Hi DK,

"Thrift is the future" :)

I have not even read your post yet and this sentence above alone brings a Dutch proverb into my mind: "Zuinigheid met vlijt, bouwt huizen als kastelen".

How could I translate that into a proper English sentence: "be penny-wise and diligent and you will built houses like castles".

Am going to read your entry now :)

Today I read a most profound explanation why the stock exchange collapsed.

You should read what I write hereunder with a wink :).

It is a translation from a Dutch text into the English language and the Dutch word ‘eikel’ translated into English; ‘acorn’ has a double meaning in our Dutch language, one of that is: ‘dunce’. So keep that in mind.

How does the stock exchange work:

One day a man appeared in a village. He declared to want to buy acorns and he wanted to pay one Euro a piece for them. Because there were a lot of acorn trees in the village, villagers quickly began to gather acorns. A week later the man bought thousands of acorns for one Euro a piece.

The man declared that he would be back a week later and would pay two ‘Euri’ for one acorn.

And again villagers started to gather acorns, although there were a lot less left now.

A week later the man appeared, paid two ‘Euri’ per piece and declared he would be back again one week later and would pay five ‘Euri’ per acorn.

The stock of acorns was almost gone and the villagers did their utmost to yet find as many acorns as they could. And they still found some. The man appeared exactly on time, one week later, paid five ‘Euri’ per acorn and declared to come back a week later again and then would pay twenty ‘Euri’ per acorn.

However, the villagers could not find a single acorn anymore.

Then, a day later a second man appeared with a big bag with acorns on his back. The villagers asked whether they could buy the acorns from the man, but the man asked 15 ‘Euri’ for one acorn.

The villagers gathered all the money they could find. They put all the savings they had together and bought the big bag with acorns.

However, one week later the man did not appear. The villagers never saw the man again.
They lost all their money and the only thing they had left was a large amount of acorns.

And in this way, ladies and gentlemen, the stock exchange works…...

Let me state it bluntly, those that are part and parcel of the system and play in it cannot see the forest for the trees.

Recessions are the result of a flawed economic / monetary system and are somewhat contrived.

Although lack of "thrift" may play a small part it is not the main culprit.

Gambling
Making Money off of Money (usury)
Artificial Economy

To cut through the financial obfuscation jargon.

Derivatives - Bets
Hedge Funds - Borrowing money to Gamble
Credit Defaults Swap - Insurance on Bets

Reality - average citizens are being forced to cover the bets while the wealthy feel not much pain.

This is not the fault of the common producers and consumers.

Meike, that was a brilliant story and Metaphor.

Here is something I have been working on.

Vested Interest the New Dividend

Replacing a system designed to produce losers.

As many are coming to know as a result of The Great Dissemination the application of charging interest for the use of money or at a more lucid level the right to participate in the economic system, results in a master balance sheet that can never be balanced. This is due to the fact only the amount of the principal is allocated to the borrower side of the equation yet the interest to be repaid must come from the borrower side of the equation creating a deficit. This means not all borrowers will be able to pay back the interest based on simple math and will forfeit their tangible collateral. In other words this system creates losers in fact based on math a percentage of economic system participants are guaranteed to be losers. We need a system that only creates winners.

No one can argue against the divine side of investment directing energy to an entity to fund it’s ability and development to be able to create value in the system and then receiving dividends as a result of that entities success. One flaw in the current approach of banking is that the lender expects to be repaid principal plus interest regardless of whether the borrowing entity succeeds or fails.

The financial mentor should ideally have a vested interest in the success of the borrower, which would mean that if the borrower does not succeed then the lender does not benefit. If the borrower succeeds then the lender reaps the tax free dividends.

Now here is where we evolve. We have individual lenders that not only benefit if the borrower succeeds or fails, they still get paid there interest, these individual lenders have little or no control over the borrowers environment that would allow them to ensure the success of the borrower. However if the lender was not an individual but rather the collective, the collective, “government” would have the ability to influence the environment to ensure the success of the borrower.

