THIS IS MY 141ST BLOG ON UNDERSTANDING MONEY
TOOLS
August, 2018
understandingmoneytools.blogspot.com
This is my 9th blog on a series of America and
the evolution of this country from about 1772 up until today. We have concentrated on wars and the
relationship to debt, economic decisions that have had terrible repercussions
especially to the middle class taxpayer, the build up of personal and corporate
debt, and the costs of hegemony/imperialism. In this blog we will cover finance and economics.
Our blogs are based on pragmatic views; cause and effect,
wars cause debt, and debt kills!
And, more.
We can lay the problems of today mainly on today’s
Americans. We, as a whole, are
complacent, non-caring, and naïve not holding our politicians “strictly” to the
adherence of good policy that will improve the nation, not short term, but long
term.
Perhaps it would be of interest to ask the question, “to
what authority do I speak upon these topics of finance”? Permit me:
- During
my 20 years of corporate business from 1971 until 1992 I held National
Association of Securities Dealer licenses Series 1, 7, 22 and 63. Most investment bankers and brokers
hold only Series 7 and 63.
- I
have held a real estate agents or brokers license in two states for the past 48
years. This for better
understanding of real estate and large project developments.
- I
have been the finance person, and sometimes partner, on very large real estate
and oil and gas projects, including manager of corporate finance and taking one
of the most successful oil and gas companies public, (Energetics, Inc.) with
Rothschild, Inc.
- In
the late 1970s and early 1980s our team of investment bankers and Wall Street
raised $200 million a year for large projects.
- I
was an employee of L. R. Nicholson & Co. in the 1980s a well respected
Denver private equity company.
- I
was Sr. VP. Of Trust Company of America, manager of Corporate Pensions and
investment money.
- I
was on a small team to purchase $100 million in mortgage derivatives for a
wealthy US Family. Henry Kaufman
of the Kaufman Fund paralleled our invest investment to $200 million. I was required to go through Solomon
Bros. mortgage derivative school in New York City for one month before joining
project.
So, here we go.
First, as I have done in each of the previous blogs let’s
re-cap what was covered in the last blog:
- The
time frame in the last blog was from 2009 to present.
- We
witnessed our debt go from approximately $5.7 trillion when Mr.
George W. Bush took office to $10.7 trillion when Mr. Barack Obama took office to $20 trillion when Mr. Donald Trump took office.
George W. Bush took office to $10.7 trillion when Mr. Barack Obama took office to $20 trillion when Mr. Donald Trump took office.
- Mr.
Obama started us on the right track of a better national health care system,
however it was not completed to a required and needed level to help all
Americans.
- Mr.
Trump is a businessman not a politician, so he has alienated many of the older
politicians, even worldwide, who are accustomed to a certain demeanor. He is trying to “clean the swamp” of
the incestuous relations and corruption we have had for the past 30 years and
more in Washington.
- Mr.
Trump has set standards adhering to the agreements with the Untied Nations and
NATO countries for them to pay their far share of costs.
Viewing the buildup of US debt over the past 18 years we saw
a doubling of debt under Bush, a doubling of debt under Obama, what would
happen if we had close to a doubling of debt or even 50% rise (to $30 trillion)
if Mr. Trump was in for a total of 8 years? I am afraid the answer will be “Kaboom!” The only options in this case would be
1) to see if countries around the world would stabilize our dollar and use it
for trade and funding, 2) re-configure our debt and bond obligations if
countries will accept less than what they paid, or 3) default on our bonds and
debt like Greece and other countries have done. In all honesty, we are in such bad shape financially that
there is no amount of new business we could create here to offset growing debt
and interest on our debt.
We need to break this down into segments and make it
understandable. BANKING: Starting after 9/11 our country went
into recession. The way out was to
emphasize real estate and oil/gas development. Banking regulations were loose and money easy to get. Banks lent on assets versus
income. Then, after 2006 the free
markets were too high, defaults came into the picture and corruption was
rampant with buyers, banks and government agencies including “rating agencies”
in relationship to quality. (Fannie Mae, Freddie Mac, Standard and Poor’s and
Moody’s all included).
The government made the banks do “mark to market” for assets
proving up capital requirements. An example would be that a bank had a home on
the books for what the home was purchased for, let’s say $400,000, but with the
downturn in the housing market the home now was worth only $250,000. Banks needed to adjust their books
accordingly and fell well below government capital requirements. Bank failures
and loans called “due and payable” immediately. Enter “The Great Recession” as we have covered in prior
blogs. As mainly the biggest banks
survived they now decided to go from asset based lending to income based
lending. As we sit today, a person
or company could have $5 million in real estate or other hard assets, but if it
is “non-performing” or non-income producing to a certain standard you cannot
borrow money with the asset. I
would say this will bite us in the future worse than asset based lending.
