Best of Dennis – The Problem Ain’t The Cost Of Money – It’s The Cost Of Stuff!
Best of Dennis…
Dennis is taking some much-deserved vacation time, and will be back writing soon. This article was posted originally on January 18, 2024, it is still relevant today….
New Year’s Eve, 1999 – a special time for Jo and me. We took our motor home to Key West, Florida. We celebrated the magic moment, the turn of a century, in front of (famous Ernest Hemingway hangout) Sloppy Joe’s Bar.
As the conch shell slid down the pipe, people yelled, “10-9-8-7″…until the clock struck midnight. Happy New Year! I kissed my bride and we headed back to the bus (hoping Y2k didn’t fry our computer).
The intimacy of a motor home provides a great opportunity for lots of conversation. 2000 was a personal milestone, I turned 60. Jo and I spent a lot of time reflecting; wondering what the future would bring.
I predicted we would recall the last decade as “The good old days.” Little did I know how right that would turn out to be.
What was so good about them?
Interest rates stabilized from the double-digit Volcker years. After a short 1990 recession, business was booming, moving quickly into the internet era.
While Clinton pushed through the largest tax increase in history, House Speaker Gingrich kept his campaign promise, holding the line on government spending; creating the last budget surplus we will likely ever see.
On January 1, 1990, the Fed funds rate was 8.25%, dropping to a low of 3% in 1992 and hovering in the mid-5% range for most of the decade.
With Volcker bringing inflation under control, interest rates stabilized and mortgages were affordable. CD and bond interest rates were above inflation.
| Interest rates were not an impediment or incentive to doing business. |
I was managing the money for both sets of parents. We invested in safe, secure investments. Their interest income, coupled with social security allowed them to live comfortably, without worry. Times were good.
What the heck happened?
A year later, 9/11 occurred, followed by huge government deficits, spending hundreds of billions for the never-ending “War on Terror.”
While Clinton took credit for boom times and balancing the budget, the effects of certain policy decisions were not yet evident.
Clinton prided himself on increasing homeownership for the poor and minorities. Banks were required to make loans to buyers with poor credit history – or they risked losing their charters. The banks complied, while screaming to the government they would fail if the process continued. Instead of tightening loan standards, government agencies, Fannie Mae and Freddy Mac were authorized to buy these risky loans from banks.
Banks no longer worried about the creditworthiness of the borrower. They added outlandish origination fees to the mortgage, while passing the default risk to the government (US taxpayer). Billions flowed into the housing sector.
Clinton pushed the 1999 repeal of the Glass-Steagall Act, allowing banks to merge with brokerage firms. In a few short years, five banks controlled almost half the nation’s wealth.
These new casino banks jumped in, writing thousands of risky mortgages to all comers, many in excess of the value of the underlying property. They packaged these high-risk loans into fee-based products and peddled them to unsuspecting investors.
The movie The Big Short details how the rating agencies gave these mortgage packages improper ratings, creating an illusion of creditworthiness and safety.
The casino banks got bigger and gambled with trillions in derivatives.
Investopedia defines derivatives for us:
“Derivatives are financial contracts, set between two or more parties, that derive their value from an underlying asset, group of assets, or benchmark. A derivative can trade on an exchange or over-the-counter. Prices for derivatives derive from fluctuations in the underlying asset.”
The repeal of Glass-Steagall’s created this monster. Famed (Big Short) investor Michael Burry warned Wall Street about the toxic loans, predicting a real estate crash. No one listened, they mocked him. The crash came, the casino banks (deemed, “too big to fail”) were bailed out with trillions of taxpayer dollars. The Fed flooded the banking system with credit and dropped interest rates to historic lows, well below the true inflation rate.
Their in-house trading (gambling with our money) continues. If they lose, taxpayers will cover their losses.
Wall Street On Parade reports:
“Three Wall Street Mega Banks Hold $157.3 Trillion in Derivatives – That’s $56.7 Trillion More than the Entire World’s GDP Last Year”
Consumers, industry and governments binged on “free money;” borrowing and spending like there was no tomorrow! Experts warned inflation would follow; most were surprised it took so long.
After reaching double digits, heading toward Zimbabwe-type inflation, the Federal Reserve finally had little choice but to raise rates – not wanting citizens to storm the palace.
