Market crash: are we there yet ?

[Bene505]

I heard from a friend originally from Russia, that Brazil, Russia, India and China (BRIC) met in Russia this week. One item was how to disentangle themselves from the dolar.

Now I see these headlines:

Dollar drops on reserve currency doubts

and

China sells US bonds to 'show concern'

[TropicCat]

Originally Posted by Bene505

I heard from a friend originally from Russia, that Brazil, Russia, India and China (BRIC) met in Russia this week. One item was how to disentangle themselves from the dolar

I do believe I mentioned this a while back. We're getting closer to the cliff as the dollar falls. Today I heard the 'experts' are proposing giving the Fed more power. The patients are now officially running the asylum.

[therapy23]

Originally Posted by TropicCat

The patients are now officially running the asylum.

So, buy gold at 900+ an ounce?

[erps]

Originally Posted by therapy23

So, buy gold at 900+ an ounce?

or canned soup at $1.85 a can for the good stuff.

[camaraderie]

Rick/Windy...Completely out of the market today...feels weird...first time in 40 years I own nothing! Next week...moving to gold. I think the edge of the cliff is gettin close and I don't want to time it any closer. I can wait for gains...and I don't think there is much more downside to gold now so best to limit my exposure.

[sailaway21]

Originally Posted by TropicCat

I do believe I mentioned this a while back. We're getting closer to the cliff as the dollar falls. Today I heard the 'experts' are proposing giving the Fed more power. The patients are now officially running the asylum.

An unusual convergence of opinion between Rick and Larry Kudlow. From NRO:

06/17 05:19 PMShare

The Fed in Charge of Systemic Risk? What a Mess [Larry Kudlow]

The big winner of the Obama financial-regulation plan appears to be the Federal Reserve, which becomes the consolidated supervisor of large, systemically important banks.

This is like the fox guarding the henhouse. After all, the Fed’s overly loose money policies created the asset bubble — including housing, commodities, and energy — in the first place. Near-zero interest rates, huge money growth, and total disregard for the plunging dollar are what set up the housing boom and the unfortunate overleveraging by consumers, mortgage borrowers, and Wall Street securitizers.

It also set up the astronomical $150 oil shock, which came alongside the Fed’s overly tight money policies to offset the prior loose policies that would cause this credit crunch and deep recession. In fact, looking back to the last two bubbles — the tech bubble of 1999-2000 and the housing/energy bubble after that — it was the Fed’s pillar-to-post go-stop-go-stop lurches that deserve the principal blame for the economic messes that ensued.

The Great Moderation of the ’80s and ’90s has given way to extremism in Fed policy. And we may be in danger of repeating it all over again, with a new round of near-zero interest rates and a massive 11 percent growth of M2 over the past nine months.

There is one positive in the Obama plan: Sponsors of securitized asset-backed bonds will be forced to put 5 percent equity-skin in the game, in order to improve incentives for more appropriate risk and responsibility in lending.

But it strikes me as somewhat ironic that the Fed would be placed in charge of systemic risk.

We also don’t know if any of the new regulations from the Obama White House and Treasury will deal with the moral-hazard question of “too big to fail” that was pointed out in Paul Volcker’s China speech last week. There will be new resolution authority to close down banks, but whether that will apply to the big banks remains to be seen.

Then there’s the new Consumer Financial Protection Agency. This provision was apparently written by liberal-left Harvard professor Elizabeth Warren, a staunch foe of free markets and an overzealous supporter of consumer-as-victim rights. Among its massive powers, this agency would enforce the Community Reinvestment Act, which has for years forced banks and other lenders to throw mortgage money at borrowers who cannot afford it. And the consumer protection would reach deep into bank supervision as well. What a mess.

Missing from the package is a reform that would put Fed monetary policy back on a commodity-price rule, including gold and the dollar. This rule was basically used from the early ’80s to the late ’90s, during Paul Volcker’s Fed term and the first half of Alan Greenspan’s term. This would have been the best-possible reform, but of course it’s not in the proposal.

So now the Fed has become the supreme Keynesian unemployment vs. growth Philips-curve tinkerer. Until this totally mistaken policy is changed, we can have ten more reregulation plans that will not fix the real problem.

[TropicCat]

I've written this before. Our 'experts' have remade the American economy into one of consumerism. Where consumer spending is 70% of GDP. How this was done was by creating an environment of easy lending. This included mortgages, credit cards, car loans and personal loans. All lending for folks with marginal credit has now stopped.... taking our economy with it. Experts say this is a good thing, yet without these loans 70% of GDP is no longer attainable. This is where we are today.

