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401(k) Debit Card, Gold, Deflation/inflation, post-bust real estate looting, wage arbitrage, mandatory health coverage, Riley's Colander Theory, air traffic control and much more   (week of January 14, 2007)

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Albert T.

Just Put It on My 401(k) Debit Card:

"Borrowing against your nest egg is becoming as easy as stopping at an ATM. A growing number of companies now offer employees the option of being issued a debit card that taps a 401(k) loan. The card, called ReservePlus, allows workers to withdraw funds from their 401(k)s.

The immediate concern for consumers is that impulse spending desires could trump their long-term savings needs."

This just smells of desperation. To me it says the following: -please spend somehow spend borrow somewhere so you could spend just a little more it will all be OK just spend some more- and after that I think if there is a credit card with this sort of notion there must have been some demand to get it up to this point. Isn't it great having a 20% line of credit backed by your own savings with the bank risking absolutely nothing? just getting paid for providing a no-risk service simply wonderful. (at least thats my perception of it maybe I am wrong but it sure does smell that the bank has no risk at all)

"The ReservePlus loan program is growing. The card was first offered in 2003, and Young says employees who have used the debit cards for loans now number in the thousands." "The interest rate on ReservePlus loans is 2.9% higher than the prime rate, which is higher than traditional loans, and employees pay an initial set-up fee." (just wonderful sarcasm intended) (I am certain if you ever default on such a loan there will be a ton of fees with all those early withdrawal penalties etc...)

Why don't they make intergenerational loans, ergo if you have kids you as their legal guardian make them sign a commitment to be indentured servants of your debt which they promise to service after your demise. Would be sort of interesting how long you will have to pay for that big screen tv perhaps? We could have new loan programs with 6000, 2400, 1200 payments, heh. But of course everyone would be responsible and only borrow the amount they could afford right?

Riley T.

Today's article Terrorism, Good Intentions and the Erosion of Civil Liberties is certainly scary but inevitable. If you think you are afraid think about our leaders. They told every one they knew, that's why they got elected. In fact they are clue less.

I would venture that you and I and all your readers are among the most educated and well read people in America. I strongly recommend every one read Deer Hunting with Jesus: Dispatches from America's Class War Read this book and get in touch with what a minority we are in. Get out of your local environment and meet the illiterate and ignorant.

I don't mean to disparage any one by making these comments. I grew up with and was what would be called hillbillies or white trash. They care as much about you as you do about them.

Read about the working poor and get in touch with the struggle people have just to survive. Joe Bageant's book is a doorway into another world.

Scott M.

Instead of choosing (gambling?) on a currency with which to face the coming storm (Recession) why not consider Precious Metals? While I am not armed with graphs - the evidence shows that all fiat currencies are being inflated (debased) against commodities - particularly gold, as evidenced by almost any graph of any currency versus gold in the past 7 years.

What is the average prudent investor to do given the relentless drop in the US dollar against most or all currencies and commodities? You raise a concern that I share, and that is - if we head into a deep recession, most commodity prices will begin to suffer along with stock prices. It is not clear that the US dollar will be the worst performing currency going forward - as long as it manages to hang on to some semblance of "World Reserve Currency" status through the worst of the coming storm. It is my belief that the world's investors will be looking for both "Safe Haven" currencies and commodities.

The US dollar will at least be remembered by some investors (perhaps the older ones) as a "safe haven" currency in times of trouble. Will that slow or reverse its' slide against other currencies? Perhaps. Investors also have to consider where they will consume their proverbial basket of goods going forward. In other words, where you live, should have some bearing on what you invest in. If you are an American and you bet on the Euro as a currency (i.e. hold Euro bonds for example), you had better be right that the Euro continues to outperform the US dollar - or you will experience the double whammy of inflation and currency loss.

