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How Do People Destroy Their Capital?
I have written previously about the interest rate, which is falling under the planning of the Federal Reserve. The flip side of falling interest rates is the rising price of bonds. Bonds are in an endless, ferocious bull market. Why do I call it ferocious? Perhaps voracious is a better word, as it is gobbling up capital like the Cookie Monster jamming tollhouses into his maw. There are several mechanisms by which this occurs, let’s look at one here.
Artificially low interest makes it necessary to seek other ways to make money. Deprived of a decent yield, people are encouraged (pushed, really) to go speculating. And so the juice in bonds spills over into other markets. When rates fall, people find other assets more attractive. As they adjust their portfolios and go questing for yield, they buy equities and real estate.
Dirt cheap credit is also the fuel for rising asset prices. People can use leverage to buy assets, and further enhance their gains.
And it’s wonderful fun. A bull market, especially one that is believed to be infinite—if not Fed-guaranteed—seemingly provides free money. All you have to do is buy something, wait, and sell it. You can get your capital back plus something extra.
Many people spend most of this extra. This is their gain, their income. Their brokers, advisers, and other professionals also make their income off of it.
However, there’s a contradiction. Common sense tells us that it should be impossible to consume without first producing something. How can this be possible? How can an entire sector of economy get away with it?
It can’t. There is no Santa Claus. Something else is happening, something insidious.
The falling-rate-driven bull market is a process of conversion of someone’s wealth into your income.
Let’s look at how this works. Suppose Jennifer buys a condominium for a million bucks. If she pays cash, this is a large chunk of her life savings or inheritance. If she borrows to buy it, then she’s disbursing someone else’s savings. That saver has no idea what is being done with his savings. He probably thinks it’s safe in
the bank.
Jen forks over this cash to the seller, David. Dave recovers his original cost to buy the asset, say six hundred grand. The rest, say four hundred, is profit. He goes out and uses much of the profit to buy a Ferrari, drink a 1983 Bordeaux, and dine on beluga caviar. Dave is driving, drinking, and eating Jen’s life savings.
What was Jennifer thinking? Why did she place so much of her wealth into his hands of David, who will only consume a large part of it?
Simple. Jen sees the bull market, and expects it to continue. She is hoping that after a while, she will sell at a profit. That is, she relies on the next guy to come along and give over an even larger chunk of wealth to her, so she can consume it. Maybe Ferraris aren’t her thing, but she fancies a cruise around the world, a diamond necklace, and she will enjoy some caviar too.
Charles Ponzi is now infamous for having promoted a scheme, where people who buy in later are enabling the earlier participants to cash out with profits. Such schemes can’t go on forever, because they are cannibalizing the participants. They do not generate real profits by increasing production. There are mere transfers, converting the wealth of some into the income of others.
Ponzi had nothing on the Fed, with its endless bond bull market, speculation, and capital destruction. Don’t blame Jennifer or David. Blame the Fed and its perverse game.
Gold is an international issue from China to Switzerland to India. It’s also a national issue in the US, as it is part of the Republican primary debate. And it is an issue in Arizona, soon to become (we hope!) the third state to pass a gold legal tender law. Please come to the Monetary Innovation Conference in Phoenix on Tuesday. Keith will discuss his ideas about falling interest rates and how it’s hurting everyone from savers to retirees. Entrepreneurs will discuss the problems they’re solving using gold. Please click here to register
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nvm
"How come when I try to post a comment, and I only push the Save button once, it posts multiple times, anywhere from twice to four or five times?"
1. Zerohedge post
2. NSA repository in Utah
3. Local ISIS cell at DHS
4. Girlfriends email account-she doesn't trust you what with all those cartoons and stuff
I can't access ZH's homepage. I can read the banner articles and go into contributors only since my internet was out all day yesterday.
Page not found.
Whazzup wid dat?
PIX of Jen or it didn't happen.
Actually when Jennifer borrows the money, the bank doesn't give her anybody's savings, they just create new money out of thin air. Since she probably put 10% down, that cash becomes the bank's reserve on Dave's new deposit of $1,000,000. Nobody's wealth is getting spent.
When she pays cash, she has a much reduced rent (taxes & insurance) and over the life of the loan she will make 2-3 times her money in savings because she's not paying interest to the bank.
Correct. Everything is suspect after this: "If she borrows to buy it, then she’s disbursing someone else’s savings." Nobody's savings was used, it was digital "money". I guess one could say that the "money" is a lien on the future income of the country as a whole, that is, a debt on the citizens. A debt that the citizens did not agree to pay.
^^^This. Now that money creation does not require any real collateral, why can't anyone create it?
Such "let the majority eat cake" monetary experiments have been tried before.
Thank you for pointing this out.
What a fucking stupid article.
