Well, the system works for the United States and anyone else in the world that wants to open up an account in a US bank. The depositor is insured for 100K. The reason our interest rates are falling, is that the rest of the world wants our bank insurance (if you buy T-Bills there is no 100K limit).
In the 1930’s the collapse of the banking system reduced the money supply and interest rates rose. Remember too, the dollar was pegged to gold so a high interest rate for the time would have been about 4 to 5 percent. The wealth of the nation dropped 80 percent. A run on the banks dries up liquidity. The result, less money in circulation.
In today’s world your money is insured but that is really quite misleading. The banks are not collapsing because of runs. This time it is a lack of liquidity from very poor investments. The bank depositor will get his dollars back, but their redeemed funds will purchase a lot less than when they were first deposited.
With FDIC insurance, the bank money in circulation is guaranteed to remain the same. The depositor will be made “whole.” If this plays out the same as the 1930’s, a 100 dollar bill will lose 80% of its purchasing power. In this case there is no run on the bank but the effect is the same except for one thing you are not waiting in line. More money is printed to replace the money lost. The guy in 1930 lucky enough to draw his funds out of the bank had real buying power. It’s not going to work that way for us. FDIC insurance a socialistic approach to modern banking, enjoy the haircut!
The one place that the contraction cannot be controlled is in the investment markets. Look for the collapse of the stock market. This could contract drastically. The thing to understand here is perceived value. If you need cash fast, perceived value is the price you can sell it for. It does not represent the true utility of the instrument. IBM at $10 dollars a share has the same ownership value as the same share selling at $130.
In normal times a stock going to one dollar indicates a stock in BK. In distressed times, it would more often suggest not much market interest for the product or a hell of a lot of shorting. There will be some money to be made here. This time however, the aspect of the FDIC keeping depositors whole will make bargain basement priced stocks a hedge against inflation.
Here is your program guide for the DJIA market for tomorrow, it could prove interesting
Dow 2000 anyone???
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10 comments:
What is your advice as to best prepare for what is upcoming?
Also...months back to wrote about deflation and inflation occuring....which one do you think will happen now?
Really unnerving. The current situation leaves very little room for a guy like me to maneuver. I don't have a lot in the stock market (401K that I didn't roll over), but in this situation, this is beside the point.
I read some financial blogs (including this one), not for investment advice, but as an alternative alternative to the MSM.
I've know since 2005 that something bad was on the horizon, but outside of a gut feeling, I couldn't really quantify it. With the help of your blog and others like it, I received confirmation that not only was I not alone, but that things were much worse than I had imagined.
Your local knowledge of the real estate market helped in my decision to leave my job in commercial RE development in Temecula and take a job as an R&D engineer for a local manufacturer. Things at work are tightening up, but were still OK. I'm beginning to wonder if that will still be true in 6-12 months. The three retail center projects I was managing have since been shelved indefinitely though.
Given how bad things are right now, I can only imagine how bad they are going to be at year's end.
It's hard to believe that the greedy bastards that live in this country (at all levels) were willing to gamble the future to such an extent for short term profits.
anonymous,
Regarding inflation vs. deflation, obviously we are going through an extreme deflationary event. Money is being destroyed at an unprecedented rate as evidenced by the actions of the Fed and the Treasury.
Money is flying around between commodities, treasuries, gold, and equities. Everyone is looking for a safe haven for their money.
I don't think you can look at the rise in gold as a clear indication that hyper-inflation is here, its just investors looking for any investment which won't decline precipitously. Another indication of this is the fact that the 3-month T-bill return rate is now at 0.02%. Any port in a storm.
I believe that the Government cannot stem the tide of destruction that is going on. They are pulling out all of the stops and the markets are still in turmoil.
Another important point to remember is that US government and business are so dependent on foreign investment in our debt that our hands are tied. As much as the PTB would like to inflate their way out of the crisis, they can't because it would close the conduit to borrowed money which keeps us afloat. I am not confident that they can prevent foreign investment from fleeing anyway though.
When foreigners stop providing investment in US debt, we are really and truly screwed. This will happen sooner or later regardless of our government policies.
Last Winter I moved my entire 401K into cash and bonds (Stable Value Fund). I got lucky; each day has been a new record high, albeit slowly.
Question; if I know the entire market is going to continue to plunge, how can I take my meager stock trading account and make money with it? Is there any way for a simpleton like me to profit from the turmoil?
Hi,
my humble oppinion is that stockexchange shutdown is a good thing. Today lot of trades are made from computers. Lot of traders are made from Cramericans, who are even dumber than computers.
The events from 1987 are computer made. If there were no computers trading then, the exchange could not fall that much.
I am no longer technical trader/investor. So I know fundamentals are very bad at the moment, but I believe the rule of shutdown is ***GOOD***.
For future reading see this [here]
Hi Anon 8:55
I'm not sure, the Fed is changing the rules.
As for whether it will be deflation or inflation, I see deflation being the first step and inflation 4 years out. It seems like we are looking at both right now. 10% inflation with a shrinking money supply coupled with increased unemployment. The net result right now is deflation.
With all of the bail out crap in the last two weeks, gold and silver seem like the only things that are certain. If the government prints enough money, they could prove me very wrong about deflation. Sorry I'm not much help here.
Hi Brian
I glad us bloggers were able to help you pick your way successfully through this mess.
I too believe that the government will fail in this grand plan. And like you suggested some day the foreigners are going to call for their cash back.
Thank you for your comments
Hi Anon 11:08
Investing in the present stock market is nothing more than pure gambling right now.
Last week I shorted 100 shares of WFC and BAC. After today I'm down $1,500. The change in the rules on short positions kind of burned me. I might hold on, I've got deep pockets on these trades so I don't have to buy back yet. It does make my blood boil to see a change in rules change the stock dynamics.
If you are young, I see nothing wrong with opening up a Scottrade or Etrade account with a couple of grand and putz around. Get a book on bonds and study it, that's where the money will be made if interest rates take off.
My rule of thumb is 10% of your funds in real estate gold, silver--10 % high speculation and the rest diversified in what you feel comfortable with.
Real estate and gold are tangible assets that are a hedge against inflation. You don't really need both. A house is pretty much the equivalent of 150 ounces of gold.
My advice on the stock market, right now, is avoid it if you think of it as investing. Three years from now, the market could lose 90 percent of its present value.
Hope this answers your question
Hi Nmmm
I don't think that a shutdown will get rid of the "Cramericans" (I like your word). It would be a good brand name label for prune juice.
What most people don't realize is that after the crash in 1929 you couldn't interest anyone in stocks. You lost 90% of your money (if you were lucky), 180% of your money if you weren't.
A real stock market is one that does nothing for years, but pays a dividend. Kind of like watching paint dry.
Thank you for your comments
What investment books/ books on bonds do your recommend?
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