Who Started This Mess?
Stocks bounced up 142 points today after yesterday’s mauling. There is always hope in the market – hope that AIG will get bailed out, hope that WaMu isn’t that bad off, hope the FED doesn’t cut rates…
Bonds lost very little (only 0.01%) as the FED decided to NOT cut the Fed Funds Rate. Bond traders were betting on a 25 basis point drop, and some were betting on a 50 basis point drop. They can get it wrong too.
Oil and gasoline fell dramatically again – almost all the way to $90.
Gold fell $6 and is still a terrific buy.
In the news today….
I’m tired of reporting news, so I think I’ll just spout my ideas of what’s going on, who started this mess, and who’s next to fall?
First the easy one – who’s next to fall.
AIG – is my number one pick.
WAMU – they are hurting big time.
Citibank – has always been on my list – I think they’re hiding right now.
Morgan Stanley – this is on my watch list – I intend to talk to one of their senior VP’s in two weeks and get some straight talk.
What’s going on??
There is a credit crunch. All that fiat money that is floating around the US caused some big bubbles, and all bubbles burst. The housing bubble is just the latest. But right on top of it is the individual credit bubble – you remember – all those credit card applications you get in the mail each week. They’re throwing money away – and this bubble will burst too – and it’s a very big bubble too. You see – when bubbles burst – all that money goes to “money heaven” - bless it. There is less money around – and this is called a deflation – and it leads directly to a recession, then depression, then financial chaos with lots of bank failures – and we haven’t begun to see those bank failures yet. The deflation scared the heck out of the FED, and that’s why they are pumping money into the system as fast as they can print it – remember just $70B given out yesterday – the largest amount since 9/11!!!!!!!! That should be food for thought for all the cerebral readers. The FED saw that banks weren’t lending to each other – that’s the overnight interest rate – because banks were afraid they would lose their loan – so the FED injected $70B into the overnight lending facility to encourage banks to lend, and to keep their lending rate at a reasonable level.
Who caused this mess???
You’ll probably read, or will hear that Alan Greenspan is the culprit. Au contraire, mon ami. He just inherited this mess, and did the best he could with it. Did he cause the dot.com bubble? Nope. He lowered interest rates, but lowering rates by itself does not increase the amount of money in circulation. It takes hard cash deposited in banks to increase the amount of money in circulation. He did not print all that money – it came from somewhere else. I think the culprits go back to 1943. Can you believe that? Can anyone tell me what happened in 1943 that has economic significance? More importantly, what’s going on today that was caused by that lousy decision in 1943? Hint: President Nixon later played a key role in this story too.
I intend to go to the heart of this mess we’re in. I want ever reader to understand the cause of the fiat money that has caused ALL those bubbles over the past 60 years. Do you remember South America’s bubble – Argentina, etc.? Some of you weren’t born then. Do you remember the “Tiger” nations in SouthEast Asia? Do you remember Japan’s bubble and bust?
These bubbles were no different than today’s bubbles – they just played out a little differently?
Any of you that know what I’m talking about (1943 for example) or where the money came from? Write and tell me. If I hear interest – I’ll continue to talk about how we can turn this catastrophe into profits for our pockets.
Oh, did you see that the Russian stock market fell 20% today, and was shut down, ending down – only 17%. That may seem like a big number to you, but do you think it could happen in the US? The US Stock Market is a bubble too – and as it bursts – it will decline in value.
How safe in your money in the bank?? Don’t care because you have FDIC insurance? Think again. What happens when (not if) the FDIC runs out of money? One of two things could happen – option 1 - the government steps in and gives the FDIC more money (probable), or option 2 – they stop insuring your account? What’s your congressperson doing about this – probably nothing – probably doesn’t even know it’s going on – but it’s Congress who mandate the money for the FDIC – so they should be engaged.
Here are Today’s numbers:
Dow Jones 30 Industrial – 11,059 (up 142 points) - I call this a dead cat bounce.
10 Year Treasury Bond - 3.49% (up 0.01%)
Euro - $1.41.57
Gold - $781 (down $7)
Oil - $91.15 (down $4.56) - this is the market that caused the Russian stock market to crash.
Gasoline - $2.40 (down $0.16)- how low can it go without you seeing something at the pump?
Was it the Bretton Woods conference held in Bretton Woods New Hampshire? This is what took us off the gold standard and move us to an “adjustable-peg” system of exchange rates. Eventually the IMF came out of it.
Hi Tom:
“If you build it they will come”….Field of Dreams (1989). Great article as always…probably one of my favorites! Please keep it up.
Tom in my opinion it’s time to have the Economy Guy Mastermind we keep talking about…..this is all going to get really “messy”. What do you think? I think it would be a great success! And I think the worse the economy gets the more people will be driven the the site and the masterminds/events.
Here is my guess on your question…you made me think a little on the 1943 question. Because I really think of this event occurring in 1944. The later question was easy!
Here we go:
During World War II, some governments were preparing post-war monetary plans — primarily through the efforts of the United Kingdom and the United States. The British Plan made public by Lord Keynes in early 1943, called for an “International Stabilization Fund” to help international economies. Harry Dexter White, deputy secretary of the U.S. Treasury, was called upon to formulate an American response to the British plan.
1944-We get the Bretton Woods Conference (state side in NH). The Bretton Woods system was a quasi-gold standard because other countries were guaranteed the right to convert their dollars into gold at a fixed exchange rate of US$35 for one ounce of gold.
In a nut shell and very accidentally the world economy was shifted from a monetary system anchored by a physical asset, like gold, to one that was completely unanchored by ANYTHING!!!!
1971-Nixon suspends the dollars convertibility in order to protect the US’s gold reserves…and with that the mess perpetuated!
Let me know what you think….”If you build it they will come”
All the best,
Emanuel Botelho
My summary of the root problem:
Fiat currency combined with fractional reserve banking.
The logic consequence is inflation and deflation (or said another way - bubbles and then the burst)
I was sent this quote below. It sounds too good to be true, but maybe it is accurate.
————–
I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
- Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802)
1943? the bretton woods agreement (quasi-gold) then the switch from that to a fiat (oil) dollar system under Nixon 1971.
But isn’t the culprit always too much leverage/debt (which creates money too)? It’s the shadow banking system, fee driven behavior and securitization. People reached for yield (wanted something for nothing and bought what they didn’t understand) and the wizards of wall street created these products (and the stories and fraud behind them) to satisfy the need.
Greenspan overdosed on Ayn Rand and “free markets”, should have been way more regulation. Makes you wonder, they must have known. So why push it? Something to do with the US dollar hegemony going for broke in a much bigger globalized economy? They all knew about Minsky and that stability leads to instability. Blunder or calculated risk?
Hi Tom,
In 1943, President Roosevelt froze prices, wages & salaries to prevent inflation. The price of gold had been fixed at $35/ounce during his administration also.
In 1973, Nixon reluctantly reimposed the freeze, which didn’t help solve the problem of rising inflation. It was mostly abolished by 1974, though price controls over oil and natural gas were still in place. This established several tiers of oil prices, including holding down prices of domestically produced oil, which forced those producers to subsidize imported oil and provided additional incentives to import oil into the US.
I found all the above info from two sources: Information Please website and an excerpt from “The Commanding Heights” by Daniel Yergin and Joseph Stanislaw, published in 1977.
I am certainly no expert on economics, just ask my friend Liz U., so if any of this is relevant to your question, please explain the significance. Also, Nixon went to China during his administration. Does that have anything to do with this? I know he established trade agreements with China.
Now I’m off to learn about fiat currency and Bretton Woods Agreement!
Thanks,
Amy