This Just In!

I pulled this data today from the Treasury Direct website. This shows the interest rates for various maturities of the securities that have been auctioned this year. As they say, a picture is worth a thousand words. The Orange Line (10 Year Notes) is the rate used to set most mortgage loans (and mortgage rate resets, too). Maybe I’m missing something, but the trends in evidence here are not particularly encouraging.

Deflation vs Inflation

I recently read an analysis that made the argument for deflation rather than inflation. The analyst’s point was that the recently deflated credit bubble has resulted in over-capacity in all sectors of the economy. And this is a global phenomenon, not just a US problem. There are now too many factories, too many ships, too many trains, too many trucks, too many malls and retail shops of all varieties. Over the past few years it was just too easy to get the credit (debt) to build more and more. So if we go back to the economic basics of supply and demand, when there is too much supply something has to happen to either decrease the supply or increase the demand. This analyst makes the argument that prices will decline in order to stimulate demand, hence price deflation. And quite honestly, we are seeing this in many areas. Real estate and stock prices have been in decline, as we all know. There are lots of sales going on in the retail sector, airline ticket prices and hotel room prices are also in decline. The soft demand for these items has resulted in lower prices. The question to ask, however, is how far can this go? How long can it last? Is it of a magnitude that could possibly offset the government’s massive borrowing and spending?

Here’s the thing, this price deflation doesn’t happen by itself, without any corresponding effects that can be felt elsewhere in the overall economy. Sadly, a large percentage of the goods and services that the US economy is made up of have their origins overseas. Whether we are talking about Middle East oil or trinkets from China, so much of our economy results in US dollars going overseas. And, as I’ve already explained, many of those dollars end up coming back to purchase US Treasuries to keep the government running. So, let’s stipulate that the deflationary effects do happen. That will mean that fewer dollars go overseas. That will mean that fewer dollars are available to fund the activities of the US government. As we’ve seen, this will put upward pressure on interest rates. The Federal Reserve will be tempted to buy up the excess Treasuries in order to keep interest rates down, but that will be a big red flag to the foreign holders of US debt that the dollar is being debased. So in spite of what the Fed desires, interest rates will have to go up to attract buyers for the Treasuries that go up to auction. Higher interest rates will put even more downward pressure on the economy, resulting in less economic activity. The cycle will reinforce itself. So in this scenario we see price deflation, higher interest rates and higher unemployment. But does this lead to inflation?

The believers in big government, which essentially are the members of both political parties (Republicans and Democrats both believe that government action is called for to solve our economic ills, they differ only in the magnitude of the action they propose) will naturally turn to more and more government intrusion into our lives. These government handouts will have to be funded by debt and that will increasingly be supported by the creation of dollars by the Federal Reserve. The dollar will become less and less desirable to foreign companies and governments, which means that more and more of them will be required in order to purchase goods and services from those foreign companies and governments. That, my friends, will be inflationary. And by the time we reach that point in the drama that is unfolding before us there will be no stopping it.

So I’ve made the argument for both deflation and inflation. The big question is which force will win the tug-of-war? I’m betting on inflation. Why? For a couple of reasons. One, the loss of US dollar purchasing power is a nearly uninterrupted trend since the creation of the Federal Reserve in 1913 (see the chart from a couple of posts ago). This is the natural trend for fiat currencies (currency that only has value because a government says it has value – fiat is Latin for “let it be done”). They seek their intrinsic value, which is zero. What complicates the situation today is the fact that every currency in the world is a fiat currency. So we are privileged to watch this global race to the bottom, which I believe the US will win because we have the political will to achieve this goal (sadly, this is not a good thing). Two, inflation will win because the US Government has only two options with respect to the massive debt it is raising. They can either default or they can inflate.

Default would be quick, enormously painful and globally disruptive. But it would also be effective, in two ways. The criminals responsible for the pain will be evident to all (I’m talking about the US politicians who trigger the default). They’ll never hold another public office, they’ll go down in history as the criminals they are and they might very likely suffer prosecution from several plaintiffs, if not actually be in physical danger. And, after the mess of default is cleaned up the US dollar will be out of the position of being the world’s reserve currency. That will result in a complete inability of the follow-on government to pursue similarly destructive public policies. We’ll be forced to live within our means, which will be much smaller than we’re used to, by the way.

On the other hand, inflation will allow the current political criminals to continue living in their imagined splendor. As long as inflation doesn’t get too far out of control everything will appear to be “fine” and “normal”. Since inflation preserves the political status quo it is the option to bet on. Quite frankly, I am hoping for mild inflation instead of Zimbabwe style inflation. If inflation were to get out of hand the end result for the US will look very much like the default option. But in either case hard currencies will do well, i.e., a store of physical commodities. I urge you to re-read these past several posts. Think about everything I’ve said. Consider what a proper response to current events should be, particularly as it relates to your savings. Do you really want your savings to be in a stack of pathetic, worthless slips of paper? Shouldn’t you consider putting at least a small portion in something tangible?

A Quick Look at Deflation

This table shows the annual increase (or decrease) in the value of consumer credit and real estate loans in the US since 2005, in billions of dollars.

2005 +$613B
2006 +$452B
2007 +$743B
2008 –$1168B
2009Q1 –$532B

So you can see that over the past 5 quarters nearly all the credit that had been given out in the preceding 3 years has been obliterated. Now I must remind you that this is credit and until it is spent it isn’t debt. So it represents only the potential for dollars in circulation. I don’t know how much of this credit has been turned into debt, but I suspect that the majority of it has indeed been spent (otherwise why are so many people paying monthly minimum payments on their credit cards?). Nevertheless, given that 70% our economy is driven by consumption, when you take $1.7T out of potential circulation that is going to have an effect.

