Banks and Delinquent Borrowers: The Chickens Are Coming Home to Roost

We got a little problem here.....

A progress report released last week by the Treasury Department showed that only 11 percent (about 95,000) of Bank of America's (BAC) delinquent borrowers who were potentially eligible for the program had been given a loan modification. That compares with 27 percent, or 117,000, for J.P. Morgan Chase, and 33 percent, or 68,000, at Citigroup, the Treasury reported. The figure for Saxon Mortgage Services, which is owned by Morgan Stanley, is 41 percent, or 32,000.

There are too many conflicting currents here, which is what will ultimately doom this program, as has doomed all the previous ones.

First among them is the simple question: How many of these people who allegedly "qualify" for a modification will wind up with a sustainable mortgage if they get one?

This is a key question, yet one that hasn't been asked in public, nor have there been public answers tendered. The truth is pretty ugly - without significant principal forgiveness (not "forbearance") a huge, perhaps even majority percentage of these loans are not sustainable even if modified.

The problem is simply that on any reasonable set of assumptions, the income of the household does not support the principal balance. "HAMP" calls for modifications to reduce principal and interest for all outstanding mortgage liens (firsts and seconds, if any) to 31%.

Here's the "waterfall" process, as shown by MGIC (one of the mortgage insurers who has been hammered severely by this mess)

The problem here is that several of these steps don't do much. If you "capitalize" arrears all you're doing is adding them to the principal balance of the loan. This "cures" the instant default but does nothing to solve the underlying problem that caused it in the first place (unaffordable payments.)

Reducing the interest rate helps only if the owner started with a "reasonable" rate up front. If their original loan was an "OptionARM" with a teaser, and they qualified on that teaser, they're unlikely to get to sustainable payments even with a reduced interest rate.

The third step, extending terms, does little as well. A $200,000 loan @ 5% over 30 years has a P&I of $1,069.19. The same loan over 40 years (the maximum extension) has a P&I of $960.39. $100 matters (it's about a 10% payment reduction), but if the difference of $100 makes it possible for you to pay, then you're still one unscheduled calamity (e.g. your car needs a new alternator) away from being delinquent again.

The fourth step, "forbearing" principal, is not principal forgiveness. It is simply deferment, turning your note into what amounts to a balloon. This last step is particularly nasty for homeowners in that it will preclude you from being able to move for a decade or more, and will make it impossible for the workforce to follow job opportunities, as you would have to pay off the balloon in order to sell the house.

Then you have attitude:

Even as the administration urges lenders to do more to help homeowners, some Bank of America employees continue to express skepticism about whether all of those seeking assistance really need it. "There's a difference between hardship and entitlement," said Jerry Durham, Bank of America's vice president of home retention.

Oh really? Let us remember that Bank of America "acquired" Countrywide Financial, the king of making unsustainable and outrageously risky loans that were pushed like a drug junkie shoves his smack under the nose of debt addicts. Never mind that Bank of America seemed to think it was "entitled" to tens of billions of taxpayer dollars. Now the bank suddenly thinks that other people being "entitled" is such a bad thing? Who set the example?

The article also cites a disturbing trend:

On a recent morning, Tiffany Palmer was on the line with a frustrated borrower looking for help with his mortgage. He was $6,000 behind in his payments.

"Do you have a 401(k) or savings -- liquid assets that can be quickly converted into cash?" she asked him. He was going to have to come up with money for the mortgage. Because his monthly mortgage payments represented less than 31 percent of his income, he made too much to qualify for a modified mortgage under the federal initiative. "You will not be eligible for the program," she said.

This sort of "advice" should be barred under Federal Law and result in criminal sanction, especially for banks that have received taxpayer funds (of which BAC is particularly exposed.) Why? Because 401k and IRA money is protected in the event of a bankruptcy, with few exceptions. As such it is outrageously irresponsible to suggest that a debtor in trouble liquidate retirement accounts to come current, especially when nothing is being done to make the loan sustainable in the long term. Better to file bankruptcy and shove that loan up the bank's behind!

Never mind this sort of advice:

Could she skip her credit card payments, about $400 a month?

Oh, so that's nice - screw someone else so we get ours? Uh huh.