I'm starting to believe that thinking about or handling gold for too long is like eating lead paint chips.
It may seem reasonable at first, but frequently leads to brain damage and retardation.
Vinz
If Jen paid cash, then her nether regions must look like an old used leather mailbag.
When I first saw this link, I thought "Madison isn't that bad, nor is Bismarck", but then again, Hartford, Montgomery, and Little Rock look somewhat destroyed already.
Jungle Jim must be one of the manipulators tryin' to scare people out of or away from gold/silver in order to repay the central banks for the physical stuff they borrowed and dumped to control the gold/silver price so they could continue to lie and steal from everyone else.
I would like to see charts based upon real data of how much money the gold hoarders have lost/gained in the last 5 years.
Priced in what, exactly? Fives years is nothing. How about ten, 15, 20, or 30? How long do you expect to live?
There have been many posting on ZH about how the regimes are actively involved in suppressing the price of gold, and I believe that this speculation is true.
So as an investor, trying to earn income to provide for my children and grandchildren, while preserving my savings, I do not invest in anything that is the target of oppression by the regime and going down in market price and not paying me income to hold it while waiting for the miracle upside.
Do gold hoarders have time machines that allow them to go back in time and buy gold at the price of 30 years ago?
Fact is that gold had a HUGE decline in price since the panic of the Lehman crash passed and a lot of gold buyers have lost a lot of money, defined as buying power. During that same time, my treasuries have been paying interest, which I used to pay living expenses, and they even gave me big capital gains twice, which I used to increase my net worth, buy a summer home, pickup truck and 2 fishing boats, one for each house, and my net worth is still higher now than before.
Gold is a religion, not an investment.
The Jungle Jim thread.
There's only three types of people whose business is assured; Undertakers, Bankers and Whores.
I'm guessing Jennifer is a whore?
How much is Jennifer charging for her wares? How about some pics of her.
Right on schedule. You could set your watch by it.
http://www.learcommoditycenter.com/#
Thanks for that one - http://www.learcommoditycenter.com/#
How come when I try to post a comment, and I only push the Save button once, it posts multiple times, anywhere from twice to four or five times?
I recall the multiple post problem being discussed in another ZH thread, and it was attributed to certain tablets and smartphones. That's all I got.
On the other hand, if I had simply hoarded cash, I would have saved myself ~$120,000 -$140,000. But I was told the dollar was about to collapse in value. So I went out and bought a $#!+-load of metal -- in order to "preserve my wealth." Now my future looks like this.
http://www.picturesof.net/_images_300/A_Colorful_Cartoon_Beggar_Holding_...
On the other hand, if I had simply horaded cash, I would have saved myself ~$120,000 -$140,000. But I was told the dollar was about to collapse in value. So I went out and bought a $#!+-load of metal -- in order to "preserve my wealth." Now my future looks like this.
http://www.picturesof.net/_images_300/A_Colorful_Cartoon_Beggar_Holding_...
On the other hand, if I had simply horaded cash, I would have saved myself ~$120,000 -$140,000. But I was told the dollar was about to collapse in value. So I went out and bought a $#!+-load of metal -- in order to "preserve my wealth." Now my future looks like this.
http://www.picturesof.net/_images_300/A_Colorful_Cartoon_Beggar_Holding_...
On the other hand, if I had simply horaded cash, I would have saved myself ~$120,000 -$140,000. But I was told the dollar was about to collapse in value. So I went out and bought a $#!+-load of metal -- in order to "preserve my wealth." Now my future looks like this.
http://www.picturesof.net/_images_300/A_Colorful_Cartoon_Beggar_Holding_...
http://www.picturesof.net/_images_300/Leprechaun_Sitting_In_a_Spilled_Po...
Another pretty good way was to buy a whole bunch of gold in 2011-2013.
http://drawception.com/pub/panels/2014/9-13/djCnr2zSgm-4.png
Another pretty good way was to buy a whole bunch of gold in 2011-2013.
http://drawception.com/pub/panels/2014/9-13/djCnr2zSgm-4.png
One real good, fast way was to buy a whole bunch of silver in 2010-2011.
http://www.marshotelonline.com/nopants.JPG
Get rich quick, get poor quicker. everybody wants a pile of money without going through that pesky long term investing stuff and PM's are a store of value, not a money making scheme. Land is also a good investment if you know what it's worth as opposed to modern real estate hucksterism......
That was a great way to make money. But some people only show up at an exterme because they think an unsustainable trend will go on forever.
Capital is often destroy through civil war. Just you are look at any city after war is take hold.
Sorry, Boris is mistake word "capitol".
Capital is city, Capitol is building.
Section 8 can destroy the capital, Tornado can destroy the Capitol.
Even more confusing, Capitol building uses capital "C".
Thank you are for effort, but is now more confusing.