July 4th, 2010 Update- Truth in What Happened and What will happen.

Marc's Notes:

Free show update: Should you stop paying your Home Mortgage" Show 86 is now free for download under the FREE SHOW tab on the right side menu bar. This was one of my most popular shows so now you can have it free.

On this special day, I bring you truth and explanations. I wish all of you a great 4th.

Today we seek to detail what has happened and what will transpire in the days and weeks to follow.

The great transfer of private debt to public debt sails on. With a world awash in debt in 2007, private entities from banks to homeowners to businesses find they cannot service the massive amount of owed money and nature demanded payment or default. Too much debt cannot be paid back and the world economies start the great deleveraging process. Nature demands payment and the markets start to deleverage by either default (not paying) or discounting (selling assets at a discount). This process is the markets way of clearing out the rot and making way for new growth. Deleveraging on this scale will cause massive economic pain, with unemployment, defaults, bankruptcies and human suffering. Unfortunate but necessary because of the mistakes made in the last 3 decades or more.
World governments refuse to allow this necessary cleansing because of the misery it will cause so they transfer all private debt to the public through bailouts, mortgage reductions, free money to the banks and every sort of program they can think of.
2008 and 2009 mark the largest transfer of private debt to the public. Private entitles are relieved of their debt by governments use of taxpayer money, putting the rest of us on the hook for others mistakes. Simply put, private debt is transferred to the public: you and I.

Massive deficits are amassed to try and deleverage this debt by transferring it to us.
Accounting rules are also changed to allow banks to overstate their assets- “mark to market accounting” is replaced by Enron style “mark to make believe”. The banks immediate mark up their assets to show massive profits and start paying themselves bonuses again as the rest of us suffer from their past economic transgressions.

The debt has not gone away however! It has only been transferred to the public. It is still there! And now we have more debt to boot. Governments everywhere print money like mad, causing markets to rally temporarily into 2010. The debt now has traveled upstream to entire countries. More deficits are created to try and stave off these entire country defaults.
But the debt is still there! Deleveraging has not been allowed.

In late spring 2010 (now), the bailout money is spent. Very little debt has been reduced, only transferred to the taxpayer. The repudiation of debt is still necessary and since it must happen, it will. Economic figures start to show the fallacy in the bailouts and markets start to deteriorate as investors realize the fix has not fixed anything, only prolonged the inevitable but also amassed even more debt in the process. Now the resulting deleveraging will be that much worse.

Many listeners comment that my “fix” of letting everything clear is cold and not compassionate. There is nothing farther from the truth. I just realize that by the governments trying to “fix” a natural force of debt repudiation, they will only make things worse and make it worse for so many more in the end. When banks, and people and governments spend money foolishly, there is a penalty to pay. Like life, make a bad decision, and suffer the consequences. By the Federal Reserve trying to stave off a dotcom crash and further massive social spending, they drop interest rates to low levels, unnatural levels. These low levels of interest make money too cheap, at a time when money should have been expensive. After all, when the dotcom bubble burst, the investing environment became very risky. When risk rises, so should interest rates, because when investors are nervous, they tend to want to hold on to their money, or demand more interest for lending it. But the Federal Reserve lowered rates, the exact opposite of what they should have done. This artificial cost of money, now being too low, entices people to borrow money they shouldn’t have. Then they speculate with it, on houses, on new cars, on more credit cards. This causes new bubbles, like housing, and do so with out ever curing the last bubble. In essence, they create bubble after bubble, all with more and more debt, until finally the debt can no longer be serviced as massive debt requires massive interest payments. This debt can no longer be paid for with private money, there is simply not enough of it. The governments are then forced to just “create” more money to pay off all this debt. Bu this created money is really just more debt. So the debt alligator just gets bigger and hungrier and becomes an even greater burden on society until a point is reached where society is no longer able to feed him and he devours everything.

Our Federal Reserve thinks that depressions and recessions are cured by amassing more debt and spending it, but like an addict, more of the drug may alleviate the symptoms for a while, but then they return with a vengeance, requiring even more of the drug to alleviate the symptoms again. If you look at the amounts of money now being spent, you realize this is just like the drug addict. The amounts now are getting ridiculous and it can’t continue. There isn’t enough money in the world to pay this all off (it wont be enough) but the FEDS think they can continue to administer higher amounts of it, thinking they just didn’t spend enough the first ten times. Do you see the fallacy in this thinking?
The example of the drug addict is EXACTLY the best way for you to visualize the problem. Money (aka debt) IS the problem, and administering more of it won’t solve the problem. The solution is to PAY OFF DEBT, not make more of it.

