Talking heads here and there are debating how serious this financial mess is — some draw allusions to 1929, some say it’s a silly comparison, many say it’s irrelevant. Here is something they won’t talk about. This picture is a graph of the crash in 1929 that heralded the Great Depression:
When most people hear “crash,” they assume all the stocks became valueless, or they declined by 90%, or something similar. Nope. They only have to decline by 20% or so across the board to send the nation into a tailspin for a decade or more. From the day the stocks declined there in pink, it took until 1954 before the stock market returned to its previous levels. Now take a look at this chart from last week:
That dotted line is where we were at last Thursday, had the Federal Reserve not massively intervened and pumped in over $100 billion before the opening bell. From this article in the New York Post. We would have opened with the Dow at 8300 — a 22% decline. We would have had a 1929-style crash, no doubt about it. None. That’s how serious the situation is. Intervention prevented that, but intervention cannot change the underlying bad fundamentals that give rise to this problem. Interventions are not magic. We cannot fix the system by a wave of the wand, or a hundred waves of the wand. We are lucky, in a sense, to have time to prepare for the inevitable Deprssion without the shock of a crash, but make no mistake: we are definitely entering a Depression. Prepare.
Today’s article of doom: default by the US government no longer unthinkable.
“Like scores of evangelists and hypocrites and moralists who spew and praise family values and pretend to be holier than thou and are then regularly caught cheating or found to be perverts, these Bush hypocrites who spewed for years the glory of unfettered Wild West laissez-faire jungle capitalism allowed the biggest debt bubble ever to fester without any control, and have caused the biggest financial crisis since the Great Depression.
They are are now forced to perform the biggest government intervention and nationalisations in the recent history of humanity, all for the benefit of the rich and the well connected. So Comrades Bush and Paulson and Bernanke will rightly pass to the history books as a troika of Bolsheviks who turned the USA into the USSRA.”
From this article. Great summary. Here’s another good one: stock market cheers financial insanity. Our denial is staggering. As if throwing another trillion at the problem is going to fix it. Neither will two trillion. Or three. Or fifty. Want to know what the problem is in simple terms? This picture will illustrate it:
That’s the problem. The small number on the left is the amount of dollars in existence, which is directly tied to our purchasing power. The slightly larger number is the productive capacity of the entire world to deal with the problem. The number to the right of that is the total value of all the monetary assets.
The bomb on the right — well, that’s the debt that is now being called due. Not national debt — but phantom monetary credit called CDS (credit default swaps) that is basically fake money big banks lend to each other to protect each others’ assets. If you’re shaking your head, it’s because the concept is absurd. How can there be $516 trillion in credit/debt relationships when there is only $15 trillion in existence?
Good question. THAT IS THE PROBLEM. The problem is not greed, nor “lack of regulation,” nor poor oversight, or any of that. The problem is our entire fiat money-based system, which uses fractional-reserve lending, at the core of which is our Federal Reserve, which allows an infinite amount of fake money, and derivatives thereof, to spring into existence, by the whim of a few bankers. Back when currency stood for a fixed amount of gold and silver, like checks represent actual money in the bank, there was no problem. But now that money is decoupled from gold and silver, there can be an infinite amount of credit issued based upon it, and an infinite amount of it created. Its value, and all debt relationships based upon it therefore, can become worthless. Just ask Zimbabwe.
Now, can the government create $516 trillion to unwind those derivatives? Sure, they can add as many zeroes to banks’ databases as necessary; they don’t even have to pay for the ink and paper to print the money. But then, if there are suddenly 50 times the amount of dollars in existence, how much do you think your dollars are worth in purchasing power? Well, the answer is $0.02. Good thing you’ve been saving up!
Of all the people talking about our financial system over the past year, they were all wrong; all except one. All gave varying degrees of “well, the basics are okay, we’ll just ride this out. We’ll think of something. The system just needs a few tweaks.” Whether it’s McCain’s tax cuts, or Obama’s tax cuts, or talk about earmarks, or curbing spending, or shuffling of this or that, blah blah blah blah blah, none of it hits the mark. It’s arguing over property boundaries in Nagasaki after the bomb drops. It’s irrelevant. No one said, “Hey, we’re in meltdown! This is the second great depression! Wake up! Our dollar will be worthless!” No one, except one person.
Bernanke was wrong.
