Friday, July 04, 2008

Going Out of Business 2008-Style.

Wickes Furniture. Levitz. Sharper Image. KB Toys. Skybus. CompUSA. Select outlets in chains such as Eddie Bauer, Ann Taylor, Lane Bryant, Fashion Bug, Gap, Foot Locker, Zales, Sprint Nextel, Wilsons Leather,Pacific Sunwear, and Home Depot. General Motors (??) The last time I Googled "going out of business sale 2008" and limited my search to the previous month, I got 1,960,000 hits. Rumors of a coming recession from three years ago have morphed into concerns about a full-on, 30's-style Depression. Besides the fact that malls nationwide are going to get increasingly desolate, the amount of jobs cut is likely to be staggering. Perhaps Walmart will take up the slack, but somehow I doubt it.

In a society with members increasingly defined by consumer "lifestyle", there are going to be a lot of lost individuals stumbling about in the coming years. It might be a good time to look for identification elsewhere. When the shit hits the fan, it's not going to matter what brand of handbag you are carrying. Forget airplane travel... if you can afford to fill your tank, you will be deemed a success- especially if you still have a job to commute to. It's time to re-establish your relationships to the simpler pleasures in life. Take your kids to the park and the library. Have a good ol' fashioned backyard barbecue. Learn to enjoy gardening. Dig a well on the periphery of your property. Install solar panels. Buy a gun and learn to use it.

Things just may get nasty this time around. People have grown up expecting material prosperity. Very few folks planned on doing worse than their parents. Our youth have been force-fed on the myths of perpetual financial growth and the promise of unfettered Capitalism. But what happens when the bulk of the population figures out that it is really a zero sum game? I hope there are some natural barriers between your neighborhood and the poorer ones. Because a significant proportion of the population is going to be severely under-prepared for the coming hardships. And they are going to be desperate, and driven by a sense that they have nothing to lose. The concept of ill-gotten goods may disappear.

Some pundits will tell you to buy gold. They will point out that the US dollar is not officially backed up by anything. For the most part this is true. The perception of value is the only thing that underscores our currency. The truth is that cheap energy (in the form of oil) has bolstered our economy for years. Foreign nations have had to keep a reserve of US dollars in order to buy oil. Now several oil-producing countries are starting to accept other currencies. Sometime during the Bush Administration the US lost its superpower status. If that weren't the case, nobody would be suggesting you invest your wealth in precious metals. What's going unsaid is that gold lacks inherent value as well. There's no reason that people should agree to consider the substance precious- besides tradition.

Food. Clean Water. Fuel. Shelter. Guns. These things will retain their value no matter what happens in the world. But perhaps we won't get to that point. Maybe this whole thing is overblown. The federal government might just tighten up and maintain basic order. However the basic assumptions within our society will inevitably have to change. For those unstinting proponents of the "free market", there's a lot of frustration coming down the pike. How long do you really expect "socialism" to be considered an evil monster by a growing underclass? Without the promise of infinite wealth, collectivism looks increasingly attractive to frustrated citizens. Taxing the rich may not remain so unpopular in the near future. We may see a "Newer Deal" within our lifetimes. Or maybe we'll cease to exist as a coherent society.

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15 Comments:

Blogger Rick Byerly said...

a catch 22 here is that if enough people slam on the brakes and cut back their spending to the extreme it will create a recession/depression of it's own. 2/3 of the u.s. economy is consumer spending so it's a self-perpetuating paradox of sorts.

as far as a new deal i for one can't support more government involvement given the nature of how congress and the 2 party system works. we need change for sure, but not the rhetoric which comes from the 2 party system which has handed us the last 8 years or so.

just my 2 cents

10:55 AM  
Blogger Ryan said...

I clearly see all of your points here and from everything i can piece together, whether I like it or not, I think the US will be heading down the collectivist path at a much quicker rate in the next few years.

I agree with your postion on gold holding no intrinsic value as well but would add that, like federal reserve notes, you might be able to count on enough people buying into the percieved value of the metal to increase it's value even further during an economic crisis. Certainly if anyone had bought gold or silver at the 'rumors of a coming recession from three years ago' they would be able to buy quite a bit more food, fuel, water, shelter and guns today.

