first majestic silver

Housing Next?

Part III

August 9, 2002

I know this is unusual, but it has to be done, simply because of its wide implications, and the fact that it might be the hinge on which the American economy swings. More and more letters have come to me about these columns on housing. Letters from South Carolina, California, Maine, Maryland, Ohio, Las Vegas, and numerous places. Letters that tell of lots of for sale signs, and no sales. Lots of letters telling of reduced prices. Columnists speaking of the housing bubble that will break. It is plain common sense that what goes up unnaturally, will come down either slowly, as did gold and silver after the 1980 peak, or quickly, as in the NASDAQ fall. Housing is the only thing that is keeping the economy afloat, I truly believe.

Ever-escalating housing prices, are the same as the ever escalating stock market bubble…that burst. Why did it burst? There was no true value in the stocks. Only hype. There was no profit, the PE ratios were either absurd or non-existent, and it was pure fluff, similar to the tulip bubble, and Louisiana land bubble, which took the French economy with it; thanks to John Law. The stock crash, percentage wise, has been almost identical to the 1929-1931 crash, which took real estate with it.

Argentina is gone. People are starving, and literally, the land is in ruins. Uruguay is going fast, with more paper insertions by America and the IMF (which are the same) only postponing the inevitable for a short time. Brazil will be next, with debts many times those of Argentina, and a situation far more hopeless. Japan has faded, and zero interest has failed to prop up a real estate market that has failed, taking investors with it. Foreigners have slowed buying US government paper, due to the falling dollar and low interest. Lots of foreigners are cashing in their US debt. The US cash outflow (balance of trade deficit) is over $400 billion per year, meaning we are spending far more than we take in, and have virtually ceased to manufacture the things we consume. The Dow Jones "industrial" average of 30 prime stocks, hardly represents "industry" any longer, and has banks, Walt Disney, and other non "industrial" stocks as part of its consist. We are doing each other's laundry, and believe we are OK. It's all so pitiful.

Just like stocks going up with no value, real estate has done the same. The cost to build a home, plus land, in 90% of the cases, has gone up to twice, or much higher in dollar price in many cases, and especially in higher priced neighborhoods, such as Washington DC, but also in California, and other so called "hot spots." DC is an anomaly all its own, and prices there and in its environs, can be lain at the always growing federal government. Government will never shrink, but continue growing like Topsy. Government produces NOTHING, creates no wealth, and is a detriment to wealth production. It eats capital, resources, and causes wealth production to slow, and in many cases cease all together; as in mining. (Everything has to be initially either grown or mined) DC real estate prices may go up for a long time, because like a cancer, government keeps growing, and destroying the rest of us. Washington DC is indeed a cancerous growth that no one knows how to stop or cure. Real estate prices there, may go on, but this is not the rest of America. D.C. is a world of its own.

Sir Allen Greenspan and his cahoot bankers, caused the money supply and consequent stocks to go far too high, which mandated a crash. It is mortgage bankers, Freddie Mac, Fannie Mae, and others that have created money out of thin air, to bolster sales of ever higher priced housing and assessments, with no actual increase in value, as was true with stocks. The stock crash took hundreds of thousands of jobs with it, as well as the retirement hopes and dreams of millions, plus the savings of millions, and the destruction, it is said, of $7 trillion. The housing bubble could pop, leaving America with nothing. The stock market crash has cost the jobs of people who can not pay their mortgages, and retirements of those who realize they cannot continue living at the level that they had become accustomed to, so they attempt to downsize. Expensive homes go first, but others will surely follow.

A friend in California, had a 1400 square foot home he paid $140,000 for several years ago. He sold it for well over $500,000 to some sap, who will probably watch it go down, even though southern California is a "hot spot." Jim laughed all the way to the bank, and now resides in a much lower priced community, in a much larger home, that cost less than half of what he sold for in Caalifornia. Can this nonsense go on forever? I think not.

I am certain that the PPT, and every person in the know with a checkbook or authority in DC, is working overtime to keep everything in place till after the elections in November, and hoping against hope that the terrorists don't mark their first anniversary with another attack, but it may not happen as they wish. The loss of a job has a devastating effect on the psyche of the individual, and of his ability to pay a mortgage. It is said that some up and coming yuppies have committed 35-45% of their paychecks to live in these sumptuous, overpriced homes. The dot com crash has left these areas with thousands of for sale signs, and few are buying. "Do you know the way to San Jose?"

While the woes of Brazil, Argentina, Uruguay, Japan, and others may seem far off, they aren't. Argentina, a couple of years ago, was a wonderful place to live, and Buenos Aires was one of the truly great cities in the world. It has gone like a lightning flash. "Us collapse? You must be kidding. Why, we have a wonderful life style, beautiful cities and farms, and our currency is even pegged to your dollar. You are out of your mind." That could be a quote from a resident of Argentina or Uruguay, who prides itself in its banking system and high standard of living. Debt was, and is, the problem in South America, Mexico, and a host of other lands. Does America have debt? You must be kidding. America's corporate, personal, mortgage, and government debt is the largest debt in the entire world. Besides that, Citibank, and JP Morgan-Chase, it is said, are already bankrupt and have a derivative hang-over of hundreds of trillions of dollars. It's all paper, just like the debts of the other countries. When the paper falls to nothing, due to the utter worthlessness of it, people go rummaging through trash cans to get something to eat. Banks close, prices go to the sky in worthless currencies, jobs are lost, and it all comes crashing down. Savings of a lifetime will buy a meal when currencies go bust, and insurance policies become pointless. Already Met Life has had so many failures in its investment portfolio of commercial shopping centers, stocks, bonds, and other instruments, that its stock and dividends are plunging.

