Blog Topic

INFLATION HURTS RETIRED PEOPLE THE MOST
Posted by: Darrell Castle
January 29, 2010

Inflation can be defined as an increase in the quantity of money and debt within an economy. Inflation is specifically not an increase in prices within an economy. Price increase within an economy is a consequence of inflation not the cause.

Governments then, in our modern central bank run economies, are responsible for inflation because of their constant increases in the money supply through the central banks. In the U.S., the central bank is the Federal Reserve. Inflation is a hidden or stealth tax imposed on the public without their knowledge or consent. Inflation serves to steal the savings and transfer the wealth of people to the government.

Retired people, usually on fixed or limited incomes, are hurt the most by inflation because their income cannot keep up with the constant rise in prices and therefore their standard of living constantly falls. Due to inflation, the real standard of living in America has been falling since about 1971. This is true because people are falling further and further behind the ever increasing rate of inflation. For example: If you had ten loaves of bread which cost two dollars each for a total cost of twenty dollars and you double the money supply then each loaf would increase in price to four dollars because there would be twice as much money available and it is therefore worth half as much. The more you make of something the less it is worth. The bread is the same bread but it costs twice as much and the retired person with the same income must pay twice as much for it.

Inflation serves the constant need of government to buy more than it can legitimately pay for because a real tax increase may not be possible. The over spending and over production of money comes at the expense of people who cannot keep up and constantly must borrow to maintain their standard of living. Inflation and the need to borrow to keep up also explain, at least in part, our current recession. Credit collapsed and with the collapse of credit came an end to borrowing and an end to people's ability to keep up with the rate of inflation by going further and further into debt. At the same time, businesses started to fail because credit was no longer available to them. This credit collapse resulted in lost jobs and declining tax revenue which resulted in even more inflation.

To reduce your own exposure to a system over which you no longer have any control, get out of debt as quickly as possible.

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UNEMPLOYED YOUNG AMERICANS
Posted by: Darrell Castle
January 27, 2010

The U.S. economic recession has taken a heavy toll on young Americans according to Reuters.com. There are record numbers of black men aged 20 to 24 neither working or in school. Teenagers have found it very difficult to find jobs. About 68 percent of black teenagers are currently unemployed. Teenagers often use part time jobs as a way to pay for school and as a spring board to future full time employment and those jobs are rapidly disappearing from the job market. U.S. Census Bureau data show that only 26 percent of teenagers aged 16 to 19 were employed in 2009 an all time low. Those figures do not include those young people in prison.

The prospects for young people today are grim whether they are black, white, Hispanic or something else and whether they are poor, low income workers or Ivy League educated. This has been widely reported in newspapers such as the New York Times which carried a feature article in the Sunday, January 24, 2010 edition about young lawyers in New York and other cities having to lower their expectations. Young people have always been told to "live your dreams" and to "go for it" or "be all you can be" but today military service is available, but not much else.

America needs to deleverage and clean out its debt both public and private in order to allow the economy to rebuild and get people back to work. Further, in today's times of struggle, the minimum wage laws, which are intended to raise people to a living wage instead do the opposite. The employment rate is hurt by employers' inability to hire at market rates thus destroying lower paying and part time jobs. We should take a hard look at what all this is doing to us as a society and soon or the destruction will get much worse.

Don't wait for the government, whether federal or state level, to do the right thing. Get out of debt as quickly as possible.

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RETAIL CREDIT CARD DEFAULTS AT RECORD LEVELS
Posted by: Darrell Castle
January 22, 2010

Fitch's December Retail Credit Card Index results show that more than one in every eight dollars of receivables was written off as uncollectable during the November collection period on an annualized basis. Fitch expects retail credit card defaults to continue elevated through the first half of 2010. "We do not foresee any meaningful improvement in the retail card credit quality in the coming months," said Managing Director Michael Dean. U.S. consumers are under pressure from many sources the most important of which is rising unemployment, and default rates reflect those pressures. Translation: people can't pay their credit card bills if they don't have jobs.