The current Federal Funds rate is 5.5%. Many cheap loans are now coming due and must be paid off or rolled over at a much higher rate.
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Prices have exploded!
The Wall Street Journal recently reported the average monthly mortgage payment has soared to $3,322 from $1,787 since 2021. Why?
Interest rates were kept artificially low, mortgage rates have risen since the Fed brought interest rates back to pre-2008 normal.
MSN.com explains:
“Homeownership has become a pipe dream for more Americans, even those who could afford to buy just a few years ago.
Many would-be buyers were already feeling stretched thin by home prices that shot quickly higher in the pandemic, but at least mortgage rates were low. Now that they are high, many people are just giving up.
…. Typically, high mortgage rates slow down home sales, and home prices should soften as a result. Not this time. Home sales are certainly falling, but prices are still rising—there just aren’t enough homes to go around. The national median existing-home price rose to about $392,000 in October, the highest ever for that month in data that goes back to 1999.
…. Buyers get a lot less home for their dollar. Before the Fed started raising rates, a person with a monthly housing budget of $2,000 could have bought a home valued at more than $400,000. Today, that same buyer would need to find a home valued at $295,000 or less.”
Y-Charts shows us the numbers:
Don’t buy government baloney!
James Rickards explains:
“Everyday Americans understand inflation perfectly. …. Inflation is one of the biggest concerns of those who live in the real world.
…. Here’s the reality and here’s the political narrative: Reality is that prices have been going up at the fastest rate in 40 years and they are still going up.
Inflation (on an annualized basis) was 9.1% in June 2022, 4.9% in April 2023, 3.7% in September 2023 and 3.1% in November 2023.
| It’s true that the rate of inflation is coming down, but prices are still going up. They’re going up at a slower rate but they’re still going up. |
…. The average price of a pound of ground beef in the U.S. was $5.11 in September 2023. In October 2023 the price of a pound of ground beef was $5.23. That’s a 2.3% increase on a month-over-month basis, which annualizes to over 25%.
That’s the kind of inflation that real Americans confront every day.
…. It is possible to use propaganda to lie to the American people; it can work in the short run. But inflation is not one of those areas where propaganda works. The American people know what things cost, they know prices are going up, and no amount of lies can change that.”
Bankrate chimes in:
“Inflation is eroding workers’ gains. Three in 5 workers (60 percent) say their incomes haven’t kept pace with inflation over the past 12 months, up from 55 percent last year. For those who did receive a pay bump of some form, more than half (53 percent) said their incomes haven’t kept pace with inflation, up slightly from 50 percent last year.”
| “Inflation makes the extension of socialism possible by providing the financial chaos in which it flourishes.”
— Henry Hazlitt |
Mark Hamrick, Bankrate Senior Economic Analyst adds:
“While inflation has come down, broadly speaking, prices have not. There is a…virtual sticker shock that continues to weigh on the minds and pocketbooks of consumers.”
Bill Bonner summarizes:
“For the average working man, almost everything went up in price – except the real value of his major asset: his time. So, he had to spend more time to get the basics in life. Before the money switcheroo, he had to labor for about 4 years to buy a house, for example. Today, it will cost him more than 8 years of labor.”
The casino banks are screaming, profits are down, the Fed has to pivot and drop interest rates. Baloney! When Volcker pivoted, interest rates were double-digits and he pivoted back down to “normal.” Today’s rates are at historical “normal” – what worked for decades.
Lending cheap money to high credit risks (government included) creates the illusion of prosperity while creating terrible, inevitable inflationary consequences.
The cost of money ain’t the problem, it is the cost of stuff.
Leave rates alone, don’t make things worse. Volcker got us through a recession – things will work out once the excess debt is out of the system.
As always, politicians scream, “vote for me, I’ll fix the problem!” Ain’t gonna happen, no matter who wins the election. Without massive spending cuts and sanity in Washington, nothing will change. It’s no wonder many of us are holding on to our gold wishing for, “the good old days.”
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On The Lighter Side
Quote(s) of the Week….
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…. will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” — Thomas Jefferson
“The most important thing to remember is that inflation is NOT an act of God, that inflation is NOT a catastrophe of the elements or a disease that comes like the plague. INFLATION IS A POLICY.” — Ludwig von Mises
Until next time…
Dennis Miller
“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken
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