Paulson was wrong.
Greenspan was wrong.
McCain was wrong.
Obama was wrong.
Bush was wrong.
Pelosi was wrong.
Giuliani was wrong.
Clinton was wrong.
Not until recently, in the past few months, have any of these people started to admit that something is wrong. If you listen to their comments from a year ago, they were all sunshine and lollipops.You know who was right? That “crackpot” — the one no one would vote for. The crazy guy. Ron Paul. Ron Paul was right. Period. Everyone else was wrong. From this:
Back in September 2003, Mr Paul told a House Financial Services Committee that: “Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market.
“This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions.” Of course, if we are going to give Mr Paul credit, than we should also highlight the efforts of Peter Schiff, his economic advisor and long-time economic hawk.
A year ago, he warned about the impending crash of the dollar and pointed the finger directly at the Fed. For everyone who wasn’t paying attention, here is a video summary from last year:
Ron Paul on the economy in 2007:
Ron Paul on the economy yesterday:
The politicians are predictably pointing fingers at each other, lamenting the greed of anonymous culprits, and telling us the solution is that we, the common people, should pay for it all, even though we had nothing to do with it. And, predictably, we are agreeing to that, bowing to the benevolent wisdom of our leaders, and crossing our fingers, hoping two plus two won’t equal four this time.
Today’s article of doom: just pick up a newspaper.
Despite the ridiculous recent rebound of the dollar (coordinated by central banks in Europe, US, and Japan), which caused everyone to sigh with relief because “The US is going to recover from recession sooner,” it seems there is just too much rot in the system to magically wave away.
While it’s ultimately good the Federal Reserve didn’t bail out Lehman Brothers, they should have refused to bail out Bear Stearns, Fanny Mae, Freddy Mac, and AIG. Yes, I know none of the above were called bailouts — they were called “conservatorships” and “guarantees” and other nonsense, but they all required billions of dollars of taxpayer funds, and will require more in the future. Now the FDIC is tapped, and that will require more taxpayer funds too.
The argument for bailing all these places out was that it would be “too destructive to let them fail.” In other words, they have made a killing over the past several years overextending their leverage and making risky bets, and their investors have pocketed that money, but now that their bets have failed, their destruction wouldn’t just destroy them, it would destroy TONS of the greedy investors who overextended themselves. And it’s okay if some rich people lose money, but not tons, because… well, what would we do without all those rich people? Therefore, the taxpayer needs to cover their losses. A fitting phrase is, “privatizing the gains and socializing the losses.” And when the FDIC taxpayer funds aren’t enough, they’ll have to raise taxes to get more, or at least increase our national debt, and have the next generation(s) foot the bill. Jim Rogers was correct when he called the recent actions “socialism for the rich.“
Why not take back the profits and packages from the directors or investors of these failed companies to pay their debts? Why not let them go into bankruptcy? That would be fair. If you or I make a bad investment, we owe the government and we don’t get bailed out. We have to declare bankruptcy. Only the rich people; the people with the advantages, the ones who don’t need the money to eat — only they get bailed out. And who funds the bailout? Those of us who do have to worry about having enough money to eat. Sad. And utterly unfair.
Well, we saw this coming. And there is nothing we peasants could have done. There is always gold and silver, but, as recent events have proven, those aren’t a sure bet. Maybe it’s simply due to the effects of destruction of credit and therefore deflation. Maybe it’s due to the fact that when a bunch of investment banks get free (lower than market interest) loans from the Fed, they can simply short gold and silver (selling gold and silver you don’t physically have, promising to buy an equal amount at some distant point in the future, driving the price down) instead of using that money to loan each other. In fact, you can actually sell more gold and silver than even exists. Funny the magic of Wall Street. Either way, there is no simple answer. I think the article today that summed up the situation best is this one. Exerpt below:
“”So now the U.S. Treasury is bailing out AIG with conservatorship and an $80 billion allowance for their newest member of the dysfunctional family. What’s next? Oh, I already know, the Big 3 have asked for a gov’t check, and before you know it, Disneyland will be asking for an allowance from the gov’t!”
What next? It’s anyone’s guess. Other countries are having it worse than us. Russia’s stock market collapsed yesterday. Each new day will likely bring surprising events. These are the times for appreciating what you still have.
Today’s article of doom: having to face the unreal possibility of losing your bank deposits.