It’s time to sit back, relax and enjoy a little joe …
Welcome to another rousing edition of Black Coffee, your off-beat weekly round-up of what’s been going on in the world of money and personal finance.
Another awesome summer week is behind us, with fall right around the corner. Are you excited? I know I am!
Okay, away we go …
“Blessed are the young, for they shall inherit the National Debt.”
— Herbert Hoover
“A billion here, a billion there; sooner or later it adds up to real money.”
— Everett Dirksen
“You can ignore reality, but you cannot ignore the consequences of ignoring reality.”
— Ayn Rand
Credits and Debits
Debit: In 2010, the Bank of Japan held no exchange traded funds (ETFs), which is how it should be. But, thanks to central bank meddling, it’s a different world today: a financial house of mirrors, full of phony wealth and false price signals. The Bank of Japan is one of the biggest offenders too — after buying Japanese ETFs as part of unprecedented economic stimulus, they now own 75% of those funds by market value.
Credit: Here’s a couple of thought experiments: What happens if the BoJ buys 100% of Japan’s ETFs? Or what happens the day they decide, instead of buying those ETFs, to start selling? Hint: Try clicking your heels together three times and then repeat the following: “There’s no place like home.”
Debit: In other news, I see Treasury Secretary, Steven Mnuchin, warned China this week that the US may cut off access to America’s financial system if Beijing doesn’t comply with the United Nations’ restrictions against North Korea. Heh. I can’t figure out if this is misplaced hubris, or just plain stupidity.
Credit: After all, cutting off China’s access to the US financial and dollar-based international monetary systems only serves to hasten the demise of the US dollar’s reserve currency status. And if the dollar loses its reserve currency status, you can bet the impacts won’t go over well with most of America, as it would significantly reduce middle- and lower-class living standards.
Credit: Maybe the Secretary believes that America is dealing from a position of financial strength, considering the Census Bureau reports that inflation-adjusted median household income in America was $59,039 last year; that surpasses the previous high of $58,655 set in 1999. Of course, all that really means is our standard of living has stagnated for almost 20 years — despite $16 trillion in new debt since then.
Credit: Here’s more good news. I think. America’s poverty rate also fell to 12.7% — that’s the lowest since 2007, the year before the financial crisis hit. Too bad the rising income and falling poverty statistics are an illusion, created and maintained through the accumulation of massive debt. For now.
Debit: Speaking of massive debt, David Stockman is warning that America’s constantly ballooning federal budget is a fiscal doomsday machine that’s essentially on autopilot. In fact, Stockman notes that in 2027 the combined cost of mandatory programs and debt service will nearly double to $5 trillion, including a doubling of entitlement spending — even if Congress took a 10-year recess. Think about that.
Debit: I know: but the US economy is big enough to handle the debt. Actually, no … it’s not. America’s debt is growing more than three times faster than its economy. That’s okay as long as the rest of the world continues accepting conjured dollars in exchange for the real goods they produce. Unfortunately, a growing number of countries are tiring of trading their real products for green confetti we print out of thin air.
Debit: Fortunately, America’s credit card has not yet been revoked by the rest of the world. I only say that because, with Congress temporarily suspending the debt ceiling this week, the National Debt surpassed $20 trillion. In fact, the debt increased $318 billion on the very first day the ban was lifted. That is not the sign of an economic powerhouse, folks — it’s the sign of a hopelessly indebted nation on the road to ruin.
Debit: Sadly, too many Americans manage their household finances just like their government. With nearly $940 billion in credit card debt — nearly $8000 per household — consumer revolving debt is now at its highest level since the previous peak nine years ago. Yes, right before the Great Financial Crisis of 2008. The bad news is, unlike the Fed, Americans don’t own a printing press. Er … at least I think they don’t.
Debit: Then again, maybe debt isn’t such a big deal after all because the President and Congress have apparently decided that the country would be better off if they get rid of the debt ceiling law once and for all.
Debit: If that makes the hairs stand up on the back of your neck, it should. David Stockman cleverly describes the US debt ceiling law as a financial safety brake that acts as America’s last line of defense against runaway government spending. In case you’re wondering, it’s a safety brake that has been used “only” 79 times since 1960. Hey … who says politicians can’t control their spending?
Credit: Frankly, you don’t have to be a rocket surgeon to figure out the answer to this question: If America racked up $20 trillion in red ink with the debt ceiling in place for roughly 100 years, then how much faster will the US National Debt increase without one? Place your answer in the comment section below. Oh … and don’t forget to show your work.
Credit: As Peter Schiff notes, the politicians may eventually repeal the debt ceiling law, but our creditors may not care because, with the US dropping even the pretense of self-restraint via a theoretical spending limit, her lenders may decide it’s finally time to cancel America’s national credit card and impose a lending ceiling of their own. That’s when the “fun” really begins.
The Question of the Week
[poll id="181"]
Last Week’s Poll Result
Chocolate, vanilla or strawberry?
