YouTube vid explaining how money in the US is created and its nature as a debt system rather than a value system. This, IMJ, is required viewing for everyone in 12th grade. But I doubt you'll see it (or anything like it) on a civics syllabus any time soon. In any case, anyone living during these economic times needs to understand the basic message of this video so they at least can have some understanding of what is happening around them (and what is happening to their savings) as our financial markets go through their gyrations.

Rat-pucking as the new public works solution for Berlin? Yes, read about it here.

Alas that voice-over guy who was famous for lines starting with "In a world where..." died not too long ago. This is really too bad because he was fairly young, only in his 60s. Anyway, I have to give credit where it's due, because I say this: In a world where rat-pucking can even be suggested as a solution for rodent infestation and under-employment in a modern western country, anything, I mean anything, is possible.

Folks, I am really sporting tinfoil these days, aren't I? Or am I? I am going to say that the next Big Shock, aside from anything else that is too hard to definitely predict (natural or man-made disasters, etc.), is the "Big I Word": Inflation. We are headed to nasty levels of inflation. Are we looking at Wiemar Germany or modern-day Zimbabwe inflation? Probably not. But ask yourself this: if your buying power were effectively half what it is now this time next year, what would life be like for you? Not nearly as pleasant as it is now. And I think we may be looking at that kind of scenario.

Why is this? Because the government has few options but to run the presses. The solutions to the current loan mess are few. In fact, to keep more people from becoming homeless than the government can deal with, they must come up with a way to keep them from going into default on their loans. They can do this by ordering the banks not to foreclose on properties, and this would effectively be the final straw as far as our financial system goes. But they cannot allow 5% of the population to be wandering the streets. That is a recipe for chaos. So they will order the refinancing of all these bad loans to fixed rates (under 6% I predict, probably 4-5%) and tell the banks to suck it up. When they complain, the gov't will give them the money to pay their many obligations that they currently cannot meet. The result of all this is inflation. If we double the money supply, what happens? Today's dollar is worth half of what it was the day before the money supply was doubled.

But wait, it isn't that simple. If we were a nation of Vulcans, that is how things would go. But we are not a nation of Vulcans. We concern ourselves mostly not with what is but what could be. That "could" in times like this is driven largely by fear. It will not take a doubling of the money supply to cause a 50% drop in the value of the currency. Between the actual mechanical effects of supply v. demand, there are the psychological factors. As confidence in a currency erodes, the value of it also erodes. Simple example: if I print up $15,000 in "Matt Money" that has a picture of yours truly on it and go out and try to spend it, no one of course will take it. That is because there would be no confidence in my custom-made currency. So even if there is only a mere $15k of this new money around, thus it being much scarcer than US dollars, it would still be worthless. That is because it has no confidence put into it by the public. So you see what I mean here.

The key to planning for yourself and others when all this stuff is going on is not to worry too much about specifics, because these are determined by too many things that will happen that are not really predictable. What is predictable, though, is trends. The trend is toward inflation. The exact details and sub-mechanisms are to be determined but the basic driving laws around politics and economics are not different for the US as compared with anyplace else at any other time in history. People are people, money is money. And inflation is a-comin'!

"So where is it all going? Someone has to be winning!" I got this recently from a coworker. He was figuring someone had to be on the getting side of all this money that is fleeing the market. After all, there is that whole first law of thermodynamics thing. Exactly what you'd expect from an engineer! :) But alas, the financial world doesn't live by the same rules as the physical world.

No. That is just it. The money is in fact disappearing -- into The Past. It is going back in time, as it were, to pay for the things everyone bought before it (the money itself) either existed or before it was even conceived-- that is what using credit is, spending money that doesn't yet exist. The problem is, we don't have enough of the stuff to pay The Past back. The Past likes to collect interest and we can't even make those payments. That is why we are defaulting on our obligations to ourselves that we created in The Past as we fail to meet the debt service obligations created in The Past for payment to The Past from here in The Present, which at that time in The Past, was The Future.

Get it?

OK, let's try to be a bit more linear here... if you think of the financial world as a boat and all of us as passengers, imagine this: the boat has leaks and that is to be expected, all boats do. We bail out the boat regularly to keep the bilge level tolerable. That is our ordinary borrow-and-repay analogy. Now imagine we decide to let loads of water into the boat for some bizarre reason. Who knows, maybe we think the boat will move faster if we do. Or better yet, let's say we think the boat will get bigger and better if we can quickly let in a lot of water, then pump it out real fast. So, we let in loads of water and then, after we see that this isn't working as expected, we then decide to pump it all back out. The problem is, the boat is now so heavy with water that we can't pump it out fast enough before the water line crests the top of the main deck.

That's the analogy to use. It incorporates all the right factors-- time being the most crucial to understanding what is happening to our financial markets.

But some people are indeed making some money-- shorts have been making money. However it's a scary game, shorting. It has its own set of rules and challenges and it is possible for short contracts to decline in value even as the shorted security declines in value. How? Repayment. The contract has to be honored. If a short-writer can't pony up, the contract loses value-- fast. After all, the short contract is only as good as the ability of the writer thereof to make good on it. Most writers of short contracts are, not surprisingly, market makers-- eg: brokerages, other financial institutions of various kinds (ones that are licensed to deal in securities-- and you wouldn't believe how many of them are), etc. And many of the biggest names of these are in serious danger, not just from their toxic CDOs but of course, because they wrote all sorts of short contracts they may not be able to cover.

So if you are having trouble getting your short notes paid, what to do? Go talk to the SEC. They'll get to you -- in about 5 years or so. Stand in line, pal, there's a long wait these days.

So this is the answer to the question, "How is it that so many different kinds of securities, pretty much all of them, can all lose so much value with nothing seeming to be up side of all this?" Based on the foregoing, the answer is: we are -- "we" who borrowed for our houses or private planes under crazed loan terms that required no real commitment to re-payment of principal. "We" who maxed out our credit lines thinking the fun would never end. "We"-- institutions and individuals alike. The past 20 years, and esp. the past 5 years, we have been living on borrowed money (and borrowed time) -- money borrowed from ourselves, the selves of the future-- and we can't pay ourselves back now that the future has become the present. Our chickens have come home to roost.

*Cluck* *cluck*!

I got the low-down on that cookie-stealing bunny, right here.