"Danger Will Rogers...Danger" *

Steven Pearlstein, a columnist for the Washington Post wrote about the "Global Economy Comes To The End Of Its String" and went on to explain, quite "readably" why it's happening. The column, in the 8/6/11 online edition, discusses the fact that we are cycling back to 2008 levels (maybe), because we never fixed the underlying problems with ours and the global economies. The only issue I would have with the characterization is that we are finding it increasingly difficult to separate our economy from the global economy.

As was written in the prior post here, the U.S. has been spending more than it's been making. We have relied on foreign countries, like China, to continue to buy our Treasury Bonds, which is just lending us money. That's what the whole "Debt-Ceiling" debate was all about. It took Congress 3 months to decide if we would be allowed by law to borrow more so we could keep operating our Country without a DEEP cutback in services, like Defense, Medicaid, Parks, EPA protections, Federal Aviation Admin., and on & on & on.

Brian Wolfman posted a short piece of the article on the Consumer Law & Policy Blog and asks at the end "So, what's the chance that will happen given what we've just seen in Congress?" Here is my response:

"You ask, somewhat rhetorically, about the chances for Congress to adopt policies like those Mr. Pearlstein outlined and accept his analysis of the "how we got here". If you know how to bring back from the un-living (on earth anyway) Sam Rayburn, Tip O'Neill, Dwight Eisenhower, Louis Brandeis, Earl Warren, Hugo Black, Ronald Reagan, and Gerald Ford, we might have a chance. As partisan as some of those folks were, they put the Country first when the chips were down (don't really know what that expression means but...).

The current Congress is so ideologically focused and unyielding in their world view, that they belong back to a time when the "world was flat". Common sense tells them that if you go to a beach and look out to the horizon, you can see that the world is flat. That was the prevailing common sense. Oh, and, of course, from Wasilla, AK you can see Russia (I tried with military issue binoculars, from the highest point in Wasilla, in March of 2010, on a clear day, and could NOT see the "Hammer and Sickle").

We are truly at a turning point for the Country and the world. The EU (European Union) is as divided as our Congress, so they will be no help. At least here, the big issue for BOTH Congressmen and Senators is GETTING RE-ELECTED in the same country. The pandering to lobbyists and ideologues must stop. The hard core Tea Partyists are at least true to their beliefs, but remember the flat world.

The future looks grim. Voters cast out the evil-doers in the mid-terms. The world economic crisis was only in part our fault. We allowed the most selfish politicians and "bankers" to run us into the ground. No regulation, no brakes, no-mind to the constitutional interpretations of the past, and a skilled manipulation of the concepts of a "free-market economy" ruled for 8 years. But, this coincided with Europe deciding to try getting along. No one hired a Cat Herder.

Maybe if we remember Peter Pan's plea that we all believe in Tinker Bell (metaphorically only) our economic system will survive. If it doesn't and we don't begin to rebound quickly, we are facing a future that we have fought 2 world wars, our own revolution, a civil war, and the "baby-boomer wars" for nothing.

*from the CBS Show -"Lost in Space" - fitting!

Author's Copyright by Richard I. Isacoff, Esq., August, 2011
rii@isacofflaw.com
http://www.isacofflaw.com

We Have Been Sent To The Minors

I work in the private practice of law dealing daily with the economic realities of average people who have average problems and with those who have extraordinary financial problems. Having had the responsibility for the investment of as much as $145M, I continue to pay attention to the financial markets on a daily basis. This posting is to try to explain what has happened in the lowering of the credit rating of the Country's "sovereign" debt (meaning money the Country itself has borrowed - think Treasury Bonds) from AAA to AA+. Just like in baseball, we have been sent down to the minors.

By now, the entire world, knows that the United States has lost some of its credit-worthiness. Standard and Poors, known better by "S&P", in its role as a debt rating agency (a company that determines what debt is safe for investment and what is risky and how risky). The fact that the other two major raters have not taken any action "against" the U.S.'s risk seems to be of no importance.

In the world of investments PERCEPTION IS REALITY. That's true in many areas of life but especially in this one

The downgrade was apparently caused not by economic factors but rather the dithering of the Congress in deciding to do anything about the debt-ceiling and deficit reduction. With the complete polarization of the 2 ½ parties currently "in charge", little was done to address the systemic problem of our growing debt and its root causes.

