If you only knew

I wonder how many Americans realize just how close we just came to a major bank failure – and what that would mean. Americans have not had a good scare since the early 1990s, and that wasn’t a “holy $##%! I just #%@!! in my boots” scary. This was.

Remember all those talking heads on CNBC commenting about how much “capital is sloshing around the world”? What happened to all that capital? How did we get from there to the current “credit crunch”? Where did all that capital come from, and where did it go? In our system, money is created when it is loaned into existence. It is also destroyed when those loans default (or when a loan is repaid, but that is not the issue here).

The Fed put us here, and is now navigating some tough stuff to get us out without too much harm. The good news is that the Federal Reserve has just telegraphed their intention to abandon the U.S. dollar in favor of the banking system/housing/real estate market. It was the right thing to do, really, as there was no way the Fed could save the value of the dollar, so they might as well save the dollar/economy. Further, a huge amount of liquidity has been pumped into the system, with more surely to follow. In my opinion this will only increase commodity inflation versus the dollar – the dollar will fall against oil, gold, silver (especially at these levels courtesy of the “credit crunch”), corn, wheat, milk, etc… If you are in debt, or hold commodities, inflation is your friend. If you own cash, C.D.’s, etc… inflation is your mortal enemy. The Fed talks tough about inflation, but what the Fed really, really, really fears is DEFLATION (just take a look at Japan for the past 17 years).

Deflation, not inflation, causes bank failures, falling money supply, mortgage defaults, stock market crashes. The Fed just” ain’t gonna” stand by and let that happen. They will print till they can’t turn the crank anymore, and since it is in no one’s interest for the dollar to crash against other currencies; the other central banks will fall quietly into line (my friend FireAngel from theoildrum.com thinks this is the case with the exception of New Zealand and Australia’s central banks). My focus was not on the currency trade opportunity (typical American), but the dollar/commodity exchange rate.

I received many emails from people who think I am a ”goldbug”; I am no such thing. I simply despise the U.S. dollar as a store of value. Gold, silver, land, timber, livestock, oil, etc… are likely to be a better store of value. A diversified portfolio would include some, if not all, of these, in addition to financial assets. I am afraid that the purchasing power of the U.S. dollar will decline which will be exacerbated by the continuing decline in home prices, the proverbial “double whammy”.

Stay tuned, the Fed as well as the markets have more work to do. If the Fed and the other central banks continue to pump money into the system (and I believe that they will) this new liquidity will find a home, and it won’t be homes, and these new dollars will not be good for your existing dollars.

Yours for a better world,

Mentatt (at) yahoo.com