Howard Capital Management

Just How Self Made Are You Take Test And Find Out

noreply@blogger.com (Groupboss) — Tue, 30 May 2017 17:22:00 +0000

The Unhealthy Delusion Of The Self Made Man And Woman

By Melvin J. Howard

If someone starts with modest resources, does well in business, and makes a fortune, isn't it fair to attribute that wealth to individual merit? Not really. Here is another question why do some people succeed and others don't? Is it luck? Is it talent? That's the question Malcolm Gladwell sets himself to in his book Outliers. The answer he finds is, often, none of these. To make his point, Gladwell compares Christopher Langan to Robert Oppenheimer.

Langan has an astronomical IQ of 195 but he has not been able to parlay that into significant academic or business success. On the other hand is J. Robert Oppenheimer, the theoretical physicist who headed up the Manhattan Project, America's effort to create an atomic bomb. Yet here was a man who had to talk his way out of an apparent murder attempt while at Cambridge in his twenties. Langham, on the other hand, couldn't even talk his college adviser into letting him transfer classes. Why? Oppenheimer's family and cultural background allowed him to absorb as if by osmosis not only a sense of entitlement but the instincts needed to move successfully among powerful, rich, talented people. Langham had none of that. Since our whole monetary and trade systems are built primarily on contracts of agreement, modern markets would not exist, and economic development could not happen, without significant government intervention.

Those who also argue for an end to government sponsored re-distributive mechanisms either overlook or dismiss the role of periodic redistribution in sustaining economic prosperity. Without government intervention in redistributing wealth in suitable amounts you continue on this spiral of increasing inequality. "Nothing can preserve the integrity of contract between individuals except a discretionary authority in the State to revise what has become intolerable.

Just How "Self-Made" are you? Take the test

Where you helped by any of the following on your way to wealth:

1. Laws concerning property or contracts, and the public agencies that enforce such laws

2. Public schools or employees educated in public schools

3. Employees or customers who rely on public transportation

4. Roads, bridges, airports, sewers, water treatment plants, harbors, or other utilities built and maintained at public expense

5. Mail systems built and operated at public expense

6. Public hospitals and government-licensed physicians

7. Health and safety regulations created and enforced at public expense

8. Police and fire protection provided at public expense

9. Public libraries and parks

10. Any public amenities that add value to commercial or residential real estate

11. Government contracts

12. Government-provided business incentives

13. Regulatory agencies, such as the Federal Trade Commission or the Securities and Exchange Commission, that sustain trust in the stock market

14. A government-granted license permitting the exclusive use of a broadcast channel

15. The Internet

16. A form of currency legitimated and backed by a stable government

17. The U.S. Military

And what is often over looked social welfare programs that keep the poor from rebelling and rioting in the streets. For proof of this you only have to look at what is happening in other countries.

If we use these criteria to determine who can legitimately claim to be "entirely self-made," the number is in fact, precisely zero. If not for the legal and political arrangements that we create and maintain as a society with contributions from us all, costs to us all, and benefits to us all and if not for what we call "the public infrastructure," nobody could accumulate wealth. In short, there can be no private wealth without common wealth of a nation.

Wealth always depends on collective effort. Why? Because of what the "entirely self-made" myth implies. If I have amassed a fortune solely through my individual talent and hard work, then it is wrong for the government to take any of it away. By further implication, taxation is wrong, and progressive taxation is really wrong. Casting "the government" as an evil empire that confiscates the fruits of one's labors also serves the interests of the division class. Working-class and middle-class people who embrace this view are less likely to take an interest in government as a means to build, protect, and fairly employ the nation's common wealth. By helping to portray government as the enemy of individual initiative and prosperity, further plays to the insecurities of the middle and lower class.

Class difference

In a competitive, individualistic society like the U.S., the "entirely self-made" illusion is seductive. It gives us the pleasure of taking credit for our successes. It also mitigates the guilt that can come from recognizing our own class privilege. The "entirely self-made" myth is handy for both self-congratulation and self-absolution. But we should reject the mythology not just because it's wrong, but because, unlike many other comforting myths about American society, this one has especially pernicious consequences for democracy and community. At worst, it can make us feel that we have no right to democratic control of our common wealth.

If we recognize that all private wealth depends on our common wealth, then we incur two obligations. One is to contribute our fair share and the bigger the rewards we derive from society, the bigger that share should be. The other obligation is to participate in protecting our common wealth and determining how it is used. We should not let those decisions be made only by a few self-serving people that laugh all the way to the bank.

Why does one person get not only much higher pay but also health benefits, greater authority, flexible work hours, higher social status and a more comfortable work environment while doing interesting work, yet the other person does the least desirable work for less pay, no benefits, virtually no authority, with very low status, often in a brutal work environment? None of the reasons we often give to justify this hierarchy hold up when scrutinized. For example, we may say that the professional went to school to earn a higher paying, higher status job. But that does not take into account the different opportunities that people have for education nor may that academic ability be the result of upbringing, conditioning or heredity none of which the individual has any control over. And none of this explains why people who spend all of their time moving money around electronically do not really produce anything and in fact may actually be destroying the work of others yet they get compensated at astronomical levels. Neither the Wall Streeters, the professionals nor the immigrant workers got to where they are all by themselves. Each was helped, or hurt, by others, including others far removed from them in the economic system.

The Truth

The wealthier we are, the higher our status in the system, the easier it is to delude ourselves that we got there all by our own effort. In the modern world, where everyone is connected to each other, being entirely self-dependent cannot be the road to success. We must be able to depend on each other to be successful both as individuals and as a society.

Many point to the great inventors throughout history, like Henry Ford, as examples of self-made men being wildly successful without others’ help. While it is true that many rise from humble beginning, they need help from others to rise to the top. Ford was a great innovator, but he needed outside investments to allow him to create Ford. He even benefited greatly, both directly and indirectly, from the federal government. He was awarded 161 patents that allowed him to profit from his inventions, and transportation investments from various levels of government to build roads and highways throughout America helped fuel demand for his cars for decades. This myth is popular with the unenlightened for many reasons but I know better. Some like the concept because it fits nicely with their narrative. A country where any individual can flourish without any outside help requires no government spending on medicine for the poor and elderly. No need for public education; they can educate themselves. No need for scientific research grants; if the free market wanted a cure for polio so badly, it could fund the needed research. The fact is nobody got rich on his own nobody.

Whether Your Money Is Old Or New You Should Have A Plan Trust Me....

noreply@blogger.com (Groupboss) — Mon, 15 May 2017 21:29:00 +0000

TRUSTS CAN LAST FOREVER

By Melvin J. Howard

The fascination I have with Trusts goes back to over 20 years ago. When my lawyer, business confidant and friend taught me the many uses of Trusts and it’s intricacies. But I dug further I wanted to know the history where did the idea of trusts come from etc. I discovered it arose almost accidentally from the procedural intricacies of English law, where a dual system of justice had arisen as early as the fourteenth century. The system provided two judicial structures based on fundamentally different jurisprudences of the rule of law and the rule of equity. The common-law courts administered law and the Chancery courts provided equitable relief when the application of strict law in the common-law courts either gave no remedy or gave an unjust one. The Chancery courts were often faced with petitions relating to “uses”. A “use” arose where a person (the “feoffor”) conveyed property of any sort to another (the “feofee”) upon the understanding that the other was to hold the property on behalf of the feoffor or on behalf of a third party (cestui que use). Clearly the feofee, bound in honour but beyond the law, was in a position of confidence which he might abuse. Consequently, the rights of the cestui que use required protection. The common-law courts failed to recognize uses and so it was upon repeated petition to the court of “conscience” that relief was awarded by the Chancellor who forced the feofee to administer the property for the benefit of the cestui que use, according to the terms of the grant.

Throughout the centuries, the trust has proved a remarkably resilient and flexible concept. Its uses have reflected the needs of the times. In Medieval times, it was used as a means of avoiding forfeiture, while in the Victorian period it was often used as a means of controlling one’s family, even after one’s own death. Today, as well as retaining its old uses, the trust has been put to many new ones. The modern role of the trust lies significantly in pension funds, charities and various endowments.

A function of the trust concept, which has been common for many centuries, is its utilization for charitable purposes or for the public good. “Charitable” in English law has a technical and somewhat artificial meaning, which derives from the meaning contained in the Statute of Charitable Uses (the Statute of Elizabeth). To date, no comprehensive definition of a legal “charity” has been provided either by statute or by the courts. However, there is an accepted if not wholly adequate test. A claim to charitable status is determined by considering whether the purpose in question comes within Lord MacNaghten’s classification, first stated in 1891:

Charity in its legal sense comprises four principal divisions: trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of religion; and trusts for other purposes beneficial to the community’. The achievement of charitable purposes through the use of a trust is often easier and cheaper than the use of a charitable corporation, or for the purposes to be administered by a local authority. For these reasons, many established charities today are in fact trusts. One pertinent way in which such trusts are utilized is in the creation of disaster funds which accepts funds from members of the public (the trusters or settlors) for equitable distribution amongst the victims, survivors and dependents of victims, of the disaster.

A debtor’s property is in principle available for the satisfaction of his creditors and ,if he becomes bankrupt, it will pass to his trustee in bankruptcy; but it is possible, by making use of a protective trust, to obtain a measure of protection against such a calamity. The very notion of protective trusts, which effectively empowers a settler to defeat his creditors by putting his property beyond their grasp, would no doubt have Henry VIII turning in his grave. However, there is much to be said for allowing some means of protecting a person’s dependents from the adversities caused by his own lack of financial prudence and from this perspective it is pleasing to note that a settler cannot create a trust which will protect him against himself own bankruptcy. In Re Boroughs-Fowler , a settler attempted to protect his property by creating an ante-nuptial settlement that provided that the income from the trust should be paid to him and in event of his bankruptcy, paid to his wife. This was not allowed by the court and it was held that the property vested in the bankruptcy trustee, who could validly dispose of it. This rule is now enshrined in the Trustees Act 2000, formerly the Trustees Act 1925 of the UK.

A trust may be created in order to avoid any single person acquiring a controlling share of a company. If for some commercial or other reason the original owner does not want another person or body to acquire a controlling shareholding in a company, a sufficient number of shares could be taken out of circulation and put in trust. This method may be used in order to protect a company from a hostile takeover. It should be recognized however that this procedure might well have the effect of limiting the company’s freedom of manoeuvre, as the trust holding would be subject both to trust considerations and to commercial ones, and company decisions would be tightly bound into the welfare of the trust.

With the increasing incidence of divorce in modern society it is foreseeable that a marriage will not last a lifetime. One way of avoiding the financial arguments that invariably embitter the parties to a divorce would be to make provision for the holding of property in trust, with the aim of dividing it out equitably on the break-up of the marriage. However, there may be a problem in relation to such a provision’s validity. In Re Johnston’s Will Trusts a trust was set up which made provision by a father whereby his daughter was to receive certain sums in the event of her divorcing her husband. Clearly, the father’s intention was to provide for his daughter only if her husband stopped supporting her; but the court held that the provision was void as being contrary to public policy in that it amounted to an encouragement to the daughter to divorce her husband. In spite of such precedents, it is submitted that such a provision may be a sensible way to deal with an event that is undesirable but foreseeable, so long as it does not encourage the onset of the undesirable event itself.

COMING TO AMERICA

The Business Trust made its debut in Massachusetts in 1827. As a result, a U.S. Business Trust today is often called a "Massachusetts Trust" in legal circles. The U.S. Supreme Court defined the Massachusetts Trust as a form of business organization, common in Massachusetts consisting essentially of an arrangement whereby property is conveyed to trustees: in accordance with terms of the Trust. The business is to be held and managed for the benefit of persons who hold transferable certificates issued by the trustees showing the shares into which the beneficial interest in the property is divided. [Hecht v. Malley, 265 U.S. 144 (1924)] [446 U.S. 458, 469].

Neither the railroads, nor industry or banking were invented in the period between 1865 and 1914, generally accepted as the time limits of what was called the Gilded Age. The new element which drove the concentration of wealth was consolidation in search of economies of scale and the strive for monopoly ( “ Trusts “).

When the great C. Vanderbilt acquired both the New York & Harlem and the Hudson River railroads, he achieved a monopoly on railroad transportation between New York City and Albany. This he later parlayed into a controlling interest of the New York Central Railroad, which he promptly merged with his Hudson River railroad, thereby establishing a through line between New York and the Great Lakes. His interest in the Erie Railroad, which ran a parallel line along the Southern border of New York state, was entirely motivated by the intention to extend his monopoly. What Vanderbilt did or sought to do in New York, the Pennsylvania Railroad did in Pennsylvania and other railroads did elsewhere. Mergers created larger and more efficient systems and a reduction of competition, which in turn promised higher profits. Thus, when the new generation of industrialists started to expand their scope of activity from local factory owners to national operators, they merely followed the railroads in their economic logics.

The concepts of pooling and artificial price fixing, were not invented during the Gilded Age, but the period was characterized by the typical short economic cycles, the boom and bust cycles, which favored their application. In times of rapid growth, high profits tended to attract an excess of investors and overcapacities were rapidly built up. When the excessive offer hit the markets, prices had to sink and spelled doom over the concerned industries. Leading firms then often tried to maintain high prices by pooling and collectively reducing production. Such pools (or cartels) were more or less loose and the looser they were, the less they were effective. Only in a few cases did these cartels succeed to control prices effectively for a prolonged period. One such example is the Gunpowder Trade Association, which was organized by the leading gunpowder manufacturers, including E.I. Du Pont de Nemours, after the end of Civil War threatened the industry, which then naturally suffered from overcapacity.

The concept of "trusts" was invented during the Gilded Age, as a response to the specific legal situation, which forbid corporations from owning other companies or assets in other states. It notably appeared as the legal form, the Standard Oil alliance took in 1882, to unite its shareholders as it could not merge its constituent companies. The introduction of the holding company in New Jersey during the 1890's allowed what was formerly impossible and thereby accelerated the trust movement in corporate America during this period. Under public pressure, the US Congress reluctantly introduced anti-trust laws to rein in the growing concentration of wealth and power in the hands of a few individuals and fight the large corporations in their efforts to restrain competition. These efforts proved rather futile, as witnessed by the creation in 1890 of the American Tobacco trust, the same year in which the Sherman Act passed. The American Sugar Refining Company joined in January 1891 and the nine year old Standard Oil trust made no efforts to adjust, despite the fact that it was the target of the Sherman anti-trust legislation. It would take twenty years until these three major trust would be dissolved by order of the Supreme Court of the United States.

In time most American industries fell prey to the consolidation or trust movement, many of them during the 1890's. However, some sectors were more suited to be "organized" than others. Such was the case of the nascent (rock) oil or petroleum industry, which came under the influence of the secretive John D. Rockerfella and his partners. Drawing his strength in his deep faith, John D. Rockefeller relentlessly brought his Standard Oil Company forward, until it owned 90% of the nation's oil refining capacity and controlled all essential oil transportation infrastructures, with its pipeline network, tank car fleet and secret railroad rebates. The four major railroads serving the Western Pennsylvania Oil Regions then were the New York Central - Lake Shore, the Erie - Atlantic & Great Western, the Pennsylvania and the Baltimore & Ohio. To achieve his goal of monopolizing the oil industry, John D. Rockefeller allied himself with his strongest competitors : refiners. He also enrolled the most fervent of his opponents in the Oil Regions, such as John Dustin Archbold and lawyer Samuel C.T. Dodd.

Standard Oil became so fabulously profitable, that it was soon known as the "Mother of Trusts", standing behind the consolidation of many other industries. By then, John D. Rockefeller inherited the mantle of evil the brand-mark of the villain, who tried to monopolize just every sector he could get hold on and thereby required his tribute from the innocent consumer and producer. This impression was actually wrong, as these enterprises sprang from the initiatives of the oil trust's individual shareholders and were not orchestrated by a common entity. Although John D. Rockefeller had some ambitions to consolidate the steel industry, (which he failed to do), most of the trusts financed by Standard Oil money were organized by other partners. The most active were Oliver Hazard Payne (American Tobacco), Henry Huddleston Rogers (the smelters trust) and Rockefeller's brother William, who promoted the great Amalgamated Copper scheme in 1899, with the support of James Stillman and the National City Bank. There were lesser trusts with Standard Oil influence, such as the National Lead Company and the American Linseed Company.

What Rockefeller did in oil, James Buchanan did in tobacco products and the Havemeyers in sugar refining. Founded in 1890, the American Tobacco Company grew mainly by acquisitions until it controlled most of the smoking tobacco industry in the USA. Its sister, the Continental Tobacco Company, was organized (in 1898) to control the plug tobacco sector as where the American Snuff and American Cigar companies to control their respective segments of the tobacco trade. These companies were merged into the Consolidated Tobacco Company of New Jersey in 1901. To expand into foreign markets, the British American Tobacco Company was formed and the Havana Tobacco Company, to control the cigar supplies from that Caribbean island. Duke, a self-made-man like Rockefeller, was supported by a powerful group of Northern financiers, who had built the street railway systems in New York, Philadelphia and other cities. This group essentially consisted in William Collins Whitney, Thomas Fortune Ryan, Peter A. B. Widener and Anthony N. Brady. Oliver Hazard Payne, the long-time treasurer of Standard Oil and estranged brother-in-law of William C. Whitney, was also a large shareholder.

Unlike the Rockefellers and the Dukes, the Havemeyers who reorganized the sugar industry in the 1890's, were already wealthy and well established in the sugar refining business. The first pair of Havemeyer brothers, William and Frederick Christian, immigrated from Schaumburg-Lippe (Germany) in 1802 and established their first sugar refinery on Vandam Street in New York three years later. Their family prospered in New York and made the city to the premier sugar refining center in America. A scion of this family, Henry Osborne Havemeyer, who was linked by marriage to the Elder family, whose fortune was also made in sugar refining, consolidated the industry under his American Sugar Refining Company in 1891. By 1907, the Sugar Trust controlled 98% of US sugar production. Thereafter it came under litigation with the US government and was forced to relinquish control of its member firms, thereby effectively loosing its dominant position. When a settlement was reached in 1922, the market share of American Sugar Refining had sunk to 32%. In modern times, sugar refining ceased to be the profitable business it used to and the industry, once New York's most important, declined.

During the 1890's and into the first decade of the Twentieth Century, trusts were organized in every major American industry. Some were loose agreements between major firms, such as the infamous "Meat Trust", which pooled the large Chicago and St. Louis packers (Armour, Cudahy, Morris, Swift and Wilson) in one strong combination, using essentially the same methods as Standard Oil, notably in relation with the railroads, to fix prices and drive competitors out of business. Others took the form of holding corporations, usually chartered in New Jersey or Delaware and frequently organized with speculative rather than economic motives. To these, we may count a number of the companies, which were set up by a former shipping merchant, turned investment banker, whose involvement in industrial consolidation earned him the nickname "father of trusts" : Charles Ranlett Flint. Although generally weak at their beginnings, some of the Flint trusts later became successful corporations, like American Woolen (later Textron) or the Computing-Tabulating-Recording Company (now IBM). The Moore brothers of Chicago were also prominent trust organizers of the rather speculative nature. They created the National Biscuit Company (Nabisco), the Diamond Match Company and four companies, which were absorbed by the United States Steel Corporation in 1901. The Moores stood also behind one of the last great railroad empires to be organized in the USA.