So, what's next? Do they reintroduce subprime lending and credit cards for everyone, with the hope of regaining the lost ground? No, you say? OK, then what?

Consumerism replaced a manufacturing based economy. What replaces consumerism?

Unless the structure of our entire economy is put on the table, and new answers found, or marginal lending reintroduced, there can be no recovery regardless of what the talking heads say.

We've had banking running the economy for 10 years, we know where that has brought us. To look to the Fed for answers will result in completing the decimation of the middle class in America. We need creative thinking and solutions to difficult questions. All trade agreements have to be reviewed and a new way forward proposed while failed policies are discarded. This has to happen regardless of the fact that the US dollar is about to lose it's reserve currency status. The Fed can not and will not provide this leadership. In my humble opinion, giving the instrument of our demise more power is just plain stupid. Will somebody please give Chris Dodd a nudge?? He's obviously fallen asleep at the switch...again.

Apparently, I agree with Kudlow, or he agrees with me. In either case, who would have thought this possible?

[wind_magic]

Originally Posted by sailaway21

So now the Fed has become the supreme Keynesian unemployment vs. growth Philips-curve tinkerer. Until this totally mistaken policy is changed, we can have ten more reregulation plans that will not fix the real problem.

It all comes down to one basic misunderstanding.

Phase 1 - If there are a group of people and they are trading with one another with $xx's (some currency) and trade becomes vigorous, they may start to drive up asset prices to some small degree. Corn they've grown, clothing they've made, all the rest, may become slightly more expensive due to demand, but not much, and it levels off given some static population size and static amount of money per capita.

Phase 2 - During a debt bubble credit is too easy and people are able to borrow enough money to drive the price of assets up. If one person is able to borrow into creation as much money as another person who is actually working for their money, the person who borrowed money into existence begins to compete with earned money and marginalizes (to some degree) the person who is making an honest living. The money will have to be repaid, however, at some point. The person who borrowed money also starts to act as pressure on prices, because now there is much more money in the economy, so prices start to rise. This can turn into a debt bubble if rates are too easy because honest work doesn't pay anymore, the only way to get ahead is to out-borrow the next guy. People who are working for their money essentially can't even compete with borrowed money anymore, and you end up enslaving workers to a banking class and a general quiet discontent that is only sated by more and increasing amounts of borrowing.

Phase 3 - The debt bubble pops because at some point the debt is so high that it simply isn't sustainable, savings rates are just too low, debt service is so high nobody can afford to even make payments on their debt much less borrow even more, etc, etc, and you get deflation. Deflation is the destruction of debt, debt inflation in reverse as defaults increase and the whole house of cards collapses in on itself. Borrowers freak out because all the stuff (stock, homes, cars, whatever ...) that they paid top $xx for suddenly lose price, people stop buying, unemployment increases, and we all have first hand experience of what can happen. Quiet discontent becomes a little more vocal as people lose the last crutch they had and are left with nothing but debt service.

Phase 4 - Here is where they finally screw it all up ....

If the powers that be would just let the deflation continue until the debt unwinds (which can take a long time and be very painful) then everything would eventually work itself out. As deflation continues, people who are working get pay cuts, etc, but those cuts are LESS than the deflationary price decreases, so their salaries are actually increasing (if they can keep a job). Prices fall, everyone with savings suddenly becomes rich, and people with debt pay the piper and have to service their debt with increasingly expensive money and all the rest, demand continues to drop, etc, until at some point it all hits bottom and people start working and borrowing again. Bleak if you are a borrower, terrific if you saved up money for your retirement and have cash in your pocket, tragic for everyone involved, but not as bad as it could be (be thankful at this point because you haven't lost everything yet ...)

What happens though, and they are doing it now, is that some of the powers that be start to believe 2 important things, 1 that is correct (albeit dishonest), and 1 that is incorrect -

• Correct - They start to believe that if they devalue the currency then they will make it easier for borrowers to pay off debt at the expense of savers, which is completely true, however unethical it may be. The benefits of this are debatable, but if you have most of the people in the country listed as borrowers and very few savers, obviously it is going to be the politically expedient thing to do, and you piss off the least number of people (though some would argue that you piss off the ones who could actually solve your problem).
  
