Finance and Stuff

Thoughts on finance and other stuff by Johan Lindén

Category: Economy (Page 2 of 3)

Survival of the Weakest

money printing press inflationIt seems that most countries want their currency weaker. At least in bad times such as the present. Both strong countries such as Switzerland, and countries with serious problems such as the USA.

In times of trouble debt is building up. In the US it seems that debt is building up no matter it is the best of times or the worst of times. When debt has reached a level in which it cannot be repaid, then there is one option left, to inflate the amount of that country’s currency and thus devalue the value of its debt.

The downside is that you lose confidence next time you need to borrow. Also note that this trick is worthless if all other countries do the same, which is what we will see happen in the future. Then the value of money just will evaporate all around the globe.

So stay tuned for a nice inflationary cycle to come within the next few years, in times when many countries will try to have the weakest currency. But then again, why not? The intrinsic value of today’s money is nil.

Fixed or Adjustable Mortgage Rate

Two questions regarding mortgage (home) loans.
Why are most people having adjustable mortgage rates on their home loans?
Is it better to have adjustable or fixed rate?

There are mainly two reasons why people choose adjustable mortgage rate:

  1. Because, an adjustable rate is mainly lower, since you have to pay an insurance premium for knowing your rate beforehand and will not end up with negative (or positive) surprises. You have secured your price of living at a certain rate. Secondly;
  2. since rates have steadily gone down for the last fifteen year or so, the bet to secure at a higher rate have been a losing bet. And since most home buyers memory have only seen interests going down and house prices going up, this is what they will define as a normal state of things.

The typical home buyer do now have the knowledge or understanding that interest rates have been much higher historically and most were not thinking of rates when rates were 15%, just back in the 90’s.

Another misconception is that they will be able to change to a fixed rate later on if rates go up. No such luck. If rates are going up, they will not be able to fix their rate at todays low level. They must then fix it at a higher level or continue speculating that rates will remain low, thus ruining the whole idea about keeping the cost of living low and decrease risk. What all this basically means is that when choosing an adjustable rate you are speculating with your home as security that rates will go down or remain neutral.

When choosing a time-period, do not choose 2 or 3 years, since then you are only insured from spiking interest rates for that period. Choose a period for as long as you need to make payments for the house, thus knowing your cost of living for that period instead of running the risk of ugly surprises. The government will not bail you out. They only do that to the really big and stupid risk-takers that have million-dollar-bonuses every year.

When choosing a fixed mortgage rate today, you get the lowest fixed rates in the history of mankind, and pay the smallest premium ever compared to the adjustable rate. So instead of taking the risk to double the cost of your living, fixing your rate seems like a pretty good deal of you ask me.

Below a chart comparing the long 30-year-old rate (blue) and the short prime rate (orange).

adjustable fixed mortgage rate home loan

Reproduced with the permission of Mortgage-X.com

Ceiling on Swiss Franc

Today the Swiss National Bank announced that they will no longer tolerate a Euro under 1.20, thus putting a ceiling on the franc.

The bank said that: “The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development [and] the SNB is therefore aiming for a substantial and sustained weakening of the Swiss franc”.

The bank also said that to prevail this goal they may buy Euro in “in unlimited quantities” to suppress the Swiss Franc.

The trade we recommended last week is better shown in a chart:

us dollar swiss franc trade chart

Q&A:s The Monetary System & Fractional Banking

criticism fractional banking monetary systemA look into the arguments against our current monetary system, and the criticism surrounding fractional reserve banking with fiat money.

There are thousands of opinions and experts that claims that our monetary system, a fractional reserve banking system backed by fiat money, is doomed to fail. The idea got even more popularized by the criticized but also praised documentary Zeitgeist. There is also a lot of critical, often gold-related, websites such as www.gold-eagle.com and lewrockwell.com who make these claims.

Here follows a summation of some arguments used to criticize our current monetary system:

Our monetary system is totally based on fiat (faith) money without any real value or promise. What many people, especially from the younger generation, do not know is that there was a time where people could exchange their money for gold. Today they are guaranteed to exchange their money for exactly nothing in the end.

All things will at some time in history return to its intrinsic value. That means that paper money will at some point be worth only the paper it is written on.