In defense of the misery to come, keep in mind that during the 1930’s, charitable donations from individuals actually reached record levels, so those with money can and do help when things get bad. It may not be all that is needed, but it does help. The difference is when the private sector (you and I) donate money, we donate earned money, but when the government does it, it is just more debt.

What will follow is more negative news as the world again starts to deleverage. That will prompt the government to again try and “fix” the problem with ….more debt.

Since interest rates are now close to zero, and since they tried to pull back on their spending programs, they will again try and reinstate many of these programs yet again, amassing more debt. You may see the symptoms ease once again and markets start to rise again if and when they announce more bailouts and programs, but by now you know it will only be temporary. When THAT spending runs out, we will again find ourselves right where we are now, right where we were in 2008, only with even MORE DEBT.

It’s a vicious cycle and will continue as these guys just don’t get it. The end result will be the “crack up boom” foretold by Ludwig Von Mises, 20th century economist. Read about it here. (Link).http://mises.org/daily/4016

The governments will continue to create more money through a variety of programs and what they call “quantitative easing”. Read about it here (Link) http://faculty.chicagobooth.edu/john.cochrane/research/Papers/fiscal2.htm    and pay close attention to the paragraphs entitled “end game”.

For now, look at the increasing bad news on housing, unemployment, and other economic fundamentals that will deteriorate. The market will follow this negative news with a downward bias. Then look for a new plethora of explanations and remedies from Washington, all which will cause them to reinstate past programs and initiate new ones. Look for more unemployment extensions, more jobs programs, new bank programs and perhaps more aggressive programs to get money directly into the hands of the public.
More money will be spend, all through the accumulation of more debt, but just like now, temporary rallies will falter as each new money injection wears off.

You will see inflation creeping in slowly. Sandwiches will continue to rise in price, food will likely creep up, coffee, medical costs, college tuitions-everything will slowly creep up. In the midst of this, look for more “for lease” signs, emptier restaurants, falling hotel rates and airline fares, service industries will suffer, contractors and builders will see their business slow once again. Those of you with cash will see great buys on vacations, cars, and other discretionary items. Those on the fringe will find themselves slowly slipping even farther into the abyss. Dismal? Unfortunately yes, but don’t shoot the messenger.
This was and will be brought upon you by failed economic beliefs of the economists and policy makers in Washington. The underclass will clamor for even more to be done to try and “fix” things, as many are uneducated in the way money works. Read about it here in the piece “The Deliberate Dumbing Down of America” (link).http://www.deliberatedumbingdown.com/pages/book.htm

There will be and must be survivors so we can help America recovery and it will take those with money to accomplish this. This is why you and I and everyone we can educate must hold onto your money. Don’t let them take it from you, or we will all join the food lines. Defend yourself and don’t lose hope. The times ahead will be the most trying of your life. You will see unbelievable machinations unfolding, and the US CONSTITUTION will be trashed (as it already has been) and your rights will be slowly taken from you under the guise of “for the good of the system”. The economically ignorant will demand you “pay your fair share”. The wealthy and those who have worked hard for their future will be villanized as capitalistic pigs. Much like Nazi Germany, you will see more government intervention then you would have thought possible. The poor will revolt and officials will tremble at the sight of pitchforks. But all this now must happen to awaken the great spirit of the free man. It is too late to turn the tides I fear. The amounts are now too great, the momentum towards socialism too powerful. But I have hope the free man will prevail again. It is always the same. So explained by Alexander Tyler, a Scottish history professor at the University of Edinburgh, who had this to say about the fall of the Athenian Republic some 2,000 years earlier:
“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government.”
“A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury.”
“From that moment on, the majority always vote for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.”
“The average age of the world’s greatest civilizations from the beginning of history, has been about 200 years.”
“During those 200 years, those nations always progressed through the following sequence:
1.    From bondage to spiritual faith;
2. From spiritual faith to great courage;
3. From courage to liberty;
4. From liberty to abundance;
5. From abundance to complacency;
6. From complacency to apathy;
7. From apathy to dependence;
8. From dependence back into bondage”

I only hope my children will witness the first one again when they grow into adulthood.

Keep the faith, educate yourself and everyone you know. Copy the Money Matters shows and give them away. Have more people read these newsletters, and talk with your family, friends and neighbors about how we can help. Be compassionate but not foolish with your money. Don’t believe what comes out of Washington and instead read the signs all around you. Look for truth. It is out there and will always prevail.

Marc