Thursday, February 18, 2010

The truth behind our financial system

Fed Chairman Ben Bernanke exposes the truth behind our entire financial system:
The U.S. economy ceased to function this week after unexpected existential remarks by Federal Reserve chairman Ben Bernanke shocked Americans into realizing that money is, in fact, just a meaningless and intangible social construct.

What began as a routine report before the Senate Finance Committee Tuesday ended with Bernanke passionately disavowing the entire concept of currency, and negating in an instant the very foundation of the world's largest economy.

"Though raising interest rates is unlikely at the moment, the Fed will of course act appropriately if we…if we…" said Bernanke, who then paused for a moment, looked down at his prepared statement, and shook his head in utter disbelief. "You know what? It doesn't matter. None of this—this so-called 'money'—really matters at all."

"It's just an illusion," a wide-eyed Bernanke added as he removed bills from his wallet and slowly spread them out before him. "Just look at it: Meaningless pieces of paper with numbers printed on them. Worthless."

According to witnesses, Finance Committee members sat in thunderstruck silence for several moments until Sen. Orrin Hatch (R-UT) finally shouted out, "Oh my God, he's right. It's all a mirage. All of it—the money, our whole economy—it's all a lie!" ...

At the New York Stock Exchange, Wednesday morning's opening bell echoed across a silent floor as the few traders who arrived for work out of habit looked up blankly at the meaningless scrolling numbers on the flashing screens above.

"I've spent 25 years in this room yelling 'Buy, buy! Sell, sell!' and for what?" longtime trader Michael Palermo said. "All I've done is move arbitrary designations of wealth from one column to another, wasting my life chasing this unattainable hallucination of wealth." ...

Sources at the White House said President Obama was "still trying to get his head around all this" and was in seclusion with his coin collection, muttering "it's just metal, it's just metal" over and over again.
Some gold bugs use the excuse that "paper money only has value because people think it does" to argue for a return to the gold standard. However, they overlook the fact that the same applies to gold as well. Gold only has value because people think it does. As with paper money, its value is dependent on supply and demand.

Sure, if they choose to, governments can more easily produce more paper currency than they can produce more gold. On the other hand, to the extent that we store gold in military forts in Kentucky (and waste resources protecting it), we limit its supply for more useful purposes.

Hat tip: Marginal Revolution.

Update: For those who didn't get it, the article come from The Onion.

57 comments:

  1. "Some gold bugs use the excuse that "paper money only has value because people think it does" to argue for a return to the gold standard."

    We've been off the gold standard much longer than most people realize. When Nixon ostensibly took us off in the 70's, the connection to gold was already pretty tenuous and had been for some time.

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  2. "When Nixon ostensibly took us off in the 70's, the connection to gold was already pretty tenuous and had been for some time."

    Agreed - go back to the turn of the century and see the debates regarding bimetalism and William Jennings Bryan's "Cross of Gold" speech.

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  3. Ahem, ahem,
    I think you better check The Onion for the source of this 'expose'.

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  4. Diplodocus Rex said...
    "Ahem, ahem,
    I think you better check The Onion for the source of this 'expose'."

    Let me guess, you didn't click the link at the beginning of this post did you?

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  5. CNBC excerpt

    "Wayne Bryant and his wife have just stopped paying the mortgage on their home in northern California, even though they can afford to pay. The reason? Because, Bryant says, the value of the house is less than what they owe.

    "We are 45-50 percent under water," claims the 61-year-old Bryant, who works in airport management. "At this point we are 20 years away from being even. We're walking away because it's a good business decision."

    "I thought about the moral hazard," Bryant admits. "But look at what's going on. Big banks are not helping anyone out. Big investors are walking away from debts. I'm angry how the system works. There's no way I'm going to feel guilty about this."

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  6. Bye Bye inventory - it was nice to know you!

    http://www.recharts.com/nova/nova.html

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  7. Don't forget the shadow inventory lurking out there!

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  8. You mean the same shadow inventory that we have been told day in and day out for 2.5 years? The one that will suddenly re-emerge in a TSUNAMI of REO and drive prices back into oblivion?

    Hows that one working out?

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  9. I can always tell when gold and silver are about to spike again... I start to see opinion articles written by (paid for?) individuals who quickly forget that gold is and has been the #1 trusted currency throughout all of human history. The fiat dollar "bugs" would rather hold worthless dollars, rather than worthless gold that has a very long history of people who are ignorant of how "worthless" it is. Good luck trying to convince the public to dump their gold or not purchase any, prior to a dollar collapse which is happening starting TOMORROW.