Debt grows exponentially, while the economies’ of states grows like s-shaped curves. That must lead to a debt that will sooner or later being too big to being paid back. All economies depending on this monetary system will therefore eventually crash.

Although the claims above seem very logical, a few arguments arise that are not so often answered by the people who are making those claims:

  1. You are not forced to take credit. So you are never forced to pay any exponentially growing interest to some evil bank. How bad can it be to let people freely do business with their own chosen terms?

  2. Most creditors are likely to be included in our economies. The economies that we are told will be destroyed be the exponentially growing interest in the long-run. So the only thing that can really happen to our economy is that money goes from the people making bad business to the people who are doing smart business. Kind of like how the system has worked since the beginning of time.

  3. Even if we had a gold standard we could and would still have exponentially growing debt. If you lend someone ten ounces of gold you would still want to have eleven ounces back. So that argument is not specifically related to our current monetary system, but to all free economy systems.

  4. If the fractional banking system of today is so bad, how come most countries, that are economically and politically stable, have had their monetary system intact since War World II?

  5.  The fact that debt is growing exponentially may sound alarming, but exponentially only means that it grows by a certain factor every year. If debt increases by 2% every year it is growing exponentially, but it is growing at a fairly low rate. It will take 35 years for that debt to double. The growth of debt is met by economic output, such as services, natural resources and production of goods which is constantly being added to the economy. So an exponentially growing debt will be met as long as people work. Increasing debt also means inflation or that the value of money/debt decreases. With an increasing population and economic growth there should be no problem with an increasing amount of money or debt as long as it increasing in harmony with other economic outputs such as houses, cars, or plates with food. In the long-run there will be a problem to produce an ever-increasing stream of those products, but that is an ecological problem and not a problem of the monetary system.

Please feel free to come with other questions or if you are one of those questioning the current monetary system try to answer one or more of the questions above.

Negative Interest Rate in Swiss Franc… Again

Switzerland is now charging interest (or call it a tax if you want) if you want to lend the country your money! That is right, for every franc you want to lend them they will give you less back.

No matter how crazy this might sound, this is actually for the second time period in history that Switzerland charge investors to give them money. The first period where Switzerland had negative interest rate was in the 1970’s and that initially lead to a decline of 27% before the appreciation continued. Switzerland sure seem like a country who knows how to take care of its currency. Maybe something other countries could learn from.

Today you have to pay 0,82 Swiss Franc for a U.S. Dollar. The facts above indicates that the market sentiment is a bit stretched to say the least, and if the pattern from the 1970’s repeats, then there seem to be a good risk/reward to buy U.S Dollar with Swiss Franc. 0,7765 is where I put the stop loss for this idea, which is 5,3% below current value.

US Dollar Swiss Franc USD CHF

Beware! Be sure to understand money management and the risk of trading before attempting any trades. For instance, in the example above, if you only want to risk 1% of your trading capital you need to invest a fifth of your capital. There will be a risk and money management article coming up in later posts.

Bernanke Speaking at Jackson Hole

FED director Mr Bernanke is now starting his speech in the Jackson Hole FED-bank conference.

bernanke jackson hole stock market

The market participants are now waiting for news about the economy. Last year a big rally started in the stock market that lasted until this summer.

This time people do not seem that optimistic about the things Bernanke has left to offer. A Quantitative Easing number 3 is what many hopes for to help inject money into the markets. But even if that comes that is no guarantee for a raising stock market.

The positive side, I think, is that so many are negative now and not many believe in a strong stock market. That is the only, but very important, tell that we might enjoy some strength in the market.

But beware of volatility. Always take smaller trade sizes during times of high volatility. More about trade sizing in later posts.

S&P 500 is at this time down 1,3% to 1144.

POST-MEETING UPDATE 16:48 CET

No specific information about quantitative easing was given as most had expected.  But Bernanke said that the U.S. Federal Reserve will do what is necessary to support the economic recovery. — Suprise suprise!

The recovery in the U.S. economy remains modest. The recovery is slower than the Fed had hoped for, but the Fed continues to expect better growth in the second half of 2011. — I think you should change the world “expect” for “hope for”. What they or any expert expect is rarely what happens.