The conflicts of interest here are huge:

• The banks have "Servicing Rights" (or MSRs) that require them as servicers to advance principal and interest payments to the noteholders. There are several risks involved in such an enterprise, of course, including the risk that the debtor won't pay at all, but in addition, there is "prepayment" risk - that is, anything that causes the loan to terminate early (short sale, refinance, etc) decreases the value of that loan to the bank holding the servicing rights. These "MSRs" were "written up" in a major way in the first and second quarters. Was that a fantasy? Probably.
• Forbearance, interest rate reductions and similar games sound good but they decrease cash flow. Remember that the ultimate holders of these notes through securitization have to agree. When this is Fannie or Freddie this simply forces their heads further underwater, but when it is someone else they have no mandate to agree to take less than they contracted for. In most cases securitization documents permit some small percentage of modifications without investor approval (e.g. 5% of the loans in the pool) but once that threshold is crossed the story changes.
• In addition, and perhaps most importantly, a loan that is modified but which re-defaults is one where the investor made a good faith change (reducing his or her cash flow) believing that it was cheaper than prosecuting a foreclosure, but then wound up with both the lower cash flow and the foreclosure! This is perhaps the most serious problem and unlike the others it is not really a conflict of interest, it is simply the expression of the fact that in nearly all cases the first loss you can take and clear your board is the best loss; the more screwing around you do the worse things are.

The bottom line is that there is no evidence that HAMP is working or can, and the Congressional Oversight Panel has seen through the ruse:

The Panel found, "The result for many homeowners could be that foreclosure is delayed, not avoided." HAMP modifications are often not permanent: For many homeowners, payments will rise after five years, and although the program is still in its early stages, only a very small proportion of trial modifications have converted into longer term modifications. The Panel is also concerned about homeowners who face negative equity or are "underwater" - that is, the value of the loan exceeds the value of their home. For many borrowers, HAMP modifications increase negative equity, a factor that appears to be associated with increased rates of re-default.

Yep.

At the time I said that these efforts would fail as there is no actual solution other than forcing those who made bad loans to eat them. HAMP, and all other programs like it, are inherently just another gimmick promulgated upon the public by our government - another form of "extend and pretend", that when boiled down to its essence is legally-sanctioned accounting fraud.

The solution to unaffordable mortgages, as I have repeatedly noted, is foreclosure and a forcing downward of housing prices whether Congress and The Administration want to admit it or not. Affordable housing requires not gimmicks but houses that are inexpensive enough for people to be able to purchase and afford on an ongoing basis. We're not there, despite the crooning of The National Association of Realtors and other associated pressure groups.

This is directly contrary to the stated policy of Congress as expressed by Barney Frank, who has said that making bad loans on purpose is A POLICY to prevent home prices from contracting to long-term sustainable values.

In other words the bankers and Realtors have effectively bought Congress and goaded them into keeping home prices unaffordable for the average American. Refusing to reverse course on this policy will guarantee that sustainable economic growth will not return to America.

We will not and cannot, mathematically, exit this crisis until the bad debt is flushed from the system. This same sort of gimmickry and game-playing was attempted in the 1930s and was directly responsible for The Depression extending for a decade, ending only when World War II began.

You would think that we would have learned from this history lesson that all the game-playing in the world will not solve a debt problem, nor will shifting debt from one hand to another (e.g. to the federal government) lead to a sustainable economic recovery.

Those institutions that made bad, unsustainable loans must be forced to recognize their losses, even if it results in business failure. Only through contraction of these asset prices to sustainable levels where people can afford to purchase them on an ongoing basis given the actual employment prospects that exist (including the consequence of offshoring all our call centers and most of our manufacturing!) will we exit this crisis.

Housing prices must come down significantly - very significantly - from here. This will bankrupt many lenders who made unsustainable loans and that must be not only allowed to occur but encouraged so as to result in truly sustainable home ownership.

An environment of excessive debt, fostered by the improper and ridiculously negligent and intentional acts of both Congress and The Federal Reserve, cannot be resolve with more debt, and more than you can solve a drunk's problems by handing him another bottle of whiskey.

Comments

[dieuwer:]

1) Who would be willing to lend you $500K with no money down?
2) Who would be willing to lease you $500K worth of gold?

Why would anyone lend $500K if he/she knows the money will be repaid with depreciated dollars? You think people are that stupid??

