Every year we produce more hard drive space than we destroy. Every year we produce more LCD televisions than we destroy. Every year we produce more video games than we destroy. Anyone who wants a particular hard drive, LCD television or video game need only wait until it gets cheap to afford it. This is often called deflation, a wonderful symptom of wealth and prosperity.

Wouldn’t life be wonderful if the same thing held true for homes, cars, food and clothes? Anyone who wants a particularly sized home need only wait until the price drops to where he can afford it. Anyone who wants a particular car with a particular set of amenities need only wait — prices will come down and he can afford it. Want to eat steaks and fine Italian suits? Wait until the world produces enough that the price drops to an affordable level.

Things used to work this way. A basked of goods purchased in 1800 for $20 cost the same $20 or less in 1912, more than a century later. That is incredible when you think of the increasing demand due to population growth.

The population of Europe doubled from 203m in 1800 to 408m in 1900 (Wikipedia). The population of North America exploded more than 1000% from 7m in 1800 to 82m a century later.

In other words the United States needed ten times as much food to feed itself in 1900 than a hundred years prior. But prices did not rise; prices fell. The United States produced so much more food that prices fell. A basket of goods in 1800 cost around $50 but produced so much more food a century later that the cost dropped to around $20-$30.

The United States created the Federal Reserve in 1913. Life has become more and more unaffordable ever since. Bankruptcy is now more common than divorce. The same basket of goods that cost $50 in 1800 and $30 in 1900 now costs $600. No wonder people can no longer afford to retire!

Before he was chairman of the organization Benjamin Bernanke believed the Federal Reserve would make life forever more expensive and unaffordable:

I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.

Will the economic commanders at the Federal Reserve be any more successful in the end than their soviet counterparts? I hope not. Prices are falling:

The Commerce Department’s price index for personal consumption expenditures, a closely watched inflation gauge, fell 1.1% in November

Prices are falling enough that people can once again afford to save and build wealth:

savings from lower gasoline prices is showing up as savings – as opposed to other consumption

So the first part of Bernanke’s belief — that the Fed can always prevent savings, prosperity and the lower prices he calls deflation — looks increasingly false by the day. It is now up to us to decide whether we will allow him to reverse the course of society.

Saving will not be easy. It means working hard. It means earning more than you spend and learning to live without:

I believe that each of us, the communities we live in, and the organizations and companies we serve, are going to have to make choices. We are going to have to separate what is most important from least, and act accordingly. Where life was once limitless, it will now be constrained. And, like it or not, all of us will need to return to our vocabulary a simple phrase that I believe has been lost over the past 20 years: “I can’t afford that.”

I believe it is worth it. Learning to live without lowers demand. Lower demand lowers prices. Lower prices are a good thing. Celebrate lower prices.

Money measures the value of goods. It helps people who are not experts at building homes, writing software or growing food set a desirable exchange rate between them and with what they produce. Nowhere in this equation is the creation of more money necessary.

Creating more money makes it easier to acquire a particular nominal amount of that money. Does the amount of work required to write software or grow food change? No. it still takes the same amount; people bid up the exchange rate between money and food/software as a result.

Goods and services are what make prosperity. More money does not create more goods or services.

Saving is what makes us wealthy. Saving for a rainy day gives us the confidence to invest in new ways to produce more of those goods. Producing more goods makes those goods more affordable — not creating more money.

People who believe life becomes more affordable with more money may as well believe they can lose weight by moving from the US to Europe. Sure the scale now says 72 instead of 160, but 1kg is heavier than 1 pound. Bernanke is trying the same hocus-pocus on society right now by printing unfathomable amounts of money:

Bernanke thinks this improves life. Maybe for bankers at JPMorgan and Bernanke’s family. How about for the rest of us? Bill Bonner of the Daily Reckoning begs to differ:

It is amazing to us that so many people have so much faith in so much humbug.

We’re talking about the bailout…the fix…the save…the plan to revive the world economy by giving it more of what it least needs – more debt. [...] the feds aim to make [people] borrow more [...] and make them spend more…by causing prices to rise. [...] It’s a consumer economy, they say; all we’ve got to do is to lure people to consume. The simpletons.

