Sunday, September 28, 2008

Deal Done, Meltdown Only Slowed, NOT STOPPED


Some form of liquidity injection plan has just been agreed to in Washington, if the reports on CNN are to be believed.  I have no knowledge of the particulars.

I have been in favor of the injection, but in the BEST CASE scenario, the injection will only cause the rate of change, the SPEED of the collapse, to change - it will not change the ultimate outcome, in my opinion.

The American people are going to be forced to change everything - their expectations, their saving and consumption habits, their work habits, their childbearing and divorce habits, their retirement expectations, etc...  Measured against the American people's expectations, we are truly on the verge of earth shaking, economic, social and political, change - and not the "Change" our presidential candidates are talking about.

I get a great deal of email and comments from folks telling me that we are saddling our children and grandchildren with "Debt".  Didn't we just saddle all of America with a huge amount of debt?  And what happened?  We defaulted on that debt.  Our descendants will do no less.  Debts, like promises, are made to be broken.

The following is from J.R. Nyquest's excellent website:


According to Ludwig von Mises, an upswing occasioned by credit expansion can only be maintained by further credit expansion; and, in the long run, “it turns into depression when the further progress of credit expansion stops.” This outcome is absolutely certain and today’s financial crisis underscores the point. The economic boom of recent years has been propelled forward by an unprecedented credit expansion. At each turn, when the market was threatened with contraction, further credit expansion was urged.

The magic wand of credit expansion is like heroin addiction. The more you take, the more you want. The day inevitably comes when you cannot increase the dosage because you run short of supply. And so it is with credit expansion. The markets are accustomed to easy money. They now require easier and easier money. They are addicted. Eventually, however, they must suffer the symptoms of withdrawal.

Did we think this expansion could continue forever without consequence? Evidently we did not consider where we would end up. And now, at last, the United States Government believes it can fill the hunger for credit through a coordinated push – the last gasp of our insatiable credit addicts. President Bush offers a plan. Behind closed doors he reportedly said, “This sucker could go down.” Once again, the president’s grammar is in error. The sucker in question will go down.

Every dollar poured into the proposed rescue operation will be lost. Buying toxic debt is not a solution. The proposed mechanism for rescuing the economy represents a new falsification of values – and a new twisting of the market. The dollar cannot possibly survive this new initiative. A $700 billion bailout is only the beginning. It is merely a foretaste. What we see in Washington is an exercise in self deception. It is the self deception of a country that does not see danger, of a country that ignores the wisdom of ancestors and the ABCs of economics.

They want a booming economy. What they’ve failed to consider is the false nature of the boom thereby engendered. False values, false ideas and promises of false prosperity pepper the program of today’s politicians. They have no business at the helm of a great country. Their leadership consists in pitiful ignorance, and the republic may be in its last days. There has been a shocking willingness to destroy the country’s currency. “If the government does not care how far foreign exchange rates may rise, it can for some time continue to cling to credit expansion,” Mises explained. “But one day the crack-up boom will annihilate its monetary system.”

The proposed plan to save the markets will save nothing. The proposed solution is no solution. Improper investments have been made and massive losses must result. We have to take our medicine before we can get better. Debasing our already debased currency makes things worse. We have avoided economic pain by a continuous expansion of credit. The artificial boom must come to an end. False values must pass away so that real values can be brought to the fore.

Few realize how destructive the boom has been; for the real damage is done by the regime of false values and our collective investment in those values. “The boom is called good business,” noted Mises, “prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression.” The latter, however, is the period of healing and correction."
Original article here*

THe Right appears to want their cake and eat it, too.  The Left appears to want the system to collapse so that they can rebuild it into a "fair" world.  The old line, "Be care what you ask for; you may get it", really applies here.  Only you might only get half of want you want, the other half might just eat you alive.

American investors who continue to believe in financial assets, rather than assets representing an interest in hard assets, are going to come to ruin.  RUIN.  Everybody talks TOUGH when they have a full belly, and a warm place to sleep, and money that can still buy something in the bank.  Remove ANY of those 3, and you find we are not so tough anymore.

The injection will NOT stop the ultimate collapse in the US$ and U.S. financial assets along with the economy, but it might give you the time to get your house in order, while lulling most into a false sense of security.  The Middle Class is going to shrink in ways few thought possible, as will the ranks of the Rich.  In the end, if you re reading this it is likely that you are a middle aged man with a family to provide for and some assets to protect.  You are not running for president, just trying to run your family.  Do not allow your self to be lulled into that false sense of security, or you will have wasted every second of time you have spent reading my stuff.

Good Luck!

Mentatt (at) yahoo (d0t) com

6 comments:

Anonymous said...

Greg- any way to comment on the viability of GLD/SLV without your being in the position of technically offering investment advice?

Bureaucrat said...

Although I admit I'm a pessimistic person who suspended my pessimism during the bull market of the last 17 years, I think we're gonna have to try a little harder to keep all of this real.

I find the bailout (in whatever form it takes) to be a hyperreaction to a maybe problem. Jeffers will get his liquidity, but it won't solve much, cause we are right back to the deflation problem: We have an 11 month housing supply (4-5 is normal), skyhigh debt all around us, energy getting wobbly at best, and all our industrial capacity was sent elsewhere. It's a recipe for the end times.

