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.
I hope everyone is enjoying their weekend! In the meantime, why don’t we get this show on the road? Then I can start mine …
The Founding Fathers never intended a nation where citizens would pay nearly half of everything they earn to the government.
— Ron Paul
When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it, and a moral code that glorifies it.
— Frederic Bastiat
Credits and Debits
Debit: Did you see this? Last week, rates spiked to 10% in the overnight loan (repo) market and, for the first time since the financial crisis, forced the Fed to step in as a lender of last resort. Since then, the Fed has intervened every business day with overnight loans, while also providing $150 billion in 14-day term loans to unnamed banks. Carry on, folks. It’s probably nothing. No, really.
Debit: On the other hand, in a healthy banking system these repo loans from the Fed wouldn’t be necessary. More likely, the constant Fed intervention is a sign that at least one large systemically-significant commerical bank is in dire straits — if not more. You can also bet that behind-the-scenes financial mayhem is why the Fed announced the return of quantitative easing — also known as naked debt monetization — next month.
Credit: Of course, the Fed is also denying that the QE program they’re officially restarting next month isn’t really QE. Uh huh. Thankfully, they aren’t fooling Michael Krieger, and everyone else who is actually paying attention:
The fact the Fed has to come out and insist this isnt QE tells you all you need to know. Central bankers are lying charlatans who are terrified of losing the narrative. They exist to protect and entrench oligarchy.
Michael Krieger (@LibertyBlitz) October 11, 2019
Debit: Although Deutsche Bank’s plunging stock price has many believing it’s in serious financial trouble — and the main cause of the repo market crisis — Reuters has public data that shows JPMorgan reduced its cash deposits at the Fed by $158 billion in the year through June — that’s a 57% decline. In fact, JPMorgan’s draw down on its cash accounted for about a third of the drop in all banking reserves at the Fed during the period.
Credit: As economist Daniel Lacalle notes, “What the repo market crisis shows us is that fear of contagion and rising risk are evident in the weakest link of the financial-repression machine. Central banks believed they could create a liquidity tsunami and manage the waves. However, the repo market is (signaling) debt saturation and massive risk accumulation.” More to the point, it says the banks are losing trust in each other.
Credit: Unfortunately, as economist Alasdair Macleod observes, “The productive side of major economies have only been kept afloat due to the expansion of consumer credit, and the draw-down of savings. And when American politicians bemoan the transfer of production to China, they fail to recognize their own role in the destruction of domestic manufacturing through credit inflation.” Yep. Truer words have never been spoken.
Credit: Credit expansion leads to other nefarious issues. For example, Lacalle warns that, “The Fed’s US liquidity tsunami includes the destruction of the credit transmission mechanism, (which) has happened in the (world’s) most diversified and competitive financial market. Now imagine it happening in the Eurozone. This, along with negative rates is just the tip of a truly scary iceberg.” Speaking of icebergs …
Credit: Bill Holter reminds us that if a currency is literally being given away via negative interest rates, then it exposes the currency as worthless: “What most people don’t understand is that what’s ‘free’ to them costs somebody; food, housing, and medical care can’t be conjured out of thin air. But once the majority believes it, who is left to pay for the largesse?” What a stupid question; in Utopia, anything is possible.
Credit: Oswald Gruebel — who was a CEO for Credit Suisse, and the top exec at UBS Group — is one banker who has the chutzpah to openly admit the economic implications of negative rates: “(They’re) crazy. That means money isn’t worth anything anymore,” he exclaimed last week in an interview with a Swiss newspaper. Like all “good” bankers, Gruebel conflates currency with money — but let’s give him credit for trying.
Credit: Asset manager Egon Von Greyerz certainly can see how the bankers’ game will eventually end: “As long as the value attributed to the debt is positive, the assets financed by the debt will have positive value. But when the ‘Eureka moment’ arrives — and the debt implodes due to the sheer volume of worthless credit issued — then the debt that becomes worthless will also lead to any assets financed by that debt becoming worthless.” Uh oh.
Debit: And, finally … It turns out that net migration out of Illinois has more than doubled since 2015. The urge to flee is so bad that an ‘Escaping Illinois’ Facebook group has 39,000 followers. Do you think Illinois’ oppressive taxes at all levels of government are to blame? Me too. Then again, I guess Illinoisans aren’t the only ones with the urge to flee …
Credit: Blogger Mish Shedlock is one of those residents who is moving away from the “progressive socialist hellhole” that is the Land of Lincoln. “We’re out of here; can’t take it anymore,” he says. What was the straw that broke the proverbial camel’s back? His annual $15,000 property tax — on a home worth about $400,000 — and recent increases on 19 other state taxes. Imagine that.
By the Numbers
In a temporary — but ultimately futile — attempt to sustain the unsustainable, a number of local Illinois governments are hiking taxes and cutting core services to pay for ever-rising pension contributions, and avoid the state’s new funding-intercept law. If you don’t think this isn’t coming soon to communities outside Illinois, you’re fooling yourself. This will not end well — at some point, taxpayers will say “enough is enough”:
31 The number of firefighters and policemen the Chicago suburb of Harvey had to lay off last year in order to keep its police and fire pension funds solvent.
