A canary may have just keeled over. Not in the coal mine – but in the stock market. Shares of Ford – healthiest of the Big Three automakers – are down 8 percent, according to Bloomberg. And it’s not just Ford, either. GM, Honda and Toyota stocks are down, too.
Could it be related to the gloomy news that the number of new mortgage applications has just hit a 13 year low? That the yield on 10-year U.S. Treasuries is a barely break-even-with-inflation 3 percent? That there are almost1.5 million fewer Americans employed full-time today than there were in 2006, even as the population has increased by 16 million since then?
We’re fed a steady diet of Happy News about the economy by the MSM punditry – and perhaps things are happy, if you’re a MSM pundit with a seven figure contract. In that case, the purchase of a $30,000 new car – the average price paid for a new car last year – is not to worry. But given that the median household income of an American family is $51,017 (down from $51,100 in 2011) it may be that ordinary people are beginning to worry a lot. Signing up for a $300 monthly payment for the next six years (which would finance a $22,000 car at zero percent interest) doesn’t seem like such a hot idea, especially with the new Obamacare wealth (not health) tax kicking in just a few days from now. People with money who had insurance are discovering that in order to make health insurance (but not necessarily health care) more “affordable” for others, their premiums are going up – and not by a little bit.
Maybe now’s not the right to buy (whoops – finance) a new car.
This Fear – this dawning awareness that things may be on the verge of becoming harder and more expensive, that the reality check is very definitely in the mail – is starting to reflect in the wilting stock prices of ostensibly healthy automakers. Ford – remember, the healthiest of the Big Three – just announced that it expects to earn $7-$8 billion next year after a bumper-crop $8.5 billion for 2013. It’s still profitable, but the profits will be less – unless there’s a trends turnaround. GM recently posted similar: third quarter 2013 income is off 53 percent – a possibly ominous development, even though overall the bailed-out behemoth has been generating profit for 15 consecutive quarters. In addition to buyer heebie jeebies, GM also still has the albatross of the UAW Retiree Medical Benefits Trust hanging around its neck. GM must buy 140 million shares back at $25 a share exactly one year from now, in December 2014. Or put another way, GM has exactly one year to earn that much net cash (count the zeroes) to pay off the UAW before it pays shareholders.
But the buying power of the average American – not just his ability but his inclination – is the decisive factor. And the buying power of the average American is going down – not up. Lower household income; higher cost of necessaries (food especially). Higher – and new – taxes (in particular, the ObamaTax). The very real specter of Zimbabwean inflation at any moment. It is enough to give a sensible person pause.
There is an argument – one I buy into – that the recent uptick in the fortunes of the car industry can be credited to two factors, both of which are dissipating.
First, the blowback from the odious “Cash for Clunkers” program, which artificially stimulated demand for new cars by artificially making scarce (by destroying them) perfectly usable used cars and making more expensive those not destroyed, such that many people decided to go ahead and get a new car since the cost difference was no longer that great.Remember: People were paid to throw away their old cars – or put another way, the purchase of new cars was heavily subsidized. Check Walmart Ad and Home Depot Ad. But that’s all gone now (excepting the subsidies for hybrid and electric cars, of course).
The other factor was (and still is) interest rates on new car loans, which have been low to nonexistent for several years running. Free money is another artificial inducement – one that eggs on what Greenspan called “irrational exuberance.” It applies to car loans as much as home loans. 
But, inevitably, the chickens come home to roost. Someone’s got to pay the bill.
I suppose they could just kick out the loan period to seven – maybe eight – years and keep the con going for a little while longer. I doubt it’ll work, though – for the simple reason that most cars are sufficiently depreciated by five years old to leave their loan-holders very much under water, owing more on the car than the car’s worth by that point. The banksters are many things – greedy, amoral, sociopathic – but they are not stupid. They aren’t going to write seven, eight year car loans . . . unless of course they can leave someone else holding the bag. Which they may be able to do. 
But interest rates? Forget about it. When they begin their inevitable uptick – expect this to happen by summer – it will be impossible to sweep under the rug. And it will probably do to the car industry’s fortunes what Bernie Madoff did to his “investors.”
Grab onto something. It’s going to get bumpy.
Throw it in the Woods?
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For When Things Are Swell – A Song of Joys – Whitman
O to make the most jubilant song!
Full of music–full of manhood, womanhood, infancy!
Full of common employments–full of grain and trees.
O for the voices of animals–O for the swiftness and balance of fishes!
O for the dropping of raindrops in a song!
O for the sunshine and motion of waves in a song!
O the joy of my spirit–it is uncaged–it darts like lightning!
It is not enough to have this globe or a certain time,
I will have thousands of globes and all time.
O the engineer’s joys! to go with a locomotive!
To hear the hiss of steam, the merry shriek, the steam-whistle, the laughing locomotive!
To push with resistless way and speed off in the distance.
O the gleesome saunter over fields and hillsides!
The leaves and flowers of the commonest weeds, the moist fresh stillness of the woods,
The exquisite smell of the earth at daybreak, and all through the forenoon.
O the horseman’s and horsewoman’s joys!
The saddle, the gallop, the pressure upon the seat, the cool gurgling by the ears and hair.
O the joy of the strong-brawn’d fighter, towering in the arena in perfect condition, conscious of power, thirsting to meet his opponent.
O the joy of that vast elemental sympathy which only the human soul is capable of generating and emitting in steady and limitless floods.
O the mother’s joys!