At least as an American, with American Bonds (lets say) you only have to contend with Inflation. That said - one still needs protection against (vastly) understated inflation. For me that makes bonds - perhaps one of the worst potential investments as an inflation hedge. The low returns do not offset (real non-reported) inflation. At best bonds/treasuries will be a temporary "safe haven" from a declining stock market (average drop of stock market during a Recession is 25 %). So now what is the solution?

The advantage of most commodities is that they cannot be printed like fiat currencies. However as you point out - most commodities (e.g Oil, wheat, copper, etc.) are subject to the forces of supply and demand. Gold, as a commodity is also subject to the forces of supply and demand. At high prices, and in particular during Recessionary times, demand may wane.

At the same time however, there are supply concerns with gold - there is plenty of evidence that the world is running out of gold. There have been no significant new discoveries of gold for decades (except perhaps Aurelian Resources operating in Ecuador). Even more importantly however, and at the risk of sounding like a gold-bug", which I am not, gold is the one commodity that also happens to act as a form of money (at least historically and perhaps psychologically). So to protect my purchasing power I am sticking with the historical trend (remember the trend is your friend) of gold holding up better than virtually any fiat currency as an inflation hedge.

I am also going with it as one of the few commodities most likely to hold up against demand destruction caused by a North American or a world-wide Recession. Peak oil advocates will make a similar pitch for why Oil prices will remain high.

Bottom-line? Get educated, make some choices, and hedge your bets.

Michael S.

"But I can foresee a situation in which we have deflationary monetary policy and rising costs for taxes, energy and food--hardly what the term "deflationary" would imply. CHS"


In the past, I've mentioned that I dislike the formation of "social endowments" because I see them as "regressive taxation on commodities," like food and create the problems you're worried about.

i.e. in the past, production savings were returned to the consumer but, in today's world, "production savings" now support things like "university endownments," for example, because "money managers" have made the claim that their investments, in capitol, are more important than the consumer's investment in loyalty and discernment.

These "incremental non market based costs" (nationwide taxation in my opinion) infuriate me because hospitals, for example, also want "endowments" and, unfortunately, it's probably too "unamerican" to fight these parasitic cost increases since they're wrapped up in the shroud of philanthropy;

I emphasize "shroud of philanthropy" here since these hospitals, for example, would never, as a policy, provide care to those who were forced-- through historically high commodiy prices-- and reduced purchasing power, to fund their hospitals.


in general, I agree that deflation is kind to consumers whereas, on the other hand, since banks want people to pay off their loans, banks depend on inflation.

This economic contradiction, in my opinion, gives rise to the "inflationary economy" since economists theorize that inflation causes deflation; i.e. if investors can depend on future inflation, they'll borrow money, invest it into R & D and then discovery efficiencies which bring about defaltion.

Of course this pocess is messy and Stirling Newberry (The Coming Double Dip Recession), for example, writes:

"There is not enough investment supply (R & D): that is a stream of businesses which will pay the natural cost of money. There is too much investment demand chasing too little supply, which means real returns must fall, except in those limited areas where there are resource benefits. Lack of Investment Supply. Put it on your wall and frame it."

So, right now-- I think that this balance between inflation and deflation, the sort of economy where both the banks and the consumers get a return, is being challenged.

thus, in closing, I'd speculate that what is called the "inflationary economy" is also the "trickle down economy" since inflation (credit to private individuals for R & D) precedes deflation (public wealth and purchasing power).

*     *     *

"Why would they allow that (hyper-inflationary) cycle to take hold?" CHS

I'd speculate that such a cycle rises the bar and effectively changes the definition of what "being rich" means and, thus, those without wealth, or those on the borderline, have to take bigger risks (politically and materially) to "remain rich" and if 90% of those efforts fail, others will benefit from a well funded gold rush.

A "nature analogy" would be the National Park Service; in the past, they've released huge amounts of water into the Grand Canyon to restore it.

James C.

I am studying Karl Marx this winter. I majored in economics in college and had a class on Marx then but have not really looked at his writing much since. It tends to make ones eyes glaze over, even someone like me that loves to study economics. The point is, the labor situation that was common during the time that Marx was writing would be unthinkable to Americans today, yet everyday many Americans purchase items made in countries that have a similar working environment.