It's easy to state that the Obama administration did or didn't do this or that, or that Bush allowed deregulation to go too far (think SEC and securitization). But, in reality should that have affected the credit worthiness "rating" of the sovereign debt of the U.S.? Probably NOT.

The Congress, through a myriad of laws and regulations wanted/tried to rein-in the Rating Agencies and hold them accountable for the financial meltdown. Remember it was these same agencies that rated Mortgage Backed Securities as AAA paper. That they were/are paid by the "investment banks" who did the securities to sell bonds to make $$billions has escaped the review of the markets now in panic over our AA+ rating. Rather than this being an assault on the problem with our deficits and trade imbalance, it seems more like S&P trying to exert enough pressure to get Congress here, and Parliaments in the EU to back off assigning liability to Credit Rating Agencies.

S&P was the only agency to downgrade. S&P was the agency most involved in giving the "seal of approval" to the MBS and CMBS bonds. S&P stands to be the biggest target if liability is established for the incorrect/negligent/disregard for underwriting standards rating of those bonds. It's worth repeating that the securities firms securitizing the loans and selling them for huge profits paid the rating agencies large fees to rate the bonds.

Michael Shemi wrote an excellent column in the August 4, 2011 edition of American Banker's blog "BANK THINK" ( http://tinyurl.com/3s4tn7n ) where he discusses the moves to lessen the restraints and assignment of liability to and on the credit rating agencies. As he put it "Lastly, the continuing crises surrounding sovereign debts and national deficits from Greece to Portugal to the United States are affording rating agencies another opportunity to boost their own importance. By threatening the imminent downgrade of the ratings for these countries, the rating agencies keep their names in the news and constantly rattle the chains of issuers, regulators, and investors."

Of note is the matter of the probable divestiture of S&P by McGraw-Hill which owns it - "spin-off" because of S&P's enormous profitability. It needs publicity. It needs a crisis to show its importance and absolute need.

The U.S. economy has problems but also the capacity to overcome those issues if Congress can stop the "Texas steel cage death fight" over ideology". It's almost as if each political party and each faction thereof wants credit for causing the next recession. The rating agencies need to be held accountable - but so does Congress; and so do WE the people. We desparately need a coherent plan to reduce the deficit over the next decade by $4trillion and then another $10trillion in the decade following. Budget cuts? Social Security cuts? NO!! Tax reform - so rich folks pay a share commensurate with their annual income. Raise the age for Social Security benefits starting in "X" years - maybe from 62 (early)and 65/6 (regular-full) to 63 and 67/8 respectively.

If the WORLD saw us with a plan to eliminate the deficit totally in 20 years with a big push in the first 10, all would be well again.

Author's Copyright by Richard Isacoff, Esq, August 2011

rii@isacofflaw.com
http://www.isacofflaw.com

The Theory of Money - (Part 2 of March 7th Posting)

(From the March 7, 2011 posting for background)

[How much is GOLD worth? Or even more basic, why is gold worth anything? Why does the Pound Sterling or the Euro or the U.S. or Canadian Dollars have value? Only because "we" say so!

The above statement is an over-simplification of a complex, and seldom discussed matter of economics - THE THEORY OF MONEY. Think of this concept: Money, regardless of country, and so-called "precious metals", have value only because the people of the world say they do. In reality, what we call money is a short-hand and efficient method of barter. After all, we use money to get ("buy") something of value from someone else.]

(Now the new information)

If money is worth only what we agree it's worth, then we could declare all money worthless, right? NO! This is because, as mentioned in the March 7th posting, whatever we use to exchange goods and services, without literally trading the bushel of corn for a pair of shoes, or 5 bushels of wheat for one pig, is a shorthand method of keeping track. I want your shoes that you will trade for 1 bushel of corn. I have none but Sally has corn. I just have wheat. Sally will trade her corn for my wheat; I trade her my wheat for her corn and trade with you, giving you my (originally Sally's) corn for your shoes. Now each of the three of us has what we want. I have shoes, you have corn and Sally has wheat.

BUT what if I want your shoes; you want Sally's corn; Sally wants Pete's painting; Pete wants George's work as a plumber; and George wants my wheat. It will all work out but it would take a week just to move goods and perform services, when all I wanted was a pair of shoes. Money, a universally accepted product/commodity/service "stand-in" makes it all very simple. We agree that (1) unit of this thing called "money" will trade-for (is worth) 1/10th bushel of corn, and that (4) units are needed to trade for the shoes, and that one hour of plumbing time will "cost" (5) units, and so on. We have created money as we know it.

