December 5, 2008:

1 Euro = $1.27 (USD)

1oz gold = $767.69 (USD)

DJIA (DOW) = 8,204.44

The dollar continues to rally against the Euro, although the rally has started to slow. The DOW is still suffering from extreme manic-depressive behavior, but continuing an overall down trend. IMO, gold remains extremely undervalued (good time to buy for an inflation hedge)

In other news, 533k US jobs were cut in November 2008:

http://www.businessweek.com/bwdaily/dnflash/content/dec2008/db2008124_194018.htm?chan=top+news_top+news+index+-+temp_top+story

Unemployment hit 6.7%, a 34-year high:

http://news.bbc.co.uk/2/hi/business/7767326.stm

The bailout news du jour is the $18B bailout of GM. Michael Moore rightly points out that the entire company could be purchased outright for less than $3B (today's market cap: $2.45B)

I contend that this $18B bailout is all but irrelevant in light og the $7.7 TRILLION dollars already committed to the bailouts.

Also, the Fed is about to drop the federal funds rate to under 1%, but not even Ben Bernanke is deluded enough to think this will do any good.

http://online.wsj.com/article/SB122843724270881449.html?mod=googlenews_wsj

Zap's predictions for Dec 08:

1. The XMAS season will disappoint, leading to heavy losses in some sectors and more job losses in early 2009

2. The DOW will fight to stay above 8,000 through the end of the year, but assuming it breaks 8 I would not be surprised to see the DOW at 7,000 by March 09.

3. As job losses fuel our already devastated investment and housing markets, we will begin to see the inflation kick-in. By summer 2009 inflation is the hot topic in all the economics news.

4. As of Dec 2008, some are warning of a pending deflation. This may occur in the short term, but a better term is "stagflation" whereby purchasing power continues to decline despite a slumping economy. I would argue a genuine deflation would be one of the best things that could happen to us, but understand that we refuse to take our medicine, and so a spending-induced stagflation will be the preferred course of action.

5. As a nation willing to kill for Walmart sales, I can only imagine the horrors of the pending riots. However, we are still more than a year away from the worst of this.

Place your bets! Is Zap full of shit? Time will tell.

I'm not much of a betting man, but if I were, what exactly would I be betting on? You sound a lot like many 'experts' on TV who use words like 'disappointing' sales 'more' job losses, 'not surprised to see...' and 'a hot topic'.

All of these types of predictions make it relatively easy to not necessarily be right, but not necessarily be wrong either.

Give me some real numbers to bet on Zaptradomus. Then I'll be your hucleberry.

"The DOW will fight to stay above 8,000 through the end of the year, but assuming it breaks 8 I would not be surprised to see the DOW at 7,000 by March 09."

That's about as specific as I can get- clear numbers and date targets.

p.s. ROFL @ Zaptradomus :-)

Really? That's as specific has you can get?

Will the Dow be above or below 8000 at the close on Dec. 31?

Using 'fight to stay above' makes you right either way - pretty ballsy prediction there eh?

Will Dow be above or below 7000 on March 1, 2009?

Using 'not surprised to see' is like going to the betting window at the horse track and saying '$50 on Eight Belles to show or come close'.

Sorry to sound so antagonistic Zap. I agree with much of your logic, but I've followed the self-absorbed advice of too many prognosticators in the past and lost my ass. The TV forums they made their predictions on never made them answer when they were wrong, but this forum allows me to hold your feet to the fire.

Merrill Lynch CEO wants $10m bonus.

If this is true, it is truly sickening.

If we are stopping the torture now, does that mean we can't bring back the pillory?

"Using 'fight to stay above' makes you right either way - pretty ballsy prediction there eh?"

Guilty as charged- this prediction uses "weasel words" to be right either way. However, before I continue, I would caution all readers that they are responsible for their own due dilligence. The goal of this thread is to document what I expect to be a multi-year descent into madness, not to provide any specific advice to anyone.

As a 28 year old, I am looking forward to some bargain hunting, followed by a 30 year recovery. I am in a very different situation that the typical Boomer lamenting over their 401k. Because of this, I am more interested in the macro-scale, which is the ultimate cop-out because most Boomers will be dead before I retire either way.

In that spirit, here are some predictions you can call bullshit on within the next 6 months:

1. the auto bailout will pass as one of President Obama's first actions in office

2. Additionally, Obama's plan to "create or save X million jobs" is, essentially, more bailouts and subsidies. By March 2009 it will be clear Pres. Obama intends to "spend us out of this mess"

3. I have no clue what to expect from this market. Basically, it comes down to dueling predictions:

3a) If my prediction on inflation is correct, the market should continue a steady rise. If hyperinflation kicks in, the price of stocks will jump radically (as will all commodities and everything else we trade USD for). This is great on paper, but lousy once you sell that stock to buy food.

3b) If my prediction on a dismal xmas season is correct, the market should get slammed hard with the Q4 releases in early January.

So, the X factor is this: will the inflation kick-in before the Q4 reports show us the xmas numbers? If I had to guess, I would say "no"- the market will crash until the inflation picks it back up about a year from now. However, even if the market stays between 8,000-9,000 it would be rational to expect inflation to be a root cause.

