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View Full Version : Explaining TRUE economics to an elitist PhD relative: Explaining the Boom/Bust cycles



nmreich
5th April 2010, 21:12
His email to me:



-----Original Message-----
From:
Sent: Sunday, April 04, 2010 22:20
To:
Subject: Re: economy

Hi,

I don't understand your concern with the economy. Are you worried that the world economy is going to collapse in the next year or two or three? To clarify what we each think, how about we each make our best predictions of where the economy will be over the next 2 to 5 years in one short paragraph. Here is my prediction:

I think the US is entering an extended recovery with modest growth on the order of 4% per year. I expect employment will also recover, although fairly slowly. There may be regional crises, but I expect the current global crisis to dissipate and worldwide growth to resume.

Well, that is my view.

As for trading gold, I also don't see what the big issue is. Is it that insiders are making money using their insider knowledge? Then let's regulate the markets better. Is it that people with dominant positions are trying to influence the price by making bets? It seems to me that is a risky business, and once people catch on to these bets they will be able to take advantage of this and hurt the betters. (I simply do not buy the idea that traders are stupid and are repeatedly going to lose money in the same way to JPM.) Is it that too many banks have shorted gold? If that is true then there is easy money to be made by buying gold. But I doubt that is actually true because people with better knowledge of the situation would have already taken advantage of that knowledge and made most of the money there is to be made by buying it at a lower than the price it will go up to.

The reason I am not overly worried is that markets are self correcting. When new knowledge of new potential gains or bigger risks becomes available, markets adjust accordingly. It is true that sometimes there is "group-think" and some risks are incorrectly ignored. But this happens very rarely, and almost always those that bet big against the markets are the ones that lose money.

Sincerely,
XXXXXXX


My response



Here is what I believe in a very over simplified nutshell will happen in due time. It may be one, two, three or five years down the road depending on how much further they can kick this can down the road, but one thing is for certain – the can is becoming larger and harder to kick:

- Food crisis 2010 – 2011
- Second phase of the mortgage crisis (this time it will be worse) and it will involve commercial real estate as well.
- Eventually the interest rates will rise based on the 10 year Treasury bonds – this will make the mortgage crisis even worse
- Massive banking / financial crisis
- More sovereign debt problems with other nations
- Significant tax increases in USA – don’t forget that Bush’s tax cuts expire in 2011
- More businesses going out of business
- More government jobs, (these are actually negative-jobs and extremely bad for the economy)
- More government control of people’s lives
- Less free market and more corporatism (government controlled winners and loosers, not free market winners and loosers)
- Perhaps another bailout, but this time bigger
- Perhaps other corporate bailouts like AIG/GM
- Loss of US Dollar value to gold and silver currencies
- The US Dollar may maintain relative strength for some time yet relative to other fraudulent paper currencies which are also loosing strength to the gold/silver index.
- Inflation becoming a problem in the USA with eventual severe inflation especially in areas such as food, clothing, energy, electronics, and other items that we import from the developing world.
- Increased unemployment in the private sector
- A deepening political unrest within the country as citizens realize that the Nobel-prize winning brilliant economic policies and emergency measures have only made their lives worse, not better
- Fuel prices will skyrocket, same with heating

Why am I so pessimistic? Simply because the policies that led to this recession and now depression are not only being continued but they are being put on steroids all the while under the name of “economic recovery plans”.

The KEY to understanding this is: It is during the BOOM phase that the actual destruction of the economy occurs. The BUST phase is simply the free market finally catching up and liquidating all of the mal-investments made during the boom phase.