On Oct 14 01:01 PM Mark Anthony wrote:

> Even that is not true. The housing affordability has nothing to do
> with treasury bond yield. The dollar could collapse and the treasury
> bond yield can go to the moon, but you can still pretty much afford
> a decent house, if you understand that a house retains its intrinsic
> value while your debt will become worth less and less.
>
> Buy a house, rent it out. Chances are that the rent probably pays
> for the mortgage payment. From economic principle, the rent should
> ALWAYS be higher than the carrying cost of the house, otherwise there
> will be no house rental business.
>
> Alternatively, buy a house at $500K on a $500K loan. Then lease $500K
> worth of gold, using the house as mortgage. Use the gold to pay off
> the loan. And then from that point on you only needs to pay the lease
> rate of the gold. At 0.5325% one year lease rate, it costs you only
> $2662 per year, or $222 per month. How about owning a half million
> dollar house for a cost of only $222 per month?
>
> The rease rate of gold reflect the REAL interest rate, inflation
> adjusted.
>
> On Oct 14 08:34 AM Andrew Butter wrote:

Oct 14 01:29 PM

[Mark Anthony:]

Karl:

Karl:
You are completely wrong.
The equity of a house equals the value of the house, subtracting the value of the loan, principal and cumulative interest. Your monthly mortgage payment pays down the debt and increases your equity. But your monthly payment is not the only thing that causes your equity to increase. The depreciation of the dollar pushes down the value of the debt you owe, even if you pay not a single dime.

If the house itself "appreciate" faster than the growth of compounded interest and principal of the loan, then it costs you nothing to carry the house and the loan. Not only it cost you nothing, you actually gain something.

To understand this concept, let me tell you that I put down $100K down payment and took a $200K loan, for a total of $300K, to buy 1714 ounces of palladium in a broker's pool account, when palladium was at $175. The loan cost me 7% annual interest. That means I need to pay $14K in interest per year, or $1167 per months. Could I afford an extra $1167 per month on top of my other expenditures? NO. But I have not paid a dime. The loan just compounds.

Then palladium appreciate to $200, interest added to my loan was $2333, so I owe the broker $202333 while my palladium is now worth 1714x$200 = $342.8K. My equity is therefore $140,467. I borrow another $78.6K to buy 393 ounces of palladium. Now I have 2107 ounces and owe the broker $280933 in debt.

Another two months and I pay $3278 in interest, now I owe $284211 in debt. But now my 2107 ounces of palladium is worth $225 per ounces. So my equity is $189864. I want to maintain a debt/equity ratio of 2.0, so I borrow another $95625 from broker to buy another 425 ounces, bring my total to 2532 ounces and my debt to $379836.

Another two months and I pay $4432 in interest. Do you think I have that much money to pay from my monthly income? It just compounds into my loan, so now my debt is $384268. But now my 2532 ounces of palladium is worth $250 each. So my equity is now $248732. So why not borrow more? I borrow $113250 to buy 453 ounces more. Now I owe $497518 and own 2985 ounces of palladium.

Another two months. Interest paid $5804. Borrow $131725 more to buy 479 more ounces at $275 each. Now I owe $635047 in debts, but I own 3464 ounces of palladium.

Another two months. Interest compounded $7409. Borrow $150900 more to buy 503 more ounces at $300 each. Now I owe $793356 in debts, but I own 3967 ounces of palladium.

Another two months. Interest compounded $9256. Borrow $170625 more to buy 525 more ounces at $325 each. Now I owe $973237 in debts, but I own 4492 ounces of palladium, worth $1459900. So I have an equity of $486663.

How did it happen? I started with $100K down payment, and paid not a penny from my income to service my loan, and I end up with $486.663K in equity? The reason is my asset appreciate faster than my debt. And my debt, even if interest compounded, are actually SHRINKING in terms of real purchase power.


On Oct 14 08:25 AM Karl Denninger wrote:

> Housing, in the long term, cannot rise faster than after-tax household
> income.
>
> C'mon guys, this is basic math. Two exponential (compound) functions,
> where one has a larger exponent than the other, will ALWAYS run away
> from each other.
>
> Sixth grade math folks. You passed, right?
>
> This stuff is NOT hard to figure out.

