keeping them somewhere?
Also, I like the idea of a 6 month supply of food but I live in a 1 bedroom apt. While I could maybe find space for the food, where would I store water? We're just out of college and can't afford a house, let alone one with some land so we can have a large garden. Any suggestions, other than moving to a (much) cheaper city?
", indexed for inflation only. 41% of your so-called value is strictly due to the inflation of the dollar"
This is true. But my main point was that it could fall in value by quite a bit and I'd still be paying about half of what rents are going for now in my area. Rarity is what's making California real estate go up. That problem will only be solved if people want to move somewhere else. Until that time I can't lose... and even if I start to lose my value would have to be cut in half to show any real decline in value.
I like the idea of a 6 month supply of food but I live in a 1 bedroom apt. While I could maybe find space for the food, where would I store water?
There's just two of you? If you have access to your hot water tank, and it's not a communal "on-demand" system, you should have plenty of water. You need about a quart per day per person for bare living, a little more if your food is mostly dehydrated. For emergancy use, keep one of those pump type water filters (generally $60-$70) around and a large sheet of plastic (to catch rainwater) and some jugs (anything, old soda bottles, etc) to keep collected water. In most of the US there is enough rainfall, except in mid-summer, to provide plenty of water provided you have about a two-three week supply to start with. If power goes out, you should still have water pressure for about a day or so since nearly every water system is gravity feed, so you should have time to fill jugs if you get right on it.
"Nate, you're overlooking a fundamental economic truth; something is worth whatever someone is willing to pay for it. "
No sir, you are over-lookin' the fact that people aren't concerned with houe much the house costs. They are only conserned with the payment, which is artificially low, due to insane interest-rates, and evil ARMs.
If you think ARMs are bad, then take a look at no interest loans. Whoever thought of those should be horsewhipped in the public square.
Good grief! Not "no interest" but "interest only" loans.
I sentence myself to 30 lashes with a wet noodle for gross lack of editing.
you are over-lookin' the fact that people aren't concerned with houe much the house costs. They are only conserned with the payment,
I got it. I'm not sure you get it. Lemme 'splain. Many many people don't care how much the house costs, cause they ain't buying it. They consider themselves as renting it from the bank. All they want to do is live somewhere they can walk to work, walk to a bar, walk to a movie, etc etc. It's all about the location, they ain't thinking of it as buying a house, so they don't care about how much the house costs, or their interest rates, etc. It's a renters mentality.
Actually Papa I blogged on credit-card payment type loans a while back...
and dammit Bill... What happens to those "renters" when they try to sell they try to sell that house and realize that it ain't worth what they owe it?
Choose your words carefully... and consider that the average homeowner trades houses every 7 years now.
My guess is unless there is a catastrophic rise in interest rates those folks will simply take a bath or keep the overpriced property. And you REALLY need to stop lookin' at our interest rates as insanely low. They are really not that out of line. You children of the 80's arewacked out about what is a reasonable amount to pay for a loan.
Nate, put on your cynical hat for a minute and think about it from a yuppie perspective - they ain't stupid, they just think about it differently than you do. They don't really want the house. They just want to live there. Since they know they're gonna move in 5 years, and with a conventional loan it will cost them Serious Money to stay for only 5 years given that it's all interest payments anyway, why not structure the loan for the lowest possible payment. The cash outlay is the same regardless of what the property does, unless it goes up in price, in which case you make out. But, in the meantime, you get the time value of money. It's just a balloon payment, with your option to pay or not and all your cash is not stupidly tied up in a house worth less than you owe.
If you're buying what you know is overpriced property with a volatile price that could go up or down, and you really don't want the house, what do you do?
Structure the loan to push the risk onto the bank. Absolute worst case, you go Chapter 7, which you would anyway even with a conventional loan, or, if you either are or have a good lawyer you might be able to get the bank to take the property and you walk. Presto! You just lived there for less than what it would cost to rent in the same area, and you get a bigger place.
Keep in mind how much principal you pay in the first 5 years on a 30 year note anyway, this is a pretty key point.
I found an on-line calculator.
Assumptions;
6.5% mortgage
$500,000 property
30 year note
Interest Only Payment: $2,708
Fully Amortized Payment: $3,160
Monthly Savings: $452
After 5 years you still owe $468,079
You've paid off 31,921 of principal.
Over those same five years, you could have saved $27,120 by making interest only payments. For a grand total delta of $4801, which is what it cost you, over five years, to push more risk onto the bank. Assuming the property stays the same value, it will cost you $30,000 just in Realtor fees to sell it.