Colleague Simone Wapler explains that it doesn’t work that way:

“Of course, a consumer economy requires consumption, but that’s not all it requires. Imagine an island where a fisherman, a hairdresser, a doctor and a central banker live. The fisherman sells his fish. The hairdresser cuts hair. And the doctor does whatever doctors do. They all live on their services, using shells for money. The population is stable; everybody does what he’s supposed to do. Everyone is fed. They all have nice haircuts. And they all get medical treatment. The number of shells is stable too. That’s all there is to the story.”

Simone gores on to explain that the only way people can get their hair cut two times a day…eat twice as many fish…or get sick more often and expect to get the same treatment they got before is by INCREASING PRODUCTION. And that requires saving…and investment. Otherwise, increasing consumption isn’t possible. Even if you add more shells, the productive capacity remains the same.

We don’t even know why we are pointing this out. Every fool knows it. But every fool also believes that if you mix in a little macro-economic mumbo jumbo that, somehow, central bankers can increase consumption by discouraging saving…and just getting more shells into consumers’ hands.

Increased production allows sustainable consumption growth and comes from saving. The Federal Reserve openly opposes saving due to the resulting price deflation — deflation is bad for banks. The faster the United States dissolves the Federal Reserve the better of the rest of us will be.

Join the cause.

End the Federal Reserve.

The Federal Reserve bailed out JP Morgan when Bear Stearns collapsed. They received another bailout when Washington Mutual collapsed. JP Morgan defaulted on all of Washington Mutual’s debts but kept all the deposits.

JPMorgan keeps what is profitable and let’s the public suffer the consequences of the rest:

JPMorgan Chase & Co. will officially tell Seattle property owners [they] will not be taking over the bank’s thousands of feet of downtown office space.
The move will leave a gaping hole in Seattle’s commercial real estate market. [...] WaMu leases about 543,000 square feet and subleases an additional 185,000, according to Seattle-based Flinn Ferguson Corporate Real Estate [...] JPMorgan (NYSE: JPM) will move all of WaMu’s remaining employees and those on its transition team to WaMu Center, the 42-story high-rise tower that Washington Mutual built in partnership with the Seattle Art Museum [...] WaMu employed 4,200 people downtown but JPMorgan is cutting 3,400 of those jobs.

Why give JPMorgan the right to keep the retail buildings and deposits it wants but default on Seattle’s pensions, leases and anything else? Why should Seattle’s Commercial Real Estate suffer for JPMorgan’s benefit?

Reminder: Murray voted to hand hundreds of billions to these vultures. Senator Patty Murray sold out Seattle and Washington State. Replace her at the earliest opportunity.

Overpriced homes do not sell:

The months of supply for October was revised up to 11.8 months – the ALL TIME RECORD!
[...]
This is the lowest sales for November since 1981. (NSA, 28 thousand new homes were sold in November 2008, 27 thousand were sold in November 1981).

Which is no surprise given deteriorating macroeconomic conditions:

[Weyerhaeuser] reduced its quarterly dividend from 60 cents to 25 cents and also froze all executive and salaried wage levels at 2008 levels.

The company’s board also reduced capital spending next year from $425 million to between $200 million and $250 million.

On the bright side, home prices are falling:

The median resale price fell 13 percent from a year before, to $181,300, “probably the largest price decline since the Great Depression,” National Association of Realtors Chief Economist Lawrence Yun said in Washington.

The hours of work needed to repay a mortgage needs to fall to more affordable levels. Falling prices helps new home owners, but destroys equity for current mortgaged owners. That is why modifying only the terms of an overpriced mortgage does not work:

Data from the Office of the Comptroller of the Currency show that 55% of mortgage mods redefault within six months. Even more discouraging, the three month re-default rate was higher for loans modified in the second quarter of 2008 than the first.

I expect the auto bailout will find no more success. There are too many cars priced far above what people want or can afford to pay:

Gleaming new Mercedes cars roll one by one out of a huge container ship here and onto a pier. Ordinarily the cars would be loaded on trucks within hours, destined for dealerships around the country. But these are not ordinary times.