"Rising unemployment rates and intentional household deleveraging of debt will limit demand for credit in the near future. Consumer confidence remains low and again reflects the unemployment rate."Translation: people are out of work and don't want more debt, and being out of work and broke makes them pessimistic. "Households will remain cautious with their spending and further curtail their use of retail cards in 2010," Dean Said. Translation: people have finally stopped spending money they don't have on things they don't need.

"The latest Fed figures show revolving credit usage decreased at an annual rate of 18.5% in November-the largest dollar value drop since 1968 and the 14^th consecutive decline since October 2008. As long as the employment and income growth remain weak, demand for consumer credit, especially retail credit, will be limited." Translation: the credit created debt based economy is as dead as fried chicken and Dr. Frankenstein will not revive it until people go back to work.

Get out of debt as quickly as possible.

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DO WE HAVE A MORAL OBLIGATION TO PAY A MORTGAGE
Posted by: Darrell Castle
January 15, 2010

Does the mortgage on your home come with a moral obligation to pay, or is it acceptable to just walk away? Mortgage lenders today are going to extraordinary lengths to keep people in their homes and prevent mortgage defaults. Quite often people are expected to believe that this represents some type of philanthropy or new found generosity on the part of the mortgage industry but close examination reveals otherwise. When times were good and the value of homes was constantly rising, lenders were quick to foreclose. The attitude was basically, pay up or get out. Now that times are bad and home values are falling and many homes are worth less than the mortgage, lenders are moregenerous. Perhaps the industry is growing tired of foreclosing on mortgages that exceed the value of the collateral.

The fact is that a mortgage between borrower and lender, in the vast majority of cases, is a simple business decision and nothing more. The lender examines the property, gets an appraisal, looks at the borrower's financials and decides to make the loan taking the property as collateral. The borrower finds a home, does his due diligence, and applies for the loan. When the loan is made, the deal is simply; you pay the mortgage or I will foreclose, take the home, and sell it to someone else. Most of the time, that's all there is to it.

Sometimes both parties make bad decisions. The lender lends into a declining market for real estate and his collateral is worth less than the loan balance when the borrower defaults. The borrower has the same problem in that his home cannot be sold because its value has fallen below what he owes. That's the deal folks, and that's all there is to it. If you do not pay the mortgage the lender takes the collateral. There's nothing more to it than that.

Times are difficult and getting worse. Get out of debt as quickly as possible.

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CONSUMERS ARE DONE WITH CONSUMING
Posted by: Darrell Castle
January 14, 2010

The Webster's Dictionary definition of consume is; to reduce to nothing; to burn up; to squander; to waste away slowly; to be exhausted. The December 2009 retail sales figures as reported by the Associated Press tell us that the American people are through, or at least a bit tired of consuming. Hopefully, we are also tired of being referred to as "consumers." In order for the American economy to recover, we the American "consumers" must go back to squandering money that we don't have and we seem rather hesitant to do that. "Consumer spending is considered critical to any sustained economic revival since consumer spending accounts for 70 percent of total economic activity." Did you hear that? The American economy is 70 percent dependent on whether or not we are willing to return to a lifestyle of squandering money we don't have and will never earn? I must point out that people and nations do not become wealthy by consuming, they become wealthy by producing and by saving.

"Retail sales fell in December as demand for autos, clothing and appliances all slipped, a disappointing finish to a year in which sales had the largest drop on record. The weakness in consumer demand highlighted the formidable hurdles facing the economy as it struggles to recover from the deepest recession in seven decades. " For December, sales of autos dropped by 0.8 percent, specialty clothing 0.6 percent, big retailers such as Wal-Mart 0.8 percent, electronics and appliances 2.6 percent, and hardware 0.4 percent.