The steel merger, which created the largest company of the world, was the apotheosis of the trust movement and a monument to America's greatest financier of the Gilded Age : John Pierpont Morgan. The banker and railroad pacificator had already a name in industrial consolidation, having merged the Edison manufacturing units with Thomson & Houston to form General Electric in 1892. Morgan's credit in organizing the US Steel Corporation was essentially related to the mobilization of the huge financial means it took to float securities with a par value of $ 1'370'000'000 without breaking the market. Morgan, who stood behind the Federal Steel Company and the National Tube Company, also managed to unite all major players in his steel trust, these being the Carnegie Company, the Moore Group, Gates' American Steel & Wire Company as well as Rockefeller's iron ore properties in the Mesabi range. Elbert Henry Gary from Morgan's Federal Steel became chairman of the board, Charles Michael Schwab of Carnegie Steel became president and the directors included J.P. Morgan, John D. Rockefeller and J.D. Rockefeller jr , Henry H. Rogers, Marshall Field, Nathaniel Thayer jr, William H. Moore, Peter A.B. Widener and Henry C. Frick. Unlike Standard Oil or Consolidated Tobacco, the United States Steel company, despite its huge capitalization, was nowhere near achieving a monopoly position, as several major competitors (including Lackawanna Steel, Jones &

Laughlin, the Crucible Steel Company of America and others) were left out.

New combinations soon appeared and threatened the steel trust in its very existence. After clashing numerous times with the conservative Gary over corporate policies, Schwab left US Steel after a three year tenure, took over Bethlehem Steel and built it into a major competitor. His successor William E. Corey also left after a few years to take over a competing concern. John Warne "Bet-A-Million" Gates was involved in the creation of Republic Iron & Steel after he had unloaded his wire trust to United States Steel. And Henry Clay Frick, while still a director, teamed with the Mellons of Pittsburgh to create the Union-Sharon Steel company, which they also unloaded on the steel trust.

Under the presidency of Theodore Roosevelt, who succeeded the elected William McKinley after his assassination in 1901, the US government started to take a stronger stand against the trusts. As a consequence of these actions, the following major trusts were ordered to dissolve: Northern Securities (Western railroads) in 1904, Standard Oil and American Tobacco in 1911. The split-up parts continued to prosper and in many cases became greater than their parents had ever been. But with the gradual retirement and dilution of the founding interests, the resulting oligopoly of strong companies characterized a new and more competitive environment, which eventually benefited both, the general economy and the stronger of the competing firms. Industries, where competition gave way to regulation, like the railroads, generally declined, although this decline may be essentially due to more general macro-economic changes. The trusts were the predecessors of our modern corporations and they played a role in the economic growth of the United States. The multi-million dollar fortunes they made to their organizers and promoters were part of the Gilded Age. But it is no different today when billion dollar fortunes are derived from successful companies in the field of high tech.

The above are a few of the uses to which the trust can be put. The examples chosen show that the nature of a trust can be protective, of person or property; it can achieve desirable aims, either of a private or charitable variety; or it can be distributive, in the sense of transferring wealth in a tax advantageous manner. From a strategic point of view, it is submitted that Maitland’s claim that the trust is “the greatest …achievement performed by Englishmen in the field of jurisprudence” holds sufficient weight. From a moral stand point, it is simply stated that Henry VIII’s misgivings of the Medieval system would still hold a degree of justice when applied to the modern trust. However, what is important to note is that the trust can clearly not be dismissed as having outlived its usefulness and today forms a distinctive part of English law which at the very least says a great deal about the ingenuity of some highly skilled lawyers of which I have known a few.

WEALTH STARTS IN YOUR MIND FIRST AND FOREMOST

noreply@blogger.com (Groupboss) — Thu, 11 May 2017 17:15:00 +0000

It all starts with your mindset

By Melvin J. Howard

"Everything can be taken from a man but ...the last of the human freedoms - to choose one's attitude in any given set of circumstances, to choose one's own way. Viktor E. Frankl

The first step to having wealth is to know what it is. And few people know what it really is, in and of itself. What is wealth? What causes it? What causes the cause of it? Let us start with money, the world’s symbol of wealth, and then move deeper. Lets take a look at money. Money is merely legal tender, a form of exchange. We use it to exchange value. It represents value. Money is the ‘body’ of value. It is the physical representation of value that rises and falls in ourselves, within us. Not within ‘things’ outside of us, but within us. For without us, what can the value of a thing, such as a car, be to us? Nothing, at least not to us. In other words, it is we, the observers, that place value in things, but this value is really value in us – we give value to the material things. The material things have no ‘money’ value in themselves – we give that to them. So, money is the external physical representation of a particular section of our internal value, within us, within you. That is why a house or a block of shares valued at $1 million today can fall to a valuation of half a million dollars tomorrow when fear is introduced into the hearts of those involved. The fear kills a portion of the internal values of the participants and that is reflected by the paper money, the ‘body’ of value.

Money is not the enabler; it is that which makes the people point their attention and their power in a certain way. It is the carrot on the stick. It gives you a promise, alters your belief so you may act in a certain way. In fact, it doesn't do it by itself; you build that image all by yourself in your mind. You build the belief and the promise in your mind, you convince yourself, and then you act in that way. This acting ‘in that way’ is what people mistake as the power of money. Money can't do anything by itself. It is we the people that do things, create things, exchange things. And we do it all based on what we believe. And then we think we are powerless and it is money that has the power. And this misconception has such a strong grip on people’s minds.

How many times have you felt powerless, defeated and incapable, just because in your mind you did not have ‘enough money’? How many times have you reduced yourself and thrown away your dreams because of this idea? Don’t you find it incredible that you can actually believe, in an instant, that you are next to nothing just because the ATM slip printed less zeros than you expected? You can actually be dreaming of starting a business, doing something for yourself and loved ones, and all those dreams can be shattered in one second when you get your bill or account statement. Why do you choose this? Look, if you only have $10 left, the reality as it stands would be that, at that moment, you only posses $10 of funny money. That is all. That is not related to the next moment of your life – it is up to you to choose how you will next move. It is not related to your dreams and goals – it needs not shake them one single bit. It is not related to your emotions and mood – you choose how to feel about that $10 and that is why different people feel differently about $10. It is not related to your power, capability, confidence or anything else like that – you choose all these yourself.

Walt Disney, against all odds, criticism, and a string of ‘failures’, stuck to his imagination and became the entertainment king of the world. Mickey Mouse was launched at the lowest point of his ‘failures’. No one could have predicted that an empire would have been launched on a mouse. When we willingly go where our most desired imaginations take us, we become creative forces that have no limits. Albert Einstein said that imagination is the greatest creative force. Learn to be willing to go where your imagination and desire takes you. Your thoughts are a major part of your wealth consciousness and beliefs. Example remember that most people who win lotteries lose all their money within a few years and actually end up in debt, while people with high wealth consciousness make billions out of nothing repeatedly.

Money is not something you need. It is not a need. As long as you feel you need money, you will find it hard to get. The minute you drop your neediness of it, your belief that you are any less without it, you will find you are surrounded by it and by whatever it is that you desire and move towards. Money is a communication device, and when you have neediness, you are communicating lack of, and that is what you will experience.

Whether you are in a job or a business of your own, the way to gain increasing wealth (and money if that is what you want – but remember that you can have wealth without money) is to continuously go within and find the value and power that is inherent in you as it is in everybody. Then bring it out and communicate it. And you will find that, in ways you can't even predict, the wealth and money will automatically come. Go within, bring it out, communicate your value, ask for what you desire, and repeat. Ask and it shall be given. Seek and you shall find. Knock and it shall be opened unto you. We have seen how money enables you to convince someone else to act in a certain way. It shifts their beliefs towards something you would like to have happen. But what else does money do? It shifts your own beliefs – it convinces you that you have the power. But it is not the money that convinces you; it cannot possibly do that. You convince yourself, without a shred of doubt, that you have the ability! When you don’t have $100 that you imagine you need to get a pair of shoes, the $100 you imagine is the only way, out of infinite possibilities, that will get you the shoes, you convince yourself totally that you don’t have the ability to get shoes. When you have the $100, you convince yourself totally that you have all the power you need to get shoes.

Did you know that you could convince yourself of either of these even without money? You may have the $100 but convince yourself totally that you have some perceived shortage and you shouldn’t spend it on shoes or else you will suffer. And so you remain without shoes. Of you may not have the $100 but you convince yourself totally that you will get shoes, and somehow you end up with shoes (as a gift, through some special offer, or in any of many other ways! This all teaches you two things: (1) you can convince yourself either way regardless of the money and the results happen regardless of the money and (2) you always, always, regardless of the money, have to convince yourself first of your ability so that you may use it.

Congratulations your head of a family empire

noreply@blogger.com (Groupboss) — Wed, 03 May 2017 18:51:00 +0000

You’re the founding member of family wealth now what do you do?

By Melvin J. Howard

You have worked day and night you have made sacrifices to no end. Blood sweat and tears was on the daily menu. You have taken ridicule sometimes by immediate family members. You have taken risks that people said were foolish. You were laugh at left isolated it cost you a marriage or two, friends were nowhere to be found. You had a number of set backs. But you did not quit you kept going and now you are a success a Founding Entrepreneur of a family empire now what do you do how do you make sure it is carried on? Only 34% of family businesses survive to the second generation, and just 15% make it to the third. Among those that don’t survive, 10% are due to transfer taxation, 25% to unprepared heirs, and 60% to the way successor family members interact.

When discussing generational issues, one needs to distinguish the entrepreneur-founder of a family business from the senior family member in a business that is now in the hands of the second or third generation. Entrepreneurs differ from other people. They have certain characteristics, which make them successful. As it happens, these are the very same characteristics, which make them difficult to relate to as individuals. Spouses, girl-boy friends of Entrepreneurs have to deal with a whole new set of dynamics that are not part of a regular relationship.

A family business' founding entrepreneur is usually a father. (Although less true today than in the past, the entrepreneur-founder is, more often than not, male.) The founder probably had problems with his own father over authority and control. As a result, he has not had the role model needed for shaping his interaction with his own children in ways that build a healthy relationship towards authority and control issues on their part. It would be a mistake, however, to confuse the entrepreneur's difficulty interacting with his children with a lack of commitment to family or a lack of intellectual understanding of the father's role.

On the contrary, an entrepreneur is frequently driven to achieve precisely because of a deeply rooted need to recreate the family situation that he wished he had experienced as a child, but was denied. In fact, entrepreneurial founders can often be persuaded of the need for communication between generations because they understand intellectually the emotional needs they experienced in their relationships to their own fathers.

Entrepreneurial seniors can often find the wisdom to change even before being pushed by their children seeking more autonomy and responsibility, who seek, in short, a benign exercise of authority by their parents. Ensuring financial security for children is also seen as an important motivation for amassing and protecting wealth. The desire to pass wealth to the next generation is sometimes tempered by concerns that leaving too much money could cause problems for the benefactors. Increasingly, wealthy individuals are keen to ensure that their dependents receive financial education to prepare them for wealth and, in some cases, are adding stipulations to their wills, such as the requirement that a university or some other form of education is to be completed.

Inheriting money can have a “curse,” a dark side—it can disable people, isolating them, causing shame about what they have, arrogance, or a sense of unworthiness. The discovery of personal identity in heirs has been likened to a journey, where they must go out in the world and find out who they are on their own, away from family and their names. The major challenge in development of heirs is to balance a sense of responsibility for their wealth with their sense of entitlement.

If an heir feels that they deserve what they get and that there are no corresponding values or responsibilities placed upon their inheritance, they eventually experience a deep sense of emptiness, even resentment, inside. Getting a paycheck on one’s own, starting a small business or a community project, or just graduating with honors, are achievements that build personal identity. The young heir has to find some way to do something important.

It all begins with an entrepreneur

The entrepreneur, the original founder and manager of what will become a Family Business Empire, controls all levers of power on the levels of ownership, management and family standing behind this newly created business entity. He/she provides the founding myth for the family that captures the core family values and a vision to be referred to across generations. The family business will play a significant role in the dynamics of a family for generations to come. The business is in fact part of the day-to-day living of the family, and is a platform for interactions within the family and with outsiders.

In the later generations, not everyone in the family is, or wants to be, involved directly in the running of the business – while they might all be owners, only some are managers. Whether rising family members become managers in the business is in great measure determined to the extent that active efforts were made to consistently involve them in the business from an early age. Further, the greater generational distance from the original founder translates into a rising need for a separation of power and control over the family’s financial affairs, including the family business. While the business is a family enterprise, at the individual level, once you get past the founder, not everyone in the family is or wants to be involved directly as manager in the business. In such situations there is a clear need to think strategically about the family’s financial position and design a new structure and a plan of action – they have now become a family-in-business.

Maintaining and Growing Private Wealth

A family-in-business needs a platform to capture the wealth – business and financial and to address the broader needs of current and future generations. A family office is the perfect structure it will take care of the day-to-day management and administration of the collective assets and business affairs of one or more families. Its long-term goal is to preserve and grow the wealth for current and future generations. For the family-in-business a family office takes on the rallying role previously served by the family itself.

Transfer assets across generations

Family offices have served as vehicles for intra-family and intergenerational transfer of assets. The most common example for the establishment of an office is the retirement of the original founder(s). Family offices can be established on behalf of heirs, so as to have the structures necessary to manage inherited assets in common, rather than liquidating the assets and dividing the proceeds. The truth is that many persons are unprepared to deal with accumulated wealth or a sudden financial windfall. The process of accumulating wealth and enjoying its benefits consumes substantial time. Little thought is given to what happens in the event of disability or death of senior family members. Even less thought is given to the education and preparation of children for the responsibilities of wealth that awaits them in the due course of time. Much work must be done to protect and preserve wealth. This includes a continuous process of education for senior family members, middle-aged adults and younger family members. When formulating a strategy for wealth preservation, rich parents should consider:

Mommy

Financial planning for the family is pointless unless absolute financial security is assured for Mom. It is not possible to talk about sharing present and future wealth with children and other family members until priority and attention is given to providing financial security for the surviving spouse. Usually, this is the wife. Sometimes, this wife is not the mother of some or all of the children who are expectant heirs of a portion of the family wealth. Stepmothers, stepfathers, and stepchildren complicate the discussion of wealth planning alternatives. But it can be overcame with the right strategies. Depending on what kind of relationship you have with your ex-spouse they can be included into the overall plan or left out of it’s entirely up to you. If the founding member of the family enterprise have children but is not married to the mother. This will have to be addressed if the founding member remarries and has children with the current spouse this also makes it complicated. Make sure you address all these issues with your estate lawyer. Its just a common fact kids are not the same even in the same family. They have different personalities some will take an active role in the family business some will not. It is expected that almost half of all family-owned businesses will undergo an event associated with successorship in the next Ten years. In some cases, there are unfair biases and assumptions that impede a healthy planning process. This can be overcome through candid communications facilitated by a neutral professional.

The next generation.

Rich parents are reluctant to transfer wealth to their children for fear much will be lost in a divorce. A prudent desire to protect assets from loss or dissipation in the event of a future divorce is commendable. At the same time, appropriate planning, including outright gifts and trusts, should not be avoided out of unsubstantiated fears and concerns for the future in this regard. There will always be excuses to avoid the distribution of assets to members of the younger generation. At the same time, there is a need to prepare the next generation for the responsibilities of wealth. In many cases, there may be substantial wealth that should be shared with younger family members before they are required to survive both parents. What good will wealth do the children if they are 70 before they obtain it? After all, rich widows live forever!

Many wealthy families allow one dysfunctional child to stymie the planning process for the entire family. It is a rare case where all members of the family are stable, healthy, mature, well-adjusted and free of disabilities and shortcomings. In a typical situation involving three or four adult married children, it is unusual if all of the marriages enjoy complete harmony and happiness. It is important for the wealthy family to avoid allowing one isolated situation to shut down the overall planning process that benefits all members of the family. Appropriate special provisions can be made to address the special needs of a family member. The circumstances, however, should not become an excuse to avoid or postpone discussion of important planning matters.

In-laws

Do not allow family traditions and gatherings to prevent children from developing a healthy degree of independence with their own families. At the same time, it is important for rich parents to remember that their grandchildren share more than one heritage. They need to avoid making the mistake of planning the lives of children. Rich parents should also allow their children to develop traditions that are new and unique for their own family units. Whatever route you take is purely up to you but not taking any advance preparation for the future of generations to come is like planting a flower and not watering it and making sure enough sunlight gets to it. Expecting that if it is not looked after it will just grow on its own.

What Type Of Wealthy Investor Are You

noreply@blogger.com (Groupboss) — Sun, 30 Apr 2017 17:52:00 +0000

It’s all in the eye of the beholder
By Melvin J. Howard

When the stock market is acting irrational you have to wonder is money and stock real why do we feel that if the stock market is in the dumps we feel that we lost all of our money? “Trillions in stock market value - gone. Trillions in retirement savings - gone. A huge chunk of the money you paid for your house, the money you're saving for college, the money your boss needs to make payroll - gone, gone, gone.

"Whether you're a stock broker or Joe Six-pack, if you have a 401(k), a mutual fund or a college savings plan, tumbling stock markets and sagging home prices mean you've lost a whole lot of the money that was right there on your account statements just a few months ago. But if you’re planning to jump out of the nearest ledge I won’t be joining you. You might be disappointed to learn that it was never really money in the first place.

Robert Shiller, an economist at Yale, puts it bluntly: The notion that you lose a pile of money whenever the stock market tanks are a 'fallacy.' He says the price of a stock has never been the same thing as money - it's simply the 'best guess' of what the stock is worth.

"'It's in people's minds,' Shiller explains. 'We're just recording a measure of what people think the stock market is worth. What the people who are willing to trade today - who are very, very few people - are actually trading at. So we're just extrapolating that and thinking, well, maybe that's what everyone thinks it's worth.'

"Shiller uses the example of an appraiser who values a house at $350,000, a week after saying it was worth $400,000. 'In a sense, $50,000 just disappeared when he said that,' he said. 'But it's all in the mind.'"

Psychology of the Wealthy investor

In my course of business, I have met a number of investors and they all eventually fall into certain categories. No doubt you've noticed that different wealthy people respond very differently to particular situations. One might respond to a sharp market dip by wanting to discuss its causes and ramifications with you at length, for example, while another would prefer that you not talk about it at all. There are distinct personalities that all affluent investors tend to fall into. But it’s all in the mind of the individual investor it is psychology or what I like to refer to as Quantum reality they break down as follows:

Family Stewards

Caring for family is dominant focus conservative in personal and professional life Not very knowledgeable about investing.

Investment Phobics

Confused and frustrated by the responsibility of wealth dislike investing and avoid technical discussion of it choose advisers based on level of personal trust they feel.

Independents

Seek the personal freedom money makes possible feel investing is a necessary means to an end not interested in the process of investing.

The Anonymous

Primarily concerned with confidentiality prize privacy for financial affairs. Likely to concentrate assets with an adviser who protects their privacy.

Moguls

Maintaining control is a primary concern use investing as another way of extending personal power decisive in decisions, rarely look back.

VIPs

Investing results in ability to purchase status possessions place high value on prestige is important like to affiliate with institutions and financial advisers with leading reputations.

Accumulators

Focused on making their portfolios bigger investment performance-oriented tend to live below their means and spend frugally.

Gamblers

Enjoy investing for the excitement of it tend to be very knowledgeable and involved exhibit a high-risk tolerance.

Innovators

Focused on leading-edge products and services sophisticated investors who like complex products tend to be technically savvy and highly educated.

No matter the investor type it is all based on psychology what do you think is the value of something.

My Word Is My Financial Sovereign Bond

noreply@blogger.com (Groupboss) — Wed, 25 May 2016 21:32:00 +0000

Let’s Bond Market Over Tea Shall We

By Melvin J. Howard

The beginning of the Boston Tea Party is often sourced to what the Colonists felt was an unfair tax on tea. This is only partly true. The Tea Party was a protest in reaction to a tax meant to help raise funds following the French and Indian War. But the tax was also a political power move on behalf of Parliament, meant to reassert control over the colonies, as well as an economic decision designed to bail out the floundering East India Company, a threshold of English commercial interests. After the long and costly war between France and England, King George III and the British Parliament implemented a tax to help raise money to pay off the massive debts incurred. They chose to place this tax on tea sold in both England and in the English Colonies. They were convinced that people would rather pay a tax than give up their daily tea.