The watching, the endurance, the precious love, the anguish, the patiently yielded life.
O the of increase, growth, recuperation,
The joy of soothing and pacifying, the joy of concord and harmony.
O to go back to the place where I was born,
To hear the birds sing once more,
To ramble about the house and barn and over the fields once more,
And through the orchard and along the old lanes once more.
O to have been brought up on bays, lagoons, creeks, or along the coast,
To continue and be employ’d there all my life,
The briny and damp smell, the shore, the salt weeds exposed at low water,
The work of fishermen, the work of the eel-fisher and clam-fisher;
I come with my clam-rake and spade, I come with my eel-spear,
Is the tide out? I Join the group of clam-diggers on the flats,
I laugh and work with them, I joke at my work like a mettlesome young man;
Another time mackerel-taking,
Voracious, mad for the hook, near the surface, they seem to fill the water for miles;
Another time fishing for rock-fish in Chesapeake bay, I one of the brown-faced crew;
Another time trailing for blue-fish off Paumanok, I stand with braced body,
My left foot is on the gunwale, my right arm throws far out the coils of slender rope,
In sight around me the quick veering and darting of fifty skiffs, my companions.
O boating on the rivers,
The voyage down the St. Lawrence, the superb scenery, the steamers,
The ships sailing, the Thousand Islands, the occasional timber-raft and the raftsmen with long-reaching sweep-oars,
The little huts on the rafts, and the stream of smoke when they cook supper at evening.
(O something pernicious and dread!
Something far away from a puny and pious life!
Something unproved! something in a trance!
Something escaped from the anchorage and driving free.)
O to work in mines, or forging iron,
Foundry casting, the foundry itself, the rude high roof, the ample and shadow’d space,
The furnace, the hot liquid pour’d out and running.
O the whaleman’s joys! O I cruise my old cruise again!
I feel the ship’s motion under me, I feel the Atlantic breezes fanning me,
I hear the cry again sent down from the mast-head, There–she blows!
Again I spring up the rigging to look with the rest–we descend, wild with excitement,
I leap in the lower’d boat, we row toward our prey where he lies,
We approach stealthy and silent, I see the mountainous mass, lethargic, basking,
I see the harpooneer standing up, I see the weapon dart from his vigorous arm;
O swift again far out in the ocean the wounded whale, settling, running to windward, tows me,
Again I see him rise to breathe, we row close again,
I see a lance driven through his side, press’d deep, turn’d in the wound,
Again we back off, I see him settle again, the life is leaving him fast,
As he rises he spouts blood, I see him swim in circles narrower and narrower, swiftly cutting the water–I see him die,
He gives one convulsive leap in the center of the circle, and then falls flat and still in the bloody foam.
O the old manhood of me, my noblest joy of all!
My children and grand-children, my white hair and beard,
My largeness, calmness, majesty, out of the long stretch of my life.
O ripen’d joy of womanhood! O happiness at last!
I am more than eighty years of age, I am the most venerable mother,
How clear is my mind–how all people draw nigh to me!
What attractions are these beyond any before? what bloom more than the bloom of youth?
What beauty is this that descends upon me and rises out of me?
O the joy of my soul leaning pois’d on itself, receiving identity through materials and loving them, observing characters and absorbing them,
My soul vibrated back to me from them, from sight, hearing, touch, reason, articulation, comparison, memory, and the like,
The real life of my senses and flesh transcending my senses and flesh,
My body done with materials, my sight done with my material eyes,
Proved to me this day beyond cavil that it is not my material eyes which finally see,
Nor my material body which finally loves, walks, laughs, shouts, embraces, procreates.
O the farmer’s joys!
Ohioan’s, Illinoisian’s, Wisconsinese’, Canadian’s, Iowan’s,
Kansian’s, Missourian’s, Oregonese’ joys!
To rise at peep of day and pass forth nimbly to work,
To plow land in the fall for winter-sown crops,
To plow land in the spring for maize,
To train orchards, to graft the trees, to gather apples in the fall.
O to bathe in the swimming-bath, or in a good place along shore, To splash the water! to walk ankle-deep, or race naked along the shore.
O to realize space!
The plenteousness of all, that there are no bounds,
To emerge and be of the sky, of the sun and moon and flying clouds, as one with them.
O the joy a manly self-hood!
To be servile to none, to defer to none, not to any tyrant known or unknown,
To walk with erect carriage, a step springy and elastic,
To look with calm gaze or with a flashing eye,
To speak with a full and sonorous voice out of a broad chest,
To confront with your personality all the other personalities of the earth.
Knowist thou the excellent joys of youth?
Joys of the dear companions and of the merry word and laughing face?
Joy of the glad light-beaming day, joy of the wide-breath’d games?
Joy of sweet music, joy of the lighted ball-room and the dancers?
Joy of the plenteous dinner, strong carouse and drinking?
Yet O my soul supreme!
Knowist thou the joys of pensive thought?
Joys of the free and lonesome heart, the tender, gloomy heart?
Joys of the solitary walk, the spirit bow’d yet proud, the suffering and the struggle?
The agonistic throes, the ecstasies, joys of the solemn musings day or night?
Joys of the thought of Death, the great spheres Time and Space?
Prophetic joys of better, loftier love’s ideals, the divine wife, the sweet, eternal, perfect comrade?
Joys all thine own undying one, joys worthy thee O soul.
