Monthly Archives: October 2008

Wednesday October 8, 2008

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This may very well be an interesting day…. Asia is taking a major hit as we sleep or well we are about to sleep as is my case.  Here is the latest Bloomberg headline:

Asian Stocks Plunge on Credit Concern; Indonesia Halts Trading 

I’ve been very cautious about the markets continuing on their tumble down and am unfortunately not surprised that this is happening.  It seems that the world has reached panic mode and is fleeing paper, which also is another indicator about why gold is so difficult to find.  

We just may have reached that point where the markets enter freefall.  It is similar to watching a stampede running towards you.  You have a few choices:

  1. Get out of the way!
  2. Get run over!
  3. Run like a mad-man and go with the stampede.

I’ll go with #1 or #3 or perhaps a combination of both.  When there is panic nothing is rational.  Even if things aren’t really necessitating a major sell-off the herd mentality will cause a major sell off.  It is self-perpetuating, a feedback loop.  Very similar to hyper-inflation.  Once the shakeout occurs what is going to happen with all newly created money floating around that nobody wants to lend at the moment, coupled with peak oil, and fiat currencies worth not a whole lot… That’s the trillion dollar question.  Not good is all I can say, not good at all.  

Imagine losing most of you wealth to the market as did happen similarly in 1929-1932, then due to a massive increase in the money supply prices take off and unemployment rises.  Don’t be surprised if the next President resembles Roosevelt and the New Deal.  If that ends up being the case I’m even more concerned.  He did want to raise taxes to 100% beyond a minimum income. That will halt any growth in an economy because people have no incentive.

On the bright side the amount of panic and fear in the air could be considered a contrarian indicator.  Why not…. when there is blood in the streets BUY… oh but wait… HOW MUCH BLOOD??

Look at the Fed Goooooooooooooooooooooo

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I found this on www.chrismartenson.com and couldn’t resist posting it here especially after my post about the dollar.  How the dollar is going to survive after this much cash is pushed into the system I really don’t know.  A inflationary depression seems to be looking more and more likely.  It would explain why gold is so scarce on the physical market.  People are losing faith in fiat currency and want hard currency that has some store of value.  Paper is easily printed, and as Voltaire said

“Paper money eventually returns to its intrinsic value – zero”

Is it just me or is that line going almost STRAIGHT up.  If that isn’t a sign of complete and utter panic well I don’t know what is.  They are going to put as much liquidity into the system as possible.  Will this mean that you house will go back up in value?  Perhaps, but your purchasing power will decline severely.  Jim Rogers said the US currency is doomed, and I agree.  It is only a matter of when, and not if.

 

The US Dollar gaining? What?

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Hyperinflation, inflation, deflation, depression, recession, stagflation… well which is it? I have no clue, but there is a massive monetary inflation occurring, and a looming recession.  Hmmm so does this mean a inflationary depression?  Yikes.

Last week I took a break from overwhelming myself about the markets and the state of the economy. The timing wasn’t perfect, but I had personal reasons.

Before I start on the quest of exploring our present situation of the potententional…”ion”s I want to make sure we are on the same page. Therefore lets have a defining moment:

Money: Easily exchangeable, is relatively scarce, and is a store of value.

Inflation: An increase in the money supply
Deflation: A decrease in the money supply
Hyperinflation: A self-perpetuating unstoppable (more or less) state of inflation
Recession: A significant decline in business activity, mainly a contraction in the economy or slowing of growth
Depression: A long-term economic state characterized by unemployment and low prices and low levels of trade and investment
Stagflation: A period of time characterized by high inflation and recessionary conditions.

I’ve been looking at calls for the vaious scenarios and needed some clarification as to what happens in the various situations.  For the most part it seems obvious, but I’ve been struggling with the increase in the value of the United States dollar.  Our national debt is above 10 trillion and rising rapidly as the recent bailouts continue, and the most recent increase in military spending added another $612 billion that we have to pay for.

Why is the risk of deflation so frightening that the Fed, Treasury, governments, and foreign central banks will do anything to stave it off?  Deflation is like the grim reaper knocking on your door for a fiat currency.  A fiat currency survives on debt and inflation (credit expansion).  Too much inflation and it can become worthless, and negative inflation (deflation) and it gains value.  That sounds like a good thing but it isn’t.  As the currency gains in value debt becomes more expensive, and thus more difficult to pay off.  Imagine taking out a $100,000.00 loan with todays dollars and paying it off with dollars from 1930.  Good luck! During deflation prices also fall due to the decrease in the money supply and as there is no longer credit being handed out for people to use to consume and invest.  The whole system comes tumbling down and the reaper walks in the door to say hello!

When credit is created (a loan) that is an increase in the money supply, and when it is paid off that is a decrease in the money supply.  Say the loan is $100.00.  That is $100.00 of money put into existance with a very small percentage actually backing it.  Now I repay my $100.00 loan and that credit is erased and the money supply contracts.  This is the normal situation that occurs daily.  However, if people don’t want to lend or borrow then we have a problem.

No credit means no ability to borrow, which means no abilty to purchase goods and services.  Everything is based on debt today.  The change began in 1913 with the Fed, and the ultimate shift to fiat money was in 1972 during the Nixon presidency when we abandoned the gold standard and thus savers were punished from that day forward.

Okay this leads to me to the strengthening of the United States Dollar…  Why I ask is it getting stronger.  Many argue that it is because Europe is weakening, which may be part of the picture.  However, I read something that made a clear point that because European banks are required to hold dollars for various toxic debt they hold denominated in dollars they normally use the interbank markets based on the LIBOR rate.  However, that market is seized up and nobody wants to lend so they start using the EUR / USD credit swap market.  As they purchase dollars its value goes up.  Notice today that the Euro gained against the dollar when the Fed decided to start purchasing short-term commercial paper.  They are stepping in and becoming the new mainstay for that market: which one?  EVERY MARKET <Interesting…>

And tomorrow is a new day!