Economics and Government and Politics and Social Issues and Stock Market16 Aug 2011 12:10 pm

Anyone who has ever taken out a loan knows the importance of interest rates. Whether the loan be for school, home, car or business  “a good rate” can make all the difference. Even though much has been made of the high debt load of the US our historic low interest rates hovering near zero have made it serviceable. If interest rates were to rise even a little bit, our debt load would quickly become unmanageable.

Almost immediately after the S&P downgraded the US from its AAA rating the markets began to plummet. In essence that was like the entire nation getting a lower credit score and a signal that higher interest rates for our national debt were on the way. All eyes were on the Fed to see how it was going to respond. The Fed surprised a lot of people and said little in direct response to either the market, quantitative easing or the integrity of US debt, instead the Fed pledged to keep interest rates at near zero till at least 2013.

Historic low rates and floods of easy money have been behind the stock markets meteoric rise over the last two years despite a moribund rebound in the consumer economy. The Fed’s assurance of low interest rates through the middle of 2013 along with the rising of the debt ceiling through the same time period should give an all clear to the stock market if the European financial systems can avoid a meltdown.

Though the pledge of low interest rates may reassure the wealthy that debt won’t kill the flow of easy money, it will force many safe investors on a fixed income into the risky casino of the stock market. The certainty of low interest rates means that those with conservative safe investment and retirement portfolios may not be able to live or survive on the interest alone, thereby resulting in their putting larger portions of their retirement and pension funds into stocks in search of income to maintain their life style or avert the possibility of their outliving their savings.

For a more in depth analysis of the ways in which the Fed and our economic policies are making life miserable for retirees read the following:


The market pundits and media could put up a rather convincing argument that the recent “crash” has already “priced into the stock market” a European financial meltdown and the prospect that “we’ve already entered a double dip recession”. Any data or announcements which indicate that Europe and the US economy are not as bad as recently advertised could result in a market rally and the official proclamation that the “economic soft patch” is over and the recovery is back on track. In that case a quick and strong market surge could begin which along with the dashing of any hopes of higher interest rates for those on a fixed or limited income, could entice/force those who have been risk aversive back into the stock market.

Then, soon as any recession data returns or another round of financial issues surface the stock market will tank even quicker and stronger than the last few weeks, resulting in a return of the bear market begun in 2007/2008. In this very likely scenario those coaxed and forced back in the stock market will be devastated. This means that not only will granny lose her last pennies, but those who missed out on the last stock market rally and who have been coaxed back in by the Fed’s last move will once again see half or more of their savings/investments evaporate.

Making matters worse is the likelihood that the last two year rally will prevent them from selling as the market goes down, for they won’t want to miss the next rebound. The problem is the rebound may not come this time. The same thing happened during the last great depression. The stock market crash of 1929 was not when most people lost their money, but after the rebound in the early 30’s followed by the real prolonged crash of the market.

So, those on a fixed income will lose their remaining money either through not receiving interest they are depended on, or in the stock market where they are attempting to make modest gains to supplement their lack of interest. Those who aren’t retired but are below or near where they were before the stock plunge of the 2008 recession, will either continue to stay out of the market or get in and get mauled in the next leg down in this bear market.

The transfer of wealth from the many to the few is about to pick up momentum. The coming deflationary depression will accomplish much of the same as the depression of the 30’s. A few entities will win the great game of monopoly and but up every thing at much lower prices. The great majority of people will be wiped out and be struggling to get by for decades while the handful of winners make the current billionaires look like paupers.

The common man will have no recourse. Very little of the money which was taken out of their paychecks for social security and medicare will be returned. Workers rights through the decline of unions and collective bargaining will be hard to rekindle. The great war machine of the military-industrial complex will continue to centralize power and wealth, and make most forms of protest or political discussion illegal and punishable.

Those who own debt such as the Fed and other central banks will not likely ever be repaid, but when the smoke clears they will own most assets, real estate and businesses around the world. At some point they will probably give up the ghost of trying to get loans paid off and find some way to forgive all debt. This has been done numerous times throughout history and even has a name for the occasion (Jubilee). After all is said and done money is an abstraction, but ownership is true wealth, and those who own the debt own the assets behind the loan.