Well, people can't or won't "consume" all the foreign merchandise being shipped to America if they don't have jobs and jobs are harder to come by these days than retail sales. "In the jobs report, the Labor Department said new claims for unemployment insurance rose by 11,000 to a seasonally adjusted 444,000. Wall Street economists polled by Thomson Reuters expected an increase of only 3,000." New claims for unemployment insurance are considered a gauge of employers' willingness to hire new workers. The conclusion then is that not many people will hire workers to sell imported things that few people have the money or inclination to buy and therefore, this consumer based economy is in serious trouble.

I hear the government is working on a new economic stimulus for this year so I guess since we "consumers" aren't squandering our money fast enough; the government must step in and squander it for us. My advice: get out of debt as quickly as possible.

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RECESSION OR DEPRESSION
Posted by: Darrell Castle
January 13, 2010

There is an old adage that goes something like this; when your neighbor is out of work, that's a recession; when you are out of work, that's a depression. Many things are happening in the economy right now as a result of the decades long build up of debt both public and private. Robert Farrell who was a market strategist with Merrill Lynch before he retired used to list what he called his 10 market rules to remember. Number two was that excesses in one direction will lead to opposite excesses in the other direction. The excess of credit and the debt based economy that has been present for many years will result in excess in the other direction to bring the market back to the mean, or average, so it can grow again. Now frugality is popular again. People are saving not borrowing. The other old adage is something like this; he who goes borrowing goes sorrowing. The book of Proverbs tells us that the borrower becomes the slave of the lender. People find themselves nervous and fearful of what's ahead for them economically. The economy will have to deleverage or get rid of the excess debt before people can be expected to engage in credit and reignite another debt based economic boom. When a nation's economy is based on credit and debt, false signals are sent to the market causing it to react in false ways. People buy on credit as if they had real money and each buy is a market signal to build more stuff for which there is no real market. Factories are built and workers are hired to produce goods for which there is no real market. When credit contracts, either intentionally by bank action or naturally through market forces, the whole thing comes crashing down. The federal government, in its view, cannot let that happen because it would mean a deflationary depression and the politicians would be punished in the elections. Their tactic then is to build the house of cards ever bigger hoping that someone else will have to deal with it. The bigger the house of cards gets, the bigger the mess when it falls. This contraction of credit and resulting crash is what happened in the fall of 2008 and the government has been resisting the crash since then. The means of resistance include pumping printed money into the economy, bailing out one segment or another of the economy, taking control of industries and stimulus by pumping money into projects.

One wonders if borrowing more money will ever be a successful cure for a problem caused by too much borrowing. One also wonders if this "recession" will be solved and the economy boom again, or will it dissolve into full blown depression. Time will tell but in any event, get out of debt as soon as possible.

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VISA DEBIT: SHOULD YOU SIGN OR NOT
Posted by: Darrell Castle
January 08, 2010

The January 5, 2010 edition of the New York Times, in an article entitled "How Visa, Using Card Fees, Dominates a Market," covered a story that is very familiar to anyone who uses a debit card instead of checks or a credit card. When you make your purchase, the merchant asks whether you want to put in your PIN code or sign your name and sometimes he simply asks,debit or credit. It seems like a pointless decision for most people and some will say "I don't care, whatever is easiest for you" or "it doesn't matter to me." However, behind the scenes billions of dollars are at stake.

When a customer signs a debit card at a retailer, the merchant pays your debit card bank on the average of 75 cents for every $100 you spent, which is more than twice as much as when you punch in your PIN. The difference nationwide is so huge that Costco will not allow customers to sign debit cards at the checkout lines and Wal-mart and Home Depot try to steer customers to use their PIN.

The competition between card companies like Visa and MasterCard usually centers around how many banks they can get to issue their cards. These card companies then set the fees that merchants must pay to the cardholder's bank. Higher fees, of course, mean higher profits for the banks which means higher prices across the board because merchants pass the bank fees on to customers. Since it is to the bank's advantage for the card companies to charge more to the merchant, the charges keep going higher because of competition between Visa and MasterCard. The competition is good for banks but bad for merchants and their customers. Merchants say that they cannot refuse higher fees because lost card rights would kill sales.