For now, the port itself is the destination. Unwelcome by dealers and buyers, thousands of cars worth tens of millions of dollars are being warehoused on increasingly crowded port property.

And for the first time, Mercedes-Benz, Toyota, and Nissan have each asked to lease space from the port for these orphan vehicles. They are turning dozens of acres of the nation’s second-largest container port into a parking lot, creating a vivid picture of a paralyzed auto business and an economy in peril.

Government can try determining who feels the pain, but the hours of work needed to repay debt needs to fall. Nothing they do will change this.

Printing and bankruptcy are both forms of default. The main difference is that printing punishes everyone who uses the currency. Bankruptcy merely punishes those involved in the bad decisions. Bankruptcy is the more honest, straightforward and capitalist approach to default.

Bernanke and his colleges at the Federal Reserve seem to disagree. We will all suffer as a result.

The Puget Sound Business Journal reports on consumers deleveraging:

84 percent said they’re using cash more to help control spending and manage budgets. Another 69 percent said they’re using cash more because they’re worried about credit card debt.

Yesterday the market crashed farther than any since the Great Depression. In fact, it is crashing further, faster than what may soon be called World Depression I:

This looks like World Depression II. What will happen when this chart of credit / gdp reverses itself like it did during World Depression I?

I read yesterday that each active GM or Ford employee must produce enough for nearly 10 people:

GM, Ford, and Chrysler employ 240,000. They provide healthcare to 2 million, pension benefits to 775,000

That is unsustainable and unfair to young workers.

People who believe it essentially to support this business model are missing an important point. People will always want to get around — and that probably includes cars — but every dollar the federal government spends supporting insolvent companies like GM is a dollar that someone else cannot spend building a better car company to build better cars.

The Ayn Rand Institute captures the importance of failures succinctly:

Overlooked here is that in a free market business failures are not just normal, they’re crucial for the best products and ideas to emerge. Most restaurants fail in their first three years because customers have other preferences. Many mom-and-pop grocers go out of business because Walmart offers better selection and lower prices. Even whole industries–think typewriters, 8-tracks and horses and buggies–vanish because new inventions and competitors arise.

None of these failures are a problem, nor do they threaten the system. On the contrary, they are an inherent part of the progress which only capitalism makes possible.

Well said.

People are stopping their driving:

Oil prices are dropping like a stone (how much of this is deleveraging?).

Japan, the largest holder of US debt, wants US Treasuries issued in Japanese Yen:

Japanese economists, increasingly concerned that the United States might seek to pay its enormous and growing debt obligations in a weakened US dollar, are looking to the possibility of US Treasuries being issued in yen.

This would make it far more expensive for the US to issue more debt, threatening a reversal of this trend:

The US dollar is a terribly flawed currency today.

Why are the people of Irvine paying the federal government to lease them propery it took for free?

The Federal Deposit Insurance Corp. has leased 200,000 square feet of space in Irvine for a temporary office that will manage receiverships and liquidate assets from failed financial institutions in the western United States.

Why not just default and sell the buildings to the highest bidder? I’ll bid it for $1.

Commercial Real Estate is way over capacity. Defaults are bound to increase:

General Growth Properties, the second largest mall owner in the U.S. behind Simon Property, has hired bankruptcy counsel

It is sad that people view Bush as a champion of free-market economics. The Bush administration expanded government interference into US citizens’ private affairs, both social and economic, more than any other. Bush nationalized our financial system and is replacing what is left of our meritocracy with a kleptocracy:

Mr. Paulson under George Bush in 2008 is looking like the U.S. counterpart to Anatoly Chubais under Boris Yeltsin in 1996. Just as Russian neoliberals led by Chubais were promoted by Clinton Treasury Secretary Robert Rubin of Goldman Sachs, today’s Wall Street power grab to replace the government as the economy’s central planner is being orchestrated by another Treasury Secretary from Goldman Sachs, empowered to decide which kleptocrats are to receive what public resources and on what terms, aided by “Helicopter” Ben Bernanke at the Federal Reserve. Mr. Bernanke’s famous quip about helicopters dropping money to get the economy moving seems to be limited to Wall Street for use in buying financial assets, not real goods and services for the population at large.