Mark McHugh

Archive for September, 2010|Monthly archive page

Understanding the National Debt (Sesame Street edition)

In Open Thread on Friday, September 24, 2010 at 12:57 pm

Note: An updated version of the elmo chart can be found HERE.

Keep It Simple, Stupid

Words to live by.  Remember that when someone starts explaining which way the smoke on an electric train is gonna blow, you should probably check your wallet.  

I’m tired of convoluted explanations of simple problems.  It distracts people from the truth, which is usually the intent of those doing the explaining.  The end result is large numbers of people pretending to understand things they don’t.  Bernie Madoff’s “success”,  ETFs, Treasury auctions,   the housing market. 

The easiest way to confuse people is with numbers so mind-numbingly  big they mean nothing to the average person.  What’s 13 and a half Trillion dollars supposed to mean to Joe Sixpack?  This is the best I could come up with:

Note: An updated version of the chart can be found HERE.

Can you say “Unsustainable”?

Another way to confuse people is with words.  Focus, if you will, on just two words from the Purposes page of the Emergency Economic Stabilization Act of 2008:

The purposes of this chapter are—

(1) to immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States; and

(2) to ensure that such authority and such facilities are used in a manner that—

(A) protects home values, college funds, retirement accounts, and life savings;

 (B) preserves homeownership and promotes jobs and economic growth;

(C) maximizes overall returns to the taxpayers of the United States; and

(D) provides public accountability for the exercise of such authority.

Protect values.  Sounds downright noble, doesn’t it?  It does until you think about what those words really mean in this context.  The inescapable conclusion is:

Protecting values means distorting prices

In order to distort prices, you must distort markets.  Sure, that Commodore 64 you bought in ’82 would still be worth 600 bucks if we had outlawed improving computer design and Commodore would still be alive and well today.  Thankfully, no one concerned themselves with protecting the value of the C-64 and Commodore declared bankruptcy in 1994.  That’s how markets work and that’s why capitalism works.

Distorting prices and markets is an absolute fool’s game, so we find ourselves with a never-ending procession of Ivy League fucktards, who fancy themselves masters of the Universe, lining up to take a whack at it.  Yes, you can keep house prices up, if you can keep interest rates low, but in order to keep interest rates low, you  must rig the credit market.  To rig the credit market without destroying stock prices,  you must create money out of thin air to buy debt, which devalues your currency, so you have to hide it as much as you can.  So now you’re rigging the Forex and precious metals markets to cover your tracks…..

Next thing you know, you’re selling choppers to Saudi Arabia.

There’s no such thing as a free lunch.   Everybody with an IQ below 140, who’s not in politics knows that.  What most of those people don’t understand is how much this little magic show costs.  This next chart shows the monthly cost of  the changes in the National Debt, per person.  In other words, this is what it would cost just to stop adding to the National Debt.

This is the real cost of the so-called “recovery.”  Is there a family of four on this side of the rainbow willing to cough up 2 grand a month to keep it going?


Treasury is Re-writing History – Literally

In Open Thread on Thursday, September 16, 2010 at 1:19 pm

Once upon a time in America, $100 Billion dollar errors were considered a “big deal.”  Not so much anymore.  So if you are one of those confused souls who has no idea who the fuck is buying US Treasuries, take heart.  You are not alone.  Tim Geithner has catapulted himself to tops on that list by revising a few numbers on the “Treasury’s Estimated Ownership of U.S. Treasury Securities” report (TABLE OFS-2) .

Well, actually it was more than a few:

I present the Q1 version of OFS-2 and the Q2 version.  The changes since 2007 are highlighted (there are more…)  The red boxes show the most dramatic revisions:

Private Pension holdings were revised up $91.4 B.  (429.8 from 338.4)

The mysterious “Other Investors” holdings were revised down $126.2 B.  (874.9 from 1,001.4).

Are you trying to tell me that the US Treasury just figured out what the term “Private Pension” means?  I should also point out that these revisions pertain to Q4 2009, eight and a half months and 1.1 Trillion in debt ago.