And deflation is simply the result of fewer dollars in circulation to chase the amount of goods and services that are available. Those dollars can disappear from circulation for two reasons. First of all, they can disappear like the table above shows. Banks can eliminate lines of credit, etc. Second, people can voluntarily take them out of circulation by saving instead of spending. This concept is important to understand for the next post I will be writing.

Inflation, then, is just more dollars in circulation to chase after a fixed amount of goods and services. Where do those dollars come from? Well, they can come from credit that is turned into debt when consumers spend it. This has been the major driver of our economy in the recent past. Secondly, the dollars can come into circulation when they are pulled from savings.

Strictly speaking, when the Federal Reserve puts dollars into the economy they do it by depositing it into Banks to then be offered as credit for businesses and consumers to then turn it into debt when it gets spent on goods and services. Right now we are seeing large sums of money going to the Banks, but they aren’t yet offering credit. This is one reason why the federal stimulus efforts aren’t currently yielding results. At some point, though, that pressure will build to the point of rupturing the dam and the money will flood the system.

Bond Auction Update

Here is a short summary I found on the progress to date on the massive bond auction that has been going on for the past few days.

The government managed to auction $39 billion worth of 5-year debt yesterday (7/29)… barely. Wednesday’s debt sale drew a bid-to-cover ratio of 1.92, the lowest investor demand since September 2008. Low demand forced Uncle Sam to jack up interest rates at the last minute in two separate bond auctions this week -- yesterday’s sale and Tuesday’s $42 billion auction of 2-year notes.

So what’s an indebted government to do? Manipulate the market, of course. Bond yields have given back yesterday’s spike partly thanks to the Federal Reserve, which bought $3 billion in U.S. bonds yesterday. They’ve announced their intention to buy again today (7/30), which will bump its total purchases of U.S. Treasuries to over $222 billion since March 25.

The U.S. government has already shoved more than $1 trillion in bonds down the market’s throat this year. They’ll likely issue another trillion before 2010. Another $28 billion in 7-year notes will be pawned off today (7/30)… might be worth keeping an eye on.

Keep an eye on this ball, folks. This is real stuff here, not imagination, not interpretation, not opinion. I have offered my opinion on the consequences of these actions by our Government. But the actions are now a matter of history. As I say, let’s see what happens.

Almost a Quarter Trillion Dollars!

Starting on Friday, July 24th, the US Treasury is auctioning the following:

70-day CMBs, $30 billion (July 24th)
13-week Bills, $32 billion (July 27th)
26-week Bills, $31 billion (July 27th)
52-week Bills, $27 billion (July 28th)
2-year Notes, $42 billion (July 28th)
5-year Notes, $39 billion (July 29th)
7-year Notes, $28 billion (July 30th)
19-year, 6-month TIPS (reopened), $6 billion (July 27th)

Add it all up and you get $235 billion over the next week. This is an unprecedented amount in such a short time period. Who is going to step up to the window and purchase these? I suggest we all pay attention to the news this week and see how this turns out. It will be a very, very big signal about the timing of the coming inflation. If the Federal Reserve has to step up to cover these debts I would say that the coming inflation is very near. Protect yourself.

More on Inflation

One last thought about the expansion of the US money supply, and this has to do with interest rates. The Fed has announced that they intend to employ quantitative easing as one of their tools to alleviate the current economic crisis. As I’ve explained, this is basically the creation of money out of thin air. Recently the US Treasury Secretary was in China, and he was laughed at by students there when he tried to explain that the US was committed to following a responsible fiscal policy. Can you believe this? We all know how important it is in Oriental culture to show respect. There can be only two explanations for this apparent breach of etiquette. Either the students thought the Secretary was making a joke, therefore they laughed, or the statement was so preposterous and unbelievable that Mr. Geithner lost their respect immediately and there was no longer any social restraint to prevent them from laughing in the face of a fool.

The Fed has to walk a very fine line with their purchases of US Treasuries at auction. If they purchase too much, too often, then the world will see it as an unrestrained effort to debase the value of the dollar (by inflating the supply of money). To protect themselves they will probably begin to unload some of the trillions of dollars they hold in US Treasuries, causing the price of those bonds to drop (due to the expanding supply), which results in an increase in interest rates. Higher interest rates will destroy an already weak economy and inflation will begin to rise to very unpleasant levels. Does anyone remember the late 70’s or early 80’s? I do. I do not know whether this particular risk will materialize. If it does, then lots of other countries will suffer from this run on the bank, so to speak. So there is some pressure on the international community to avoid this situation. By the way, this is the “nuclear option” that the Chinese have hinted at in trade discussions with the US. It will be interesting to see how this unfolds. But it can very easily happen.

I urge you in the most strenuous way to make provision for the coming inflation. The usual path taken in anticipation of inflation is to purchase precious metals, such as gold or silver. Historically these metals have provided a good hedge against inflation, though for different reasons. Yes, both metals have in the past been used as money. I’ll have to admit that I don’t believe this is likely to be the case in the future. (This is only a realistic option for gold, and given the amount of metal available the price of an ounce would have to multiply several times over in order to supply the kind of liquidity that would be necessary.) Nevertheless, each metal has something to recommend it as an inflation hedge.

