"The largest source of liquid private wealth remaining in the United States are the $15 trillion in private retirement funds and the ultimate ownership, control and future of these funds have already been compromised and exchanged for the favorable tax treatment of private retirement plans. Congress writes the laws, so they can tax, penalize, hold your funds hostage and although they’d never use the word, “confiscate” your assets at their discretion.I still remember when many years ago, the Government first proposed "Individual Retirement Accounts", my father saying, "My concern is that someday the Government will decide it needs that money and take it." Seems now like he might turn out to be quite the prophet.
The retirement trap ... is only a proposal at the present time and since it may well begin in the latter years of the Obama Administration ... I’m calling it the “Obama Retirement Trap”. But make no mistake, the government need for current revenue and their frenzied search for a short-term fix to fund a backstop of liquidity to buy future government debt obligations when no credible investors will buy them is an unspoken quest of both political parties. The establishments of both political parties will do anything to stay in power and this will include raiding and pillaging your retirement funds.
The prototype for their plan was devised in 1991 by Alicia H. Munnell, then Director of Research for the Federal Reserve Bank of Boston. She presented the idea in a paper entitled “Current Taxation of Qualified Pension Plans: Has the Time Come?”
Later she was promoted to Assistant Treasury Secretary, and along with Robert Reich, Henry Cisneros and Hillary Clinton, she began to plot a raid on retirement funds. One element of the scheme was to create a Mandatory Pension System and fund it with a one-time 15% tax on retirement assets and a recurring 15% tax on retirement plan income.
The latest leftist plan first appeared in 2007 at the Economic Policy Institute: Agenda for Shared Prosperity. In 2008, she became the new Director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research. In her book, “When I’m 64: The Plot Against Pensions and the Plan to Save Them”, she hypes her retirement solution for millions who do not have adequate retirement savings and her solution is to confiscate most of the retirement assets of successful Americans.
A plan this radical can’t just be slipped through Congress. It can only ride into law on a first-class national crisis. Have you noticed that somehow the politicians are always able to find one when they need one. According to the author, there could be several possible triggers:
Loss of Triple-A Status for U.S. Treasury Bonds (most likely)
Terrorist Attack or Military Disaster
Another Economic Meltdown
A Run on Treasury Debt by Foreign Investors
[Assuming the most likely scenario] At some time during the next decade, a global run on treasury debt and the dollar will also likely take the American stock market down past lows not seen since the financial meltdown crisis in 2008 and 2009. The 50% to 75% stock market pullback during the actual bankruptcy of the Washington debt and paper dollar will send shock waves through retirees and current plan participants as their private retirement plan balances plummet.
At this time, Washington will come to the rescue and guarantee all private retirement plan market values back to pre-crisis levels. The gullible American public will overwhelmingly support this effort by switching their dwindling funds into the Guaranteed Retirement Annuity managed by the government. For the first few years, Washington will probably label those few of us who warn that that Americans have lost their retirement benefits as extremists, Ron Paul paranoids and Tea Party advocates.
Then it will become crystal clear to all Americans that their retirement benefits have been given away for a promise by an evil group of plunderers who have never in their history kept a promise, a guarantee or their word on anything. The greatest theft of wealth in the history of the world will have taken place and only those few who heeded an early warning will still have their retirement benefits and security.
Thursday, January 28, 2010
Hold Onto Your (Retirement) Wallet
Soon, the Government will be reaching for it. In "Prepare Now to Escape Obama’s Retirement Trap," January 21, 2010, Ron Holland warns:
Tuesday, January 26, 2010
Et tu, Supreme Court?
In case you thought there was a part of Government not bought and paid for like, say Treasury, Congress, or the Presidency, along comes another slap in the face to wake you up. In The New York Times, January 21, 2010, “Justices, 5-4, Reject Corporate Spending Limit”, Adam Liptak reported that the Supreme Court overruled two important precedents about the First Amendment rights of corporations:
I’m sorry, but I fail to see how a corporation is a citizen or association of citizens. A corporation is a legal entity, not a person, and it is certainly not an association of citizens in the sense of a social or special interest club, where people participate on a relatively equal footing, and the voice of the association is representative of its members.
