Curried Wealth Building
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January 25, 2009
Issue 30  -  Interest Rate Mystery

Today if you invest in the United States 10-year treasury notes, you will receive about 2.6% per year interest. If you opt for 30-year bonds then you will receive about 3.3%. Now one might ask what is going on here? Who would lend money for years and years and agree to receive such a meager return?

There are basically three types of people that would lend money at such low rates:

  1. Stupid people
  2. Someone seeking safety over all other concerns
  3. "Investors" looking for an appreciating asset

Let’s cover these in order. Stupid people do stupid things and you’d have to be pretty stupid to think that 3% interest over 30 years was adequate when inflation is over 3%. Although this does account for some quantity of the buyers here, I’d say it's still a pretty small percentage of total buyers. With large minimums to buy these instruments, and realizing that stupid people don’t usually have a lot of money, I think we can safely argue this category is fairly small.

Number two is a little more likely to be contributing a large portion of buyers. With assets collapsing left and right, it is perfectly understandable that some want to protect themselves. Treasuries are perfectly safe as far as default because the U.S. Treasury has the printing press. Now it could be argued that the United States is bankrupt and could default. I think this is unlikely, as it is ALWAYS easier to inflate. This makes the outgoing dollars being used to pay the interest of lesser and lesser value. The borrower is actually losing money, but because he got his promised payout he can be fooled. Remember that inflation is an invisible tax and most are unaware how much it actually devastates the value of fixed interest assets.

So this is probably a fairly wise strategy if you have a 7-figure portfolio and are worried that the stock market may implode. However, they are going to lose a lot of value as inflation kicks in more fiercely. The following snippet just backs that position up, as the U.S. financial system is precarious at best.

Roubini Predicts U.S. Losses May Reach $3.6 Trillion

Jan. 20 (Bloomberg) -- U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is "effectively insolvent," said New York University Professor Nouriel Roubini, who predicted last year's economic crisis.

"I've found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers," Roubini said at a conference in Dubai today. "If that's true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis."

This leaves those who are trying to make a lot of money investing. These folks are commonly called "hot money" because they are attracted to "hot" assets but will quickly sell and move on with no thought at all. Remember that bonds increase in value when interest rates DECREASE. Kind of counterintuitive but it makes sense if you think about it. Say you buy a bond paying 10% (I can dream can’t I) and then interest rates drop to 8%. Wouldn’t you be willing to pay more for the first bond? Of course you would. Conversely if interest rates went to 12% then your bond would be worth less as investors could get a higher rate than your bond pays.

So hot money investing in bonds because interest rates are dropping is like a self-reinforcing dynamic because as they buy bonds, interest rates drop further and thereby driving prices of bonds up. This is a classic bubble, which will pop. Believe me, when the hot money thinks the bond bubble is done they will get out fast. This will cause a giant increase in rates. The Government will be forced to monetize the debt and print money to buy the bonds. This will lead to price inflation.

So the vast majority of buyers in government bonds are not buying for income. Bonds are traditionally bought for income so this is an anomaly. This anomaly WILL lead to higher interest rates and/or large price inflation.

Obama Acting Like Bush

Unfortunately President Obama’s first actions and plans are not going to help anything. He is trying the same old tired liberal solutions that have never worked and never will. How about a new bank?

"Obama team weighs government bank to ease crisis

* Saturday January 17, 2009, 4:28 pm EST

By Tim Ahmann

WASHINGTON (Reuters) - The incoming Obama administration is considering setting up a government-run bank to acquire bad assets clogging the financial system, a person familiar with the Obama team's thinking said on Saturday.

The U.S. Federal Reserve, Treasury and Federal Deposit Insurance Corp have been in talks about ways to ease a banking crisis that is once again deepening -- and a government-run "aggregator bank" is among the options.

Outgoing Treasury Secretary Henry Paulson and FDIC Chairman Sheila Bair both said on Friday a government bank was one of a number of ideas U.S. regulators had been discussing.

The source said advisers to President-elect Barack Obama, who takes office on Tuesday, were also considering the idea of an aggregator bank among a range of options that could be pursued.

David Axelrod, a top adviser to Obama, told Reuters the new administration would have something to say about a fresh approach to the financial crisis in "the next few days."

"I'm not going to get into the structure of how we're going to approach the revamped financial rescue package," Axelrod said after speaking to a conference of mayors in Washington.

"What we have to do is approach this with a lot more transparency on the front end."

In addition to steps to bolster banks, Obama officials want to aggressively attack the underlying causes of the credit crisis: the sharp downturn in the U.S. housing market and the related deterioration in mortgage-related assets.

"There are a range of things we're going to have to do to stabilize the financial community and part of it is going to involve housing, and part of it is going to involve how we approach this issue generally," Axelrod said."

Let’s see if I have this straight. Taking all the crap from the banks that created the crap, thereby letting them "clean" their balance sheets and plopping them into a taxpayer owned bank is going to "save" the system? It might save the banks but the taxpayer will get screwed, as usual. Why don’t we take the bailout money and give it to the GOOD banks and have them lend it out? Let the bad banks fail. No, we can’t have that, that makes too much sense and this was NEVER about doing what’s good for the system. This is a bailout of people who made mistakes, plain and simple. Watch this exchange between a Federal Reserve Governor and a "onto the game" congressman, Alan Grayson.  This guy is a hero.  Too bad he doesn't have too many others in his posse.

We're not telling you anything, so there!  What a joke.  We are truly finished as a powerful nation.  These skunks are taking us down and they don't care.  In fact, very few do care.
For those of you who still hold out hope for Obama, watch as he installs the hand picked minion of the Powers That Be into the key monetary position for the country. Timothy Geithner is up for Treasury Secretary. He works for the Federal Reserve and didn’t pay taxes on some of his income. He claims it was an honest mistake. Now we find out it was no such thing:

"IMF Informed Geithner on Taxes

Senate Delays Treasury Nominee's Hearing Till Jan. 21; Obama Vote of Confidence


Timothy Geithner, whose nomination as Treasury secretary has been delayed by his past failure to pay taxes, was repeatedly advised in writing by the International Monetary Fund that he would be responsible for any Social Security and Medicare taxes he owed on income he earned at the IMF between 2001 and 2004.

Questions about Mr. Geithner's initial failure to pay more than $34,000 in taxes are clouding his prospects for confirmation. The Senate Finance Committee postponed Mr. Geithner's confirmation hearing from a tentative Friday date to next Wednesday, which means President-elect Barack Obama will take office without a Treasury secretary amid the biggest financial crisis in decades.

Current and former IMF officials said the fund provided numerous warnings to U.S. employees about payroll taxes. According to IMF documents released by the Senate Finance panel, Mr. Geithner regularly received information about his tax obligations."

So a tax cheat will be in charge of the IRS.  Peachy.  He received free money to pay taxes and then decided he wasn’t going to pay even though he was told he to. Now he claims his lawyer told him he didn’t have to pay. Instead of checking again with someone else he just decided to keep the money. This isn’t change; it’s more of the same.

I expect things to worsen throughout this year as the depression deepens. You can't expect the people who caused these problems to fix them.  Not going to happen.  Please pay off your debt and acquire some gold and silver. If you have any questions let me know. 703-791-6066.