The Great Depression Online

Great Depression Online Archive Issue:

Knowing When To Say When

Great Depression Online
Long Beach, CA
March 25, 2008

Inside This Issue You Will Discover…

*** Call Review
*** What Really Happened Anyway
*** Knowing When To Say When
*** And More

Call Review

If you recall last Friday, we left you with a prescient market prediction.  Through inductive reason and the law of the yo-yo’s reflexive property we conjectured that “…the DOW shall drop at least 200 points on Monday.”

Tim Paradis, AP Business Writer, tells how we did…

“The Dow rose 187.32, or 1.52 percent, to 12,548.64, after rising more than 260 points on Thursday, the last day of trading before the Easter weekend.”

So much for the law of the yo-yo.  Looks like we should have followed the law of opposites, which posits that one should always do the exact opposite of what they think they should do.  You can see the inherent contradictions between these two laws.

So how do you know which one to use?

The answer: You don’t.

And here’s the point.  A new theory or new fangled idea always appears to be right, just until the moment it’s wrong.


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Remember this and you won’t be taken as a fool by the slick theories that’ll surface to explain the next great market mania.  What the next mania will be, we don’t know.  That it’s coming is as certain as day after night.

What Really Happened Anyway

Last weeks bipolar market seemed a bit amiss.  So what really happened anyway?

Tom Raum, AP Writer, on Saturday March 22nd, reminds us that the Federal Reserve “…is the only U.S. institution with the authority and ability to create money out of this air.”

That this is in direct conflict with the U.S. Constitution, Article I Section 8, which gives Congress – not that Federal Reserve – the power to coin money and regulate the value thereof, does not receive mention.  But that’s just an aside.

Mr. Raum does offer some astute detail on what Federal Reserve actions compelled the market’s manic depressive behavior.

“In a remarkable week, the Fed:

“--engineered the fire sale of bankruptcy-headed Bear Stearns Cos. to J.P. Morgan Chase & Co. with a $30 billion loan.

“--offered emergency loans to other securities dealers under terms normally reserved for regulated banks.

“--slashed a key short-term interest rate by three quarters of a percentage point, to 2.25 percent. The cut was sixth since September.

“These steps followed moves to lend $100 billion in cash to banks and $200 billion in Treasury bonds to cash-strapped investment banks.  The goal was to keep the financial system from seizing up.”

With the credit contraction calling into question the solvency of banks…and the Federal Reserve throwing massive amounts of money back into the banking sector to counter act the crunch, traders didn’t know whether to laugh or cry.  So they did both.

Knowing When To Say When

Maybe the crisis has been averted.  Or maybe it’s been postponed.  But regardless, this massive money infusion is unhealthy.

If you remember back to 2002, the Alan Greenspan led Federal Reserve artificially lowered the rate of interest below the rate of inflation to soften the landing of the dot com bust that they’d helped inflate.  All the sham money went into housing and produced a sham housing boom.  The boom was really just a Federal Reserve induced asset inflation.

But now that housing prices are deflating, and that much of the debt that supported the sham boom prices is going bad…the Federal Reserve is at it again – desperately trying to pump the bubble back up.  Where the money will go this time may not be as fun.  So far it seems to be showing up in prices at the grocery store, the gas pumps, and in your utility bill.

Regardless of where the money goes, these repeated cycles of reflation are grotesquely unhealthy.

For example, following the holidays Joe gained 10-pounds.  He went on a diet, but, unfortunately, he only lost 5 of those pounds.  Still five extra pounds are no big deal, right?

But the next year, the same thing happened.  Now Joe’s 10-pounds over weight.  And the following year it happened again…and on and on.  Until after several more years Joe has morphed into a rotund and unrecognizable version of his old self.

Joe’s knees now hurt and his chest pounds when he walks up stairs.  And when he fly’s on an airplane his weight causes those around him to be uncomfortable – both because he bulges into their space and because they must look at him up close.  Little kids gawk and stare.  And little old ladies look the other way in repulsion.  All because Joe didn’t know when to say when to the extra servings of mashed potatoes.

So goes the U.S. economy…it’s had more than enough binges upon cheap credit.  But the Federal Reserve wants to keep dishing up more.  For in their mind the pain of eating more is less than the pain of diet and exercise.  Will the inflation Ponzi scheme continue or will a long Japanese deflation take over?

If we had our druthers we’d choose neither.  But that choice no longer exists.  And even if it did, it’s not up to us; it’s up to the fate of the gods to decide.


M.N. Gordon
Great Depression Online

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