Monday, February 22, 2016

Two Assaults On Producers - One Defense

There were two news items in the last feww weeks tht stood out amongst the "sinking titanic economy"  daily deluge.  One was the worldwide move to eliminate high denomination cash, the other was seven US Marshalls arresting a man with a $1500 25 year old student loan bill.

AS to the first, this is a bit more clever than people think.
Well, not even 24 hours later, and another Harvard “scholar” and Fed chairman wannabe, Larry Summers, has just released an oped in the left-leaning Amazon Washington Post, titled “It’s time to kill the $100 bill” in which he makes it clear that the pursuit of paper money is only just starting. Not surprisingly, just like in Europe, the argument is that killing the Benjamins would somehow eradicate crime, saying that “a moratorium on printing new high denomination notes would make the world a better place.
A better place for whom, Larry?  You and your buddies who created this mess, and made sure you benefitted no matter what?  Certainly not for anyone productive.

USA has done this before, getting rid of the $10,000, $1,000 and $500 notes.  I recall seeing $1000 notes as a kid, people used them to buy cars and such and they were useful for keeping well hidden back in the day when stick-ups were common enough, due to no credit cards and folks carrying cash.

But here is the deal:  some $625 billion of the $853 billion in USA currency is in the form of $100 bills, and over half of all USA currency is outside of the USA.  So figure about $500 billion, a half trillion, in US$100 is overseas.  If one day Uncle Sam calls those bills useless, it is not that they cannot be traded for $50 or $20 or less, it is the process of exchanging involves explaining where you got $10,000 USA cash.  Just like getting pulled over by cops who search your car and find $10,000, it will be seized on suspicion of drug trafficking or terrorism or whatever.  You are guilty, when it comes to currency, until proven innocent.

Banks won't want them because it will become a foreign banks' problem to explain where all that currency came from, and reporting just will not be worth it, way too much risk of seizure and denial.  It will not be a rush to the exits, there will just be no exits.  Unloading $100 will at once make the $100 very cheap, and the $50 and less more in demand.  All those people who carefully tucked away cash over the last decades seeing the iceberg ahead will lose their hedge.

But as the article notes, it will be a race to the bottom as all countries get rid of the big notes, wiping out gains, ill-gotten and otherwise, of countless smart money folk.

How to have avoided this?  See below after the second story....

Whereas a half trillion wiped off the liabilities side of Uncle Sam's balance sheet is one of many big moves Uncle Sam (and all the other uncles) can take, there are tiny moves too.  Student loans are federal, so when some private collection agency gets a judgment against a borrower, US Marshalls go full SWAT and do a takedown.  In this case over a 30 year old $1500 debt.

Why?  Well, one distinct feature of "over" for a regime is when it farms out collections to private companies.  Any sane entity would have written this off, and the judge's over-the-top comments remind one of "the lady doth protest too much, methinks."  With marijuana becoming more legal, there is not as much work for federal judges now, so student loan prosecutions means new income stream.  full employment for judges!  And US Marshalls too! Yay!

By the way.  The average student loan debt is some $35,000 in USA.  It is not bankruptable.  The last eight years we went from 500 billion in student loans outstanding to $1.5 trillion.  There is a way out, of sorts.  Join the military if you are under 40 years old.  We call it the poverty draft in USA.  All volunteer.  Despoilment for student loan debts, or "serve" your country.  Nice!

In 2011 the US Dept of Education did a SWAT raid in Stockton, CA over student loan issues, and got the wrong person, handcuffed kids, etc, usual SWAT stuff.  People were appalled and complained.  Now things have gotten worse.

So what is the same solution to both problems?  Never give or take loans at interest.  It is possible to get a BA degree without student loans, so do so if you want one.  It seems easier up front to get a BA with student loans, but the end result is a lifelong lesson in the miseries of taking EZ credit at interest with no asset backing.  At the same time, extend and take loans at no interest, as long as they are asset-backed (so there is mitigating recourse).

The difference between the two is benecredit and malcredit, benecredit being unitive and creative, and malcredit being divisive (the 1%) and destructive (see student loan bubble, housing bubble, stock bubble, auto loan bubble, ad nauseum.)

Self employed and small businesses never really need cash, so no stack of $100 bills, since they give and take credit as a matter of business.  The small business "stack of cash" is the untouchable net accounts receivable.

Step aside from the insanity of capitalism, and enter the sanity of the free markets.

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