It was also an item that the colonies were required to import only from England. Furthermore, the tax was a way to reign in the colonies, who had been neglected during the long war, and remind them that their allegiance belonged to England. One of the first persons to master the Bond market was Nathan Rothschild. Master of universe at that time, he boasted that he was the arbiter of peace and war, and that the credit of nations depends upon his nod. So just what are Bonds a Bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest. There are many kinds of bonds but for this entry I will be focusing on Government Bonds. Nathan Mayer Rothschild, founder of the London branch of what was, for most of the nineteenth century, the biggest bank in the world.But it was the bond market that made the Rothschild family rich real rich.

Lord Rothschild, Nathan's great-great-great-grandson. Said of Nathan he was 'short, fat, obsessive, extremely clever, wholly focused I can't imagine he would have been a very pleasant person to have dealings with. The Battle of Waterloo was the culmination of more than two decades of intermittent conflict between Britain and France. But it was more than a battle between two armies. It was also a contest between rival financial systems: one, the French, which under Napoleon had come to be based on plunder (the taxation of the conquered); the other, the British, based on debt. Between 1793 and 1815 the British national debt increased by a factor of three to more than double the annual output of the UK economy. This increase in the supply of bonds had weighed heavily on the London market.

Now let’s jump to the other side of the Atlantic to another war the Civil war in America and how the North really won. The South's ability to manipulate the bond market depended on one overriding condition that investors should be able to take physical possession of the cotton, which underpinned the confederate bonds if the South failed to make its interest payments. Collateral is; after all, only good if a creditor can get his hands on it. And that is why the fall of New Orleans was the real turning point in the American Civil War. With the South's main port in Union hands, any investor who wanted to get hold of Southern cotton had to run the Union's naval blockade not once but twice, in and out. Given the North's growing naval power in and around the Mississippi, that was non-starter.

If the South had managed to keep New Orleans until the cotton harvest had been offloaded to Europe, they might have been able to sell more cotton bonds in London. The Confederacy had miscalculated. They had turned off the cotton tap, but then wasn’t able to turn it back on. By 1863 the mills of Lancashire England had found new sources of cotton in China, Egypt and India. And now investors were rapidly losing faith in the South's cotton-backed bonds. The consequences for the Confederate economy were disastrous. With its domestic bond market exhausted and only two paltry foreign loans, the Confederate government was forced to print unbacked paper dollars to pay for the war and its other expenses, 1.7 billion dollars' worth in all. Both sides in the Civil War had to print money. But by the end of the war the Union's 'greenback' dollars were still worth about 50 cents in gold, whereas the Confederacy's 'greybacks' were worth just one cent. The situation got worst by the ability of Southern states and municipalities to print paper money of their own.

With ever more paper money chasing ever fewer goods, inflation exploded. Prices in the South rose by around 4,000 per cent during the Civil War.By contrast, prices in the North rose by just 60 per cent. Even before the surrender of the principal Confederate armies in April 1865, the economy of the South was collapsing, with hyperinflation remember this word I will come back to it later. Was the partner of the North in the defeat of the South. Those who had invested in Confederate bonds ended up losing their shirts. The North pledged not to honor the debts of the South. In the end, there had been no option but to finance the Southern war effort by printing money. It would not be the last time in history that an attempt to buck the bond market would end in ruinous inflation and military humiliation. The fate of those who lost their shirts on Confederate bonds was not especially unusual in the nineteenth century.

The Confederacy was far from the only state in the Americas to end up disappointing its bondholders; it was merely the northernmost delinquent. South of the Rio Grande, debt defaults and currency depreciation's verged on the commonplace. Latin America in the nineteenth century in many ways foreshadowed problems that would become almost universal in the middle of the twentieth century. Partly it was because Latin American republics were among the first to discover that it was relatively painless to default when a substantial proportion of bondholders were foreign. It was no mere accident that the first great Latin American debt crisis happened as early as 1816, when Peru, Colombia, Chile, Mexico, Guatemala and Argentina all defaulted on loans issued in London just a few years before.

But by the later nineteenth century, countries that defaulted on their debts risked economic sanctions, the imposition of foreign control over their finances and even, in at least five cases, military intervention. Defeat itself had a high price. All sides had reassured taxpayers and bondholders that the enemy would pay for the war. Now the bills fell due take Berlin Germany for instance. One way to understand the post-war hyperinflation was a form of state bankruptcy. Those who had bought war bonds had invested in a promise of victory; defeat and revolution represented a national insolvency, the brunt of which necessarily had to be borne by the Germans creditors. At the conference at Versailles, which imposed an unspecified reparations liability on the fledgling Republic the total indemnity was finally fixed in 1921, the Germans found themselves saddled with a huge external debt with a nominal capital value of 132, billion 'gold marks' (pre-war marks), equivalent to more than three times national income. Although not all this new debt was immediately interest-bearing, the scheduled reparations payments accounted for more than a third of all hail Hitler’s expenditure in 1921 and 1922.

Hyperinflation seemed to be the word of the day after the First World War. Austria - as well as the newly independent Hungary and Poland - also suffered comparably bad currency collapses between 1917 and 1924. In the Russian case, hyperinflation came after the Bolsheviks had defaulted outright on the entire Tsarist debt. Bondholders would suffer similar fates in the aftermath of the Second World War, when Germany, Hungary and Greece all saw their currencies and bond markets collapse. It could be easy to associate hyperinflation with the costs of losing world wars; it would be relatively easy to understand. Yet there is a caveat in more recent times, a number of countries have been driven to default on their debts. Either directly by suspending interest payments, or indirectly by debasing the currency in which the debts are denominated.

There is a slight gamble involved when an investor buys a bond. Part of that gamble is that an upsurge in inflation will not consume the value of the bond's annual interest payments. If inflation goes up to ten per cent and the value of a fixed rate interest is only five, then that basically means that the bond holder is falling behind inflation by five per cent.' As we have seen, the danger that rising inflation poses is that it erodes the purchasing power of both the capital sum invested and the interest payments due. And that is why, at the first whiff of higher inflation, bond prices tend to fall. In 1975, as inflation soared around the world, the bond market made the casino’s look like a pretty safe place to invest your money. At that time when US inflation was surging into double digits, peaking at just fewer than 15 per cent in 1980. That was perhaps the worst bond bear market in history.' To be precise, real annual returns on U.S. government bonds in the 1975 were minus 3 percent, almost as bad as during the inflationary years of the world wars. Today, only a handful of countries have inflation rates above 10 per cent and only one, Zimbabwe, is afflicted with hyperinflation.'"" But back in 1979 at least seven countries had an annual inflation rate above 50 per cent and more than sixty countries, including Britain and the United States, had inflation in double digits. Among the countries worst affected, none suffered more severe long-term damage than Argentina.

Inflation has come down partly because many of the items we buy, from clothes to computers, have got cheaper as a result of technological innovation and the relocation of production to low-wage economies in Asia. It has also been reduced because of a worldwide transformation in monetary policy, which began with the monetarist-inspired increases in short-term rates implemented by the Bank of England and the Federal Reserve in late 1975 and early 1985. Also trade unions have become less powerful. Loss-making state industries have been privatized. But, perhaps most importantly of all, the social constituency with an interest in positive real returns on bonds has grown. A rising share of wealth is held in the form of private pension funds and other savings institutions that are required, or at least expected, to hold a high proportion of their assets in the form of government bonds and other fixed income securities. With every passing year, the proportion of the population living off the income from such funds goes up, as the share of retirees’ increases. In a graying society, there is a huge and growing need for fixed income securities, and for low inflation to ensure that the interest they pay retains its purchasing power. As more and more people leave the workforce, recurrent public sector deficits ensure that the bond market will never be short of new bonds to sell.

Daddy where does money come from and how do you make it?

noreply@blogger.com (Groupboss) — Fri, 20 May 2016 22:37:00 +0000

Show Me The Money

By Melvin J. Howard

This got me thinking about the time when my children were very young. One of them ask me Dad how do you make money and where does it come from? I said good question that got me to thinking how many grown-ups do not know the answer of how money is made and where it comes from either. For many years I had really had no answer they do not teach it in school. That’s when I set out on a quest for knowledge not just about making money but the philosophy behind it. How do societies start how do they rise and fall why some countries are rich and why some are poor? Science, Philosophy, Metaphysics, Anthropology, Sociology, Economics all the stuff I use to avoid like the plague in school I find myself drawn to it now. How is money created, and what role does the Federal Reserve and its member banks play?

Let’s start with some common misconceptions about money, and why they are not true:

Misconception 1: You make money by going to work, or by selling something.

FALSE: Nobody can make money except commercial banks (also called depository institutions) and the Federal Reserve, which is owned by the commercial banking industry. When you get paid for work it is merely a transfer of money that already exists. It was, at some time in the past, created by the banking industry (or really lend) money. The main reason people get a job is to get a transfer of money from people who already have some.

When we talk about money here we mean money that can be used in all transactions and in the repayment of all debts. This is what we are calling bank money. However, many non-bank types of so called "money" raising instruments are increasingly being used by non-bank corporations to avoid direct contact with the bank money creating process. This includes things like corporate bonds and shareholder equity, which expand on the bank money supply, but all are completely dependent on, and rely on the confidence that they can be liquidated for, "bank money". Hence the credit crunch in the subprime commercial paper and bond markets. We might call this other stuff "near money". Since, in our society, it is really bank money people seem to need for the basics of life, and these other near monies are luxuries for people that have excess, we will just focus on bank money here.

Misconception 2: Money has something to do with gold at Fort Knox.

FALSE: The monetary system use to be backed by the gold standard until President Nixon abolished the Gold Standard in 1971 during the Vietnam War. He did this because there was not enough gold at Fort Knox, KY to back all the money that needed to be created to fund the massive wartime expenditures. The axing of the gold standard backing the US dollar led to the "floating" of most national currencies, which were no longer pegged to a gold conversion standard. This lead to phenomenal growth in speculation against international currencies, which later led to massive economic and social crises in various countries that were speculated against. Examples include the Mexican Peso crisis of 1994-95, the Asian financial crisis of the late 1990s, followed by the Russian ruble crisis. Since the death of the gold standard and the floating of most major currencies we have seen currency speculation increase to an astonishing 98% of all international transactions. This means that "real economic" transactions account for a mere 2% of international transactions. This data on currency speculation is derived from the Bank for International Settlements and summarized in the book "The Future of Money" by Bernard Lietaer.

Money supply and debt have exploded in the absence of gold convertibility. Money is no longer a store of value. It is only a measure, an electronic accounting system of credits and debits that has come to be accepted world over as the only way of conducting trade. Each day several trillion dollars travels the globe trying to attract more electronic credits for its owners. Today's money is not backed by gold. It is now backed by our trust in the monetary system. This is ultimately a trust in those that create and control money the commercial banking system, and its major shareholders. The statement on all Federal Reserve Notes "In God We Trust" is a solid reminder of that trust.

Misconception 3: Money is Created by the Government Printing it.

FALSE: Today almost NO money is created by the government. Most of the total money supply is created by banks making loans to the non-bank public. Almost all money (more than 95% at any time) is created by the creation of a corresponding amount of debt. Currency in circulation is just a very small proportion of the total money supply and it is created by the Federal Reserve System, not the government.

So how then does money get created?

Having gotten some of these misconceptions out of the way let’s talk briefly about the actual mechanics of money creation. Money creation happens in two main ways. First the creation of base money, which is mostly physical currency notes, created by the Federal Reserve. The second money creation process involves checking account or deposit money created by the commercial banks, and which makes up most of the money supply.

Base money, also called high powered money, is created when the Federal Reserve performs what are known as Open Market Operations. In this process the Federal Reserve injects money by buying Government Securities, which then become debt owed by the government (that is the American Taxpayer) to the Federal Reserve. And where does the Federal Reserve get this money to buy the government securities? Well, that’s another story. The Federal Reserve has no budget, quite simply because it doesn’t need one. In fact, almost all money we come by has its basis in high powered money that the Federal Reserve pumped into the system at some time in the past. Most of this base money is currency in the form of Federal Reserve Notes.

The Federal Reserve then creates a spurious "liability" on its balance sheet called Federal Reserve Notes outstanding, and in return gets an asset in the form of government securities, which the public must repay through the efforts of real work. Every time the Federal Reserve creates or extinguishes base money the financial press and other mainstream media reports it as an interest rate announcement. This is not technically correct but it does sound more palatable than saying that the Federal Reserve just printed some money up or just took some money out of circulation.

Once this base money is created, banks can create around 10 times this amount in checking accounts and other deposits. They do this by making loans to the non-bank public. A corresponding amount of checking account money is created for each new loan. So most money is created just by bankers writing some new numbers on a piece of paper, or these days, entering bits and bytes in computers, since money really now exist just on a bunch of computer records. This means that when you go to borrow money to buy a house or car, the money is really being created by the bank, and being credited to the checking account of the seller.

The bank has a distinct advantage in all this just by being a bank. For if you can’t pay the loan through your hard work, they automatically get the house, and all they did was write some numbers into the computer. From the banks perspective however, if you don’t pay off the loan, they would have to write down their asset. (i.e. your loan) and this would affect the earnings they report. If lots of people did this the bank could go "belly up".

To reduce risk of banking system failure (which ultimately comes from sudden loss of confidence or trust in the system) institutions such as the IMF and World Bank have evolved into mechanisms for preventing banking system collapse. Unfortunately, however, what these mechanisms amount to is transferring the cost that could collapse the banking system outside of the banking system. And these costs end up being borne by those who have the least say in the financial system the regular taxpayer.

Partnership Banking

noreply@blogger.com (Groupboss) — Thu, 19 May 2016 23:56:00 +0000

HEALTH CARE PARTNERING WITH NON BANK LENDERS

By MELVIN J. HOWARD

The advent of non-bank lending institutions, whose only business is making loans. Have opened new doors for Health care developers, Physicians and Hospitals who need capital to start, build and grow their businesses. Medical facilities in businesses that do not typically qualify for conventional financing have discovered that non-bank lenders offer a viable alternative. Medical facilities such as specialty hospitals and clinic, physicians practices or small regional hospital centers that are difficult for banks to finance because they are single use properties, or the medical facility fall’s outside the bank's risk profile. Although it might seem that banks and non-banks would be rivals competing for Small Business customers. Increasingly conventional banks and non-banks are collaborating to benefit both the customer and themselves.

Partnering with a non-bank lender benefits the conventional lender in several ways. Perhaps most significant is that such a partnership can provide a bank an opportunity to say "yes" to a prospective borrower. Banks receive numerous loan inquiries through their broad networks of branches and business development officers. Many requests are turned down because they do not fit the bank's desired risk profile. However, these same prospects are likely to have deposits and/or other banking needs, both of which are desirable to a bank for its operations and overall profitability. Loans referred to a non-bank lender provide an opportunity for a bank to outsource loans it cannot approve while maintaining the profitable, non-credit portion of the relationship.

Non-banks can also serve as an outplacement resource for a bank's existing credit situations that no longer meet its desired risk profile. For example, as a result of a merger or acquisition, a bank may find that it now has a number of loans that do not fit its risk profile. A lender may also wish to outplace a loan that is performing, but is no longer desirable due to changes in loan-to-value, covenant violations or changes in operations. A non-bank lender may be able to refinance the loan, usually over a longer term and without covenants, thus improving the customer's cash flow and stability and removing the risk from the bank's balance sheet without impacting the remainder of the bank relationship.

A partnership between banks and non-banks ultimately benefits the customer. First and foremost, a non-bank often provides access to financing that is not available from a conventional lender. Furthermore, the customer's borrowing needs are met in a permanent way. Term loans do not have to be balloon payments, eliminating the need for a borrower to refinance the loan in 5 or 10 years. Therefore, the costs associated with a long-term loan (i.e. appraisals, environmental reports, and legal costs) are incurred just once.

When working with a non-bank lender, a customer can be assured that the lender is focused entirely on the loan transaction. Because a non-bank lender is interested only in the loan transaction, there is no need for a customer to unwind its banking relationship or move its deposit accounts. Many non-bank lenders have earned "preferred" lender status enabling them to provide quick turnaround on loan decisions with a high level of expertise in the loan process, thus providing a customer with painless fulfillment of it financing need.

Key to understanding how the bank and the non-bank work together, is an understanding of how they are different. Aside from the organizational or structural differences, how does a non-bank lender differ from a conventional bank? First, non-banks' only business is that of making loans. They do not take deposits or sell other services such as payroll, cash management, etc.

Contrary to popular opinion, non-bank lenders are not necessarily more aggressive in their evaluation of a loan request. However, because their loans are not funded by deposits and because they are not subject to the same set of regulations as banks, the non-banks can and will consider industries and situations conventional lenders will typically shy away from. Examples of industries that non-bank lenders will consider include gas stations/convenience stores, auto body shops, car washes, restaurants and the hospitality industry (hotels/motels). In addition, non-bank lenders are willing to consider situations, such as start-up businesses or businesses/individuals with problematic credit histories, which are generally perceived as being higher-risk.

Non-bank lenders can also be flexible in other ways. For example, non-bank lenders are typically long-term lenders, with a desired loan term of seven to 25 years, depending on the use of loan proceeds. In addition, many non-bank lenders lend nationally and are not restricted to a particular region or "footprint." Lastly, non-bank lenders often take a more holistic approach to a loan request, particularly with regards to collateral. As business assets may be insufficient to adequately secure a loan, a non-bank lender will often look to the availability of other assets as part of the entire collateral pool.

As we often hear, small and regional clinics and hospitals are the backbone of rural communities. They are often also the backbone of a bank's branch deposit base and overall profitability. By partnering with a non-bank lender, a bank can benefit both itself and its health care commercial customers.

Social Security And Medicare How Is It Funded

noreply@blogger.com (Groupboss) — Tue, 29 Mar 2016 20:19:00 +0000

And Will It Still Be Around For The Next Generation?

By Melvin J. Howard

If you look at your pay-stub you will see two deductions for FICA taxes. Ever wondered what it means? Well FICA stands for Federal Insurance Contributions Act and covers two basic benefits for retirees and disabled persons:

Social Security:

Labeled as FICA-OASDI or Old Age and Survivors Insurance and Disability Insurance. This provides pension benefits to retirees, survivors and disabled persons.

Medicare:

Labeled as FICA-HI or Health Insurance. This provides medical insurance for retirees, survivors and disabled persons.

Some of you may be aware that the amount of money the government collects from employees and employers as the FICA taxes has exceeded the government's obligations in Social Security and Medicare payments for the past three decades. This has been true since FICA taxes were increased under the Reagan administration in 1983, at a time when other Federal Income Taxes were reduced. Then the question is "What has the government done with that excess money?" It’s all been spent on other things. About $2.2 Trillion of Social Security and Medicare Surpluses - all spent elsewhere by the US Treasury. Let’s see why this is. Many people are upset because they think the government should have "saved the money" for the future and often they are misled to believe this through the existence of what are called the Social Security and Medicare Trusts, or sometimes known as the Lock Boxes. In what form could the government save the money?

Perhaps:

* Keep it as US dollars or deposit it in a bank,

* Invest in the private sector, or

* Buy government bonds. I.e. write IOUs to oneself.

Let's look at the first possibility. If the government keeps the money as US dollars this is tantamount to the Treasury intervening in monetary policy, which is the job of the Federal Reserve. The Treasury would be essentially holding large sums of money out of the economy for many years, which would not make sense at all. The Treasury could instead decide to deposit the savings in a bank thereby making the funds available for use in the economy and draw on its deposits later as benefits fall due. But the banking system is backed up by the government itself, so the promises of the bank to make good on depositor’s funds is ultimately the promise of the government to itself. So why bother with all the banking fees?

