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.
Let’s get right to it this week …
“In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: ‘If you don’t work you die.'”
— Rudyard Kipling (from The Gods of the Copybook Headings)
Credits and Debits
Debit: Did you see this? Los Angeles County asked homeowners to shelter homeless people in their backyard sheds. Yep. Homeowners can get paid to house the homeless in small sheds in their backyards because voters agreed to pay $1.2 billion in taxes to help with homeless city housing in Los Angeles County back in 2016. Heh. And yet, Los Angeles County officials wonder why their homeless population keeps growing.
Debit: On a related note, a recent Pew study found that, as of 2014 the number of Americans between 18 and 34 who are living with parents surpassed those in other living arrangements for the first time in more than 130 years. Not surprisingly, it also found that young adults in that group without a college degree are more likely to be living with parents, than to be married or cohabiting in their own homes. Imagine that.
Debit: I guess the increase in multi-generational homes probably shouldn’t be a surprise, given that a recent study by a prominent housing-market data-aggregator showed that the average worker can’t afford the median-priced home in 70% of US counties. Obviously, this wouldn’t be a problem if America had more counties offering taxpayer-subsidized backyard sheds.
Debit: Keep in mind that the current lack of housing affordability remains despite the fact that the US banking industry is once again giving loans to anybody who can fog a mirror. Yes, even to this guy:
Debit: Meanwhile, as Zero Hedge notes, “China has signaled an aggressive and potentially more ominous escalation in the developing trade wars to the White House.” How? Well … a macroeconomic consulting firm reported this week that the Chinese government has halted its purchases of US Treasuries. In other words: They cancelled America’s credit card.
Debit: Of course, if true, that’s bad news for the US, which depends on credit from other nations. In fact, Bloomberg notes that, “A mix of tax cuts and spending increases by the Trump administration and Congress leaves the US budget deficit on track to surpass the $1 trillion mark by 2020, two years faster than the CBO previously forecast. And the shortfall is estimated to reach $804 billion this fiscal year.” Uh oh.
Credit: It used to be that US credit was primarily financed by other nations. But Treasury debt has ballooned by $3 trillion since 2014 — with 67% of it supposedly being bought by mutual funds, brokers, dealers, personal trusts, estates, businesses, and “other” investors. Really? As Chris Hamilton notes, “It’s an open and awkward question why. It’s hard to believe this is anything more than state level fraud.” Hmm. Ya think?
Debit: If the US government is cooking the books to hide the fact that it is, in reality, monetizing most of its debt, then the dollar’s demise may be closer than we think.
Debit: Understandably, Bloomberg says nervous investors are now flocking into gold ETFs. Unfortunately, ETFs are paper-based derivatives; so in an actual currency crisis, they’ll fail to offer any protection, which means investors who are moving their cash from stocks and bonds to gold ETFs are jumping from the frying pan into the fire. Remember, folks: If you want gold and silver as insurance — then you must buy the real thing.
Debit: In other news, 15% of S&P 500 companies now have interest expenses that exceed their average 3-year earnings before interest & taxes; that’s the highest level in two decades. As Jesse Felder notes, if rising interest rates force these zombie companies into liquidation, then major economic problems could be on tap, assuming the so-called “wealth effect” proves to be more powerful to the downside than it has been to the upside.
Debit: Frankly, it’s not just stocks that may see more powerful moves to the downside after buyers turn into sellers. As Bill Blain pointed out this week: “Look how European bonds are already anticipating the end of QE — bunds are rising, begging the question: What happens when the QE-unlimited market-liquidity spigot is turned off? Clue: Pain. Lots of it.” Blain is right, if only because fear always trumps greed.
Credit: And finally … Speaking of Europe, in 1660 Sweden’s Riksbank was the first central bank to issue paper currency. Ironically, Sweden is well on its way to becoming the first cashless society. However, the Guardian reports that a small but growing number of Swedes are becoming wary of their nation’s rush to eliminate cash, fearing a loss of control, cyber-attack risks, and the inherent loss of freedom. Huh. Who knew? Perhaps there’s hope after all.