Let’s start with silver. This metal is primarily an industrial metal. It has some significant use in coinage and jewelry and investment. But the largest usage is for industrial purposes. Silver is practically unique in its physical properties and it is used in literally hundreds of industrial applications. Its relatively low cost, coupled with its unique properties, has made it a material of choice in all aspects of modern life. The driver for silver in the current environment will be its relative rarity. Not many people are aware of the fact that there is essentially no inventory of above ground silver. The governments of the world still hold inventories of gold, but nobody today is holding silver. And as we use silver in various industrial applications it essentially gets used up. Not that it disappears, but it gets rendered into a concentration that isn’t economically recoverable. At least, not at current prices.

The other feature of silver is that a large percentage of its mining is done as a consequence of going after some other metal, such as copper or zinc. There are few purely silver mines in the world. The recent economic slowdown has curtailed the mining of most base metals, since their prices have dropped. This has impacted the supply of silver, as well. So far we haven’t seen a supply issue because the industrial demand for silver has dropped along with everything else. At some point, however, the lack of silver supply from the mines will create a silver shortage that cannot be mitigated by an inventory of above ground silver, because there isn’t any. The nominal price of silver will take off to the moon. Silver is a very good hedge for the coming months.

Then there is gold. Gold is primarily an investment metal. It also has a significant usage in coins and jewelry. It has some industrial applications, but this is a minor part of the gold story. Virtually all the gold that has ever been mined over the course of human history is still above ground and recoverable. Gold has a long history of use as money. Governments around the world still hold sizeable amounts of gold in reserve. China has lately been adding significantly to their gold holdings. Let’s face it, gold is unique in its ability to attract the attention of men. They have always desired it and they will continue to desire it. It is pretty. It can be easily manipulated into all kinds of pretty and decorative and desirable forms and shapes. I don’t believe gold will ever lose its appeal. I can confidently state that because of this feature, gold will always have some intrinsic value. Men will always desire it and will be willing to trade goods and services for it. This is the very definition of money. When the inflationary tide finally hits, the price of gold will also fly. It might not fly as high, relatively speaking, as silver. But if you are holding any amount of gold you will not be disappointed. I urge you to consider holding some gold.

In the current environment I think it is a very low risk to purchase gold or silver. Yes, the price will fluctuate daily as a consequence of any number of things that hit the news. Forget about that high-frequency noise. Look at the longer term. If you buy an ounce of gold or silver for $X today it will very likely be worth about $X a year from now, assuming we don’t enter into the inevitable inflationary spiral by then. But the whole point of buying that ounce isn’t to sell it in a year. You must think instead that when you buy that ounce you do not intend to EVER sell it. Ownership of gold and silver is all about wealth preservation, not about short-term trading profits. Get that whole concept out of your brain. When you put your money down on the counter to purchase that quantity of metal you are going to take your metal and go home and bury it in the back yard (figuratively speaking). You will only take it out in the most dire of situations. But if you find yourself in that kind of dire situation you can believe me that you will be very, very glad that you have some precious metals to fall back to.

Think very hard about this.

By the way, this graph says volumes. I should just shut up and show you pictures in order to make my point. It is particularly interesting if you look at how things have gone since the creation of the Federal Reserve in 1913. Hmmm.

More on the economy

Okay. So the US Treasury is holding its auction and everyone who wants to buy US debt is finished bidding. But there's lots more debt sitting on the table to be sold. So what do we do? Here comes the Federal Reserve to the rescue! In order to obscure the real nature of what they are doing they've come up with a clever term that means nothing. Quantitative easing. Sounds so scientific. But it isn't scientific, it is diabolical. The Fed shows up to the auction window and says, "I'll buy up all the debt you have left." In order to accomplish this they have to literally create money out of thin air. The bank balance of the US Treasury goes up after the sale, the investment portfolio of the Fed goes up by the amount of money they just printed (magically) and everyone is happy. This is an incredible event. I cannot imagine that the Japanese or the Chinese or the oil sheiks are happy about it, at all. One branch of the US government just bought billions of dollars of US debt from another branch of the US government, and everyone pretends that this is a legitimate business transaction. The result is that there are billions of dollars in the money supply that never existed before, until the transaction. This reduces the purchasing power of each of the original dollars, and these foreign countries hold billions of them. I can’t imagine they are okay with this.

Let's pause for a moment to talk about inflation. Let's limit ourselves to ideal systems for the moment. In an ideal economic system with a fixed amount of money and a fixed amount of goods and services, an equilibrium will be reached. The "price" of any good or service in this system will remain stable, because there will always be the same number of dollars to apply to a given amount of goods or service. If the amount of money in the system is increased, but the economic output remains fixed, then the larger number of dollars chasing after the fixed amount of goods/services will ultimately equilibrate at a point where a given amount of goods will require a higher amount of dollars, which we call price inflation. The opposite effect works, as well. In our situation, with the Fed creating extra dollars out of thin air we should expect this to ultimately result in price inflation. Those extra dollars are running around in our economic system and they will demand a price increase so that the extra dollars get "used up". The only other thing to mention here is that this outcome takes a little time to become evident. But it is inevitable. So, here are some facts. The Fed has engaged in quantitative easing, or creating money out of thin air. They will most likely have to continue this because we need to sell $2 trillion dollars of US debt, and there just aren’t that many buyers out there right now. The end result of this activity is that there will be inflation.