HOWEVER, before you call "game over" to America and the world, we need to keep in mind:

1) NO ONE wants this all to end. Our "enemies" are farces: (Venezuela, Iran, Russia, etc. Even mighty China has no idea what to do with themselves now.) They are all bad SNL sketches. We have identified why they will fail, and we are avoiding the stuff that kills governments & societies: totalitarianism, Nazism, communism, authoritarianism, even racism and sexism. In other words, we know the enemy, and we have exposed him.

2) We have gone thru periods like this. The 1970s, the 1930s, and countless other times when the "world was supposed to come to an end." It didn't. It caused stress and loss, but we survived. The 1970s was my first experience with killer inflation: my Reggie candy bar went from 25 cents to 40 (damn Carter). But I survived and went to college and now I'm an overpaid Federal employee. My ATT stock bought in 1980 went all directions and it is now worth a lot.

3) Don't even get me started on the COLOSSAL WASTE all around us that can be reduced immediately. Fewer car trips (walk!), fewer worldwide vacations on overloaded cruise ships, less tacky furniture, stop spending lots of bucks on sporting events and bars, fewer home remodels, LESS GOLF!, less overeating, turn out the lights!, government benefits to people who don't need them -- waste, waste everywhere. We can lower out expenses and conserve out stuff WAY more than we do.

So, while another juice loan to the Wall Street jerks (not you, Jeffers) who want to socialize the losses, is probably inevitable, I am seriously doubting that we even need it. In the past, we've worked thru everything else cause we've always had the right model.

But I'll keep my freeze-dried food and white sugar in storage, just in case. :)

Anonymous said...

Great rant, bureacrat. Here is some reading that you might find interesting-

1.Long Emergency- James Kunstler
2.Bad Money- Kevin Phillips
3.And the Money Came Rolling in and Out- Paul Blustein on Argentina
4.Financial Armageddon- M. Panzner
5.The Party's Over- R. Heinberg
6.The Good Old Days-They Were Terrible- Otto Bettman
7.Reinventing Collapse-Dmitry Orlov
8.Collapse of Complex Societies by Tainter
9.Eating Fossil Fuels by David Allen Pfieffer
10.And many more

The USA is not alone here. The entire developed world will face existential challenges due to resource depletion(Energy bulletin, Oil Drum blogs). The US is just the most dependent on the cheap oil/gas nipple and has built 70 years of infrastructure which will not work as the energy import situation reverses- and no easy solutions. Note that the credit crisis is joined at the hip with the quickly evolving crude oil depletion situation.

The current crisis is largely about too-long below market interest rates, turbo-computerized financial markets, and BAD US leadership on all levels and both major parties. But this crisis will look mild compared to the challenges faced by actual year-after-year drops in global oil production- to be followed by depletion of most other energy resources and strategic materials which includes farmland.

Note that in the past, most major doomsayers were of the nut and religious varieties. The scientists, engineers were the debunkers of these past doom purveyors. Today the situation is reversed....

And the point is not to scare everyone with doom predictions. The point is to push urgent measures to face these crises head on and take pre-measures that will mitigate the worst effects and transition to a sustainable society. But so far- no luck. And bad leadership continues.

Dan said...

@ Bureaucrat

We haven’t just lost industrial capacity; we are loosing the ability to retool. Our toolmakers are not training apprentices and only taking on difficult (expensive) jobs themselves. A couple more decades and the bridge back is burnt; which is one of the reasons I favor a crash sooner rather then later.

A little while longer and to get tooling, for say making wind turbines, we will be dependant on countries we are competing for resources with.

Greg T. Jeffers said...

I can comment on commodities without restriction as I am not a registered commodity broker or CTA.

I won't offer advice as to TIMING when to buy GLD and SLV. I will say that I have significant (by my definition) positions in both GLD and SLV. I do tend to trade around the position, adding when I think it is cheap and selling a little, or selling covered calls in GLD (their are no options as yet on SLV). I also trade Silver and Gold in the futures market, ALWAYS with a "long side" bias.

I have read a great deal on the 2 funds and it is my OPINION that they owned what they said they owned at the time of the audits, and I have no reason to believe that they do not in between the audits.

Remember that these can be technically overbought over oversold at any one time, and that I am NOT perfect by any means.

I hope this helps...

Good Luck!

I hope that helps

Greg T. Jeffers said...

Bureaucrat:

The "game" ain't over yet, and it will NEVER be completely over.

Over time, though, it will get bad enough to make one think the "game" will not continue, though of course it will.

BTW, when I say collapse I do not mean to ZERO, just 50% to 90% decline in the purchasing power of the US$. We will still use the US$, as the government will require payment of taxes in the currency, rather than in gold or sheep or corn.

Further, I am much more hopeful than many doomers are in that America's Constitution WILL survive, perhaps in much better shape than it operates in the current environment. Our way of life WILL change, but perhaps our freedoms and our responsibilities will grow - at least that is my fervent hope!