The Final Collapse of the Economy

[ACCT]

Pooh-Pooh Accounting

My favorite accounting assumption is the monetary unit assumption. All accounting information is disclosed in dollars. However, a dollar is not a valid measuring tool because a dollar is changing in size. We do not have that problem with inches or pounds. Even a little inflation adds up. In 1946 the average income was $2,500, a new car costs $1,125 and a new house cost $5,600. What happens to the monetary unit when inflation is 180% or 800%? Some accountants came up with the idea of a unit of purchasing power. However, the idea was quickly abandoned when the media called it “pooh-pooh” accounting.

 

[Ridgerunner]

Pooh-Pooh Accounting

My favorite accounting assumption is the monetary unit assumption. All accounting information is disclosed in dollars. However, a dollar is not a valid measuring tool because a dollar is changing in size. We do not have that problem with inches or pounds. Even a little inflation adds up. In 1946 the average income was $2,500, a new car costs $1,125 and a new house cost $5,600. What happens to the monetary unit when inflation is 180% or 800%? Some accountants came up with the idea of a unit of purchasing power. However, the idea was quickly abandoned when the media called it “pooh-pooh” accounting.

Assumptions can change approaches. Your underlying assumptions appear to be that the government will continue to spend as it has and that the Fed will be accommodative as far as the eye can see.

I am mildly dubious about the first assumption and very dubious about the second. In Obama’s second term, he is going to be faced with intense inflationary pressures. If he doesn’t have a 2009-style congress, he isn’t going to get any more “stimulus” passed.
He might not even have the political power to keep spending at its current level.

Bernanke is not going to accommodate forever. At a point, he’ll resist political pressure so he isn’t known to Fed history as the man who let inflation rise beyond all historic levels to the end of his term. He’ll raise interest rates and touch off recessionary pressures, just as he did in 2007. But by then, his focus will be in his place in Fed history and he’ll do it anyway.

At that point, the only “bullets” Obama will have in his “change” gun will be to tax and oppress by regulation. More downers for business.

In addition, the stark reality of the cost of Obamacare will set in during 2014. I don’t see how even its “middle class subsidies” will prevent a huge premium increase even for the subsidized. For the higher earners, it will be unbearable as he adds mandate after mandate and makes them pay for those. But Obama won’t relent, because he still wants “single payer” and probably even hopes Obamacare will crater so people will turn to full socialized medicine and bad medical care just to get some financial relief.

Between Obama and Bernanke, they’ll suck all the oxygen out of the economy, and the recession will get worse; maybe much worse. People have to have money even to buy gold. If they don’t have money, they won’t buy anything. Those who already own it will sell down or sell out in order to get the super high interest rates that will then be prevalent even in government bonds. Gold will be unattractive to those who have cash.

 

[ACCT]

Assumptions can change approaches. Your underlying assumptions appear to be that the government will continue to spend as it has and that the Fed will be accommodative as far as the eye can see.

I am mildly dubious about the first assumption and very dubious about the second. In Obama’s second term, he is going to be faced with intense inflationary pressures. If he doesn’t have a 2009-style congress, he isn’t going to get any more “stimulus” passed.
He might not even have the political power to keep spending at its current level.

Bernanke is not going to accommodate forever. At a point, he’ll resist political pressure so he isn’t known to Fed history as the man who let inflation rise beyond all historic levels to the end of his term. He’ll raise interest rates and touch off recessionary pressures, just as he did in 2007. But by then, his focus will be in his place in Fed history and he’ll do it anyway.

At that point, the only “bullets” Obama will have in his “change” gun will be to tax and oppress by regulation. More downers for business.

In addition, the stark reality of the cost of Obamacare will set in during 2014. I don’t see how even its “middle class subsidies” will prevent a huge premium increase even for the subsidized. For the higher earners, it will be unbearable as he adds mandate after mandate and makes them pay for those. But Obama won’t relent, because he still wants “single payer” and probably even hopes Obamacare will crater so people will turn to full socialized medicine and bad medical care just to get some financial relief.

Between Obama and Bernanke, they’ll suck all the oxygen out of the economy, and the recession will get worse; maybe much worse. People have to have money even to buy gold. If they don’t have money, they won’t buy anything. Those who already own it will sell down or sell out in order to get the super high interest rates that will then be prevalent even in government bonds. Gold will be unattractive to those who have cash.