But is that the end of the story? Not really. In a beautiful example of positive feedback, higher inflation will result in investors (China, Japan, etc.) who demand a higher return on their investments. That means that interest rates on US debt will have to rise. Which will mean that the US government will have to actually borrow more in order to pay for the borrowing they are already doing (this is not a good trend), and the higher level of borrowing will feedback into higher interest rates and higher borrowing etc., ad infinitum. Making things even worse, at some point the foreign investors will begin to wonder whether the US government is really going to be good for its debts. That loss of confidence in the US government will be a bad thing.

In order to give you the whole picture I must talk a bit about deflation. There are many economists today who are primarily concerned about deflation, rather than inflation. And the fact is that we have been in a largely deflationary environment for the past year, which explains why we haven’t yet seen the runaway inflation that would normally be expected with the introduction of so many new dollars into the economy. Deflation is basically the inverse of inflation, and can be simply defined as the decrease in the available dollars in an economic system to cover a fixed amount of goods and services. In this scenario each dollar becomes more valuable, so the price of goods and services goes down. As we all know, there has been an enormous amount of value destruction in the past year. Housing prices and stock prices have decreased markedly. These price decreases have resulted in the virtual evaporation of large quantities of dollars. To the extent that these realized losses have made their way into the money supply we have experienced deflation. The actions of the US government have been patently inflationary. When combined with the current deflationary environment the observed effect is that things have basically stayed the same as usual.

In theory, and the Federal Reserve is betting everything on this theory, once the deflationary pressure is lifted from the economy the Fed can simultaneously lift the inflationary pressure and we are back to normal and everyone is happy. The fly in this particular ointment is that there is virtually no way that the Fed will be able to stop their inflationary activities. The US government will not suddenly stop spending money like there is no tomorrow. From a political perspective, they cannot suddenly start taxing everyone in sight. They have to maintain the fiction that they won’t raise taxes on the regular Joe. And they cannot entertain a reduction in the services that the nanny state provides to boobus americanus. So when deflationary value destruction ceases to be a predominant force in the economy all we’ll be left with is the inflationary activity of the US government. And we are talking about an inflationary flood that will dwarf anything we have ever seen before in this country. So, inflation is inevitable although it may not be imminent.

What a mess! There are so many things going on right now that affect so many different areas of interest. We have domestic and internation political issues. We have domestic and international economic issues. We have social issues. We have religious issues. Everywhere I look, I see issues. Recently I have begun to wonder whether or not these individual issues can be pulled together to create a bigger picture. Is there something more going on around us, or are these just interesting times, as they say? It is hard to know where to start, and right now I frankly don't know where my musings and cogitations are going to take me. But I feel compelled to try to make sense of everything I see happening. In the interests of full disclosure I must tell you that I believe that there is a "grand plan", that events aren't happening as a series of cosmic accidents. Rather, it is God who "works out everything in conformity with the purpose of his
will" (Eph 1:11 NIV). So for me the real question is whether these days are close to the time when he starts wrapping it all up. Let's see what I come up with.

In light of recent events I think I'd like to start with the economy. That is a pretty big topic, so it will take a few paragraphs to get through it. If I start to bore you with details that you're already comfortable with, then please feel free to skip ahead. As we all know, the economy is in the midst of a recession. What isn't talked about to broadly here in the US is that this recession is being felt around the world. Global trade has been hit hard. Banks around the world are failing and those who are still in business are not eagerly lending money right now. So business, in a global sense, is have a really tough time. Adding to the mix, central banks are pretty much
all spending money like drunken sailors. And given the fact that there is not a single nation anywhere which has a currency tied to a hard commodity (such as gold or silver), we are looking at a global situation that has no historical parallel. The entire world is ripe for a cataclysmic financial disaster where confidence in paper money is lost universally, causing widespread disruption of trade and commerce. I don't think many Americans think about this very much, but the fact is that most of us, a huge majority of us, live far from the land, so to speak. I'm not so much thinking about distance in miles traveled as I am thinking distance in economic terms. Do you know how dependent you are on global and local commerce to make sure that there is bread and milk and eggs and vegetables at your local supermarket? Next time you're in the produce section take a close look at the labels on the goods. Lots and lots of fresh food comes to us from far, far away. Think about the consequences of global economic disruption on an historic scale.

Moving on, I'd like to explore a little more deeply the impact of current US economic policies on our currency, world trade and our way of life. The US government is spending money at a staggering rate. It is spending money that it has not collected in taxes. How is this possible? Well, they borrow it. The most obvious question to ask, then, is "Who has that kind of money?" Because we are talking about trillions of dollars, with a T. I'm about to explain, in simplistic terms, how the US government gets the money that they then go out and spend. You might recall hearing on the news about something called a Treasury Auction. That is something held on a regular basis where the US Treasury sells bonds, of varying lengths of maturity, to whoever wishes to buy them. Some times there is a high demand for these bonds, some times there isn't such a high demand. When the demand is high, the bonds will sell for a higher price, following the law of supply and demand quite faithfully. When the demand is low, the bond price goes lower in order to elicit enough demand to get all the bonds sold. The interest rate that the bonds pay is inversely related to price. So higher bond prices (caused by higher demand for those
bonds) bring about lower interest rates and vice versa. In order to make up the gap between the money the US government takes in through taxes and the money the US government spends on various programs the US Treasury sells bonds. This gap is what is called the deficit. In the current fiscal year the deficit will likely come out to be close to $2 trillion dollars (if not more, as some believe). That is more than 3 times greater than any previous deficit in US history.

