Here is a news article that reports that for 2005 about one in sixty households filed for bankruptcy, for around 2 million total. Most of these filings were for low-income households who would not have been affected by the 2005 bankruptcy law anyways.

There is a good article on Yahoo Finance by Robert Kiyosaki today. He points out that Warren Buffet is planning on reducing Berkshire Hathoway’s cash holdings by $30 billion dollars, investing much of that money overseas.

This is the real deal guys. All these questions about the US government deficit, monetary inflation, social security, oil, the war on terror — this ugly future is very real and it must be dealt with. Its not the end of the world, but people who have misallocated their assets will be wiped out much like what happened in the dot com boom. Unfortunately I think this realignment will be much worse and involve a very visible decline in the standard of living.

Kiyosaki points out that while financial planners are telling people to save more, Warren Buffet is doing the opposite. What does he know that the average American doesn’t?

US Today has an article you should read — “Taxpayers owe more than a half-million dollars per household for financial promises made by government, mostly to cover the cost of retirement benefits for baby boomers, a USA TODAY analysis shows. Federal, state and local governments have added nearly $10 trillion to taxpayer liabilities in the past two years, bringing the total of government’s unfunded obligations to an unprecedented $57.8 trillion.”

So how is this going to get paid?

Inflationary money supply. Think Social Security is going to cover more than one week’s grocery bill when you retire in 30-40 years? You are in for a suprise.

The Telegraph reports - “Global markets are bracing for turmoil today after an ominous slide in the US dollar and a slump in equity and bond prices late last week sent tremors through the global financial system, evoking memories of the 1987 crash.”

The Brazilian Real, Mexican Peso, and South African Rand have all seen very steep declines.

Gold also saw a pullback in US Dollars from $710 Friday to the low $680s by noon Monday.

In 2000 the stock market was in trouble. Several years of heavy speculation poured investment dollars into the stocks of companies that bled money. Many of these companies had nice ideas. Unfortunately they lacked one thing: profit.

In an attempt to hold back a serious economic depression the US Federal Reserve headed by Allan Greenspan dropped the target rate. They didn’t just tweak interest rates, they pulled the floor out from underneath them. The prime rate slid from 9.5% to a low of 4% in 2003. Te Fed’s target rate was down to 1%.

Money flowing out of the hot stock market was going into real estate. Low interest rates ignited several local real estate markets moving the speculation out of stocks and into real estate. At the same time, the money started flowing back into the stock market, pushing it back over 10,000 by late 2003.

From a distance, the US economy was looking good. Home prices were appreciating at record growth rates and it appeared the the stock market was finally recovering.

But was all well with the US economy?

By dropping interest rates the Fed floods the economy with easy credit. Easy credit means that a business or real estate project that may have not made sense earlier was suddenly profitable.

Economic growth means more jobs and more money is in the system. Isn’t this where we want to be?

Here is the problem — while the money supply can be increased at will, the limited supply of certain assets remains the same. Things such as real estate.. gold.. oil. The list goes on.

The problem is exacerbated because of the delayed increase behind employee wages. Thanks to other global trends, such as outsourcing, these wages may never catch back up. Are you starting to see the problem?

While Republicans have been willing to dismiss the “growing gap between the rich and poor” as Marxist propoganda, I no longer buy it. Well off individuals had a big advantage in this past real estate boom. Because many of them were already in real estate when it started, they had the beginners advantage.

The wealthy already get a large chunk of their income from investments. When the money supply increases, so does the paper value of these assets. The same can not be said of employees saving that money for retirement (if saving it at all)

When buying a new home the average consumer looks at the monthly payments — not the actual sticker price. Low interest rates meant they could leverage themselves into bigger homes. Combined with increased speculation this pushed the real estate market higher.

At first this appeared like an economic miracle. Increased home ownership and affordability was even praised by the President himself.

