Thursday, June 11, 2009

the fourth quarter

these are certainly interesting times. those who have experience in the stock markets and have a knowledge of real (austrian) economics, seem to have a crystal ball for economic prognostication. they do. when an economy is as entwined with the state as the u.s. economy is, there are virtually no economic activities that are outside of the state's interventions. because government economic interventions are very predictable, understanding them allows one to peer into the future with a nearly unobstructed view.

that said, let's prognosticate! so, the federal reserve has pumped massive amounts of new cash into the system in order to correct the recession caused by pumping massive amounts of new cash into the system. the bubbles burst, and the fed is trying to reflate them. so far, the attempt appears to be successful. the fed is able to reroute savings (necessary to a viable economy) into the old bubbles.

people always try to seek a higher rate of return, so when interest rates (and , consequentially, the dollar's value) drop due to cash pumping by the fed, money goes into "investments" that they normally wouldn't have, creating a false demand, increasing prices where there are no underlying fundamentals to support such an increase. eventually, the market must correct for such inflated and unsustainable investments and the crash results. what is often missed in the analysis is the destruction of capital. because these bubbles are not fueled by money alone and capital must be allocated to the areas where the investment goes, capital is destroyed by routing it into unsustainable projects as well as by borrowing resulting from a feeling of wealth of those invested in the bubble. so, when the bubbles burst, not only is the misallocated capital destroyed, but the money borrowed against the now worthless capital creates a debt without backing collateral. in the end, prosperity has been an illusion by consuming capital.

the current bubbles are now being reflated. in an ailing economy, where savings must be accumulated to restock the capital base, the plan is to continue to misallocate that capital to continue the illusion. it's working. but what happens when when the dollar spirals out of control because of all of the new money being pumped in? the fed says it has a plan to take it out. great! but how do they plan to do that when the entire economy is now based on the bubble? taking it out will temporarily stop the hemorrhaging of the dollar, but the economy will crash even deeper, at which point, the pumps will be primed again and the spiral will deepen.

so , as predicted, the economy crashed. as predicted, the reflation began. so the next step is to determine the future. there are two options: 1) the fed reels in the printed money, crashes the economy and is forced to try to re-reflate the bubbles, bringing on almost certain dollar hyper-inflation, or 2) they simply inflate the dollar to the point were dollar holding central banks around the world begin to dump it as reserve currency, thereby setting off even higher inflation rates as the money supply on the market increases, setting off another hyper-inflation scenario.

how to avoid having your wealth decimated? put all dollar-denominated assets into things other than the dollar, like more stable foreign currencies (the ones you're familiar with are probably the shitty ones), gold and other precious metals, strong foreign markets or anything that has value in itself, like land.

the game is over for the u.s. economy for a long time. those who are prudent will be able to ride out the storm more like an interested spectator, rather than like one who is in the ring with a 21 year-old mike tyson.

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