So, again, either I am right, or I am right. However, if the market recovers AND inflation stays in check, I will consider myself DEAD WRONG on this. If the market plummets AND inflation goes nuts, it is time to buy weapons because we will have discovered the theoretical ugly step-sister of stagflation, and will find ourselves in uncharted territory.

Macro scale: Obama embraces the bailout mentality, is replaced by a socially liberal / economic conservative member of the GOP (re-branded as Libertarian).

This happens in either 2012 or 2016, depending on whether or not Obama declares Afghanistan a success by then. If Obama is smart, he will declare victory in both Iraq and Afghanistan before the 2012 election cycle, and hang-on until Clinton loses 2016 to a "neo-Paulian".

Until a Paulian view of spending is embraced (due to the necessity of a pending bankruptcy) I expect the failed ideologies of FDR's New Deal and Reganomics to duel back and forth, with short-term gains and no change to the macro trend.

As far as long-term recovery goes, this happens as soon as the U.S. returns to the global stage as a major exporter (my guess is alternative energy, e.g. solar panels or geothermal systems). This will not happen until the cost of American manufacturing become cost-competitive again, by which point the standard of living in America will have already plummeted. Furthermore, the postponed bankruptcy of America will cause a radical reduction in the U.S. Military, which could have a zillion unexpected geopolitical consequences. In other words, at this point the increase from living in shit, to living in shit with enough to eat, will feel like a gain, even though it would horrify those who lived through the 60's and 50's.

On the plus side, our collapse will eliminate the threat of China, and remind Europe why they put up with us in the first place.

So there is a rough outline of the long-term assumptions I am working from. In early 2009 I should have enough data to warrant some updates, and focus more on the next year specifically.

Interesting stuff Zap. As a 28 year old, I'm not sure why inflation scares you as much as it does.

I don't know if we're heading for inflation, stagflation, deflation or none of the above. There are just too many variables to figure that one out (for me at least). But assuming you are right about inflation, are there some real positives you may be forgetting?

Here's a few I can think of:

Inflation is like a tax on people who have piles of money - they lose purchasing power and still must pay capital gains taxes when they sell assets even though they haven't 'gained' anything.

Inflation is like a debt reducer for people, businesses or governments who have borrowed massive amounts of money. They're paying back yesterday's more valuable dollars with today's less valuable dollars. Considering the US government is the largest debtor in the world, inflation might be a good thing from their perspective.

Inflation is like a wealth equalizer. Sure there will always be rich and poor, but those people with big bank accounts get a little less rich while the wages of the working class move up with inflation.

These may seem like putting rose colored glasses on, but if you look at these same issues from the very real possibility of a deflationary environment they can turn into real monsters. Maybe a little more inflation is the preventative medicine we need right now.

Fiat currencies are fascinating creatures Zap, and the US Dollar is a particularly interesting one in my opinion because of it's global usage. International human psychology seems to have as much of an effect (or more) on it's value as the government entities that work so hard to control it.

You may have mentioned it before, and I missed it, but outside of Paulionism, what is your background in economics? Does the history of the Bank of Japan's fight with deflation put into question some of your assumptions about inflation?

"You may have mentioned it before, and I missed it, but outside of Paulionism, what is your background in economics?"

A 4-year B.S. from SUNY, which led me towards the mises.org / Murray Rothbard version of economic history. I was going to go into finance for awhile until I decided to escape NY while I still could.

Also, my first political involvement came at age 12, sparked by Ross Perot. I actually liked those charts of his, because they set me down a path of economic education that continues to this day.

"Does the history of the Bank of Japan's fight with deflation put into question some of your assumptions about inflation?"

Japan responded to the threat of deflation by pumping up the money supply with decreased interest rates. You can clearly see the bubble:

http://www.mises.org/images3/Shostak/03-03-2004/4.gif

This appears to mirror our own real estate meltdown- the increased money supply was effective in creating a short-term bubble, but like all bubbles, it was unsustainable. Loans may help secure the initial purchases, but that debt must still be serviced with a portion of real earnings somewhere down the line. If real wages are decreasing at this same time, we are only making things worse, because that debt must be serviced with a reduced spending power.

Of course, that is deflation- my house is worth 66% of what I paid for it right now. However, all the new money created in this mortgage shuffle is still out in circulation, competing for food and oil and iPods. In 2004-2006, as the housing market deflated like a popped balloon, the CPI continued to jump. Why did our CPI jump, unlike Japan? I'm not sure anyone knows for sure.

This chart, btw, mirrors what I expect to see in the USA housing market- and its real ugly. Far uglier than the talking heads on tee vee will admit.

"Inflation is like a wealth equalizer. Sure there will always be rich and poor, but those people with big bank accounts get a little less rich while the wages of the working class move up with inflation."

I would disagree. Most wealthy people I know exist on the front end of inflation- for example, they own their business. This means they control when to raise prices, and when to adjust the wages they pay. For example, as a self-employed programmer, I'm actually doing real well this year in Europe, mainly because the psychology of a strong Euro-USD made it easier to accept my higher rate. Meanwhile, my wife is getting a measly 4% cost-of-living increase, when even the most optimistic are expecting 5+% inflation this year.