I think the working class in America is going to meet the Asian working class somewhere in between the respective regions standard of living. That is going to be really difficult for an "upwardly mobile" America.

Corporate America is padding their bottom line and their CEO's pockets off the cheap labor in Asia. I suspect they are counting on the Asians of the 21st century being somewhat like the Americans of the 20th century (enthusiatic consumers). This, in my opinion, is what is contributing to the divergence in wealth between the working class and elite class in America.

Per your comments on deflation/inflation, there are two types of inflation. Oil is a good example, part of the rise in oil prices is due to the fact that there is probably not enough oil being produced to sustain demand over the coming years. This part of the rise in oil would still be there even if all foreign trade was still settled in gold. The other part of the rise in oil is due to the massive production of dollars via debt creation. This is the monetary part of the inflation. In today's world, all money comes into being by the creation of debt. Debt is just like humans, at any given time some is being born and some is dying. When we have a situation like we have had in the last several months, it is comparable to the plague, more debt is dying than is being born. This is deflationary and banks go into panic mode. They are a multi level marketing scheme, and have to have a constant flow of new borrower/depositors to keep the game going.

However, we have to keep in mind that we have the military industrial complex, along with all sorts of public programs (think medicare/medicaid) as a means of injecting money into the economy and they are VERY inflationary. I think that is why we can have evidence of inflation and deflation at the same time. Unless you keep really good records of what is going on in the whole economy, it is impossible to tell which one is going to dominate until it becomes obvious. By the time it is obvious we are screwed. That is why I am managing my accounts in such a cautious manner, there is no way to know which crisis we are heading for. One or the other for sure. Think of it this way, a couple or three bypass surgeries paid for by medicaid with money borrowed from China will cancel out one home mortgage default.

Kevin K.

Western Savings built a multi story building in Waco, Texas in 1986 and spent 10 million on the building.

The building sold in 1991 through the Resolution Trust Corporation to Clifton Robinson for 4 million. Robinson had an offer for 6 million the next day and turned it down. He eventually gave the building to Baylor University in about 99 and I bet he took around a fifteen million dollar tax deduction.

That is the taxpayer taking it on the chin through the RTC and the tax laws.

I had a conversation with a long time banker friend of mine two years ago when all this nonsense of poor lending practices had kind of hit its peak. We both agreed the 1980í savings and loan debacle will look like a picnic compared to what is coming down the pike. Bush is already talking bail out.

*     *    

The looting of real estate like what happened with the resolution trust corp. turned out to be very profitable. Why not try it again.

Now we have the sub-prime crisis. Prices are going to decline. Repossessions will peak. The PMI companies will all go broke paying that top 20 percent. The government will step in to save the day and the rich will get much richer and of course they will use some of that money to contribute to the political campaigns of the good old boys who made it all possible. I know I am a cynic but I got this way watching this stuff play out. Only the names are changed to protect the guilty.

The member banks of the Fed were instructed to call one half of their broker loans in October of 1929. With a 10% margin requirement and your loan is called and you donít have the money, you would be forced to sell right? When one half of the investors are all having to sell, what happens to the market? The money powers then came in and bought up equities for pennies on the dollar. Kind of like the savings and loan debacle. Kind of like what is happening now.

Albert T.

RE: wage arbitrage: I am afraid of two things: acceptance of the coming situation of wage competition becoming frantic and the necessity to work hard to survive because I enjoy being a semi-lazy person and I am sure many others as well. But angry tax rebellion is also a bit scary not for the sake of itself but for the politicians shifting burden from one business to another kaleidoscoping out any viable business out of their jurisdiction. Well NYC did go bankrupt before so at least they have that fresh on their memory here.

My sense is in the beginning there will be lots of fear and capital will win out in most cases until it drives down costs so low that it would be opportunistic for anyone with an entrepreneurial backbone to just take the client list from the company they work for and begin competing with their prior employer.

