The last five decades converted Ford from a manufacturing company who dabbled in credit to a bank who built cars. The F.I.R.E. economy (Finance, Insurance, Real Estate) resulted from the move away from the gold standard. Unrestricted money creation attracted the corporate treasurers to the profits of financial engineering. GM made more money in it GMAC lending unit than it did building cars.
The housing bubble was a debt based bubble. When the housing prices fell, the debt level did not and the banks do not want to book the loss. They want the consumers to absorb the loss instead, equal to about $1 Trillion per year. We need a banking system but the banks moved away from their original mandate and became aggressive investors. Their aggressive behavior created huge losses and they don’t want to be held accountable. High unemployment hinders the ability of borrowers to pay back the inflated loans and most are now considering default. That is the dilemma.
The Federal Reserve is trying to resurrect the broken FIRE economy but should be focused on creating new jobs by building a new energy-efficient infrastructure. The FIRE economy is history. The Transportation, Energy, Communications, Infrastructure (TECI) economy should now be the focus.
Gold lost $40 on Friday and silver lost $1.64, about 5%. But silver is up 54% for the year. This metals bull market will try to buck timid investors off its back. Was anything solved at the G20 summit? No. QE2 (Quantitative Easing #2) will push the dollar lower but there will be rallies on the way. The Fed will use foreign intervention to keep the dollar from tanking immediately. They want the dollar to decline, but in an orderly fashion. The dollar rally this week needed to happen as the President participated in talks at the G20 summit to project “confidence” in U.S. policy.
The Banking System Flush
For those unfamiliar with how regulators process insolvent banks, it would be helpful provide a little discussion. Regulators audit banks on an annual basis. They track performance ratios on a continual basis. When banks become weak, the regulators start looking for suitors to take over the bank. This may take many months to solve the problem. The regulators closely monitor the bank and keep it afloat while attempting to find another bank or a qualified group of investor to acquire the bank. This allows regulators to “manage” bank closures so that it does alert the public to the seriousness of the insolvency in the system. Thus a systematic approach to bank closure that manages perception is used. Three banks were closed this week and more will be closed in coming weeks.
Living Beyond Our Means
Cut spending for others, but not for me. The U.S. is spending beyond its ability to pay back the money it borrows to satisfy the accustomed lifestyle. Americans are unwilling to choose austerity as a solution to the problem. The only other solution is to inflate our way out of debt. That is Ben Bernanke’s job. Obama knows it, the Chinese know it, the Fed knows it, and now you know it. What can we do as individuals? Shift some of our assets into precious metals, store food for future consumption, pay off debt, reduce our monthly bills, and simplify.