Rate/HistoricalInflation.aspx?dsInflationcurrentPage=0?

Extrapolate this trend, and it is clear to me that inflation hurts those on the lower rungs far more. Essentially, the sooner you get to the money, the better inflation is for you. By the time all this money trickles down via wage increases, the cost of living has already gone up, and spending power of those wages have already gone down.

"Inflation is like a debt reducer for people, businesses or governments who have borrowed massive amounts of money. They're paying back yesterday's more valuable dollars with today's less valuable dollars."

This is Reaganomics in a nutshell- a theory I was extremely fond of pre-mises, having grown up in the booming 80's. Essentially, we will "spend ourselves out of debt".

In practice, I consider this somewhat of a pump-and-dump scam, minus the "dump". In other words, using debt, it is absolutely possible to shock the economy into rapid growth. i.e. If Obama hands out $1T in work-project wages, or Reagan spends $1T on national defense, this will absolutely create some short-term gains, and whether they go bottom-up, or top-down is more a sociological debate than an economic debate.

But- at some point you need to take your profits off the table. For example: many people took ~5% mortgages on their house so they could invest that equity in the market and get ~7%. In theory, they net 2% /yr for filing some paperwork- smart move. However, unless you ultimately sell those investments and repay the house, your net worth on paper is extremely deceptive. Case in point: most of these people will lose ~30% of their investments AND pay 5% interest on house debt this year. Had they taken profits in 2004, this would have worked fine- but unless you take your profits, this is essentially sitting at the slot machines all night on the hope that it "owes you" by now.

This is where Reaganomics loses me- we never paid back that debt, we never took our profits off the table. Sure we boomed in the 80's- but so did the debt. We boomed again in the 90's, but the closest we got to paying it back was a balanced budget. We boomed again in the early 00's, and again the debt boomed right along with it.

This chart says it all:

http://www.swivel.com/graphs/show/5543118

If my house gains 10%, and I borrow another 10%, my net value is decreasing, not increasing, once interest is factored in (even if only 0.00001% APR).

And sooner or later you hit the point of no return- your monthly debt payments exceed your monthly income. This is true of individuals, businesses, multi-national conglomerates, governments, Republicans, Democrats, Atheists and Baptists. It has nothing to do with ideology.

This commercial explains this phenomenon on a micro scale:

http://www.youtube.com/watch?v=hn5EP9StlVA

Stanley Johnson is the American dream. As he says so eloquently: "somebody help me".

Bonus Irony: this is a commercial for more debt.

As best I can tell, the biggest difference between 2008 and 1981 is that Reagan still had a credit line to exploit when he unveiled Reganomics. Today, we're still broke, and now we've run up our credit cards. Sure, we can bump the credit limit- this is America after all. But look at this graph again:

http://www.swivel.com/graphs/show/5543118

Where does this strategy lead? How long can it continue?

I appreciate an opposing view point, and welcome correction. Personally, right now I'm hoarding cash and precious metals, waiting for the bottom so I can go on a buying orgy. Real estate is cheap enough to cash-flow again, and in some areas of the rust-belt you can get-in with $10,000 and no mortgage (which sounded insane to me too, until I realized the depth of our manufacturing recession).

What say you? Where is the smart money right now?

Thanks Zap,

You've presented so much I don't know what to respond to. I was a little tripped up by your assertion that once money is created, it never goes away. Maybe you could clarify that one for me. Assume I believe money can and does disappear.

As far as the smart money, I'd have to say real estate (I'm talking land). It won't make you rich quick, but they stopped making it a long time ago, and they ain't making any more of it.

If there's a particular point you'd like me to respond to, let me know.

Okay Zap,

I've been thinking about your short term predictions, and I'd like to play ball. I'm betting the DJIA will be closer to 9000 than 8000 at the close on the last trading day of the year. If it's under 8500, you win. If it's over 8500, I win.

I'll even bet the DJIA will stay closer to 9000 than 7000 on March 1, 2008. If it's under 8000, you win. If it's over 8000, I win.

You game?

Now what are the stakes? (No money).

"tripped up by your assertion that once money is created, it never goes away"

It goes away as the debt is repaid. For example, a $300k mortgage is created in about two month, and repaid over 30 years. But now we are dealing with the mechanics of money supply, which is a whole other monster.

DJIA < 8500 on Dec 31, 08?

Tough call, but what the hell. I will wager the market is between 8,149 and 8,500 at the end of the year.

I will wager a bag of Florida navel oranges, which are delicious and just coming into season now. Or if you prefer, a 1oz silver coin. Or, perhaps just a thorough "I was wrong post" in which I accept all due humility?

If you win, I'll make a donation to your favorite online charity equal to what I get paid for one hour of work.

If I win, you'll make an online donation to my favorite online charity equal to what you get paid for one hour of work.

This goes for the second wager too (March 1, 2009). Two separate bets with two separate payouts.

Deal?

One wager is enough for me.

< 8,500 on Dec 31, 2008

Loser donates an hour of salary to the the winner's favorite charity.