So how on earth will the US government be able to sell that many bonds? In all likelihood they won't be able to, at least not to anyone else. But I'll get to that later. First of all I want to talk about foreign reserves, balance of trade and the world's reserve currency. Maybe you've heard that the US dollar is the world's reserve currency. What does that mean? Simply, it means that international trade is settled in terms of US dollars. When a farmer in Argentina sells a boatload of wheat to China, someone in China deposits US dollars into the farmer's Argentinean bank account. In the simplest of terms that is what it means to be the world's reserve currency. So for the last several decades it has been advantageous for foreign countries to hold some US dollars, because this made it possible for them to conduct international trade more easily. The US dollars that are held by these countries are what is referred to as foreign reserves. Some
countries have lots of foreign reserves (Japan, China, the Arab oil countries). These reserves have built up over time because they have enjoyed a positive balance of trade with the US. In other words, we bought more from them than they bought from us. So they ended up with
excess dollars. Their problem then becomes one of where to put those dollars? Along comes the US Treasury with such a deal!

For the last several years these countries with excess foreign reserves (excess over what they need to support their level of international trade) have showed up at the US Treasury Auction to buy some good ol' US Treasury bonds. Why not? The US is a stable country, they pay their debts, essentially it has been considered to be an investment of zero risk. Well, not so much anymore. Lately two things have been happening. These foreign buyers of US debt have been buying less and they have been buying more on the short end of the maturity curve. Let's look at the maturity issue first. What is the long term consequence to the US if more and more of it's outstanding debt is of short maturity? Well, when the bond matures in 1 or 2 years it is usually rolled over into another bond. When this happens the new bond may carry a different interest rate, which might be higher or it might be lower. In case you haven't been paying attention to these things, the current interest rates for US government debt are about as low as they have ever been in history. They are about as close to zero as they will ever come. So which direction do you think is the most likely one for those rates to go in the future? If you said, "higher", then pat yourself on the back. You've obviously been paying attention. So this interest rate risk presents a future problem for the US. If rates rise, which will likely happen because of poor economic conditions, this will be a double whammy that will only serve to make the bad situation even worse.

But the other thing that is happening right now is that the foreign countries with money to spend are actually spending less at the US Treasury Auction. There are a couple of reasons for this, but the reasons are less important than the consequence that results. Let me just touch on the reasons. First of all, because of the current global economic slowdown, these foreign countries have fewer US dollars to spend at the auction. They already hold billions of dollars of US bonds, but their current income of US dollars has dropped because of the global recession, so obviously they are spending less at the auction. The second cause is more troubling. These countries are now beginning to wonder if it is such a good thing for them to be buying US debt. They are wondering if it really is such a zero-risk investment. In fact, some of these countries are beginning to divert some of their excess US dollars into a stockpile of hard commodities, such as copper or iron or gold. This is really happening, right now. I believe that the trend will increase, rather than decrease or stay the same. It doesn't work out well for the US.

It is time for a recap. The US is spending more money than it has. It is borrowing the excess from foreign countries who have extra dollars to lend back to us. The amount of money that the US needs to borrow in the future is huge, compared to what we've borrowed in the past. The amount of money that foreign countries have to loan us (or are willing to loan us) appears to be decreasing, rather than increasing. This is not good.

Anniversary Dinner

Well, Mary and I celebrated our 24th wedding anniversary on Monday. We decided to go out to dinner as part of our celebration. I had heard about Elle Wine Country Restaurant a couple of years ago and have long wanted to try it. Their commercials play all the time on the radio and it always "sounded" delicious. So, now was the time to finally try one of Tucson's Originals. Things started out okay, we arrived just before six to an almost empty restaurant and were seated promptly. Service was prompt, of course it was almost empty after all, and the wait staff was friendly. Here's where things started to go downhill. The small bread plates we used for our olive oil & balsamic vinegar dip and our single forks stayed with us through our bruschetta appetizer and our meals. One might think it customary for these items to be replaced at finer dining establishments, not Elle. Our dinners were not all that great either, maybe "just okay". Mary ordered the grilled beef tenderloin medallions medium and I ordered the pan seared ahi tuna rare. The medallions were tender, but overcooked. The grilled red potatoes that accompanied them were way over cooked, almost burnt. My ahi was prepared just right, but the cut of tuna was off. I'm not sure what it was - cheap tuna, old tuna, maybe frozen tuna, I'm not quite sure. One thing I do know is good tuna, having feasted on it many times on my trips to Hawaii. Now, I'm not saying that the tuna in Tucson should be as good as the tuna one gets in Hawaii, caught fresh that morning, but I have seen better pieces of tuna in this town. Bottom line, we won't go back. For all the hype in the commercials, the slick web site, and it being a Tucson Original, Elle Wine Country Restaurant was a big let down.

Is it near?

Thinking about the end of the world this week. Actually, it seems I trip over that subject more often these days. The tenor of the news doesn't seem to help. I read through Matthew 24, where Jesus responded to the questions of his disciples about what would be the signs of the end of the age. There are many different opinions about the end of the world, but I still think that we can take a few valid points away from this passage, independent of your particular brand of eschatology.

First, we are warned to give no heed to those who claim "Christ is here" or "Christ is there". In v 30 he says, "At that time...they will see the Son of Man coming on the clouds...". So, it will be evident to all, you won't need anyone else to tell you that Jesus is here.

Second, Jesus confirms the validity of the prophecies of Daniel in v 15. There are many opinions about the book of Daniel, but I'll stick with Jesus on this one. As another point, the Apostle Paul also refers to the coming "lawless one" in 2 Thessalonians. I might have more to say about this subject in a later post, but not right now.

Third, we are to be faithful to His calling. We must not think we can delay our obligations just because we don't think he is coming anytime soon.