Think of it this way: Person X gets a credit card and immediately starts buying stuff. At the end of the month he doesn’t have enough money to pay the bill, but he decides to just pay the interest. Next month he treats himself and his friends to lavish dinner parties, dancing, restaurants, a new HDTV, iPad, iPhone, high speed internet, and then the new Nissan Maxima comes out and he wants one. Each month he racks up more and more credit card debt, but who cares, he’s feeling GOOD! His job is a waiter at the local restaurant and he decides that he can get enough cash-back from his credit card that he can afford a mortgage on a decent suburban home. Afterall, since all this spending like mad he thinks he ought to save some money for retirement and so buying a house is a good idea. He continues to spend, buying drapes and decorations for the new home, and getting someone in to remodel the bathroom so he can have a private Jacuzzi. All the while, his interest payments on his credit cards keep mounting. No worries because the new CitiBank card says that he can transfer all his payments on to one card and pay a lower monthly fee. He does this but soon he is really struggling to keep up.

That is the BOOM phase. It is economic destruction. He has destroyed a massive amount of wealth.

The corrective phase is: His home has lost 20% of it’s value and he is now underwater with respect to his mortgage. His CitiBank card has raised the interest payments to 35% and he barely has enough money to heat his home. Since more and more people are in the same predicament, less and less of them are going out to eat and now the restaurant has to close down, so he looses his job. Eventually he files for bankruptcy and defaults on the home. The bank which sold him the mortgage now has to suck up the losses since the home is rapidly devaluing. The bank finds itself underwater but unfortunately since this has been happening all over the country FDIC has gone bankrupt and doesn’t have enough money. He looses all of his savings and has nothing left. He can sell his car for $2000 and he goes to live in a tent city near New York City. He has barely enough money to buy new clothes and gets rejected for job offers because of his appearance.

That is the BUST phase. It is simply bringing the economy back to REALITY – it is the painful DETOX process whereby the economic system is purging itself of all the mal-investments. A BUST is merely this: RESISTRIBUTION OF WEALTH. And it always flows from the working middle class to the super-rich. It never flows the opposite way. Think about it: What asset do central banks have after all their paper currencies turn into nothing more than paper? The answer is: GOLD! If gold is a barbarous relic, then WHY are central banks buying it like mad?

Central Bank Gold Holdings Expand at Fastest Pace Since 1964
http://www.businessweek.com/news/2010-03-18/central-bank-gold-holdings-expand-at-fastest-pace-since-1964.html

If the free market was allowed to function properly USA would have been bankrupt by 1972 and it would have experienced a depression and liquidated the malinvestments then. The pain would have been discomforting to the people and more severe than the 1970’s stagflation, BUT it would have CLEARED out the bad. Instead, under Nixon, Carter, Bush I, Clinton, Bush II, and now Obama we have the presidents and the Federal Reserve engaging in “compassion” for people who they do not wish to see suffer – but the price is that the economic system is becoming so bloated with mal-investments that it is near bursting point – and all that compassion will backfire because the free market is the “Universal Law of Nature” and nobody can stop it – they can only POSTPONE it. Every time it is postponed all of the malinvestments from before are NOT liquidated, they are merely carried over and accumulated.

There will always come a point where there is no more that a government can do with all of the power of a central bank. At that point the entire system erupts and millions are wiped out completely.

I highly recommend watching this short video about these very effects in the country of Zimbabwe only a couple of years ago:

Gold for Bread
http://www.youtube.com/watch?v=7ubJp6rmUYM

If you are really, truly, compassionate, you would want that first guy in the story to feel the pain RIGHT AWAY, instead of assuaging his pain by providing him more and more of the drug that he can not break free from – the drug is called CREDIT. True compassionate people want economic stability, not inflation, not credit bubbles, not busts.

Here is the honest truth: Paper fiat currencies are for the masses. Real money (gold) is for the elites.

Anyway, I wrote much more than I had intended. Again please take this is simply my opinion.

akak
5th April 2010, 21:53
Wow, fantastic job!

And as for your elitist (and clueless) PhD relative, I offer the following: the USSR, when it collapsed and for years before, was full of economic PhDs as well ---- yes, PhDs in "Marxist Economics". Some value to Soviet society they were!

nmreich
5th April 2010, 22:09
I just received a response from this relative regarding what I wrote to him:



-----Original Message-----
From:
Sent: Monday, April 05, 2010 23:05
To:
Subject: Re: economy


It is interesting how our views and predictions contrast. Perhaps the difference in our outlooks is based on our different views of human nature. I think people are on average hard workers, pretty clever, and want to save for their future and for their kids. Sometimes they make bad choices and get over their heads in debt, but this I think is the minority. It seems you have a much more pessimistic view.