Could I be wrong. Of course, I could be wrong. Yet, from a historical point of view this script has played out a number of times, and we all know the folly of thinking “this time is different”. The only way it will be different is if we make it different. Yet, at this moment I do not see any sign that we have the courage or insight on how to alter the unfolding script.

The combination of technology and globalism make it possible that this depression could be the most intense and severe of any on record. Will we end up in a return to Feudalism, or in a world similar to Brave New World or 1984? Perhaps.

Each previous global empire has fallen, and each previous monopoly game has resulted in new societies being formed in which the game begins again. Yet, sometimes there can be lost decades or even centuries before a revival. The scariest thing of this monolith is how efficient is its ability to monitor, survey, and shape perception.

Yet, the obvious question most of you are asking is what can be done? Well, we have missed a myriad of opportunities over the last few decades. Since the coming deflationary depression is weeks or months away from taking hold of the global economies there is almost nothing to do in  terms of prevention. The snowball is already careening down the hill, and the best we can hope for is not to be in its direct path.

Okay let’s take a look at what you can do in the short and long run to help yourself not only survive but actually improve your situation in the coming economic tsunami.

If possible get out of debt or at least continue to pay down your debt
On a political level stand up for the rights and freedoms of the little guy
Let Godzilla and King Kong do battle, but don’t get to close, or choose sides
Get out of the market and go to cash

To expand on the above points I’ll just say the following. People who own your debt own your possessions, rights and control your future.
On the level of regaining our rights and freedoms read my post 2nd Bill of Rights, or Google FDR’s second Bill of Rights. This would be a good start in terms of making sure that all citizens are treated with respect and dignity and not punished if they are not gifted, ambitious or ruthless. There is safety and power in numbers so embrace the little guy even if he’s a tad flawed or obnoxious.
Since so much wealth and power is at stake as the titans clash, it is best to get out of the way when untold trillions of dollars get lost and ownership goes to the last man standing.
Probably the last of my four recommendations is the most important. During a deflationary depression a great portion of money disappears as unserviceable debt gets wrung out of the economy.
In deflation wages and prices plummet kind of like what is happening on a relatively small scale in the housing market. During this time the buying power of money increases dramatically, whereby a thousand dollars today will buy 6 to 10 thousand dollars of goods then. A person worth $200,000 who keeps his money safe and out of risky investments will be able to live the life style of a person with assets over a million today. In other words as the money pool shrinks the relative worth of those not losing money skyrockets.

Let me address two other popular options often given to people looking to be winners during a severe economic downturn. One recommendation is to take advantage of a falling market and to short stocks. The second is to own gold, which is and has historically been viewed as real money.

An investor “shorts” a stock or the market when they feel the stock price is going down and not up. Since stock markets often go down faster than they go up, a good timer of the market can make substantial amounts of money in a very short period of time. Yet, shorting the market is highly dependent on smaller time frames and money made can be wiped out completely if the market has a rebound within the context of its overall decline.

Yet, even a vigilant and talented market timer can be thwarted by new rules and bans which are often enforced during “volatile” and turbulent markets. History has shown that the majority of market timers who have shorted the market have lost much more than they gained, and that during prolonged market declines bans and rule changes regarding shorting have made it almost impossible for the little guy to beat the odds.

I’ll have to admit that gold does have an allure, and one does feel a bit good about supporting a form of wealth and value that is tangible, and not completely arbitrary like fiat paper money. Yet, when I think about it and look at the historical record an investment in gold doesn’t seem as good as advertised. First, gold is both a commodity as well as “real money” and all commodities go down in a deflationary depression. Now, one could make an argument that gold goes down less than other commodities and largely be defended by historical record. Yet, during a deflationary depression the value of money is actually increasing so why hold have gold which is decreasing in value?

In answering my own question I could state that gold, having tangible real value, is an insurance policy against an arbitrary thing like the dollar. I could also state that since gold has real value one could always use it commercially even if the dollar were to fail. These arguments are valid in some contexts but fall short of supporting me recommending buying gold right now for the following reasons.

