The Real Truth About Money

Reuters just published an article called, More U.S. Cities Set to Enter Default Zone when I saw it all I could this was well duh, is this really a surprise to anyone, sadly it is.   From the article,

“But the next series of major cities and counties in danger of defaulting on their debt can hardly point to one single decision for their malaise. Whether it be Detroit, Miami or Providence, Rhode Island, their problems have a lot more to do with financial policies that put them on course to live well beyond their means.”

When I read stuff like this the sarcasm just pours out of me, I just want to shout “really?  really? you are telling me that government borrows money to pay for what it can’t afford and eventually the bill comes due.”  The real news here of course isn’t that cities are going broke along with counties and that states are not behind them.  If you read TRTAM and listen to The Survival Podcast you have been hearing that for two years now.  To me we are starting to entering the “point of acceleration” I have been worried about for so long.

You see what you are looking at right now is a pattern that the main stream media has repeated over and over.  Leading up to an event they will permit a few contrarians who speak the truth to come on once in a while, in this case the best example is Meredith Whitney who has been speaking about the coming defaults for even longer than I have.  In fact I must credit Meredith with being one of my main sources to uncovering this coming financial disaster.

Of course the news channels then bring out three or four so called “expert” talking heads to mock the one person who is speaking the truth.  Down the road the problem becomes more evident and while never apologizing or acknowledging the accuracy of the contrarian they begin to cover the issue while still down playing the real problem.  Not long after that the problem becomes something we hear about over and over and everyone blames everyone else and “we the people” deal with the suffering.

So to me it is important that we watch coverage of this issue closely, trust me the more main stream coverage it gets the closer we are to the point where the problem comes to its unavoidable conclusion as a raging economic storm.  When it does the politicians will showboat and blame but have no solutions.  Everyone will act shocked and tell us something completely stupid like, “no one could have seen this coming”.  In summary, there is a major global recession on the way and the municipal bond defaults that are coming may very well be the catalyst that sets it off.   One thing we can say for sure is, it certainly isn’t going to help anything.

The last line of the Reuters article says it all, “At an industry conference last month in Philadelphia, Richman said, “A lot of the easy fixes are gone.”

Indeed they are, in fact I would put it more accurately and simply state, there are no longer any easy fixes.  Austerity at the State, Country and City level is on the way and likely Federal level austerity isn’t far behind.  This is not time to let a smile be your umbrella, if you do expect that soon your ass will be soaking wet.

Telling Mayor Angel Taveras the Truth Might Get You Fired

For years and years I have warned that one of the true dangers to our economic future is the fact that many cities, counties and states in America are sitting on the verge of bankruptcy.  Unlike the Federal Government cities and counties can’t “print money”, all they can do is tax and borrow to raise money.  The way they borrow is via selling bonds, these are called “municipal bonds”.   A text book explanation of a municipal bond would be,

A municipal bond is a bond issued by an American city or other local government, or their agencies for the purpose of financing the infrastructure needs of the issuing municipality. These needs vary greatly but can include schools, streets and highways, bridges, hospitals, public housing, sewer and water systems, power utilities, and various public projects.

However a more accurate way to describe a municipal bond would be - A way for a government body to borrow money in order to pay for things it can not afford so the people today can have something their children will be forced to pay for with interest added on tomorrow.  Currently there are billions upon billions of dollars in debt issued as this type of bond and many of them are propping up cities, counties or states that would have been bankrupted long ago with out them.  The problem is this is exactly like using your MasterCard to pay the Visa people, it can only go on for so long.

Currently Providence Rhode Island is sitting on the verge of bankruptcy, in fact an honest man by the name of Robert Flanders said recently that not only was bankruptcy likely for Providence but “I don’t see how they can get out of it without going there“.  Such honesty is rare but more rare would have been for such honesty to be rewarded, in this case it certainly wasn’t.

What the Mayor did was fire Mr. Flanders and his firm saying that, his comment was “unacceptable”.  The mayor hasn’t claimed that the city isn’t going bankrupt, simply that saying it is again, “unacceptable”.    He also said, “Providence is not Central Falls,”  along with, “We’ve already accomplished much in our work to put Providence back on firm financial ground.” Notice he doesn’t say, the city won’t go into bankruptcy?  Why?  Because the city is teetering on it right now and likely will at some point.

The key thing to take away from this is that this isn’t really about Mr. Flanders, Mayor Taveras or even Rhode Island.  No what you see here is the reality that all these cities are trying to hide and how they go about doing so.  They simply say that any talk of bankruptcy is nonsense and unacceptable right up until they end up in bankruptcy and at that point they blame someone else.  The key is they are all hiding the reality that money has been borrowed that many cities and counties will never be able to pay back or that obligations have been made in the form of pensions and entitlements that can never be met.