The other difference perhaps stems from how we view markets. I view markets (that have a balance of freedom to trade combined with regulations to prevent fraud and to enforce transparency) as very powerful assessors of economic value and also the best predictors of the future that we have. That is why I am not worried about paper currencies: there are very powerful currency markets that can break any currency that is over-valued, the dollar included. Being a "reserve" currency does not mean it is immune from currency trading. The causation is the opposite direction: it is because people and banks trust that the dollar will maintain its value that they choose to keep significant portions of their wealth in dollars. If this trust is lost, there are plenty of dollars that could be off-loaded on the world markets and its value would plummet. The reason it stays strong is that people trust that the US government will continue the policies it has kept in place over the last half century of fighting inflation. I agree that our government and individual debts are a problem that we need to address. How big a problem and how critical are these debts levels compared to our net assets and future earnings? I don't think any one person is clever enough to work that out. But the market I think is a better judge than we are. And the fact that the stock markets are up is a very good indicator that our debt is not critical and economic growth is back for the next few years at least.


So sad. So, so, sad.

Katwoman
5th April 2010, 22:23
"But I doubt that is actually true because people with better knowledge of the situation would have already taken advantage of that knowledge and made most of the money there is to be made by buying it at a lower than the price it will go up to."

This is the statement that shows what a moron he is. Has it occurred to Mr Einstein that "we" are the people with the better than average knowledge who have been taking advantage of the situation by buying in ahead of the big run up?

akak
5th April 2010, 22:23
I just received a response from this relative regarding what I wrote to him:



So sad. So, so, sad.

I know this is a relative of yours, nmreich, but truly --- what a complete idiot!

"...it is because people and banks trust that the dollar will maintain its value that they choose to keep significant portions of their wealth in dollars. If this trust is lost, there are plenty of dollars that could be off-loaded on the world markets and its value would plummet. The reason it stays strong is that people trust that the US government will continue the policies it has kept in place over the last half century of fighting inflation."

Is this relative of yours serious? Do they have ANY sense of monetary history whatsoever? Apparently not, as in the last half-century the US dollar has lost 90% of its value and purchasing power! Does that constitute "fighting inflation"? This person has such a shallow, conventional, conformist, platitude-filled sense of economics and financial matters that if I were confronted by such idiocy in person, I would merely stand there speechless, so dumbfounded I would be as to where to even begin to address the across-the-board inaccuracies, flawed analyses and strawman arguments of your eminent PhD relative.

I sure hope this is at least not your spouse!

nmreich
5th April 2010, 22:31
I know this is a relative of yours, nmreich, but truly --- what a complete idiot!

"...it is because people and banks trust that the dollar will maintain its value that they choose to keep significant portions of their wealth in dollars. If this trust is lost, there are plenty of dollars that could be off-loaded on the world markets and its value would plummet. The reason it stays strong is that people trust that the US government will continue the policies it has kept in place over the last half century of fighting inflation."

Is this relative of yours serious? Do they have ANY sense of monetary history whatsoever? Apparently not, as in the last half-century the US dollar has lost 90% of its value and purchasing power! Does that constitute "fighting inflation"? This person has such a shallow, conventional, conformist, platitude-filled sense of economics and financial matters that if I were confronted by such idiocy in person, I would merely stand there speechless, so dumbfounded I would be as to where to even begin to address the across-the-board inaccuracies, flawed analyses and strawman arguments of your eminent PhD relative.

I sure hope this is at least not your spouse!

No, he is not my spouse. He is blood relative, but yes, I am feeling very validated.

No worries about offending, etc. I am a big boy now and I don't get offended by anyone, except my wife occasionally. :) (thank GOD!!!! my wife believes in the same thing I do - otherwise I'd buy a shed and sleep in it).

