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Can you remember back to 2004, 2005 and 2006, when your home value (and
equity) was at its all time high? Do you ever wish you had sold your house
during those years? At that time did you consider the tremendous equity in
your home to be your reserves? Do you sometimes wish you had consolidated
those "reserves" before they vanished into thin air?
I had a house I bought in 2000. In 2005 I sold it for 233% of what I paid for
it. But when I look at the actual cash I put down for that house, 5% down!,
my down payment yielded a 2,500% tax-free gain! I consolidated my
"reserves"!
Of course there were costs along the way, to defend my 5% leveraged
"investment". I had to regularly pay the interest on my loan, and I
had to maintain and secure the property. But boy was I lucky I decided to
sell in 2005! I wish I could say that I made that brilliant decision out of
economic foresight. But alas, I did not. And later I made a few not-so-great
decisions.
Some are still clutching their bygone perceived reserves
Wouldn't it be exciting to have such an opportunity come along again? Only
this time to be able to see it coming? How about if you could gain TWICE the
"leverage" without the risk and expense of actual leverage (debt)?
And what if you didn't have to worry about consolidating your reserves by
timing the peak? What if this next opportunity was in buying THE ultimate
wealth consolidator? Sound too good to be true?
In order to understand why this is absolutely true, no matter how good it
sounds to the exceedingly small and paranoid segment of society we call the
gold bugs, we need to clarify a few definitions. Reader Jeff comments,
"FOFOA, I find your writing in 'plain english' highly readable, putting
you head and shoulders above [those] who engage in foolish jargon. Don't
change a thing."
Thank you Jeff. This is something I strive for, and I am pleased that you
noticed. I don't believe it is fancy words that make for a high-level
discussion. Instead it is deep thoughts, fully understood and clearly
articulated. In fact, fancy words are often used to intentionally obfuscate
the meaning (or lack of meaning) in what is being said. And sometimes words
have different meanings to different people, hopelessly confusing any
discussion.
So what I'd like to do here is to explore the definitions of a few relevant
words in plain English. To do this I will utilize various online
dictionaries, a few friends, and my own plain English. Fair enough? I had a
list of six words I was going to tackle, but as you can see by how long this
post turned out I had to cut it down to three: recapitalization, liquidity
and reserves.
Recapitalization
This is an especially tricky word because it definitely means different
things to different people. At its root is the word "capital" which
has been redefined through 66 years of $IMFS rule. But redefined or not, the
only definition that actually works in times of systemic transition
hasn't changed. After all, "money" is just a temporary intermediate
surrogate for "real capital".
Imagine a family unit that has found itself to be bankrupt. How would it
undertake a recapitalization? Would it borrow more money, or take a large
cash advance and consider itself "recapitalized"? Of course not. It
would immediately stop unnecessary spending and start saving its income. The
same process we call "austerity" when applied to countries like Greece.
Investorwords.com defines recapitalization as a change in the permanent
long-term financing of a company, including long-term debt, stock, and
retained earnings. It says recapitalization is often undertaken with the aim
of making the company's capital structure more stable.
So in plain English, recapitalization means reorganizing your ways and means
for long-term financial survival, sustainability and stability. And this
applies on all scales, not just to companies, but also to individuals,
sovereign nations and even the global economy.
I mentioned above that individuals and nations (that cannot print their own
reserve currency) both recapitalize by decreasing spending and increasing
saving. This goes for most private corporations as well. But in a recent ECB press conference,
Jean-Claude Trichet stressed the need for commercial banks to recapitalize
themselves through other means. He did mention "retaining earnings"
(saving), but he also encouraged banks to "use the markets" and to
"take full advantage of government support measures for
recapitalisation."
Jean-Claude Trichet at a press conference
This made me wonder if the banking system defines
"recapitalization" the same way the rest of us do. So I went back
to Investorwords.com and read more about "recapitalization":
"Recapitalization
is often undertaken with the aim of making the company's capital structure
more stable, and sometimes to boost the company's stock price (for
example, by issuing bonds and buying stock). Companies that do not want to
become hostile takeover targets might undergo a recapitalization by taking
on a very large amount of debt, and issuing substantial dividends to
their shareholders (this makes the stock riskier, but the high dividends may
still make them attractive to shareholders)."