Spot Gold Price July 7th 2005
$425

Spot Gold Price July 8th 2008
(as i write)
$927.60

I think there is more than a little room to grow here too and there are certainly bigger gambles that you could take. Maybe think of it as a little bit of insurance that you might be able to collect on someday. It's my opinion that silver has a higher potential upside, due to, among other things, growing industrial use in developing countries.

2:26 PM  
Blogger Merge Divide said...

Hey Ryan,

I remember that we talked about this several years ago. I never did buy any, but I considered it. I'm shying away at the current price.

Silver, eh?

4:38 PM  
Anonymous Anonymous said...

Seriously Merge, the word hypocrite comes to mind. Inflation is the hallmark and calling card of the kind of statist society you are always rooting for.

Here are the words of a young Alan Greenspan on gold.

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

9:09 AM  
Anonymous Anonymous said...

Sorry here's a link to the Greenspan essay which I think has been abridged

9:13 AM  
Anonymous Anonymous said...

Here's the link....

http://www.usagold.com/gildedopinion/greenspan.html

9:14 AM  
Blogger Merge Divide said...

Anonymouse! You're back!

Thanks for the link. It's especially edifying to be offered the words of a former chairman of the federal reserve from a "libertarian". Talk about "hypocrisy"!

Actually, I'm not clear on your point. After all, the charge of hypocrisy is always the ultimate refuge of the idealogue. Why don't you just speak in your native tongue?

If you are saying I have taken a firm stance on the "gold standard", or if you think that is what my post was about... we should define some terms, eh?

Your assumption that I am a "collectivist" and your assertion that I am against the "gold standard" are easily reconciled, and in fact- according to your logic, since these two suppositions characterize a single worldview... they would be the opposite of "hypocrisy". After all, aren't you implying (or actually, wasn't Greenspan saying) that "collectivists" would indeed be against the "gold standard"?

That aside... the fact that I am not an idealogue allows me to have seemingly contradictory beliefs. The truth is that I think that wealth and value is more of a "zero-sum game" than free market capitalists would have it. Therefore, in theory, I should support the gold standard- as it is a reflection of this viewpoint.

"Hypocrisy", eh? You don't know the half of it, brother. That's why it sneaks up on you like that.

10:49 AM  
Anonymous Anonymous said...

Well, Merge... Greenspan is and was a hypocrite.

Getting back to your line of thought here, that the current problems reflect problems in the marketplace and the weakness of free markets has a few flaws.

At the housing bubble's epicenter is -- The Federal Reserve and the two Government created entities born in the last "New Deal", Fannie Mae and Freddie Mac. Both perfectly demonstrate the crooked shell game of government accounting and it's off the books liabilities.

"Freddie Mac fell $2.59 to $11.91 after earlier dropping as low as $10.28. Fannie Mae declined $3.04 to $15.74 and earlier fell to $14.65.

The new FAS 140 rule that seeks to stop companies keeping assets in off-balance sheet entities may force Fannie Mae and Freddie Mac to bring mortgages back onto their books, requiring them to put up capital, Lehman analysts led by Bruce Harting wrote in a note to clients today.

Fannie Mae would need to add $46 billion of capital and Freddie Mac would need about $29 billion, the Lehman analysts wrote.

The companies will probably get an exemption from the rule because it would be ``very difficult'' for them to raise that amount of capital, the analysts said."

See, the problem is that Fannie and Freddie alegedly back trillions of dollars in mortgage loans. Fannie alone backs over 5 trillion, which means that a 1 percent decline in the value of it's mortgages would wipe out it's capital and place taxpayers on the hook.

"Fannie Mae has failed to help make housing affordable (its primary mission)

Fannie Mae's CEO was forced out in disgrace

Fannie Mae and Freddie Mac were both involved in multi-year derivative scandals where they had no idea what their derivative books ever were.

Government sponsorship of housing is absolutely guaranteed to drive up prices (until things implode as they did in the US).
And most importantly the government has no business promoting housing over renting for any reason. Such promotion causes bubbles and the biggest bubble in history is now imploding. If ever there was a complete model of precisely what not to do, the US government sponsorship of Fannie Mae and Freddie Mac would surely be on the list."

http://globaleconomicanalysis.blogspot.com/2008/07/were-all-homeowners-now-nationalization.html

Fannie and Freddie are the tip of the iceberg of imploding government loans, false promises and "guaranties", which is the reason for the falling dollar. As more and more of the invisible debt rises to the surface it exposes the true debt level of the US government. It's not 9 trillion, but closer to 70 trillion in Federal debt alone!

