In the spiritual circles, I've tracked in, there's an old and true saying, "Error destroys itself."
Sooner or later the true value of everything is revealed, and every day now we're seeing the true value of stocks, whose prices were based on euphoria, hype and "free" money made available by the Fed's rate policy. But the bottom 50% of Americans won't be hurt by the stock market's price collapse...because they own no stocks. The top 10%...and especially the 1%...traded most of the stocks. The 1% , if they were smart, wouldn't be hurt at all. The almost daily purchases of stocks--with funds made available by the Fed and Treasury--boosted stock prices, and should have been fair warning that the whole artificial thing was headed into implosion. Market insiders, knowing that, should have "cashed out" when prices were at extreme heights. Many no doubt did.
The hurt will fall on Mom & Pop investors...and on insurance companies that had to stay invested in a top-heavy, manipulated market, hoping to come close to the 7% gain needed to keep retirement funds solvent. Rescuing insurance companies was a big deal in 2008 because of all the hedging done through derivatives issued by gambling banks and corporations making risky bets. This time, to save the banks, the Fed (and the government) will also have to try to rescue the customers of the banks. To keep everybody solvent requires the creation of money (out of thin air) like the world has never seen. The hope is that the world "goes along" with it, just as if the Dollar was still worth something. But there is no guarantee that will happen...as I point out below.
Precious metal prices will be beaten down, by the Fed and Treasury, until people, in a "naked Emperor" moment realize that the Dollar has the value of Monopoly Money, and will--like China did the other day--demand US payment, not in paper or electronic dollars, but in demanding something "real"--some thing of real value...and that's where gold and silver come in again. That's where the true value of precious metal is revealed. So, if you own precious metal, hold it and keep it safe because the time will come when things such as food will be so valuable that dollars won't buy them. In demanding something real (such as gold, silver, oil, etc.) we're talking about "commodities." Dollars are not money. J.P. Morgan once said, "Gold is money. All else is credit."
Until 1971 Dollars represented money--which is gold and silver. Since 1971 CREDIT has been king...and the globe has been on a spending/credit/debt spree for nearly fifty years. In 1971 President Nixon took the US and the world off that "gold standard," and the dollar has had no real value ever since. All the bank will give you for your dollar is another just like it.
Outside the US, Central Banks have been vaulting as much gold and silver as they can pry out of the hands of owners. These bankers are smart enough to know that "Reckoning Day" would come...and this is it. So, if you own precious metal, hold onto it because when times get really tough the world dances to gold's tune. The founders of the US defined the Dollar as so many grams of gold. Bankers have been playing games with "imitation" money for a long time, saying that gold won't work, but if you watch, you'll see gold and silver WORK when paper dollars won't work and can't work. The Fed and the Treasury force the price (but not the value) of gold and silver down in an attempt to force investors to keep on investing their paper dollars in the stock market (where banks make hugh profits from fees and charges).
Our free-spending, easy money, "throw it away" days may be numbered, and we may have to learn the frugal lessons of how to economize, save pennies and string, and "make do"--just as we did in the 1930's. That will automatically benefit the global ecology, but for us humans the adjustment might be painful...but not tragic. The government says it will be sending taxpayers a check for $1200, but in my opinion, that won't do much to re-float the economy. To get the nation's heart and circulatory system pumping again, I think it would take $5000 per taxpayer--$10,000 per family--to get the nation over the hump of its health crisis, and back towards "normal" again. But our "Humpty-Dumpty" economy has been broken, and things will never be the same.
But, it's not all gloom and doom. Crisis calls out the positive as well as some negative, as the humor, the songs, and the movies of the 1930s remind us. Maybe we could see a move away from tastelessness, brutality, and violence in humor, music, and entertainment.
Let every American see himself/herself as part of the solution. At a time when politics is adding a few more cracks to Humpty-Dumpty, let us, whose lives aren't ruled by politics, unleash the creative Spirit that brought this country into existence. Let that spirit be its ruling spirit now. The cloud of "virus" will lift, and recovery--physical, emotional, social, and economic will commence. Will recovery look like the heyday of consumerism again? No. Will it look like $30,000 stock market again? No. But it can have a sounder, firmer foundation. And, if we have any sense, a sense of values will be restored--values that let us appreciate the smallest of blessings...along with the strength gained by companionship, fellowship, and the joy of making good things and good times happen. Let's get on with it...
First published on www.talkmarkets.com