December 16, 2008:

1 Euro = $1.40 (USD)

1oz gold = $830.79 (USD)

DJIA (DOW) = 8,924.14

The USD rally has ended, and gold has begun moving up again. The DOW is showing a significant improvement in the past 10 days.

From Bloomberg:

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Why is a 0.25% special funds rate a big deal? Two words: liquidity trap.

From Wikipedia:

In monetary economics, a liquidity trap occurs when the nominal interest rate is close or equal to zero, and the monetary authority is unable to stimulate the economy with traditional monetary policy tools. In this kind of situation, people do not expect high returns on physical or financial investments, so they keep assets in short-term cash bank accounts or hoards rather than making long-term investments. This makes a recession even more severe, and can contribute to deflation.

Some personal observations: the DOW seems to be deliberately ignoring all experts. Last update, all signs pointed to inflation, and the DOW dropped 1,000 points. This update, all signs point to deflation, and the DOW has jumped 1,000 points. Clearly, investors seem to have a low opinion of the "experts" right now.

So which threat should we be worried about: deflation, or hyperinflation?

As counterintutive as it may seem, the answer is BOTH:

From the Market Oracle:

It is no accident that many of the worst periods of hyperinflation are preceded by deflation. In fiat currencies with high levels of government debt, severe cases of deflation cause a loss of confidence in the nation's currency by shrinking the economy and making the government's debt appear increasingly unsustainable. The loss of confidence then causes the flow of money to speed up as individuals become desperate to exchange cash for real goods as fast as possible, producing hyperinflation.

Note: I strongly disagree with the author when they say "The danger of hyperinflation lies in a dramatic increase in the velocity of money due to a loss of confidence, not in changes in the money supply". I would argue that BOTH are contributors. In either event, an interesting article.

In other news, Obama is being described as a Keynesian. Many here on OGM think Obama should pursue the FDR approach, with a "New Deal" of sorts. Here is an opposing view, presented from a Libertarian think tank.

watch the video here

Problems with the Cato Institute arguments:

(1) The only purpose of the Keynesian policies is to put money in consumers pockets in order to stimulate spending are ‘prime the pump’, so to speak.

No – that isn’t the only purpose of public spending. It may amount to that if the government spends money building military boondoggles that even pentagon planners don’t want. It may be the case when a president like Reagan is convinced to blow money on an SDI program that, thirty years later, still has trouble shooting down a single missile in a planned test in which the missile’s trajectory is known beforehand. However, if the government spends money building Hoover Dam which, 70 years later, is still producing 2 gigawatts of power (enough for a city of 750,000), the government has made a useful investment that “puts money in consumer’s pockets” and is providing very important products (electricity that still replaces oil imported from abroad, flood control, fresh water, etc.). If we put people to work building energy-producing infrastructure, we will stimulate the economy by replacing foreign oil with domestically produced energy and keep money in the US economy that we would have otherwise sent to shitty regimes overseas. How much new American-produced energy have oil companies produced with the tax cuts that the Cato institute guys told us would stimulate investment? How much new American-produced energy has the $600 billion in oil company profits over the Bush years yielded?

(2) The government can’t put into the economy without taking money out of the economy.

This ignores the question of when the money is ‘taken’ out of the economy and from what ‘parts’ of the economy it is taken from. The government must always take money out of the economy in order to perform its functions. You can argue about what functions are the legitimate role of government, but once you’ve decided what those functions are, the question that remains is when are the best times for the government to do those things for which timing is optional. When the economy is booming and the competition for labor and the cost of borrowing is high, or when labor is available and the cost of borrowing is low? And if the Cato Institute guy is right in stating that people are fearful in a depression and try to boost savings so much of their wages end up in savings (only really true of people not living from paycheck to paycheck, but let’s put that aside), it is the Cato institute guy who is wrong in suggesting that the money is being left idle anyway – in the aggregate, the government is borrowing money that would have sat idle in savings accounts.

(3) Unemployment averaged 17.2 percent during the 1930’s.

True, but it is totally dishonest to not plot the change in unemployment through the period, as he showed for the Hoover years. This is as bad as Hannity claiming that average unemployment during Bush’s eight years has been good.

(4) Overall out put did not get back to the 1929 level until World War 2.

True, but it is totally dishonest to not plot the change in output through the period.

(5) Other Keynesian episodes generated similarly bad results, though never as bad as the great depression.

So dishonest it turns my stomach. The great depression was a Keynesian episode? Talk about a complete distortion of history.

(6) The Laffer curve? You’ve got to be kidding!

Throughout the late eighties and early nineties, supply-siders like Jack Kemp moaned about high interest rates choking the economy because he and his ilk would never admit that their tax cuts never generated the growth necessary to close deficits. Growth in the economy was stifled by the government competing with private borrowing for capital and thereby raising interest rates. Clinton took office, raised taxes on the wealthy and proposed modest budgets, and the supply-siders predicted disaster. Result: longest economic expansion is postwar history.

Just because the guys at the Cato Institute can’t make the distinction between bad government and good government, doesn’t mean that good government isn’t possible.

Zap,

I didn't mean to accuse you, my problem was with the Cato Institute.