In short when faced with the truth they lie and continue on with business as usual and hope no one pays attention.  Keep this in mind and please have a plan for an eventual economic day of reckoning.  Between the Federal Debt, the reality that Medicare, Medicaid and Social Security are underfunded by over 100 trillion dollars in future obligations, the fact that the interest on the national debt alone is now our 4th largest expense and over 100 cities are in danger of bankruptcy can lead any honest person to one conclusion.   Some day soon the bills will come due and the people that caused the problem will be long gone by then leaving you and your children holding the bag.  We only need to look to Argentina and Greece to see where that road leads.

See the Full Interactive Map at TheEconomist.com

So I am sure you’ve heard that if Italy fails under its current debt crisis that it could be a huge problem for the entire world right?  Further with the current situations in Italy and Greece combined we could have a real mess on our hands that could have global implications.  Now I am not saying anything about the above isn’t true, but how bad do you think it would be if say the states of California and Washington collapsed in a debt crisis?

Here is a shock, according to a new resource provided by The Economist numbers wise it would be about the same as Greece and Italy going under.

The GSP (gross state product) of Washington State is about the same as the GDP (gross domestic product) of Italy, the same comparison can be made between California and Italy.  This is why I am so concerned about a domestic crisis in the municipal bond market.  Some other shocking comparisons.

• The state of Texas is roughly equivalent to the nation of Russia
• The state of New York is roughly equivalent to the nation of Australia
• The state of New Jersey is roughly equivalent to the nation of Switzerland

This begs the obvious question, if the nations of Italy, Greece, Russia, Australia and Switzerland all fell at the same time how bad would it be for us and for the world as a whole?  While we can’t make a direct comparison in many ways the same crisis could be caused by just 5 US states.

All in all “The Economist” was able to create an interactive map that accurately correlated 50 different nations to each of our 50 states.  In short a US collapse would be equivalent to 50 different nations going down at once.  Again it isn’t a direct 1 for 1 comparison but it should give us pause when the talking heads on TV tell us there is nothing to worry about from a stand point of state, city and county municipal bond based debt.

You can find the map and get a better perspective of this situation on The Economist website at this link.

No one can deny that the economic climate in the U.S. and the world has been in a decline for a while now.  The problem has been around long before the most recent “crisis” in the housing and banking systems.  It’s basically a two-fold problem: debt backed currency, and a lack of true value.  The first problem is not one that individuals can really do much about on a grand scale.  The second problem is one everyone can do something about even if it’s in a small way.

Many jobs end up being nothing more than pushing paper or shuffling goods.  Now I don’t mean to put anyone down at all.  What I am saying is that when the majority of the population is employed in jobs such as a retail clerk selling goods from China and other countries to fellow citizens also employed in similar positions, we start to have a problem.  Less and less is being produced and more and more being consumed.  How long can we sustain sitting in cubicles answering phones for insurance companies or selling products from other countries or just shuffling papers in an office as a means of “production?”

At the end of the day, we all have to eat, sleep in a bed, take showers, and wear clothes.  All these things relate to physical goods. Even information products are items that can be sold and add value. Services are a one off.  While services are necessary I believe that the economy has shifted to an imbalance of services versus products. Colleges seem to be breeding this to the extreme with most college positions being for services or management.  Youth unemployment shows this as it is surging and has been for the past few years. Check out this article on Global Youth Unemployment. One of the best articles I have read on the subject of youth unemployment can be found here.

As time progresses everyone, especially the youth will have to create true wealth. We will have to be the ones creating the jobs and starting businesses.  No one is going to do it for us.  Create the wealth for yourself in a sustainable manner and you will be in a much better place.  Consequently it will enable you to help others even more.

All true wealth comes from the ground in one form or another. The oldest wealthy were the land owners because of the crops that could be grown on it and the buildings that could be built on it.

So what exactly are some ways to create True Wealth™?

#1.  Grow a garden.  Even if you’re in an apartment I’d bet you could find a way to grow a little food on your patio in pots and perhaps raised beds.  Having the ability to produce your own food is a type of true wealth.  If you have more than just a few pots, all the better.  There are great resources all over the internet including on my site on how to create raised bed gardens.

#2. Provide some percentage of your own energy needs.  A great way to do that would be to install a small amount of solar panels over time if you can afford it.  If you take this rout make sure you get an inverter that can handle scaling up.  If you put a couple panels on each year, you can spread the investment out over time and still provide some of your own energy needs.  Another way to provide energy needs would be to harvest your own firewood where it is legally permitted.  Season it properly and use it in your fireplace or barbecue.

#3. Create a business or a product.  Creating a business is becoming more and more necessary as jobs (and true wealth creating jobs) decline.  If you can find a way to make your business or product generate even more true wealth for your clients, then it can truly impact them. Creating a product can be anything from something you make from other resources, to an instructional ebook or DVD on how to do something that would be useful to someone.