O while I live to be the ruler of life, not a slave,
To meet life as a powerful conqueror,
No fumes, no ennui, no more complaints or scornful criticisms,
To these proud laws of the air, the water and the ground, proving my interior soul impregnable,
And nothing exterior shall ever take command of me.
For not life’s joys alone I sing, repeating–the joy of death!
The beautiful touch of Death, soothing and benumbing a few moments, for reasons,
Myself discharging my excrementitious body to be burn’d, or render’d to powder, or buried,
My real body doubtless left to me for other spheres,
My voided body nothing more to me, returning to the purifications, further offices, eternal uses of the earth.
O to attract by more than attraction!
How it is I know not–yet behold! the something which obeys none of the rest,
It is offensive, never defensive–yet how magnetic it draws.
O to struggle against great odds, to meet enemies undaunted!
To be entirely alone with them, to find how much one can stand!
To look strife, torture, prison, popular odium, face to face!
To mount the scaffold, to advance to the muzzles of guns with perfect nonchalance!
To be indeed a God!
O to sail to sea in a ship!
To leave this steady unendurable land,
To leave the tiresome sameness of the streets, the sidewalks and the houses,
To leave you O you solid motionless land, and entering a ship,
To sail and sail and sail!
O to have life henceforth a poem of new joys!
To dance, clap hands, exult, shout, skip, leap, roll on, float on!
To be a sailor of the world bound for all ports,
A ship itself, (see indeed these sails I spread to the sun and air,)
A swift and swelling ship full of rich words, full of joys.
Alan Watts On Buddhism
4 Noble Truths
http://secularbuddhism.org/2013/05/06/the-four-noble-truths/
8 Fold Path
http://secularbuddhism.org/2013/05/03/what-is-the-eightfold-path/
– If I myself become swell, then for me in particular, things will be swell.
Buddha Quotes
“Every morning we are born again. What we do today is what matters most.”
“It is better to conquer yourself than to win a thousand battles. Then the victory is yours. It cannot be taken from you, not by angels or by demons, heaven or hell.”
“Rage is a powerful energy that with diligent practice can be transformed into fierce compassion. However much we disagree with our enemies, our task is to identify with them. They too feel justified in their point of view.”
“It is better to travel well than to arrive.”
“Peace comes from within. Do not seek it without.”
“There is nothing more dreadful than the habit of doubt. Doubt separates people. It is a poison that disintegrates friendships and breaks up pleasant relations. It is a thorn that irritates and hurts; it is a sword that kills.”
“Let us rise up and be thankful, for if we didn’t learn a lot at least we learned a little, and if we didn’t learn a little, at least we didn’t get sick, and if we got sick, at least we didn’t die; so, let us all be thankful.”
“Pain is certain, suffering is optional.”
“We are what we think. All that we are arises with our thoughts. With our thoughts, we make the world. What we think, we become.“
“An idea that is developed and put into action is more important than an idea that exists only as an idea.”
“Holding on to anger is like grasping a hot coal with the intent of throwing it at someone else; you are the one who gets burned.”
“However many holy words you read, however many you speak, what good will they do you if you do not act on upon them?”
“I never see what has been done; I only see what remains to be done.”
“Have compassion for all beings, rich and poor alike; each has their suffering. Some suffer too much, others too little.”
“In a controversy the instant we feel anger we have already ceased striving for the truth, and have begun striving for ourselves.”
“Teach this triple truth to all: A generous heart, kind speech, and a life of service and compassion are the things which renew humanity.”
“To enjoy good health, to bring true happiness to one’s family, to bring peace to all, one must first discipline and control one’s own mind. If a man can control his mind he can find the way to Enlightenment, and all wisdom and virtue will naturally come to him.”
“He who experiences the unity of life sees his own Self in all beings, and all beings in his own Self, and looks on everything with an impartial eye.”
“Just as treasures are uncovered from the earth, so virtue appears from good deeds, and wisdom appears from a pure and peaceful mind. To walk safely through the maze of human life, one needs the light of wisdom and the guidance of virtue.”
“You can search throughout the entire universe for someone who is more deserving of your love and affection than you are yourself, and that person is not to be found anywhere. You yourself, as much as anybody in the entire universe deserve your love and affection.”
“All wrong-doing arises because of mind. If mind is transformed can wrong-doing remain?”
“An insincere and evil friend is more to be feared than a wild beast; a wild beast may wound your body, but an evil friend will wound your mind.”
“Believe nothing, no matter where you read it, or who said it, no matter if I have said it, unless it agrees with your own reason and your own common sense.”
“To conquer oneself is a greater task than conquering others.”
“Virtue is persecuted more by the wicked than it is loved by the good.”
“A dog is not considered a good dog because he is a good barker. A man is not considered a good man because he is a good talker.”
“In the end, these things matter most: How well did you love? How fully did you live? How deeply did you let go?”
Tor – Thank you so much for this post. All of it is true and we should be ever mindful of this wisdom.
Sure thing, glad you enjoy it, Boothe.
“Learning to let go should be learned before learning to get. Life should be touched, not strangled. You’ve got to relax, let it happen at times, and at others move forward with it.”
― Ray Bradbury
“If there is any religion that could respond to the needs of modern science, it would be Buddhism.”
― Albert Einstein
“We are not going in circles, we are going upwards. The path is a spiral; we have already climbed many steps.”
― Hermann Hesse
“The thought manifests the word; The word manifests the deed;
The deed develops into habit; And habit hardens into character;
So watch the thought and its ways with care, And let them spring forth from love Born out of compassion for all beings. As the shadow follows the body, as we think, so we become.”