While noted a significant growth in the global economy and America’s banking sector is generally in much better shape now, says Bernanke, and I believe him, but it is not now I am worried about. It is tomorrow or next year. Warren Buffet also seems to believe in the American banking system. Google Buffet + BAC for more info about his latest investment.

The Federal Reserve has a number of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. — They might have the holy grail but they have not used it yet and do not want to tell us about it.

Their next meeting is in one month.

S&P 500 is at this time down 0,7% to 1152.

Our Economies Last Safety Barrier is Reached

Our Economies Last Safety Barrier is Reached and Things look Pretty Gloomy from here.last barrier of the economy

The economical crises we see and read about these days started with consumers that got broke and could not repay their banks. Which in turn lead to banks going bankrupt. Many banks got saved by the state, but now lately even states are going or are getting close to bankrupt.

Consumers ? Companies ? Countries ? What is next?

Who is left to save the last barrier of the economy?

When companies got bad the states invested in them making them go from publicly owned companies to owned by the state.

So what will happen when states get bankrupt? I guess one reasonable way to go is to sell companies owned by the state to the public. The management or managerial system have obviously not done a good job so it is time to let a new management in.

Another way we could go, that have also happened in the pass, is for the states to use force to confiscate people’s assets such as land and natural resources. That is a socialistic or totalitarian approach that I do not think will work in this new age of information technology.

In the long-run, I believe, pure Darwinism* will show that capitalism, an efficient system based on mans free will, are going to prevail over socialism, an inefficient system based on force and musts.

* The survival of the fittest. In this case the survival of the fittest economic system.

Creating Something out of Nothing – The Story of our Monetary System

Today our guest blogger, Carl Norberg, gives his view on the current monetary system and why this system has always been doomed to fail.

What is the common denominator for the financial, ecological and social crisis? All these crises are now accelerating caused by a dysfunctional monetary system, or more popularly expressed, the financial system.

The basis for why it continually becomes more difficult to deal with these crises lies in the very foundation of our financial system, the way money is created and derives its value. In order to create sustainable capitalism an unconditionally sustainable monetary system is needed. This is because the intrinsic logic behind a monetary system controls all other economic decisions.

It controls if there is a short-term and unsustainable economic growth that benefit but a few individuals or a long-term sustainable economic growth that benefits the whole society.

Bush & Greenspan - Experts on Economy

One Expert Giving a medal to another Expert

The monetary process is difficult to understand for many, even for experts (see picture). The process of how banks create money is so irrational that it almost is repulsive for our way to reason.

Seemingly though, it appears as if we borrow something very valuable from the banks (money) and we are therefore more than willing to pledge something valuable in return, we even pledge to give a part of our future earnings and our possessions (assets) in the case of if we do not pay. But in reality, the relationship is just the opposite. We get something from the bank which is basically completely worthless (figures in an account or coloured paper) and it is we as borrowers who have to cover or fill these worthless digits with any value, namely the promise of performance. Money is thus created in a completely different way than most people think.

The bank has only received power from the state to create money through credit lending. Therefore, today’s money is called “debt money” or “Fiat money”. The Bible says that God created light out of nothing but the power of his words. He said: “Fiat lux” (Let there be light). Fiat money is also created from “nothing”, but their value is created through a social construction, where we cover up the “nothing” with a debt recognition and a performance promise.

Debt Money was out of this first called “Protestant” money, since they got their legitimacy through the formation of central banks in Protestant countries such as Sweden (1668) and England (1688). There is thus a religious background to today’s non-rational monetary system. The confession and the trade of guilt was a Catholic mission. Within Protestantism the trade of debt or guilt became an internalized settlement between the individual and God. The creation of money through debt recognition therefore appears like a “natural” psychological step for a guilty Protestant. Today’s money is basically based on a secular faith, nothing else. It only exists because we believe in an illusionistic, but internalized guilt. [Editors note: In Sanskrit, Hebrew, Aramaic, ‘‘debt,’’ ‘‘guilt,’’ and ‘‘sin’’ are actually the same word.]

The right to create money has previously always been confined to a state’s sovereignty. Today that right belongs to the private banks.