It makes more sense for the government just to write a note to itself - "I owe to myself $x trillions of dollars", which is essentially what happens. A similar argument applies to investing the funds in the non-government guaranteed private sector. The private sector depends for its success on the stability and financial security of the State. If the State collapses so does the private enterprise defined by the rules of the State. If certain private enterprises collapse it shouldn't affect the State, except if there is massive widespread collapse like the recent banking crisis and then the State would step in to provide as many guarantees as possible. So some ultimate risks are still born by the State. The main point is that investing in the private sector carries with it higher risks than holding a government obligation. And the main point of Social Security is to pass risk from those that can least bear it over to those that can. Private investing without government guarantees completely removes this risk transfer feature of Social Security and places private sector investment risks onto those who can least afford it.

Therefore, as nonsensical as it sounds, so long as there is a surplus collection, the most sensible thing to do is for the Social Security and Medicare funds to pass over the excess funds they collect each year to the Treasury for it to spend back into the economy. The Treasury then writes an IOU to the trust fund to pay back the amount it just spent on something else. Basically the Government is writing an IOU to itself. Then they put the IOU in a box, lock it up and call it a safe "lock box" or trust fund. Whether intentional or not, what effectively happened to the Social Security and Medicare surpluses generated by the Reagan Era FICA tax increases and reductions in benefits, helped fund Reagan's big military build-up of the eighties. With a Federal Income Tax Cut, but an increase in FICA taxes, the tax burden was less progressive, and the loss in tax revenues in the general Treasury account was somewhat offset by Social Security Surpluses. This shifting of funds also enabled the government to replace borrowing from the private sector (the markets), which it cannot default on without dire consequences to the economy, with a promise to "pay back" the funds to Social Security and Medicare many years in the future when needed. This is a much less serious promise than issuing debt to the private sector because future governments may very well get away with reducing publicly funded social security benefits if they argue it effectively enough.

However the government cannot default on debt issued to the private sector else it will send the markets into a tailspin (since it is the most risk-free asset) and thus send the world's economy crashing. The Bush tax cuts and the recent extension of those cuts has compounded this trend of borrowing from Social Security and Medicare to make up for lower general revenues and thereby fund other government expenditures, and substitute borrowing from the markets with borrowing from Social Security/Medicare. Only time will tell if this was the right move or will promises be broken.

John Law's seeds of modern banking

noreply@blogger.com (Groupboss) — Sun, 06 Mar 2016 21:28:00 +0000

The Law of Banking

By Melvin J. Howard

Studying Quantum Physics has taught me a lot of things about the life around us it begins to explain how somethings in our world comes to be. And the lack of awareness of this fact and how the physical matter comes about and your role in it, makes your life appear to you as an occurrence that is out of your control. It may appear to you as if you are the victim of circumstances, while all along you are the cause of those circumstances. Take for instance JOHN LAW, here is a perfect example of a person who realize how to create the circumstances around his life. A goldsmith's son, he was born in Edinburgh, Scotland, in April 1671.

Having escaped from prison in London, where he was held after conviction of murder in his early twenties, he toured Europe, earning his living as a professional gambler, and then achieved the most amazing leap in history. From the gaming table to the highest office in France a country of which he was not a citizen and from which, a few years before, he had been ejected by the minister of police because of his suspiciously. And when he assumed the role of financial dictator of France he had the satisfaction of succeeding the very gentleman who as minister of police had invited him to clear out of Paris. Law discovered and perfected the device that has played, perhaps, the most important role in the growth of what we now call finance capitalism. Here is what he discovered. On the first day of January 1939, the banks in America had on deposit, guaranteed by the government, the money of their depositors to the extent of fifty billion dollars.

But the balance sheets of these banks showed only seventeen billion dollars in cash. A closer examination, however, reveals that not only was the fifty billion in deposits a myth, but the seventeen billions in cash was equally a fiction. There was not that much cash in America then. The actual amount of cash—currency—in the banks was less than a billion dollars. Law's famous Mississippi Bubble was something more than a mere get-rich-quick scheme. To understand it you must have a clear idea of the theory, which lay at its base.

This theory consisted in two propositions. One was that the world had insufficient supplies of metal money to do business with. The other was that, by means of a bank of discount, a nation could create all the money it required, without depending on the inadequate metallic resources of the world. The bank Law had in mind was nothing more or less than the kind of banks we now do business with universally.

But this was a unique proposal back then. Law did not invent this idea. He found the germs of it in a bank then in existence—the Bank of Amsterdam. This Law got the opportunity to observe when he was a fugitive from England. The Bank of Amsterdam, established in 1609, was owned by the city. Amsterdam was the great port of the world. In its marts circulated the coins of innumerable states and cities. Every nation, many princes and lords, many trading cities minted their own coins. The merchant who sold a shipment of wool might get in payment a bag full of guilders, drachmas, gulden, marks, ducats, livres, pistoles, ducatoons, piscatoons, and a miscellany of coins he had never heard of. This is what made the business of the moneychanger so essential. Every moneychanger carried a manual kept up to date listing all these coins. The manual contained the names and valuations of 500 gold coins and 340 silver ones minted all over Europe. No man could know the value of these coins, for they were being devalued continually by princes and clipped by merchants. To remedy this situation, the Bank of Amsterdam was established. Here is how it worked. A merchant could bring his money to the bank.

The bank would weigh and assay all the coins and give him a credit on its books for the honest value in guilders. Thereafter that deposit remained steadfast in value. It was in fact a deposit. Checks were not in use. But it was treated as a loan by the bank with the coins as security. The bank loaned the merchant what it called bank credit. Thereafter if he wished to pay a bill he could transfer to his creditor a part of his bank credit. The creditor preferred this to money. He would rather have a payment in a medium the value of which was fixed and guaranteed than in a hatful of suspicious, fluctuating coins from a score of countries. So much was this true that a man who was willing to sell an article for a hundred guilders would take a hundred in bank credit but demand a hundred and five in cash. One effect of this was that once coin or bullion went into this bank it tended to remain there. All merchants, even foreigners, kept their cash there. When one merchant paid another, the transaction was effected by transfer on the books of the bank and the metal remained in its vaults. Why should a merchant withdraw cash when the cash would buy for him only 95 per cent of what he could purchase with the bank credit? And so in time most of the metal of Europe tended to flow into this bank. There was in Amsterdam another corporation—the East India Company.

A great trading corporation, it was considered of vital importance to the city's business. The city owned half its stock. The time came when the East India Company needed money to build ships. In the bank lay that great pool of cash. The trading company's managers itched to get hold of some of it. The mayor, who named the bank commissioners, put pressure on them to make loans to the company—loans without any deposit of money or bullion. It was done in absolute secrecy. It was against the law of the bank. But the bank was powerless to resist. The bank and the company did this surreptitiously. They did not realize the nature of the powerful instrument they had forged. They did not realize they were laying the foundations of modern finance called capitalism. It was Law who saw this. Law perceived with clarity that this bank, in its secret violation of its charter, had actually invented a method of creating money. He came to the conclusion that this was something, which should be not merely legalized, but put into general use to cure the ills of Europe.

He also saw clearly that this bank had brought into existence a great pool or reservoir of money and that he who controlled this supply could perform wonders. This was to be one of the most powerful weapons of the acquisitive man of the future—the collection of vast stores of other people's money into pools and the capture of control of those pools. Here is what Law saw. It is an operation that takes place in banks daily. Lets say The First National Bank of Middletown has on deposit a million dollars. Mr. Smith walks into the bank and asks for a loan of $10,000. The bank makes the loan. But it does not give him ten thousand in cash. Instead the cashier writes in his deposit book a record of a deposit of $10,000. Mr. Smith has not deposited ten thousand. The bank has loaned him a deposit. The cashier also writes upon the bank's books the record of this deposit of Mr. Smith. When Mr. Smith walks out of the bank he has a deposit of ten thousand that he did not have when he entered. The bank has deposits of a million dollars when Mr. Smith enters. When he leaves it has deposits of a million and ten thousand dollars. Its deposits have been increased ten thousand dollars by the mere act of making a loan to Mr. Smith. Mr. Smith uses this deposit as money.

It is bank money this bank money has been created not by depositing cash but by loans by the bank to depositors. This is what the Bank of Amsterdam did by its secret loans to the East India Company, which it hoped would never be found out. This is what Law saw, but more important, he saw the social uses of it. It became the foundation of our current banking System.

FINANCIAL DERIVATIVES FROM A HEALTH CARE POINT OF VIEW

noreply@blogger.com (Groupboss) — Wed, 02 Mar 2016 18:15:00 +0000

BETTING ON RISK

By Melvin J. Howard

Derivatives has been a huge part of hospital's financial problems in the past and as evidence suggest translated into a lack of hospital beds. Since the 1980's innovative bankers have entered into the health care industry with an array of financial products. But what the financial crisis brought to the surface was that some CEOs or so called "sophisticated" investors participated in all sorts of transactions they simply could not understand.

Hospital managers should concentrate on the hospital at hand not their financial complex portfolios. The job as the CEO of a hospital is to be a healthcare expert not Warren Buffet but egos prevailed. Even though health care organizations have long used floating-rate debt in finance with great success. I myself have deployed this technique many times but it is not for the un-sophisticated.

For some health care administrators, derivatives seemed like a safe bet and why not. The potential rewards were too great to resist, for years and years it was a smart strategy. Hospitals made money on these for a long time. What changed? the financial crisis and they lost money. When times were good it worked for a while but when times went bad it went very bad. Boom you took a hit on your swaps.

Many hospitals committed cash to alternative investments as they took on additional risk by borrowing in short-term markets, debt that could be unloaded by investors for quick repayment, assuming bonds could be sold to new investors. Some used derivatives known as "swaps" as an interest-rate hedge for bonds in short-term markets. Conventional thinking was the wisdom about swaps is that they can be a good way for hospitals to guard against a sudden change in rates. This was true in some cases but the key word is "some." Just not always. Just what are Derivatives they are bets, pure and simple, predictions about the future.

The concept of derivative is to create a contract that derives from an original contract or asset. For example, stock market derivatives are contracts that are settled based on movements in prices of stocks, without transferring the underlying stock. Similarly, a credit derivative is a contract that involves a contract between parties in relation to the returns from a credit asset, without transferring the asset as such. As you may notice this is a financial instrument that is used by financial institutions. It has now been expanded to a number of industries. In order to properly serve as a hospital administrator or CEO. It is important that one has some information on the different methods of financing and mitigating risks of their health care facility but I often find that this roll is often conflicted with the CEO and CFO of the facility and the fund that owns it.

What is a credit derivative? A credit asset is the extension of credit in some form: normally a loan, installment credit or financial lease contract. Every credit asset is a bundle of risks and returns: every credit asset is acquired to make certain returns on the asset, and the probability of not making the expected return is the risk inherent in a credit asset. There are several reasons due to which a credit asset may not end up giving the expected return to the holder: delinquency, default, losses, foreclosure, prepayment, interest rate movements, exchange rate movements, etc. A credit derivative contract intends to transfer the risk of the total return in a credit transaction falling below a stipulated rate, without transferring the underlying asset. For example, if bank A enters into a credit derivative with bank B relating to the former's portfolio, bank B bears the risk, of course for a fee, inherent in the portfolio held by bank A, while bank A continues to hold the portfolio.

The motivation to enter into credit derivatives transactions are well appreciable. The above example has depicted credit derivatives being a bilateral transaction - as a sort of a bartering of risks. As a matter of fact, credit derivatives can be completely marketable contracts the credit risk inherent in a portfolio can be securitized and sold in the capital market just like any other capital market security. So, anyone who buys such a security is inherently buying a fragment of the risk inherent in the portfolio, and the buyers of such securities are buying a fraction of the risks and returns of a portfolio held by the originating bank. Thus, the concept of derivatives and securitization have joined together to make risk a tradable commodity of which we participate in.

A definition of credit derivatives: Credit derivatives can be defined as arrangements that allow one party (protection buyer or originator) to transfer credit risk of a reference asset, which it may or may not own, to one or more other parties (the protection sellers). Types of credit derivatives: The easiest and the most traditional form of a credit derivative is a guarantee. Financial guarantees have existed for thousands of years. However, the present day concept of credit derivatives has traveled much farther than a simple bank guarantee. The credit derivatives being currently used in the market can be broadly classified into the following:

Total return swap: As the name implies, a total return swap is a swap of the total return out of a credit asset against a contracted prefixed return. The total return out of a credit asset can be affected by various factors, some of which may be quite extraneous to the asset in question, such as interest rate movements, exchange rate fluctuations etc. Nevertheless, the protection seller here guarantees a prefixed return to the originator, who in turn, agrees to pass on the entire collections from the credit asset to the protection seller. That is to say, the protection buyer swaps the total return from a credit asset for a predetermined, prefixed return.

Credit default swap: Credit default swap is a refined form of a traditional financial guarantee, with the difference that a credit swap need not be limited to compensation upon an actual default but might even cover events such as downgrading, apprehended default etc. In a credit default swap, the protection seller agrees, for an upfront or continuing premium or fee, to compensate the protection buyer upon the happening of a specified event, such as a default, downgrading of the obligor, apprehended default etc. Credit default swap covers only the credit risk inherent in the asset, while risks on account of other factors such as interest rate movements remains with the originator.

Credit linked notes: Credit linked notes are a securitized form of credit derivatives. The technology of securitization here has been borrowed from the catastrophe bonds or risk securitization instruments. Here, the protection buyer issues notes. The investor who buys the notes has to suffer either a delay in repayment or has to forego interest, if a specified credit event, say, default or bankruptcy, takes place. This device also transfers merely the credit risk and not other risks involved with the credit asset. Now that you know the different methods it doesn't get hospital administrators off the hook. You should not use financial instruments you don't understand. The point I am making is this hospitals the health care industry, like companies in other sectors, relies increasingly on the securities market to drive profits. Over the years they've developed an ever greater appetite for all sorts of risk, particularly hedge funds, as investors push health care companies to boost return on capital so you should be aware of all scenarios.

CAPTAIN KIRK POLITICS IT IS SIMPLY NOT LOGICAL

noreply@blogger.com (Groupboss) — Tue, 23 Feb 2016 22:16:00 +0000

Arguments Theories and Conspiracies

By Melvin J. Howard

You have probably heard Spock say to Captain Kirk on the TV series Star Trek (That is not logical Captain) now that the elections are coming up. The push is on to get your votes but how do you make an intelligent decision with so much information coming at you like the speed of light. How do you decipher fact from fiction who is wrong who is right? Since there are no federal laws requiring truth in political ads at all. And the few states that have attempted such laws have had them overturned or found them ineffective. Some believe that politicians can be sued for defamation if they stray too far from the truth, and they think that provides some protection to voters. It doesn’t the courts move to slowly for that trust me and they rightly give candidates the full benefit of free-speech protection of the U.S. constitution. So lawsuits for false political claims are rare or non-existent. The reality is that the public is exposed to enormous amounts of deception that go unchallenged by government regulators the courts or the news media. Fear has been a staple tactic of advertisers and politicians for so long that it has become the political go to when all else fails. We should always approach claims cautiously when they are too dramatic, especially when you want them to be true. Extravagant claims are just too easy to accept when they match your own biases.

People who find their position weak or indefensible often attack. You see our minds betray us not only when it comes to politics but all sorts of matters. People are not by nature the fact driven rational beings we think we are. We embrace information that supports our beliefs and reject evidence that challenges them. You see anyone who cites statistics or poll numbers has an investment in the statistic. It is quite rare to hear a statistic from an unbiased voice. Statistics and actuarial tables work because most people live predictable lives. They are influenced by the same news casts read the same newspapers read the same bill boards consume the same fast foods. Listen to the same sermons agree with people of the same skin color, oppose the same political party fight over money and complain about the same problems and are willing to settle for a cookie-cutter way of life. But for those of us who do not adhere to a robotic existence we use logic or deep thinking. We all use the word logic but what does the word mean? It is the science or study of how to evaluate arguments and reasoning. Logic is a way to allow us to distinguish correct reasoning from poor reasoning. Logic is important because it helps us reason correctly without correct reasoning, we don’t have a viable means for knowing the truth or arriving at sound beliefs. I have a personal interest in logic and how the mind works as Spock would say it is fascinating.

Logic is not a matter of opinion when it comes to evaluating arguments; there are specific principles and criteria, which are used. If we use those principles and criteria, then we are using logic. This is important because sometimes people don’t realize that what sounds reasonable isn’t necessarily logical in the strict sense of the word. The ability to use reasoning is far from perfect, but it is also our most reliable and successful means for developing sound judgments about the world around us. In general, our ability to survive depends upon our ability to know what is true, or at least what is more likely true than not true. For that, we need to use reason. I had a very good friend and business partner whom was my lawyer he has since passed away. His passing was a terrible lost to me personally and professionally. We were roughly the same age we had some of the same ideas about life. But we were the polar opposites when it came to our personal style he was downtown I was uptown. But we clicked he knew how my mind worked it was magic.

But what Dave gave to me was more important than any legal advice he taught me how to think in terms of logic and reason. Of course, reason can be used well or it can be used poorly and that is where logic comes in. The Greek philosopher Aristotle is generally regarded as the “father” of logic. Others before him discussed the nature of arguments and how to evaluate them, but he was the one who first created a system for doing it. Whatever the subject matter logic is applicable anywhere that reasoning and arguments are being used. If we don’t apply the criteria of logic to our arguments, we cannot trust that our reasoning is sound.

When a lawyer makes an argument for a particular course of action, how can that argument be properly evaluated without an understanding of the principles of logic? When a CEO makes a pitch for a product, arguing that it is superior to the competition, how can we determine whether to trust the claims if we aren’t familiar with what distinguishes a good argument from a poor one? Here is where we have to use critical thinking, critical thinking is an effort to develop reliable, rational evaluations about what is reasonable for us to believe or disbelieve. Critical thinking makes use of the tools of logic and science because it values skepticism over gullibility or dogmatism, reason over faith, science of pseudoscience, and rationality over wishful thinking. Critical thinking does not guarantee that you will arrive at the truth, but it does make it much more likely than not you will.

Open Your Mind

A person who wishes to think critically about something like politics must be open-minded. This requires being open to the possibility that not only are others right, but also that you are wrong. Too often people launch into a frenzy of arguments apparently without taking any time to consider that they may be mistaken in something. Of course, it is also possible to be too “open-minded” because not every idea is equally valid or has an equal chance of being true. Although we should technically allow for the possibility that someone is correct, we must still require that they offer support for their claims if they cannot or do not, we may be justified in dismissing those claims and acting as if they weren’t true. Even if you have clear logical reason for accepting an idea, you also probably have emotional and psychological reasons for accepting it. Reasons, which you are not fully aware of. It is important though, that you learn to separate the two because the latter can easily interfere with the former.

Don’t Jump

It’s easy for people to quickly go to the first and most obvious conclusion in any sort of dilemma, but the fact of the matter is the obvious conclusion isn’t always the correct one. Remember all those TV crime dramas that you thought you had wrapped up in 15 minutes only to be wrong at the end of the show. Unfortunately, once a person adopts a conclusion it can be difficult to get them to give it up in favor of something else after all, no one wants to be wrong, do they? One of the most important things to watch out for in arguments is the influence of bias or vested interest and every human has them. Both are variations on the same sort of problem, although there are differences that require mentioning each separately. Bias occurs any time that facts are interpreted in a way that unreasonably favors one position over another; vested interest is a cause of bias in which one will personally and specifically benefit if people adopt a particular position. Ultimately, some sort of bias is always going to exist we all have our passions, desires, and preferences. We wouldn’t even be debating particular issues unless we cared about them in some way, so the very nature that we are participating in a debate or discussion is itself evidence of some sort of bias.