So, you have about the same cash outlay whether or not you take the big risk, or the bank takes the big risk. And in the meantime, you get to hang onto your 30k. Make sense?
Bill,
Of course it makes since, until you get fired... or until you try to sell the house and can't. Or until enough people start filing chapter 7 (government making it easier)that the whole kit and kaboodle falls to hell... which is exactly what I'm predicting.
F'ing blogger!!!
Of course it makes since, until you get fired... or until you try to sell the house and can't. Or until enough people start filing chapter 7 (government making it easier)that the whole kit and kaboodle falls to hell
I'm thinking not, in both cases. Oh, BTW, the new government regs make it much more difficult to go Chapter 7, they pretty much force you to go Chapter 13, so obviously someone is thinking about this.
Regarding individuals;
They're going to get spanked financially, but not too much more than if they'd just been renting, they're out their money regardless. I could see local collapses, as we've seen in Texas and other places that have bubbled. But even in the bad spots it’s generally it's not totally catastrophic to the people involved. In this case, they'll make out better that the people in Texas because the banks have assumed most of the risk.
Banking trouble;
The banks will do OK, not great, but OK. Keep in mind that they've been making incredible profits during this entire bubble, I just hope they've put some aside for a rainy decade. Worst case, the banks will assume ownership of a bunch of homes and will try to sell them, thus possibly modestly depressing the market. The good news is that the banks won’t be under immediate pressure to dump the properties, and the banks have extremely strong incentives to not dump the properties at fire sale prices. Plus, the feds would do ANYTHING, including calling out the National Guard to hold a gun to bank president's heads, to avoid cascading cross defaults.
The trick is going to be unwinding the market without totally tanking it. So far the plan seems to be to make mortgages more difficult to get, and more difficult to get out of. Sounds like a sound plan to me.
About what time do you usually put up the ATF Nate?
Bill,
My guess is that the banks won’t much care if homeowners go belly up. Only a minority of banks hold a large part of their mortgage portfolio in house. Most sell Freddie Mac or flat out write Fannie or FHA paper. The risk is transferred back to the agency underwriting the loan. Now the fact that all three of those groups are and have been struggling for the last 3 to 4 years, and hiding their financial reports in a way that the Enron crowd would be proud of, is another matter altogether.
Res, I just took a look at the Freddie Mac and Fannie Mae charts for the first time on my charting program, the reckoning has just begun... They look so sweet for a Short I'm going to play them soon. I think I'll have to put a post up about them. How much of the US mortgage market are they responsible for?
JamieR,
A big chunk I'd have to research the precentage but its over 60% of conforming lending.
I'll try to find some stats for you.
Freddie Mac monthly volume stats here:
http://www.freddiemac.com/invest...vestors/volsum/
Fannie May stats:
http://www.fanniemae.com/ir/
mont...Monthly+Summary
I believe FHA is 100% sold into MBS bundles and bought on wall street. The individual investors would hold the risk for those packs. The company that services them would potentially have some downside risk as well.
From the folks at PMI:
Overall mortgage origination volume: $1.7 to $2.3 trillion
Purchase mortgage volume: $1.0 to $1.3 trillion, about equal to 2003 purchase mortgage origination volume
Link to ppt:
http://media.corporate-ir.net/
me...2004Outlook.ppt
You’ll need to spread sheet the stats to analyze them since there in PDF it might take awhile. Doing that should have you ready for a Friday beer!
Thanks!
I don't know whether I'll go postal with all those numbers in a post, but very interesting stuff. I didn't even realise that I have the capacity to Short both those stocks, I've already missed out on the first leg down, but the second is starting up. They've both got a LONG way to drop yet. Very early days.
This here on the Fannie Mae link:
"On December 22, 2004 Fannie Mae announced that its previously issued financial statements should not be relied upon in light of the SEC's determination that the financial statements were prepared applying accounting practices that did not comply with generally accepted accounting principles, or GAAP."
Gotta be worried about that!
And too late for me to start on the beers since I'm already half way through my fourth... shit, I invented Friday drink-trading!
JamieR,
We’ve got several other major mortgage originator companies in the US and they will see a down turn also, you might want to explore the industry further.
Gotta be worried about that!
Heck, did you catch the link I posted earlier?
http://www.washtimes.com/busines...iness/20030609-
114506-2286r.htm
There's a good dozen stories just like this that I've read over the past year.
Dang it! I don't know why the space creeps in there!
One mo time.
http://www.washtimes.com/busines...14506-
2286r.htm
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