Oct 14 02:03 PM

[Mark Anthony:]

Dieuwer:

Good question you asked. Both answers are affirmative. Banks did lend $500K to people with no money down and no income. They are not that foolish any more. But there are still the equivalent. Let say I do put 20% down, it does not change my argument.

Second question, who is going to lease $500K worth of gold to me? Gold is being leased at ridiculously low lease rate. That is a fact. I use my house as mortgage to lease the gold, so it is secured loan there is no reason why they are not willing to lease it to me. Particularly if I do put 20% down on the house.

Your final question: "> Why would anyone lend $500K if he/she knows the money will be repaid with depreciated dollars? You think people are that stupid??"

The answer is ABSOLUTELY YES. People ARE that stupid. 99% of people are that stupid and it is even worse than that. Look at all these people who buy US treasury bonds at ridiculous low yield. They know they will be paid back in depreciated dollar, but they put trillion dollars to lend the money to the US government any way. At least the people who lend money to allow me to buy a house at 6% interest rate and 20% down payment are smarter. They get paid more interest rate and their loans are secured by the physical house. But they, too, are paid back in depreciated dollar. So they too are foolish.

There are tremendous money making opportunities today. You can easily quadruple your money in a matter of a year, because there are soo many foolish people willing to lend money at 1% or 2% interest rate and be paid back in depreciated dollar, and they are happy about that.

And they think it is risky to buy precious metals like palladium, silver and gold? US dollar is safe haven. yeah right.


On Oct 14 01:29 PM dieuwer wrote:

> 1) Who would be willing to lend you $500K with no money down?
> 2) Who would be willing to lease you $500K worth of gold?
>
> Why would anyone lend $500K if he/she knows the money will be repaid
> with depreciated dollars? You think people are that stupid??
>
> On Oct 14 01:01 PM Mark Anthony wrote:

Oct 14 02:19 PM

[Jasper M:]

Marc
I note your steadfast reliance on depreciation of the dollar to justify some of your equations. This strikes me as a bad habit - as I have posted elsewhere, the collapse of credit inflations is always DEflationary, usually in spite of the wishes of the 'relevant' authorities. And this credit inflation has been of unprecedented severity.
MOST of that credit is going away. And that means a precipitous drop in money supply. Further, it means an environment where the Fed's capacity to instantaneously create 'money' (actually credit) will be ineffective, leaving them only the physical printing press, which is far too slow to fill the gaping hole in time to save them.

As for your notions re rents, I encourage you to find charts of real estate prices & rents going back to the 20's. Big chunks of that are NOT pretty for the owners.

Oct 14 03:03 PM

[ebworthen:]

Mark,

This is the kind of thinking that got us to where we are.

It's like a drug addict switching from crack to heroin.

O.K., so, we let the dollar drop, then inflate our way to "recovery" in ten years. Then what, lower interest rates again and encourage the next generation to buy a home or cash in on equity?

Oy vey...

On Oct 14 02:03 PM Mark Anthony wrote:

> Karl:
>
> Karl:
> You are completely wrong.
> The equity of a house equals the value of the house, subtracting
> the value of the loan, principal and cumulative interest. Your monthly
> mortgage payment pays down the debt and increases your equity. But
> your monthly payment is not the only thing that causes your equity
> to increase. The depreciation of the dollar pushes down the value
> of the debt you owe, even if you pay not a single dime.
>
>

Oct 14 03:08 PM

[jackooo:]

The modification program from Obama is a sham. I also went that route with no results. I did get lots of lawyers calling wanting to help me get it modified for a fee though.

Oct 14 03:14 PM

[ebworthen:]

Possibly, but you are leaving out healthcare costs, no family farm or land anymore, and more and more people renting.

The figures you are relying on may currently only include the upper classes.

You also don't appear to have included in the formula the trillions of dollars of current prices that were artificially inflated with low interest rates.

If there is a debt bubble, underwater mortgages, and 1.5 trillion in FED money propping up banks and insurance companies; current housing prices are 30-40% higher than historical "norms".