Having a bias, however, is not the same as allowing one’s reasoning and arguments to succumb to bias. In critical thinking the person makes a sincere effort to recognize and acknowledge their biases, ultimately taking them into account when weighing evidence and logic so as to ensure that those biases don’t unfairly tip the scales in an inappropriate direction. It is also important to listen when someone points out possible biases because, quite frankly, we often aren’t good at noticing when we have biases that influence our thinking. A vested interest is a particular cause of bias, which occurs not simply when one unreasonably favors a preferred perspective, but in fact favors a perspective which provides them with specific benefits. An obvious example of vested interest would be anyone who is paid to promote a product in commercials.

There are also many ways in which a person can have a vested interest which aren’t quite so obvious. A person might, for example, discount allegations of unethical or illegal conduct against a company they have stock in. They might also favor any reports that improve the image of their case on the assumption that anything, which makes their theory look better, must therefore make them look better as well. You can also identify backwards-looking examples of vested interest because people seem to have a strong interest in defending decisions that have already been made i.e. the wrongly convicted no one wants to be wrong. Similar behavior can be seen when it comes to political candidates or political parties’ ideology.

The Psychology Of Blind Trust In The Global Markets

noreply@blogger.com (Groupboss) — Tue, 16 Feb 2016 21:27:00 +0000

The Public Trust

By Melvin J. Howard

Economics has a reputation by pretending to be an exact science rather than what it really is global psychology. The truth is economics leaves out the aggregate behavior of humans. It seeks to cloak its uncertainties and shifting fashions with mathematical formulae and elaborate econometric computerized models. This much is certain; people operate within markets, free or regulated, patchy or organized. They attach numerical (and emotional) values to their inputs (work, capital) and to their possessions (assets, natural endowments).

They communicate these values to each other by sending out signals known as prices. The market is people many of them and there is no calculation for how individuals will behave to an exact science. But scientists are working on it but until that day comes we have to rely on good old fashion trust.

News of doom and gloom are everywhere its being broadcast 24 hours a day printed every day in newsprint. The economy, the war on terrorism who is saying what about whom in the U.S. presidential election, negative interest rates (“Bad Idea”). This has got a lot of people globally worried about their futures this is setting off a chain reaction of catastrophic proportions. If the current thinking of doom and gloom is not curtailed and stopped forthwith it will become a reality a reality that will become a major health and economic issue worldwide.

You have to remember money is the physical representation of value that rises and falls in ourselves. Not within ‘things’ outside of us, but within us. For without people, what can the value of a thing, such as a car or art be to us nothing. In other words, it is us the observers, that place value in things, but this value is really value in us. We give value to the material things. The material things have no ‘money’ value in themselves we give that to them. So, money is the external physical representation of a particular section of our internal value, within us. As we all know today that house and block of shares you bought recently and valued at $1 million dollars. Can fall to a valuation of half a million dollars tomorrow when fear is introduced into the hearts of those involved.

The fear kills a portion of the internal values of the participants and that is reflected by money, the ‘body’ of value. This is what’s happening today you cannot pick up a newspaper or watch a 24-hour newscast without fear running rampant. The only reason our system does not collapse is that we all believe in it. The last time people stopped believing in it in a large enough extent was just before the Great Depression when large numbers of people rushed to their banks to withdraw their money and found that they could not all get it. This is not what caused the Great Depression, but in a large way accelerated it.

Yet, this entire edifice the market and its price mechanism critically depends on trust. If people do not trust each other, or the economic "envelope" within which they interact economic activity gradually grinds to a halt like the credit markets. Banks will not lend to Banks or corporations or the retail section. There is a strong correlation between the general level of trust and the extent and intensity of economic activity. Francis Fukuyama, the political scientist, distinguishes between high-trust and prosperous societies and low-trust and, therefore, impoverished collectives.

Trust underlies economic success, he argued in a 1995 tome. Trust is not a monolithic quantity. There are a few categories of economic trust. Some forms of trust are akin to a public good and are closely related to governmental action or inaction, the reputation of the state and its institutions, and its pronounced agenda. Other types of trust are the outcomes of kinship, ethnic origin, personal standing and goodwill, corporate brands and other data generated by individuals, households, and firms.

Trust in the market

To transact, people have to maintain faith in a relevant economic horizon and in the immutability of the economic playing field or "envelope". Put less obscurely, a few hidden assumptions underlie the continued economic activity of market players. They assume, for instance, that the market will continue to exist for the foreseeable future in its current form. That it will remain inert unhindered by externalities like government intervention, geopolitical upheavals, crises, abrupt changes in accounting policies and tax laws, hyperinflation, institutional and structural reform and other market-deflecting events and processes.

They further assume that their price signals will not be distorted or thwarted on a consistent basis thus skewing the efficient and rational allocation of risks and rewards. Insider trading, stock manipulation, monopolies, hoarding and corruption all tend to consistently but unpredictably distort price signals and, thus, deter market participation.

Market players take for granted the existence and continuous operation of institutions financial intermediaries, law enforcement agencies, courts. It is important to note that market players prefer continuity and certainty to evolution, however gradual and ultimately beneficial. A venal bureaucrat is a known quantity and can be tackled effectively. A period of transition to good and equitable governance can be more stifling than any level of corruption and malfeasance. This is why economic activity drops sharply whenever institutions are reformed.

Trust in other players most important

Market players assume that other players are (generally) rational, that they have intentions, that they intend to maximize their benefits and that they are likely to act on their intentions in a legal (or rule-based), rational manner.

Trust in market liquidity

Market players assume that other players possess or have access to the liquid means they need in order to act on their intentions and obligations. They know, from personal experience, that idle capital tends to dwindle and that the only way to, perhaps, maintain or increase it is to transact with others, directly or through intermediaries, such as banks.

Trust in others' knowledge and ability

Market players assume that other players possess or have access to the intellectual property, technology, and knowledge they need in order to realize their intentions and obligations. This implicitly presupposes that all other market players are physically, mentally, legally and financially able and willing to act their parts as stipulated, for instance, in contracts they sign. The emotional dimensions of contracting are often neglected in economics. Players assume that their counterparts maintain a realistic and stable sense of self-worth based on intimate knowledge of their own strengths and weaknesses. Market participants are presumed to harbor realistic expectations, commensurate with their skills and accomplishments. Allowance is made for exaggeration, disinformation, even outright deception but these are supposed to be marginal phenomena.

When trust breaks down like now it is often the result of an external or internal systemic shock - people react expectedly. The number of voluntary interactions and transactions decreases sharply. With a collapsed investment horizon, individuals and firms become corrupt in an effort to shortcut their way into economic benefits, not knowing how long will the system survive. Criminal activity increases.

People compensate with fantasies and grandiose delusions for their growing sense of uncertainty, helplessness, and fears. This is a self-reinforcing mechanism, a vicious cycle which results in under-confidence and a fluctuating self-esteem. They develop psychological defense mechanisms. Cognitive dissonance ("I really choose to be poor rather than heartless"), pathological envy i.e mass shootings (seeks to deprive others and thus gain emotional reward), rigidity ("I am like that, my family or ethnic group has been like that for generations, there is nothing I can do"), passive-aggressive behavior (obstructing the work flow, absenteeism, stealing from the employer, adhering strictly to arcane regulations) - are all reactions to a breakdown in one or more of the four aforementioned types of trust. Furthermore, people in a trust crisis are unable to postpone gratification.

They often become frustrated, aggressive, and deceitful if denied. They resort to reckless behavior and stopgap economic activities. In economic environments with compromised and impaired trust, loyalty decreases and mobility increases. People switch jobs, renege on obligations, fail to repay debts, relocate often. Concepts like exclusivity, the sanctity of contracts, workplace loyalty, or a career path all get eroded. As a result, little is invested in the future, in the acquisition of skills, in long term savings. Short-termism and bottom line mentality rule. The outcomes of a crisis of trust are, usually, catastrophic. Economic activity is much reduced, human capital is corroded and wasted, brain drain increases, illegal and extra-legal activities rise, society is polarized between haves and haves-not, interethnic and inter-racial tensions increase. To rebuild trust in such circumstances is a daunting task.

The loss of trust is contagious and, finally, it infects every institution and profession in the land. It is what brings down great empires. It is my summation no matter what government is in power, nor matter new rules, new people and procedures. Trust is the key ingredient for stability in the future. Before I go I want to make something very clear. Money represents an aspect of a person’s internal value, but that does not mean that it represents a person’s entire internal value. It is not about self-worth. Money only represents an aspect of that internal value that pertains to wealth. You cannot therefore say that a wealthy person has a higher self-worth and value than a poor person.

THIS IS A SURGEON GENERAL’S WARNING: Financial illiteracy is dangerous to our global financial health

noreply@blogger.com (Groupboss) — Tue, 09 Feb 2016 21:50:00 +0000

The Education Of Risk

By Melvin J. Howard

Ask yourself "What is the defining feature that lies at the heart of capitalism?" To that question many people would probably answer "profits". But it may be more correct to say that it is "RISK". Profits are compensation for taking risk. In a capitalist economy, individuals with accumulated capital either spend it on something real or invest it, which really means lending it to some economic venture. When you invest your money, you are putting your capital at risk for you might lose some or all of it. Investors are compensated for this risk taking by the potential for profits.

This potential for return provides the incentive for risk taking, and it is this risk taking that has led to phenomenal economic growth in market economies. One of the downsides of the system is that individuals are required to bear many of the risks of daily living themselves. The risks of devastating events like unemployment, sickness, accident and loss of housing. In our current economy, some of this is alleviated through government safety nets and the insurance markets, where risks can be transferred, but for a price. As government safety nets shrink and more people find adequate insurance coverage prohibitively expensive, it becomes increasingly important for individuals to develop their own contingency plans. In a market economy, each player would do very well to understand how to manage his or her risks, and how to take calculated risks just putting your money in a regular savings account just won’t cut it anymore. As we have seen in this economy you should have a backup plan. Check your pension plans make sure the company is on solid footing (remember Enron and World Com) or at least make sure the fund is segregated.

Amazingly, many people do not pay much attention to this ever changing, ever elusive beast that runs so much of our lives. Risk is sneaky it influences everything we do, most people don’t realize there is risk in everything we do in life whether for love or money the risk if you don’t and the risk if you do. Risks also likes to take the credit (or the blame!) for it. Risk can lead to untold wealth it can take you from rag to riches and back again. More is required then fate and destiny so over the past thousand years’ various tools developed to measure risk and for humans to take some control of this wild beast. These capabilities ultimately lead to our capital markets, and our modern monetary system and it's financing of the industrial and technological revolutions that followed.

Developments in Mathematics and developments in finance have been inseparable since the days when merchants would use an abacus to calculate their trading gains. But perhaps the real turning point occurred somewhere along the halls of Baghdad about a thousand years ago. While Europe was going through the Dark Ages, an Arab mathematician named Al-Khowarizmi (hopefully I have the name right) laid the foundations for basic arithmetic and algebra we use today, upon which most subsequent mathematical theory would later be based.

And part of his motivation was quite simply practical to facilitate trading. Imagine how things would have progressed if, instead of this development, the world had stayed on the old Roman and Greek numbering systems, adding them up with an abacus or pebbles in the sand! It must have been at this point that risk was getting nervous that soon, not only would it be noticed, but also humans might try and use it to their advantage.

As Europe woke up from its dark era and the renaissance began, the Europeans built on these developments from the Arab Mathematicians and the equipment for dealing with risk and the mathematics of finance began to develop. Initially, probability theory was born mainly as a result of wealthy men's fascination with games of chance. Accounting theory developed in Italy and facilitated the flow of capital into business ventures. Then the mathematics behind insurance (or actuarial science) began to develop to help manage the risks of overseas trade and financing vehicles such as annuities issued by the English government to finance their budget deficits. Over the centuries the mathematics behind trade and finance has developed as a tool to help investors take calculated risks and get capital to flow in the direction of economic development, rather than catastrophic loss.

Finally, the late twentieth century saw the ultimate formalization of the practice of "risk management", and today there are tools to help us manage the risk/return trade-off for just about any risk we can imagine. For a market economy to be somewhat fair in providing opportunity, all market players must know how to play and must be able to make sensible risk return trade off decisions. Where you have large segments of society that participate but never really learn how to play, then they will be preyed upon by the more knowledgeable players.

"Even more important than money it is information about money.” Just as in a sports game it's important for each player to know the rules of the market game and to learn some skills and strategies to get to their desired outcome. Also of paramount importance is to have some information on how other players are going to play the game. Information is money.

Deregulation in both the financial and gaming sectors over the past few decades has created a situation where the more sophisticated players can play directly against those that never even learned the rules of the game, let alone strategy. And so over the past two decades we have seen the rapid rise of things such as predatory lending, credit card, banking and investment fraud. All of these create a transfer of wealth from the poorer to the richer, based on the knowledge gaps between the two groups. Capitalist economies have tried to prepare people for a life in the market economy through their education systems but that has not worked out so well everybody now days wants to be a rock or rap star. Or pitching their new reality TV show they want fame and fortune now. They do not have time to learn just a little on how the market system works. Capitalist have also tried, in varying degrees, to provide a safety net for those who do not have the ability to withstand the risks of disability, illness, unemployment and so forth, to prevent them from being shut out of the economy.

But government funding for this safety net for handling risk and for the education system is shrinking as states face budget crises and as federal spending is increasingly diverted to other branches and banking bailouts. And more and more it seems that the funding gaps are to be funded by the winnings of this market game played by the skilled players against the less educated players, just as the latter becomes more tempted towards games of pure chance to change their situation. Statically most people who win lotteries lose all their money within a few years and actually end up in debt, while people whom took the time to educate themselves on finance and the free market economy made Millions out of nothing repeatedly. Nothing in this life is risk free but remember "He who is not courageous enough to take risks will accomplish nothing in life."

What A Capital Idea

noreply@blogger.com (Groupboss) — Fri, 29 Jan 2016 18:57:00 +0000

The Reason I’m A Capitalist

By Melvin J. Howard

Since the global financial meltdown and now the stock market I have been reading a lot lately that capitalism is dead and that socialism is the way to go. I disagree with that theory. This is not to be confused with crony capitalism which success in business depends on close relationships between business people and government officials. Which often times exhibits favoritism and corruption in the distribution of legal permits, government grants, special tax breaks, or other forms of state intervention. That type of capitalism should be wiped out completely. But up until a few centuries ago, the main sources of wealth were mines, slaves and serfs, land, and cattle, and the only ways to acquire these rapidly were by inheritance, marriage, conquest, or confiscation. Naturally wealth had a bad reputation. Two things changed the first was the rule of law. For most of the world's history, if you did somehow accumulate a fortune, the ruler or his henchmen would find a way to steal it. But in medieval Europe something new happened.

A new class of merchants and manufacturers began to sprout up. Together they were able to withstand the pressure from the local king or Mayor. So for the first time in history, the bullies stopped stealing the merchant and manufacturers wares and goods. This was naturally a great incentive, and possibly indeed the main cause of the second big change, industrialization. The Industrial Revolution was born part of the success of that era was.

Conditions were made that people who made fortunes be able to enjoy them in peace. One piece of evidence is what happened to countries that tried to return to the old model, like the Soviet Union, and to a lesser extent Britain under the labor governments of the 1960s and early 1970s. Take away the incentive of wealth, and technical innovation grinds to a halt. Starting your own company is, economically: a way of saying, I want to work faster, smarter and harder. Instead of accumulating money slowly by being paid a regular wage for fifty years, I want to get it over with as soon as possible. So governments that forbid you to accumulate wealth and tax you toward the heavy side are in effect decreeing that you work slowly.

They're willing to let you earn $3 million over fifty years, but they're not willing to let you work so hard that you can do it in two. They are like the corporate boss that you can't go to and say, I want to work ten times as hard, so please pay me ten times a much. Except this is not a boss you can escape by starting your own company. America is one of the leading technological countries in the world. Microsoft, Oracle, Apple, Facebook well you get the jist.

The problem with working slowly is not just that technical innovation happens slowly. It's that it tends not to happen at all. It's only when you're deliberately looking for hard problems, as a way to use speed to the greatest advantage, which you take on this kind of project. Developing new technology is a long drawn out process. It is, as Edison said, one percent inspiration and ninety-nine percent perspiration. Without the incentive of wealth, no one wants to do it.

Since it became possible to get rich by creating wealth, everyone who has done it has used essentially the same recipe: measurement and leverage, where measurement comes from working with a small group, and leverage from developing new techniques. The recipe was the same in Florence in 1200 as it is today. Understanding this may help to answer an important question why Europe grew so powerful back then. Was it something about the geography of Europe? Was it that Europeans are somehow racially superior no, was it their religion no. The answer may be that the Europeans came upon a powerful new idea allowing those who made a lot of money to keep it! Wow what a concept who would have thought.

Once you're allowed to do that, people who want to get rich can do it by generating wealth instead of stealing it. The resulting technological growth translates not only into wealth but into military power. The theory that led to the stealth plane was developed by a Soviet mathematician. But because the Soviet Union didn't have a computer industry, it remained for them a theory; they didn't have hardware capable of executing the calculations fast enough to design an actual airplane. In that respect the Cold War teaches the same lesson as World War II and, for that matter, most wars in recent history. Don't let politicians and special interest squash the entrepreneurs and capitalism.

The same recipe that makes individuals rich makes countries powerful. Let the founders of companies and the nerds that create new technology keep their lunch money, and you rule the world. A company will be maximally profitable when each employee is paid in proportion to the wealth they generate.

It is probably no accident that the middle class first appeared in northern Italy and the low countries, where there were no strong central governments. These two regions were the richest of their time and became the twin centers from which Renaissance civilization shined. If they no longer play that role, it is because other places, like the United States, have been truer to the principles they discovered CAPATILAISM.

WHY U.S. GOVERNMENT BONDS ARE CONSIDERED THE SAFEST ASSET IN THE WORLD

noreply@blogger.com (Groupboss) — Fri, 15 Jan 2016 23:10:00 +0000

“Give me your tired, your poor asset classes”

By Melvin J. Howard

The role of the Treasury Department or Treasurer is to deal with financial issues to collect income, to disperse expenditures, to maintain the books, see to the investment of surpluses and the borrowing necessary to cover shortfalls. So to with the U.S. Department of Treasury that oversees the management of the biggest account in the world, that of the U.S. Government. The U.S. Treasury Department oversees the main governmental revenue collector, the IRS or Internal Revenue Service, the Bureau of Public Debt that manages government debt issuance, and the U.S. Financial Management Service, who manages "The Books".

It is important to appreciate that the accounts of a government do not look at all like the accounts of anybody in the private sector, be it a for-profit or a non-profit organization, or even an individual. Indeed, if you viewed the U.S. government balance sheet through a private sector lens you would immediately declare it bankrupt and wonder why U.S. Government Bonds are considered the safest assets in the world!

However, the reason a government's balance sheet doesn't tell you what you need to know about the safety of a government obligation is because it doesn't place a value on the right of a sovereign to tax its residents. This right of the sovereign, held only by the sovereign, generally makes obligations of the sovereign a safer investment than any private sector body licensed by, or domiciled in, that same sovereign nation. Then, the higher the national income (or the tax-base) in that country the higher the expected revenue to the sovereign body, and the more likely it will be able to meet its own obligations (provided its debt levels stays within certain bounds). Thus it comes as no surprise that the country with the largest economy and national income also issues the least risky type of debt security and in today's world that is the U.S. Government.

The result is the easy ability for the government to both tax and to borrow facilitates. This enables the type of military expenditure and infrastructure spending necessary for America to continue building further economic growth. Economic growth spurs further access to capital for military and infrastructure expansion, and so the cycle continues. So America would then be very concerned about the following two primary threats to this pattern.