Hmm... Does this sounded familiar? Borrow lots of money at almost 0% and then
use it to buy (pump) your own stock? Interesting concept. Especially since I
found it in the definition of "recapitalization" on a $IMFS
financial website. Not exactly a "long-term", sustainable or stable
recapitalization. But what the heck do I know?
In another article I read recently, titled funny enough, Cash Is Now King, Worthless Or Not, So
Buy Dollars, John Taylor, Chairman and CEO of FX
Concepts (Foreign Exchange Concepts), "one of the world's oldest and
most established independent currency managers", explained that the
entire world is now in the process of recapitalization. Everyone is doing the
"austerity two-step"; cut spending, start saving. Everyone is
saving their income (rather than spending every penny they earn plus more
through debt). Everyone is hoarding dollars. And you should too.
John R. Taylor Jr.
Taylor correctly points to the difference between macro and micro views of
the economy in explaining misleading GDP data. The micro view looks only at
individual entities, each recapitalizing, saving and repairing their balance
sheets in one way or another, while ignoring the fact that when everyone is
forced to do this all at once it lubricates the real economy like C&H
pure cane sugar lubricates a Formula 1 engine. He goes on to quote Keynes in
this regard:
"Keynes
famously noted that there was a savings paradox. As I would paraphrase it, if
one family saves, it is good for the family, but if all families save, the
economy will be ruined. This is happening everywhere. The S&P 500
companies are all saving, by cutting costs – and building giant
worthless cash mountains (like they did in the 1930’s) – but this
is shrinking nominal GDP as their saved costs are others’ lost
earnings. The global economies are all trying to grow by increasing exports,
which is the same as saving. If there are no countries stimulating
consumption, the world economy will shrink. If all countries try to balance
their fiscal books, they are clearly saving. The Eurozone, the UK, and the
American states are dramatic examples of this. And if consumers build up
their savings, we know what happens to retail sales and the GDP."
Remember that unlike gold, which can simply be mined (dug up) from the ground
by anyone, cash cannot. Dollars are not so easily gathered in nature. Only
one person (Ben Bernanke) can produce real dollars, while ANYONE can dig up
more gold. And Taylor says that everyone is hoarding dollars today, meaning
the velocity of the buck stops here. So you should hoard them too. Greenbacks
will be very hard to come by, especially for the debtors who will most likely
have to default, while the whole world recapitalizes itself on scarce (even
though they're worthless) dollars.
In other words, even if paper money completely ceases to perform its primary
role - medium of exchange - it can still be counted on to gain value in its
secondary role - store of value - "worthless or not."
Remember at the top of this section I said that the definition of
"capital" had been rewritten over the past 66 years? And I also
said that only the OLD definition would work in times of transition? If you
are consolidating your wealth today, or even if you're doing the
bankrupt-debtor-version of consolidation - recapitalizing your long-term
financial prospects - how far down this pyramid do you think should you go
for safety and/or return? And if the dollar is failing profoundly in its
primary transactional function (to lubricate the real economy through new debt
creation) then how long do you think it can possibly hold its value
(GLOBALLY) being ONLY a "worthless" store of value?
Liquidity
Liquidity is another one of those hard-to-define words. Investorwords.com
says it is "The ability of an asset to be converted into cash quickly
and without any price discount."
In the above press conference Trichet said, "...we are in a situation of
liquidity withdrawal. But it was the will of the banks [not the ECB], because
they had an unlimited supply of liquidity [from us]... I would say that we
[the ECB] are still in a mode of unlimited supply of liquidity."
BusinessDictionary.com says liquidity is the measure of the extent to which
an entity has cash to meet immediate and short-term obligations, or the
ability of current assets to meet current liabilities.
So, to me, liquidity seems to mean our day-to-day ability to meet our
day-to-day needs. Fair enough?
But in the $IMFS-ruled bank
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