Visa no longer provides credit for customers to buy merchandise. The credit is provided by the banks which issue the cards. The banks used to own Visa until it went public in 2008 and now Visa simply acts as an electronic processing center for the transactions between merchants and banks. The fee that goes to Visa averages 5 or 6 cents per transaction. That may seem like a small fee but the National Retail Federation said that the transaction fees cost households an average of $427 per year.

The U.S. Justice Department is currently investigating the rules imposed on merchants and lawsuits have been filed by merchant groups against card companies seeking relief from the fee setting system. Several bills have, of course, been introduced in Congress seeking relief for merchants.

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NOTHING BUT FOOD STAMPS
Posted by: Darrell Castle
January 06, 2010

The New York Times as reported in a front page story in the Sunday, January 3, 2010 edition has discovered that there are a lot of really poor people out there in America and that list is growing every day. "Food stamp use is at a record high and surging by the day." The fastest growing subgroup consists of about six million people who have no income at all except food stamps. This information is revealed in federal audits; that they are unemployed and receiving no cash aid, no welfare, no unemployment insurance, no pension, no child support or disability pay.

People cope with this situation the best that they can according to the Times. Some are displaced strivers, some sleep in homeless shelters, some have under the table jobs, some live with relatives, and some get non-cash help like rent subsidized apartments. Many people use food stamps only for brief periods of time between jobs and others subsist on food stamps for many months. One in eight Americans now receives food stamps and one in four children. This is an outrageous situation that is simply not justifiable in this country. There is no excuse for it whatsoever and it should be addressed immediately. Poverty, misery, and despair spread across the land while we squander our resources and the fruits of our labor bailing out banks and Wall Street. Good paying jobs could return to America and we could start making things that people want to buy once again. To pull out of this economic death spin we will have to concentrate on making things not buying things. Production is not consuming things it is making things. Should we as a people persist in this "jobless recovery" we will soon run out of foreign credit to pay for the relief people need to keep from starving. These things taken together indicate that we have abandoned the moral authority to lead.

Well, times are hard for people with millions living on nothing but food stamps and growing more and more dependent on government each day and there is no end in sight. Jobs are not safe in the future no matter how safe they may look today. Make plans to survive for periods when you have no work. Get out of debt as quickly as possible.

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BANKRUPTCY FILINGS UP 32 PERCENT IN 2009
Posted by: Darrell Castle
January 05, 2010

From the Wall Street Journal of Tuesday January 5, 2010 we learn that bankruptcy filings were up by nearly a third in 2009. Significantly, Chapter 7 filings were much higher. That is very significant because the 2005 changes to the bankruptcy laws were designed to force people to choose chapter 13 repayment plans over chapter 7 discharge. This is obviously being driven by the declining economy and the resultant increase in unemployment and the decline in residential housing values. Chapter 7 filings were up 42 percent through November 2009 and chapter 13 filings were up 12 percent. Chapter 13 filings made up less than a third of 2009 filings.

This all taken together indicates that the 2005 bankruptcy law changes have been a failure according to Ronald Mann, a law professor at Columbia University. The Post reported that professor Mann stated, "I don't think anybody who's knowledgeable about the bankruptcy system thought the statute was well crafted."

The demographics of Bankruptcy also seem to be changing. The Institute for Financial Literacy reports that more people with high income and high education levels are resorting to bankruptcy than ever. My response is that rather than say these people are "resorting" to bankruptcy why not report accurately and say that they are left with no option other than bankruptcy after losing their jobs and homes. Expenses that were reasonable and affordable when fully employed become unsustainable with job loss.

The one third increase in bankruptcy filings reflect the declining American economy but they mean much more than that. They mean that Americans are not optimistic about the future. People cannot meet their debt service obligations without full employment and very few expect a return to full employment in the immediate future.

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