Fourth, the time may be unknowable, but we should be able to recognize the season. There will be signs.

As for recognizing the season, the signs of the times, I think there are abundant reasons to say that the time of His appearing draws near. What is near? 2 years? 10 years? 50 years? I don't know, but I can't see it being 50, probably much close to 10. Why do I say that? Think about the power that now exists to destroy. This is unique in history. At no other time has it been so easy to achieve the destruction of all life. The religious and racial hatred has been with us from time immemorial, but not the means to destroy. And the geopolitical forces currently in play will not allow a significant pause in conflict. The Muslim world is growing larger every day, the "Christian" West is in decline. The godless Chinese are wanting to take the leading role in the world economy. And Russia is not ready to become a footnote of history. And then there is Iran. Is it so difficult to imagine an alignment of Russia and Iran that gets hostile against Israel?

And Israel is the key. I cannot imagine God allowing that nation to be destroyed, yet the forces arrayed against it are poised to do just that (if their rhetoric is to be believed).

So I'm thinking we are in the season of the end. Watch world events very closely. Interpret them through the lens of scripture, and particularly with a view toward how things will affect Israel.

Getting old, I guess

Not a whole lot to say today. I've been encouraged to record my most recent prognostications, however I'm having trouble remembering what they were. Perhaps someone out there could help my memory...?

I.O.U.S.A

We just watched the full version of this movie. We are screwed. Scratch that, our kids and their kids are screwed.

Sometimes we are our worst enemy

The recent murder of abortion doctor Tiller in Kansas is a sad affair. No matter what your opinion on the subject of abortion and, specific to Dr. Tiller, late-term abortion, this murder should be considered a terrible act without any reasonable justification. I'm sure that the murderer didn't reflect on the longer term consequences of his actions. Those will left to the rest of us to address.

I expect that this event will become the rallying cry for those in the pro-abortion camp. This will become the poster child for changing the discussion on the allowability/desireability of any kind of debate on the topic of abortion. Soon all those who choose to protest abortion will be a priori judged to be capable of murder (forgetting for a moment that we are all so capable). It won't stop there, though. Abortion protesters will become pre-disposed toward murder. In fact, any protest will be seen as simply a precursor to the act of murder. Hence, all abortion protests will be outlawed. There will be vigorous application of this prohibition to all venues. You won't even be able to write a letter to the Editor of your local newspaper without coming under serious persecution/prosecution.

You may think that my prediction is too overdone. I guess we'll just have to wait and see.

How can you say "No" to this magnificent coin?

This graph should alarm you. As you can see, the USA spends a great deal more on healthcare (as a % of GDP) than the average of several other developed nations. This has a direct impact on the competitive advantage that other countries have over US manufacturers. This is a large part of the problems at GM, Chrysler and Ford. And now we have an Administration and Congress that are eager to provide "free" healthcare to 40 million Americans who currently are uninsured or under-insured. Where do you suppose the money to cover those costs will come from? And once they have access to "free" and "unlimited" healthcare, do you suppose the demand for healthcare will stay the same, or lessen? Of course not! Already in 2009, 50 cents of every dollar that the US Gov't spends will have to be borrowed. Imagine what it will be like if we go to some kind of national health insurance scheme.

Here is a new graphic that is very interesting. What we see is that after this latest drop in the Dow we are still a bit more expensive, in Gold terms, that the last 3 low points. If we say the "normal" low point is 2oz of Gold to buy the Dow (meaning if Gold is $800/oz the Dow is 1600). To rectify this we'd need to see either the Dow drop to 1800-1900 (given Gold at $900-$950/oz) or Gold to rise to $4000 (given the Dow at 8000). A more likely scenario is that both prices move and meet in the middle. So a Dow of 4000 and Gold at $2000/oz is within the realm of possibility.

Do you have any Gold?

Old Or Young - Make Up Your Mind

Is the created universe young, or old? By young I am meaning something on the order of 10,000 years and by old I am meaning the 13-15 billion years that the evolutionary scientists would have us believe. I believe in a young age, for reasons I will expound upon in a moment. But first it is important to note that this question, and the answer thereof, is of minimal significance in the overall scheme of things. Of vastly more importance is the answer and response to the question of Christ’s significance to my life.

Nevertheless, why do I believe in a young age? Here are my reasons:

1. One of the first principles of Bible study is to just accept the written word at face value. If we do that, the immediate conclusion drawn is that the record of history included in the Bible only covers a few thousand years. This is not a compelling argument, but it is a simple one that is easily understood.

2. Some would say that the 6 “days” of creation do not refer to 6 periods of 24 hours duration. My counter to this is that each “day” transitioned to the next one via an evening and a morning. When one has to rely on a convoluted argument to prove that the simple, plain text interpretation or understanding of the Bible is not correct, I begin to have a problem. And the simple understanding in this case is that a 24-hour period, as we know it today, is being described.

3. Various passages of Scripture refer to God having brought the universe into being by speaking it.
“By the word of the Lord were the heavens made, their starry hosts by the breath of his mouth.” Ps 33:6
“For he spoke, and it came to be.” Ps 33.9
It seems incredible (as in, not credible) to me that God only spoke the time-space continuum into being and then stepped back to allow natural interactions, in accordance with physical laws set by Him, to deliver this present age some 15 billion years after His first cause.

