Financial Safety


So I recently purchased a new 27″ iMac fully loaded for a nice chunk of change and I looked back on my blog to figure out how long I had waited.   It turns out I had initially intended to buy it in 2008 but held off then in 2009, I got sacked because of the financial crisis and it’s now been two years and a month since that time and I’ve finally restarted to make large purchases.

To be fair, financial confidence actually happened sooner with a nice vacation to the east coast this summer but it’s interesting that financially prudent people really don’t dive into big expenditures until cash reserves and emergency reserves are fully replenished before taking a plunge back into the consumerist lifestyle.    Things are very different for me though because I’ve paid down almost all debt including mortgage and now have excessive cash reserves so it’s seemed appropriate to spend some cash.

This year I’ve taken two nice vacations, purchased an iPad and iMac and just purchased another iPad as a gift for someone special ;).   So where does that leave us now?   If we do hit another recession or dip deeper into more malaise then there possibly can’t be any economic boom until at least late 2013 or even 2014.  In the meantime, cash keeps tumbling in on my investment activity so I’ll keep chugging along.

This Wall Street Journal article points out what I’ve been suspecting for years: Pre-paid college tuition is a scam!  It’s a scam or rather “ponzi” scheme just like social security, medicare and any other government program with similar characteristics.

This poor woman has contributed $100,000 under the false assumption that her grand kids college education would be taken care of but now the state is struggling to keep up and finding all sorts of loop holes to not fulfill their obligations.  Hmmm…..sound familiar?

Patti Lambert wanted to pay the college tuition for her eight grandchildren. So for the past 16 years, the real-estate agent signed onto the state of Alabama’s prepaid tuition program. She invested more than $100,000—a daunting amount but a good deal because the prepaid plan promises to cover tuition no matter how much it increases.

Or so she thought. Facing a severe funding shortfall, Alabama is trying to renege on its promise to foot the whole bill. Instead, the state wants to pay the average tuition rate, potentially forcing schools and families to make up any difference.

When my wife and I first got married, we went through our finances and my wife showed me some contributions she was making to a similar program for her younger sister.  I immediately told her to quit paying it and request a refund.  She got all of her money back and we put it in savings.   I told my wife that when the time came, we would help her out as much as we could but that ultimately the plan wasn’t going to work.   A few years after the state froze the program and significantly modified the plan, making many people unhappy.    My sister in law graduates this May and my wife’s been helping her along the way with tuition and other items.

I’m still waiting for the day when the exact same thing happens to social security and at the current rate of disintegration that should only be a few years away.

It seems like all revolutions start on college campuses and this time won’t be any different.  From California, it seems unbearable tuition hikes were the final straw…

The UC regents are expected to put the final seal today on a hefty 32 percent tuition increase as students resume the protests that shut down their board meeting three times Wednesday and required campus police in riot gear to maintain calm.

Students, furious at the increase that will bring their yearly fees above $10,000 for the first time, rushed the UCLA building where the regents were meeting, throwing food, sticks and vinegar-soaked red bandannas meant to look like blood.

UC police arrested 14 people for disrupting the meeting and resisting arrest.

Wednesday’s vote by the regents’ finance committee was also protested at UC Berkeley, where about 1,000 students, faculty and university workers filled Sproul Plaza for a noontime rally. About 300 protesters turned out at UC Santa Cruz. The full board is to vote today.

Read more: http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2009/11/19/MN9O1ALCKG.DTL#ixzz0XM5ip14U

So how far and fast is spreads from there is up for question but I won’t be surprised to see a grass roots movement spiral out of control.

I keep getting weekly offers for 0% APR balance transfers but after all the bank shenanigans can you really trust them?   I have to say that what is really keeping me from them aside from the possible rate jack is the ridiculous 4% balance transfer fee.   Borrowing 50k at 4% is essentially $2,000 in balance transfer fees and that is too steep a price to pay in this deflationary environment.

I called a major credit card company a few days ago to activate a new card they had sent me to replace an expired one and the agent on the phone was probing to find out how they could get me to use my card more often.   I explained that I primarily use my Costco Amex card and get a generous rebate on my purchases and they immediately offered to switch me to another plan with 1% cash back but that still doesn’t beat Costco’s Amex program so I told them I wasn’t interested.