Growing expenditures that increasingly take money away from the primary building and maintenance expenditures (military and infrastructure investment). Emerging empires with fast economic growth that could take their place. And so it would be that some of the main concerns of Financial Management today are:

In the first category of competition for empire building funds are two main things. First are terrorist actions that make economic infrastructure more expensive to maintain. The other is the aging of the U.S. population and increasing healthcare costs. In the second category of emerging empires China and India are the most frequently used. Although looking at both today that is not a concern.

Role of Taxation

Of course one cannot talk about the role of tax without talking about the role of government since tax is what funds everything a government decides to do. Regardless of what kind of society you live in - dictatorship, communist, capitalist, democracy, semi-democracy - a government will spend money on the following in various orders of priority:

1.     Militaries for self-defense of the home country and possibly for control over other countries.

2.     Some type of system of law and order in the home country.

3.     Infrastructure for economic development.

4.     Human development - education, healthcare, and so forth.

5.     Foreign relations with other countries.

6.     Redistribution and economic insurance, or "safety net", for individual residents.

In the U.S. the main redistribution function and associated safety nets look a bit more like a type of "insurance" against personal economic disasters, whereby the risks of such events are spread across the society as a whole. For example, the risks of no longer having access to money due to retirement or disability which is what Social Security covers are borne by society as a whole, which has a much larger capacity to bear that risk, than do the individuals likely to experience such events. Placing these risks on individuals to bear became intolerable during the Great Depression, leading to the establishment of the Social Security system. The purpose of any insurance is to pool risks so that each individual in the pool lowers their own risk of some crippling disaster for a small annual fee paid to the pool. Therefore, any insurance mechanism is necessarily re-distributive. "Insurance like" federal taxes such as Social Security are more re-distributive than any private sector insurance because those with the highest ability to bear the related risks (those with high incomes) get the lowest expected return on their contributions to the system. In addition, what is really happening, is that current worker’s contributions are always paying for current retirees in the system and there really isn't any "saving for the future" going on, as is so often presented. Such a progressive risk sharing mechanism could not work in the private sector, which is why it was founded as a public system in the first place.

Some argue for less government intervention in the market economy seem to overlook the fact that the government creates the infrastructure for the markets to function in the first place. Without government created legal and judicial infrastructure, even the most basic contract would not be enforceable, except at gunpoint. Since our whole monetary and trade systems are built primarily on contracts of agreement, modern markets would not exist, and economic development could not happen, without significant government intervention.

Those who also argue for an end to government sponsored re-distributive mechanisms either overlook or dismiss the role of periodic redistribution in sustaining economic prosperity. Without government intervention in redistributing wealth in suitable amounts you step on to a spiral of increasing inequality. "Nothing can preserve the integrity of contract between individuals except a discretionary authority in the State to revise what has become intolerable. The powers of uninterrupted usury are too great. If the accretions of vested interest were to grow without mitigation for many generations, half the population would be no better than slaves to the other half. Those who insist that the State is in exactly the same position as the individual, will, if they have their way, render impossible the continuance of an individualist society, which depends for its existence on moderation.

The Bear Reaper Came To Market And Took What Was His

noreply@blogger.com (Groupboss) — Sun, 10 Jan 2016 01:40:00 +0000

So What The Sky Is Not Falling

By Melvin J. Howard

Why are we so surprised of what is happening today in the markets and in China its happened before. I remember I use to hate history I always thought history was always shaded by whom was ever telling the story. But when it comes to financial models and market history it is worth revisiting. The crash of 1929 was not without its Enrons and Worldcom's. Clarence Hatry and his associates admitted to forging the accounts of their investment group to show a fake net worth of $24 million British pounds - rather than the true picture of 19 billion in liabilities. This led to forced liquidation of Wall Street positions by harried British financiers.

The collapse of Middle West Utilities, run by the energy tycoon, Samuel Insull, exposed a web of offshore holding companies whose only purpose was to hide losses and disguise leverage. The former president of NYSE, Richard Whitney was arrested for larceny.

Analysts and commentators thought of the stock exchange as decoupled from the real economy. Only one tenth of the population was invested - compared to 55 percent today. "The World" wrote, with more than a bit of Schadenfreude. "The country has not suffered a catastrophe ... The American people ... has been gambling largely with the surplus of its astonishing prosperity."

"The Daily News" concurred. "The sagging of the stocks has not destroyed a single factory, wiped out a single farm or city lot or real estate development, decreased the productive powers of a single workman or machine in the United States." In Louisville, the "Herald Post" commented sagely: "While Wall Street was getting rid of its weak holder to their own most drastic punishment, gain was stronger.

That will go to the credit side of the national prosperity and help replace that buying power which some fear has been gravely impaired." During the Coolidge presidency, according to the Encyclopaedia Britannica, "stock dividends rose by 108 percent, corporate profits by 76 percent, and wages by 33 percent. In 1929, 4,455,100 passenger cars were sold by American factories, one for every 27 members of the population, a record that was not broken until 1950.

Productivity was the key to America's economic growth. Because of improvements in technology, overall labour costs declined by nearly 10 percent, even though the wages of individual workers rose."

Jude Waninski adds in his tome "The Way the World Works" that "between 1921 and 1929, GNP grew to $103.1 billion from $69.6 billion. And because prices were falling, real output increased even faster." Tax rates were sharply reduced.

John Kenneth Galbraith noted these data in his seminal "The Great Crash" "Between 1925 and 1929, the number of manufacturing establishments increased from 183,900 to 206,700; the value of their output rose from $60.8 billion to $68 billion. The Federal Reserve index of industrial production which had averaged only 67 in 1921 ... had risen to 110 by July 1928, and it reached 126 in June 1929 ... (but the American people) were also displaying an inordinate desire to get rich quickly with a minimum of physical effort. "Personal borrowing for consumption peaked in 1928 - though the administration, unlike today, maintained twin fiscal and current account surpluses and the USA was a large net creditor.

Charles Kettering, head of the research division of General Motors described consumeritis thus, just days before the crash. “The key to economic prosperity is the organized creation of dissatisfaction.”

Inequality skyrocketed. While output per man-hour shot up by 32 percent between 1923 and 1929, wages crept up only 8 percent. In 1929, the top 0.1 percent of the population earned as much as the bottom 42 percent.

Business-friendly administrations reduced by 70 percent the exorbitant taxes paid by those with an income of more than $1 million. But in the summer of 1929, businesses reported sharp increases in inventories. It was the beginning of the end. Were stocks overvalued prior to the crash?

Did all stocks collapse indiscriminately? Not so. Even at the height of the panic, investors remained conscious of real values. On November 3, 1929 the shares of American Can, General Electric, Westinghouse and Anaconda Copper were still substantially higher than on March 3, 1928. John Campbell and Robert Shiller, author of "Irrational Exuberance", calculated, in a joint paper titled "Valuation Ratios and the Lon-Run Market Outlook". An Update posted on Yale University' s Web Site, that share prices divided by a moving average of 10 years’ worth of earnings reached 28 just prior to the crash. Contrast this with 45 on March 2000. In an NBER working paper published December 2001 and tellingly titled "The Stock Market Crash of 1929 - Irving Fisher was Right", Ellen McGrattan and Edward Prescott boldly claim.

"We find that the stock market in 1929 did not crash because the market was overvalued. In fact, the evidence strongly suggests that stocks were undervalued, even at their 1929 peak." According to their detailed paper, stocks were trading at 19 times after-tax corporate earnings at the peak in 1929, a fraction of today's valuations even after the recent correction. A March 1999 "Economic Letter" published by the Federal Reserve Bank of San-Francisco wholeheartedly concurs. It notes that at the peak, prices stood at 30.5 times the dividend yield, only slightly above the long term average.

Contrast this with an article published in June 1990 issue of the "Journal of Economic History" by Robert Barsky and Bradford De Long and titled "Bull and Bear Markets in the Twentieth Century": "Major bull and bear markets were driven by shifts in assessments of fundamentals. Investors had little knowledge of crucial factors, in particular the long run dividend growth rate, and their changing expectations of average dividend growth plausibly lie behind the major swings of this century."

Jude Waninski attributes the crash to the disintegration of the pro-free-trade coalition in the Senate which later led to the notorious Smoot-Hawley Tariff Act of 1930. He traces all the important moves in the market between March 1929 and June 1930 to the intricate protectionist dance in Congress.

This argument may never be decided. Is a similar case happening now? This cannot be ruled out. The late 2000’s resembled the 1920's in more than one way. Are we ready for a recurrence of 1929? No not by a long shot but we have a short attention span. Human nature - the prime mover behind market meltdowns - seemed not to have changed that much in seven decades.

Will a stock market crash, should it happen, be followed by another "Great Depression"? It depends which kind of crash. The short term puncturing of a temporary bubble - e.g., in 1962 and 1987 - is usually divorced from other economic fundamentals. But a major correction to a lasting bull market invariably leads to recession or worse.

The Day The U.S. Treasury Helped The Federal Reserve

noreply@blogger.com (Groupboss) — Thu, 17 Dec 2015 22:29:00 +0000

The Matrix Of The Financial System What pill would you take?

By Melvin J. Howard

After seven years of the most accommodative monetary policy in U.S. history, the Fed on Wednesday, as widely expected, approved a quarter-point increase in its target funds rate. The new target will go from 0 percent to 0.25 percent to 0.25 percent to 0.5 percent. Most members expect the new rate to coalesce around 0.375 percent before the next hike, according to a chart showing individual member expectations.

The decision, given the official stamp of approval from the Federal Open Market Committee, marks the first increase since the panel pushed the key rate to 5.25 percent on June 29, 2006. In a succession of moves necessitated by the financial crisis and the Great Recession that officially ended in mid-2009, the FOMC took the rate to zero exactly seven years ago, on Dec. 16, 2008. Let’s go back to 2008 when the FED needed help that’s right. The Federal Reserve System the central banking system of the United States needed help.

The Treasury Department, for the first time in its history, sold bonds for the Federal Reserve in an effort to help the central bank deal with its unprecedented borrowing needs. The Treasury set up a temporary financing program at the Fed’s request. The program auctioned Treasury bills to raise cash for the Fed’s use. The initiative was to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters. Normally, the Fed issues Federal Reserve Notes for U.S. bonds (the federal government’s I.O.U.s), in order to provide Congress with the dollars it cannot raise through taxes. Now, the government is issuing bonds, not for its own use, but for the use of the Fed. The plan was to swap them with the banks’ junky collateral directly, without actually putting them up for sale to outside buyers. As stated in its press release dated March 11, 2008.

Federal Reserve Actions

The Federal Reserve announced an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS.

The TSLF was intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions were held on a weekly basis, starting in March 27, 2008. The Federal Reserve consulted with primary dealers on technical design features of the TSLF.

In addition, the Federal Open Market Committee authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements provided dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008. These actions y supplement the measures announced by the Federal Reserve the week before to boost the size of the Term Auction Facility to $100 billion and to undertake a series of term repurchase transactions that cumulated to $100 billion.

To switch debt that is less liquid for U.S. government securities that are easily tradable” means that the government gets the banks’ toxic debt, and the banks get the government’s triple-A securities. Unlike other debt, federal securities are considered “risk-free” for purposes of determining capital requirements, allowing the banks to improve their capital position so they can make new loans.

But here is something more interesting October 3, 2008, the Fed acquired the ability to pay interest to its member banks on the reserves the banks maintain at the Fed. As reported by Reuters: “The U.S. Federal Reserve gained a key tactical tool from the $700 billion financial rescue package signed into law on Friday that will help it channel funds into parched credit markets.

Tucked into the 451-page bill is a provision that lets the Fed pay interest on the reserves banks are required to hold at the central bank. To put it simply if the Fed’s money comes ultimately from the taxpayers, that means the taxpayers are paying interest to the banks on the banks’ own reserves – reserves. Now where does that money go? Let’s take a look how the Treasury and the Fed interact with each other. 1) What role does the Treasury Department play? - It is the role of the Treasury to make sure that the U.S. government has enough money to fund the obligations of the U.S. government. Whether the government is running a fiscal surplus or deficit, it is their responsibility to determine how much money should be raised and when. It is also their responsibility to determine what the maturities of this debt should be.

The amount of each offering is set by the amount of debt maturing (thus requiring refinancing) as well as any additional debt that may be needed above and beyond that (i.e. to fund that year's deficit). If you check, this is done thru weekly Treasury bill auctions, quarterly refundings and other periodic treasury auctions such as the monthly two-year note. Treasury does not conduct these auctions. The Federal Reserve Bank of New York thru their network of recognized government securities dealers conducts them. The important thing to note here - these Treasury financings has absolutely no impact on the money supply. They simply determine how much Treasury debt is outstanding (i.e. the national debt). (2) What role does the Federal Reserve play - Besides facilitating the Treasury's effort to fund the operations of the government, the FED is charged (along with many other things) with determining how much money is in the system. So how does the FED expand or contract the money supply. To create more money, they buy a Treasury bill, note, or bond from one of the recognized government securities dealers (i.e. $1MM treasury security goes to FED, $1MM is released into the system as payment). It’ the money creation/contraction (that can be raised or lowered at will by the FED simply by buying or selling treasury or GSE agency securities), that then gets circulated throughout the financial system.

The National Debt now exceeds $18.7 trillion dollars. In Fiscal Year 2006 the U.S. Government spent $406 billion on interest payments alone to holders of that debt. Why so big a debt? Because Government spends far more then it receives in revenue. In 2007 the US government paid roughly $430 billion in interest to pay for money borrowed to finance previous deficits. Each year it keeps getting rolled over the cycle continues. So how does it do this year after year without the financial world coming crumbling down?

Here is how for example, the government runs a $400-billion-dollar deficit. The Treasury Department has to sell $400 billion in US Treasury bills, bonds and notes (government IOUs) to buyers at a rate of interest sufficient to attract their money (and beat the interest competition of other banks’ CDs and other governments’ bills, bonds and notes). To avoid a credit squeeze, the Federal Reserve System Open Market Committee in Washington directs the NY Federal Reserve Bank to purchase roughly 10% of that total (or $40 billion) in existing US bills, bonds, and notes from the current holders. To pay for them it creates the $40 billion out of computer entries. Now this new $40 billion is deposited into the banks of the various bill, bond, and note sellers, thereby increasing the reserves of those banks by $40 billion still with me? Pursuant to the Federal Reserve Act of 1913 those banks must keep only 10% of those new deposits on "reserve." (Because these banks do not have to keep 100% on reserve, this banking system is called a “fractional reserve” system.).

So of the $40 billion deposited, the banks must keep 10% on reserve ($4 billion) and may loan out $36 billion (90%), for business loans, mortgages, credit card loans, to purchase government bonds - for whatever borrowers want. Those loans (and payments) are in turn deposited in banks. So of the $36 billion loaned out and then re-deposited, the banks receiving the new deposits can then loan out 90% or $32.4 billion, retaining 10% or $3.6 billion as reserves. Then wash and repeat the same process every year.

The events of 2008 exposed the flaw in the system the money supply was cut off people lost confidence in the dollar. What happened as a result, stocks declined in value some almost by 50%. Corporate bonds were defaulting. Loss of confidence caused a flight of capital from U.S. government securities. Real estate prices plummeted the U.S. dollar had lost some of its purchasing power.

So just like in the film the Matrix, Morpheus who by the way is (named after the Greek god of dreams and sleep). Asked Neo here are two pills. The red pill will answer the question "what is the Matrix?" (by removing him from it) and the blue pill simply for life to carry on as before (not knowing anything more). As Neo reaches for the red pill Morpheus warns Neo "Remember, all I'm offering is the truth. Nothing more." About 90% of the population thinks that life is just the way it is and don’t want to learn or question the status quo. Then I guess the blue pill is for them. But for the other 10% of the population we are in the know. So the question I leave with you is this what pill would you take if you really wanted to know how the banking system works? You take the blue pill, the story ends and you wake up believing whatever you want to believe. You take the red pill, you stay in wonderland and I show you just how deep the rabbit hole goes!

Financing Debt

noreply@blogger.com (Groupboss) — Thu, 03 Dec 2015 19:22:00 +0000

The only and true way to use debt is to structure it:

BY MELVIN J. HOWARD

Structured finance encompasses all advanced private and public financial arrangements that serve to efficiently refinance and hedge any profitable economic activity beyond the scope of conventional forms of on-balance sheet securities (debt, bonds, equity) at lower capital cost and agency costs from market impediments on liquidity. In particular, most structured investments combine traditional asset classes with contingent claims, such as risk transfer derivatives and/or derivative claims on commodities, currencies or receivables from other reference assets, or replicate traditional asset classes through securitization or new financial instruments. Structured finance is invoked by financial and non-financial institutions in both banking and capital markets if established forms of external finance are either unavailable (or depleted) for a particular financing need, or traditional sources of funds are too expensive for issuers to mobilize sufficient funds for what would otherwise be an unattractive investment based on the issuer’s desired cost of capital. Structured finance offers the issuers’ enormous flexibility in terms of maturity structure, security design and asset types, which allows issuers to provide enhanced return at a customized degree of diversification commensurate to an individual investor’s appetite for risk. Hence, structured finance contributes to a more complete capital market by offering any mean-variance trade-off along the efficient frontier of optimal diversification at lower transaction cost. However, the increasing complexity of the structured finance market, and the ever growing range of products being made available to investors, invariably create challenges in terms of efficient assembly, management and dissemination of information.

The premier form of structured finance is capital market-based risk transfer (except loan sales, asset swaps and natural hedges through bond trading whose two major asset classes include asset securitization (which is mostly used for funding purposes) and credit derivative transactions (as hedging instruments) permit issuers to devise almost an infinite number of ways to combine various asset classes in order to both transfer asset risk between banks, insurance companies, other money managers and non-financial investors in order to achieve greater transformation and diversification of risk.

Asset securitization describes the process and the result of converting a pool of designated financial assets into tradable liability and equity obligations as contingent claims backed by identifiable cash flows from the credit and payment performance of these asset exposures. Asset securitization initially started as a way of depository institutions, non-bank finance companies and other corporations to explore new sources of asset funding either through moving assets off their balance sheet or raising cash by borrowing against balance sheet assets (“liquifying”) without increasing the capital base (capital optimization). In the meantime, securitization has gone a long way in advancing further objectives beyond being a flexible and efficient source of funding.

For issuers, securitization registers as an alternative, market-based source of refinancing economic activity in lieu of intermediated debt finance. Securitization substitutes capital market-based finance for credit finance by sponsoring financial relationships without the lending and deposit-taking capabilities of banks (disintermediation). The off-balance sheet treatment of securitization also serves to reduce both economic cost of capital and regulatory minimum capital requirements as a balance sheet restructuring tool (regulatory and economic motive) and to diversify asset exposures (especially interest rate risk and currency risk). The generation of securitized cash flows from a diversified asset portfolio also represents an effective method of redistributing asset risks to investors and broader capital markets (transformation and fragmentation of asset exposures). The implicit risk transfer of securitization does not help issuers improve their capital management, but also allows issuers to benefit from enhanced liquidity and more cost efficient terms of high-credit quality finance without increasing their on-balance sheet liabilities or compromising the profit-generating capacity of assets. However, securitization involves a complex structured finance technology, which commands significant initial investment of managerial and financial resources.

Investors in securitization have a wider choice of high-quality investments at their disposal, whose market valuation engenders greater overall efficiency and liquidity of capital markets. The tradability of securitized asset risk also facilitates the synthetic assembly and dynamic adjustment of asset portfolios via secondary markets according to investor preferences. As opposed to ordinary debt, a securitized contingent claim on a promised portfolio performance affords investors to quickly adjust their investment holdings at low transaction costs in response to changes in personal risk sensitivity, market sentiment and/or consumption preferences.