This needs addressing again. As we went from asset based lending to income based lending,
big corporations went to Wall Street banks and pledged their stock and income
to borrow a ton of money at low interest rates issuing bonds (debt). We went from a free market-based
society to a manipulated artificial Keynesian society to prop up the economy and
help the biggest and wealthiest.
Very dangerous. Interest
rates held low too long and the old mainstays of stability given in. One example is we always used the
“quick ratio” or “liquid ratio” tests to quickly analyze a company’s
worth. That ratio was $2 in assets
for every $1 in liabilities. Within the last 10 years and all the borrowing of new debt
this ratio has gone to a ludicrous $1 in asset for $8 of debt (this excludes
some of the biggest companies like Apple). Corporations used this borrowed money to “buy in” their own
stock more than constructively expand their businesses and manufacturing
capabilities. Banks can only lend
a certain percentage of stock values.
Do you see why banks don’t lend on assets any longer, but income? Corporations now are tremendously in
debt, again exclusive of a few of the top ones.
GOVERNMENT DEBT:
Let’s start with US government debt. There is “on” balance sheet and
“off” balance sheet debt. The debt
we see these days advertised to you and me is $21.25 trillion. In actuality it
is much higher. Here is an
example: when George W. Bush was in office we had our severely wounded military
coming back home for long-term health care. Instead of showing this as an ongoing liability Mr. Bush
took it “off” balance sheet although we are paying for it daily. Other debt we don’t look at is the
long-term estimated obligations for Medicare, Medicaid, pensions and more. We will again go over other pension
money, however to repeat the US Government Employee Pension is currently $6
trillion under-funded. We rob
Peter to pay Paul, or a Ponzi Scheme.
Same goes for Social Security.
Broke within 10 or 15 years.
The government also robs the money from that fund. There are fewer workers with high
paying jobs coming into the market supporting the payments to older generations
of people. Automation coming
on. Robots and machines don’t pay
into Social Security at 14.3%. 2
and 2 not adding up to 4!
I look at our current politicians running for office this
fall and see a totally unrealistic group of candidates, especially the left
wing, socialist side. I, and other people, would love to see some of the
welfare proposals enacted, however they are unrealistic. There is NO MONEY! One example is a healthcare system
based upon Medicare. Wonderful,
except the estimated costs are about $33 trillion. (Wealthy nation?
I have seen estimates of total United States assets around $100 trillion
and total future United States liabilities and obligations at over $100
trillion!)
Let’s touch upon our US Bond debt. To keep us afloat several countries buy our bonds. Up until recently the 4 biggest holders
of our bonds are China with over $1 trillion, Japan, Russia and Saudi
Arabia. This year since we placed
sanctions on Russia they have sold hundreds of billions of our bonds into the
market place. You don’t hear this
but other countries have come to our rescue. This normally would lower our dollar substantially, but to
prop it up countries like Japan have stepped in to buy our dollar. If our debt continues, and our growth
lags, our dollar will drop, and countries won’t come to our rescue.
As you know, the Federal Reserve has been raising interest
rates using the excuse of inflation.
Right now, short-term rates have risen faster than long-term rates and
meeting on a curve. This is called an “inversion curve” and it normally
precedes a recession. In a
recession like “The Great Recession” we lowered interest rates close to zero
(some countries like Switzerland went negative rates meaning you paid the
country money to hold money or buy their bonds). I believe we are raising rates to give us a cushion for the
next recession when we need to lower interest rates. (We have gone far longer
than the historical time frame between recessions and we are due for one.)
The US Government has the ability to print money and tax
people. Taxes work inversely to growth, and at some point printing of money
will catch up to us as other countries will not support the US dollar and it
will go into a tailspin.
State, county, city and local governing bodies also have
financial problems, as illustrated all to well with Illinois, Chicago, and the
state of Connecticut. Many are
broke and their pensions greatly under-funded with no realistic way out.
CORPORATE PENSION DEBT: Ponzi Scheme 2!
Corporations have not funded their pensions and taken out their portion
of obligated money. The employees
money paid in, including 401K money, should be protected, however do you think
you will ever see the money promised to you from your corporation,
doubtful. (In today’s news it
stated that our top management people were compensated 312 times the average
worker’s pay. So sad, we are so
greedy at the top and this inequality is bound to catch up to us.)
PERSOANL DEBT:
“Buy anything, no money or little money down”. This is part of the manipulated Keynesian economics we have
held to over the past 10 years to create an artificial economy. The first to falter, and already are,
are unsecured debts like credit cards and school loans. Each of these is now well over $1
trillion. (Credit card debt per individual averaged $16, 061 in 2017 according
to personal finance company Nerd Wallet.)
Next would come car loans.
The security of the loan is the car, however it could have been bought
with almost nothing down or very little. Currently, there is over $1.25
trillion in auto loan debt.
Last would be home loans.
The lending policies have returned to make our economy look better with
very little money down to purchase.
“No skin in the game, walk away!”
In our next blog on America we will continue with finance
covering stocks, bonds, currencies and gold.
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