- Chocolate (45%)
- Vanilla (41%)
- Strawberry (14%)
More than 1200 people answered this week’s survey question and, as expected, the great majority of them prefer chocolate and vanilla to strawberry, with chocolate holding a slight edge over vanilla. I like all three, which is why I am extremely glad Neapolitan ice cream was invented!
(The Best of) By the Numbers
You may want to think twice before inviting champion eater Matt Stonie to dinner. Here are some of his gastronomical feats:
6 Pounds of bacon he consumed in five minutes. (That’s a world record.)
182 Slices of bacon it takes to make six pounds.
8 Minutes it took Stonie to gobble down a 14.5 pound birthday cake.
101 Number of traditional tacos Matt recently put away during an 8-minute span.
20.8 Pounds of pumpkin pie he devoured in 8 minutes.
10 Minutes it took Stonie to dispatch 24 gyros.
10.5 Pounds of frozen yogurt he swallowed in a 6-minute period.
Source: Major League Eating
Other Useless News
Here are the top — and bottom — five Canadian provinces and territories in terms of the average number of pages viewed per visit here at Len Penzo dot Com over the past 30 days:
1. Manitoba (2.18 pages/visit)
2. Alberta (1.63)
3. British Columbia (1.53)
4. Ontario (1.43)
5. New Brunswick (1.41)
9. Prince Edward Island (1.29)
10. Saskatchewan (1.27)
11. Yukon Territory (1.25)
12. Nunavut (1.20)
13. Northwest Territories (1.00)
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Letters, I Get Letters
Every week I feature the most interesting question or comment — assuming I get one, that is. And folks who are lucky enough to have the only question in the mailbag get their letter highlighted here whether it’s interesting or not! You can reach me at: Len@LenPenzo.com
After reading about RD Blakeslee’s experience working on Ford’s 8N farm tractor assembly line way back in 1949, Barbara R. shared this:
We have a 1949 8N. Her name is Daisybelle!
According to RD, you should sit on Daisybelle carefully — he says he may not have got all the seat bolts tightened. Thanks for sharing the photo!
I’m Len Penzo and I approved this message.
Photo Credit: (coffee) brendan-c
The only way they can double the national debt in the next 8 years is by repealing the debt ceiling! The debt is increasing too fast now to have it any other way!
Have a nice weekend Len!
Sara
Sara, I don’t believe the law makes any difference, one way or the other.
The debt will increase, regardless.
Congress goes through its inevitable charade , raising the ceiling each time it’s reached.
I agree, Sara. We are clearly on the exponential side of the debt curve now. Elimination of the debt ceiling is an inevitable “solution” for extending America’s penchant for living beyond its means a little while longer. We’ve been doing it since the late 1960s, but the move to repeal the debt ceiling is strong evidence the game cannot continue much longer.
That’s a sharp looking tractor. They don’t make ’em like they used to.
David, “Daisybelle” appears to be an extra nice one, but those 8N tractors are still in use everywhere – I could take pictures of several just by driving around the county where I live.
You’re right, they don’t make them like they used to.
A local farm machinery repair business owner tells me Kubota tractors of about the same size rarely enter his shop. most of the other contemporary “estate tractors” (as they call them, these days), do.
My son recently bought a larger size Kubota hurriedly, to get this years model before new EPA-required emission equipment cost an extra TEN THOUSAND DOLLARS!
“Grandfather” will write about other older machinery, later on.
Dave, is that a stock color scheme, or did they come out of the factory in a different color?
That’s stock, Len. Preserving original paint on old farm equipment adds to it’s value.
Remember old Henry’s edict re the Model T?
“You can have any color as long as it’s black”
Re: credit card debt. Credit cards are designed for people who lack self discipline. They’re great though if you are disciplined. I take advantage of the rewards they offer and I earn enough points to pay for a nice hotel suite for a week every year. Other people prefer cash back bonuses and get hundreds of dollars back in cash a year. The trick is to only spend what you can and use the credit card to pay then pay it all off, never carry a balance. The credit card companies are counting on you carrying a balance.
We do the same thing. We either take the rewards money and put it towards Christmas gifts or waste it on the barbarous relics known as Gold and Silver. Wait if they are barbarous relics, why does our Constitution mandate that our monetary system be based on such a thing!? Oh yeah, The Keynesian Communists that run our country say the Constitution is outdated and no longer relevant. I’m afraid we are about to pay for their ignorance.
Our household does the same thing too.
Sometimes I wonder if those in the Fed and Treasury understand that Russia and China have developed new monetary transfer systems to avoid international payments outside the dollar. They’re just waiting for the perfect opportunity to use it. It seems as if Mnuchin is working hard to make it happen.
It seems that way, WA. Frankly, I think the Fed and Treasury understand the end game — which has been going since 2008 — is almost over. I think they also realize that checkmate is just around the corner; surely within the next several years, if not sooner.
I am beginning to believe this is the real reason why the Secretary went to Fort Knox to tell us “the gold is safe!” (Despite the fact that the statement in and of itself really doesn’t prove anything.)
Blessed are the young, for they shall inherit the National Debt.
Blessed are the old, for they won’t.
The National Debt will be paid off when the dollar dies (i.e., with worthless dollars). This has been the plan all along, the only question has been: when?