It gets worse….

Glancing at back issues of the Treasury Bulletin, I can tell you that these are not the first revisions to OFS-2.  Wierd how the WSJ, FT, NYT, Steve Liesman, Erin and all the other jack-off  professional financial journalists never mentioned this before, huh? 

I used to be sort of embarrassed to admit that I take screen shots of things I don’t think the government wants us to see, just in case they should “disappear.”  For example, I know I’ve seen a video of Bernanke scoffing (literally) at a school kid and saying, “Today’s situation is nothing like the great depression.”  Poof. gone.  I’ve even offered a hundred bucks to anyone who can find it, but I digress.

I’d strongly urge concerned citizens to go download the back issues of the Treasury Bulletin now.  Like it or not, believe it or not. the blogoshere is America’s last line of defense.

The Nickel – Change We Can Believe In

In Open Thread on Tuesday, September 14, 2010 at 2:18 pm

Recycle everything you can, I always say.  Obviously, he’s not using it anymore.

Yeah I know, gold is hitting new record highs today, but everybody’s talking about that.  Besides, after a rather impressive string of correct calls on gold, I got a huge move wrong and have been living in a self-imposed exile from all discussions related to short-term movements of the yellow metal since.  My macro view was clearly stated here, and that remains unchanged.  I’ve got other news – cooler news.

Nickels are worth 5.7 cents today according to Coinflation.comShhh….that’s 115% of face value.

That’s right, for a limited time only, you can take a Federal Reserve note and get 20 stylish coins depicting Thomas Jefferson, truly one of the greatest Americans (that’s a $1.15 melt value!).  And when I say this is a limited time offer, I mean it.  The Nickel is sure to be reformulated with cheaper metals (like every other coin in use today) or eliminated altogether in the very near future,  I guarantee it.  It’s the last sliver of hard money in a fiat world.  Get ‘em while you can.

Fun facts -  One dollar’s worth of the 90% Silver US coins, discontinued in 1965, are currently worth $14.76 (that’s a 1376% gain!).  The S & P 500 has returned 1204% since January 1, 1965 (excluding dividends).

The other reason I mention this today is this whole inflation vs. deflation debate.  It doesn’t matter when you’re talking nickels,  because nickels are both currency and commodity (75% copper, 25% nickel).  So if the inflationists (or hyperinflationists) are right the melt value will go up.  If the deflationists win, just lug them back to the bank and get paper dollars.  This is truly win-win.

Caveats and warnings – Nickels are heavy as hell, so it’s not really practical to hold large amounts of money in the Jeffersonian form.  And don’t get any ideals about melting them down and selling them as scrap – that’s illegal.  I should also point out that nickels are not at an all-time high, they’ve been over 7 cents before.  Be warned: Everyone at the bank treats you like a total crackpot when you demand nickels (God I love that feeling!).

It is poetic that the coin bearing Jefferson’s likeness is the last surviving US coin with a significant melt value.  The primary author of the Declaration of Independence is a timeless spokesman.  These words, written in 1815, could just have easily been written last week:

The treasury, lacking confidence in the country, delivered itself bound hand and foot to bold and bankrupt adventurers and bankers pretending to have money, whom it could have crushed at any moment…These jugglers were at the feet of government. For it was not, any confidence in their frothy bubbles, but the lack of all other money, which induced…people to take their paper

~ Thomas Jefferson, October 1815 letter to (former) Treasury Secretary, Albert Gallatin

That quote and many other thought-proving things were brought to my attention in this video recommended by my blogosphere friend who goes by the name S. Gompers.  It runs two hours but I think just about anyone would get some fresh persective from it.

“Shut-up and Eat Your Paint Chips, Kid” – Miseducating America

In Open Thread on Monday, September 13, 2010 at 1:49 pm

Without question, the best way to make people love you politically is to throw Tootsie rolls into the crowd. In lieu of sugary treats, making an impassioned plea for education is a close second. No one wants to see their kid grow up to be a potato head, right?