Perhaps if the individual financial mentor with the return on it’s investment in the form of dividends contingent upon the success of the borrower worked in conjunction with the collective the lender would be better able to ensure a return on their investment. The collective or government would also receive dividends as a result of the success of an economic participant being able to produce value for other economic system participants rather than simply being a consumer. We know that if the government was the only investor the individuals making the decisions would have no vested interest in the success of the borrower either. So there needs to be a blend of individual and collective financial mentor. The key is the payment of dividends rather than interest that are contingent upon the success (ability to create genuine value in the system) of the borrower. The success assured by collaboration between both the individual and collective lenders; the government and private industry.

What happens if an entity is both borrower and lender? It doesn’t change the equation or the math it simply obscures the problem.

Hi Richard #3,

Well, thank you :)

Forward it, i would say to as many people as you can :)

Happy Holidays to you and to DK and family

Mieke

If the matter is not "properly" resolved very quickly you can imagine a French Revolution on a Global Scale.

Look at Greece.

Good post. On the money.

I can be even a little more candid here and say the bailout so far has been simply a bailout for the super-rich people who got us into this mess. It is meant to cover top executives of huge megabanks and the auto industries.

IF America had a "free market" which the ideologues bleat so much about, these businesses would fail, and they would be replaced by more efficient, thriftier businesses aimed at benefiting the number 1 customer - the middle class wage and salary earners.

In a free market, businesses that cannot compete fail. Fortunes are made and lost as demand changes according to market pressures.

If the auto makers failed, they would provide the fresh manure for thousands of independent geniuses to provide with affordable efficient gas and water-powered vehicles.

If Big Oil was allowed to fail, the energy industry would automatically respond by diversifying, opening up the field once again for that legendary figure - the American innovator/inventor/entrepreneur, who gave us so much of America's greatness in the first place.

Instead we are nationalizing the banks, and socializing the debts that should be repayed by the people who incurred them. Instead of encouraging enrepeneurs who have competitive new products for the new millenium, we are propping up the uncompetitive, old, wasteful and profit-draining industries.

As far as I can tell, we're still lying to ourselves about how and why this happened, and hoping more lies will be sufficient to help us avoid the consequences.

You are correct Yogi in that we have talked about starting a new car company here. It would take about $ 200 million. I know the entire automotive chain, not only did I work for the big three I also did consulting and development for many 1st 2nd 3rd tier suppliers.

What we would create is a consortium, a large joint venture, and the actual car company would be for all intent and purpose a virtual company it would quickly advance to be have greater profit margins then any car company on the planet.

I wrote a while back here that the large corporations would eventually collapse as a result of their bloated bureaucracy inefficiency and huge cost burdens and they are simply to slow to match the speed of change, which I know to well.

You see it is like software if you have a package you have been maintaining for 12 years it is bloated with old technology and foundation. You build something new from scratch it shines.

Anyone want to pony up the 200 million?

Richard, here I am mangling what you said, but does the following clumsy rehash reflect any of what you mentioned in your post about vested interest....?

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The divine side of investment is that it directs energy to a borrowing company/entity to fund its ability and development to be able to create value in the system and then in return giving its lenders/investors dividends as a result of that borrowing company/entity's success. Investment, whether by banks, investment groups, or individuals, is essentially the act of lending money at a certain rate or other consideration to a company or other entity that provides a service or product that serves people and that people want. Charging interest for the use of money (in other words, charging for giving the company or entity the ability to participate in the economic system) results in a master balance sheet that can never be balanced. Not all companies or entities will be able to pay the interest to their supportive lenders/investors as initially hoped, and that company will fail. Since some companies will inevitably fail anyway, wouldn't it be nice if the government were somehow able to intervene omnisciently and benevolently to ensure the continuation of those companies that truly produce VALUE for the buyer and for the market and for the common man.
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I do tend to believe that the government needs to somehow support good value-providing companies (environmentally healthy and innovative etc etc)...right now the government seems to be supporting the usurers at the expense of the common taxpayer

It is so encouraging that Obama plans to undertake massive infrastructure projects and also plans to monitor and regulate the banking industry more intensively, as one of Dr. Mayai's guest commentators suggested last month with the fourteen points that now need to be undertaken.
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[text mangled by janie]
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Saving the U.S. Economy
through Trickle-Up Economics

Rinaldo Brutoco

THE FIX
(SUMMARY)