First, though gold is tangible and real, in dire times I distrust its functionality. I cannot picture a time in which my dollars would be worthless, but I could go into a local grocer and he would give me basic food stuffs in exchange for a fraction of an ounce of gold. When we all are in need, we need to barter need for need. If I were to getting tangible things to prepare for such an environment it would be amassing things like can goods, water, etc. for which I could barter. In a  depressed world of need, what can someone do with a bit of gold?

Second, if we use history as our guide we would notice that the ownership of gold was prohibited during the Great Depression of the 30’s.  The government banned private ownership and demanded all gold be handed in to banks which would give you something like $35 an ounce even though its stated worth was much higher. Now some people hid their gold and did not turn it in, but of course, they still couldn’t use it.

In today’s world of global tracking and surveillance it would even be harder to hide one’s gold than it was in the 30’s. Yet, your hiding of the gold would be in violation of the law, and therefore punishable if found out.

Since gold and gold stocks will most likely go down in the coming deflationary depression, it would make sense to me to wait on the purchase of gold until the bulk of the deflationary depression is over and the stock market has bottomed.

Currently the US dollar’s role as the reserve currency of the planet is viewed as being in jeopardy. Foreign nations threatening to stop using dollars as the currency of commerce are met with quick and strong political, economic and often military reaction by our government. Our political and economic leaders are very determined to keep the dollar’s role as reserve currency intact.

Many of the countries threatening to decouple themselves from the US dollar are increasing their storehouse of gold, and making efforts to replace the dollar with gold bullion. The nations most determined to get free of the dollar are or are quickly becoming our enemies and their actions and ambitions are labeled as terrorism. Therefore, it would not surprise me in the least if the US were to once again ban the ownership of gold for all US citizens and if they treated anyone who disregarded this ban as a terrorist or at least an abettor of terrorism.

In my post Communists, Terrorists, Charity and Compassion  I discussed a recent case in which something called the liberty dollar was being used locally in a transparent and open way as a form of barter/commerce. As far as I had known it was a very small economy agreed upon by a small number of merchants and was never misrepresented as actual US currency. So, in essence what you had was some actual silver being used similarly as gold advocates propose gold being used if our economic situation were to continue to worsen. Well, as you can see by the quote below the government came in and treated this practice as a form of terrorism.

“Attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism. While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country”
-Anne M. Tompkins, U.S. Attorney, March 18, 2011 [von NotHaus trial]
Wouldn’t the government respond to the use of personal un-minted gold in the same manner?

One last thought before ending. Even the most doom and gloom conspiracist always talks about how the everyone including the Fed, central banks, government and financial elite are opposed and afraid of a deflationary depression.

The fact is that the majority of mega-wealth and power that these entities wield was created during and because of the Great Depression. Many of these same entities are well positioned to have another quantum leap of wealth an power due to an increase in the percentage of ownership in assets around the globe.

I find it hard to believe that the Fed and the financial elite are afraid or opposed to increasing their marketshare in their businesses or the percentage of global wealth they hold. The trend has been more and more money in fewer and fewer hands, is their a better or more complete example of how that takes place than in the aftermath of a deflationary depression?

Do we truly believe that those who most stand to benefit by the financial demise of the lower 99.9% of the populace are really working and making decisions on our behalf?

Jim Guido

2 Responses to “Taking Granny’s Last Pennies”

  1. on 02 Feb 2012 at 4:35 am Scotty Dunten

    Much of this was made worse when Congress, under Republican leadership-, revised the bankruptcy code to prevent discharge of student debt and to prevent “cram-down-” of residentia-l mortgages. They made it extremely difficult for real human beings to discharge debt in bankruptcy allowing corporatio-ns to do it easily.gw2 gold,buy guild wars 2 gold

  2. on 06 Feb 2012 at 6:19 am Tony Fujino

    This really stinks. In the old days Americans would have tarred and feathered these guys. I say it is about time to bring back that particular American tradition. I’ll bring the rail to run them out of town. Seriously, this type of action has to stop and the rules put into place need rolled back, way back.guild wars 2 gold

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