We have different assumptions. One day all the dollars in the world will not buy one ounce of silver. Fiat money, like the dollar, has a shelf-life of about 50 years. I started counting on June 24, 1968 when a dollar was no longer convertible into silver coins.

In the 1960s Paul Samuelson and many other economists believed that the government could “fine-tune” the economy. Hogwash! The economy is not an engine. Consumers are not robots.

The Federal Reserve controls both the supply and the price of money. I visualize the Fed Chairman driving down the Interstate with one foot on the gas pedal and one foot on the brake. He is not concerned about staying in his lane, he just wants to avoid running into the ditch!

The beauty of the free market is that no one has to know how to run the economy. Unfortunately, the Democrats and the Republicans do not get it. Every time they open their mouths about bailouts, the value of the dollar falls.

Friends ask me how do we “cure” this financial crisis? I answer with a question, “How do you cure an alcoholic or drug addict?” The government’s drug of choice is debt. The first step towards today’s financial crisis occurred with the creation of the Federal Reserve in 1913.

This financial crisis will end when other countries no longer accept the dollar as the reserve currency of the world. When that day comes, and it will come, we will become a third world country overnight. Additionally, there is a good possibility that we will also loose our sovereignty.

I am sorry that you do not see the sharks in the water. I have been seeing them since 1968 when I took my first macroeconomics class.

 

[ACCT]

Money

What is money? Money is all kinds of things. In the Wealth of Nations, Adam Smith said, “… a species of shells in some parts of the coast of India; dried cod in Newfoundland; tobacco in Virginia; sugar in some of our West Indies colonies; hides or dressed leather in some other countries …” were all used as money. Native Americans used wampum, (polished beads) as money, gold and silver have been used as money, and in World War II prisoner of war camps, cigarettes were used as money. Money is really just a state of mind, that is, whatever is acceptable as money is money.

“Acceptable” is the key word. U.S. money (the dollar) is the most acceptable form of money on Earth. Still, Americans have not accepted some forms of the U.S. dollar. Two examples are the two dollar bill and the dollar coin. Although we have confidence in both, we find them inconvenient, that is, unacceptable. Consequently, both have all but disappeared from the marketplace! Pennies are also becoming a nuisance as a medium of exchange because they are worth so little–many retailers now have a dish of pennies near their cash registers for customer’s use in making change. “The unit-of-account function refers to the way we think about and record transactions; the means-of-payment function refers to how payment is actually made.”

 

[Ridgerunner]

We have different assumptions. One day all the dollars in the world will not buy one ounce of silver. Fiat money, like the dollar, has a shelf-life of about 50 years. I started counting on June 24, 1968 when a dollar was no longer convertible into silver coins.

In the 1960s Paul Samuelson and many other economists believed that the government could “fine-tune” the economy. Hogwash! The economy is not an engine. Consumers are not robots.

The Federal Reserve controls both the supply and the price of money. I visualize the Fed Chairman driving down the Interstate with one foot on the gas pedal and one foot on the brake. He is not concerned about staying in his lane, he just wants to avoid running into the ditch!

The beauty of the free market is that no one has to know how to run the economy. Unfortunately, the Democrats and the Republicans do not get it. Every time they open their mouths about bailouts, the value of the dollar falls.

Friends ask me how do we “cure” this financial crisis? I answer with a question, “How do you cure an alcoholic or drug addict?” The government’s drug of choice is debt. The first step towards today’s financial crisis occurred with the creation of the Federal Reserve in 1913.

This financial crisis will end when other countries no longer accept the dollar as the reserve currency of the world. When that day comes, and it will come, we will become a third world country overnight. Additionally, there is a good possibility that we will also loose our sovereignty.

I am sorry that you do not see the sharks in the water. I have been seeing them since 1968 when I took my first macroeconomics class.

I think we’re just seeing different sharks. In part, I think you came very close to my point of view. You said that the Fed controls the price of money. And so it does. That being the case, it can manipulate its price and, while doing it, manipulate the prices of other things, including meat, milk, sugar, housing, clothing and gold.