On Oct 14 08:34 AM Andrew Butter wrote:

> Yes it can.
>
> The value of a housing is a function of after tax household income
> divided by a function of the 30-Year Treasury yield.
>
> That's basic math
>
> Don't believe me?
>
> That algorithm gives a 98.9% R-Squared going back to 1915

Oct 14 03:15 PM

[Mark Anthony:]

Jasper:

The deflationists forget that our dollar itself, called Federal Reserve Notes, is a debt coupon. Our money is a debt money. The biggest debt bubble is the US dollar itself. As the debt bubble bursts, so will the value of the dollar collapse. It is happening. I would rather hold physical assets than to hold a pile of worthless paper. By holding the US dollar paper, you are extending credit to the US government. Why would you do that? I don't want to lend money to any one. I would rather want to borrow money from any one at low interest rate.

Where do you want to park your fortune? In US treasury bonds? Come on. You are better off lend me the money let me buy more palladium coins, than lend the money to the US government.

On Oct 14 03:03 PM Jasper M wrote:

> Marc
> I note your steadfast reliance on depreciation of the dollar to justify
> some of your equations. This strikes me as a bad habit - as I have
> posted elsewhere, the collapse of credit inflations is always DEflationary,
> usually in spite of the wishes of the 'relevant' authorities. And
> this credit inflation has been of unprecedented severity.
> MOST of that credit is going away. And that means a precipitous drop
> in money supply. Further, it means an environment where the Fed's
> capacity to instantaneously create 'money' (actually credit) will
> be ineffective, leaving them only the physical printing press, which
> is far too slow to fill the gaping hole in time to save them.
>
> As for your notions re rents, I encourage you to find charts of real
> estate prices & rents going back to the 20's. Big chunks of that
> are NOT pretty for the owners.

Oct 14 03:22 PM

[Mark Anthony:]

ebworthen:

I absolutely agree with you. But that is exactly the reason that you need to leverage up to profit from a collapsing dollar. The fact of the matter is no one can do anything about it, the dollar is collapsing. This is a fact that I can not change, but I can profit from it. The opportunity is available because not many people dare to leverage and there are too much money available to be borrowed.

We are talking about profiting using OTHER PEOPLE's money. It's rare to have such opportunity that you can borrow OTHER PEOPLE's money at such low interest rate it was like stealing money from others. Those foolish people are competend getting paid 1% interest or even less, in depreciated US dollar. They will not remain foolish forever.

On Oct 14 03:08 PM ebworthen wrote:

> Mark,
>
> This is the kind of thinking that got us to where we are.
>
> It's like a drug addict switching from crack to heroin.
>
> O.K., so, we let the dollar drop, then inflate our way to "recovery"
> in ten years. Then what, lower interest rates again and encourage
> the next generation to buy a home or cash in on equity?
>
> Oy vey...
>
> On Oct 14 02:03 PM Mark Anthony wrote:

Oct 14 03:35 PM

[dieuwer:]

I'm not so sure about house prices going up. Besides, people always "conveniently forget" that it is not just the mortgage payments that have to be made. You also have to pay SKY HIGH property taxes, upkeep and insurance.
Here in Boston where I live, property taxes, upkeep and insurance is sometimes MORE than the rent! And don't forget: cash strapped local governments will INCREASE taxes on your home to pay for their lavish programs.

With respect to a cheap loan: shorting SHY would do the job?


On Oct 14 02:19 PM Mark Anthony wrote:

> Dieuwer:
>
> Good question you asked. Both answers are affirmative. Banks did
> lend $500K to people with no money down and no income. They are not
> that foolish any more. But there are still the equivalent. Let say
> I do put 20% down, it does not change my argument.
>
> Second question, who is going to lease $500K worth of gold to me?
> Gold is being leased at ridiculously low lease rate. That is a fact.
> I use my house as mortgage to lease the gold, so it is secured loan
> there is no reason why they are not willing to lease it to me. Particularly
> if I do put 20% down on the house.
>
> Your final question: "> Why would anyone lend $500K if he/she knows
> the money will be repaid with depreciated dollars? You think people
> are that stupid??"
>
> The answer is ABSOLUTELY YES. People ARE that stupid. 99% of people
> are that stupid and it is even worse than that. Look at all these
> people who buy US treasury bonds at ridiculous low yield. They know
> they will be paid back in depreciated dollar, but they put trillion
> dollars to lend the money to the US government any way. At least
> the people who lend money to allow me to buy a house at 6% interest
> rate and 20% down payment are smarter. They get paid more interest
> rate and their loans are secured by the physical house. But they,
> too, are paid back in depreciated dollar. So they too are foolish.