Then things started to look ugly. In the hot markets such as South Florida and California home prices started to be pushed to the brink of the average consumer’s affordability. The second generation of speculators were eagerly repeating out old wives tales such as “real estate never drops” and “location, location, location.” New home buyers were factoring in indefinate appreciation into their home purchases — completely ignoring the possibility of price drops.

Despite pullbacks that are already happening in the hottest markets it is unlikely that most Americans will see the bottoms fall out of their home’s dollar value.

Why? Because the Federal Reserve has been using asset targetting to set their target rates. That means they look at the stock market and real estate prices and adjust their rates accordingly.

This policy rewards speculation. The market responds to profits just as any rational individual would. Speculation is indeed an important part of any economy. Speculators make assets more liquid and assume risks bridging buyers and sellers. However, by stamping a guarantee on asset appreciation the Fed provides insurance to speculators; thats not their job.

In the next post I will examine the potential side effects of diverting capital away from sectors of the economy that meet consumer demand and into speculative assets. Note: this article was written on the way I see the US economy based on my personal observations both as an entrepreneur and student of economic theory.

USA Today reports that several banks are now offering 50 year mortgages. I heard some rumours about this, but this is the first official story I’ve seen. Here is the interesting part — “If you’re going to be there more than five years, you’re gambling,” says Marc Savitt of the consumer protection committee for the National Association of Mortgage Brokers. “You don’t know what interest rates are going to be. I wouldn’t do it.”

There has been a lot of talk about 100 year mortgages in Japan. I suspect it is true, but I don’t have any sources to back that up.

Shortly after 12 EST time today Gold pushed above $700 an ounce. This is the first time since 1980 that gold has hit this price point.

As you may know, relative to inflation gold is still historically low. I do not think this is a blank check to gold investment safety, but it is an interesting fact to take into consideration. Here are some numbers you might not be aware of — Gold adjusted for M3 money supply.

About a month ago I created a chart pegging the price of gold on the supply of US dollars. The formula used was the price of gold divided by M3 times 100. The numbers are very revealing.

The Business Times from Malaysia reports - “LI YONG, China’s vice minister for finance, said he had heard a ‘rumour’ that the US dollar was headed for a 25 per cent drop. If the gossip was true, the consequences would be ’shocking’, he said.”

The United States has been pushing China to unpeg its currency from the US dollar. The reasoning is that China’s currency will rise in value and help eliminate the US trade deficit. I question if the United States truely wants to increase China’s buying power, especially considering the rising price of oil.

At the end of the day, China may just leave the US dollar on its own accord. As the article reports, there is increasing discussion about creating a regional currency to replace the US dollar. This could help bring regional economic unification. For the US though, it could mean that China would become less dependant on our goodwill. China may be able to act more independently both economically and in international situations such as what we have with Iran today. If you believe in the Kondratieff cycle you see where this could be going.

Long term, the US stock market and real estate markets have two very different paths which could be travelled down depending on the state of the money supply. One path is deflation, the other is inflation.

Here is the dilema — Japan’s housing market peaked around 1990 and has been riding straight down ever since. In that same time frame their money supply almost doubled!

Of course there is an explanation to this. The question is, will it really be safe to rely on inflation for long term investment appreciation?

This blog is part of my larger site, BrokeSucks.com. I created BrokeSucks to address consumer financial needs that I feel are not being addressed very well on sites like Fool.com or Yahoo Finance. While other sites advocate paying off all of your debt and pinching pennies for retirement 30 years from now I don’t believe that this approach is a good one for the average person.

This blog, Money Supply & Debt - The Big Picture, is targetted toward a very different audience than the main site. In fact, this blog is mostly here for me to talk about things I am interested in — the effect of an inflationary global money supply on the economy of the new millenium. Big topic, not many answers out there.

I really do not have any qualifications to write this blog. I’m not an investment expert, economics phd, or historian. I am just a young entrepreneur who enjoys studying economic theory.

It is up to you to judge what I say here and form your own opinions. You won’t find me pushing any books or recommending stocks. Just like anything you reading, online or offline, take it with a grain of salt and discount it based on your own experiences.