posted on Mar, 7 2009 @ 11:57 AM
When George Bush took the presidency the S&P 500 ( a more accurate market barometer than the dow) was trading at a level of 1456. When Obama took
office it was trading at 850. Down 41`% during the Bush years. Since Obama took office the S&P is down 167 points versus 550 points in the last 9
months of the Bush presidency. Blame this Obama but it is obvious that this decline is just a continuation of the Bush declines and the situation that
he left the economy in.
As to the market being over/under valued, it is trading at 12 times earnings. Historically this is very low. If you use operating cash flow(add back
in non-cash expenses) instead the market is selling at about 8 times cash production. This equates to about a 12% cash flow yield which compares to a
.7% risk free rate. These two variables are at the biggest historical spreads in history making the market in my view, extremely undervalued. The
market could double and it would still be relatively cheap on this basis. Likewise earnings could halve from here and still te market is undervalued.
Rates could go up but i doubt it. Low economic demand will cause deflation, which will make the real yield on treasuries larger than their coupon. So
low rates are here for some time, so I think that part of the equation stays constant.
Goverment spending pales to the amount of money has been taken out of the economy. If you figure that every dollar created becomes five dollars in the
economy, then if you figure $11 trillion in equity losses and $5 trillion in mortgage loan losses, not to count all the deravitive losses, then you
are talking about 50-100 trilion being removed the economy when factoring in multiplication. This is a massive amount of money to disapear and if you
wnat things to get better than you need to replace it.
The biggest problem of all this is that we issue debt to create dollars. We need to be able to mint our own money. Right now there is less than 2
trilion in real US money. That is totally insufficient for an economy of our size. As a result we have had to turn to a deposit -loan scheme where the
amount of deposits is a fraction of the neeeded loans. This is entirely unsustainable in a period where loan defaults rise. We need to be replacing
this debt with hard cash. In other words monetize the economy. With more money and thus more savings in the banks you could drastically decrease the
leverage of the financial institutions while still maintaing a stimulative level of lending. It's effects on inflation would be neutral as the
increased cash would replace many multiples of debt down the line.
I think the economy needs a paydown of debt of $10 trillion or so. If you figure 100 million legal households in the USA that works out to $100,000
each. Money would have to be used to pay off . If you have no debt than you get a payment of $25,000. If you don't have $100,000 but some you get
reduced cash from the 25,000.
Then you attack the rest of the debt that is left(lines, credit cards, mortgages rolled into one). You refinance it all at 4% and let the debtor pick
the term up to 30 years. You let the banks keep them, and they will be profitable, as banks will borrow directly from the fed at a fixed 2%. Amount of
bank leverage then gets adjusted to stimulate or slow down the economy. once the $100,00 per household is paid off, then the banks will have much more
moderate leverage. This will also make all the CDS expire without having to pay off (which by the way is what the big money doesn't want, as if they
do payoff, certian folks will own almost all of the American economy).
So basically what you have now is $10 trillion being put in the hands of banks and investors who are getting repaid on their loans. This is basically
money they had before anyways. They will use this money to invest in american industry, stimulating the economy. Foreiegn invetsors will use that
money to buy american goods, that we will be making once again due to new investment in american industry. Families would be able to resume their
normal standard of living again, having been relieved of some debt payments. Banks would be whole, although they would have to abide by much higher
reserve and leverage requirements(target of 50% and 2X leverage over time). Borrowers would be held to stricter standards. Investors would have much
higher quality debt to invest in. All this would serve to slow down the money velocity significantly enough to offset the effects of $10 trillion in
Where does the $10 trillion come from? Under the current system I understand that the fed refunds to the treasury all excess interest it recieves
above it's cost to operate. They also get some kind of dividend or something. I say lets scrap the dividend and use the fed for all the goverment
borrowing rather than using foriegn countries. Of course just creating our own money instead of using the fed is preferrable, but I favor the Fed over
other sovereign goverments.
Bottom line is if we want to eliminate debt in our economy, we have to increase the amount of money in circulation by a large amount. There really is
no other choice. No better way to do it than to just wipe the debt out, pay off the lenders and let that money then be used to reinvigorate the
economy. Regulate the banks properly and you could prevent it from being all that infaltionary, if at all.