4. Closely coupled with argument #3 is the struggle I have with accepting that God would require the passage of time to lay out the universe as we see it. This concept seems to imply that God isn’t up to the challenge of directing the uncountable number of physical interactions that occur every moment throughout the universe, so He had to rely on large quantities of time to give Himself the appropriate statistical chances that things would turn out. This flies in the face of the idea that God has a plan, that He is actively directing the course of history.
“according to the plan of him who works everything in conformity with the purpose of his will” Eph 1:11

5. The creation account in Genesis does not follow what would be expected of a naturalistic, evolutionary process. For example, it wasn’t until the 4th day that the sun, moon and stars were created. This is completely out of line with a naturalistic explanation. Believers who attempt to find common ground with evolution would have to discard this whole day in the account. And once you start picking and choosing what you will believe you really have no credible position any longer.

As you can see, my reasons have little to do with scientific evidence and everything to do with the declarations of the Bible. I think it is important to pause and think about that distinction. Each person must decide where their ultimate truth will come from, the wisdom of man or the wisdom of God.
“in the wisdom of God the world through its wisdom did not know him” I Cor 1:21

Personally, I’d rather start with believing God and then wait for the understanding to come that allows man’s knowledge to match up. This is a key point, and I will linger for a moment to explore it further. Consider this,
“since what may be known about God is plain to them, because God has made it plain to them. For since the creation of the world God’s invisible qualities – his eternal power and divine nature – have been clearly seen, being understood from what has been made, so that men are without excuse.” Rom 1:19-20

In the movie “Expelled” one of the Darwinists was asked what he’d say to God if it turns out that God really does exist. The answer was something along the line of “Why did you hide yourself?” Quite clearly the exact opposite is true. God is not in hiding, that which may be known about him is plain to see. In fact, even his invisible qualities are knowable. They are evident in the very creation, the very STUFF that the Darwinists claim as their only source of knowledge!
“The heavens declare the glory of God.” Ps 19:1
“But ask the animals, and they will teach you, or the birds of the air, and they will tell you; or speak to the earth, and it will teach you, or let the fish of the sea inform you. Which of all these does not know that the hand of the Lord has done this?” Job 12:7-9

How is it that so many supposedly wise men have come to a completely false conclusion? The Bible has words to describe the current situation,
“their thinking became futile and their foolish hearts were darkened. Although they claimed to be wise, they became fools.” Rom 1:21-22

I don’t expect that these few words will convince anyone about the age of the universe. That isn’t my intent. I’m more interested in getting you to think about the source of the claims that you ascribe to as truth. Are you relying upon the wisdom of man, or the wisdom of God. In the case of the question before us, I’d much rather say simply that I don’t know how old the universe is, but I do know that God created it, he has directed it according to his plan from the very beginning and it will reach fulfillment some day when he brings “all things in heaven and on earth together under one head, even Christ.” Eph 1:10

The age of Earth - Moon dust argument

http://www.answersingenesis.org/creation/v15/i4/moondust.asp

What is the point?

What is the point, you may have asked yourself, to these great thoughts that are being thunk? It is a question worth asking, and answering. But before we go there I think it might be profitable to spend some time putting the big picture together. This will give us some context for our future discussions, a framework to place the various puzzle pieces we examine.

First of all, it is my view that we aren’t headed for a glorious future filled with human accomplishment. I don’t know how long it will take us to not reach that end, but we are inexorably moving away from it. That was a backward way of saying that we’re headed towards an uninviting destination in the proverbial hand-basket. Of course, this outlook is colored by events happening in America that aren’t necessarily representative of the rest of the world, but I don’t think that matters. As an example, Mark Steyn has written in “America Alone: The End of the World as We Know It” about the rapidly changing demographic in Europe, citing the low birth rates of the ethnic European peoples at the same time that immigration and the high birth rates of the Islamic people in Europe are already altering the political landscape and in as little as a decade or two that continent will be controlled by persons who lack a Western cultural heritage and are followers of an extremist religious philosophy bent upon domination and extermination of all who hold an opposing point of view. So, the bad news is all around us.

And the evidence pointing to this conclusion can be found in a variety of places. The shifts in cultural mores, political thought, economic conditions and geo-politics can all be indicators of the overall direction of life. I recognize, however, that others might look at the same set of conditions or circumstances that I am viewing and come to a dramatically different conclusion. That, in itself, is a strong argument in favor of my point. It used to be, not all that long ago, that Americans shared a fairly consistent view of the world. This view was independent of ethnic, economic or religious background. There was a common understanding that some things were right and some things were wrong. Kids didn’t grow up as hooligans because even when parents weren’t around there were always friends, neighbors and society to censure and decry shameful behavior. In fact, as a society we’ve entirely lost our sense of shame. How else can you explain the debased and moronic antics that pass for humor and entertainment on TV and in the movies? In some ways I can find sympathy for the revulsion that religious Islamists feel toward our society. I can’t sympathize with their extreme positions, but I think I know where they’re coming from.

I’ll pick up this thread next time and we’ll see where it goes from here.

America for Sale!

Here are some recent headlines and stories. I point these out because I want to start laying a foundation for your appreciation of the global economic situation that exists today and which is moving along a trajectory that will have huge implications for our future.

Citigroup to Take $16 Billion Writedown, Merrill Says
By Edward Evans
Jan. 8 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank, may be forced to write down $16 billion in the fourth quarter and post a larger loss than previously estimated, Merrill Lynch & Co. analyst Guy Moszkowski said.