1--buy up and renegotiate troubled mortgages and provide credit counseling to homeowners who hold troubled loans

2-freeze interest rates at today's levels on adjustable rate mortgages and home equity lines of credit and prohibit lending institutions from further capital calls on mortgages and home equity lines of credit

3--allow bankruptcy courts to modify applicants' mortgage payments and make it easier for consumers to use bankruptcy to discharge credit card debt

4--get control of the unregulated market for credit default swaps and prohibit the issuance of any new credit default swaps

5--increase margin requirements for all stock purchases, in order to continue reducing leveraged, speculative purchases of all stocks, including equities, bonds, and commodities

6--reevaluate short-selling rules to prevent short sellers from speeding up crisis-induced downward spirals in share prices

7--restore a needed wall between investment banking and commercial/retail banking

8--undertake a massive project to rebuild and expand American infrastructure

9--reduce our defense spending

10--enact a universal healthcare system and require pharmaceutical companies that sell drug products in the United States to sell at the lowest price they charge for the same product anywhere else in the world

11--cease the taxation of companies for the dividends they pay out

12--reinstitute the federal one-fourth-of-a-percent securities transfer tax

13--demand the effectiveness, fairness, and probity of the powerful oversight or supervisory panel created as part of the bailout plan

14--create a temporary financing fund for state, county, and city government entities

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.........................
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and we need to keep in mind that the United States fluorishes only as the rest of the world fluorishes. Maybe we could again take the lead in providing solutions to world hunger. Surely some wonderful new economic sectors and enterprises could be formed in that pursuit.

By the way.....what ever happened to the panic aabout the Population Explosion? Does anybody Else besides me see the population explosion as the humongous elephant in the living room, ignored and , well, humongous.....
WORLD HUNGER MAP
http://paperdreamer.files.wordpress.com/2008/04/world_hunger_map.jpg
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A whopping 65 percent of the world's undernourished people live in only SEVEN highly populated COUNTRIES:
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.....India
.....China
.....Congo
.....Bangladesh
.....Indonesia
.....Pakistan
.....Ethiopia
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In my mind, this concentration of hunger into relatively few countries makes the problem politically/socially easier to tackle, in some ways. ..Fewer national governments to deal with...???....or perhaps, au contraire, greater robbery of the foodstuffs donated? What happened to the Green Revolution? Helping local farmers by providing hardier varietals...
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[ SIDEBAR-----WORLD MOUNTAINS MAP
http://www.ii.uib.no/~petter/mountains/World_pic/world50.jpg
comparing with world hunger map from earlier link, interesting that there seems to be some correlation geographically between world areas' hunger and world areas' mountainnousness ]

from the United Nations FAO:

NUMBER OF HUNGRY PEOPLE WORLDWIDE
RISES TO 963 MILLION

www.chinaview.cn 2008-12-12
[edited a little bit by Jane ]
ROME, Dec. 11 (Xinhua) --

Another 40 million people have been pushed into hunger this year primarily due to higher food prices, according to a new report published by the UN Food and Agriculture Organization (FAO) this week. This brings the overall number of undernourished people in the world to 963 million, compared with 923 million in 2007. The ongoing financial and economic crisis could tip even more people into hunger and poverty. Presenting the new edition of FAO's hunger report titled "The State of Food Insecurity in the World: 2008," FAO Assistant Director-General Hafez Ghanem stated, "For millions of people in developing countries, eating the minimum amount of food every day to live an active and healthy life is a distant dream. The structural problem of hunger, like the lack of access to land, credit, and employment, remains a dire reality, worsened by high food prices. ... If ...the economic crisis forces farmers to plant less food, another round of dramatic food prices could be unleashed next year. ...The 1996 World Food Summit target, to reduce the number of hungry by half by 2015, requires a strong political commitment and investment in poor countries of at least 30 billion dollars per year for agriculture and social protection of the poor." The vast majority of the world's undernourished people -- 907 million -- live in developing countries, according to the 2007 data reported by the State of Food Insecurity in the World. Of these, 65 percent live in only seven countries: India, China, the Democratic Republic of Congo, Bangladesh, Indonesia, Pakistan, and Ethiopia. Progress in these countries with large populations would have an important impact on global hunger reduction, FAO said.