A corporation has more in common with the Army than it has with association of citizens, because the average corporate employee has no more say in the activities of the corporation than does a private in the army. While the Sierra Club, Greenpeace, the NRA, or your local golf club would never dare advocate against the interests of its own members, a corporation very well might advocate for laws against unions for example, against its own employees in other words. What could be more unfair than taking profits made by the labor of its own employees and using it to lobby Government against their interests?
No, this Government is taking sides in class warfare at every turn, the top against everyone below, first the bailouts of Wall Street and the banks, now this. It’s ugly to witness.
“… a bitterly divided Supreme Court on Thursday ruled that the government may not ban political spending by corporations in candidate elections.
The 5-to-4 decision was a vindication, the majority said, of the First Amendment’s most basic free speech principle — that the government has no business regulating political speech. The dissenters said that allowing corporate money to flood the political marketplace would corrupt democracy.Other sources suggest the ruling opens the door to unlimited spending by foreign and multinational corporations as well in US elections. So much for YOUR voice in America.
The justices in the majority brushed aside warnings about what might follow from their ruling in favor of a formal but fervent embrace of a broad interpretation of free speech rights.
“If the First Amendment has any force,” Justice Anthony M. Kennedy wrote for the majority, which included the four members of the court’s conservative wing, “it prohibits Congress from fining or jailing citizens, or associations of citizens, for simply engaging in political speech.””
I’m sorry, but I fail to see how a corporation is a citizen or association of citizens. A corporation is a legal entity, not a person, and it is certainly not an association of citizens in the sense of a social or special interest club, where people participate on a relatively equal footing, and the voice of the association is representative of its members.
A corporation has more in common with the Army than it has with association of citizens, because the average corporate employee has no more say in the activities of the corporation than does a private in the army. While the Sierra Club, Greenpeace, the NRA, or your local golf club would never dare advocate against the interests of its own members, a corporation very well might advocate for laws against unions for example, against its own employees in other words. What could be more unfair than taking profits made by the labor of its own employees and using it to lobby Government against their interests?
No, this Government is taking sides in class warfare at every turn, the top against everyone below, first the bailouts of Wall Street and the banks, now this. It’s ugly to witness.
Monday, January 25, 2010
Wake up Rip Van Winkle
Some of us did, but most people didn't see the March, 2008, general stock markets crash and subsequent "Great Recession" coming. For those who, like Rip Van Winkle, have been sleeping for the past twenty years, because everything seemed to be so fine and dandy, but now the world seems like a far scarier place, you might want to get caught up on what happened during your long nap.
If so, the recent writings of Stewart Dougherty are a good place to start. A Tufts University graduate Magna Cum Laude, with a double major in English and History, he started a successful company after college and sold it to attend Harvard Business School. Made a Fellow of the business school, he was invited by Harvard to write business case studies. The studies he wrote were published in several languages, and taught in business schools around the world. He earned an M.B.A. from Harvard Business School in 1982.
Founder of a strategic consulting firm that served companies in the telecommunications and financial services industries, he was subsequently hired by client MCI Communications Corporation, and became Vice President of International Strategic Planning. Part of a team that proposed to integrate British Telecommunications and MCI, he witnessed Worldcom upset the deal, and acquire MCI Communications. He had grave concerns about Worldcom's viability, and directly after MCI's acquisition by Worldcom, he returned to his private consulting practice, where he has worked since. He is a Life Member of the Greater Philadelphia Chamber of Commerce.
Worldcom with $107 billion in assets subsequently imploded in July, 2002, in the United States' largest bankrupcty at the time, dwarfing the prior bankrupcty of Enron with $63 billion in assets. I remember because the V.P. of Salomon Smith Barney at the time had strongly recommended both stocks to me shortly before each went bankrupt. Such events stuck in my mind, not to mention my craw, and did much to diminish the exceedingly small store of confidence I had in U.S. financial institutions after the Nasdaq market crash of March, 2000.
You see, I'm no genius. The Nasdaq crash of March, 2000, was the beating that woke me up. Consistently mislead by brokers, the U.S. Government, and mainstream financial information sources, it was not until after my own personal financial rape, I began reading what appeared to be die-hard skeptics of everything I had assumed to true about business and economics and began to form an understanding of how economics works in the real world.