You seem to be assuming that the Fed will not “reprice” money upward. It sure can do it as well as “reprice” it downward. Take money out of circulation like the Fed did in the early 1980s and the “price” of fiat money goes up relative to meat, milk, sugar, housing, clothing and gold. Pour money into circulation and its “price” goes down relative to those things. In that sense, money is a commodity too. And so is gold. In the late 1970s, an ounce of gold would have bought me a (used) car. In the mid 1980s, it would have only bought me a set of tires. Now it would buy me a used car, though not as good a car as it did forty years ago.

In my lifetime I have seen an ounce of silver go from $1.00 to $40 to $2 to (what is it now) $25 or so. Why all those changes? Because the Fed repriced the money it takes to buy silver.

You are assuming the Fed will never again reprice money upward. Having seen it, I am not willing to make that assumption.

But I will also add that, like you, I do not like the ever-increasing debt. I think it’s terribly hazardous, particularly when the administration is doing everything in its power to choke the economy in other ways. I didn’t like Greenspan’s “easy money policy”, nor do I presently like Bernanke’s. But I am not willing to bet that it will go on like this forever.

 

[BobCatholic]

Pooh-Pooh Accounting

My favorite accounting assumption is the monetary unit assumption. All accounting information is disclosed in dollars. However, a dollar is not a valid measuring tool because a dollar is changing in size. We do not have that problem with inches or pounds. Even a little inflation adds up. In 1946 the average income was $2,500, a new car costs $1,125 and a new house cost $5,600. What happens to the monetary unit when inflation is 180% or 800%? Some accountants came up with the idea of a unit of purchasing power. However, the idea was quickly abandoned when the media called it “pooh-pooh” accounting.

As opposed to our government’s accounting, which is poo-poo accounting

The single most effective thing you can do to reduce your carbon footprint is to not have children. In fact, if you believe in AGW, then I firmly believe that you are obligated to not have children…

Unfortunately, this is part of the culture of death that environmentalists seem to want. They start by dehumanizing the children.

Every time a culture dehumanizes one group of people, it continues downhill from there.

 

[BobCatholic]

You seem to be assuming that the Fed will not “reprice” money upward.

That is deflation. And the Powers That Be HATE deflation. Why?

This means prices go down. Profits go down. Wages go down.

And most importantly: TAX REVENUE goes down. This means less money for the government to spend on cronies. And that is the biggest eeeeeeeevil that must be prevented at all costs by turning on those printing presses.

Under deflation, ordinary people benefit from lower prices even if their wages are lower. Since wages cannot go below the minimum, the minimum wage earners benefit the most from deflation.

But The Powers That Be cannot have that happen. Cronies would suffer, and that is horrible!

 

[myriad1]

I don’t believe that it is possible to have a “final” collapse of an economy. History has shown us time and time again how ingenious and resourceful people are and how they can improve upon the past models of economics and social systems. With so much past experience to reference and with so many opportunities to brainstorm, I believe that the United States will somehow invent a new improved system of capitalistic consumerism based on service to developing countries.

To me, crisis thinking is a thought process stopped before it is completely thought through.

 

[Abu]

myriad1
Yes, but no new “invention” is required, the key is to cease the government finagling which has caused the booms and busts of the last 80 years.

Additionally, if communist China doesn’t adjust it’s exchange rate, U.S. tariffs against Chinese imports with the proceeds applied to reduce taxes on U.S. producers, should bring some sense into that trade and cause American firms relocated to China to want to return home.

 

[Ridgerunner]

myriad1
Yes, but no new “invention” is required, the key is to cease the government finagling which has caused the booms and busts of the last 80 years.

Additionally, if communist China doesn’t adjust it’s exchange rate, U.S. tariffs against Chinese imports with the proceeds applied to reduce taxes on U.S. producers, should bring some sense into that trade and cause American firms relocated to China to want to return home.

Actually, it’s easier than that. If we did not run the budget deficits we do, China (or its trading partners) would be forced to buy American goods and services in exactly the amount we pay for Chinese goods. All money has to return to its country of origin in some manner, or it becomes worthless. Unfortunately, we give China the alternative of buying debt instruments in huge quantity; a terrible drain on our national income and wealth because taxpayers ultimately have to pay the interest and the principle with no corresponding offset in the form of Chinese purchases of American goods and services, and resultant wealth creation here. If China had no alternative but to buy goods and services, it would return the wealth to this country and enhance job creation here. It could be through intermediaries, of course. They could buy, e.g., French wine with our dollars. But then the French would have the “return” problem.