Editor: Sun

Richard, is this following paragraph sort of what the slant was (pardon the mangling).. your excellent insights have inspired a veritable thought fiesta in me....

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""""""(me mangling Richard's interesting, very interesting, post...thanks and oops sorry) The divine side of investment is that it directs energy to a borrowing company/entity to fund its ability and development to be able to create value in the system and then in return giving its lenders/investors dividends as a result of that borrowing company/entity's success. Investment, whether by banks, investment groups, or individuals, is essentially the act of lending money at a certain rate or other consideration to a company or other entity that provides a service or product that serves people and that people want. Charging interest for the use of money (in other words, charging for giving the company or entity the ability to participate in the economic system) results in a master balance sheet that can never be balanced. Not all companies or entities will be able to pay the interest to their supportive lenders/investors as initially hoped, and that company will fail. Since some companies will inevitably fail anyway, wouldn't it be nice if the government were somehow able to intervene omnisciently and benevolently to ensure the continuation of those companies that truly produce VALUE for the buyer and for the market and for the common man."""""""
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I do tend to believe that the government needs to somehow support good value-providing companies (environmentally healthy and innovative etc etc)...right now the government seems to be supporting the usurers at the expense of the common taxpayer

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It is so encouraging that Obama plans to undertake massive infrastructure projects and also plans to monitor and regulate the banking industry more intensively, as one of Dr. Matai's guest commentators suggested last month with the fourteen points that now need to be undertaken.
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[text mangled by janie]
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Saving the U.S. Economy
through Trickle-Up Economics

Rinaldo Brutoco

THE FIX
(SUMMARY)

1--buy up and renegotiate troubled mortgages and provide credit counseling to homeowners who hold troubled loans

2-freeze interest rates at today's levels on adjustable rate mortgages and home equity lines of credit and prohibit lending institutions from further capital calls on mortgages and home equity lines of credit

3--allow bankruptcy courts to modify applicants' mortgage payments and make it easier for consumers to use bankruptcy to discharge credit card debt

4--get control of the unregulated market for credit default swaps and prohibit the issuance of any new credit default swaps

5--increase margin requirements for all stock purchases, in order to continue reducing leveraged, speculative purchases of all stocks, including equities, bonds, and commodities

6--reevaluate short-selling rules to prevent short sellers from speeding up crisis-induced downward spirals in share prices

7--restore a needed wall between investment banking and commercial/retail banking

8--undertake a massive project to rebuild and expand American infrastructure

9--reduce our defense spending

10--enact a universal healthcare system and require pharmaceutical companies that sell drug products in the United States to sell at the lowest price they charge for the same product anywhere else in the world

11--cease the taxation of companies for the dividends they pay out

12--reinstitute the federal one-fourth-of-a-percent securities transfer tax

13--demand the effectiveness, fairness, and probity of the powerful oversight or supervisory panel created as part of the bailout plan

14--create a temporary financing fund for state, county, and city government entities

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.........................
wouldn't it be nice if some of the support and inspiration government needs to provide will be coming in the form of support for companies and sectors that work toward the easing of world hunger... whatever happened to the Green Revolution??

also, is anyone besides me lingeringly appalled at the world's continuing POPULATION EXPLOSION???!! Please do not tell me that it is not a factor for some sad sad stuff.....
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WORLD HUNGER MAP
http://paperdreamer.files.wordpress.com/2008/04/world_hunger_map.jpg
.

A whopping 65 percent of the world's undernourished people live in only SEVEN highly populated COUNTRIES:
.
.....India
.....China
.....Congo
.....Bangladesh
.....Indonesia
.....Pakistan
.....Ethiopia
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In my mind, this concentration of hunger into relatively few countries makes the problem politically/socially easier to tackle, in some ways. ..Fewer national governments to deal with...???....or perhaps, au contraire, greater robbery of the foodstuffs donated? ....and as asked earlier, What happened to the Green Revolution? Helping local farmers by providing hardier foodcrop varietals...
.

from the United Nations FAO:

NUMBER OF HUNGRY PEOPLE WORLDWIDE
RISES TO 963 MILLION

www.chinaview.cn 2008-12-12
[edited a little bit by Jane ]
ROME, Dec. 11 (Xinhua) --