― Juan Mascaró
Siddhartha (1972)
The Legend of Buddha
The whole state of affairs is nothing more than chickens coming home to roost.
You can thank the young “Occupy Wall Street” types for foisting Obama’s second term and Obamacare on everybody. The under–30s are completely ignorant and don’t follow the news at all. They thought Obamacare was going to be free medical care for them—despite all the news stories and commentary about how it was necessary for this same group to be mandated to buy medical insurance to subsidize the older, sicker types. The young guys just did not pay attention or ignored it as “that does not compute, must be a lie”.
My brother’s wife has an 18–year-old son. He stays utterly ignorant about the news and current events. After his sister received a new debit card in the mail to replace one compromised in the Target hacking debacle, he was astonished. He had had no clue about this story that had been all over the media for days. Well, people like him voted for Obama. And Obamacare.
> You can thank the young “Occupy Wall Street” types for foisting Obama’s second term and Obamacare on everybody.
The reality is that the Republicans would of done exactly the same thing as Obama.
The reality is that Medicare/Medicaid combined with interest payments for national debt is rapidly going to bankrupt the nation. Obamacare represents a stop-gap measure by forcing young people to pay into insurance pools in order to lower the costs of old people on insurance. Otherwise old people are going to see insurance premium skyrocket in the next few years. Monthly payments of 1000-1500 dollars would be normal. There would of been a max movement away from private insurance plans to public plans simply becuase nobody is going to be able to afford private plans anymore. With Obamacare they can make these government programs last another decade or so.
Sure the Republicans would of come up with their own plan that would superficially be different, but in the end the results would of been the same.
The reality is that Republican vs Democrat is as real as Professional Wrestling.
Sure there is are real people that exists that are called ‘Obama’ or ‘McCain’ that are in office just like there are real people that are called ‘Hogan’ and ‘Steve Austin’ in professional wrestling. It’s just their personas you see on television and in the news that are manufactured. They are personalities based on focus groups and professional advertising consultants that are carefully cultivated to sucker the masses. The difference between American politics and professional wrestling is that the people that run professional wrestlilng are a hell of a lot more honest about what they do.
It wasn’t ‘his type’ that gave us eight years of that simpering idiot Bush, and the debacles before him. Let’s face it, the talent is never let into the equation; the third parties are sidelined and the whole thing is a farce. Do you really think things would be different (or better) if the Mormon who believes in Planet Kolob was elected? Y’know, the guy who bought a multimillion dollar house in La Jolla and wants to raze it and build a replacement?
Are Aussie Automakers All No-Hopers?
Only Major Auto Maker in Oz – Toyota – Also Leaving?
http://www.news.com.au/finance/business/toyota-foreshadows-it-will-close-manufacturing-in-australia/story-fnkgdhrc-1226781015661
Toyota Camry/Aurion Builders In Altoona Fear Days Numbered
http://www.smh.com.au/federal-politics/political-news/toyota-workers-at-altona-fear-days-numbered-20131212-2zabu.html
Pyrrhic Victory for Aussie Auto Workers
http://www.theaustralian.com.au/opinion/columnists/judgment-a-pyrrhic-victory-for-car-workers/story-fnbkvnk7-1226789061748#
They’ll still have Elfin though. De-value your currency or De-industrialize, say the communitarian currency De-basers.
Gotta question your math Eric. The stocks of both Ford & GM are doing rather well this year. A decent new car can be had at well under $30K. BTW since you used median family income you should have used median new car cost not average. Or you could have also used average family income to match average vehicle cost for an apples-apples comparison.
Relative to wages/salaries that $30k vehicle today is no more expensive than a median/average vehicle of 30 – 40 years ago, but it is of a far higher quality. I will almost certainly buy one new vehicle this year and perhaps two. The ones I have are are past 10 years and getting some minor quirks. Certainly with a bit of TLC they are good for another five years or more ………….. BUT breakdowns always seem to occur 1000 miles from home rather than 1 mile and on a bad day at that. So yeah at least the higher mileage vehicle will be replaced. Cash on the counter of course, no finance.
Excessive use of financing today is the real economic problem, not the price of vehicles.
It’s not my math, Mike – I merely quoted stats posted by GM and Ford themselves.
Whether a decent car can be had for less than $30k is not the issue. What I wrote – the fact I referenced – is that last year, the average price paid for a new car was more than $30k.
Financing: Virtually impossible to obtain a new car without. Even a $20k car. Who has $20k in cash these days? Most people don’t have even $5k in cash savings.
Hence the 5-6 year loan.
Necessary because (a) the cars themselves cost a tremendous amount to purchase relative to available income and (b) on top of the car itself, they are required to purchase exorbitantly priced insurance and (c) they are crippled by taxes at multiple levels and their remaining dollars heavily depreciated.
Available income continues to decrease for most people – a trend that will be accelerated once Obamacare kicks in full force.
Add to this the much higher cost to repair/maintain modern cars and it’s easy to see why they are becoming unaffordable – and why the car industry is beginning to see a trend that could be the proverbial canary croaking in the coal mine.
EP: “That the yield on 10-year U.S. Treasuries is a barely break-even-with-inflation 3 percent?”
If the gov figure for inflation is 3 percent – double it, at least.
Food inflation is 10 + percent. Inflation is but a symptom of the value of
the phony paper “money” – heading towards its intrinsic value of zero.
Absolutely, Libertyx –
I was conservative in the piece and used government-acknowledged numbers to avoid being accused of “hysteria.”