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  10. Count me among those who no longer have faith in the impact of the shadow inventory.

    I used to wait eagerly for another report from Mr. Mortgage about how it was going to be when the tsunami started. But once he pulled his website and yanked "the quickening" video I felt, well "skeevy", like I needed to take a shower or something.

    Where I am looking prices are pretty much exactly the same as they were 2 years ago. On balance, Im glad I waited just to be sure there wasnt a big dump of shadow inventory coming. Still, I would like to have 2 years of my life back too.

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  11. Christina, at least you didn't buy a crappy house for half a million. A money pit where all you do with your free time is spend money fixing it up instead of enjoying life. I feel sorry for those suckers.

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  12. Actually, I will. I am under contract for a little place in Arlington for 650K. I will have to spend a little time sprucing it up, but I will cut my commute by 1.5 hours a day (7.5 hours a week).

    That in and of itself is so worth it. I would have paid 800K to get rid of that commute ;)

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  13. Christina, that is the personal choice I made years ago.

    Two or three times a year, I have to attend meetings near Dulles. Once I drove to Manassas. The reverse commute from Immundria is enough to remind me of the value of a close-in location.

    Immundria and Immunington SFH held their value through 2006-2010.

    Arlington... reminds me, I gotta get over to Rays Hell Burger when the weather warms up.

    A short commute, great services, and a history of holding value.

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  14. No shadow inventory?????

    Take a look at today's classified section of the Washington Post. Pages and pages of foreclosures for auction. In fact, the entire classified section is nothing but foreclosures. Montgomery County, a favorite on this blog, is represented very well!

    Enjoy!

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  15. I think nearly everyone agrees that shadow inventory exists. The only disagreement is whether it comes out in one fell swoop, causing prices to crater, or whether the banks continue to drip drip drip it back on the market, causing the price trend of the last year or so to continue.

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  16. I don't think prices are going to drop in the immunizones, however I also don't think they will appreciate until the 25th century.

    All these guys happy their row-house is worth the same price they paid for it 2 or 3 years ago aren't going to be happy selling for the exact same price 30 years from now.

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  17. "All these guys happy their row-house is worth the same price they paid for it 2 or 3 years ago aren't going to be happy selling for the exact same price 30 years from now."

    30 years from now, they will owe $0. Why wont they be happy with getting a payoff of $700,000? A home is a place to live, not an investment.

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  18. Very interesting article. It is scary to think of how much our economy is built on these intangible ideas of wealth. It will be very interesting to see how things develop over the next few years...

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  19. "Why wont they be happy with getting a payoff of $700,000? A home is a place to live, not an investment."

    I never heard of someone on their death bed say "boy I am sure glad I paid that house off because I couldn't live another moment with a mortgage payment!"

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  20. "30 years from now, they will owe $0. Why wont they be happy with getting a payoff of $700,000? A home is a place to live, not an investment."

    Good point -- I dont think many people will be "unhappy" getting 700,000 handed to them!

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  21. Gold has been money for thousands of years so it must have some redeeming value. I will not hash it all out I am sure you have heard the lines.

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  22. "Good point -- I dont think many people will be "unhappy" getting 700,000 handed to them!"

    After paying more than 700k? Did you forget about interest, taxes and other expenese associated with home ownership. You fools act like the person didn't pay anything for the house or he or she got a %0 loan. There are 30 years of payments...that's right, payments that exceed the initial cost of the home due to interest. Hey dummies, do the calculation. You buy a home for 600k and 0 down at 5.5% interest to make it easy for you math whizzes, you end up paying $626,000 just in interest after 30 years. That means the $600,000 home really costs you $1,226,000 after 30 years. Smart move dummies!

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  23. "I dont think many people will be "unhappy" getting 700,000 handed to them!"

    I bought my place, a SFH, in Immundria prior to 2000. I have a tiny mortgage, about the rent on a 1/1 condo.

    If inflation comes back, rents will rise but my tiny mortgage will just get tinier and tinier.

    Maybe inflation won't come back. I'll still have a small mortgage.

    Seems odd to bet that over 30 years, there won't be a couple periods of very high inflation.

    If it happens, a nice home is a terrific hedge. If it doesn't it's still a nice home.