 

[ACCT]

I don’t believe that it is possible to have a “final” collapse of an economy. History has shown us time and time again how ingenious and resourceful people are and how they can improve upon the past models of economics and social systems. With so much past experience to reference and with so many opportunities to brainstorm, I believe that the United States will somehow invent a new improved system of capitalistic consumerism based on service to developing countries.

To me, crisis thinking is a thought process stopped before it is completely thought through.

Unfortunately, your thoughts are just wishful thinking. It is imperative that you understand what the government is doing to your money.

These are some of my favorite quotes from Ludwig von Mises. He is known as the head of the “Austrian school” of economics. He was a Professor of Economics at the University of Vienna from 1934 to 1940

The whole system is the acme of the short-run principle.”

“The credit expansion boom is built on the sands of banknotes and deposits. ** It must collapse.”**

“If one wants to avoid the recurrence of periods of economic depression, one must start by preventing the emergence of artificial booms. One must prevent the governments from embarking upon a policy of cheap interest rates, deficit spending, and borrowing from the commercial banks. This is, of course, a very difficult task. Governments are in this regard very obstinate. They long for the popularity that booming business conditions seldom fail to win for the party in power. The unavoidable crash, they think, will appear only later; then the other party will be in power and will have to account to the voters for the evils which their predecessors have sown.”

“**There is no means of avoiding the final collapse **of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

 

[myriad1]

If our economy does indeed collapse, i will look back at several turning points:

1. Ronald Reagan’s union breaking policy and his nod to corporations that wanted to be permitted to outsource jobs without tariff penalties. Reagan set the precedent for subsequent presidents.
2. Bill Clinton’s embrace of NAFTA.
3. George W. Bush’s unjust wars in Iraq and Afghanistan and his failure to properly police Wall St, the banking industry, and Fannie and Freddie. I was appalled that Congress gave him the nod to declare those wars.
4. Obama’s decision to bail out everyone with taxpayer money. We probably should have just went into a depression and gotten it over with.

The Congresses of course share the blame whether Republican or Democrat as does the American Baby Boomer generation who really dropped the ball. As a boomer, I am personally ashamed at what we have left to those behind us.

 

[ACCT]

If our economy does indeed collapse, i will look back at several turning points:

1. Ronald Reagan’s union breaking policy and his nod to corporations that wanted to be permitted to outsource jobs without tariff penalties. Reagan set the precedent for subsequent presidents.
2. Bill Clinton’s embrace of NAFTA.
3. George W. Bush’s unjust wars in Iraq and Afghanistan and his failure to properly police Wall St, the banking industry, and Fannie and Freddie. I was appalled that Congress gave him the nod to declare those wars.
4. Obama’s decision to bail out everyone with taxpayer money. We probably should have just went into a depression and gotten it over with.

The Congresses of course share the blame whether Republican or Democrat as does the American Baby Boomer generation who really dropped the ball. As a boomer, I am personally ashamed at what we have left to those behind us.

I think that you missed the point. The problem is fiat money. Only governments can cause inflation by creating money out of thin air.

 

[ACCT]

One of the functions of money is a medium of exchange. If governments do not create money, people will invent money. A medium of exchange makes trading so much easier and efficient. Everything traded will be denominated in terms of the medium of exchange (i.e. money).

Measuring values in terms of an asset that represents the real value of money is the only real way to measure anything today. That’s even truer these days than ever before because paper currencies are so fickle and volatile in nature.

 

[myriad1]

but, it seems to me that governments HAVE to create money out of thin air and run up the debt so that they can keep their supporters happy. their supporters give them money so i don’t see a way around it with the high cost of running for office and staying in office.

 

[ACCT]

but, it seems to me that governments HAVE to create money out of thin air and run up the debt so that they can keep their supporters happy. their supporters give them money so i don’t see a way around it with the high cost of running for office and staying in office.

The party will end when the dollar is on its death bed. The final collapse of the dollar is inevitable.

 

[ACCT]

I am trying to sell the idea that the dollar is not a reliable measuring stick. The dollar is not tied to anything of value! However, gold is still money for most people in other countries, and it is a reliable yard stick. This is a difficult sell for Americans. We have not had the bad experiences with government money that other countries have had, until now.

Wake up and smell the coffee. If you understand that the old rules are no longer working, do what you can to financially protect yourself. Do not rely on government issued money that is not tied to anything of value.