I’m afraid Eric’s logic about cars, and the influence of artificially low interest rates, also applies in my real estate business. With rates of 3.25% for 30 year mortgages the sales were goosed and some appreciation followed. Lower rates lead to higher prices because the monthly purchasing power of $1,000 is greater. I’m afraid the mild appreciation that occurred only masked an underlying decline. I’m discouraged as I see the rates moving to 5% and more.
The important number is the household incomes. I don’t see these rising as happened in the 1990s. Maybe these will improve?? It has been flat for a long time.
Hi Patrick,
In my area, there’s lots of stuff “for sale” – but from what I can tell, not much is selling.
Maybe you can shed some light on something I’ve noticed: This is the first time in the 10 years we’ve lived here that a bunch of properties went on the market in late fall (and currently). Isn’t it usually the case that people wait until spring before putting a house on the market?
Unless, of course, they can no longer afford to stay in their house….
“lots of stuff for sale, but not much selling” – same here in my part of Flori-Duh…
I have been cleaning out my garage and sheds the last several months and throwing a few things on Craig’s list – not one call.
Once in in a while I will peruse the Barter list and the crap listed just reeks of desperation, people are trying to do anything for a buck these days – very sad!
Same same here… our neighbors recently had their truck repo’d.
Very sad, indeed.
Hi Eric,
Every real estate market is local. In my area there are a large number of sales in the Spring but the large majority of sales occur in the other three seasons combined. There could be factors in your area that cause people to want to sell in the slower winter season. For example:
Statewide sales and appreciation have improved so these people might anticipate improved chances of selling and want to get in front of the rest.
Maybe they are bailing out via short sales or foreclosures.
Maybe they found better employment elsewhere.
I enjoy your automotive articles and the feedback on the web site.
Thanks for the feedback, Patrick!
It just struck me as odd – because unusual – to see so many “for sale” signs springing up in fall/winter…. I’ve never seen that happen in all the years (10) we’ve lived here…
People may find the following Australian development of interest: http://www.abc.net.au/news/2013-12-11/holden-to-cease-manufacturing-operations-in-australia-by-2017/5150034
Very sad news, P.M. –
Ford is also ending production in Oz. The scheduled end date is October 2016.
Australia has always been a small market, and has long been saturated with excess production capability and too many players.
Actually, it’s subtler than that. Australia is only about 20% or 30% smaller than viable, or maybe not even that much smaller, for a vertically integrated car industry model. It’s well over viable size for a horizontally integrated industry model, if there are only a few heavy producers and then progressively more firms as the layers get nearer consumers (there have to be vertical information flows good enough to head off inventory whiplash effects, but that is easy enough to arrange if you know about the issue). However, even an industry structured like that would need some form of support, just to cope with a globalised economy where such support is the norm.
I see your point with the artificial/temporary demand. But why do you think that interest rates will rise specifically by this summer, and not stay as they are for another year? Obamacare? If I were someone who only bought new cars, would you recommend I do that real soon?
My body is ready.
Hi Brandon,
My understanding is that interest rates have been held at such low levels artificially (by the Fed system) to try to jump-start consumer spending (and resuscitate the debt-financing model that defines the modern American economy). But this can’t be done indefinitely, because it’s a net money loser for lenders when money is free or almost free. Remember: The make their money off the interest on loans. If the interest charged is such that it barely compensates for inflation (as now) they are not making money on the loans. And may lose money. That can’t be sustained.
“The make their money off the interest on loans. If the interest charged is such that it barely compensates for inflation (as now) they are not making money on the loans. ”
That certainly sounds sensible — but I am not sure that it is correct. Here is why. If banks were truly lending out their own funds, then yes, they would never lend at a rate less than that of inflation. But banks do not necessarily lend their own money. They may be lending depositor’s money — money which they are renting at only 0.1% paid on savings. As long as they can use other peoples money (which costs them less than what they are charging) it does not really matter whether their lending rate is low. After all, the depositor is the one taking the loss, not the bank. On the other hand, if the bank is engaged in fractional reserve lending, they are literally creating money out of nothing (for at least 90% or so of their funds). Yes, this creates a liability on their books — but the liability is balanced by the asset of the loan papers. The bank gets interest paid, and in the end, the principle of the loan is also paid by the borrower. Again, the bank makes a profit, even if the interest rate is lower than the rate of inflation because the “money” it loaned was created at no cost to the bank, and repaid at no cost to the bank. In a case where the borrower goes bankrupt and never repays the loan, yes, the bank loses money — but even that loss is repaid by inflated dollars some time after the loan was made — meaning that the loss is repaid in devalued currency.
It is possible for banks to lose money — but it is difficult to do so without major fraud and graft taking place. The game is rigged, and you and I are not the beneficiaries!
Jason Calley, you forgot to mention how the lenders make money when they re-take possession by selling it yet again,… and months later, do it again. A different kind of flipping? Cars, boats, houses, etc… nice stack of money for them there.
Lenders always lose money in a foreclosure or short sale. There might be a rare exception, one in a thousand, if values suddenly and dramatically increase after they take a house back. People go to foreclosure when they have no equity in the house. If they had equity they would simply sell it on the market and take whatever equity they had. Foreclosures almost always follow years of the owners going broke for whatever reason. The house is neglected. Half the time the appliances, even heating and cooling systems, are removed by the failed owners. Banks will go a long way to avoid a foreclosure.