A few days later, I get a new credit card in the mail touting the new rewards on the card which I specifically stated that I didn’t want.   If I can’t trust these guys NOT to send me a new rewards card, how can I trust them on a balance transfer offer?

According to the Federal Reserve System there is approximately $600 billion in cash circulating around the world. usprintedmoney

According to the US Treasury, approximately $750 million dollars of US currency are printed annually primarily to replace aging/damaged/worn currency

During fiscal year 2007, the Bureau of Engraving and Printing (BEP) produced approximately 38 million notes a day with a face value of approximately $750 million.

What can be derived from these two pieces of information?

We can posit that Americans generally “consume” approximately $750 million in cash yearly.   By “consume” I mean “wear out” the currency to the point where it needs to be replaced.  If there are 300 million people in the US trading dollar bills in the amount of $750 million then on average $2.50 is traded yearly between people.   That’s sound a bit odd doesn’t it?

If we look at the population demographics:

  • 0−19 years: 27.4% (male 42,667,761; female 40,328,895)
  • 20−64 years: 60.1% (male 89,881,041; female 90,813,578)
  • 65 years and over: 12.6% (male 15,858,477; female 21,991,195)

We can make some assumptions, the 0-19 will likely not have too much cash on hand so the remainder of the populous will be dealing with mostly cash transactions which gives us aboute 113 million people.   Doing the math again we get roughly $6.60 per transaction.

How can this puny amount be correct when you know you spend at least $10 on lunch, $20 on gas, and $5 on Starbucks every other day?   The answer is that the remainder of the transactions are done with CREDIT and not cash.   If these transactions were being conducted in cash, the amount of currency in circulation would need to grow exponentially.

So let’s take a leap of faith, what happens when the CREDIT disappears?   How will these transactions be conducted if they are still necessary?   The only solution is to utilize cash.   Where do most people keep their cash?   At the bank!   What happens when banks run out of credit to give and have a sudden and huge demand for cash?

As for the other cash circulating around the world, it’s doing just that, circulating around the world in respective countries to conduct business transactions or to use as a store of value.

It’s not too difficult to figure out, all you have to do is follow the money and do the math.

Note that I’ve used various assumptions, get out your spreadsheet and run the numbers any way you like and you’ll be able to figure out more or less when the bank runs will begin, it’s not rocket science it’s basic math.

I’ve been warning people over and over again but the complacency persists but now you can hear it from the FDIC chair’s mouth:

March 4 (Bloomberg) — Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.

Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

I’ll refer you to this post I wrote back in October.

I’ll reiterate: When people realize that the money they thought they had in the stock market is gone, when they realize that their credit lines have been cut and when they have no cash on hand left to pay for fuel, groceries or medicine there will be a stampede at your local bank.   The first ones to get there and pull out some or all of their cash will get their money; the lazy, the ignorant, the socialized, the optimists, and the clueless will be left cashless.

Continuing on yesterday’s discussion about what to do in the post economic collapse (ecopalypse), my friend wants to return to a gold standard.  While I own physical gold and agree it’s prudent to own some, it’s not the panacea that many people think it will be to return to a gold standard.

For starters, if gold increases to $2000/oz you can bet that there will be more armed robbers chasing after women’s (and men’s) wedding bands and gold jewelry.  You’ve already seen those cheesy “Cash For Gold” commercials and how long before outfits like that become the defacto pawn shop for criminals?

I just finished Kim MacQuarrie’s The Last Days of the Incas which gives a great overview of the Spanish conquest of the Incan Empire and it helped remind me that there was a great deal of suffering in the world because of the lust for the yellow metal during the colonization period.

Imagine if gold increased in value to $5000/oz.  What do you think would happen to society at that point?  Walking around with gold jewelry of any kind would be the same as flashing a giant neon sign with, “I’m Loaded, Rob Me!” right over your head.

While I occasionally have been infatuated with gold, I clearly understand the danger it represents if the price for it gets out of control.

I was talking to a friend about the coming epocalypse (economic apocalypse) and what to do the day after. He strongly suggested that I buy a farm or land and start growing my own food. I retorted that is was unrealistic and unfeasible for every American to go out and start their own farm and grow their own food.

Think about the sheer amount of land, water and fertilizer needed for each person to grow their own food and maintain their own livestock. I’ve always wondered how many horses we would have roaming around if the automobile hadn’t been invented. Think about 300 million Americans each owning their own horse. I don’t know how much shit a horse produces in a day but that would be a ton of crap all over the place. How much food and water does it take to maintain a horse anyway? How much grazing land would be needed?

