Financial topics

[VinceP1974]

John and Higginbotham,

Much has been posted about the FDIC and funds held at an FDIC insured institution but do you consider NCUA insured funds held in large credit unions equally secure? In a financial collapse how do you think things would play out for credit unions in general?


Tom

I think the FDIC is one giant Moral Hazard.

I grew up hearing about all these great institutions established as a consequence of the Depression.

What good are any of them today? They are worthless. It wasn't the Govt that kept economic stability from the 1940s to the 1970s.. it was the people who went through the crisis.

Now all of their Anti-Constitutional scaffolding they erected is now collapsing from its own weight and will pull the government down with it.

[jwfid]

It depends on how deep the crisis gets. Probably the key question is whether the federal government can stay solvent enough to "bail out" the depositors. If they can't, or you don't think they can or aren't sure, one thing that might help would be to get creative and think like the people in charge might under these circumstances. For example, if things get sticky, a decision might be made to pay off the depositors with 30 year Treasury bonds. Or they might pay the depositors off with IOU's and make statements to the effect that people will get their money over time as things get better. And they might. I think all the while the news will be blaring that the government is keeping their committments to depositors and everything is on a sound footing. Just one scenario to think about. That seems to be their MO. If you get a bond or an IOU, it might pay a certain percentage of principal each year so you get a little money. I think even when the Soviet Union collapsed the pensioners got a little money from the government. That might be another thing to check into to get some ideas.

Higginbotham,

Thanks. I hadn't thought that they would do something creative like you mentioned. One thing is for sure; they will be very creative. Everything that has taken place so far in this crisis has surprised me. The California IOU's, the suspension of mark-to-market, the results from the bank stress tests, the PR campaign by the administration this time last year, ect. ect.

Joe

[MisterB]

Safety and liquidity of funds: First of all there is a difference between a long run safety of principal and immediate liquidity. Your example for gold is a good example. Giving human history, gold will retain considerable value but in an emergency you may not be able to turn it into paper currency. If we have a complete breakdown, paper currency should be the king and gold buyers will demand a huge discount in buying your gold.

Argentina provides some guidelines. The government put strict limits in how much currency a person could take out of banks per day. This WOULD happen in a complete breakdown. In the most basic way, there would not be enough physical currency if a huge amount of people demanded currency from banks. It is a good point that “cashing out” US Treasury bills would result in electronic dollars credited to a bank type of account. I don’t believe that it is possible to obtain currency from the US government in exchange for T Bills. So with T Bills one would still be limited by the allowed level of bank deposit withdrawals. Having said all that, in a crisis the government may well protect ITS OWN source of funds first and make payments on its debts but provide a “work out” freeze plan on FDIC accounts.

About currency: In foreign countries I understand that they like $50 and $100 bills, but in the US the main currency used is the $20 bill. Every ATM that I have ever used gives you $20s only. If you save money in $50s or $100s they may have acceptability problems in a crisis. A big advantage with currency is that for most people with regular bank accounts is that there are ZERO transaction costs.

Gold: I believe that you should hold 1 OZ US Gold Eagles as these have the most credibility in the marketplace. If things went to hell, the average black market trader would have great doubt in believing the credibility of a gold bar etc. Gold coins have a significant disadvantage to currency in that in the best of times one still would face a minimum 5% in and out transaction cost. IMO, one of the main advantages of gold is that there in a large value in small physical form. One pound of gold has a value of over $16,000. Gold takes up less room than $20 bills of equivalent value. (The problem that I have with silver is that a pound of silver has a value of about $250 and that gives one storage issues.) As mentioned gold is riskier than currency and you could lose 50% due to market declines.

In the ultimate crisis gold may be better. Historically, in other countries NEW currency is printed and people are forced to convert old currency for new at devalued rates. In some cases people were only allowed to convert a limited amount of old currency for the new. Of course, in such a situation there would also be a forced exchange of gold for new currency and after that gold ownership would be illegal again – which of course happened in the US. Old currency would have NO value, but gold would continue to have value in a black market.

$20 US currency should be the fundamental “security blanket” savings with gold as a complementary element savings.

[OLD1953]

Been absent a while, my father died and I had to fly back to the states for the funeral, then stayed a while as I had some time off coming up about a week after I'd have gotten back. I am an expat, pays better and as long as the tax breaks hold up I get to keep more of it.

I can't feel too badly about my fathers death, Alzheimers had pretty well taken him down several years ago. It wasn't pretty, and near the end he forgot about being hungry. You can't get much worse than that. I'm sorry he went that way, I'm sure he'd have preferred to have died before he got in such a shape.

And that's why I've not had much to say recently. So a bit of rambling today.

In ultimate financial extremity, I'd prefer having potatoes to gold. So would anyone else if there aren't enough potatoes to go around. Gold is pretty, but food is much more necessary. If you read the histories of WWII and how the Russians in the cities survived, you figure out pretty quickly that a LOT of wealth got spread to the peasents when the food started running short.

The idea that a gold standard or a silver standard or any other standard will "make governments honest" is a myth. Nothing will make a government or a bank honest if it doesn't want to be honest. And the "gold" Roman coins of the later era have so much iron in them they can tarnish.

The idea of "good money driving out bad money" just means you spend what inflates fastest, and keep what doesn't. With deflation, people don't take on debt. With inflation, people do take on debt. Same song, different dancers. If Treasuries were acceptable as currency, then we'd have some interesting times.

Which makes one think of "smart" money. Would the public go for chip embedded money if those chips recorded how long you kept your cash, and paid you interest for the length of time it took you to spend it? OFC, since the govt wants a higher velocity of money, would they pay more if you spent it quicker?