Your plots are fine and they show more fairly the reduction in unemployment under Roosevelt - albeit incomplete. Overall, I find Krugman's argument more persuasive than the Cato argument. I don't know exactly when a "recession" become a "depression", but it is clear that until 1937, when Krugman indicated that Roosevelt attempted to reinstitute more conservative spending policies, things were improving.

One thing is interesting, and I have thought about it since Norm put up the exchange between George Will and Krugman: both agree -and your figures show it - World War II ended the depression. Why? If the Cato institute guys are right, there is no reason it should have - Roosevelt was just taking money from one part of the economy and giving it to another. Furthermore, the war spending was being used to make a lot of stuff that was just going to be destroyed in war. So while some spending was used to retool factories, re-equip shipyards, and to innovate such as in wartime plane production, surely spending that was entirely devoted to infrastructure would have improved the economy more. Building aircraft carriers put money in shipbuilders' pockets, but TVA electrification surely was a more beneficial direct investment in infrastructure - and surely created more demand for domestic items like electrical appliances.

If government spending is not the way to end a depression, then why did WW II end the depression?

If government spending is not the way to end a depression, then why did WW II end the depression?

As I understand it, the short answer is: because by the mid-1940s, the rest of the industrialized world had been reduced to rubble. If you wanted a TV, a car, or a refrigerator, that meant you were buying America. Cue the 1950's and the "golden age" of American economic growth.

By the 1970s, the world (especially Asia) has caught-up with us again, and so began the slow painful death of our American empire.

Again: that's a cliff notes version.

I do agree with the point that government spending does little more than shuffle money from the left pocket to the right pocket, as shown in this graph:

http://www.swivel.com/graphs/show/5543118

Debt and GDP go together hand in hand. The numbers get bigger, but the "net value" of our economy changes very little.

Important clarification: I am speaking to macro economics here. Obviously the Vietnam War and the Hoover Dam had very different ROIs.

As I understand it, the short answer is: because by the mid-1940s, the rest of the industrialized world had been reduced to rubble. If you wanted a TV, a car, or a refrigerator, that meant you were buying America. Cue the 1950's and the "golden age" of American economic growth.

Oh, obviously - everyone knows the Cliff notes version. And undoubtedly, the US economy had a big advantage at the end of the war because it was the only one left standing. But most output was consumed domestically produced domestically - exports were not the principle source of income for American producers and import competition at the beginning of the depression didn't start the depression. The depression was over long before the war ended - and I find any hypothesis for its end other than massive government spending hard to believe.

All empires end and the effort to keep them hastens their end. They don't have to end with a crash - we can choose to recognize what we're doing to ourselves take our place among nations - even as a leader among nations in many ways - but the neocon fantasy of dictating to the world - that will screw us for sure.

Tim:

Could you suggest any specific books or articles presenting a pro-government spending view of the Great Depression and recovery?

When I have some time, I'd like to double-check those export numbers, because I believe exports were in fact a major part of the recovery. I.e. initially weapons to European allies, and eventually consumer goods worldwide.

I find it interesting that an economic catastrophe 50 years before I was born is still debated as furiously as say, abortion. You would think we would have consensus by now.

To be clear: not trying to argue, just trying to educate myself.

You raise a good question concerning the fraction of war production that was export (pre-war for us in '40 and '41). I don't really know how much was ultimately paid for (or was "lend"-lease that was never actually paid for). It seems certain that most production for American forces ultimately came out of the taxpayers pocket - one way or the other.

I've never actually read an book just on the subject of the "economics" of the depression. Perhaps I need more eduction too. I really appreciate your nonconfrontational attitude, Zap – I should probably cultivate it!

Hey Zap,

I found an article written by an actual economist that I thought you might find interesting. It's not all that deep, but I like the solutions he poses at the end.

Caution: don't read any of his other articles.

link

I've always been amused by the arguements about WWII ending the depression. I don't doubt the government spending actually helped, but I think it was more of a psychological thing. Nationalism seems to go along with booming economies. This goes along with my belief that fiat currencies are largely effected by the confidence of the people using it. I don't know that one causes the other, but there seems to be a relationship, and from what I've read about WWII, and the post-war years, nationalism ran high.

Tim:

What about the Marshall Plan? This seems like a strong piece of evidence in favor of government spending to boost long-term (sustained) economic growth. You might even describe it as a "bailout done right", although pro-isolationists will argue we shot ourselves in the foot, and created our own competitors.

The first step to fixing this is to understand what went wrong. I can chant the mantra of Paulian idealism all day long, but if it isn't true, it does us no good.

And speaking of Paulian idealism, I largely agree with the article Syngas linked to:

Milton Friedman explained, "(I)nflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output." Put another way, inflation results from an increase in the supply of money relative to the demand for money.

To use a forced "Star Wars" analogy, if Ron Paul is Luke Skywalker, Milton Friedman is Yoda.

Central banks are villains in most countries; ours is just not as bad as others.

I think the word "villain" is accurate.

It turns out that we did without a central bank from 1836, when President Andrew Jackson closed the Second Bank of the United States, to 1913 when Federal Reserve Act was written. During that interval, we prospered and became one of the world's major economic powers.