#4. Look into investing in land and precious metals.  Again, wealth comes from the ground.  The thing about land is you can’t print more of it, therefore it will always be valuable. Sometimes you can find great deals on land if you look for it.  It would be wise to look for land that could produce food or set up in some other way to generate income.

#5. Build social capital.  No matter how good or how wealthy you are, you can’t do it alone nor, would you want to.  Building your social network (in real life and online) can help you because you can’t do it all.  People have connections, resources, talents.  Beyond that they can just simply be your friends.

Question:

What are some other ways to build true wealth in 2012?

About the author: Jake Reed is programmer and creator of Survivalize.com and Unreasonablog.com which are sites dedicated to helping you consistently live a better life in every area.

Photo Credit to Gage Skidmore via Flickr

Back on June 23rd I reported that for the first time Ben Bernanke and I were in agreement.

At that time the good chairman had decided it was time to stop printing money, better known as quantitative easing.

If you are not exactly clear on what quantitative easing is, this simple video will explain it and both a humorous and depressing way.

The key thing though is that less than a month ago, The Federal Reserve Chairman said three things of great importance…

• Two rounds of quantitative easing didn’t work

• It was time to stop doing it

• He was confused as to why it didn’t work

At this point anyone with a pulse should have drawn two conclusions

• Bernanke is a disaster, the man who holds the nation’s credit card is confused as to why blowing 5 trillion of our dollars didn’t work.  -  Hell listen to Ron Paul eat his lunch in this video.

• As he didn’t get why it didn’t work he was probably lying when he said it was time to stop.  The fact that he was confused should have told you he still believed that printing money was the solution and eventually he would decide that they simply didn’t do enough of it.

Of course in my first article on this subject I stated clearly, “I predict QE3 will happen down the road”, but even I am shocked here.  Bernanke how now executed an about face that would make a Marine envious with its speed and relative quickness on such an important issue.  It only took 20 days to go from, “it didn’t work, it is time to stop and I am not sure why it didn’t work” to “it may time to start doing it again because we have to get the economy going”.  Yes old helicopter Ben is at it again according to a report on CNBC old Ben now has told congress he is working on a some new ways to stimulate the economy, how you ask, from the article on CNBC…

Minutes to the central bank’s June meeting on Tuesday suggested that, while some members were pondering the possible need for additional easing amid a weak economy, the Fed is not yet ready to take any further action.

But the minutes also reflected divisions within the central bank over further easing, and Bernanke’s speech provided a further indicator that a QE3 move is far from off the table.

“Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further,” Bernanke said.

Let me give you the nuts and bolts, Jack Spirko version of this, “we have a number of ways in which we could act to ease financial conditions further” means simply, if the economy stays in the crapper for much longer we will start buying up bonds again with computer entries, gobbling up toxic assets at tax payer expense and flood the markets with money because it is the only thing we can do.

Indeed it will be the only thing they can do as city after city continues to declare bankruptcy and run to the states for bailouts.  They may talk of raising interest rates but that is the only thing you say when the interest rate is basically zero.  Yet raising rates is not really an option.  Do that and the duct tape holding the false recovery together flies apart.

Photo Credit to Purpleslog via Flickr

Two years ago I began warning listeners of The Survival Podcast that round two of the current crisis would begin with a series of city level defaults, followed by state defaults.  This would eventually cause run away inflation as the federal government attempted the impossible task of fixing the mess with the end result being a re-basing of the currency.  In short money printing has its’ limits, the coming defaults by hundreds of cities and dozens of states will be what pushes us to said limit.

Over the past year at TRTAM, I have continued to sound this alarm.  In response I have been called a loon, an alarmist and a quack.  In spite of being called those names I am beginning to wish I was nuts and the naysayers were right.  Unfortunately this catastrophe is unfolding right in front of us and just about as on schedule as it could be.  Right down to me calling the Dow at 12,500 as part of the false recovery by mid 2011, it currently sits at 12,601 as I type this.

Just two days ago Boston.com reported that Central Falls Rhode Island is now standing on the “edge of financial abyss.”  Here is a excerpt from the article on Boston.com

Central Falls, one of New England’s most distressed cities, is on the cusp of filing for bankruptcy protection – a relatively rare step for municipalities even in tough financial times. Since 1980, only about 46 cities or towns in the United States have sought such protection, according to James Spiotto, an attorney in Chicago who is an expert in municipal bankruptcies.

Last year, the state took over Central Falls – a city of 19,000 residents with an unadjusted unemployment rate of 15 percent – stripping the mayor of his keys to City Hall and the rest of his authority. That move came after every teacher was fired at the under performing high school, with most of them rehired later.