• Incorrect - They also start to believe that by artificially increasing prices by devaluing the currency people will just start to go out and buy stuff again. This is naive and shows a complete disconnect inside of human brains everywhere because it is essentially the same thing as saying that if you are running out of gasoline in your car that you can reach up and push the needle on the instrument panel up so it makes it look like you have more gasoline and somehow that's going to get you to your destination and everyone in the car is now going to be happy because there is plenty of gasoline to make the trip. The real mistake here is to confuse demand driven price increases which are due to active borrowing by legitimately charged up consumers and employers with artificial price increases that are brought about by simply diluting the whiskey before you serve it up at the bar, i.e. currency devaluation.

The end result of all of this non-sense will be the greatest game of "Who wants to be a millionaire" ever played. Once upon a time being a millionaire meant something, but now over the past decade as the government used easy rates to increase the amount of money chasing goods and services anyone with a home has been able to become a millionaire simply by owning something. Now that the government has started to "fight deflation" by devaluing the currency they are going to artificially prop up the price of housing, cars, and everything else, they have lost touch with the actual mechanisms that create real economy and have decided to live in a delusion wherein all they have to do is tinker with rates, buttons, and buy the right amount of bad paper and eventually they will get what they want, forgetting completely that actual demand comes from willing buyers of real goods and services. When it is all said and done, the result may be that not only will you have the decreasing economic output, higher unemployment, and decreased demand that you would have during a deflation, but you will also destroy investor/saver trust in the currency as a store of value and you will end up with decreasing economic output, higher unemployment, decrease demand AND A RUN ON THE CURRENCY as people lose faith not only in the economy but also in the currency. The final effect may be that people simply lose faith in pretty much everything - they start by losing faith in markets and asset prices when the deflation starts, move on to losing faith in the economy as unemployment increases, and finally lose faith completely when they can't even count on the currency as a way to save money to get through the hard times - the tempest spins up, and they panic, and you end up with Trop's "Great Depression II" scenario, except this time you've got runaway price inflation.

Intentional currency devaluation is a whore's solution to a lack of committed interest i.e. if a little screwing around didn't get you a marriage proposal the problem isn't that you shouldn't have been screwing around in the first place, it is instead that you didn't screw around ENOUGH to keep everyone's interest. The reason it sells so well is that people are dumb enough to believe that being a "millionaire" is what is important instead of realizing that what they really wanted was purchasing power, because who really cares about having a million $xx if that's only half as much as you need to purchase a 1980 Honda motorcycle. We are all about to be re-educated on the merits of scarcity as the overwhelming ingredient in faith, but I fear not before we are witness to one of the greatest (and for some the most entertaining) shows in the history of human civilization.

[camaraderie]

Couldn't we just sell a chunk of the USA to China to get out of this mess? Maybe California and DC??

[craigimass]

I agree with Trop on the consumerism thing.....was way out of hand.

The problem with consumerism is that we see no downside....yes, there is a downside to the environment and those other people the world over whose resources we are swindling...and to the savers (myself among them) who cannot get a decent return on our money when money is cheap, but we don't SEE it in our daily lives. Eat, drink and be merry is the word.

As of right now, saving and government spending have taken the place of the consumerism in terms of making up some of the GNP. No doubt some of that government spending is very wasteful, but then again so is consumerism. It's hard to make the case for people who cannot really afford it to buy 5,000 sq ft houses AND a second house! So private sector spending is every bit as wasteful...maybe more.

I just took a ride yesterday though central Ma. and RI. - and I am amazed at the vast number of projects - Road building, bridge building and even some parks and other projects.......many of them (or at least the continuation of them) made possible by the stimulus package. Also, in both states, the Stim package has halted the firing of MANY teachers and police/fire/ems crews. As bad as things are, it is at least pleasing to me to see that when we are done with this mess, we will have some great improvements in infrastructure and perhaps a more educated populace....which then benefits the economy.

Americans have a short memory. Give them more money and easy consumerism and they will forget this even happened....in a year or two. Maybe less.

Cam, good idea.....too bad that states like Alabama, Nevada, Arizona, Florida, New York and MANY others are going broke too! In fact, it appears that the states with budget gaps this year hold about 3/4 or more of the US Population.

WV is doing OK, though.

China already owns a vast portion of the US - the other part is owned by folks in the Middle East, although Russia is buying up stuff also. Unbridled capitalism with no national interest is grand. Anyone in the world can own anything....we might as well remove the borders if that is the policy!

Oh, yeah, Japan and Europe also own vast chunks....really vast. Look at all the new car factories - Honda, Subaru, Hyndai, Toyota, BMW, Mercedes, etc.