He quickly agreed that it was impractical for everyone to go out and get a farm to grow their own food. The discussion turned to gold and silver and I’ll have another post on this subject tomorrow but we concluded by saying that having ample stores of food to last for a while was a prudent move. We came to the same conclusion that I talked about a while ago: Food, Medicine, Shelter and Security are the main priorities now.

It’s becoming abundantly obvious that even if this stimulus bill passes and is enacted and carried out that it is not really going to help much. At best, the bill will simply postpone the coming mega disaster about 18 months if it even gets to the point of making a difference.

Job losses continue to mount and for those that still have jobs, hours are being cut back, salaries are being reduced and benefits are becoming non-existent. Take a good look at what’s in the stimulus bill:

United States Congress

The American Recovery and Reinvestment Act of 2009
Creating Jobs, Supporting the States and Investing in Our Country’s Future

The United States is facing its deepest economic crisis since the Great Depression, one that calls for swift, bold action. The goals of this legislation are the same as they have been from day one: to strengthen the economy now and invest in our country’s future.

This legislation will create and save jobs; help state and local governments with their budget shortfalls to prevent deep cuts in basic services such as health, education, and law enforcement; cut taxes for working families and invest in the long-term health of our economy. We do all of this with unprecedented accountability, oversight and transparency so the American people know their money is being invested responsibly.

To accomplish these goals, The American Recovery and Reinvestment Act provides $311 billion in appropriations, including the following critical investments:

Investments in Infrastructure and Science – $120 billion
Investments in Health – $14.2 billion
Investments in Education and Training – $105.9 billion
Investments in Energy, including over $30 billion in infrastructure – $37.5 billion
Helping Americans Hit Hardest by the Economic Crisis – $24.3 billion
Law Enforcement, Oversight, Other Programs – $7.8 billion

Do you honestly see anything here that will truly “stimulate” the economy?  Quite honestly, even reducing the tax rates to zero isn’t going to fix the fundamental problem:  people grossly overpaid (via leverage) for assets and have walked away from the debt and the assets.

The ONLY solution I see is to dissolve the Federal Reserve, create a new central bank, and issue new currency.  Perhaps it’s time for that “Amero” everyone has talked about and issue it at a value of $1 Amero = $10 Fed Dollars.    As people get paid in Amero’s, the old Fed Dollar debt will be inflated away rather rapidly.   Houses will then be sold in Amero adjusted currency, banks will lend in Ameros and receive payment in Ameros.

It’s the only way, anything else will be extremely painful for everyone and we’re just about to cross the proverbial “tipping point” with these political schemes that things can quickly deteriorate around the world.

I’m waiting for the first contract to be officially voided via a force majeure clause because of this economic crisis. Over the years, I don’t think I’ve ever seen a contract that didn’t include a force majeure clause in it.

If you don’t know what force majeure is, here’s a wikipedia definition:

Force Majeure (French for “superior force”) is a common clause in contracts which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, or “act of God” (e.g., flooding, earthquake, volcano), prevents one or both parties from fulfilling their obligations under the contract. However, force majeure is not intended to excuse negligence or other malfeasance of a party, as where non-performance is caused by the usual and natural consequences of external forces (e.g., predicted rain stops an outdoor event), or where the intervening circumstances are specifically contemplated.

Although the definition doesn’t explicitly state “global economic meltdown” as a cause, I can easily see how it can apply as politicians keep talking about the economic meltdown as a “once in a lifetime event” or “an act of massive crime” over the past few months.

I follow the energy, finance and healthcare industries closely as part of my investment portfolio and almost all the business activities of these industries rely heavily on contracts (with force majeure clauses) to conduct business.

Imagine a hospital stops receiving medical supplies because the provider doesn’t have enough cash/credit to pay their manufacturers: easy out – force majeure!

Imagine an oil and gas drilling company lose all of their overseas contracts because their customers don’t have bank credit or cash to pay day rates: easy out – force majeure!

Imagine a federal judge deciding that the securitized loans sold from Bank A to Investment Group B included a force majeure clause that was now in effect because of the economic crisis and PRESTO the terms of the loans are changed!

I see it coming, do you?

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