Like The Gold Standard It’s Time For The Oil Standard To Go Away

noreply@blogger.com (Groupboss) — Sun, 22 Nov 2015 21:34:00 +0000

How The Oil-Standard Kicked Out the Gold-Standard of our Money supply

By Melvin J. Howard

To understand this let us first understand how the original Bretton Woods system collapsed. Throughout the 1960s the United States was spending massive amounts of money (US dollars) abroad to fund various military operations, the "war against communism", was ultimately buying insurance on investments and economic interests abroad. While certain capital controls existed to prevent speculative pressure on currencies U.S. investors still had many economic interests throughout these regions. A rise in democracy may have nationalized natural resources, created land reforms and otherwise collapsed the value of U.S. investments. In turn this would have had serious ramifications on the U.S. stock exchanges and reverberated throughout the whole financial system. This big military spending abroad on Vietnam and other adventures caused America to have a big and rather permanent trade deficit and greatly increased the supply of U.S. dollars abroad relative to U.S. gold reserves at home. President Nixon was forced to break the peg of the U.S. dollar to the fixed price for gold in 1971 and then the US dollar kept decreasing in value with respect to gold as the U.S. increased its military activities abroad.

This caused a huge disturbance in the international monetary system and soon the whole adjustable peg system had broken down. The IMF should have disbanded at this time because its founding mission didn't exist anymore now that the Adjustable Peg had broken down.

Then OPEC came along and presented the world with its oil price shocks and a lot of large nations started running significant trade deficits with the Middle-East because the price of oil was now so high. This might have been oil's way of saying that now that the gold standard was completely dead it would take over as the real gold against which currency value should be assessed, which was appropriate since much of the human fighting stopped being about gold and became about oil. The oil shocks and America's military spending seem to have created pressure to break down the system of earlier capital flow controls so that the Western countries could balance their currency outflow from trade deficits with some inflow of capital from the OPEC countries who were making the big oil profits.

So much money then rushed in to the West as so-called petro-dollars that many financial institutions then turned around, in the absence of capital controls and the gold peg, and lent the money as U.S. dollar denominated debt to many Latin American countries to earn some higher returns. Interestingly a lot of this debt incurred in Latin America was being used to fund the purchase of military equipment by the U.S. favored regimes to assist in the "war on communism". But the expansion of the U.S. money supply and the oil-shocks led to such bad inflation problems that by the end of the 1970's the US Federal Reserve decided to reign them in by spiking up interest rates, which is the same as shrinking the U.S. dollar money supply. Many Latin American borrowers were on variable interest rates and this spike in interest rates forced them to be about to default on their U.S. dollar loans.

This threat of default marked the rebirth of the IMF, who had lost its founding mission upon the collapse of the Bretton Woods system during the Vietnam War, into a wholly new entity governing of an international monetary system. To prevent financial panic spreading to the West upon such defaults the IMF stepped in as lender of last resort to protect the Western creditors from getting hit by defaults. By giving such a blessing to the reckless behavior of international banks the IMF introduced serious distortions favorable to these banks in the form of "moral hazard" that is still with us today. Moral hazard comes about when large investors are enticed into excessive speculation by the knowledge they will get bailed out if their bets go bad.

Under today's international monetary system, we have free flow of capital. To make matters worse these countries have large amounts of U.S. dollar denominated debt, much of which originated as the petro-dollars, and the IMF has made itself understood to be there to back up the big Western banks that get into trouble. This Moral Hazard combined with the loss of the original capital flow controls has created a very bad situation for the majority of people in the developing world.

So, how did a reasonably stable post-WWII international currency regime get so nasty. Recall that under the pre-depression era gold standard, exchange rates were automatically fixed, and there were pretty free investment capital flows. But countries couldn't do very much about their own money supply to help with domestic policy, unless they went out and dug up more gold. Then under the post WWII real Bretton Woods system there were fixed exchange rates, and countries had some ability to control their money supply for domestic policy purposes such as unemployment and inflation. This was possible because there were controls on investment capital flows.

But now after the collapse of the Bretton Woods system there are few capital flow controls and many of the smaller economies have tried to peg their exchange rate to the U.S. dollar. Smaller economies try and fix their currency relative to the U.S. dollar because for most countries the U.S. is a major trading partner and because they want to attract funds from U.S. investors so they want their currency to appear stable relative to the USD. However, some currency attacks have made this a recipe for disaster and regularly smashed smaller economies.

The British economist John Meynard Keynes was very critical of this move of England back to the Gold Standard saying that "In truth, the gold standard is already a barbaric relic." This is because the gold standard forced prices and wages to be set by international traders and speculators, rather than the needs of workers and consumers. Today, these are still set by international speculators in our current environment of free capital flow and domination by a single reserve currency although that seems to be changing although I would still like to see the greenback continue to be the reserve currency of the world.

The move by the Federal Reserve in 1927 to lower interest rates to help England stay on the gold standard encouraged stock speculators to borrow money at these low rates from the banks and then plow these borrowed funds into the stock market. The banks themselves were engaged in a lot of these speculative activities because many of them also operated investment banking and brokerage businesses.

This speculation continued until 1929 when in August the Federal Reserve raised interest rates. Stock prices reached their peak in September the Dow Jones Index having doubled in just over a year. But then with the higher interest rates on borrowed speculative funds and nervousness that stocks were overvalued, stocks started falling in October. Banks started calling in the loans used to buy stock. On October 29, 1929 (Black Tuesday) the Dow-Jones Industrial Index crashed enough to wipe out this doubling of the Dow. The Dow and the markets as a whole started on a downwards spiral that bottomed out in 1932. Many people just couldn’t pay off their loans and banks started going bankrupt all over the place from this and from the collapse of their own stock investments. There was at this time no Federal Insurance of bank deposits and people saw not only their stock markets investments disappear, but also their bank accounts vanish. For, even under the gold standard, bank money is nothing but the confidence that it can be used in trade. When that confidence disappears, so does money, and so does everything you worked for and transferred into those mysterious bank credits.

America was still on the gold standard. So compounding all these problems the massive loss of confidence in the banking system caused the worst thing of all for the financial system - a run on banks - with people wanting to redeem their bank deposits and Federal Reserve Notes for gold. But of course there isn't enough gold under fractional reserve banking and such a run on banks will always collapse it. Expectation of bank collapse is a self-fulfilling prophecy, as it is with the stock markets, and as it is with any currency try to remember whatever your thinking that’s what you’re bringing about.

When you have such lost confidence in the financial system, where there has just been complete dependence on it, the whole monetary system collapses - money disappears because all it was confidence anyway.

Buying Pools Of Pools Of Mortgages

noreply@blogger.com (Groupboss) — Mon, 16 Nov 2015 18:02:00 +0000

I probably own your house without you even knowing it…….

By Melvin J. Howard

MBS mortgage-backed securities fund residential investment and are used by a wide variety of market participants for investment and collateral purposes. A key feature of MBS is that the market is "liquid". Specifically, market participants perceive that they are typically able to buy and sell significant quantities of MBS without difficulty and face relatively low transaction costs. Accordingly, many MBS investors hold these securities as a liquid investment that they expect can be quickly converted to cash at low cost when the need arises while earning a positive rate of return. This draws the heavy-gun shelling away from Manhattan and onto consumers – first in the way their home loans are funded, and then in the investments made by their pension and insurance fund managers. The United States had $7.5 trillion in these mortgage-backed securities (MBS) at last count, nearly a quarter of the entire U.S. bond market and 50% larger than the U.S. government's own Treasury debt issue. Appetite amongst professional investors in Europe was so great, Sampo Bank now Danske Bank and ABN both flooded their MBS into the market in the very same week. Britain was late to the party, but it got $9.4bn from one lender plus another $15bn from HSBC, the world's third largest bank.

You have to remember why banks were doing this. Selling a bond backed by mortgage debt means the banks can lend that much money again, doubling their assets per $Dollar of deposits. In Britain alone, this little scheme helped the major banks lend nearly $1 trillion more than they took in from savers between 2002 and 2005. Money from nowhere means money for nothing, and the banks love that!

But "mortgage-related debt differs from most other categories of debt," notes a 2003 paper for the U.S. Federal Reserve, "in that it is subject to the risk of prepayment." You might think the risk of early repayment hardly worth fretting about. Not compared with, say, the risk of never getting your money back at all. But when interest rates slip, homeowners refinance. So the MBS backed by the first loan now gets repaid...and that leaves MBS buyers holding cash instead of income. This is why for a period of time some had a hard time refinancing their mortgages investors didn’t want the cash they wanted the income from the mortgages instead. Your banker won’t tell you that but I will.

So what do pension fund manager do for yield? Buy bonds of course, preferably long-dated Treasuries...thus pushing all bond prices higher...sending bond yields lower...and causing more mortgage re-fi that then repays more MBS! "The market rallies, mortgages prepay, and all of a sudden people have to buy," says one MBS strategist. "It can turn into something that snowballs and causes the [bond] market to rally for a significant period of time."

The MBS market seeps into the wider financial universe via another leaky pipe, too. "When mortgages, or other debt instruments, are chopped up for securitization," explains John Dizard in the Financial Times, "the riskier slices may go to high yield mutual funds and people who think they're sophisticated investors. The 'residual risk', 'first loss' or 'equity' slices go either to hedge funds or are retained by the dealers or banks who package the securitizations." These dealers and banks don't use the Treasury market to offset the prepayment risk of MBS bonds, says Dizard. They go instead to the market for interest-rate swaps, where they can exchange one stream of income for another stream of yield, tweaking their earnings without selling their assets. The interest rate swaps market constitutes the largest and most liquid part of the global derivatives market. At the end of June 2014, the total notional amount of outstanding contracts was $563 trillion, representing 81% of the over-the-counter global derivatives market, and the gross market value of interest rate derivatives totaled $13 trillion.

"It's big, invisible plumbing," says Dizard, "like water mains, of little interest most of the time until there's a gurgling and nothing comes out of the pipe." Remember, the interest-rate swaps market is worth 5 times the United States' annual economy. And maybe those cheap swaps between bankers – their little-seen deals that pump credit from the mortgage market into the bond market into the profits of banks, insurance managers and hedge funds – are gone.

The money's got to go somewhere, remember. Professional investors abhor cash. But "there are not enough quality assets to go round, so what do you do? Despite the wide popularity of MBS among investors and the importance that investors place on market liquidity; until recently there has been remarkably little public information that can be used to assess the state of MBS liquidity. This is not the case in other important financial markets. In the case of exchange traded equities, for example, both transaction volumes and bid-ask spreads can be obtained at a daily frequency from a number of publicly available data sources including popular financial websites such as finance.yahoo.com. Such data is less widely available in fixed income markets, including the MBS market, which is not typically exchange traded but are dealer intermediated. The lack of similar data in the MBS market is problematic for systematically monitoring and evaluating the overall state of market liquidity.

Recently, new data has become available that can be used to assess market liquidity in the MBS market through the Financial Industry Regulatory Authority's (FINRA) TRACE reporting system. The TRACE system was developed in 2002 to increase transparency in the corporate bond market by providing data on the size and price of corporate bond transactions that are conducted by FINRA registered securities dealers. In May 2011, these reporting requirements were extended to MBS transactions as well. These data can be used for a variety of purposes including systematic measurement and monitoring of market liquidity.

Finance Out Of This World

noreply@blogger.com (Groupboss) — Sun, 08 Nov 2015 22:51:00 +0000

Physics and Finance

By Melvin J. Howard

Belal E. Baaquie put out a book by Cambridge University Press called Quantum Finance. This book applies the mathematics and concepts of quantum mechanics and quantum field theory to the modelling of interest rates and the theory of options. Particular emphasis is placed on path integrals and Hamiltonians.

Financial mathematics is dominated by stochastic calculus. The present book offers a formulation that is completely independent of that approach. As such many results emerge from the ideas developed by the author. This work will be of interest to physicists and mathematicians working in the field of finance, to quantitative analysts in banks and finance firms and to practitioners in the field of fixed income securities and foreign exchange. The book can also be used as a graduate text for courses in financial physics and financial mathematics. Applies the formalism of quantum mechanics and quantum field theory to finance. Contains a detailed discussion on the empirical aspects of the forward rate curve and comparison of the field theory model with market data. Addresses many problems in finance that cannot be solved using other approaches.

Remember the Black-Scholes model their options theory. It goes something like this options are known to be divided into two types, the first type is called a call option and the second type is called a put option and these options are offered to stock holders in order to hedge their positions against risky fluctuations of the stock price. It is important to mention that due to fluctuations of the stock price, options can be found sometimes deep in the money, at the money and out of the money. A deep in the money option is described when the option's holder has a positive expected payoff, at the money option is when the option's holder has a zero expected payoff and an out of the money option is when the payoff is negative. It is also possible that hedging leaves society worse off than it would be if unhedged since it can make markets more volatile than they otherwise would be. The rescue of LTCM by a consortium of banks after its near failure in September 1998 indicates that there were real fears that the liquidation of its positions would threaten the entire financial system. Derivatives flourish in an environment when the ability to pay is optimistic, where the creditworthiness of the chain of issuers is not in doubt. Like in a bull market now flip to a bear market and everything starts to unravel.

Much of the early success of LTCM was a result of the credibility of Merton and Scholes, which attracted heavyweight investors, lenders and trading partners to the firm, and their ideas, which provided potentially profitable trading opportunities. But for all the brilliance of their theory, it was based on 'expected volatility', which implicitly assumes that history repeats itself, that the future movements of asset prices will mirror their past movements. Unexpected events in the real world such the case, of Russia's debt default was not calculated. That’s life soon as you think you’ve got it figured out it changes on you.

Indeed, all models that are being used for risk control and to buy assets on the basis of historical movements and small increments using extraordinary leverage must be challenged. Now that Academia and Finance have got together each working on a better theory for financial engineering. Who knows which ones to pick the problem is you don’t know if you are winning or losing until it’s too late hence LTCM. Financial science is just as complex as theoretical physics, based on the fact that "energy is not continuous but comes in small and discrete units," as one definition puts it. "The movement of these particles is inherently random. It is physically impossible to know both the position and the momentum of a particle at the same time...[and] the atomic world is nothing like the world we live in." Just like today's financial markets, in other words – a random, unknowable and unreal world of atom-sized yields.

Quantum Finance – the science of making money appear out of nowhere – is too complex for all but the very brightest to grasp. Yet it underpins the entire financial universe today. The very fabric of money, mortgages and markets has come to rely on concepts not even the sales desks can follow. And Quantum Finance in its higher forms remains unregulated of course, which is just as it should be. For by the time the SEC and FSA get round to hiring the PhDs they need to make sense of the mess, the smart money will have already moved on, selling out as their Lear Jets get cleared for take-off. What about the dumb money, you may wonder? Well, if you can't spot the patsy, then it must be you.

The Economic Superpower Of The U.S. Central Bank

noreply@blogger.com (Groupboss) — Tue, 27 Oct 2015 22:34:00 +0000

Super Banking
By Melvin J. Howard

As I study more and more about banking the U.S. in particular I am amazed at where it started to where it is today. From a colony of rag tag farmers and merchants to the most competitive, creative and complicated financial and banking system in the world. Although there have been some bank failures in the past and some recently. The alternative would be 3 or 4 banks to choose from to do all your banking. Can you imagine America without choices? Let’s face it we want choices like 31 flavors it is in our blood. America's central bank (ie, government-controlled money banking system) was instituted purportedly to protect the public from the "anarchy" of free banking. Money and banking were the freest from 1936 (when President Andrew Jackson ended Federal involvement in banking) to 1862 (when Congress mandated that fiat greenbacks be accepted as legal tender to finance the Civil War -- but without prohibiting the use of gold or silver). The National Bank Act of 1863 required all banks to collateralize their bank notes with government securities. Private coinage was outlawed in 1864. Otherwise, from 1836 to 1913 banking remained under state jurisdiction, with over half of states allowing free banking. Prices remained stable during this period -- in sharp contrast to the steep inflation produced under central banking in the period after 1913.

Representatives for the American central bank say that there were bank failures in the United States prior to the Federal Reserve System. This is true where business is freely practiced, poorly run or poorly located businesses will fail. Free markets mean rapid progress through trial-and-error, rather than the stiflingly slow progress (or regress) of a controlled economy. But bank failures were far fewer under free (or semi-free) banking than under central banking. The ratio of capital to loans in American banks went from 40.5% in 1836 to 55.1% in 1842, falling to 41.3% in 1862, to 17% in 1913 and to 5.6% in 1989. In New York State, which had the largest, freest banking system, bank failures from 1838 to 1863 were less than one-third of 1% per year, on average (with customers receiving an average 75 cents on the dollar in the failures). By contrast, under central banking the rate of bank failures in the 1920s was in excess of 2% per year. And in the 1930-1933 period about one-third of all US banks failed.

Depositors lost more money in the first 20 years of central banking than had been lost in the 75 years before central banking. Bank failure rate declined after 1934 when the institution of Federal deposit insurance effectively created a welfare system for bankers, allowing federal money to bail-out poorly managed banks thereby underwriting inefficiency and encouraging risk-taking.

The Federal Reserve Act of 1913 established the Federal Reserve System (headed by the Federal Reserve Board) as the central bank of the United States (affectionately known as "the Fed"). Of course, this move was touted as the creation of high-minded oversight for money and banking that would rise above the petty interest of the market place. Conveniently, the Fed doubled the money supply during World War I to finance the war effort.

The inflation wrought by wartime government spending in Europe was far more severe than that in the United States particularly in Germany, where a postage stamp for local delivery cost 100 billion marks in 1923. The inflationary crisis in Germany undoubtedly made people desperate for a New Deal from a "high-minded" leader like Hitler, who had no trouble rising above the petty interests of peoples who would be free. As has been mentioned, Roosevelt's New Deal made the possession of gold punishable by imprisonment for American citizens.

The Federal Reserve Act of 1913 forced all banks in the United States to become part of the Federal Reserve System. This meant that their reserves (for fractional reserve banking) had to be demand deposits at the Fed. US Dollars became Federal Reserve Notes, backed (fractionally) by gold. The fractional reserves of gold held by the Fed were "backing" for the fractional reserves of Federal Reserve notes (amount dictated by the Fed) for the member banks. The system was so "successful" that in the period from 1921 to 1933 more than half of the 30,000 US banks went out of business. In 1938 the Fed doubled the reserve requirements for member banks from 10% to 20%, an economic shock treatment that led to disastrous credit liquidation.

Outlawing gold for American citizens was only half the battle for a truly fiat currency, however. As long as dollars went abroad, foreign governments could demand gold for the dollars. But central bankers in foreign countries were all engaged in the same struggle for independence from the discipline of the gold standard that the Fed was attempting. Once freed from the gold standard in the 1970s, the Fed could back-up its reserves by printing as much money as it liked.

The Fed controls money supply not so much by the amount of money it prints, but by the amount of reserves created in the banking system and the fractional reserve requirement dictated by the Fed. After 1980 the fractional reserve requirement was gradually lowered from 14% to 10%, which increased the money supply considerably. Reserve requirements for nonpersonal time deposits and CDs were eliminated entirely in 1990.

The Fed is currently not changing reserve requirements as a means to implement monetary policy. Nor do changes in the discount rate have a significant impact on money supply. Currently, the key to the Fed's control of money supply and interest rates is through its open market operations, ie, buying and selling of US government debt instruments (bonds, T-bills, etc.) through Primary Dealers. (Just over 20 Primary Dealers are authorized to buy and sell with the Fed, including Goldman Sachs and Morgan Stanley.) The buying or selling can be either permanent or temporarily through repurchase agreements or reverse repurchase agreements. For example, the Fed could increase money supply by buying $1 billion of US government bonds. The Fed writes a check to a bond dealer for $1 billion from the Federal Reserve Bank of New York and then the bond dealer deposits the check from the Fed with a commercial bank.