What is keeping the whole thing afloat, now that stocks are a joke? Real estate. The continual creation of money, through mortgages, refinancing to pay existing debt, and new construction, has kept the economy barely chugging along. Even probably fraudulent government figures show a marked slowing of the GDP, and that figure includes government spending. The so-called "consumer confidence" ratings are in the pits, and these are probably faked also. Why should a government that is afraid for its very life, exude correct figures? All the while, of course, CNBC extols everything, and suckers log on to a brief jump in the Dow, believing the broadcasters and polls, when they say, "this is the bottom."

Sir Greenspan knows that reducing interest rates will give it a bit of breathing room, and this will undoubtedly happen. But Japan has zero interest rates, and it hasn't helped. Just like it took 54 years for the Dow to regain its former status after the crash, why can't it happen again? The dollar is no longer backed by anything, and the whole world is based on worthless paper currencies, bonds, stocks, government promises, and yes…hype. The dollar has lost a lot of its value already, causing Europe and Japan to be skeptical. As if theirs have more to offer. If the process of ever-expanding amounts of greenbacks, equities, mortgages, bonds, and paper, paper, paper doesn't continue…it'll all come down with a crash. Those South American lands had the same worthless paper as do we. If expansion stops or slows, it collapses. It must be kept going. History and logic proves it.

The "price" of things, is based on their replacement after they are sold. If you buy a roast beef from a market, that market has to make a profit, and replace it in their meat-case, for someone else to make a purchase of roast beef, other wise their inventory is gone, and they are out of business. If the currencies are going down in value, it will cost more to replace, so the retail price has to increase to cover profit and replacement. Wages remain the same, while prices go up. Wages can't go up, because due to the inflation, profits are not there to give a wage increase. The wage earner, therefore, is unable to buy food, or anything else, and his employer is unable to give a wage increase. The whole thing is a chain reaction, and with inflation escalating, as it always does once it really gets going, the chain leads to a quick collapse, with banks closing their doors due to runs on them by savers, who just want to get their failing money out, so they can spend it before it goes further down, or even just to eat and pay bills. Then people are unable to pay bills, utilities, taxes, or anything, and total collapse is in the offing, with no way to stop it. IMF loans aren't even a finger in the dam, and are worthless, as the loans are consumed immediately…never to be repaid. This causes the dollars loaned by the IMF, Citibank, or J P Morgan-Chase to be un-recoverable, as with Enron or World Com, and they go down, due to insolvency. The fed then "prints" billions to bail them out, and collapse has begun here in America, because of mass increases in the currency supply. Gold, silver and everything else goes to the sky in prices of those currencies, thereby giving their owners solvency, whereas those who saved in the diminishing currencies, watch their life blood drip away, and are unable to do anything about it. Clear?

Example. Suppose Coca Cola goes to $50, as would happen with inflation getting underway in a manner that it is unstoppable. (When I was a kid it was a nickel, homes were $3500, cars $600, etc.) It's always unstoppable anyway, but can be slowed, if the supply of currency can be kept under control. Currency collapses can occur overnight, as witness Argentina. With Coke at $50, your $150,000 home would be worth $2 million, O.K.? You've saved your surplus assets in T-Bills, savings accounts, money market accounts, or whole life insurance. Follow? You will soon be bankrupt, because YOUR DOLLARS ARE BECOMING WORTHLESS. Maybe an ounce of silver will then be $500. Your ounce of silver, which you may have bought for $5, is still the same silver, but with the currency collapsing, you have "hedged" yourself, and your ounce of silver will still buy the same goods as it did when it was $5. The "money," is rapidly becoming worthless, but your silver or gold still have the same purchasing power they did before the collapse. You will eat, and those that had their money in banks or in currency denominated instruments, will be rummaging through trash cans. Remember also, that your 30-year mortgage will still have the same payments every month, so your ounce of silver may make a payment, or your 500 Silver Eagles may pay it off completely. It is possible, and I think probable…in our lifetime. How do you suppose those Americans felt when their paper money went to zero after the War Between the States, or Revolutionary War? Those that had their paper money tucked away in mattresses or banks, "for a rainy day," lost everything, even though they STILL HAD THE SAME AMOUNT OF CURRENCY. This is happening RIGHT NOW in various parts of the world. Why do Americans think it "can't happen here?" Sound familiar?

No one ever learns from experience. May I close with a quote from Benjamin Franklin? "Experience conducts a dear school, but a fool will learn in no other." Protect yourself!

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