October 13th, 2010 by Dissolving Dollars

Monthly Dollar Index Chart 2001-Present

The stock market has gone nowhere in a decade and in fact is down around 30% when measured relative to the decline in the dollar. Since the end of August, the dollar has been falling and the market has been rising, due to the prospect of quantitative easing 2.0. When the Federal Reserve prints money (monetizes debt of any kind, public or private) that is quantitative easing. Quantitative easing essentially puts interest free money into the system. In theory, that is a good thing. A debt-based monetary system needs some debt-free money, especially when people are teetering on default and don’t want to take on new debt. But in a world of zero interest rates, quantitative easing simply means more money floating around in a crappy economy looking for a place to go where it can earn a return. That means bubbles. And one of those bubbles is already trying to form in commodities, and also in foreign equities markets. So, in other words, quantitative easing doesn’t change the fact that we have an extremely crappy monetary system that has run its course to a crappy economy.

Our monetary system is an unprecedented experiment. And we are at the point in the experiment where the reality is that the experiment is a failure. We need a monetary system where people can actually save money. But in a debt-based system, saved money just means money is unavailable to pay off existing debt in the system leading to defaults. High savings is a sure sign of problems in a debt-based system. So, the manipulators over there at the central bank want to devalue the currency (or at least threaten to) to force people to stop saving and spend instead. But people aren’t really going to spend, they are just going to look for a place to beat inflation and drive up asset prices, especially in foreign markets. But high asset prices can be killer on an economy, especially if one of those assets is something like oil.

So, it is just the blind leading the blind. We need monetary reform. Otherwise, what we really need is a whole lot of debt wiped out by massive default (because honest repayment isn’t going to work). That means we need a bunch of banks to collapse, which is what should have happened at the end of 08. Massive bankruptcies would be good for the dollar and it would clean up the debt-system so the debt cycle could repeat for another 20 years. Trying to inflate out of this mess is a loser’s game. At least someone over at the Federal Reserve, Kansas City Fed President Thomas Hoenig, is smart enough to know that quantitative easing won’t work.

I don’t see how the Fed could possibly quantitative ease with gold already near $1400 an ounce and the dollar as low as it is. It would be disgustingly irresponsible–especially considering the first round of quantitative easing did nothing except prop up zombie banks and maybe help some foreign economies. And really, the Fed could just be all talk. They could keep saying they are going to do more quantitative easing but never do it. In that situation, we’d eventually see asset prices collapse since the reason for their rise would be proved delusional. So, these are interesting times. All I know is that I don’t trust any of it. Both the Fed and the Markets have quantitative easing delusions.

Monthly Gold Chart 2001-Present

October 3rd, 2010 by Dissolving Dollars

This is a great little parable that I wanted to share with everyone:

The American investment banker was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked. Inside the small boat were several large yellow fin tuna. The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.

The fisherman replied, only a little while.

The American then asked why didn’t he stay out longer and catch more fish?

The Mexican said he had enough to support his family’s immediate needs.

The American then asked, “but what do you do with the rest of your time?”

The Mexican fisherman said, “I sleep late, fish a little, play with my children, take siesta with my wife, Maria, stroll into the village each evening where I sip wine and play guitar with my amigos, I have a full and busy life.”

The American scoffed, “I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat. With the proceeds from the bigger boat you could buy several boats, eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually NYC where you will run your expanding enterprise.”

The Mexican fisherman asked, “But, how long will this all take?”

To which the American replied, “15-20 years.” “But what then?”

The American laughed and said that’s the best part. “When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions.”

“Millions.. Then what?”

The American said, “Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”