I think most Americans will live to see the debt paid off in this manner.
Most of our assets are in real estate which produces goods independently of money. Some of our so-called “liquid” assets are now in silver. Re that: Thanks for your expertise, Len.
My pleasure, Dave.
Only two ways this plays out as I see it.
1. World war between the major players, winner takes whatever little is left. Time tested way of dealing with problems like lack of resources, debt, social problems on the home front. This, I’m afraid, is the most likely outcome, and in the not too distant future.
2. The rest of the world simply abandons the US buck and goes to some kind of gold backed currency. Should we happen to have that un-audited 8,000 tons in Fort Knox, we would be able to participate in world trade, though at a more fair (to them) exchange rate. All the things we import will likely cost a lot more, and our standard of living will take a huge hit. Folks dependent on govt checks will still get paid, but it simply won’t buy much. (Exactly what Alan Greenspan told Congress many years ago…”.we can issue payments, but have no control over purchasing power”)
We live in interesting times, Andy!
You are correct about item 1). However, this time, the major powers are armed with nukes. I may be dangerously naive here, but I believe the real threat of mutually assured destruction will make sure this doesn’t happen.
I think some version of 2) is more realistic. However, to put a positive spin on this … This will result in a lot of short term pain, as the entitlement mentality infecting most Americans will be severely tested. However, returning to a new monetary system based on real money (as opposed to debt) will ultimately allow us to rebuild our domestic manufacturing base, and slowly increase living standards again. Eventually, it will once again be possible for a blue-collar dad to provide everything his family needs on a single income.
Hope “2” IS how it works out as well….we are much better set for that way….fairly self sufficient homestead, solar power, stock of precious metals.
I love neapolitan ice cream too. My favorite!
Jill, my favorite is banana ice cream. Especially “Banana Susannah”, which is banana ice cream with chocolate fudge swirls. When I can’t find that, which is usually the case, I’ll buy Ben & Jerry’s Chunky Monkey.
I clicked my heels together 3 times and said there’s no place like home but I can’t figure out what would happen when all of the ETFs are bought by the Bank of Japan. So what WILL happen?
I’m not sure myself, Sam … I was hinting that it certainly should wake more people up to the fact that the current financial system is a complete sham — perhaps enough to kill confidence once and for all. Then again, maybe it won’t and the central banks can simply sell the ETFs between themselves?
Thank you Len for another great Black Coffee. Would you say a bit about what happens to investments in securities (not sure that’s an appropriate name anymore) when the dollar inevitably collapses? Would such things, assuming the companies invested in do not go belly up, still retain their value to the entire market?
Thank you, Steve. Although “securities” can be stocks, bonds, and options, based upon your question, I assume you are referring to the former. In that situation, for two recent examples, one only has to look at stock market performance of Zimbabwe during the hyperinflation of its dollar ten years ago, or the current performance of Venezuela’s stock market today in the presence of its hyperinflating bolivar.
During its hyperinflation period, Zimbabwe’s stock market index was the best performing in the world, and Venezuela’s is among the best performing stock market today. But here’s the catch: “best performing” is in nominal terms — not real terms (i.e., adjusted for the declining purchasing power of their respective currencies). So, stock prices in Zimbabwe in 2010 and Venezuela today were rising, but still losing value due to their rapidly depreciating currencies.
That being said, people were still better off owning shares of quality companies, rather than holding cash because, in essence, cash was losing purchasing power faster than the shares of those good companies. I expect the same thing will occur with US stocks when the dollar implodes. The Dow may rise to 100,000 as the dollar hyperinflates — and Amazon may rise from $1000 a share to $10,000 or higher (in nominal terms) — but those stock prices won’t rise fast enough to offset the falling value of the dollar.
Unlike the dollar, however, the value of those quality stocks will not fall to zero; unlike fiat currencies, stocks are backed by something tangible — a real company that produces real goods and/or services. Eventually, all quality stocks will ultimately be revalued in a new currency.
Of course, the very best assets to hold when a currency dies is gold, silver, farmland and other income producing real estate. Many financial experts also recommend diamonds (although I disagree), as well as fine art and other collectibles.
Debt ceiling impose / repeal –> non issue.
Fed printing money –> non issue.
Spending in excess of reserves –> REAL issue.
If we didn’t spend as much, neither of those first 2 issues would even matter. Yes, you can harp all day about “If we didn’t allow borrowing, spending will stop” and “If money was backed by gold, we wouldn’t be able to spend”, blah, blah, blah. But these don’t address the fundamental reason why we spend into this situation.
Here is the real relevant question is:
What does America want to take off its plate?
Any takers?
What are we ready to give up?
Overseas war machines? SS? Medicare? Welfare? Mortgage interest deduction? Carried Interest? Corporate lobby loopholes? …
And please! Don’t give me phantom revenues like tax cuts will pay for themselves, tax credits will make companies bring their T$s to US, removing regulation will cause explosive growth in small business, giving healthcare to all will make us risk takers and grow the economy like never before ….. I need to see real positive numbers in the “Revenue – Spending” metric … or they don’t exist.