Another 40 million people have been pushed into hunger this year primarily due to higher food prices, according to a new report published by the UN Food and Agriculture Organization (FAO) this week. This brings the overall number of undernourished people in the world to 963 million, compared with 923 million in 2007. The ongoing financial and economic crisis could tip even more people into hunger and poverty. Presenting the new edition of FAO's hunger report titled "The State of Food Insecurity in the World: 2008," FAO Assistant Director-General Hafez Ghanem stated, "For millions of people in developing countries, eating the minimum amount of food every day to live an active and healthy life is a distant dream. The structural problem of hunger, like the lack of access to land, credit, and employment, remains a dire reality, worsened by high food prices. ... If ...the economic crisis forces farmers to plant less food, another round of dramatic food prices could be unleashed next year. ...The 1996 World Food Summit target, to reduce the number of hungry by half by 2015, requires a strong political commitment and investment in poor countries of at least 30 billion dollars per year for agriculture and social protection of the poor." The vast majority of the world's undernourished people -- 907 million -- live in developing countries, according to the 2007 data reported by the State of Food Insecurity in the World. Of these, 65 percent live in only seven countries: India, China, the Democratic Republic of Congo, Bangladesh, Indonesia, Pakistan, and Ethiopia. Progress in these countries with large populations would have an important impact on global hunger reduction, FAO said.

and does it strike anyone as odd that so much of the world's violence is centered in HUNGRY COUNTRIES....HUNGRY HIGHLY POPULATED (and many of them MOUNTAINOUS) COUNTRIES????.

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[ SIDEBAR-----WORLD MOUNTAINS MAP
http://www.ii.uib.no/~petter/mountains/World_pic/world50.jpg
comparing with world hunger map from earlier link, interesting that there seems to be some correlation geographically between world areas' hunger and world areas' mountainnousness ]
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OK this is my rant for now

wonder if any will stick to the walls.....

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LOL

“By the way.....what ever happened to the panic about the Population Explosion? Does anybody Else besides me see the population explosion as the humongous elephant in the living room, ignored and, well, humongous.....”

As long as we are unable to address the Population Explosion in a meaningful way we will keep moving toward famine and sickness. We will end up fighting for food and water everywhere.

Yes Jane, many see it but few are able to do much about it.

I fully endorse he comment made - One flow in the current approach of banking is that, the lender expects to be repaid, principal plus interest, regardless of whether the borrowing entity suceeds or fails.

The main problem is usury, and several passages in the Quran have been very specific and clear that Allah has permitted trading and forbidden Riba (usury) Surah Al-Baqarah Ayat 275

Unfortunately the entire Banking structure is based on 'interest' income. Hope this economic meltdown, will take the world into a new direction, the benefits from which, may percolate right down to different levels of our economic society.
The bail out from the tax payers money to the super rich, will not serve to benefit, it may be a face saver only, no real benefiot will be derived in the long run, is what I feel.

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well, the mad text fiddler janie strikes again....What a fascinating article! Thank you for letting us read it, Dr. Matai. The very accomplished Dr. Roche is truly a forward-thinking individual with lots to tell us about thrift and other clarifying concepts important in the global financial restructuring.....Thank You so much, again… it was wonderful to learn about Dr. Roche’s commonsense approach and imprint it on my mind in my simple way
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Thrift Is the Future:
Interventions Will Only Prolong
the Credit Crisis
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David Roche

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President and Global Strategist

Independent Strategy

London

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December 11, 2008

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Let us state it bluntly. If recessions are to be judged by their depth and length, the current global economic recession will not be made any less painful by the American, British, and French governments’ present policies, which may make that recession less deep but are equally likely to prolong it. Fiscal stimulus and lax monetary policy will help avoid debt deflation and depression, but many of the measures taken to "save" the financial system will over the long haul prolong recessive credit contraction and will leave the financial system permanently impaired.

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The immediate trigger for the collapse was the bursting of the credit bubble that had funded the booms in leverage, asset prices, and global consumption. But attempts to extend the credit party will simply prolong the disease, which has its roots in the ingrained societal behavior of the United States and of many other economies over the past two decades: people’s instant gratification of their material "needs" without reference to the ability to earn this gratification. This attitude has done away with the economic virtue of thrift and has encouraged excessive consumption, which in turn has resulted in global imbalances such as the U.S. current-account deficit.