But a check from the Fed does not "clear" the way other checks do. The check creates a deposit at the Federal Reserve Bank, increasing the commercial bank's reserves by $1 billion. The Fed has spent no money it has simply written a check creating $1 billion in new money. But with a fractional reserve policy of 10%, the commercial bank is now able to make $9 billion in new loans.

Thus, the $1 billion purchase by the Fed has increased money supply in the economy while helping supporting the market price of the government's bonds. Unlike the obvious inflation of printing money -- which only enriches the Treasury Department inflation through credit-expansion (lowering interest rates) enriches the Treasury from the $1 billion from the bond sale, enriches the Fed by the interest collected on the bonds, and enriches the commercial bank by the interest collected on the additional loanable funds.

The purchase also ensures that the government benefits disproportionately from the new money, while others (such as pensioner's living on fixed income) are harmed disproportionately by being the last to experience the inflationary effects.

The main tools the Fed has for control of money supply and interest rates are the fed funds rate and the discount rate. In a free market, interest rates are determined by the supply & demand for savings. In contemporary regulated economies, central bankers have considerable influence on interest rate through control of money & banking.

When the Fed sells government securities it decreases the supply of money (loanable reserves), which increases interest rates (the fed funds rate). When the Fed buys government securities it increases the supply of money (loanable reserves), which decreases interest rates.

The Fed indirectly controls the fed funds rate by buying or selling bonds to achieve the desired rate. Fed funds is another name money loaned or borrowed to maintain the Fed's mandated level of bank reserves, the deposits a bank has with its regional Federal Reserve Bank plus cash in the vault. The fed funds rate is the rate at which banks make short-term (usually only overnight) loans to each other to meet reserve requirements. The loans are made on a private financial market called the federal funds market.

On any given day a bank may have more or less reserves than its required amount. Banks with excess reserves can loan to banks having a deficiency (fed funds are exempt from reserve requirements). The lending bank instructs the Federal Reserve Bank to charge its own account and credit the account of the borrowing bank a transaction to be reversed the next day. No physical delivery occurs, the exchange is made through the Fed's electronic network, the "Fed Wire".

The fed funds rate is the shortest of short-term interest rates and is the US short-term benchmark. The most common fed funds instrument is an overnight, unsecured load between two financial institutions (commercial banks, savings banks, savings & loan associations or credit unions) on the basis of an oral agreement.

When banks borrow heavily on the fed funds market, the fed funds rate will rise unless the Fed adds new reserves. The Fed tries to keep the fed funds rate within a narrow band (50 basis-points or less) through buying & selling of government securities. The Fed will continue buying or selling in a trial-and-error fashion until its desired fed funds rate is achieved.

The discount rate is the rate the Fed charges banks to borrow money from the Fed. The Fed can directly control discount rate. When rates are changed, the fed funds rate and the discount rate are almost invariably both increased or decreased by the same amount at the same time. [The Fed sets a new discount rate and targets a new fed funds rate -- the latter typically being 50 basis points (ie, 0.5%) higher.] The Fed discourages banks from direct borrowing by imposing costly and time-consuming procedures, including scrutinization of the bank's creditworthiness offsetting the cost advantage of direct borrowing and making the Fed the "lender of last resort".

Unlike fed funds, reserves borrowed through the discount window require collateral, and the borrowing can only be done for "approved" reasons. Attempts to use the discount window frequently will cause the Fed discount officer to refuse the loans.

The open market policies of the Fed are decided by the Federal Open Market Committee (FOMC), which includes all 7 members of the Board of Governors plus five of the twelve Presidents of the district Feds who serve one-year terms on a rotating basis.

The Governors are appointed by the US President for a 14-year term (subject to US Senate confirmation). Because open market operations are administered through the Federal Reserve Board of New York, the President of that district bank is a permanent FOMC member, with the title of Vice-Chairman. The FOMC meets 8 times per year under the Chairman to decide on interest rates. Banks will invariably increase or decrease their prime interest rates (ie, interest rates charged by commercial banks to their most credit-worthy customers) in lockstep with increases or decreases in fed funds rate & discount rate. Mortgage rates, bond interest and other forms of interest charge follow -- although long-term interest rates tend to be more independent and subject to market forces.

The control of interest rates and money supply are powerful tools of economic regulation in a purportedly free economy. In a free economy interest rates are the "price of money" -- and that price is determined by market forces (supply and demand). Price-fixing of interest rates by autocrats invariably results dislocation from the market price -- and shocks the economy every time the change is made or anticipated. The autocrats on the FOMC undoubtedly enjoy the fawning attention of the media hanging on their every word in an attempt to second-guess the next action -- but price-fixing always misallocates market resources. The tentacles of the U.S. financial system are found all over the world including debtor nations through the IMF.

The FOMC meets in secret and only issues vague summaries of its meetings six weeks after they occur. When Alan Greenspan was Chairman his disdain for market forces has been immortalized in his description of stock market activity as "irrational exuberance". However, Mr. Greenspan may well be the least autocratic (and most pro-market) member of the Fed at the time.

International Countertrade

noreply@blogger.com (Groupboss) — Fri, 16 Oct 2015 00:44:00 +0000

Global trader in the making

By Melvin J. Howard

Circumstance has a way of preparing you for life without you knowing it. For example, when I was in College I got a job that was arranged by my alumni department head. It was working for a major defense contractor McDonnell Douglas in their countertrade division later I became one of their contractors. Little did I know at the time it would play a major role in my life now? Countertrade is a term used for parallel business transactions, linking sellers and buyers in reciprocal commitments, which usually lie outside the realm of typical monetary trade. Some of the common forms of countertrade transactions include barter, counterpurchase, compensation, buyback, clearing arrangements, offset and switch trading. More than 10% of world trade today involves some form of countertrade. The World Trade Organization estimates that 15% or $8.43 billion of the $5.62 trillion in international trade is conducted on a non-cash basis.

My mentor was a great teacher he was a Vice President of the defense firm I was working for. I was learning first-hand how to do world trade not in the classroom but on the front lines. He took me under his wings and taught me the most basic and the most complicated forms of Trade. Offsets–an umbrella term for a broad range of industrial and commercial compensation practices required of foreign suppliers under primarily government agency of state-owned enterprise acquisitions–were made a common requirement for the procurement of either military (e.g., fighter aircraft) or high-cost civilian hardware (e.g., commercial aircraft). Both defense and non-military offsets may entail overseas co-production of the procured item, as well as other economically beneficial transfers to the importing country that are not related to the original export. To assist their exporters some industrialized country governments also promoted countertrade under government agreements. For example, the French Ministry of Agriculture signed in 1989 an agreement with the USSR Council of Ministers which provided for exchanges of Soviet commodities for French agricultural and food processing equipment and technologies. Other Western governments, such as those of the United States, Canada, Belgium, Holland, the United Kingdom, and Italy, established special countertrade service units within public agencies to provide countertrade-related advisory assistance to their exporters. The French Government has supported instead the formation of a separate countertrade assistance entity in the private sector. The Swedish Government was until 1990 a major stockholder, through interests by the Swedish Investment Bank, in a private sector company involved in countertrade. Now with trade agreements like NAFTA in 1994, which integrate regional trade, based on free market principles some countertrade has abated somewhat.

International countertrade practices are now increasingly associated with bidding on major defense and non-military government procurement contracts and with project financing–a contract-based, off-balance-sheet finance technique whereby revenues generated from the output of the financed project are directly allocated to service outstanding debt and principal. A variation of the countertrade buy-back contract which links foreign contractors’ repayments to the output products of the production capacity they supplied, project financing relies instead mainly on contractual recourse to the project’s revenue streams. (According to the World Bank, developing countries are now spending around $200 billion a year on new infrastructure investment, one-fifth of their total investment.) High procurement costs and tighter budgets have prompted many emerging country governments in the 1990s to issue new civilian offset regulations (e.g., United Arab Emirates, Kuwait). Civil offset requirements, therefore, are increasingly acquiring a financing rationale in these markets. In a global environment of budgetary constraints, the ability of suppliers to meet offset requirements and/or to provide their clients with financial packages that can best those of competing bidders is a major competitive edge.

Project finance on the other hand refers to the method of financing a particular project as a unit at least partially separate from the owner, or “equity sponsor,” of the project. This typically means that the financing must be repaid out of the cash flows generated by the project itself without recourse to the cash flows or assets of the sponsor. Projects appropriate for project finance are large in scale and require a large capital investment. In addition, such projects will normally involve a considerable delay between initiation and the first positive cash flow. Many of the projects are also outside of the home country of the sponsor and in many cases are in an emerging market. All of these, and other characteristics of typical project finance projects, introduce several different types of risk. The key to successful project finance is the identification and allocation of risk.

Often contractors and future operators sponsor the project and provide a large part of the equity while a syndicate of commercial banks provides debt financing. In addition, because project finance is often used to finance the private provision of public services, the local government is often involved in a contracting out or regulatory capacity and a state-owned enterprise might be one of the participants in the project. A complex contractual structure is usually established with lenders asking for maximum guarantees and securities from other players. The focus of risk allocation is usually on the construction and start-up period, which is generally the riskiest period in the project's lifespan.

Under the financing structures, investors must look to expected cash flows, as opposed to fixed assets, for repayment. As a result, extremely careful risk assessment is necessary for each investor prior to investment. With any valuation model used to assess the value of the project, or any financial portion of the project, sensitivity analysis will be particularly important. Analyses, which improve the accuracy of the forecasts, and reduce the uncertainty surrounding the forecasts, such as engineering studies, market analyses, etc. will be well worth the time and effort.

CENTRAL BANKS AND HOW WE GOT THEM

noreply@blogger.com (Groupboss) — Sat, 10 Oct 2015 20:08:00 +0000

Debt goes back to medieval times and times have not changed much since then:

By Melvin J. Howard

There is nothing wrong with debt, when used healthily as a tool to create wealth. But when it arises, as it mostly does, from fear, feeling of lack, and negative self-worth beliefs, then it is a control game being played, a painful one at that. Additionally, what most people don’t know is that debt, in our current civilization’s monetary system, is designed to collapse for a certain number of its holders that’s right no joke. Before cash money was invented in its present form, people used to trade by barter. They would exchange goods and services. Finally, one day, a powerful merchant family named the Medici family of Italy (powerful merchants and later bankers who ruled through influence between the 13^th and 18^th century) said, “We have another way we can do this. We can make promissory notes we shall call money. They are more convenient to carry than goods and gold.” The first paper money worked as follows. A trader would go exchange his or her goods for gold. They then take this gold to deposit it with the Medici, and the Medici write up a paper with their signature and family seal, a paper that would represent the gold that was deposited with them. This paper, upon return to the Medici, would be exchanged into its gold equivalent. That concept is where the gold standard came from. Now let us look at debt. Imagine that the Medici have just opened up their first bank and announced the new scheme to the traders. So one trader, let us call him Mel goes to the Medici and deposits $100 worth of gold. The Medici make up a paper saying that they promise to exchange that paper for $100 worth of gold upon its return (less a banking fee, plus an interest, whatever). Mel takes this paper and goes home. Mel can use this paper to buy things, but let us assume he does not. So far, he is the only customer at the Medici’s new bank. Now Michelle, another person, wants to start a new business, a hotel. She has the land and building but needs some pots and pans.

She does not have any goods to trade in exchange for pots and pans, but she’s hears that the Medici are giving “loans”. So she goes to the Medici and asks for a $100 loan. The Medici says they can do that, but Michelle has to pledge her land and building as a security, collateral, in case of default. The Medici make up money (money that did not exist) by writing up a new paper, sign and seal it, and give it to Michelle. (How did the Medici bank get the money? The same way the Federal Reserve makes U.S. dollars, contrary to most people’s imagination that it is backed by something.) The condition is that on return, Michelle has to give back $100 plus $10 interest. Now freeze that right there. Imagine that Michelle and Mel are the Medici’s only two customers at the time. This means that the economy only has two paper notes out there, one with Mel and one with Michelle. And Michelle has to return her plus $10. Where will Michelle get that $10, unless Mel comes and rents a room at Michelle’s hotel for $10? The Medici did not print the extra $10! So even if Michelle is hyper-careful with her loan, even if she does not spend it at all but returns it after a year, the $100 intact, it is physically impossible for her to pay the $10 interest. This is because she cannot print the extra $10 money and Mel does not want to spend his money at the hotel, yet Mel is the only one with the only other note printed! Do you see the error in this system? Even if Michelle now has goods to trade, she cannot trade them for paper money because there is no more out there – and the Medici wants cash money or the collateral. Michelle will have to lose her hotel to the Medici simply because of a paper shortage error. She has the original $100 they gave her because she did not spend it, but she cannot possibly get the $10 they want in addition as interest, because she can't print money nor does the only other person with bank notes want to stay at her hotel and pay cash.

Her hotel may be highly successful, renting rooms in exchange for goods, but she still would not have the printed paper for $10 that she has signed to give back to the Medici as interest. So her hotel would have to be seized by the bank. This example shows exactly how our modern civilization’s debt system works. But because there are millions of people playing this game, the players don’t realize there is a problem because only 8% of people are caught by this error (about 8% of all debts are unpayable). And those that are caught by this error think there is something wrong with them only they never imagine that the system itself is flawed!

Debt, by its very nature, in our current financial system, is designed to fail for a certain percentage of the population, no matter how much effort or care they put. And it is so simply because there is not enough money created (printed) for the interest requested. The only reason this illusion has managed to run this far is that there are millions of players rotating the money and it looks like it works for most people, which makes the few it doesn’t work for look like something is wrong with them and not the system. Every now and then, the debt bubble bursts, but someone somewhere comes along and rescues it, again with more debt and more conditions of control. It happens to individuals, companies and countries. And it keeps rising, getting bigger and bigger.

This is not the time to blame the issuers of debt, or anyone else for that matter. There is no judgment or guilt in the matter. Only energetic facts. The minute you start playing the blame and judgment game, you enter into a victim position, and that is no good for you.

There is nothing wrong with debt, when used as a tool I repeat as a tool. But when it arises, as it mostly does, from fear and negative self-worth beliefs, then it is a control game being played, a painful one at that. A game we created and continue to create day in day out.

CENTRAL BANKS AND HOW WE GOT THEM

In the Middle Ages most of the banking functions were performed by Jews (who were immune from Christian prohibitions against charging interest on loans) and Knight Templars (monkish knights whose honesty and fierceness had earned them a reputation for safeguarding wealth). King Philip IV of France expelled the Jews and confiscated their property before ambushing Templar leaders, executing them and confiscating Templar property. Banking re-emerged in the Renaissance among the merchants of Northern Italy. However, the Florentine family banks were devastated in 1343 when the British monarch Edward III defaulted on his loans. Many depositors were also left destitute. Nonetheless, a century later the Medici family became the greatest of the Renaissance bankers until Charles VIII of France invaded Italy and confiscated most of their property. Fractional reserve banking (lending money given for safekeeping was considered fraudulent when done without the consent of the depositors) had been practiced during this period -- sometimes with disastrous consequences. Florence is also credited with such innovations as bills-of-exchange, double-entry bookkeeping and checks (checks) on deposits. The Bank of Amsterdam was founded in 1609 as a "safekeeping bank" based on the principle of 100% reserves (in contrast to fractional reserves). Gold is bulky and risky for a person to hold in large quantities, so a 100% reserve bank served a valuable service by storing the gold in a safe place and issuing receipts (banknotes) for the gold. The banknotes were more convenient to trade than the heavy gold, especially for large transactions. Thus, the banknotes could serve as money.

Under the demand-deposit system, however, even banknotes become unnecessary. A depositor only needed to write a check or transfer order to the bank directing that his/her gold be transferred to another person from whom the depositor had purchased goods. A bank such as the Bank of Amsterdam that operated with 100% reserves was functioning as a money-warehouse. For sake of example, imagine that on the island of Fantastica (as described earlier) the entire 1000 silver coin money supply was deposited in the Bank of Fantastica as demand deposits. Island inhabitants could write checks on their deposited silver coins to direct transfer of coins to another depositor when a purchase was made from that depositor. Suppose the Bank of Fantastica then issued 1000 silver coins worth of loans to other Fantastica inhabitants -- also in the form of demand deposits. Now the Bank of Fantastica would have recorded on its books 2000 silver coins worth of demand deposits: 1000 from the original depositors and 1000 from those receiving loans -- although there are actually only 1000 silver coins in the bank. The money supply on the Island of Fantastica has doubled, which would have the effect of doubling prices (as in the previous example). The Bank of Fantastica has engaged in fractional reserve banking using a 50% reserve -- creating 100% inflation. Fractional reserve banking is fraudulent if done without knowledge and consent of the depositors.

The character of central banking was established early with the world's first central bank, the Riksbank in Sweden. Under the authority of the Parliament charter of 1668 banknotes from Riksbank were Sweden's only paper money, redeemable in precious metal. In exchange for this charter the bank agreed to loan money to the government. In 1720 when the government failed to repay a loan, panicked citizens tried to redeem their banknotes from the insufficient reserves held at Riksbank. To deal with the crisis, Parliament declared Riksbank notes to be legal tender that satisfies any claim to payment -- without the requirement to redeem in precious metal. Central banking in Britain arose from a more competitive tradition. Since the early 17th century British goldsmiths had been issuing deposit receipts for gold held for safekeeping in their "strong rooms" -- and these receipts were circulating as money. In 1694 William of Orange was desperate for money to finance his war against France so he authorized the creation of the Bank of England by a Scottish promoter. The Bank of England issued banknotes, most of which were used to buy government debt. Impressed by the royal authorization of the institution, many British citizens deposited their gold with the Bank in exchange for receipts or banknotes. But fractional reserve practices led to a disastrous bank-run within 2 years. The government defended the Bank of England by allowing the Bank to suspend all payments for 2 years. And the Bank of England continued to help the government with its need for financial assistance.

Private banks competing with the Bank of England received a boost in business in 1730 with the advent of the printed check. The Bank of England's efforts to finance the war against France and the outflow of bullion to private banks led the Bank of England to suspend its obligation to repay its notes in gold in 1797. The Bank did not reinstate a gold repayment system until 1821. Central banking was formally instituted in Britain by the Peel Act of 1844. The Bank of England was granted a monopoly on the issuance of banknotes. Private banks could only hold demand deposits (checking accounts), redeemable in Bank of England notes. Britain was the first Western nation to adopt this central banking structure and the United States was the last.

Early in the revolutionary years, the American Continental Congress authorized paper bills ("continentals") which were supposed to be worth one Spanish dollar (peso). Despite threats of severe penalty for traitors who would not accept continentals, their value inflated by a factor of 75 within 4 years. In partial reaction against the tendency of governments to print inflated currencies, Article I Section 10 of the U.S. Constitution stated that "No State shall ... make any Thing but gold and silver Coin a Tender in Payment of Debt.

The Democratic Party of Thomas Jefferson stood as the defender of hard money for most of the 19th century. The Second Bank of the United States was a weak attempt at a central bank (it lacked a monopoly on banknotes), but its central banking powers were nullified by Democratic President Andrew Jackson in the 1830s. Hard-money Democrats were able to restore the gold standard in the United States in 1879. But the National Banking Acts enacted during the Civil War had destroyed the issuance of bank notes by state chartered banks and monopolized the issuance of bank notes for a few federally-chartered national banks. In 1913 (with strong backing from the Rockefeller and Morgan banking interests) the Federal Reserve Act brought a central banking system to the United States. Mostly every country has a Central Bank although they are supposed to run independent of the Government. Some Governments have a very strong influence on some of the decisions their Central Banks make.