Interestingly, the Fed is actually the third central bank we've had. The first, created by Hamilton in the Washington administration, was later allowed to expire by Jefferson and Hamilton. After the War of 1812, Hamilton created the 2nd bank, which was defeated by Jackson a few years later.

Simply stated, the issue of central banking was one of the most hotly debated issues among our founding fathers.

My recommendation for reducing some of that power is to repeal legal tender laws and eliminate all taxes on gold, silver and platinum transactions. That way there would be money substitutes and the government money monopoly would be reduced and hence the ability to tax -- some people would say steal from -- us through inflation.

This was one of the major planks of the Paul platform- competing currency. Rather than simply destroy the Fed, Paul argued we should allow competing currency to prove itself a better solution, and the free-market would resolve this issue itself.

Syngas is totally correct that nationalism peaked in the post-WWII years, and that confidence is a major player in determining the value of FIAT money. However, the Friedman school would argue that confidence based on nothing but jingoism is short-lived, resulting in "bubbles", not sustainable growth.

For those wanting more information, I strongly recommend: What Has Government Done To Our Money? by Rothbard and Capitalism and Freedom by Friedman.

Kinda off-topic, one of the major problems with all of this is that it is incredibly boring, and so most people could care less about the history of banking and economics.

To that end, I have been attempting to produce a cartoon series which is 2-parts propaganda, and 1-part economic history.

Not safe for work, violent, mild racist humor

My goal: make history more than interesting- make it EXCITING.

I expect this looks really stupid to people too old for cartoons and "Star Wars", but it seems to get a message across to the younger folks, so perhaps it was not a total waste of time.

Damn- I just realize I mispoke in the above post:

Interestingly, the Fed is actually the third central bank we've had. The first, created by Hamilton in the Washington administration, was later allowed to expire by Jefferson and JAMES MADISSON. After the War of 1812, MADISSON created the 2nd bank, which was defeated by Jackson a few years later.

Norm: I would really appreciate an "edit" feature if possible.

DJIA < 8500 on Dec 31, 08?

Tough call, but what the hell. I will wager the market is between 8,149 and 8,500 at the end of the year.

Looks like I lost, syngas. DOW = 8,776.39 @ close on Dec, 31 '08.

I really thought I had this one in the bag last week, but that last minute rally killed me.

Que sera. Who gets your donation?

@Tim ROFL

@Syngas done and done. I even added the 4.75% processing fee so it all goes to charity.

January 2, 2009:

1 Euro = $1.38 (USD)

1oz gold = $878.09 (USD)

DJIA (DOW) = 8,907.02

I am feeling far more optimistic about things, having spent the holidays talking with various family members and catching-up on some reading.

Short version: most people I've talked to / listened to / read seem to think we will hit bottom by June 2009, and be into a full-fledged recovery by year's end. I personally think that view might be a bit optimistic, but things are simply so cheap right now I can't help buy buy-in.

I have become especially keen on ETFs. For those not in the know, ETFs are essentially index funds that trade like stocks. Good diversification, and extremely cheap expense ratios.

I expect to see some major gains in energy this year.

I especially like XLE (energy fund heavy in oil) and GEX (alternative, renewable energies).

At this point, I think all eyes are on Obama. Is he going to stick with the tax plan he campaigned on? How much spending does he plan to do this year? What will the war in Afghanistan do to our recovery, assuming Obama escalates?

Much to my dismay, it looks like America has learned nothing, and will keep running down the road of deficit spending in the hopes of inflating us all out of our debts. I am of the opinion that if this crash didn't cause a fundamental reevaluation of things, probably nothing ever will. I doubt the glorious revolution will ever arrive.

Unintended consequence: I think I've become a bleeding heart liberal. Any argument I've ever made against socialized healthcare or higher education have been tossed completely out the window. The money already given away via bailouts far exceeds even the most pessimistic cost analaysis of these programs. If this "spend-and-spend" paradigm is here to stay, we may as well direct some of that money to those who actually work for a living.

I've decided that I need to focus more on my own career, and less on my Don Quixote quests that accomplish nothing but increasing my blood pressure. Or to put it another way, if you can't beat 'em, profit off 'em.

January 14, 2009:

1 Euro = $1.31 (USD)

1oz gold = $820.30 (USD)

1 barrel oil = $37.44 (USD)

DJIA (DOW) = 8,200.14

The economy is hell-bent on making all those who discuss it look like fools.

In the (almost) 2 weeks since the last update, the DIJA has dropped 600 points. So much for cautious optimism.

The retail numbers for December are starting to roll-in, and they are bad.

From Bloomberg:

Sales at US retailers fell more than twice as much as forecast in December as job losses and the lack of credit led Americans to cut back on everything from car purchases to eating out.

Zaptrodamus picks:

1. If Gold drops under $800, I intend to buy more. I expect gold we be back over $900 by the end of 2009.

2. Energy is still ridiculously cheap. I expect oil to be back over $60 by the end of 2009.

3. I would wager the DJIA is over 9,000 by June. Note: I am basing that entirely on self-delusion at this point.

Can we get another update Zap?