3:39 AM  
Anonymous Anonymous said...

These two videos show that the real problem with the US dollar is-not with the remains of a free market but with the unsustainable level of government commitments and the lies used to hide and evade them.

http://www.youtube.com/watch?v=OS2fI2p9iVs&feature=related

http://www.youtube.com/watch?v=KjZBOCAgR64

According to the second one, the Medicare commitment alone represents a $30 trillion spending promise--to be be paid for by future generations who had no role in creating it.

4:54 AM  
Anonymous Anonymous said...

http://www.youtube.com/watch?v=4n3g5lUgkWk&feature=related

This last video is also about the dollars collapse. One of your false ideas is that America's current consumer consumption trend is the inevitable result of capitalism. In fact, many Asian countries like Japan, Singapore, Taiwan and China, most of which are at least as capitalist as we are have very, very high national savings rates. All of them could consume more.

The US is in fact, the exception and what's clearly happening is that we are consuming beyond our means. The main instrument behind this trend being the federal government, state and local governments.

5:18 AM  
Blogger Merge Divide said...

Anon,

As always you are quick with a quote or a link to make me think.

You do have the tendency of expanding your misconceptions of my beliefs into meandering and free wheeling "discussions" that you want to provoke.

OK... so...

Where have you ever read in this blog that I support the federal government being involved in the extension of low interest mortgage loans?? I agree that it's a mess.

You think because I sometimes disagree with your take on government that I have to make every conclusion based upon an ideology that opposed your own?

I'm not rigid in my belief system. I'm not an idealogue.

I have never denied the US Dollar was in trouble, and I am very far from being a defender of the current economic approaches.

But the most amusing quote in your last trio of comments is the following...

"One of your false ideas is that America's current consumer consumption trend is the inevitable result of capitalism."

Where do you think I might have formed such an idea? You know well that I discount the idea that "capitalism" and the "free market" exist anywhere... why would I then make assumptions about "inevitable results". There's no such thing.

9:50 AM  
Anonymous Anonymous said...

Update June 10th

"Shares of mortgage giants Fannie Mae and Freddie Mac plummeted for the third day this week, following comments by a former Federal Reserve governor that the two companies are nearing insolvency and reports of White House discussion about the need for a possible bailout."

"Congress ought to recognize that these firms are insolvent," Poole told Bloomberg. Poole retired from the Fed last March, and during his time with the bank was a frequent critic of Fannie and Freddie and their implied government backing."

http://www.washingtonpost.com/wp-dyn/content/article/2008/07/10/AR2008071000895.html?hpid=topnews

Don't wory folks those government levies can never break you may get back to American Idol.

"Fannie Mae was founded as a government agency in 1938 as part of Franklin Delano Roosevelt's New Deal to provide liquidity to the mortgage market. For the next 30 years, Fannie Mae held a virtual monopoly on the secondary mortgage market in the United States.

In 1968, to remove the activity of Fannie Mae from the federal budget, Fannie Mae was converted into a private corporation.[1] Fannie Mae ceased to be the guarantor of government-issued mortgages, and that responsibility was transferred to the new Government National Mortgage Association (Ginnie Mae)."

http://en.wikipedia.org/wiki/Federal_National_Mortgage_Association

Fannie keeps some interesting books.

"In late 2004, Fannie Mae was under investigation for its accounting practices. The Office of Federal Housing Enterprise Oversight released a report [3] on September 20, 2004, alleging widespread accounting errors, including shifting of losses so senior executives could earn bonuses.

Fannie Mae was expected to spend more than $1 billion in 2006 alone to complete its internal audit and bring it closer to compliance. The anticipated restatement was estimated at $10.8 billion, however, after review resulted in $6.3 billion in restated earnings as listed in Fannie Mae's Annual Report on Form 10-K.