3 Illinois communities that got hit with special property tax hikes in 2018 specifically to cover pension shortfalls.
27 Municipal workers laid off by the city of Peoria last year in order to make pension payments.
38 Public saftey positions eliminated by Peoria in 2018 due to its city retiree pension fund shortage.
85 Percentage of Peoria’s property taxes that currently go to pensions.
100 Percentage of Peoria’s property taxes that will go into its city pension fund next year.
Source: Illinois Policy
The Question of the Week
Last Week’s Poll Result
How much NON-mortgage debt do you currently owe to creditors?
- None! (49%)
- $1001 to $10,000 (18%)
- $10,001 to $25,000 (13%)
- More than $25,000 (11%)
- Less than $1000 (9%)
More than 1700 Len Penzo dot Com readers responded to last week’s question and it turns out that 1 in 3 of them are currently carrying more than $10,000 in non-mortgage debt. On the bright side, about half of them have no non-mortgage debt on the books. As for yours truly, we currently have about $10,000 of non-mortgage debt to retire — it’s for a new car the Honeybee purchased several years ago to replace her 18 year-old Honda Odyssey. Although we have the cash to pay for the car, it made little sense to do so at the time of purchase because Honda offered to finance the car at 0.9% interest. And before anybody rushes to scold us for buying a new car, don’t bother: 1) we can afford it; and 2) we keep our cars for 15 to 20 years — so we get our money’s worth!
Useless News: The Old Cowhand
An old cowhand came riding into town on a hot, dry, dusty day. The local sheriff watched from his chair in front of the saloon as the cowboy wearily dismounted and tied his horse to the rail. The cowboy then moved slowly to the back of his horse, lifted its tail, and placed a big kiss where the sun don’t shine. He then dropped the horse’s tail, stepped up on the walk and aimed toward the swinging doors of the saloon.
“Hold on there, Mister,” said the sheriff. “Did I just see what I think I saw?”
“Reckon you did, Sheriff; I got me some powerful chapped lips.”
“And that cures them?” the Sheriff asked.
“Nope,” said the cowhand, “But it keeps me from lickin’ ’em!”
(h/t: Sam I Am)
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. Florida (2.35 pages/visit) !
2. Delaware (2.00)
3. South Dakota (1.91)
4. New Mexico (1.75)
5. Colorado (1.69)
46. New Hampshire (1.25)
47. Arizona (1.22)
48. Wisconsin (1.20)
49. Georgia (1.18)
50. Oklahoma (1.17)
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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 out to me at: Len@LenPenzo.com
After reading my article on the feasibility of eating food past its expiration date, Stephen Weber left this message in the Len Penzo dot Com Complaint Box:
My elderly father … reads your opinion and goes with it. So he is mad at me for getting rid of (food) cans that expired over 10 years ago.
As he should be. You haven’t lived until you’ve enjoyed a 10+ year-old can of Chef Boyardee ravioli.
If you enjoyed this, please forward it to your friends and family. I’m Len Penzo and I approved this message.
Photo Credit: brendan-c
RD Blakeslee says
Reasons to buy a new instead of used car:
After 1. and 2. (above);
3. You get to enjoy it in its most pristine condition – brand new.
RD Blakeslee says
… and we bought a new car recently, financed by J.P. Morgan’s Chase Bank at 0% interest, They financed everything: title, tags, extended warranty, no down payment. So, we enjoy the interest on an “extra” $22,000 in our Kasasa Cash Back checking account, left there instead of paying cash for the car.
But maybe we should apologize to Morgan – we contributed to this, I guess; (above):
“Reuters has public data that shows JPMorgan reduced its cash deposits at the Fed by $158 billion in the year through June – that’s a 57% decline. In fact, JPMorgan’s draw down on its cash accounted for about a third of the drop in all banking reserves at the Fed during the period.”
Once in awhile, the peons get a little slice of the overlord.
Len Penzo says
Yep … I agree, Dave. Number 3 is another nice perk, assuming you plan to hold the car for a long period of time. And if you put low miles on the car, that new car tends to stay “new” for a bit longer too.
Agree on buying new. We just purchased a new car at 0% interest. Yes, we could have paid cash too but would rather pay extra each month and have that cash earning interest and for it to be there for any true emergencies. Our other car is a 2005, bought in 2008 and we will keep both of them until they literally fall apart.
Len Penzo says
I’m with you, Liz. Now that zero-percent financing is so common, it really changes the calculus of buying new cars AND “financing” them. I put it in quotes, because the interest cost is essentially nil. I financed my last car, which I bought new in 2013, and ended up paying roughly $350 in interest over five years for the privelege. I too decided that, for that small price, it made more sense to hold on to my cash and put it to work for me, rather than give it all to the dealer up front.