Oct 14 03:42 PM

[Mark Anthony:]

Dieuwer:

House price never goes up, in real term. House price goes up in dollar term because the dollar goes down. In real purchase power term house price is becoming cheaper. If I buy a house using gold coins, I spend less gold coins today, than I spend in 2000.

Of course, carrying a house has a lot of costs to maintain it in good shape and pay real estate tax, too. There are other physical assets with way much less carrying cost.

I have given you the example of leveraging a loan to buy palladium coins, for example. You make much bigger money, faster, with no real estate tax and very little storage fee to pay for palladium. I use palladium as an example because this is my most favorite precious metal. It will appreciate way much more than gold, in percentage term.

I am not a big fan of shorting anything nowadays. When you short, you hold a negative position of the equity you short, and a positive position of US dollar cash. Your cash holding should be NEGATIVE, not positive. Assume you short $1M worth of something and that something goes to zero, your initial $1M investment becomes $2M. But by then your $2M could only buy you a loaf of bread, on top of that you still need to pay the US government your "capital gain". So do you make money or lose money in such a case?

Why would any one short anything in a hyper-inflation environment?

On Oct 14 03:42 PM dieuwer wrote:

> I'm not so sure about house prices going up. Besides, people always
> "conveniently forget" that it is not just the mortgage payments that
> have to be made. You also have to pay SKY HIGH property taxes, upkeep
> and insurance.
> Here in Boston where I live, property taxes, upkeep and insurance
> is sometimes MORE than the rent! And don't forget: cash strapped
> local governments will INCREASE taxes on your home to pay for their
> lavish programs.
>
> With respect to a cheap loan: shorting SHY would do the job?

Oct 14 03:52 PM

[dieuwer:]

For example: Short SHY, buy GLD. Or use short SHY to get cheap loan.


On Oct 14 03:52 PM Mark Anthony wrote:

> Dieuwer:

> I am not a big fan of shorting anything nowadays. When you short,
> you hold a negative position of the equity you short, and a positive
> position of US dollar cash. Your cash holding should be NEGATIVE,
> not positive. Assume you short $1M worth of something and that something
> goes to zero, your initial $1M investment becomes $2M. But by then
> your $2M could only buy you a loaf of bread, on top of that you still
> need to pay the US government your "capital gain". So do you make
> money or lose money in such a case?
>
> Why would any one short anything in a hyper-inflation environment?
>
>
> On Oct 14 03:42 PM dieuwer wrote:

Oct 14 04:04 PM

[Mark Anthony:]

Dieuwer:

What's the rationale for shorting SHY? I see absolutely no reason to short or long SHY. SHY is treaury bond funds. If you look at the long term chart, it barely moves much between $80 and $84. By shorting SHY, you are betting that the value of the treasury bonds will drop RELATIVE to the value of the US dollar. That's rather foolish. Both will drop in value, almost proportionally. One dollar of T bonds will always be worth a bit more than one dollar of cash. The US government will always be able to print more dollars to pay the principal of the bonds. So you can not gain anything in shorting SHY. Long SHY or short SHY, you are both losers. You are merely holding one kind of paper versus another kind of paper. All paper will become worthless.

Long commodities is the way to go.

On Oct 14 04:04 PM dieuwer wrote:

> For example: Short SHY, buy GLD. Or use short SHY to get cheap loan.
>

Oct 14 04:37 PM

[Jasper M:]

On Oct 14 03:22 PM Mark Anthony wrote:

> The deflationists forget that our dollar itself, called Federal Reserve Notes, is a debt coupon.

Not forgotten; just not relevant - it is a DURable debt coupon, which is used a commodity for day to day exchanges. It is the only part of the money supply that cannot vanish overnight.

>By holding the US dollar paper, you are extending credit to the US government.

No, I am holding an item that will be in very short supply once the money supply collapses. Think of it as forward buying. The US Treasury will get no benefit for me holding their paper during that time.

>I would rather want to borrow money from any one at low interest > rate.