(The Best of) By the Numbers
When it comes to travel delays, here are the five best — and five worst — US hub airports to fly into or out of:
1 Honolulu
2 Portland, OR
3 San Diego
4 Tampa
5 Salt Lake City
26 Philadelphia
27 Chicago (O’Hare)
28 Newark, NJ
29 New York (JFK)
30 New York (LaGuardia)
Source: fivethirtyeight
The Question of the Week
[poll id=”210″]
Last Week’s Poll Result
How old were you when you bought your first home?
- 29 or younger (58%)
- 30 – 39 (25%)
- I’ve never owned a home. (15%)
- 40 or older (2%)
More than 1200 people responded to last week’s question and it turns out that roughly 3 in 5 Len Penzo dot Com readers bought their first home in their twenties. Interestingly, just 2% of respondents said they bought their first home after they turned 40 — which suggests that if you’ve never owned a home in your first 40 years, you’re unlikely to ever become a homeowner. Do you think that’s a fair assumption?
Useless News: Last Will and Testament
Dave Smith was on his death bed and knew the end was near. While his nurse, his wife, his daughter and two sons were bedside with him at his home in London, he asked for two independent witnesses to be present and a camcorder put in place to record his last wishes.
So the independent witnesses were quickly assembled. When the camcorder was turned on, Dave mustered up what little strength he had left and began to speak:
“My son, Bernie … I want you to take the Mayfair houses.”
“My daughter, Sybil … you take the apartments over in the East end.”
“My son, Jamie … I want you to take the offices over in the City.”
“Sarah, my dear wife … please take all the residential buildings on the banks of the Thames.”
The nurse and witnesses were completely blown away, as they never realized the extent of his holdings.
And with that, Dave quietly slipped away. The nurse then said to his wife, “Mrs. Smith, my deepest condolences. Your husband must have been such a hard-working and wonderful man to have accumulated all that property.”
“Property?” replied Mrs. Smith. “The idiot had a window cleaning business.”
(h/t: AGAU)
Other Useless News
Here are the top — and bottom — five states in terms of the average number of pages viewed per visit here at Len Penzo dot Com over the past 30 days:
1. Minnesota (2.91 pages/visit) (!)
2. South Dakota (2.21)
3. Washington (2.10)
4. Idaho (1.73)
5. Arkansas (1.71)
46. Oklahoma (1.29)
47. Mississippi (1.22)
48. Massachusetts (1.16)
49. Rhode Island (1.14)
50. Montana (1.10)
Whether you happen to enjoy what you’re reading (like my friends in Minnesota … for the second month in a row!!) — or not (ahem, Montana …) — please don’t forget to:
1. Click on that Like button in the sidebar to your right and become a fan of Len Penzo dot Com on Facebook!
2. Make sure you follow me on Twitter!
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And last, but not least …
4. Consider becoming a Len Penzo dot Com Insider! Thank you.
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 out to me at: Len@LenPenzo.com
After reading this piece on my blog regarding how to find a pest control company that won’t rip you off, Silas shared this:
“We really need a pest control company’s help. We’ve got way too many ants in our kitchen, and I honestly have no idea how to get rid of them.”
Hmmm. It seems like you know exactly how to get rid of them!
I’m Len Penzo and I approved this message.
Photo Credit: brendan-c
Ad said: ” Only $2.98! Free shipping! Guaranteed to kill ants!”
What you got: Two little blocks of wood, labelled “No1” and “No.2”.
Instructions: “Put the ant on no.1 and hit it with no.2”
Well … that’s one way to do it, Dave. I prefer pouring boiling water down their ant holes.
Where I live the native large red and black ants that I used to see when I was a kid have been completely replaced by invasive tiny Argentine ants. Unlike those black and red ants, the Argentine ants prefer living in homes, rather than outside.
A fun ant related fact of the day, the soil from an anthill doesnt freeze. So, if you ever need soil that doesnt freeze, dig up an anthill.
Interesting!
“Los Angeles County asked homeowners to shelter homeless people in their backyard sheds. ”
How funny….. say YOU wanted to put a shed on your property to live in….Oh nooooo…..zoning and building code folks would shut that idea down in a heartbeat with a big long list of reasons why such structures are nonconforming and not habitable.
You nailed it, Andy. That’s called “better living through government intervention.”
Len, as long as the credit cards keep working (ours and Washington’s) nothing will change. In the meantime, I’ll keep making my monthly silver purchases.
Have a nice weekend!