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The correct method to deal with credit crises is not rocket science. It was etched in stone by the belt-tightening, no-nonsense, clarifying Scandinavian approach in the early 1990s, and although this Scandinavian-style approach is almost guaranteed to bring good results, it is being applied nowhere. The current U.K. model comes closest but nevertheless lacks the essential ingredient: that of forcing the banks to write down their assets to market value and to take the hit to shareholder capital before recapitalization begins. Without this step, we have no way of knowing how much capital is needed and which institutions are solvent and no way of distinguishing between good and bad banks.

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In the United States, about 90 percent of all the measures to deal with the credit crisis aim to prevent the falling of asset prices to market levels, at which they would clear. The balance sheets of borrowers and creditors will therefore remain encumbered by liabilities and dud assets, slowing the resumption of credit expansion and risking stagnation of the process of intermediation between savings and investment.

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Many of the fiscal measures enacted and planned, as well as the initiatives to restructure mortgages either through private-sector banks or government-sponsored entities, are intended to bail out borrowers and to prevent the repossession of houses. But this approach will prevent the rapid addressing of the ultimate cause of the crisis—lack of household thrift—and will instead train overextended mortgagees not to learn new ways when learning new ways is precisely what they need to do.

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What the world economy needs is reduced leverage. To avoid similar credit crises in the future, thrift must replace leverage and scarcer capital has to be invested more productively. Policies that deviate from this aim are bad. Thus, replacing excessive private-sector leverage with inefficient and market-distorting state leverage is not a path to a more stable world.

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It is a matter of simple arithmetic to work out that the new layers of state debt to deal with the credit crisis are not a substitute for private debt, but an addition to it. This is because state debt does not extinguish the private debt but merely finances it, thereby increasing the layering of leverage that lies at the heart of the credit crisis.

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Worse, bigger budget deficits and larger borrowing requirements will increase the U.S. and U.K. need for foreign capital, the unavailability of which may cause the dollar to crash. The increased role of the state in this area will also crowd out more productive uses of capital and will create a bigger governmental role in the economy, not necessarily a good direction.

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Historical precedent is often a mediocre forecasting tool, and the 1929 deflation periods are not accurate forecasts of where we are destined to go in the U.S. and Japanese post-bubble period. We have created our own very serious, but quite unique, mess. Fiscal stimuli and the creation of central-bank liquidity, unless rapidly reined in when the economy starts to recover, will generate inflation and low growth in productivity down the road.
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David Roche is president and global strategist at Independent Strategy, which he founded in 1994. Well known for his original and provocative ideas, he moved away early on from the notion of investment strategy as piecemeal country-oriented allocation, to focus instead on broad investment themes based on long-term econometric analysis and ethics-based, forward-thinking regional developmental objectives. He has forecast some of the major turning points in global investments over the past twenty years, including the demise of the Soviet bloc and the fall of the Berlin Wall, as well as the sharp monetary tightening that heralded the 1994 financial reversal in world bond markets. Early in 1997 his was the lonely voice that predicted the development of the Asian crisis, and early in 2000 he advocated switching out of the overstretched technology sector back into more-traditional companies that would benefit from the new-economy improvements in their particular production field. Since mid-2006 he has been developing and expanding his theory of the “new monetarism” underlying the present worldwide credit crunch. Until 1994, David was global strategist and head of research at Morgan Stanley. He holds an MA from Trinity College Dublin and an MBA with the highest distinction from INSEAD. He is also a chartered financial analyst and has a diploma in accounting and finance from the United Kingdom’s Association of Certified Accountants. He contributes regularly to the Financial Times, the Wall Street Journal, and other top financial publications. He is also a regular commentator on the BBC, CNN, and CNBC television networks. David's pioneering work on liquidity and the credit crunch is explained and discussed at length in his recently published book New Monetarism.

Jane, thanks for the feedback, and for investing the time to understand and expound upon it.

Asgar, thanks for the endorsement, the first hurdle is always obtaining enough knowledge to first be able to challenge and question.