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  24. I never heard of someone on their death bed say "boy I am sure glad I paid that house off because I couldn't live another moment with a mortgage payment!"

    Whats your point? Will this guy on his death bed be any happier if his immunozone home went up 600% - not on his "death bed".

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  25. "There are 30 years of payments...that's right, payments that exceed the initial cost of the home due to interest. Hey dummies, do the calculation. You buy a home for 600k and 0 down at 5.5% interest to make it easy for you math whizzes, you end up paying $626,000 just in interest after 30 years. That means the $600,000 home really costs you $1,226,000 after 30 years. Smart move dummies!"

    So, wait, I guess its better to rent that home for 30 years? Pay at least $900,000 in rent and at the end get back $0 and a statement from your LL "thanks for putting my kids thru college"? Brilliant!!!

    Oh, and you better pray to god you are on your "death bed" then because your rent payments will never ever ever stop. No thanks, Id rather just get back my 600K and call it a life.

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  26. You either thank the landlord or thank the bank for giving them the price of the home in interest! It's what comes out of your pocket fool.

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  27. And yet, it still better than the $0 you get back as a renter...

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  28. "And yet, it still better than the $0 you get back as a renter"

    It is much better than that. Over the decades, rents climb inexorably. A mortgage, other than city taxes and insurance, is fixed.

    Mortgages from before 2000 already are smaller than rent because the prices from before 2000 were low and loan amounts are small.

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  29. Actually, you pay less when you rent. As you fix that leaking faucet, I am relaxing enjoying my tea.

    "rents climb inexorably"

    And so do your expenses for maintaining your shack of a home. Don't forget about those property taxes too!

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  30. Good time to buy?

    "4. Washington: As the federal government scrambles to undo the damage of the nastiest recession in decades, home prices in the Washington area have grown increasingly affordable. (This metropolitan statistical area includes portions of Maryland and Virginia as well.) House prices jumped nearly 86 percent from 2002 to 2007 before taking a 31 percent dive. As a result, the price-to-income ratio of the Washington area fell to 1.12 through the third quarter of 2009. That is significantly less than the area's average price-to-income ratio of 1.69 for the 15 years ending in 2003. Still, Moody's Economy.com projects that home prices in the area will continue declining into 2011 before they begin to climb higher."

    Maybe not!

    Median household income in Arlington is $96,390 X 1.69 = $162,899.

    The numbers don't lie....

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  31. Oops, here's the link to the $65,000 +$30,000 shack.

    (hope I did it right this time.)

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  32. This comment has been removed by the author.

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  33. I messed up the 3:29 PM link.

    The Weekend Post story is about a $65,000 house on a $30,000 lot. The house was built in 1965 and recently sold for $1.35 million. They added $300K in upgrades.

    Check out the story.

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  34. Median household income in Arlington is $96,390 X 1.69 = $162,899.

    The numbers don't lie....

    Right, right. In 1998, median home price in Arlington was under 200K

    http://www.mris.com/reports/stats/route.cfm

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  35. "I am relaxing enjoying my tea."

    Thats fine. Just remember, the $600K I will get back for my home in the immunozone is far far better than the $0 you will get back from your landlord in 30 years.

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  36. After you paid 600k in interest sucker!

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  37. "Thats fine. "

    Yes it is. Applying the reasoning to the house in the Post's story. The owners paid $95,000 in 1965. Over the decades, they paid another $100,000 in interest, perhaps more.

    When they (or their heirs) sold recently, they received $1.35 million. That's not a bad amount of money.

    Along the way, they certainly made repairs, most likely paid someone to do it. This is not much different from a renter calling the landlord and the landlord calling a handiman.

    For the first 30 years, I estimate they paid about $800/month PITI. That was a lot compared to rents in the 1960's but not much compared to rents in the 1980's.

    From 1995 until they sold, they lived there with no expenses except for insurance and property tax.

    Buyer wins big over the long haul.

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  38. "After you paid 600k in interest sucker!"

    Yep - I pay 1,200,000 to buy. I get $600,000 back.

    You pay $900,000 to rent. You get $0 back.

    I win you lose. Enjoy your tea.

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  39. You live in a shack and I rent a fine place. You do not have the freedom I do. You are a slave to a 30 year mortgage I am not. You are the loser!