The ability to create money “out of nothing” is the modern industrialized world’s foundation. It really is an impressive illusionary masterpiece that requires some respect. Since we would not have the society of today and it would also have been impossible to understand it without recognizing the essence of this illusion.

All financial business that describes economy is thus based on paying back a debt, since all earned money is initially borrowed money that must be paid back. But as everyone knows, there is also an interest on debt. And since money is created through credit, this means that the compounding debt of society is continually growing as we must borrow more money to repay our debts plus interest. This means that we have indebted ourselves even more, with even more interest requirements and so on.

This is a classic vicious circle. Those who have read a bit about systems theory knows that any system that has a positive feedback is doomed to collapse. Therefore, it is a mathematical inevitability that our monetary system must sooner or later break down. The existing monetary system allows that debt grows exponentially over the years, so that is doubling at an even pace, i.e.: 2, 4, 8, 16, 32, 64. Sooner or later the system ends up in a debt crisis where states, organizations and individuals no longer have the power or will to borrow more to make more money. Money needed to create even more growth in order to pay the interest of our exponentially growing debt.

The dysfunctional monetary system of today has a wide range of adverse side effects during its final stage (before the collapse) that get more apparent and emerge as we all now are becoming aware of. The interest makes a few accumulate more bills of debt (money) while the rest are becoming increasingly indebted. Some have to go bankrupt so that others can pay their interest.

Excessive growth of debt must be met with an equally excessive economic growth, when the liabilities are covered by a performance requirement. We must therefore work more and consume more — at any given price.

Growth is hence all of the economists and politicians’ stubborn mantra. Only through growth can we even try to catch up with the exponential growth in the interest expense of our debt.

Logically our debt grows even more when we try to meet its interest requirements. So we struggle in vain no matter what we are doing. The system must, mathematically, end in a collapse as our burden of debt grows to infinity. Meanwhile, the pressure to perform increases on people, nature and our social systems. Nature’s resources will, like people, get more out of balance. The exponential need for growth do not respect the natural need for recovery.

Societies are forced to save on the lookout for opportunities to cope with the increasing burden of debt. That is what we are seeing in many countries now where states are forced to save. While at the same time citizens are expected to consume so to increase growth so that an impossible debt can be paid back. This is an equation that does not add up.

In other words, there is a self-destructive mechanism built into our monetary exchange system. A society without a functioning exchange system is a society without a functioning division of labour and is in an acute existential crisis. Our current monetary system therefore imposes a serious threat to our nations. We must realize that the monetary system now must be changed. Only a financial system with an exchange of value will build a sustainable monetary ground, and gives us the opportunity to build a sustainable economy and therefore a sustainable and just society in the future.

—Carl Norberg

Please feel free to comment if you agree or disagree.

Warren Buffet Wants Increased Taxes

Warren Buffet is calling for higher taxes for the really wealthy to pay off the US deficit. 

warren buffet on higher taxesBillionaire Warren Buffet wrote the opinion editorial in today’s New York Times and calls for higher taxes for everyone earning more than 1 million a year, and even higher taxes for the few thousands of people who earn more than 10 million a year.

He says he has been talking with his mega-rich friends and that they have the same opinion. Well, I am not surprised. Many of these billionaires are contributing a lot to charity, and Buffet is one of the biggest in the world. It is not hard to understand that they want to contribute even more now when they see that the country that brought them their fortunes are nearing a collapse.

Buffet also says that:

“While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks.”

This editorial got me thinking. Coming from the highest taxed country in the world — Sweden — I am against high taxes, but when a country is in great debt and that country need income to repay its financiers, you need a plan.

So why not let the people who have the best ability to pay and, most likely, have been the ones that benefited most from the economic growth help paying a bigger part of the bill.

I am against taxes, but when a country has a big deficit it means the taxes have been too low! Reduce government spending and lower taxes will follow.

Reasons Why The Economy Got Bad

One of the most powerful figures in finance thinks that printing money is a way to save the economy.  

Alan Greenspan, the ex chairman of the US Federal Reserve Bank and one of the most important figures in finance for the last decades, thinks that printing money can save the US economy.

Obviously he must think that the US is the only country printing their money, and that the other parts of the world still use gems and gold to do their business. No wonder we are in a bad shape.

Enjoy the video!

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