Re: Federal Reserve leveraged at 50 to 1

[Guest guest]

Lehman Brothers was leveraged at about 20 to 1 before it fell. Look at the damage that caused to the economy. The Federal Reserve is leveraged at 50 to 1. Much of its real "assets" are mortgage instruments, you know, the ones that nearly brought down the economy a couple of years ago? If the real estate market keeps crashing, then those instruments could fail and make the Fed default. Any guess what will happen to the dollar when the bank behind it fails?http://www.cqcabusinessresearch.com/201 ... hman-bros/

Here is what makes these numbers particularly important: The stock market has a bad price to earnings ratio at a time when the national government has no money to spill into the system to reinvigorate the economy if the markets crash.

This is an oversimplification, but a price to earnings ratio can be described as a measure of the cost of a share verses what the company is actually earning. In other words, the fair value of a company is its actual net worth determined by its assets, liabilities, and potential profit based on unfilled contracts. If a company has $100.00 in assets and $100.00 in debts, but has $10.00 in unfilled contracts, that means that the actual value of the company is $10.00 and its fair market value would be in the $10.00 range. A price to earnings ratio for such a company would be 1 to 1.

Currently the average price to earnings ratio on the Dow Industrial Average ranges 30 to 1 to 50 to 1, which is just about what the ration was prior to the cash of 1929.

This means that people are paying THIRTY TO FIFITY TIMES what the actual share price of a company ought to be or what the actual value of the company is. People are purchasing at these prices because they are hoping that in the long term, these companies will post profitable dividends which will allow them to rake in a huge profit, and then sell these stocks at a high price to make even more money.

The problem is, thanks to the poor economy, these companies are teetering on the edge of collapse. The companies that are on the major indices are NOT representative of ALL the companies on the indices when the companies are profitable. Only the BEST performers are on the major indices. And so when the BEST companies begin to fail, you can bet that all the worst ones aren't going to be doing too good either, and so the situation is even more grave than it appears.

and I are both averse to government interference in resolving financial crises at this time, but in the years of the crash, the government was fiscally solvent and technically hoarding cash at a time when development of infrastructure would have spurred on economic and industrial development. Thus it was to the government's advantage to part with cash to build roads, train lines, bridges, etc. The US stood to gain much from having these new transportation avenues and links put into place. It would have cut the cost of acquisition of raw materials and shipping the finished products, and it also encouraged people to be more mobile, and settle in areas where they would be more likely to work or gain employment.

These days, we have exported most of our industries to China, and our government is so broke that there is no real way to extract itself from its financial problems, and so if the market falls, the government can do nothing, and there will be no way for people to gain employment.

The only people who will have earned money will be the traders, who make money whether they buy or sell. Everyone who holds their stocks may lose their principal, and anyone who sells might sell at a loss. Meanwhile, with all this money vaporizing, the government will have no money to pump into the economy to make up the difference, unless they just print money and hand it out, in which case, the government would put itself further into debt.

Now what do you suppose is going to happen if everyone who is owned money by the government starts coming to collect what they are owed at that particular time? What do they take in exchange for cash if cash is worthless?

[Guest guest]

Good points and new information.

Wondering about what the government will do when the money runs out and the dollar is worthless. Again I'll say that's why I think they are buying up so much land and locking up resources and putting oil offshore off limits. Already China is trying to buy oil land in Texas and Canada and is looking to build factories over here to make things to export back home. I do think that this administration would sneak through sales approvals in the dead of night like they rammed through Obamacare and other legislation. I really do think they'd sell out our resources and future if it meant borrowing more money to keep their phoney baloney jobs and power just a little longer. I honestly also wouldn't be surprised if they called in UN peacekeepers, maybe Chinese, to help patrol cities once the economy gets bad enough that riots are widespread in the big cities.

That's getting off topic though. I do oppose government intervention in the market because whatever they do just creates more and bigger problems. We see this ever since the Fed came into being and really before with the Revolutionary War currency, the Greenbacks of the North during the Civil War and the Confederate currency. In each of those the government went completely off the gold standard and hyperinflation resulted each time, enough to the point that the currency was worthless and had to be withdrawn.

What's happening now is the result of a long term problem. If we just look at what happened after WWII we can see it. There were treaty agreements at that time fixing currency exchange rates. That would have worked to stabilize trade and helped Europe recover, but England set its currency at an overvalued rate and the US undervalued. At the same time, both the US and England inflated their currencies with forced the tied currencies to inflate as well. The European nations told the US to cut it out, that they had enough Eurodollars and couldn't spend them but the US kept inflating.

How much did the US inflate up through about 1960? It did so much that, even though it was on a partial gold standard, that it had there were $80 billion Eurodollars, but the US only had about $20 billion in gold reserves. This basically killed the Bretton Woods currency rate treaty. The next thing to come was the sonian Agreement which was hailed as the greatest and most wise monetary treaty ever. It lasted 2 or 3 years before completely collapsing. Around this time the Europeans made good their threats and started cashing in their Eurodollars for gold. The US gold reserves plunged to less than $10 billion and were dropping fast.

So, rather than make the dollar sound, Nixon divorced the dollar completely from gold. At that point the US had returned to a fiat currency just like the three times before. As before, the currency has inflated wildly and with increasing speed. The government, just like before and just like other times in other nations, didn't learn from the past and kept inflating the totally baseless currency. Now we are nearing the end of that game.

Now, one reason companies are seeming profitable now is a side effect of inflation. Inflation causes depreciation to seem to happen faster. Because of this accounting trick, the company seems to be making a larger profit than it really is. However, this hides the threat that the company will have to buy new machines sooner and that equipment will cost a little more because of the inflation. So that means it is only a temporary blip.

What we are also seeing is companies scaling back. There was an article in the paper today about big box stores cutting back. Best Buy, Walmart and others are looking at shrinking the size of their stores while at the same time they some are renting out unneeded space. That is a sign that retailers are feeling the pinch too. It is a sign that people are spending less money because they have less money and are holding back. This will accelerate the cycle or more layoffs and more bad economic news.

Eventually, once inflation really starts to kick, people will start spending their savings while the money has value. That will provide a temporary blip of good news but once the money is gone, the drop will continue even more sharply.

All of this could have been avoided by sound economic policy and lack of interference with interest rates by the government and its not debasing the currency. Long story short, the government needed a lot of debt as a means of inflating the currency and creating more dollars from nothing. Without all the credit and mortgages and such, the economy would be much stronger because it would be on more solid footing and not a house of debt.

Well, I'd better stop. I've researched this a lot and its hard to explain it in a short time. I could perhaps recommend a book or two that cover these points.

In a message dated 7/5/2011 8:21:22 P.M. Eastern Daylight Time, no_reply writes:

Here is what makes these numbers particularly important: The stock market has a bad price to earnings ratio at a time when the national government has no money to spill into the system to reinvigorate the economy if the markets crash.

[Guest guest]

Walmart is going to open a bunch of additional stores in Canada. 39 to be exact.

http://www.thestar.com/business/companies/walmart/article/1014669--wal-mart-to-o\

pen-urban-store-buys-zellers-sites

This should tip off American consumers. Some of America's biggest companies are

beginning to see America as a bad place to do business, and so they are selling

off some of what they have so they can INVEST elsewhere.

What's happening is they are divesting themselves of the poor market areas in

the US and finding more lucrative markets abroad.

Administrator

" What we are also seeing is companies scaling back. There was an article in the

paper today about big box stores cutting back. Best Buy, Walmart and others are

looking at shrinking the size of their stores while at the same time they some

are renting out unneeded space. "