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  40. "I win you lose"

    Don't feed the troll. He's not that silly that he doesn't realize that buying a place in Immundria (or other premium area) prior to the peak in 2006, is a winning strategy.

    He's bitter because he gambled and lost. How could anyone know that in 2010, there would be an Immunington and Immundria in the Immune Zone?

    Most were so certain that it was coming in, in side the beltway, to your city, your neighborhood, your street, your house.

    It stopped at the beltway. Wait, what? It's not coming?

    Small mortgage, small PITI, big equity, short commute, nice house.

    No wonder the doomsters ran away.

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  41. Dont worry Ajax - I just like fu**ing with this dude. The math is not on his side and he knows it - thats why in his last reply he dropped the numbers altogether and went personal on me.

    Thats all the vindication I was looking for.

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  42. Two morons. The two of you think you are really special living inside the beltway. But neither of you understand the numbers because you're not bright. Just two morons wallowing about in your shacks.

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  43. "But neither of you understand the numbers because you're not bright."

    Really?

    1.2 million to purchase - 600K back when I sell 30 years later.

    vs.

    900K to rent for 30 years. $0 back 30 years later.

    Pour yourself another tea and explain it to me then...

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  44. Jesus Christ anonymous drones!!!

    YOU, the immune owner. We get it, you are awesome, we suck - now STFU!!!

    and YOU the renter. Either admit you are wrong on the math or STFU!!!

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  45. The mystery is why there's still a discussion. Greater NOVA Housing Bubble Blog has turned into, "Is $750,000 a good price for a house?"

    There are no "It's a bad idea to buy" discussions.

    What's weird is that they're knocking around numbers that are out of my price range, but then, my concept of prices is so last century.

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  46. Don't use the lord's name in vein!

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  47. Anonymous said...
    "Don't use the lord's name in vein!"

    Nobody used Satan's name in vain.

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  48. "The mystery is why there's still a discussion."

    Come on, you know why. This area will have flat prices for the next 150-200 years. This is going to be a verrrrrrrrrrrry long conversation.

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  49. 200 years? NOVA housing Bubble blog is talking about buying $750,000 houses now.

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  50. AJAX when does it stop? If home prices keep doubling every 3 years or so, 200 years from now homes will be 6 hundred billion times average annual incomes instead of just 6 times like they are now.

    Tell me, is $750K the peak? How about 900K? What is the dollar mark that the houses stop inflating and stay stagnant until incomes can finally catch up AJAX?

    Thats what I want to know from you.

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  51. Ajax,

    Does your mom lay your clothes out for you in the morning? Let's face it, any homeowner on this blog is unsure about their purchase. Homeowners with true peace of mind don't even go onto housing blogs tailored to renters and prospective purchasers. So Ajax and that other bird are nothing but rattled owners in Beltway shacks.

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  52. "Thats what I want to know from you."

    I didn't realize that I worked for you. Can I have a raise?

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  53. "Does your mom lay your clothes out for you in the morning"

    Qua?

    State your point.

    If your point makes no sense or you are contentless troll, blog-readers will detect that.

    I put up a link to interesting local RE price maps.

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  54. Mortgages from before 2000 already are smaller than rent because the prices from before 2000 were low and loan amounts are small.

    Ajax,

    What is your point? If you bought before 2000, good for you. You bought at a low price. Nobody here denies that buying prior to 2000 was a good move.

    The question on this board has always been, should I have bought in 2006/2007/2008/2009/2010? We can't go back in time and buy a house in 2000. (I actually bought my first in '98.)

    For those who are arguing that in 30 years they'll have a paid off house. I'm renting a house for about $2000 a month. When I chose to rent that house, it would have cost me about $5000 a month to own it. Considering that I felt that the risk of rents and or house prices skyrocketing in the near future is minimal at best, the choice was a no-brainer.

    When the conditions favor ownership then I'll buy a house. Nobody said the only decision is to buy now or never in the next 30 years.

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  55. "When the conditions favor ownership then I'll buy a house."

    That is a plan.

    There is a problem. At that moment in history that it makes perfect sense for you to buy, others will recognize the opportunity.

    By the time you gather your wits and make your move, the market MAY run away from you.

    Glance over at NOVA bubble. The doomers are gone, they're buying at prices that seem high to me.

    I'm not saying that prices are running up now, nor am recommending that anyone buy, sell, rent. That's up to them.

    Everyone can use solid information and make their own best decisions.

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