The worst possible thing is if we get universal healthcare because the way it will be structured will force everyone to pay for it without any cost control. (emphasis added CHS) Ergo like mandated auto insurance in New York, it would be mandated healthcare coverage. Once they make demand in-elastic at least by legislation and some sort of enforcement it will be sort of like two governments taxing your paycheck. Romney basically did it in his state and they made a cheap preamium of $150 or $200 but it's not really cheap if its mandatory and everyone has to pay it on average.

Massachusetts Moves Toward Mandatory Insurance

For an insurance company this is great you do not have to worry about clientele, they are forced to look for you, just compete with other companies which all calculate their cost and will come up with a price that guarantees profit so they do not even have to collaborate. First the price will be low to drive out all the low cost providers; once it's dominated by a few firms they will get their 20% year on year profits growing forever.

Riley T.

Well it looks like the market along with the financial institutions are on the edge again. The PPT along with the stooges are racking their tiny minds trying to figure out what wonderful thing they can come up with to get the market back up.

The real thing they are afraid of is admitting to every one that the stocks and bonds that support their pensions have no value. If the market crashes, that will be it for these bozos. It will be the beginning of total anarchy.

I really don't think in the end it really means much. While it's happening it certainly makes good theater. Pretend you are on a space ship from the planet Oftm, looking down, I believe you would think that the planet had a disease. Humans are corrupting and poisoning the planet, making it unlivable for themselves. Clearly these humans don't have the ability to reason.

The dictionary defines virus as some thing that corrupts or poisons.

Bangladesh is a little smaller the state of Iowa and they have 150 million people. The U.S. Has less then 5 per cent of the worlds population and consumes about 25 per cent of the energy. I don't know what this means but it must be a comedy of some sort.

I am waiting with baited breath for the announcement from the PPT, I think it must come before the market opens Monday.

Let me tell you about Riley's theory of wealth. This came to me after years of working with the wealthy and never discerning anything unique.

Riley's Colander Theory of Wealth...

God covered the world with a colander, thru most of the holes God pours crap however thru a few holes God pours money and to keep things interesting every few years God gives the colander a good spin.

For those who are challenged in the kitchen a colander is a bowl with holes in the bottom used for washing food.

Ron Sprouse

FYI regarding the air traffic controller strike. My father was an air traffic controller at Boeing Field in Seattle when he retired, just a short time before the strike. He was an air traffic controller in the Air Force in WWII helping the planes over the Hump in China.

I remember him sleeping for 8 hours after a shift and then returning to work for another 8 hours. There were not enough controllers hired for the work at hand. There was no radar, and he prefered it that way. All lights, and radio and Sea Tac control tower radar if they needed it.

They were interested in some sort of help, but a union was not an option then. The FAA wanted them to buy their own uniforms, but they refused and wore white shirts and ties instead. They were constantly asking for more help, but there was no relief. Wages were not very high.

The Seattle Times posted a cartoon of traffic control operators holding strings to numerous planes illustrated like balloons with the number of passengers written in the balloon. A hundred here a hundred there. (Westcoast was just trying out their 747 Jumbo jet, not in commercial use yet.)

Here's my point on the strike issue. Air traffic controllers were essentially still part of our armed forces under the FAA. What would happen if our armed forces personnel went on strike? They can't. Our defenses would be put at risk.

When the Cuban missile crisis occured, they gave the control tower a Red Phone to the White House. My dad also got a rad meter and a sign to put in the front windshield of his 1952 Nash Statesman that said "Air Traffic Controller must get to control tower". Reagan could not allow a strike because our national defense would be at risk. Therefore, they were replaced.

I believe this action sent an unintended message to some businesses that they could do the same, and therefore bust some of the smaller unions around the U.S. Hope this was of interest.

PS. I was a musician in Vegas Showrooms until our Union Local #369 was busted in the late 80's.

Thank you, readers, for such thoughtful contributions.

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