Rather than being a passive instrument, like a plastic chip in a penny-ante poker game, I found that the US dollar had undergone radical transformations, while serving as the key weapon in a deadly serious class war, the aristocracy of wealth versus everyone else. Via the dollar: The Fed, major banks, Wall Street, corporations, and major media manipulate and control the government and public education and determine what passes as "economics"; in it there are no such things as: free enterprise, free markets, and real savings. Have not been for a long time.
That, however, is a much longer story than one mere blog entry can hope to address, but if you just want the highlights since the day the March, 2009, market crash slapped the sleep out of your eyes, here goes:
The Theft of a Nation
by Stewart Dougherty, Apr 10, 2009
Six Syllables to a Savage Truth
by Stewart Dougherty, July 14, 2009
Fort Knox, Fort Hocks or Fort Shocks: Three United States Gold Scenarios
by Stewart Dougherty, 23 July 2009
The Metastasis of Moral Hazard and its Effect on Gold
by Stewart Dougherty, 26 August 2009
America's Impending Master Class Dictatorship
by Stewart Dougherty, January 22, 2010
That ought to get your mind centered again, even if it leaves you fighting mad. But, you should be mad. Anger can be a motivator, to learn more, to spread the word, to vote. There was a time, long ago, when Americans were not very interested in sports. Politics was their passion. Maybe, you should turn off the TV, take up a new (old) sport, and get serious about it. Or, just roll-over and let the same folks who stole your money take what's left of your life.
If so, the recent writings of Stewart Dougherty are a good place to start. A Tufts University graduate Magna Cum Laude, with a double major in English and History, he started a successful company after college and sold it to attend Harvard Business School. Made a Fellow of the business school, he was invited by Harvard to write business case studies. The studies he wrote were published in several languages, and taught in business schools around the world. He earned an M.B.A. from Harvard Business School in 1982.
Founder of a strategic consulting firm that served companies in the telecommunications and financial services industries, he was subsequently hired by client MCI Communications Corporation, and became Vice President of International Strategic Planning. Part of a team that proposed to integrate British Telecommunications and MCI, he witnessed Worldcom upset the deal, and acquire MCI Communications. He had grave concerns about Worldcom's viability, and directly after MCI's acquisition by Worldcom, he returned to his private consulting practice, where he has worked since. He is a Life Member of the Greater Philadelphia Chamber of Commerce.
Worldcom with $107 billion in assets subsequently imploded in July, 2002, in the United States' largest bankrupcty at the time, dwarfing the prior bankrupcty of Enron with $63 billion in assets. I remember because the V.P. of Salomon Smith Barney at the time had strongly recommended both stocks to me shortly before each went bankrupt. Such events stuck in my mind, not to mention my craw, and did much to diminish the exceedingly small store of confidence I had in U.S. financial institutions after the Nasdaq market crash of March, 2000.
You see, I'm no genius. The Nasdaq crash of March, 2000, was the beating that woke me up. Consistently mislead by brokers, the U.S. Government, and mainstream financial information sources, it was not until after my own personal financial rape, I began reading what appeared to be die-hard skeptics of everything I had assumed to true about business and economics and began to form an understanding of how economics works in the real world.
Rather than being a passive instrument, like a plastic chip in a penny-ante poker game, I found that the US dollar had undergone radical transformations, while serving as the key weapon in a deadly serious class war, the aristocracy of wealth versus everyone else. Via the dollar: The Fed, major banks, Wall Street, corporations, and major media manipulate and control the government and public education and determine what passes as "economics"; in it there are no such things as: free enterprise, free markets, and real savings. Have not been for a long time.
That, however, is a much longer story than one mere blog entry can hope to address, but if you just want the highlights since the day the March, 2009, market crash slapped the sleep out of your eyes, here goes:
The Theft of a Nation
by Stewart Dougherty, Apr 10, 2009
Six Syllables to a Savage Truth
by Stewart Dougherty, July 14, 2009
Fort Knox, Fort Hocks or Fort Shocks: Three United States Gold Scenarios
by Stewart Dougherty, 23 July 2009
The Metastasis of Moral Hazard and its Effect on Gold
by Stewart Dougherty, 26 August 2009
America's Impending Master Class Dictatorship
by Stewart Dougherty, January 22, 2010
That ought to get your mind centered again, even if it leaves you fighting mad. But, you should be mad. Anger can be a motivator, to learn more, to spread the word, to vote. There was a time, long ago, when Americans were not very interested in sports. Politics was their passion. Maybe, you should turn off the TV, take up a new (old) sport, and get serious about it. Or, just roll-over and let the same folks who stole your money take what's left of your life.
Saturday, January 23, 2010
Who is Buying Stocks???
Charles Biderman explains his bewilderment at the US stock markets strange rise since the lows of the March 2009 crash, on Bloomberg TV, January 19, 2010. Volume has been low, gains during normal hours have been low, and most of the gains are attributed to futures trading after hours. No one seems to know who is buying. Some suspect the Fed has been propping up the markets.
Is this: capitalism, free enterprise, free markets, or none of the above? George Orwell rolls over in his grave. No one notices.
Watch the video here.
Is this: capitalism, free enterprise, free markets, or none of the above? George Orwell rolls over in his grave. No one notices.
Watch the video here.
Monday, January 18, 2010
Asleeper Has Awakened
Before the NASDAQ crash, I was asleep.
The dot-com bubble burst on March 10, 2000, when the NASDAQ peaked at 5,048.62, more than double its value of a year before. Other stock markets around the world crashed simultaneously, including commodities, but in the US, the stock market punished the worst was the tech-stock-heavy NASDAQ. Hiring freezes, layoffs, and consolidations followed in several industries, especially in the dot-com sector.
Several communication companies, burdened with debt from expansion, sold their assets for cash or filed for bankruptcy. Worldcom, the largest of the failed companies, used illegal accounting practices to overstate its profits by billions of dollars. The company's stock crashed when these irregularities were revealed. Within days, it filed the second largest corporate bankruptcy in U.S. history.
The NASDAQ crash woke me up. I researched major market crashes, including the Great Depression, to find out what happens in the aftermath, to find out how I might get my money back. What I found was fascinating, and I'll get to that, but it also raised questioned about why markets crashed simultaneously to begin with. Being an ex-mechanical engineer with a systems engineering point of view, that was strong evidence of failure by design. I found that the reason the markets crash is the result of a monetary phenomena peculiar to our monetary system.
The problem is that some 98% of all our money is issued by banks in the form of credit, and due to the unique powers given to banks by law to create credit, there is no real limit on the issuance of credit and hence no real limit on the amount of money that banks can create. Also, the mathematics of principal plus interest favor the increasing of credit by banks until the limit of the ability of debtors to repay is reached, at which time the financial expansion stops, markets crash, and bankruptcies become epidemic. The financial money-generation system cycles between credit expansion and boom times and credit freeze, market crashes, business and individual bankruptcies.
The bigger the expansion of credit and the boom times, the bigger the crash, and contrary to popular belief, there have been more than one great depression. Our type of banking-monetary system started some 400 years ago in Europe. We in the U.S. inherited it, sort of. More like it was deliberately introduced in as quiet a back-door style as possible. In 400 years, there have actually been five great depressions, the 1930s Great Depression being the latest incarnation. The media always capitalize the "G" and the "D" to create the impression it was a one-off event, a fluke, something that will never happen again. Our current "Great Recession" may indeed be the sixth great depression, but our Government works hard to counter that impression by manipulating economic statistics. If a tree falls in a forest, and Government figures say it didn't, you are supposed to believe it didn't make any noise.
Getting back to the question of how to recoup my NASDAQ losses, I found that the best and safest investments in the aftermath of a major market crash are the precious metals. They cannot go bankrupt, default, or otherwise fail like paper assets such as stocks and bonds. Also, Government and central bank responses to market crashes are invariably the same, to work overtime to try to expand credit again. If successful, this leads to another boom and rapid initial inflation, increasing the price of precious metals. Commodities go up too but they can be more volatile. "Priming the pump" with credit and keeping credit expansion going are the keys to how recessions are turned around and prevented from becoming great depressions. They are also the ways the wealthy elite who own the banking system keep us all in debt and servitude.
If Government and central bank efforts to expand credit fail, a financial crisis can persist. If the failure to expand credit is spectacularly ineffective, the overall money supply can actually contract, leading to the dreaded debt-deflation spiral, as loan defaults increase faster than credit can be expanded, plus a general fear of debt and bankruptcy replaces greed-driven speculative investment. Another way of saying this is you can make credit available but you cannot make people borrow, and even if they borrow, you cannot make them spend. If all people do with discretionary income is pay down debt, the economy continues to slow down, debts get paid off, the money supply contracts, and velocity of money falls. This is how Great Recessions turn into great depressions. Great depressions are associated with large price drops in almost every asset category, with no safe investment position except being debt-free, holding cash.
Long credit expansions are typified by steady credit expansion and price inflation. The response to a recession is always typified by an attempt at even greater credit expansion, usually by lowering interest rates, monetary inflation and less price inflation. Responses to severe financial crises are typified by vigorous, greatly increased efforts to expand credit, which may or may not result in general price rises; it all depends on whether the banks can be made to lend, lenders to borrow, and borrowers to spend.
The latter problem is also sometimes called "pushing on a string". If the credit string is pushed, and enough people are willing to pull on the on the other end of it, a recession can be turned around, the economy will pick up, and inflation will resume but not be too bad. If the credit string is pushed, but no one wants to pull the other end, credit will not expand, and a recession can turn into a Great Depression. At that point, to avert the depression, extreme measures may be taken to prevent the money supply from dropping. Such measures, including "money-printing" aka "quantitive easing", can result in an unstable financial and economic condition wherein uncontrolled expansion of the money supply occurs, people lose faith in the money, the circulation rate (velocity) of money spikes very quickly, and "hyperinflation" occurs.
This does not, however, always happen. Sometimes, the money just flows into a few assets classes, causing market "bubbles" as investors chase gains. Or the money can just sit in a constipated banking system where there is reluctance to lend, debtors are reluctant to borrow, or there is borrowing but there is reluctance to spend. The latter situation is the justification for Keynesian-Rooseveltian proposals that the Government must then become the "spender of last resort". If these latter patterns emerge, it is possible for the money supply to just keep going down due to mathematical relations between debt, income, and money supply, and the result can be an unstoppable 1930s style Great Depression.
In science and engineering, when a process reaches a point of instability where a small input can cause two or more very different system behavioral outcomes, we call that a "bifurcation point". In the aftermath of a market crash, in our current economic system, it seems that a bifurcation point occurs followed by several possibilities, depending on the extent of the previous credit expansion and severity of the underlying debt problems. In order of increasing extent of the previous credit expansion and underlying debt problems, the bifurcation points seem to be:
Most people think that if precious metals increase in price in a successful resolution of a recession (Cases #1 and #2 above), they will decrease along with most assets in an unsuccessful resolution leading to a great depression, or at least they will decrease in Case #3(b), yet history suggests that is not exactly what happens. What seems to happen is that precious metals definitely do increase in price when a recession is successfully resolved (#1 and #2) as people anticipate higher than normal inflation. Where Case #3 is a possibility, however, precious metals hold their value or increase when it appears a recession might not be resolved successfully and investors seek safety, an asset that cannot fail (cannot go bankrupt or default), and they ponder the chances of hyperinflation. If Case #3a plays out, investment in precious metals will prove to be a very smart move. If Case #3b begins to emerge, and the system progresses into a great depression, markets and assets will suffer additional crashes, and precious metals drop too, usually in sympathy with stocks and commodities, but precious metals drop less than other assets, being perceived themselves as a form of cash, making them the next best thing to cash, and when the market crashes reach bottom, the precious metals will recover quickly as investors anticipate rapid inflation.
Now matter how Case #3 plays out, investment in precious metals then is either the best investment by far (#3a) or second best to cash (#3b). From the perspective of investment in cash, that is simply holding cash, that would be the worst approach (#3a), or the best (#3b). Risk management then says, because of Case #3(a), you must invest something in precious metals when facing the possibility of a great depression, and at least part of it must be in the physical metal in personal possession.
The time when precious metals underperform most of all other assets is when a long, slow credit expansion with low interest rates occurs. Such conditions are favorable to business and trade. Many ventures enjoy real organic growth, profitability, and pay dividends under such conditions. Gold does not grow like a business, it is simply a safe store of value, so it underperforms as an asset at such times.
This economics I learned after taking my NASDAQ beat down enabled me to recover most of what I lost from 2000-2002 by investing in precious metals. It also helped me side-step the stock market crashes in 2008. Another clue to the puzzle was interest rates; they are a lever of control by the banking system over credit expansion/contraction, but to keep it simple, I kept interest rates out of the discussion so far. In the rules below, however, I mention the interest rate because they give clues as to the direction of markets and asset prices.
My lessons learned may be summarized as:
1) Stock markets, the economy, the housing market, etc, they are all about the monetary system, banks, credit, and interest rates.
2) In stable economic times, when interest rates go up, credit expansion slows, bonds drop and the stock market usually drops.
3) In stable economic times, when interest rates go down, credit expansion speeds up, bonds go up, and the stock market usually goes up.
4) Precious metals don't always respond predictably to short term moves in the interest rate. They go up when credit expands faster than real economic growth and when stocks are at risk of failing and bonds are at risk of default, in other words, they go up in times of predictable faster-than-normal inflation and great economic uncertainty.
5) When market performance seems too good to be true, it is. But, it can seem too good to be true for longer than expected. Pay attention to Lesson 1. It's hard to tell when the market is being manipulated.
6) Markets fall faster than they rise. Never take your eye off the banks, the money supply, the value of the dollar, the price of precious metals, and interest rates.
7) In the aftermath of a recessionary market crash, buy precious metals and solid but beaten down stocks.
8) In the midst of great uncertainty before what appears to be a looming great depression, be in precious metals and in cash. In the aftermath of each severe market crash, allocate more to precious metals. As market recovery rallies begin to stall out, allocate more to cash.
9) In times of peace, certainty, and a slow steady credit expansion with reasonable positive real interest rates, get out of precious metals and into stocks and other growth oriented investments.
10) None of this is true all the time. Investing, even just trying to maintain the value of your savings is always a gamble. Sometimes you win, and sometimes you lose.
Overall, saving and investing is a losing battle for most people. The game is simply rigged in favor of banks, other financial institutions, and large corporations due to the structure of our monetary and banking system. My hope in this blog is help people recover some of their disadvantage, hang on to more of their savings, and do better on choosing and timing their investments.
At the same time, I will try to choose and comment on the best articles that explain what is happening politically and economically that threatens the life, liberty, and property of ordinary people. Hopefully, understanding will lead to more sensible involvement by the public in political and economic matters.
Sincerely,
Asleeper
The dot-com bubble burst on March 10, 2000, when the NASDAQ peaked at 5,048.62, more than double its value of a year before. Other stock markets around the world crashed simultaneously, including commodities, but in the US, the stock market punished the worst was the tech-stock-heavy NASDAQ. Hiring freezes, layoffs, and consolidations followed in several industries, especially in the dot-com sector.
Several communication companies, burdened with debt from expansion, sold their assets for cash or filed for bankruptcy. Worldcom, the largest of the failed companies, used illegal accounting practices to overstate its profits by billions of dollars. The company's stock crashed when these irregularities were revealed. Within days, it filed the second largest corporate bankruptcy in U.S. history.
Many dot-coms ran out of start-up or investment capital and were acquired or liquidated. Several companies and their executives were accused or convicted of fraud, and the SEC fined Citigroup, Merril Lynch, and others millions of dollars for misleading investors.
The NASDAQ crash woke me up. I researched major market crashes, including the Great Depression, to find out what happens in the aftermath, to find out how I might get my money back. What I found was fascinating, and I'll get to that, but it also raised questioned about why markets crashed simultaneously to begin with. Being an ex-mechanical engineer with a systems engineering point of view, that was strong evidence of failure by design. I found that the reason the markets crash is the result of a monetary phenomena peculiar to our monetary system.
The problem is that some 98% of all our money is issued by banks in the form of credit, and due to the unique powers given to banks by law to create credit, there is no real limit on the issuance of credit and hence no real limit on the amount of money that banks can create. Also, the mathematics of principal plus interest favor the increasing of credit by banks until the limit of the ability of debtors to repay is reached, at which time the financial expansion stops, markets crash, and bankruptcies become epidemic. The financial money-generation system cycles between credit expansion and boom times and credit freeze, market crashes, business and individual bankruptcies.
The bigger the expansion of credit and the boom times, the bigger the crash, and contrary to popular belief, there have been more than one great depression. Our type of banking-monetary system started some 400 years ago in Europe. We in the U.S. inherited it, sort of. More like it was deliberately introduced in as quiet a back-door style as possible. In 400 years, there have actually been five great depressions, the 1930s Great Depression being the latest incarnation. The media always capitalize the "G" and the "D" to create the impression it was a one-off event, a fluke, something that will never happen again. Our current "Great Recession" may indeed be the sixth great depression, but our Government works hard to counter that impression by manipulating economic statistics. If a tree falls in a forest, and Government figures say it didn't, you are supposed to believe it didn't make any noise.
Getting back to the question of how to recoup my NASDAQ losses, I found that the best and safest investments in the aftermath of a major market crash are the precious metals. They cannot go bankrupt, default, or otherwise fail like paper assets such as stocks and bonds. Also, Government and central bank responses to market crashes are invariably the same, to work overtime to try to expand credit again. If successful, this leads to another boom and rapid initial inflation, increasing the price of precious metals. Commodities go up too but they can be more volatile. "Priming the pump" with credit and keeping credit expansion going are the keys to how recessions are turned around and prevented from becoming great depressions. They are also the ways the wealthy elite who own the banking system keep us all in debt and servitude.
If Government and central bank efforts to expand credit fail, a financial crisis can persist. If the failure to expand credit is spectacularly ineffective, the overall money supply can actually contract, leading to the dreaded debt-deflation spiral, as loan defaults increase faster than credit can be expanded, plus a general fear of debt and bankruptcy replaces greed-driven speculative investment. Another way of saying this is you can make credit available but you cannot make people borrow, and even if they borrow, you cannot make them spend. If all people do with discretionary income is pay down debt, the economy continues to slow down, debts get paid off, the money supply contracts, and velocity of money falls. This is how Great Recessions turn into great depressions. Great depressions are associated with large price drops in almost every asset category, with no safe investment position except being debt-free, holding cash.
Long credit expansions are typified by steady credit expansion and price inflation. The response to a recession is always typified by an attempt at even greater credit expansion, usually by lowering interest rates, monetary inflation and less price inflation. Responses to severe financial crises are typified by vigorous, greatly increased efforts to expand credit, which may or may not result in general price rises; it all depends on whether the banks can be made to lend, lenders to borrow, and borrowers to spend.
The latter problem is also sometimes called "pushing on a string". If the credit string is pushed, and enough people are willing to pull on the on the other end of it, a recession can be turned around, the economy will pick up, and inflation will resume but not be too bad. If the credit string is pushed, but no one wants to pull the other end, credit will not expand, and a recession can turn into a Great Depression. At that point, to avert the depression, extreme measures may be taken to prevent the money supply from dropping. Such measures, including "money-printing" aka "quantitive easing", can result in an unstable financial and economic condition wherein uncontrolled expansion of the money supply occurs, people lose faith in the money, the circulation rate (velocity) of money spikes very quickly, and "hyperinflation" occurs.
This does not, however, always happen. Sometimes, the money just flows into a few assets classes, causing market "bubbles" as investors chase gains. Or the money can just sit in a constipated banking system where there is reluctance to lend, debtors are reluctant to borrow, or there is borrowing but there is reluctance to spend. The latter situation is the justification for Keynesian-Rooseveltian proposals that the Government must then become the "spender of last resort". If these latter patterns emerge, it is possible for the money supply to just keep going down due to mathematical relations between debt, income, and money supply, and the result can be an unstoppable 1930s style Great Depression.
In science and engineering, when a process reaches a point of instability where a small input can cause two or more very different system behavioral outcomes, we call that a "bifurcation point". In the aftermath of a market crash, in our current economic system, it seems that a bifurcation point occurs followed by several possibilities, depending on the extent of the previous credit expansion and severity of the underlying debt problems. In order of increasing extent of the previous credit expansion and underlying debt problems, the bifurcation points seem to be:
- (#1) Credit expansion, renewed inflation, market recovery, gold/silver rise initially in the aftermath
- (#2) Credit expansion, renewed inflation, continued high unemployment, multiple rotating asset bubbles, carry trades, and choppy markets (stagflation), gold/silver rise initially in the aftermath
- (#3) Extreme efforts to expand credit fail, and a second bifurcation point occurs:
- (#3a) Sudden monetary inflation, ie, hyperinflation, currency failure, aka a "hyperinflationary depression", is a possibility, and gold/silver are king/queen.
- (#3b) uncontrolled monetary deflation, deflation of all asset classes except cash, counter-party failures, mass defaults on contractual commitments (all paper assets), mass bankruptcies, especially banks, extremely high unemployment, real GDP contraction, also known as a "great depression", are all possibilities, and cash is king.
Most people think that if precious metals increase in price in a successful resolution of a recession (Cases #1 and #2 above), they will decrease along with most assets in an unsuccessful resolution leading to a great depression, or at least they will decrease in Case #3(b), yet history suggests that is not exactly what happens. What seems to happen is that precious metals definitely do increase in price when a recession is successfully resolved (#1 and #2) as people anticipate higher than normal inflation. Where Case #3 is a possibility, however, precious metals hold their value or increase when it appears a recession might not be resolved successfully and investors seek safety, an asset that cannot fail (cannot go bankrupt or default), and they ponder the chances of hyperinflation. If Case #3a plays out, investment in precious metals will prove to be a very smart move. If Case #3b begins to emerge, and the system progresses into a great depression, markets and assets will suffer additional crashes, and precious metals drop too, usually in sympathy with stocks and commodities, but precious metals drop less than other assets, being perceived themselves as a form of cash, making them the next best thing to cash, and when the market crashes reach bottom, the precious metals will recover quickly as investors anticipate rapid inflation.
Now matter how Case #3 plays out, investment in precious metals then is either the best investment by far (#3a) or second best to cash (#3b). From the perspective of investment in cash, that is simply holding cash, that would be the worst approach (#3a), or the best (#3b). Risk management then says, because of Case #3(a), you must invest something in precious metals when facing the possibility of a great depression, and at least part of it must be in the physical metal in personal possession.
The time when precious metals underperform most of all other assets is when a long, slow credit expansion with low interest rates occurs. Such conditions are favorable to business and trade. Many ventures enjoy real organic growth, profitability, and pay dividends under such conditions. Gold does not grow like a business, it is simply a safe store of value, so it underperforms as an asset at such times.
This economics I learned after taking my NASDAQ beat down enabled me to recover most of what I lost from 2000-2002 by investing in precious metals. It also helped me side-step the stock market crashes in 2008. Another clue to the puzzle was interest rates; they are a lever of control by the banking system over credit expansion/contraction, but to keep it simple, I kept interest rates out of the discussion so far. In the rules below, however, I mention the interest rate because they give clues as to the direction of markets and asset prices.
My lessons learned may be summarized as:
1) Stock markets, the economy, the housing market, etc, they are all about the monetary system, banks, credit, and interest rates.
2) In stable economic times, when interest rates go up, credit expansion slows, bonds drop and the stock market usually drops.
3) In stable economic times, when interest rates go down, credit expansion speeds up, bonds go up, and the stock market usually goes up.
4) Precious metals don't always respond predictably to short term moves in the interest rate. They go up when credit expands faster than real economic growth and when stocks are at risk of failing and bonds are at risk of default, in other words, they go up in times of predictable faster-than-normal inflation and great economic uncertainty.
5) When market performance seems too good to be true, it is. But, it can seem too good to be true for longer than expected. Pay attention to Lesson 1. It's hard to tell when the market is being manipulated.
6) Markets fall faster than they rise. Never take your eye off the banks, the money supply, the value of the dollar, the price of precious metals, and interest rates.
7) In the aftermath of a recessionary market crash, buy precious metals and solid but beaten down stocks.
8) In the midst of great uncertainty before what appears to be a looming great depression, be in precious metals and in cash. In the aftermath of each severe market crash, allocate more to precious metals. As market recovery rallies begin to stall out, allocate more to cash.
9) In times of peace, certainty, and a slow steady credit expansion with reasonable positive real interest rates, get out of precious metals and into stocks and other growth oriented investments.
10) None of this is true all the time. Investing, even just trying to maintain the value of your savings is always a gamble. Sometimes you win, and sometimes you lose.
Overall, saving and investing is a losing battle for most people. The game is simply rigged in favor of banks, other financial institutions, and large corporations due to the structure of our monetary and banking system. My hope in this blog is help people recover some of their disadvantage, hang on to more of their savings, and do better on choosing and timing their investments.
At the same time, I will try to choose and comment on the best articles that explain what is happening politically and economically that threatens the life, liberty, and property of ordinary people. Hopefully, understanding will lead to more sensible involvement by the public in political and economic matters.
Sincerely,
Asleeper
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