Read a bit on that prescription drug subsidy write down John was talking about yesterday. I'll have to admit, I don't understand how you can justify extending the value of a subsidy out thirty years then taking it all as a single quarter write down, which was what some articles were claiming. Very odd way to do things, I've never heard of any subsidy that lasted for 30 years without change, it makes no sense. That smacks of some kind of tax evasion to me - though I'll admit I do not understand the rules by which corporations and governments are allowed to keep (molest? enslave?) books. They certainly are not the same as the rules I have to live by. Or is the AP making stuff up?

I'm still horribly jet lagged, so I hope the above makes some kind of sense.

[wvbill]

Been absent a while, my father died and I had to fly back to the states for the funeral, then stayed a while as I had some time off coming up about a week after I'd have gotten back...

Sorry for your loss... Glad to see you posting again...

Bill

[thomasglee]

Been absent a while, my father died and I had to fly back to the states for the funeral, then stayed a while as I had some time off coming up about a week after I'd have gotten back. I am an expat, pays better and as long as the tax breaks hold up I get to keep more of it.

Sorry for your loss.

May I ask, where are you an expat? I'm considering moving overseas myself. I've lived overseas before (Asia) and am considering moving to Korea on a D8 Visa, which is an investors visa. I already have an office there, but I run my company from the USA. If I move there, I won't have to pay SS, FICA, etc., and it sure would save me a LOT of money as in Korea I would pay much, much less.

[John]

Those who are still debating whether the economy is headed for
deflation or (hyper-)inflation may find the following article from
last September useful:

Arguments for Deflation: Unemployment, Debt and Deleveraging, the
Pension Crisis, Collapse of the Shadow Banking System, and Interest on
Reserves
http://www.washingtonsblog.com/2009/09/best-recent-arguments-for-deflation.html

It's a fairly comprehensive list of all the signs pointing to
deflation at the time, and the reasons haven't changed much since
then.

I've never seen a similar list of reasons for (hyper-)inflation,
because such a list doesn't exist.

The only reason that's ever given is: "We MUST have inflation, because
we're printing money, and so we're like the Weimar Republic."

But as I started pointing out in 2003, if that argument is valid, then
we should have started seeing rampant inflation in 2002, when the
effective prime rate fell close to zero.

In fact, the prime rate has been effectively zero (and sometimes
negative) for most of the last decade, and we've had massive
quantitative easing and stimulus programs in the last couple of years.
If the "We MUST have inflation" argument were true, then we should be
having a 20% inflation rate by now.

But we don't. We still have a near-zero CPI, and all the major trends
(as listed in the article referenced above) are pointing to deflation.

John

[ridgel]

John, here's a detailed argument for hyperinflation by John Williams, a respected PhD economist that worked advising industry for many years. He now produces a set of alternative measures of unemployment, inflation, and GDP growth, largely using current BLS raw data, but calculated using older formulas. The official formulas to calculate unemployment and inflation have changed several times since 1980, always in the direction of showing lower unemployment and lower inflation. His site has a thorough explanation.

http://www.shadowstats.com/article/hyperinflation

The United States has experienced two bouts of hyperinflation, where the underlying currency became worthless. The first the paper currency issued at the time of the Revolutionary war. The second was the paper currency issued by the South during the Civil war. The paper currency in the North wasn't far behind, although it was eventually redeemed many years later.

The United States has experience one run of deflation, in the 1930s. During that time the domestic currency was unlinked from the gold standard, however, International Trade remained in gold.

[thomasglee]

John, here's a detailed argument for hyperinflation by John Williams, a respected PhD economist that worked advising industry for many years. He now produces a set of alternative measures of unemployment, inflation, and GDP growth, largely using current BLS raw data, but calculated using older formulas. The official formulas to calculate unemployment and inflation have changed several times since 1980, always in the direction of showing lower unemployment and lower inflation. His site has a thorough explanation.

http://www.shadowstats.com/article/hyperinflation

The United States has experienced two bouts of hyperinflation, where the underlying currency became worthless. The first the paper currency issued at the time of the Revolutionary war. The second was the paper currency issued by the South during the Civil war. The paper currency in the North wasn't far behind, although it was eventually redeemed many years later.

The United States has experience one run of deflation, in the 1930s. During that time the domestic currency was unlinked from the gold standard, however, International Trade remained in gold.

Is it possible we will see inflation in some areas of the economy and deflation in others? I'm not an economist and that may sound like a stupid question, but I had to ask it. I see prices steadily increasing in certain areas, but decreasing in others.

[ridgel]

"Is it possible we will see inflation in some areas of the economy and deflation in others?"

In my experience, that's mostly what we have seen. Anything driven by Moore's law continues to fall in price. Anything that competes with Chinese imports has fallen in price so far, although that may change direction as Chinese domestic inflation heats up and if the revalue their currency. Anything that has transitioned from union labor to illegal immigrant labor, like meat/poultry or construction has fallen in price. Commodities have risen as worldwide demand has risen. Medical and Eduction have effective barriers to entry and have been largely protected from foreign competition so far - and their prices have soared 10-15% per year for the last decade. Government has similar protections and nearly the same price (tax) increases.

So overall, CPI has risen fairly slowly over the last decade. But except for tech, the items on the falling price side of the ledger depend upon the dollar being accepted by foreigners. If the dollar fell in value, it's a given that import prices would increase and inflation would increase. The Federal government is borrowing $200 to $300 billion a month - that's almost $1000 dollars per month per American citizen. The federal government is borrowing more than the typical families mortgage payment. Will the politicians lower spending, or raise taxes enough to balance this? Possible, but unlikely as huge numbers of Americans, from seniors to students to farmers depend on this spending. Will foreigners accept ever growing amounts of dollars in order to subsidize their exporters? Well, they have so far. But if their own inflation heats up, they may decide they have enough and stop. And then the position of the dollar could change very, very quickly.