Few loans are held by banks any more. Banks originate a loan then earn a commission of about 1.5% of the loan amount when they sell the loan to Fannie Mae or Freddie Mac. The Federal Reserve buys these low interest mortgage bonds (that is pools of many mortgages) from Fannie and Freddie with dollars that were created with key strokes on a computer. Even if the Fed earns a fraction of 1% it is a windfall because they buy the mortgage bonds with funny money. The profits go to the Treasury which spend these immediately and borrow even more. It is a house of cards. With any luck the economy will grow dramatically so the Fed can get out of the mortgage business. All the debt and pending inflation remains to act as a drag on future economic expansion. That’s my humble understanding.
Patrick G banks don’t necessarily lose money on a foreclosure. What they lose is the value of their assets on paper. But considering that nearly all of the money they loaned in the first place was created from nothing based upon the request of the borrower, the bank started profiting from the loan as soon as the borrower started making payments. In most cases the borrower has made payments for years before foreclosure. Theoretically, the bank must pay back the federal reserve for the created money, but since the bank IS the federal reserve (the fed is just a bank-owned organization), they are paying back themselves money that they never really had in the first place. In that sense, every penny is profit, both the principle and the interest.
Patrick G – Perhaps you haven’t heard about MERS and the securitization of mortgages. Almost as soon as a mortgage is signed, it is sold. The lender or mortgage broker gets their fees up front and dumps the note where it is bundled into a security and sold to investors. The servicing companies carry a tremendous amount of sway over the disposition of a troubled or default note. If the servicer has to restructure or modify the loan they will lose money. But if they foreclose, they will receive a fee (i.e. make money). All too often, because the notes are processed through MERS, they have to foreclose with fraudulent documents, because they have lost the paper trail back to the original note. Some states are starting to hold these crooks’ feet to the fire now and are not letting them foreclosure without clear documentation: http://4closurefraud.org/2013/04/07/states-fight-back-against-mers-mortgage-fraud/
You have to understand that the game is no longer played strictly by the rules of going to the bank with 20% down, proving your creditworthiness and borrowing money from the other depositors at that institution. It’s almost all Wall Street chicanery, smoke and mirrors now. And with Fannie Mae and Freddie Mac selling their toxic debt to the Fed, We the People will be on the hook once again when the day of reckoning comes: http://www.huffingtonpost.com/2009/10/21/perverse-incentives-lead_n_328378.html
The funny part is a few years back, a couple I knew got dunning letters from their mortgage “servicer” when the husband lost his job and couldn’t make full payments (they were paying a little something to show good faith each month even though they were destitute). When the servicer refused to restructure the note and threatened foreclosure, I told them about MERS and suggested that they ask for a copy of the original note. The servicer hemmed and hawed and finally after about 2 weeks, swore up and down that they had the note but refused to show it to the borrowers. After nearly a year and a half of this standoff, with no payments tendered by the borrowers, the servicer finally offered them $3000 to move out of the house, if they would “let them” foreclose. Since the note and consequently the title to the property were in seriously muddy water, the couple took the money and moved. Sounds to me like the servicer split the $6000 foreclosure fee with my acquaintances. So don’t assume the “lender” loses money on these foreclosures; they don’t. We, the Amerikan taxpayer will be the ones picking up the tab on this toxic debt, just like the previous “too big to fail” fleecings we’ve taken. Time to wake up Patrick.
Eric remember, the banks are making money on the spread between what they pay the Federal Reserve for the service of entering digits into a computer spreadsheet (i.e. printing money)…
…and the interest they charge the consumer.
IOW, the difference between prime rate and consumer interest rates. For mortgages, not much; but imagine how profitable 22% credit cards are when the bank’s borrowing for 2%.
Add in the absolutely massive speculation on derivatives–worldwide market estimated at 1.5 Quadrillion (1,500 trillion)–and the leveraging that affords, and they could literally care less about retail loans.
Which is why they’re so tight with them, too–they’re essentially a cost of doing business, a facade of legitimacy to amuse the masses.
Hi Methyl. Nice to see you posting. Know you’ve been busy.
I’ve seen the $1.5 quadrillion figure and wish the news sources would be more specific. In my experience, the bulk of derivatives are notional principal contracts used to limit risk rather than to speculate. In an NPC, each party lends an identical large amount to the other. Payments on those loans are denominated differently. For example, you and I loan each other $10 billion; I am to pay you a fixed rate of interest on your loan to me, and you are to pay me LIBOR on my loan to you. If one adds up the bare dollar amount of derivatives in our transaction, it would be $20 billion. But the $10 billion liabilities actually cancel each other out. If interest rates move significantly, one of us will owe the other a significant amount of money, but nowhere near the amount counted as derivatives in existence.
Thus my wish that the media would provide more detailed information: how much of the $15. quadrillion consists of mutually cancelling NPCs and how much of truly speculative derivatives?
btw, in my experience, most interest rate swaps are based on LIBOR. That’s why the LIBOR scandal was such a huge thing. It wasn’t just the London banks swindling depositors, it directly affected probably every major business in the world and all of us likely paid indirectly for it. Just imagine that you are obligated to pay LIBOR on a loan and you also get to set the LIBOR rate. You just might keep that rate kinda low. The scope of that scandal made Bernie Madoff look like a kid stealing a pencil from a schoolmate’s desk.
Agreed–the LIBOR thing (funny, swept under the rug so quickly) was ENORMOUS.