A lot to consider in the new/used debate. Is the insurance on a new car significantly more than a car 3-4 years old? New cars come with the latest tech/safety additions. Some gimmicky, others of substantial value.
David C says
I am looking at purchasing a new car in the next year.I tend to keep them longer than most. My current daily driver is a 22 year old Toyota with 327,000 miles on the clock. I tend to try to get my money’s worth out of them. With luck, my next one should last me well into retirement.
Len Penzo says
Good for you, David! If anyone is interested, here is an older blog post of mine detailing the annual maintenance costs for our old ’97 Honda Civic and ’01 Odyssey. I won’t buy new until the annual maintenance costs begin to exceed the costs of buying a new car.
Sara King says
I bought a new car too. Like you, the interest rate was 0.9 percent. At that rate I figure the money is almost free so why not take advantage? Different story from 20 years ago when a car loan was 6 or 7 percent!
Len Penzo says
I remember checking and sweating out the interest rates on a daily basis when we bought our new ’97 Civic (which we held onto for almost 20 years). That’s because back then rates were so high that a quarter-point move upwards would have kept us from buying the car!
I know interest rates are low. But I just can’t see paying full price for any new car when I know I can get the same car used a couple of years later from a private party.
Oops. Forgot to say “for half the cost”!!!
RD Blakeslee says
‘fraid not anymore, Cowpoke – you may have to settle for a 4-year-old car, to get it at half its original price:
Very cool calculator, RD. That’s an eye opener!
Sam I Am says
The whole govmt pension mess in IL (and elsewhere) was caused by power hungry politicians who sold out taxpayers so they could get the votes of the public employee unions. This pension problem won’t be untangled without sharp benefit cuts. They can try raising taxes even more but the taxpayers are already overburdened and those who can leave are doing so. You can only squeeze so much juice from a lemon.
These public union workers are in for a nasty surprise. The writing is on the wall in Illinois. The tax situation is finally forcing people and businesses to leave in large numbers. Whoever is left will end up holding the bag and be unable to pay, with a dead economy. This is how all socialist experiments always end.
Len Penzo says
The pols have a problem when it comes to raising property taxes because, for most homebuyers, affordability is determined by monthly payments (including property tax). So if they raise the property taxes too high, then property prices have to fall to a point that maintains that affordability, which in turn reduces the amount of tax revenue. Essentially, there is a built-in ceiling on property tax revenue.
Like you said, Sam, you can only get so much juice from the lemon!
“But when the Eureka moment arrives — and the debt implodes due to the sheer volume of worthless credit issued — then the debt that becomes worthless will also lead to any assets financed by that debt becoming worthless.”
Len, in English please so people like me can understand it.
Len Penzo says
I’ll try, Nicole. Although most people still don’t realize it, all asset values are artificial constructs because the currency they’re denominated in have no value. When interest rates for loans go negative, the currency is exposed as being worthless (because the bankers can no longer entice people to pay for their loaned currency). Of course, as long as most people are asleep at the wheel, the charade will continue. But eventually, enough people will wake up and hyperinflation (which is a psychological phenomenon where confidence in the currency is lost) takes over — and these negative rates are clearly hastening the process; you see the mainstream press even talking about the implications now. When this finally happens, a cup of coffee might cost $100,000.
In turn, if the currency is worthless then, say, a $100,000 home mortgage is no longer of any value to the bank that issued it. This is great for the borrower — he gets to pay off his mortgage with worthless currency. But it’s death to the banks.
Now … does this mean the house is sudednly worth only a cup of coffee? Well … it would in terms of the now-worthless dollar-denominated mortgage — but NOT in terms of real money. That is, gold and silver!
To fix the problem the monetary system must be “reset,” either by devaluing the existing currency relative to gold (i.e., vastly increasing the dollar price of gold from its current levels) or by starting over and issuing a brand new currency.
Remember, this decimation in a currency’s purchasing power also affects the dollar-denominated value of your life savings too — which is why it is important to diversify your investment portfolio with wealth insurance in the form of PHYSICAL gold and/or silver (in theory, 10% should be enough to keep you whole).
Intersting piece. Are they suggesting Egyptian architecture at We Work?
See that you now have influence in FL. Must be the folks leaving IL?
Len Penzo says
WeWork is such a blatant scam, Duke. I don’t know how the CEO has avoided an investigation by the proper authorities.
RD Blakeslee says
“Credit: Of course, the Fed is also denying that the QE program theyre officially restarting next month isnt really QE. Uh huh. Thankfully, they aren’t fooling Michael Krieger, and everyone else who is actually paying attention …”
“Everyone else” now includes “… De Nederlandsche Bank (DNB), or Dutch Central Bank, (which) has shocked many with its claim that if the system collapses, the gold stock can serve as a basis to build it up again.”
Len Penzo says
Yes … behold next week’s Black Coffee topic! We’re getting closer to the big reset folks.