Sara
Agree. If China really has decided to stop buying our Treasury bonds, then “somebody” has to pick up the slack. I think Chris Hamilton is right … I suspect more than a few other nations have stopped buying them too and the “buyers” listed as “Other” in the reports is mainly the result of Fed purchases. In other words, blatant debt monetization.
“a small but growing number of Swedes are becoming wary of their nations rush to eliminate cash, fearing a loss of control, cyber-attack risks, and the inherent loss of freedom. ”
Don’t forget the loss of privacy.
Yep.
The Treasury can’t reduce debt or the Ponzi will collapse. Either the Treasury cuts spending and the system collapses or the Fed stops selling bonds and signals quantitative failure which causes a financial panic. Does a middle equilibrium point even exist? Unlikely to get it right by the Fed or the Treasury. Say goodnight Mr. Mnuchin and Mr. Powell. Say goodnight.
Ha! I don’t see what the problem is! We’re living in an era where 1) facts don’t matter, 2) rule of law does not matter and 3) debt levels do not matter. Life is easy. Print more. Raise the debt ceiling as necessary. Distribute the “wealth”. What am I missing? Where did I put my blue pill?
It’s probably on the TV (that’s blaring the MSM’s fake news 24/7).
Baron: Clearly, the Fed has painted itself in a corner during the last eight or nine years and has no way out. The system was always destined to fail because it is mathematically unsustainable, but unleashing QE — and then the Fed’s reluctance to turn it off and raise interest rates sooner — has only served to hasten the system’s inevitable end date.
Can you explain how the system is destined to fail? Thanks.
Sure, Mango. Central banks don’t just print the currency we use everyday — they lend it into existence. All paper currency is created via a balance sheet mechanism where debt equals the monetary proceeds from that debt. This is why the system is considered to be “debt-based.” In fact, almost all of the currency we use is created this way, rather than at the printing press. The commercial banks either borrow digital dollars from their central bank or create digital dollars from deposits of others — and those commercial banks are legally allowed to lend 90 cents of every dollar they take in. That’s known as “fractional reserve banking.”
The trouble is, in a debt-based system — as opposed to an “honest money” system that only creates new currency equivalent to the amount of new wealth generated by the economy — there is no mathematical way the current debt and interest can be paid off because there can never be enough currency in existence to make payment. This is fine as long as the debt keeps growing — but at some point, the level of debt will become so large that it will be impossible to ignore the fact that there are far more outstanding obligations than the economy’s ability to ever make good on those promises.
At that point, confidence will crumble and people will insist on exchanging all of their paper and digital currency promises for real assets, resulting in hyperinflation and the death of the currency. This is how all fiat currencies die — history has proven that this occurs 100% of the time. This time is no different.
But why can’t we stop going into debt and begin paying it off?
Because in a debt-based system, there is an interest component that has to be paid. But remember, the currency required to pay that interest must be borrowed into existence!
If the borrowing stopped, then debt obligations already outstanding would eventually end up in default because there wouldn’t be enough currency to pay the interest. The defaults would quickly cascade and the system would completely implode into an economic depression far greater than anything ever seen.
So as you can see, there is no way out of this mess, short of resetting the system and starting over. Preferably with an “honest money” system.
“But why cant we stop going into debt and begin paying it off?”
Because the dollar has to be borrowed into existence. The amount required to pay debt + interest requires more debt (with more interest) ! It is an endless loop that eventually ends when no one accepts your debt paper (a so called ‘dollar’) anymore.
THIS is exactly why there is inflation….more money supply has to be created all the time to pay off previous debt PLUS interest….making the money supply grow and become more worthless. Gasoline when I began driving cost 30 cents/gal. Today, it’s nearly $3/gal. The gas isn’t better, the money simply got more worthless due to the built in inflation that goes with a debt based money.
Take for example you borrow to buy something, say a house. You go to the bank and borrow say $200,000. Most people (and common sense would dictate) the bank pools money from depositors to lend you that money. (Picture Jimmy Stewart trying to save his little S&L in “It’s a Wonderful Life” ) Nope. Not how it works. They simply make a bookkeeping entry and you walk out the door with 200grand to give to the current owner of that house. That money DID NOT EXIST until you borrowed it.
Yes, it flies in the face of all reason, but that is exactly what they do…..create money out of thin air. Lot of people think you’re crazy when you try to tell them this, but it is the truth.