January 28, 2009:

1 Euro = $1.316 (USD)

1oz gold = $902.30 (USD)

1 barrel oil = $41.92 (USD)

DJIA (DOW) = 8,375.45

Unemployment is rising, jobs are getting slashed, and our new President intends to run a $1T deficit this year. All macro indicators are real grim. So rather than reiterate bad news, I'll discuss what I'm doing and why. I'm not an expert, and this does not constitute investment advice.

1. I am a gold bug. Every time it drops to the low $800s I cost-dollar average and buy more. Every time I do it pops back over $900. I routinely sell half for ~$50 oz profit, and keep the other half in my nest egg. This pattern has been following for awhile now, and I am very bullish on gold long term, because I am expecting significant inflation within this decade.

2. I am 28, and invest via a Roth IRA monthly. Because I have 30 years until retirement, I consider this current environment a gift from the gods. Specifically I like:

Oil ETFs: common wisdom is that $41 /barrel oil is cheap. With Israel on eggshells and Obama about to escalate in Afghanistan, not to mention ever-increasing demand from China, I see no where to go but up.

I also like GEX which is an ETF that focuses on alternative energy. It tends to follow oil; higher prices make alternatives more attractive. Long-term (30 years), I expect this sector to begin displacing oil by the time I retire.

I also like ETFs that focus on dividend earnings. Even if the market stays flat, or slowly drops to 5,000, dividends provide for stable, reliable growth. I am especially keen on AOD which is offering a 30% return right now, because the NAV plumeted during the great panic of '08. I don't expect the return to stay this good for long, but intend to cost-dollar average as it recovers, and expect a solid 15% annual return.

Back to the economy in general: one final observation is that we are clearly in a period of deflation right now. My new neighbor just bought his house for roughly half what I paid for mine, and my weekly grocery bill is down almost 20% (largely due to some great bargains and cheap local produce). Meat prices look to be holding stable.

Where is the bottom?

I am feeling optimistic, and would like to think DJIA @ 7,500 is/was the bottom. My Ron Paulian friends are promising 5,000, if not 2,500. My Obamaiac friends think we'll be back over 10,000 by years end. Who knows?

Because I have the luxury of 30 years, I intend to cost-dollar average to the bottom (or die trying). As always, I suggest gold for the truly paranoid, but think oil is a good bet for mid-term (2-5 year) gain.

I like your outlook Zap. I am a little disappointed you are not buying any treasuries though. Don't you believe in the audacity of hope?

From Bloomberg:

The yield on the benchmark 10-year note climbed 10 basis points, or 0.10 percentage point, to 2.76 percent at 2:17 p.m. in New York, according to BGCantor Market Data. The price of the 3.75 percent security due in November 2018 dropped 27/32, or $8.44 per $1,000 face amount, to 108 14/32. The 30-year bond yield rose 10 basis points to 3.51 percent. It touched 3.54 percent, the highest since Nov. 26.

I can get better return at ING direct or HSBC (MMA), plus spend it whenever I need it.

I can't imagine why someone would want these treasuries, which is actually a scary thought. The day China & friends stop buying, the Paulians will look like optimists.

So one of the reasons you are not buying treasuries is that the yeild is lower than the private sector is offering.

It would seem that government is in competition for the same investments as the private sector. Do you know of any credible articles that explain how this could be stimulative?

British government bans Wilders from entry

Sorry, that was supposed to go on the 'Hate Crime' thread.

Excuse a late reply- very busy month.

It would seem that government is in competition for the same investments as the private sector. Do you know of any credible articles that explain how this could be stimulative?

Could it be stimulative? Interesting question. Credible articles? None.

My prediction du jour has been "7,500 is the floor". Tomorrow morning we'll see if I was right.

I also wanted to share the following article:

http://www.newstatesman.com/economy/2009/02/financial-crisis-china-banks

A tad pessimistic, but a good read IMO.

Not far off Zaphod.

What makes you think 7500 is the floor?

Why do I think 7500 = floor?

2 parts optimism

1 part gut instinct

1 part technical analysis

Mix well, and serve with a side dish of platitudes.

I was nervous to see the DJIA @ 74XX just an hour ago, but its already back at 7,533 @ 10:30 AM EST. I think we've found the floor.

That's really disappointing Zap:

2 parts optimism (crap sandwich)

1 part gut instinct (crap sandwich)

1 part technical anaylysis (based on one tiny bounce)

all you've really got is platitudes.

Jim Cramer sounds sane compared to you!

Some people think Tech. Analysis is something akin to reading tea leaves or tarot cards. Others think TA can illustrate trends somewhat reliably. I tend to bounce between the extremes. I guess it really comes down to how "efficient" you think the market really is.

In a nutshell- (so far) today the DOW flirted with its 52-week low, and stayed on top.

I think this is more psychological than anything- so long as the 52-week low remains the floor, investors gain confidence that the worst is behind them. No one expects the recovery to be swift, but it looks like we may have stopped the major bleeding.

Needless to say- if we drop below this floor, I will be proven wrong in a spectacular fashion (I would expect the DOW to drop 500-1000 points within days of new lows).

And, as bas as I might be, I will never be as bad as this:

http://www.youtube.com/watch?v=gUkbdjetlY8

You're right Zap, it's tough to beat Cramer at shitty forecasting, but I can't take seriously anyone who makes predictions based on optimism or gut feelings. I mean no offense Zap, and I know you're partly kidding, but I've basically been reading the same crap sandwich predictions from 'economists' on the TV and internet and it really pisses me off there are retirees out there making stupid decisions based on guru superstition.

