Year End Economic Tea Leaves
This is actually a rather minor note to clarify things of which most people seem unaware.
You may understand the noise about WW2 fixing the Great Depression is pure nonsense. What fixed the Great Depression was the US was about the only country of any size which had not suffered major destruction. We got rich because we were the only supplier selling to those rebuilding. The war itself was a major drain on our economy, and had it run longer, we would have joined the ranks of the starving. A wartime economy sends production outside the system with no significant payments or exchange coming back into the pool of wealth. Whatever plunder their might be is no longer granted to the troops who take it home to spend.
If you get that, perhaps you understand why the US dollar is okay right now. If you want to read tea leaves, you’ll get as much useful information about the future as you would from trying to use the standard analytical tools to project more than a week or two. All I’m offering is an explanation of what I see right now.
With all the bad news about the Euro and the Asian economies, investors are jittery. Right now it appears the dollar is safe. Thus, people are buying up dollar denominated investments. Demand for the dollar is up, which itself is subject to the same laws of supply and demand as anything else.
So behind the scenes, we see the relative supply of dollars has been shrinking. Ballooning government debt has failed to replace all the other forms of debt, so that the actual usable supply has been shrinking. Even with Bernanke fronting so much through the Fed to Europe, the supply is simply not keeping up with demand. Only the strictures of how the system actually works is keeping the supply low; dollars can’t be offered in quite the same way as other goods due to regulations they aren’t willing to ignore just yet.
Temporarily, at least, we can expect the price of stocks, gold and other dollar denominated investments to go down, because the dollar is stronger; it buys more. What that means at the same time is we are entering an actual deflation. Even if that deflation is relative, it’s the same net effect. It’s not as if Keynes was right about the economy being controlled to any degree by “animal spirits” — the animal spirits are being driven by whatever the bankers and financiers wish to tell them.
Again: There is absolutely no way of independently verifying anything the banking moguls and government officials tell us. This truth was reinforced when everyone discovered the Fed was moving oceans of dollars outside the borders without bothering to notify anyone. Further, Bernanke and friends bluntly lied about how big TARP was, and every bailout since then. Only they have any real idea what happened and what numbers were involved. The information we do have leaked out entirely by accident (so far as I can tell) long after the fact. We still don’t know the half of it.
So if the Euro voices whine, everyone in Euros weeps with them, having no idea if any of it is true. We know more about China’s economy, if we bother to look, than we do about our own. Granted, I could be completely wrong, but with all the differing theories and stories going around, nobody has to be right, but somebody has to be wrong. What I’ve laid out here helps to explain why I don’t bother to make any major adjustments in how I plan to face the New Year. From what I’ve seen in my 55 years of life, this seems the most realistic explanation, and all the other approaches have failed miserably. I’m lucky to be alive, in that sense. The only reason the dollar is up is because every other currency seems to be in trouble.
Their control is not absolute, but it affects my life in ways which I dare not try to read any tea leaves and make strong predictions. Given it’s all so arbitrary and opaque, and I get a hint the soup just isn’t ready yet, I plan to keep muddling along as is. What is most likely to happen are things I simply cannot account for, so it’s pointless.
But I’m watching and listening.
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