 

[ACCT]

Grow the Government

The Federal Government and regulations on financial transparency are a perfect example in explaining additional regulatory burden. More regulations mean more federal employees. Here is how the system works. In order to become a government supervisor, the federal employee must supervise a specific number of individuals. For example, a federal employee may have to supervise a total of 14 people before being promoted to a GM-15. However, to support these 14 people there must be some work for these federal employees. Enter a major regulatory proposal to expand reporting requirements on accounting transparency. Accounting transparency becomes a new form of regulatory burden. This increased regulatory burden provides many new jobs in the federal government. Additionally, regulatory burden promotes many federal employees to supervisor. New accounting regulations will cause the need for many new jobs in the Federal government. New regulations will also cause unnecessary additional regulatory burden for private companies.

Federal regulations are excessively expensive. Additionally, federal regulations usually do not have a return to the taxpayer.

 

[myriad1]

On the contrary, federal regulations are worth their weight in gold because business has proven over and over again that it cannot and will not police itself well.

Yes, improvements to the regulatory system are always needed to improve its cost-effectiveness. There are federal agencies that constantly look for ways to lower costs. But, perhaps at no other time in the history of the United States, is it more important to have a good system of checks and balances on American business. Wall St, the banking industry, Fannie & Freddie are just a few examples of just how far business will take advantage of a country’s population if left to its own device. Never again should we Americans be so naive as to put our faith in American business to do the right thing.

 

[Abu]

myriad1 #97
Wall St, the banking industry, Fannie & Freddie are just a few examples of just how far business will take advantage of a country’s population if left to its own device. Never again should we Americans be so naive as to put our faith in American business to do the right thing.

The confusion here is in not realising that the government finagling over 80 years has been the major cause of booms and busts.

The start was in 1929, and when FDR took office in March 1933 consolidated it by even worse policies – he institutionalized the Great Depression.

If Coolidge made 1929 inevitable, it was President Hoover who prolonged and deepened the depression, transforming it from a typically sharp but swiftly-disappearing depression into a lingering and near-fatal malady, a malady “cured” only by the holocaust of World War II. Hoover, not Franklin Roosevelt, was the founder of the policy of the “New Deal”: essentially the massive use of the State to do exactly what Misesian theory would most warn against — to prop up wage rates above their free-market levels, prop up prices, inflate credit, and lend money to shaky business positions. Roosevelt only advanced, to a greater degree, what Hoover had pioneered. The result for the first time in American history, was a nearly perpetual depression and nearly permanent mass unemployment. The Coolidge crisis had become the unprecedentedly prolonged Hoover-Roosevelt depression

Economist Larry Kudlow and Wall Street Journal editorial board member Steve Moore point to the Carter-era Community Reinvestment Act of 1977 (CRA) that purported to prevent denying mortgages to black borrowers - by pressuring banks to make home loans in “low and moderate-income neighborhoods.” Under the act, banks were to be graded on their attentiveness to the “credit needs” of “predominantly minority neighborhoods.” The higher a bank’s rating, the more likely that regulators would say yes when the bank sought to open a new branch or undertake a merger or acquisition. (30/3/2008)

The debacle of the Government Sponsored Enterprises (GSEs), Fannie May and Freddie Mac, that bought loans from the Banks and often bundled them as mortgage–backed securities for sale to investors, enabled the banks to issue more mortgages, fuelling the inflation of home prices by artificially diverting resources into mortgage lending. These are known as sub-prime mortgage securities. Adjustable rate mortgages, fueled by people speculating in house purchases, and artificially low interest rates created by the Federal Reserve, were a major factor in defaults as prices fell in 2006.

Federal intervention creating a feeling of prosperity stimulates the boom-bust cycle, resulting in an inevitable crash. The free market is always blamed for that crash. These artificial booms, wrote economist Henry Hazlitt, must end "in a crisis and a slump, and . . .worse than the slump itself may be the public delusion that the slump has been caused, not by the previous inflation, but by the inherent defects of ‘capitalism.’ " (What You Should Know About Inflation, 2nd ed., Van Nostrand, 1965, 18).

The same political establishment now blamed the banks and Wall Street for the subprime mortgage crisis.
More intervention cannot solve previous interventions which have distorted free enterprise.