Concerns with business and accounting practices at Fannie Mae predate the scandal itself. On June 15, 2000, the House Banking Subcommittee On Capital Markets, Securities And Government Sponsored Enterprises held hearings on Fannie Mae[4].

On December 18, 2006, U.S. regulators filed 101 civil charges against chief executive Franklin Raines; chief financial officer J. Timothy Howard; and the former controller Leanne G. Spencer. The three are accused of manipulating Fannie Mae earnings to maximize their bonuses. The lawsuit seeks to recoup more than $115 million in bonus payments, collectively accrued by the trio from 1998–2004, and about $100 million in penalties for their involvement in the accounting scandal."


"The Federal Home Loan Mortgage Corporation ("FHLMC") NYSE: FRE, commonly known as Freddie Mac, is a government-sponsored enterprise (GSE) of the United States federal government. It is a stockholder-owned corporation authorized to make loans and loan guarantees. The FHLMC was created in 1970 to expand the secondary market for mortgages in the U.S.. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market."

http://en.wikipedia.org/wiki/Freddie_Mac

5:34 PM  
Anonymous Anonymous said...

The NY Times has a more in depth story on the subject.

"But market analysts said that as the cost of borrowing rose for both firms, it increased the possibility that they could enter a spiral that could force the government to intervene.

“If you have to borrow at a high rate, and what you buy with that borrowed money pays you only a small amount, then you’re not earning enough to cover expenses, and that’s when companies go out of business,” said Sean J. Egan, managing director of Egan-Jones Ratings, an independent credit ratings firm. “In the absence of any sort of federal guarantee of these companies’ debt, they effectively go into bankruptcy.”

http://www.nytimes.com/2008/07/11/business/11fannie.html?hp

Basically, the markets are demanding that the Feds implied guarantee of their debts be made explicit because without it investors will force them to borrow at rates to high for them to operate.

But this raises the far more serious question. At what point do investors demand such high rates on the Federal Government's debt that it cannot operate? The government sits at the top of a series of financial shell games and pyramid schemes which are getting harder and harder to hide.

6:59 PM  
Anonymous Anonymous said...

Yet another Times story on Fannie and Freddie. This one really lays it out.

"If a bailout were to occur, it would most likely make it more expensive for the United States government to borrow money in the future, since the government’s potential obligations, which currently stand at about $9 trillion, would rise by an additional $5 trillion."

http://www.nytimes.com/2008/07/11/business/11ripple.html?pagewanted=2&_r=1&hp

Now in and of itself, the extra 5 Trillion isn't gonna knock over the whole ball of wax but the problem is that this is just one of many, many, many off the books government obligations.

Around 5 Trillion plus in unfunded Social Security obligations.

Perhaps 30 Trillion or more in Medicare liabilities.

How many Trillion in underfunded government pensions? Promises to repair and maintain roads, bridges and dams.

Maybee 5 plus Trillion in Iraq war related costs.

Pretty soon your talking real money.

3:04 AM  
Anonymous Anonymous said...

Update July 12th

Fannie and Freddie fall again!

"Even after a week of unprecedented losses, the companies’ declines on Friday were the sharpest yet: Freddie Mac shares were down 45 percent from Thursday’s closing price, to $4.42 a share, and Fannie Mae stock fell 39 percent to $8.06 a share."

"Freddie Mac stock has lost nearly 70 of its value in the last week alone. Fannie Mae shares have fallen 55 percent during that period. Both companies’ shares are trading at their lowest levels in nearly two decades.

Though shares of Fannie and Freddie are quickly declining, investors appear to be less concerned that the companies will be forced to default on their loans. The perceived risk of buying debt from the companies fell on Friday, as measured by the yield on the 10-year Fannie Mae note, which declined relative to its comparable Treasury bill."

http://www.nytimes.com/2008/07/12/business/12markets.html?hp

I would imagine that the lower percieved risk of thier debt relates to the rising chance of a bailout. The equity holders have little or no hope.

So, we have two of the largest creations of FDR's "New Deal" toileting and a large chunk of the Governmement's other problems relate to other flim flam New Deal Schemes like Social Security.

Of course we have those Great Society programs to fall back on right?

Mr. Galt is in a meeting in Singapore right now and won't return our calls.

1:31 PM  

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