Where is the US Economy Going? What does it mean for Central America?

peterchristopher's picture

I just received the attached letter in email.  It's yet another jab at the US Feds for their failure to effectively increase liquidity.  I'm posting the whole thing in the humor section but honestly I have something to say as well.  There are many people and institutions who are right now buying US government debt.  Not me.  I do have some savings, but it's all in equities.  It's certainly taken a big hit over the past year, on par with everyone else's.  But the dollar got stronger, so in global terms it's not as big a hit as it appears.  Sure there's some sense I wish I'd just owned dollars for the past year, but I won't berate myself too hard for being comfortable with risk.

Bernake is known for a long time to have obsessed over the depression; it appears to have been his lifelong purpose to study it so hard so he could do a better job than those at the helm in the late 20s and early 30s.  A few years back, when Bernake kept raising rates, I had to wonder, "Is he just trying to re-create a depression, to show how he could manage it?"  Well, I think that's part of what we've seen happen. What we imagine, we create.  Obviously one man doesn't control an entire economy, but we can consider what he has said he would do in cases like this.  Add cash.  This is one of Bernake's main ideas.  Inflation has never been as troubling to Bernake as deflation.  Inflation is ok for Bernake.  He has been waiting for thirty years of academia and politics to be to print trillions and trillions of dollars.  With the huge dollar-denominated debts in the U.S. it is obviously in the U.S. interest to pay them back with worthless 2015 dollars, rather than expensive 2009 dollars. So here is my prediction.  Obama will encourage through further appointments a continuation of Bernake's plan (whether with Bernake at the helm or not) - in spite of Obama's claim to prefer a strong dollar, he'll print more money, as Bernake has been doing.  Inflation will go up.  When inflation goes up, the place to have your money parked is not in currency - you need equities or properties, hard goods, commodities. 

Those who are burying their money under their mattresses in cash or treasury securities (or savings/checking accounts) will suffer a significant drop in purchasing power, especially when sometime in the next few years (could be tomorrow, could be in 18 months) the emotional investment world dumps dollars and buys equities, properties, and commodities again.  Warren Buffet also recommended something similar - take a look:  http://www.huffingtonpost.com/2008/10/17/warren-buffett-buy-americ_n_135520.html

If you do have cash, you don't need to buy property in Central America now.  You can convert it to equities or commodities; my prediction is that they will rise roughly together, while the dollar reverts back to its decline.


The following is the funny letter I enjoyed reading that inspired this post.

Dear Secretary Paulson, Chairman Bernanke, Chairman Bair and Congress:

Let me begin by thanking you for the outstanding work you are doing to restore the nation's financial industry to order. The Troubled Asset Relief Program, the bailouts of Fannie Mae (FNM, Trade ), Freddie Mac (FRE, Trade ), Citigroup Inc. (C, Trade ) and especially American International Group Inc. (AIG, Trade ) have been runaway successes.

A special thanks also to Neel Kashkari, the assistant Treasury secretary who runs TARP. I think everyone would agree he's really lived up to the expectations his experience and background promised.

The reason I'm writing you today is to clear up some misconceptions about the perception that what you're reading is commentary. As the nation's financial crisis has deepened, Writing on the Wall has done some painstaking AIG-style due diligence on its financial house.

After some careful assessment, it turns out that when you add up all of the credits (few) and debits (many) and hold this column to the light just right, it turns out that this franchise is not about commentary at all.

Mr. Secretary, ladies and gentlemen: What you're reading is not opinion. It's a bank holding company.

I know. At first, I couldn't believe it either. By the traditional standards -- you know, the ones we had before Congress repealed Depression-era banking reforms -- a column falls woefully short of the even the most basic criteria set by the Federal Reserve.

But let's face it. Those standards were really draconian. All of that stuff about reserves, safe lending practices, limits on risk-taking -- what did it give us? Just a safe and sound system. We've been far better off with the supercharged, performance-enhanced returns that banking has produced the last decade. Thank you, Sandy Weill.

The point is, if General Motors Acceptance Corp. is a bank holding company, if Goldman Sachs Group Inc. (GS, Trade ) is a bank holding company, if American Express Co. (AXP, Trade ) and Sallie Mae (SLM, Trade ) are bank holding companies, then so is this 800-or-so words that appear a couple of times a week.

Take GMAC. The financing arm of General Motors Corp. (GM, Trade ) wants to be a bank holding company. I say, why not? GMAC has been doing everything a good bank should do, except take deposits and screen its borrowers' credit histories.

Now, of course, to get its bank holding company status GMAC is pressuring bondholders to give up their existing bonds for new debt. Bondholders have been reluctant even though GMAC says the new paper will be just as good.

Personally, I don't get why these crazy bondholders don't trust GM and the hedge fund that owns half of GMAC. It's as if the bond investors think those guys had something to do with the $7.9 billion in losses suffered in the last five quarters.

I say that sounds exactly like the kind of institution the government wants in the system. I know a lot of critics say GMAC just wants a big TARP payout to cut its losses, but I think GMAC is as solid as a Pontiac with 100,000 miles on it. And if GMAC is a bank, a column can be a bank too.

After all, I'd argue that this column is a lot like GMAC, Goldman or Morgan Stanley (MS, Trade ). They have bondholders. The column has credit card debt. They like derivatives. I'd like to know what a derivative is. They've got declining real estate assets. This column, too. My wife and three subsidiaries have been losing money for the last five quarters, just like GMAC.

In fact, I'd argue that this column is even more of a bank than a bank is. For instance, not only does it lend to people who will pay it back, it's not foolish enough to think that money it gives to someone else is somehow an asset.

Standard & Poor's and Moody's Investors' Service also have indicated to me that Writing on the Wall is in line for a top rating and a great deal on a Bermuda time-share if it's willing to sit through a day-long information session.

Now, I know what you're thinking: "Writing on the Wall, you can't be a bank. You don't get bonuses when your shareholders are losing 80% of their investments. You don't make billions in trading bets with only a few million on the balance sheet. You don't have a corporate jet. You pay taxes. You're open after 3 p.m."

You'll get no argument from me. But I will point out that banks are supposed to have capital requirements, supposed to be closely supervised. I think many of the applicants in line ahead of Writing on the Wall have fallen a little short of those standards. You've also told banks applying to be holding companies that they have two years to turn themselves into banks -- and that the government will grant extensions if applicants are making progress.

In the meantime, non-bank holding companies will be considered bank holding companies when it comes to getting cash from the government. It means cheap money from the Federal Reserve's discount window and, of course, TARP money. The only caveats are that the money will have to be repaid at a rate less than charged on a 30-year-fixed mortgage and the government gets a stake.

It's a hard bargain this column is willing to accept.

In conclusion, let me just summarize what a good deal this will be for everyone. By declaring Writing on the Wall a bank holding company, my counterparties will know I'm a safe and sound institution. You only grant this designation to the most solid of banks. It will also give me the kind of regulation that I never needed because I've always conducted business properly.

I appreciate you taking the time to read my application. Just one more thing, Mr. Kashkari, if you could make that TARP check out today it would really be appreciated. And just between us: I'll be putting it under the mattress.


Post new comment

The content of this field is kept private and will not be shown publicly.
This question is for testing whether you are a human visitor and to prevent automated spam submissions.
Enter the characters shown in the image.