”Prophet!” said I, “thing of evil! – prophet still, if bird or devil! –
Whether Tempter sent, or whether tempest tossed thee here ashore,
Desolate yet all undaunted, on this desert land enchanted –
On this home by Horror haunted – tell me truly I implore –
Is there - is there balm in Gilead? – tell me – tell me, I implore!”
Bailouts and stimulus checks, and other interventions made by government are not balms of Gilead. The only solution:
Quoth the Raven, “Nevermore.”
And what do I mean by crying nevermore?
Imagine an entity sending false hope to finance institutions about future consumer demands. The owners then, being assured of bail, expand in anticipation of additional future consumer demand for services and goods which in fact don’t exist. The owners then come to the frightening development that demand has not materialized. This is when the recession (market correction) occurs.
The net worth begins to be revealed and foreign investments withdraw support. The many companies assured of insurance by bail out are in danger of crippling the entire country: so then more intervention is needed to obfuscate the danger of net worth being revealed. This way foreign investors keep their hands in the cookie jar. What happens though, is that the bail out continues in a way that doesn’t solve the problem but merely keeps things running. Things keep running, including everything that is parasitic and a drain on the economy.
The intervention delays the inevitable correction. It makes the correction worse by destroying net worth. It makes the correction worse by destroying actual wealth.
Merely this and nothing more.
Inflation accomplishes the exact same crime. Inflation is not prices rising; it isn’t gold and silver jumping all over the place. Inflation occurs when the purchasing power of the currency is weakened. How is this accomplished?
Imagine that we have 1 dollar per person circulating in the economy. Let us then say the net worth of that 1 dollar is actually 1 dollar. Now let us say that we print off another dollar per person in hopes that people will spend it which in theory ‘stimulates’ the economy. (Stimulus check anyone? I’ll take a rain check thank you.) So we now have 2 dollars per person circulating. How much do you think they are worth when put together?
Technically: the 2 dollars per person is worth the original 1 dollar per person. But it did get some of us to spend. This means the currency has been reduced to 50 cents of real value. Prices rising in consumables and other goods are indicative of a market’s reaction to a dollar which lost value – thus prices go up.
The central banks and the fed work cooperatively to print off money which only serves to make people feel safer in misallocating capital in hopes for future profit. You see its not just Wall Street who is the criminal. When government officials babble about eliminating the root cause – they aren’t talking about themselves – which is a pity.
This it is and nothing more.
Now let us look to the incredibly stupid, pathetically and fundamentally idiotic move to ban short-selling. When stock becomes too high for a speculator, he shorts the stock and pushes it back down. If stock appears undervalued he buys shares thus pushing the price back up. The prices are now being hidden because of the ban.
But the problems don’t stop there. Speculators aren’t the only ones who short stocks, hoping to gain from this. People short stock to limit exposure to downward price slides.
Disaster Scenario: A company sells a credit default swap on an investment bank. This is an insurance contract. A default on the bank with its own bonds will trigger the swap to give a payout. The very existence of the credit default swap allows for investors to be more willing to buy the bonds of that bank. The investors have insurance against a potential default.
Imagine an insurance company issues a large amount of credit default swaps on that investment bank. Rumor has it that the investment bank is carrying ‘toxic’ mortgage-backed assets. The shares would plummet and the investment bank would find short-term funds hard to find for continued operation. Its bonds would default and the insuring firm might suffer losses because the credit default swaps were triggered.
Protection from share price volatility for the insurance company can be attained by shorting a sizeable chunk of said shares of the investment bank. So the insuring company is now hedged against sudden drops in shares. Any losses to be had by a credit default swap are offset by the gains made in short sales.
The SEC has removed one of the market’s methods on containing risk. The firms vulnerable to this credit crisis are unable to find buyers of their bonds, thus not able to raise capital. Capital is what is needed to fight this.
Only this and nothing more.
People have a short memory. Last year in fall, a correction was beginning to take place. We saw prices in commodities fall, we saw stocks diminish. However; the Federal Reserve and central banks worked together to prevent the functioning of a market correction. The fall of prices stopped. Everyone thought this was a recovery, but really – the consumer was hit the hardest. Oil reached a new time high. Over the next year the Federal Reserve lowered target funds rate seven times increasing our money supply (inflation.) There is a count of about 30 interventions made by the fed within one year and people still insist we have a free market. We have a count of 30 interventions within one year and people blame the free market!?. These are crimes of intervention. These interventions comprised of provision of treasury securities (for which there actually is a market) to investment firms in exchange for the said firms’ mortgage-backed securities (for which there is obviously no existing market).
Despite the criminal intervention which led us to where we are, the natural laws of market equilibrium (or disequilibrium) are not to be ignored. A brain dead easy way of seeing a market reaction to all of this lies in watching gold. The nationalization, the socialization and the intervention allowed for gold to jump a $100 per ounce in 24 hours.
Logic follows that government and central banking intervention through tools like inflation and taxation actually destroy savings. Says Law holds that more savings are needed to create wealth for future investment and that inflation and taxation are nothing more than theft. To this I respond:
Quoth the Raven, “Nevermore.”