Borrowing is a bad habit in a deflation. You will be paying back your debts in dollars that are ever more dear.
I am 'loaning' money to the feds because the banks are dangerous now, and keeping that much cash in my house would be imprudent.

> Where do you want to park your fortune? In US treasury bonds?

No, Treasury BILLS - mature nearby, in position to chase rates up, thus minimal interest risk, and in full position to profit from recapture of purchasing power.

> You are better off lend me the money let me buy more > palladium coins, than lend the money to the US government.

Not so. Your palladium coins are likely to drop, while the purchasing power of my T-bills will just keep going up, and for Years to come.

Look, you seem like a thoughtful guy, with honest opinions to hare, and it is not m intent to belittle you. But you seem to be uninformed about some basic econ (which, to be fair, is rather fashionable these days - and probably qualifies you for public service). Rather than belabor this here, I will invite you to review my instablog posts re deflation and money supply.

Oct 14 05:59 PM

[Swashbuckler:]

Mark----If you are leveraged to the max, aren't you concerned that the dollar may go back up? In other words, if the dollar does collapse in a couple of years, but IN THE MEANTIME stages a huge rally for several months or more (like it did a year ago), it seems like you would now be extremely vulnerable to acute financial distress and possibly permanent capital loss from loans called in etc. Your thoughts?


On Oct 14 03:35 PM Mark Anthony wrote:

> ebworthen:
>
> I absolutely agree with you. But that is exactly the reason that
> you need to leverage up to profit from a collapsing dollar. The fact
> of the matter is no one can do anything about it, the dollar is collapsing.
> This is a fact that I can not change, but I can profit from it. The
> opportunity is available because not many people dare to leverage
> and there are too much money available to be borrowed.
>
> We are talking about profiting using OTHER PEOPLE's money. It's rare
> to have such opportunity that you can borrow OTHER PEOPLE's money
> at such low interest rate it was like stealing money from others.
> Those foolish people are competend getting paid 1% interest or even
> less, in depreciated US dollar. They will not remain foolish forever.
>
>
> On Oct 14 03:08 PM ebworthen wrote:

Oct 14 06:46 PM

[Mark Anthony:]

Jasper:

It's a common myth that short term treasury bills are "safer" than long term treasury bonds. If the US government can not pay off its debts in 30 years, what makes you think it can pay off it's debts in 2 years. If you get paid at all, you are probably getting paid because of a PONZI scheme. PONZI scheme is actually very profitable, and the profit is guaranteed, unless you are the last few investors who become the bag holders who lose everything.

You think the "money" is in short supply? It's true the commodity money, the precious metals, are in short supply. But the credit money, the paper money, are NEVER in short supply. Credit money is a promise money. Promises can be created out of thin air. The FED is not the only entity that can create money out of thin air. ANY ONE can do so.

Let me give you one example. Billionaire Warren Buffet goes to a picker game and he lost $500. He does not have $500 cash in his wallet. Therefore he pull out a piece of paper and write an IOU and give it to the guy. Of course who would question a billionaire's ability to pay back $500. Therefore his IOU is as good as money, maybe even better than actual US dollar cash. Then the guy with the IOU one day went to grocery shopping and he does not have enough cash. Therefore he gave Warren's IOU to the sales lady and who would reject a billionaire's IOU. The IOU is thus spent like it is a real $500 bill. The IOU could thus circulate again and again in all sorts of transactions, even though Warren himself may have forgotten he ever wrote an IOU. In such an instance, Warren Buffet had created $500 money out of thin air.

If the US government, with no credible capability to pay back the debt, can create money out of thin air, then every one with credible ability to pay back CAN create money out of thin air as well. Another example is industry producers, vendors and suppliers could supply credit to each other and that is also money.

Once again, credit money could never be in short supply. It is the trust in fiat money that is in short supply.

Oct 14 08:35 PM

[Madcow2:]

RE prices are correcting back to pre-1980 levels.

The little banks are toast. The "too big" banks will end up gobbling up all the assets at 10 cents on the dollar, and the whole cycle will begin again.

Just make sure you're not one of the people that "owns" a house - especially in a big urban coastal area.

Oct 14 08:48 PM

[Karl Denninger:]

I'm sorry that reading is troublesome for you.

Predict (accurately) the value of Treasuries over THE LONG TERM and you're just fine with that pronouncement.