Now, over the course of say 30 years, with interest on the loan, you payback, say, 500,000. WHERE did the other 300,000 come from ? It was borrowed into existence by other people just like your original 200k, paid to your for working, and you pay the bank off. They keep a hunk of it for their hard bookkeeping work, they pay some to the Federal Reserve, and so on….but that most of that new 500k never goes away now….it’s in the system.
The system ends when no one will take your debt paper any more. Unfortunately, in a world where virtually ALL money is created the same way, no one is willing to call BS and head for the exit door, since they are running the same game.
That inflation I referred to above….where gasoline cost 30 cents/gal in the early 60’s ? That was 3 dimes for a gallon. Silver dimes. Today, those same 3 silver dimes can be exchanged for $3.60. So silver (and gold) has held it’s value in relation to real things. Which is why you want at least some of your long term savings in silver and gold. They have a long history of holding their purchasing power, whereas paper dollars have exactly the opposite history….becoming more worthless as each year passes.
If the world is bankrupt…wouldnt we be wise to just spend our money before it becomes worthless ??
Your currency, Mik … yes — but correctly timing when it will become worthless is tough. So caution is advised.
Very few people have real money (i.e., physical gold and silver); those who do would be best advised to hold onto their money and use it as bridge to transfer that real wealth to the next monetary system.
p.s. – holding just 10% of your net worth in physical precious metals is likely more than enough to protect 100% of your paper-based “wealth.”
Len, I think other hard (i.e. “real”) assets will also conserve wealth for valuation in the new system, but most will not provide liquidity.
One example: land.
That is true, Dave.
Len,
I think this latest globalist attack in Syria will hasten China and Russia among others in dumping US Treasuries! Pretty soon Monopoly money could be on equal footing with the Dollar.
Trump truly disappointed me with this attack, I feel somehow he was pressured into this by the globalist.
Things are not looking good for the ole USA!
Completely agree, Jared; Trump disappointed me too.
It makes zero sense to me why the Syrian government would use chemical weapons immediately after the US announced it was pulling out of their country; they clearly understood the risk of a potential response existed if Syria used those weapons. And despite the claims of definitive proof that the Syrian government used those chemical weapons, in reality all that has been given is weak circumstantial evidence.
@ Len and TNandy:
I ready your replies / comments …. some deep insights into how today’s banking system works ….
It looks to me like I am horribly misinformed ….. Perhaps I need some clarification!!
I assumed fractional reserve banking meant that if the reserve ratio is 10%, then the bank can collect 100$ of deposits and make 90$ worth of loans …..
But it appears that you guys are saying if the bank can collect 100$ of deposits, the bank can create a total of 1000$ of loans …. where 900$ is created out of thin air to be given out to the general market as loans, etc ….?
Can you confirm this? Or clarify my misunderstanding?
That is essentially correct, Kyron.
See: How banks work (vs. how people think they work)
Wow, how the hell did I miss that article you wrote in Jan? I admit Im not too regular but I certainly check in many times a month ….
The post 2008 scenario is mind boggling. I clearly need to read up. How did they achieve that? My first thoughts were that capital reserve ratios were lowered to zero but that makes no sense or is too honest (why limit to zero when you can go to minus infinity and beyond ? ….)
Or is this that situation where the Fed force fed capital to the bank (against their opposition) and the Fed insisted on keeping them capitalized to prevent loss of confidence?
Or is it just 0% treasury short term loans?
Would love some good book suggestions on this. Of course, I’ll search myself too.
@ Len and Tnandy …. Im reading up Wikipedia on fractional reserve banking …. wow …. have i been living in ignorance …..
Thanks Len. Im glad I learned something this week. I love your website for this very reason. It opens my mind to new things that regular media / interests don’t tell us. And you know as well as I do that I don’t fully agree with all aspects of your philosophy, may be I agree 50%, but still, I always like to read your articles just to broaden my mind and I always have a healthy respect for your ideas and understand where you are coming from.
For people interested: Read the Bank of England’s “Money creation in the modern economy” which is an article in Quarterly Bulletin 2014 Q1.
Link is below but Im not sure if it will be published to prevent spammers. If so, google the above to find it.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en&hash=9A8788FD44A62D8BB927123544205CE476E01654