Katwoman
5th April 2010, 22:33
I did not think this idiot could get any dumber until I read this nonsense:

"The reason it stays strong is that people trust that the US government will continue the policies it has kept in place over the last half century of fighting inflation."

Fighting inflation? The 3% annual inflation over the last half century has completely devalued the dollar, driven up home values and as a result real estate taxes to so that people cannot really own a home anymore, forced people to invest in risky vehicle to beat the inflation rate, and allowed congress to make promises it could not keep. The inflation they fought so well is at the heart of the high healthcare costs, failure of Social Security and Medicare and most important why a real silver dollar is the only currency that has not lost any value.

At this stage of the game I would not waste my breath on him anymore and when the SHTF and he come knockin' on your door which he undoubtedly will I would tell him get beat it.

http://www.youtube.com/watch?v=8R0OfbzOVOM

nmreich
5th April 2010, 22:34
"But I doubt that is actually true because people with better knowledge of the situation would have already taken advantage of that knowledge and made most of the money there is to be made by buying it at a lower than the price it will go up to."

This is the statement that shows what a moron he is. Has it occurred to Mr Einstein that "we" are the people with the better than average knowledge who have been taking advantage of the situation by buying in ahead of the big run up?

Well, he studied at the same university as Mr. Einstein.... so there he must be right! ;) hehehe

akak
5th April 2010, 22:51
Well, he studied at the same university as Mr. Einstein.... so there he must be right! ;) hehehe


And everyone knows that Einstein was a spectacular failure as a student when it came to mathematics. So your eminent PhD relative is clearly following in his predecessor's shoes.

At least Einstein did have the common sense to see the writing on the wall in 1930s Nazi Germany, and got out while he had the chance. Whereas I get the feeling your eminent PhD relative would have argued for staying put, maybe due to "patriotism" or not falling for "conspiracies" or some such conformist BS.

I still have rarely met a group so enthralled with their own arrogance, and so oblivious to their own profound ignorance of everything outside their narrow field of studies, as PhD academics.

detokeville
6th April 2010, 02:10
I haven't made any converts, but I am starting to realize that the negative aspects of the story (currency crisis, trading silver for chickens, gold as insurance, etc...) turn people off, but the positive angle such as ending up with a much higher net worth and being able to buy the block seem to make the conversation less confrontational.

I think this is because you don't have to challenge a person's conception of how the world works. I know that the currency crisis and all of that is the core of the story, but it is the stop think button for many.

So like I said, I haven't made any converts and no luck or even interest. I needed to get some cash quick for an emergency and needed to sell a little gold and silver (eagles) immediately and I wanted to try and get a little better price than selling to the coin shop and anyway 5 days no respones, I tried to sell some to friends and family at less than Apmex BUY prices and everyone acted like I was bringing them trash....so I know the manipulation hearing is big news, but for me the fact that I tried unsuccesfully to sell silver and gold well below spot to the general public and my friends and family for over a week is real world proof that the bubble isn't even in sight, and i mean even if you had a really powerful telescope.

Mylläri
6th April 2010, 09:28
With all due respect to your relative, I know plenty of people with Master's Degrees, PhD's, or other high level educational credentials that are absolute dipshits on subjects that affect their lives more than what they happen to be soo well versed on. I'm not saying that this person you're referencing is such a person in any way, only that having a PhD doesn't automatically make you more intelligent than say an open-minded truck driver with an IQ of 190 that never had the urge to attend college.

nmreich, I don't know the reason why you engaged in this conversation with your relative. I don't know if you felt compelled to do so because of his PhD, if you felt you owed it to him, etc. What I've found out is that it is usually easier to let some people think what they want to think and believe what they want to believe. When I was younger I know of several efforts I made to convince others of whatever beliefs I held. No matter how truly right I may have been and how truly wrong they may have been, more often than not I met with futility on my end.

At this point I don't really care a whole lot about doing such things, if someone asks for my advice or thoughts on a matter I'm be glad to talk them up for a bit. Otherwise I just do whats in my best interests and everything seems to be going much better :)