Just once, I would love to see a respected economist just say 'I don't know and anyone who tells you they do is lying.'

I agree TA has it's place, but whats going on in world finance is so unpredictable right now, I don't think arbitrary round numbers have much significance in the minds of investors anymore.

It's like predicting global warming based on one variable. Sophomoric.

I'm not a respected economist, however, I would proudly say: "I don't know and anyone who tells you they do is lying."

The DOW is at 7,330 as of 11am Friday. The 7,500 floor is gone (if it was ever there).

In the immortal words of Sammy L. Jackson: hold on to your butts.

Feb 23, 09 @ 12:51 PM EST

DJIA: 7,208.37

Dropping like a rock.

Personal politics notwithstanding, the market has consistently rejected bailout-o-nomics. When will the madness end?

Mar 2, 2009 @ 11pm EST

DIJA: 6,763.29

Down ~445 points in the last week. The pessimists say DIJA @ 3000 is realistic; the optimists have already jumped out the window.

It's genius really Zap, we've gone a long way towards eliminating the bourgeoisie and the petite bourgeoisie without firing a single bullet, and only in a matter of a few months! Just 46 months left, and the classless society will be at hand!

As Karl and Fred famously stated: "The proletarians have nothing to lose but their chains. They have a world to win."

March 12, 2009:

1 Euro = $1.279 (USD)

1oz gold = $924.51 (USD)

1 barrel oil = $47.03 (USD)

DJIA (DOW) = 7,170.06 (USD)

Quick thoughts:

• The DOW is headed back to 7,500, but I simply don't trust it. I have imposed a 3-month trading restriction on myself because I've been wrong too many times.

• Oil is inching back up. As the world adjusts to the post-Bush world, it will be interesting to see where it finally lands.

• Gold is almost cheap enough for another quick profit taking. As always, if it drops below $900 or so, I would grab some more, and sell half of it the next time it pops to $1000.

This 24/7 obsession with the DJIA and the rest of the stock market is ridiculous unless you're someone who is close to retirement and thus cannot rely on "the long run" and is/was too ignorant (considering one's age) to move one's retirement income out of the stock market and into a less volatile investment.

JoAnn:

This thread exists so that 2 years from now I can look back, and see how right or wrong I was.

You are 100% correct- long term, today's DIJA doesn't matter at all. But consider these numbers:

March 12 v. March 19

1 Euro = $1.28 v. $1.37

1oz gold = $924.51 v. $955.24

1 barrel oil = $47.03 v. $50.92

DJIA (DOW) = 7,170.06 v. 7,399

That's a BIG change for only 7 days. The changes in Euro & Gold tell me that inflation is creeping back into the picture.

I also correlate this recent change directly to the actions of the Federal Reserve, explained in greater detail here:

http://news.bbc.co.uk/2/hi/business/7951493.stm

These are historic times we are living in! My fascination here is not "oh oh- how do I exploit the market for quick cash" so much as it is "wow- I never thought I would see this in my lifetime. I better take a photo."

These are historic times we are living in! My fascination here is not "oh oh- how do I exploit the market for quick cash" so much as it is "wow- I never thought I would see this in my lifetime. I better take a photo."

You remind me of what my grandpa used to say.. ;:

Today on "Bailout Update" we have a trivia question!

Riddle me this: What happens when the Federal Reserve creates (another) trillion dollars out of thin air?

Answer: China demands a new reserve currency

I fear we are soon arriving at the cusp of an even greater riddle: is the American economy based on our production and innovation, or is it based on our force of arms?

To be blunt: gold pisses me off. Everything I know about inflation tells me we should see $2000 / oz prices. And yet, in the real world, gold is unable to get above $1000 /oz.

Something smells fish to me.

And of course, the greater issue (conspiracy theory warning) is that the same clowns who control the fiat currencies ALSO control the gross majority of gold reserves.

I also think that in case of true collapse, water, food and electricity will be in greater demand than any precious metal. Then again, I've never lived through a currency collapse, so I have no idea what to expect.

I think the best summary I've heard is this: even if the Obama / Geithner plan succeeds, all it will have done is resurrect the status quo of 2005. The underlying issue have not, will not be addressed, so long as we refuse to take our medicine.

and what exactly is that medicine?

Allow the markets to revalue themselves.

This, by the way, is exactly what will happen either way.

The difference is: how many trillions will we toss out the window before accepting this?

Hmmm...

I'm not sure if you were paying attention durring the campaign Zap. We're not throwing trillions out the window, we're buying the largest insurance companies in the world, the largest banks in the world, and the largest auto makers in the world.

From now on, these entities will serve the public good instead of the greedy shareholders, and executives. Insurance will become affordable to every american! Banks will no longer be able to discriminate! SUVs will be replaced by hybrids and electric carts!

Profit will not be the prime motive of these industries any longer Zap. Public good and Green is the new P/E ratio.

Now quit worrying about your retirement accounts and get with the game.

Gulp