Citi Loses Almost $10B, Slashes Dividend
Tuesday January 15, 9:38 am ET By Madlen Read, AP Business Writer
NEW YORK (AP) -- Citigroup Inc. lost almost $10 billion in last year's final three months, the largest quarterly deficit in the bank's 196-year history, and slashed its dividend as it recorded a mammoth write-down for bad bets on the mortgage industry.
The nation's largest bank wrote down the value of its portfolio by $18.1 billion. It also boosted loan-loss reserves by $4.1 billion, signaling further problems in its consumer businesses as deflated home prices, high energy and food costs, and rising unemployment weigh on people's ability to make their loan payments.
To cut expenses, it slashed 4,200 jobs in the fourth quarter in addition to the 17,000 layoffs announced in the spring, and chief financial officer Gary Crittenden said during a conference call that more job cuts would be on the way.
Chief Executive Vikram Pandit, who replaced Charles Prince in December, said the fourth-quarter results were "unacceptable", and that he was "not yet finished" in his review of whether any of the global bank's core operations need to be cut or sold.
To bolster its capital, the bank also said Tuesday it has lined up $12.5 billion in new investments from sovereign wealth funds and existing shareholders.
That includes $6.88 billion from the Government of Singapore Investment Corp. for a 4 percent stake. Other investors were Capital Research Global Investors, Capital World Investors, the Kuwait Investment Authority, the New Jersey Division of Investment, shareholder Prince Alwaleed bin Talal of Saudi Arabia and former chief executive Sanford Weill and his family foundation.
The $12.5 billion in fresh equity adds to the $7.5 billion that Citi got in November from the Abu Dhabi Investment Authority in exchange for a 4.9 percent stake in the company.
Over the past several weeks, Asian funds have been buying up the battered stocks of struggling U.S. banks. Early Tuesday, Merrill Lynch said it will receive a total of $6.6 billion from the Korean Investment Corp., Kuwait Investment Authority and Japan's Mizuho Corporate Bank -- in addition to the $4.4 billion it has already gotten from Singapore's state-run Temasek Holdings. Pandit said Citigroup would continue to sell off "non-core" assets. The bank has already sold shares in Redecard, a card business in Latin America, and an ownership interest in a unit of the Japanese brokerage Nikko Cordial it bought last year.

Merrill Lynch to Get $6.6 Billion
Tuesday January 15, 6:45 am ET By Stephen Bernard, AP Business Writer
NEW YORK (AP) -- Merrill Lynch & Co. said Tuesday that it is getting a cash infusion of $6.6 billion from three foreign investment funds.
The Korean Investment Corp., Kuwait Investment Authority and Mizuho Corporate Bank will receive a special class of stock for their combined $6.6 billion investment. All will be passive investors and none will have any rights of control.
Both the Korean and Kuwaiti investment groups are owned by the state governments. Mizuho is a Japanese investment bank.
Working with the foreign investors will allow Merrill Lynch to broaden its relationships and operations around the world, Merrill Lynch's new chairman and chief executive, John Thain, said in a statement. The investors will receive a 9 percent dividend and their class of stock will be convertible to common shares in two years and nine months.
This is the second round of capital raising Merrill Lynch has announced in the past month. On Dec. 24, Merrill Lynch said it would sell a stake in itself of up to $5 billion to Singapore's state-run Temasek Holdings and an additional $1.2 billion stake to Davis Selected Advisers.

Where should I begin? Sovereign Wealth Funds – SWF – get used to the name. This is a euphemism for ‘America is on SALE!’ Simply put, these funds are all the US$$ held by foreign governments after selling us cars, trinkets and oil. Since it has become painfully evident that the dollars aren’t good for long term holding the SWF’s are spending them like sailors on shore leave, buying up tangible US-based assets, including shares in US banks and other financial institutions. I don’t have any disagreement with this activity, it is the marketplace doing what it does best, allocating capital to where it will be treated best. But there are geo-political implications that are apparently being ignored – at best, or not understood – at worst, by the movers and shakers in our government. There are several Trillion dollars held by these SWFs, and that will buy a lot of good ol’ American apple pie. What happens when the foreign owners of these “American” companies start making business decisions that aren’t exactly in the best interest of US citizens? What happens when they decide it is good business, for them, to move jobs out of America? As I see it there are two alternatives, either we let it happen and deal with the new circumstances of life as renters or the US government intervenes to save American jobs and our way of life. This would involve a breach of contract at the very least, and I would expect this to start a cascade of effects that would be unpleasant and most likely even less acceptable than the first alternative. What's my point? Only that you need to be aware this is happening so that you can start connecting the dots for yourself.

One other point, did you happen to catch that part in the Merrill story about claiming “all will be passive investors and none will have rights of control” and then buried a little lower for only the serious reader we find the note that all of this will eventually convert to common stock, which does confer “rights of control”. Make no mistake, these foreign investors will not be satisfied to remain passive. It might not change tomorrow, or next month or next year. But it will change.

One last excerpt from the Citigroup news:
Citigroup's $18.1 billion writedown was significantly wider than the $6 billion writedown it took in the third quarter last year, and bigger than the $8 billion to $11 billion it guessed in October that it would take for the fourth quarter.
Citigroup said as of Dec. 31, it had a total of $37.3 billion in direct subprime mortgage exposure, down from $54.6 billion three months prior.

So, let’s do some math. At the end of September Citi had $54.6B in subprime exposure. At the time they guessed they might lose $8-$11B, turns out they lost $18B. Now they have $37.3B in exposure. How much will they lose over this next 3 months? According to the article they’ve sold at least 10% of the company to foreign entities, several in the Mideast and Asia. This is not over by a long shot. Stay tuned.