Now, just imagine trying to work out the trade value of every good and service we use in this country. How do we establish the price in these units? By agreement. Essentially, we give everything a trade-value of "X" units, just as is shown above. When we are not certain, we guess. If we are right, the trade is completed - 23 units for a set of 4 chairs. If we are wrong, the chairs will be 30 units, or maybe only 21 units. IT'S ALL MADE UP! Until the majority of unit users say NO to the exchange, everything works fine.

Just keep in mind that MONEY IS WORTH WHAT ALL USERS OF THAT KIND OF MONEY AGREE TO. No More, No Less

As we look at financial markets, as we hear about the "strong Yen" or the "weak dollar" or even issues of inflation the explanation gets much more complicated.

Be patient: we will get to it a little at a time!

Author's Copyright by Richard I Isacoff, Esq, March 2011

rii@isacofflaw.com

http://www.isacofflw.com/

How Many Grams of Fat In An Ounce Of Gold?

How much is GOLD worth? Or even more basic, why is gold worth anything? Why does the Pound Sterling or the Euro or the U.S. or Canadian Dollars have value? Only because "we" say so!

The above statement is an over-simplification of a complex, and seldom discussed matter of economics - THE THEORY OF MONEY. Think of this concept: Money, regardless of country, and so-called "precious metals", have value only because the people of the world say they do. In reality, what we call money is a short-hand and efficient method of barter. After all, we use money to get ("buy") something of value from someone else.

There was a time, not all that long ago, when if someone wanted a pair of shoes, that person would trade a cobbler a bushel of corn or wheat or maybe 5 chickens. The person would get new shoes, and the cobbler would eat. Fair trade! At some point, people got tired of carrying bales of hay, sacks of corn, homemade wines/beers to the shoe maker or the dress maker. There was the thought that if there was something everyone wanted, then that item could be used to exchange goods and services. Thus enter GOLD.

Why gold? Don't really know. It can be pretty and it doesn't get corroded or corrode other things so it has use in electrical parts, and jewelry, and it can be pretty but it is prized well beyond its actual use. Here is the point - Assume you are on an island with no food but plenty of gold; gold is everywhere. FOOD is nowhere. Which has more value? Let's go off the island and into many parts of the world where food is scarce, where even gold can't buy food because there isn't any. Which has more value. How much gold would you trade to have enough food?

From the use of GOLD or diamonds or other things found in nature, we created an artificial "product" with which to barter - to exchange goods and services; we call it MONEY. It only has value if a certain number of "money" (dollars, rupees, rubles,euros, pounds etc) will be accepted in exchange for goods, like food. And, the real value is determined by how much food, clothing, steel, etc. each amount of money will "buy" (be accepted for the exchange).

Okay - this is the stuff that will put you to sleep anytime but the point is that, with the current economic situation, the price of GOLD has soared meaning that one ounce of gold will buy more whatevers than it would before the crisis; actually twice as many. Why? Because people want GOLD. Irrationally, there is the thought that gold is inherently valuable - that it is worth a great deal just by being itself.

What if, just what if, we rejected GOLD having a special value; said it was a rock, nothing more. If everyone agreed, then it would become worth no more than a regular old rock you find in the woods or elsewhere on the land or in the sea. GOLD is only valuable because people have decided, without even thinking about it, that GOLD is special; not just pretty, but special.

When the conversation shifts to why the U S Dollar is worth something more than the Crane Mfg paper it's printed on, we enter the world of monetary economics. Here, the value, the amount of corn or wheat or oil a United States Dollar will buy, is actually based on the U.S.'s ability to produce goods, manufacture, assemble, produce metals from raw materials like rocks, make silicon chips for computers from sand. Add to the mix, the country's ability to defend itself and others, the technological abilities of the nation etc. In other words, the total production of the country in an agreed upon period of time.

The only point to carry away from this posting is that "money" has no real value, nor does gold. It is only worth what people say it is. Does that mean that all gold should be discarded - NO! At least not until the world agrees it's just a pretty rock.

More next time.

Author's Copyright by Richard I. Isacoff, Esq, March 2011

rii@isacofflaw.com

http://www.isacofflaw.com/