Today we’ll be exploring the mathematics behind the US housing market over the last thirty years to determine how smart we really want our kids to be. If you can successfully complete (or at least understand) the accompanying quiz you’ll have a more thorough understanding of economic realities than every Ivy League professor (including Nobel Laureates) active in government and mainstream media.

Question #1 – Joe and Mary Twelvepack, an average American couple, buy the average American home in 1980. They pay the average American price ($76,400) and take out the average American mortgage. 29 years later, they sell the home to another couple for the 2009 average American price of $270,900. How much did they profit from the sale (assume the mortgage has been paid in full)?

 A: If you said $194,500 ride the pony, big guy.

Author’s note: If you only aspire to be as intelligent as Uncle Sam wants you to be, STOP HERE. 

Question #2 – According to the BLS, cumulative inflation from 1980 to 2009 was 160.36%.  a)What is the simple inflation adjusted value of the house?  b)How much of the Twelvepack’s profit was the result of inflation and  c)how much was their profit after inflation? 

a) $198,915.04 ($76,400 * 2.6036)

b) $122,515.04 ($198,915.04 – 76,400)

c) $ 71,984.96 ($270,900 – $198,915.04)

C’mon, chin-up buckaroo. The Twelvepacks still made money. Beating inflation is the name of the game, right?

Well, there is one other factor we should probably consider: The effect interest rates had on the value of the Twelvepack’s “investment”. After all, re-fiing the house at ever lower interest rates is how they paid for Mary’s boob job, Joe’s rehab, that boat in the driveway, and the kids’ braces. God knows it wasn’t their ability to earn more.

Question #3 –The average 1980 mortgage was 14.005% APR (13.74% w/ 1.8 pts.) and the couple that bought it, the Fourpacks, got 5.1015% APR (5.04% w/ 0.7 pts plus cool cash from Uncle Sam) Their 30-year fixed mortgage payments are $1471.10. a)How big of a mortgage would that payment get if interest rates were the same as in 1980? b)How much of the Twelvepack’s “profit” can be directly attributed to the change in interest rates?

a) $124,206 (you’ll need Excel to calculate this if you’re not Korean)

b) $146,694 ($270,900 – $124,206)

 Question #4 –So there you have it. 74% of the Twelvepack’s gain can be attributed to the 9% drop in interest rate. When you strip out the interest rate effect, the house underperformed inflation by more than 60% over 30 years (and that’s excluding all other costs associated with the American dream), which of course means this wasn’t actually an investment at all. How many Americans understand this?

 A: Not many.

 Somehow the mathematical realities of the US housing market have completely escaped the education-loving American public as they continue to assume that the next thirty years will yield results similar to the last thirty. Utterly freaking impossible. We can’t drop mortgage interest rates 9% again (currently 4.4%), but we should expect houses to continue to underperform inflation.

Despite our perception, the earth turns. That’s what makes day and night, and that’s why it seems like the sun travels through our sky. It took human beings more than 2,000 years to fully embrace that truth. Teaching your children that houses are good investments (‘cuz look how it worked out for you) and they’re lucky to have such low mortgage interest rates is about as enlightened as sacrificing them to Moloch so the Sun will continue to rise.

 Right now, the powers that be are bazooka-ing tootsie rolls into the crowd at an unprecedented rate. So if your child asks you, “Who’s gonna pay for all this?” maybe you should just say, “Shut-up and eat your paint chips, kid.”


 “The more deflation [sic] the elite, champagne economists throw out there to convince people “your tax dollars really can keep that anvil up in the air,” the more we’re gonna be stuck in the mud for years and years and years….”

 ~ Rick Santelli (more top-shelf Rick)

The ultimate result of shielding men from the effects of folly, is to fill the world with fools”

~ Herbert Spencer



U.S. Home Prices:

 30 year fixed mortgage interest rates: