Reader Comments

This page presents reader comments to Stock and House Prices Might Not Fall off a Cliff

Scroll down to see reader comments posted on 7/19/05

 

Reader comment from E.W. Drake (added on 6/29/05):

Yr comments about a Plunge Protection Team (PPT) at the FED, while very conspiratorial, are not "off the wall" fantastic. I hv long thought that this stock mkt. has "no visible means of support," and I believe that some true mavens, e.g., Warren Buffett, think the same. I suggest that you make a FOIA request to the FED for any minutes, memoranda, correspondence, etc.of any committee or operation involved in stock market purchases or financing. I believe that that FED is part of the US Govt, so they shld not be exempt from FOIA, tho you will need to check that point. Note tht the FOIA request should include, "without limitation," correspondence, memoranda, etc., for the President's Working Group on Financial Markets, an official term.Yr article is very interesting--maybe fantasy, maybe not, since stranger things hv happened. What is clear is that too much money is chasing too little value, whch hs been true for 2-3 years.

 

the Optimist:

Asking the Fed nicely to produce its secrets for the public to read could be an exercise in searching for untamed geese. I optimistically encourage energetic readers to pursue the FOIA approach, though realistically I caution against having high expectations for quick and easy success. As for how long too much fiat paper has been chasing too little value, the Optimist invites readers to reconsider the table presented in Responsibility is the Opposite Side of the Freedom Coin, G.H.W. Bush was absolutely correct in the 1980 Presidential primaries to call an intentional policy of monumental debt increases "Voodoo Economics!" Unfortunately, all administrations since 1980 have been more than happy to do that voodoo which they do so well. The Optimist advises all readers to protect their investment "wallet" from the rapidly approaching pain when government financial mismanagement will insert a large screw into the portion of their voodoo doll's anatomy that corresponds to the location of the wallet!

 

Another reader comments (added on 6/29/05):

I see things somewhat differently. I wonder how a credit expansion of such unprecedented scale, by at least an order of magnitude, can be sustained indefinitely without hyper-inflation. If the fed willingly induces hyperinflation, then we lose our status as a sovereign nation. I hope and pray that given a choice between the two evils, the fed allows deflation instead. Sustaining shifting bubbles appears to be a surreal game that has very few potential winners (the eighty/one rule). Surely, eventually, what goes up parabolically must regress to the mean, if not in the most ideal fashion.

 

the Optimist:

I admire your sentiment, and I have long advocated financial sanity as the best long term solution despite the short term pain it would impose. Fortunately for my investment portfolio, I think there is very little chance that the Fed and the politicians will decide to implement our noble preference. The inflation alternative may also be necessary for America, since a nation drowning in a deflationary depression would not have a surplus of strength to defend against hostile enemies around the world.

 

If the powers in Washington did decide to purge the past decades of excesses by letting the house of debt cards crash down into deflation, there would be one bright note. The trillions of dollars held by foreigners would increase in value enough to buy most of the American enterprise that remains. Then we could impose windfall profits taxes on the new foreign owners!

 

Chuck DiFalco (cdifalco@houston.rr.com) comments (added on 6/29/05):

I find the inflation vs. deflation debate in this secular bear market in global equities most interesting. Observations:

(1) Gold and silver will not be confiscated/specially taxed in the US in my lifetime. Why? Because thus paying special attention to precious metals would mean that the US government is admitting the worthlessness of the fiat US $. They will NEVER admit to weakness. Gold and silver will be ignored. Relatively stable foreign fiat currency will NOT be ignored.

(2) Serious (bad) deflation, not just the slow (ugly) deflation you expect, is still a strong possibility in this Kondratiev winter. Why? The Fed will be behind the inflation curve resulting from the twin deficits until foreign central banks cause a US $ devaluation (China is drooling about doing this--they aren't a democracy and will accept whatever the cost). The US government will have 2 choices (1) allow the devaluation, thereby allowing inflation, and paying off debt with second rate cheap dollars, or (2) preserve the dollar as the world's reserve currency befitting of a self-nominated superpower, by increasing short-term interest rates to whatever it takes (10%, 20%, 50%, 100%), and allowing deflation in a big way. Option #2 is the bigger ego trip. If you think that ego will not take priority over concern about the opinions of millions of registered voters, you could be in for a big surprise in your portfolio. I will be ready to profit from that trade. But I can't see that happening before 2009.

 

the Optimist:

While I agree that Washington will try to suppress and conceal the bullish move in precious metals for as long as they can do so, my bet is that there will be nothing left to hide as silver and gold surge above their 1980 highs. By then, precious metals will be on the cover of every major publication and the lack of value in the fiat dollar will be painfully obvious to all. Just as a famous outlaw robbed banks because that was where the money was, the government will tax or confiscate precious metals because that is where the value will be.

 

I don't know how strongly ego will motivate politicians, but I am confident that they will want the possibility that they and their party can be elected again in the future. If a deflationary crash is in our future, I would like to have the opportunity to bet that the party in power during that crash will not get many votes. I continue to invest in the belief that neither politicians nor the Fed will willingly push the economy off a ledge to plummet into a bottomless pit. A more likely risk is an abrupt and unexpected debt implosion which could trigger a rapid chain reaction of default. Fortunately, we optimists can sleep at night by hoping that such an unpredictable nightmare will just not happen!

 

Comment from P.F. (added on 7/02/05):

Deflation (depression) DID NOT happen because the US was on a gold standard. This is a common misconception. In 1921, the US Fed decided to help Britain save their currency and ended up creating grossly excess money and credit, in spite of the gold standard. (Do you really think the Fed would ever be stopped by the gold standard) This led to the 1920's stock market and real estate boom and subsequent bust in 1929. I think there is more and more evidence that the forces of deflation is the one think the Fed is powerless to stop. Was Japan able to get out of their deflationary slump even though they created money and credit on a unprecedented scale? The only reason it was not as devastating in Japan is because the Japanese don't have the high levels of debt we have in America. I think the Fed is terrified of deflation. The only thing the Monetarists and Keynesians at the Fed can do is create more money and credit. History is not on their side, every scheme of this nature has ultimately failed miserably and the Fed knows it and is just desperately trying to buy time.

 

the Optimist:

Several readers have pointed to the continuing deflationary pressure in Japan even after massive money creation with interest rates that hover near zero, and asked why should America expect a more inflationary fate. Before I offer my guess, let me emphasize that this is yet another area in which I have little expertise, and in which I do not know what I am talking about. I will be skating on thin ice. At least this time, if I fall through and get cold and wet, then the flaming emails I'll receive will help to thaw me out!

 

My understanding from other articles I have read is that there are at least three major areas of difference between the situations in Japan and the USA. Those differences can be summarized as people, banks, and currency exchange rates. The Japanese people seem to prefer saving for their future than spending for today. They still have painful memories about their real estate shock and meltdown from the 1980s, and that adds to their preference to save rather than spend. That could also be a good description of the American people in the 1930s who also saved what little they could. The contrast to Americans today who try to maximize their debt is obvious. When Japanese get extra funds, they add to their savings which improves the long term strength and safety of their economy. When Americans get additional funds, many of them will buy an additional house or a new TV with a screen that is larger than the sum of the other four they already make payments on, and that adds short term pricing pressures in addition to long term concerns.

 

The Japanese banking system is rumored to still have large amounts of bad loans from the real estate debacle, and a significant amount of the newly created Yen may go to keeping banks solvent, rather than directly to the people who could spend it. Finally, the Japanese government seems to have used a substantial amount of freshly printed Yen to purchase U.S. bonds in an effort to mitigate the exchange rate problem caused by the falling dollar. Those new Yen do not directly flow into the Japanese economy, so they do not yet add pricing pressure which might spur inflation indices in Japan. The net result of those three differences is that the Japanese economy is the tortoise moving strongly forward at a slow and steady pace, while the USA is a hare on steroids running circles around itself and building more debt at each turn. For so long as the Fed can prod the USA economy onward and upward, inflation in the USA will increase with debt. I remain convinced that increasing inflation in the USA will always be the preferred political process over the alternative of reacquainting the American people with the thrill of savings after the agony of deflation!

 

Additional Comment from P.F. (added on 7/02/05):

There is one thing I do worry about that the Fed and US govt. might do that you did not mention in your article. That is currency controls and the outlaw of gold and silver, even the owning of commodities; even taking over these markets, all on the pretext of national security. This is why I have purchased property in Panama and am in the process of gradually getting my assets out of the US. If I stay here, I am sure that the Fed will take everything from me that I own free and clear and force me to play their devastating game that will lead to my enslavement. I am voting with my feet and leaving because I will not play the US game anymore.

 

the Optimist:

Many thanks for an opportunity to provide a shameless plug for a previous commentary, Confiscation, My Assets! I think it is inevitable that government will take wealth from those who have it, either through outright confiscation or through severe taxes. The Optimist cautions all readers, however, that kids should not try this solution at home. People who can succeed at the P.F. approach need to be trained professionals! There are at least as many risks overseas as at home, and many of the risks may not be obvious. It is much easier to jump out of the USA frying pan than to be sure that the fire at the other side will stay comfortably warm and continuously cozy!

 

Another Reader Commented (added on 7/02/05):

The problem is there are some real structural issues with the economy. We are not producing anything we are spending our way to prosperity. This does not work. The long and short of it is that it appears the fed is not going to do anything. Apart from the small rate increases it is full speed ahead. Or am I missing something.

 

the Optimist:

Our poor Fed must be the Rodney Dangerfield of central banks. These dedicated public servants don't get any respect. They are working ceaselessly to create ever more credit and debt in a so far successful effort to inflate or die.

 

T.A. Commented (added on 7/02/05):

One solution to the debt problem is for the Fed to buy up all the debts. It prints the money to buy the debt. The lenders get paid, so they are happy. Then the Fed voids all the debt and does not require the debtors to repay it. Thus, the debtors are happy. Everybody wins except perhaps the dollar.

 

the Optimist:

Don't tell anyone about this new idea! I am sure that foreign bond holders would not be happy to learn about it. If the Fed tries your suggestion, you can bet they will keep it a secret as long as possible!

 

A reader comments (posted on 7/10/05):

T.A. commented that the FED will buy up all debts and print new money to solve the current economic conundrum.
This theory may not be far off of the mark. If anyone hasn't yet noticed, over half (probably more at this point) of all transactions do not involve the exchange of actual cash. At risk of sounding like a conspiracy theorist, I believe the underlying move is to get rid of bills and coinage in favor of a completely digital monetary system. When the move away from the printing presses and coin stamps becomes official, reevaluations will certainly be part of the program. The move away from tangible, spending, jingling cash in the pocket of the average Joe is a coming danger. Digital control of market place transactions will allow for even more control and manipulation of value than any of us have ever thought could be possible under the current FED controlled fiat system. Physical possession of tangible assets such as housing and commodities will be the only true path to hoarding any wealth. Where precious metals will come into play in a totally digital money system is the trillion dollar question. Perhaps the digits will be gold and silver based.

 

the Optimist:

I am happy to offer the positive perspective that the government will not make the future digital currency more complex by involvement of gold and silver in the process. As described in Confiscation My Assets! Government will tax away the value of gold and they will confiscate silver. Americans will not need to relearn how to use gold or silver as mediums of exchange until we vote the Repubocrats out of office, and elect our representatives from a new political party which lives by the motto Legalize Freedom!

 

Richard J. Greene (who also writes articles for FinancialSense.Com) comments (posted 7/10/05):

You bring up a good point about cash not buying more. I think this is the fatal flaw with Prechter's analysis. He says you should be in cash. Cash is not money. It is increasingly worthless green pieces of paper. Gold and silver is money. When he makes his argument I always picture him walking down the street with a wheel barrel full of paper.

 

A reader comments (posted on 7/10/05):

 

the Optimist:

We certified optimists are not permitted to travel down that dark road, even if it does lead to truth and wisdom. Let's hope that our current and future politicians will choose a well lighted path as well.

 

Peter K. comments (posted 7/10/05):

I believe the depression is right around the corner. We should have gone straight into the depression jaws in 2000-2001 but Greenspan bought time. He lowered the interest rates to a 46 year low and everybody and their mother went on a debt and refinancing binge. Zero percent cars, furniture, boats, vacations, bigger homes are the rave of the day. But, according to Kondratieff, the debt must either be paid or liquidated. Our debt levels have nearly doubled in just five years.Now with rising rates, declining wages, outsourcing, H!B visa's illegals taking middle class jobs, huge trade, federal, credit card, state, bond and corporate debts, a financial Tsunami is about to sweep the United States and the world at large like nothing before. Greenspan, through his manipulation of the markets, and intervention in the commodities has propped up the markets and suppressed the price of gold. He is trying to depart as FED chairman without the whole system blowing up in his face. His replacement will not be so fortunate. My prediction is the depression begins NEXT YEAR and by 2010 we will be in a full blown depression. 

 

I believe you are very well meaning person but have fallen to the evil genius and magic spell of Greenspan. It is almost incomprehensible for me to understand how in the heck do people believe simply MORTAL men can INDEFINITELY defy the laws of economics and logic. Short term, Greenspan has succeeded but in the long term it will blow up in the US economies face. He can print all he wants but that means RISING prices across the entire country. Regardless what Shell, Caribbean company Greenspan used to monetize the debt, or how much money he prints to prop up the market, the world economy is MUCH larger than the FED. Rising cost will impact the sheeple in more ways than your limited scope of analysis portrayed. It will force them to cut spending, impacting the bottom line of corporate America's profits. Rising oil prices, declining wages and outsourcing of jobs on a MASS scale will bring the heavily indebted citizens of this country to its knees. Rising Federal, state, corporate, personal debt (especially credit card and Adjustable mortgages) is going to put the mother of all squeezes on GM, Ford, Other heavily indebted companies, the Government, states and citizens. Something will SOON break. There is nothing in the world Greenspan can do. He can print all day long and gold will soar and prices will rise in leaps and bounds. Once the housing and equity markets crack, that money will leave to safety (commodities) and needs! Guess what? Gold, silver, oil, gas, wood, food, etc will soar in price. My friend, you meant well but you place too much ill faith in a mere evil, corrupted mortal man named Greenspan. It is your downfall in your analysis.

 

the Optimist:

I plead guilty as charged about having a high level of faith in the ability of the Fed to use the power of an unlimited printing press to temporarily paper over economic problems. I also plead guilty as charged to holding an optimistic viewpoint which expects a gradual descent (instead of a precipitous plummet) into the inevitable depression toward which the USA is sliding. We agree that high quality manufacturing and white collar jobs are rapidly leaving the USA. That does not mean, however, that the American economy will soon stop functioning. Instead of an abrupt drop in economic activity, the Optimist expects a more seamless transition in which college MBAs must take lower paying jobs as corporate accountants, college grads are pushed into lower paying jobs as sales clerks, and high school grads are left with jobs that were previously reserved for illegal aliens. The adjustment process to a lower standard of living will be painful for people but not fatal for the economy because the Fed will continue to lubricate the system's wheels to insure that they only squeal but do not freeze up. Consumer debt will be partially alleviated by inflation, but it will continue to pose severe hardships on people as they try to survive the endless pressures posed by stagflation. It will come as little surprise to the Optimist's readers that he also expects higher prices ahead for silver, gold, and the essentials of life. I welcome your support in persuading people to buy silver and gold now, so they can use them to conserve wealth for the much more expensive environment which lies ahead.

 

A reader comments (posted on 7/19/05):

It is very reasonable to assume that the PPT will continue to find a way to avoid plunges and come up with ways to inflate in a way that insures the banking system (which, after all, is what the Fed is actually protecting). My belief that there will be many new types of helicopters designed. Deflation forces people to deal with immediate realities and truths in a way that seems incompatible with how most people want to assume or run from their responsibilities. For example, I believe we have an inflation based system not only because of the bankers but because inflation fits very well with the financial irresponsibilities and delusions of the public. Bankers give people want they want and the real problem is people's financial delusion and desire to spend rather than save.

By the way, I feel that one of the big differences between now and the seventies is that real wage growth in the US will be limited by competitive wages whereas wages continued to climb strongly in the seventies. This cap on wage growth will eventually show up as a real estate cap unless interest rates can continue to drop. If mortgage rates bottom out or rise then the wage cap will slow real estate bubble growth (unless the government decided to partner up with each home buyer and become part owner in each home - a new helicopter design).

 

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This commentary presents only the viewpoints of the Optimist, and it is intended only for perspective and entertainment.  Please do not interpret any portion of this work as investment advice.  If any of the concepts discussed here appeal to you, then you must do the work to decide if and when and how you should invest.  The Optimist does not ask for any profits you make, and he cannot be liable for any losses incurred as a result of your investment decisions.  The Optimist wishes you the best of luck in whatever you decide to do or not to do.  Cheers!

 

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