I don’t know how many of the various credit default swaps etc. are mutually cancelling. But I’m deeply suspicious of the entire casino and won’t put a dime into it; I simply don’t trust the fundamentals. 100:1 P/E ratios? C’mon, pull my other leg.
But it’s totally predictable. Inflation punishes savers and rewards debtors. Interest paid on cash accounts is laughable, you’re losing money on bank deposits. Bond yields suck. Where you gonna go? Yeah, the rigged, crony-capitalist “market”, in search of some decent yields.
But that casino is so rigged–with 80% of trades coming from high-frequency computer trading programs, the PPT (Plunge Protection Team) playing out of the white house, and the Too Big To Jail banks in a massive financial circle-jerk waiting to burn the suckers as they enter?
No thanks.
Hi Meth,
Realistically, the only safe investment for us not-rich folk is tangible property; physical things of value (land, coins, ammo) that serve the function money used to before it was corrupted. Of course, they’ve done almost everything short of outright confiscation to render even this difficult or non-economic, too. Never-ending “rent” (property taxes) on land homes (and vehicles), for example. And making it illegal to use gold and silver as a medium of exchange.
@Eric–exactly. Gold, silver, land, ammo, supplies…these are a few of my favorite things… 🙂
Part of my resistance to evil is to withdraw from their game as much as possible while still maximizing what I can store up for my family. The time is coming, though, when the taxes will be so confiscatory that it’s not worth it…and at that point, all of us of conscience should drop out and go completely underground/”black” market.
That time is close. My wife and I ran the numbers for her to go to a pure-cash medical practice. I’m exploring ways of insulating myself as well.
Another major step will be banding together in country communities and letting the tyrants know we won’t be paying property tax anymore; just as in the 30’s when communities fought off the banks who were foreclosing on family farms–and bankers were showing up dead.
We’re not looking for fights; but they’ve clearly designed the system to push us into a corner and MAKE us fight.
Methyl, you are so right in not trusting the banking system. We are all going to pay for their excessive risk taking, in the form of more bailouts, but the worst hit will be those who have savings confiscated in bail-ins. It’s already happened in Cyprus, and I see more news articles lately suggesting the possibility elsewhere. No mistake about it: it will happen here.
@MikeInSpotsy–
I hope everyone here is keeping a minimal bank-account balance. At the very least get yourself out of the criminal mafia Too Big To Jail banks!
I haven’t been buying precious metals for a few months; instead, I’ve been literally keeping cash under the mattress.
It’s so hard to time the precious metals market…but I have a feeling it’s bottomed out and it’s time to pick a little up. I suspect we’re going to see a two-phase crisis–first, a rapid deflation as the banking fraud comes to a head…then, an absolutely breathtaking inflation as they overreact.
Remember, they fear deflation more than anything; their entire paradigm is based on continual inflation, stealing from us through devaluation while they benefit–from being closest to the spigot.
If the debt-slavery paradigm breaks down, they lose power. And if interest rates go up, the FedGov goes tits-up–FAST.
@ Brandonjin
“If I were someone who only bought new cars, would you recommend I do that real soon?
Hard to say for sure when rates go up, but when they do it will probably be pretty quick – better to jump sooner and on your terms rather than be forced into a situation where your choices are limited.
The use of credit (debt) if used sparingly and wisely can provide some advantages, albeit temporary.
Everyone’s situation is unique to them, so you will have to figure out what works for you if you are considering a new (or even “new-used”) car.
Just to relate – My wife and I bought a small high mileage car this past summer – getting a great deal and not quite zero % financing – even though we already had 2 perfectly good vehicles that were paid for in full. We didn’t need the new car and really didn’t want the payment, but both existing cars are gas hogs and have fairly high mileage. Our choices was to get a good deal while rates were favorable and economy cars were not in high demand. So if rates now go up it won’t effect us and if gas prices go up we will just drive the econbox a bit more and park the truck.
but both havehig-mealge
Being stuck with an old car needing constant repairs can lead to a downward economic spiral if saving money for a down payment becomes impossible. Sometimes one can be to “cheap” for their own good. (I speak from experience and a lesson well learned from quite a few years back).
So Brandonjin -that said – rates may stay low for another 2 months or another 2 years – look to your needs for the next 2-3 years and make your decision today based on that forecast.
Thanks for the info, GW, and the reminder that economy cars are in relatively low demand right now. My father is the one who only buys new cars, so I’ll relay this info to him. His plans were to buy a new car sometime in 2015.
Being too cheap for your own good, I understand that. I think my problem is more of laziness. I could afford a car payment if I needed to, but I didn’t want to work so much each month to pay for it. So, my choice, a 12 year old car, is worth 2k as trade, 4k on the private market. I think I have the line drawn at 1000 bucks. If a repair were to cost more than that, I’d probably sell it and buy something else.
Brandon,
If your current car is sound and isn’t costing you money or hassle to keep, I’d keep it. Avoid a car payment, if at all possible. It is arguably among the worst financial decisions one can make. It limits your options and makes you more vulnerable to unexpected problems that may involve money you no longer have because it’s going to a car payment.
If you want a car for enjoyment/fun, save until you can afford it and then buy it outright. Meanwhile, drive a mechanically sound beater as your everyday car.
That’s what I did – and it helped enable me to have the stuff I have now, without having payments (or debt) to go along with them.