Of course that's a wee problem, as has been repeatedly discovered.

On Oct 14 08:34 AM Andrew Butter wrote:

> Yes it can.
>
> The value of a housing is a function of after tax household income
> divided by a function of the 30-Year Treasury yield.
>
> That's basic math
>
> Don't believe me?
>
> That algorithm gives a 98.9% R-Squared going back to 1915

Oct 14 10:07 PM

[Andrew D:]

Mark,

Let me tell you that this "dollar = junk" theory is so wrong. The Fed is indeed printing money; they are printing money to absorb the securities which are being sold to the investors. The "money" is NOT flowing into small businesses and consumers. Therefore, yes, U.S. government prints money to become the largest investor, but we don't see any inflationary pressure. We see record tightening on credit, falling grocery prices, falling real wages; this is NOT inflation.

Secondly, so many people argue that U.S. government really hopes dollar depreciation to "fix all problems". Really, unlike Japan, U.S. is not an export-oriented economy, depreciated dollar has very limited impact for recovery, if at all. Even if theoretically it helps the exports, at certain point this falling dollar thing will trigger a competitive devaluation of other currencies. The "falling" dollar is all relative: do you think China or Europe are stupid? They know, at some point, falling dollar means U.S. export-led recovery at the expense of theirs.

Last, this falling dollar carry trade is becoming the world-renowned one that everyone is pushing into. This area is way too crowded therefore I don't know what will happen if any reversing trigger happens.

It would definitely appear a lot smarter to have said this 6 months ago, but at this moment it is becoming too late to the game.

Oct 16 11:34 PM

[Jasper M:]

On Oct 14 08:35 PM Mark Anthony wrote:

> It's a common myth that short term treasury bills are "safer" than
> long term treasury bonds. If the US government can not pay off its debts in 30 years, what makes you think it can pay off it's debts
> in 2 years.

I would call that a common truth. We have many decade's worth data points showing us that 'can-kicking' frequently pays of the near at the expense of the far. Certainly the current administration shows no sign of distancing itself from that approach.


> You think the "money" is in short supply? . . . But the credit money, the paper money, are NEVER in short supply.

Applied for a loan lately? ; )
Better yet, OFFERed any loans lately?
The "paper money" (as in, the actual, physical Federal Reserve Notes) IS in short supply, Compared to the value of the debt. Seriously, it's easily 100/1.
As long as debt was expanding, debt could be paid off with debt. But any contraction of credit (and we are So there) means default, SOMEwhere. And each default contracts the credit supply further.

> Credit money is a promise money. Promises can be created out > of thin air.
. . . And back to thin air they can go, every bit as fast. That's the point.

> The FED is not the only entity that can create money out of thin air. ANY ONE can do so.

ExACtly! And therefor, inescapably, the credit supply (and thus the money supply) is NOT in the hands of the Fed, but rather in the hands of those uncounted thousands upon thousands of POTENTIAL lenders. When they dry up, the effective supply crashes.
And the psychology attendant to that crash hinders any sort of fed credit extension

Re your extended "Warren Buffet's IOU" example, since it's value is based on Perception of capacity to pay, it's value is as volatile as any other.

> If the US government, with no credible capability to pay back the
> debt, can create money out of thin air,

Two false assumptions there:
1) US Has credible capacity to repay Some. Nigerian solution, selective default, etc. More importantly, market measures clearly show that (for the moment, at least) our Creditors think we have capacity to repay (at least better than, say, the English).
2) The Fed can 'create' credit, but it has zero capacity to maintain any given Value of that credit. That will be determined by market forces, and those ensure that, past a certain point, extra credit creation will net DEflate the economy, as the perception of extra credit devalues ALL credit.

> Another example is industry producers, vendors and suppliers could supply credit to each other and that is also money.

Exactly, and that is declining, sharply, as it always does after a credit inflation becomes saturated.

> Once again, credit money could never be in short supply.

Then why is history (even post-gold standard history) littered with examples of credit squezes? As we speak, EVERY measure you have put forth is Declining, to a point where it's addicts are squirming. As it inevitably does. That is what deflation is.

Please, go to a library and read something, ANYthing, by von Mises, or Hayek.

Oct 17 03:16 PM