Thanks for the advice Eric. I’ll tell you, I’m pretty damn bored of it, and she doesn’t do anything particularity well, but I will do the logical thing and hold out for a couple more years, until my desired choices decrease in price/depreciate and my income raises. I will not have a car payment, at least not for many years. It’s tough waiting though 😉
Yep, the whole economy is on very thin ice. And here is what worries me most……
As you said “The banksters are many things – greedy, amoral, sociopathic – but they are not stupid.”
And this is what I think they are planning right now. The bankers will try to structure an economic crash in such a way that all of your assets (savings/stocks/IRAs, etc) are totally wiped out, but your DEBTS remain intact.
Then, the bankers can repossess your house, cars and everything else. You will be bankrupt…and figuratively, if not literally, live the rest of your life in debtor’s prison.
What could possibly sound better to a greedy, amoral, sociopathic banister?
Mike, you make a good point. And now with debtor’s prisons on the rise, yep, debtor’s prison, there will be ensured more people to pay for to incarcerate. No doubt they’ll make good on their loans once out of jail with a “felon” tag hung on them everywhere they try to get work. I hope they can all do landscape or roofing since society has to turn a blind eye to these jobs or pay through the nose. I never realized one of the best investments I could have ever made would be to own a convenience store/check cashing store. Get 6% right off the top and then they will spend money right there on beer and snacks before heading “home”…..and “home” to them may not be what it is for me or you but a place where at least a half dozen or maybe a couple dozen workers live. I used to spend time trying to keep these guys out of jail for not paying child support and nearly every woman married to them would eventually say she wouldn’t have called the state had she known how it would turn out. Yeah, the state collects the money, aggressively, and then pockets its share before doling any out to the supposed beneficiaries. It’s a GREAT system…….for the state.
If I owe a legitimate debt to you, I am obligated to make you whole.
That can be accomplished in any of several ways. The parties can come to some understanding that entails agreed-upon payments according to a certain schedule. Or the debtor can sell off assets to generate the necessary cash – or (if the person to whom he owes the debt is agreeable) barter goods/services. For example, if I can’t pay you the money I owe, I could offer to cut your grass or do other work around the house. It’s entirely reasonable and fair to come to such an understanding.
But a debtor has no more right to simply walk away from a legitimately incurred debt (e.g., “Smith” borrowed money from “Jones”) than a thief has to help himself to the contents of your wallet. In both cases, theft has occurred.
In which case, it is by no means an injustice to pursue and hold accountable the offender.
If jailing him is the only realistic option, then so be it.
I would rather the debtor paid off (or worked off) his debt, as outlined above. But if he refuses to acknowledge the obligation and refuses to even try to make good on his obligation, then what would you say is the appropriate response? Just shrug and let him walk away – and leave the person he screwed holding the proverbial bag?
Eric, you realize you are talking to someone who has no moral problem with theft, right?
That said, I’d hold that fractional reserve banking is a form of theft, albeit subtle. Its fraudulent because you put your money in the bank expecting them to hold onto it, yet they don’t. You cannot legitimately loan out money that is not yours.
I do!
But I dissect Gil/Clover’s posts for purposes of illustration; to make a point – and to not let them get away with making theirs unchallenged!
You know, I was an easier than average conversion to anarchism because I never thought government was GOOD. I always believed taxation was theft, and I was never a fan of paternalism of any sort. I was always averse to the idea of drug prohibition, although it took me awhile to come around on legalizing hard drugs only because I was taught pretty much what everyone was taught (There will be chaos and what have you). But I never LIKED the idea. I believed in interventionism because I believed the lies that the US was actually protecting freedom around the world, and I thought the US was defending itself (I still cringe at some things I said back then.) But I never LIKED the idea of government control. I thought it was a necessary evil, a notion I have since been persuaded is wrong.
Most people are tougher because they actually LIKE the idea of government, which is problamatic.
Agreed, David.
I was the kind of person who always wanted to know why – even as a kid. “Just because” or “I say so” always rankled.
I have never been able to get into the mindset of people who like authority.
The banks loan money out of thin air, then expect to be paid back with money that actually has to be worked for; if someone loses their job or gets sick and the hospital bill is significant, where exactly are they supposed to come up with the money? When they’ve been diagnosed with something that precludes working?? Meanwhile the rates the banks charged for ‘credit’ included the risk of certain default rates.
And you want to put them in jail which has a cost to society of 50K a year … how about eliminate the middle man and just give the prison money to the banking mafia and be done with it?
Hi Signal,
I was speaking in terms of principles – of debts freely assumed that, as I see it, one is obligated to pay back.
I am no fan of the banking cartels, I assure you. But if people choose to take out a loan, are they not obligated (ethically) to pay it back? And is the lender not ethically entitled to get his money back?
If, as you suggest (as I read it) it’s ok for “Smith” to just skip out on his debt, won’t “Jones” feel like a sucker for continuing to make payments on his debt?
And if that catches on and becomes acceptable, who will risk loaning anyone money?
When the top of this authoritarian system is a bunch of liars, crooks, and con-men, when people realize that just enough, they start to emulate the behavior of those on top. So if they steal legally to issue the loan, why pay it back if there is a way to legally not pay it back? Most people won’t hold themselves to a higher standard and yes then everything tumbles down. The root problem needs fixing. Just telling people they have to be honorable when those with power aren’t isn’t going to work for long.
MP – I think you are exactly right.
All loans are already structured in such a way that all the risk is yours and all the benefit is theirs.
Should things come to pass and one loses everything except their debts – then (as Gerald Celente says) “those with nothing else to lose will lose it”
That might just be the time to go on a hunting trip…