I’m no economist, but I know some basics and I have been thinking a lot about things since the whole credit crisis and the bailout. Now I’m going to make some predictions. Take them with a grain of salt.
Stocks have been crashing, markets have been freezing, mortgages and loans of all kinds defaulting, all in a interdependent way. Additionally, silver and gold have seen a dramatic drop in price against the dollar, and have really stayed remarkably low for a while now, going on week two. This is the brunt of all my thinking, why in the world, in times of economic trouble, are the traditional securities, gold and silver, so darn low?? Real estate prices are low. Gas prices are low. Stock prices are low. Just about anywhere you look you find more low prices.
The only conclusion I could come to is that indeed it is not the stocks that are crashing or the values of gold and silver going down. What we are really seeing is the value of the DOLLAR going up! Absolutely remarkable IMO. Of course there’s an explanation, it goes back to the interdependencies of the last paragraph. There is a credit crunch, or credit freeze, or credit crisis. Whatever you call it, short answer: people are hoarding money. Nobody wants to let it go, nobody wants to lend it out not knowing if it’ll ever come back. This produces a scarcity of the dollar, and what is scarce and in demand becomes more valuable.
The take home point is that you can look at things from a different point of view. In Newtonian physics you might take a particularly hairy problem, transform it into another frame of reference, and come out with a much easier problem. I’ve followed this financial crisis with intensity, and I’ve spent a lot of brain power trying to wrap my head around it. I understood that housing prices were down because of defaulted mortgages, I understood that businesses were having a hard time getting loans because these credit default swaps permeated the market. What I couldn’t wrap my head around is how it’s so darn far reaching, even to gold and silver, and, well, everything.
This is where I found it useful to change my frame of reference. Instead of asking why everything else is so cheap, instead I ask “why is the dollar so uncharacteristically high valued?”
What we have is an artificially scarce dollar. The dollars are there but nobody is trading them. Normally, this would result in the same thing we are seeing, dollar value goes up, price of everything else goes down, and eventually things play out, people learn who to trust, money flows again, and everything goes back to normal. Arguably, if the crisis is big enough, things might not get to normal, or at least not converge to normal in any orderly fashion. If and when things get back to relatively normal, those who acted when the dollar was artificially valued high will have made a killing.
However, we have an additional variable, a big one, to the tune of near $1 trillion dollars pumped into the system in a very short time period. Dollars are guarded jealously, the government pumps tons of dollars out, those also are hoarded and the value of the dollar remains at this high point. Now, when people finally decide to trade their dollars again, and this they will do, we won’t ONLY go back to the original value of the dollar, but instead the dollars value will go back down PAST its original value. Prices will sky-rocket. Gas will return to $4/gallon AND THEN SOME. Same story with everything else with fluctuating prices. Gold and silver will go back to their pre-crisis points AND THEN SOME, perhaps even stocks will come out way better than they were pre-crisis.
Perhaps if things get really bad, what people might perceive is a horrifying devaluation of dollars, getting the message to get rid of their dollars. This would serve to exacerbate the falling price of the dollar. You go from hoarding to hot potato. We just might yet see hyperinflation in our boastful US of A. Just maybe the Lamanites CAN get into Zarahemla.
My brother points out that $1 trillion is not a very large percentage of the total money supply. However, it is enough to push the dollar below it’s previous trend line, and coupled with peoples interpretations and resulting actions, it could be enough to be devastating.
How long till this all goes down? That I’m not so sure of, nor how fast it will happen. I’ve heard others quoting as long as a 5 year ‘recovery’ period. All in all, the slower the recovery the better off we’ll be. If the recovery happens too fast, watch out for hyperinflation.
The bailout could in fact perform favourably, it might actually serve to broaden the recovery curve I mentioned. Then again it might not, I don’t pretend my analysis is that detailed. As an aside, I’m not opposed to the idea of using money to solve this problem, what I am opposed to is using taxpayer money. And what I think is particularly dangerous is using money in a way that increases the money supply. This easy credit, $1 trillion of “new” debt against the American people, is a huge gamble to make.
Word to the wise, take advantage of the high dollar value right now. Some speculate (in different terms) that the dollar will be at it’s highest mid-winter. But if you want to be safe, buy now. If you have stocks DO NOT SELL THEM.
You might ask, “but if we all go buy right now, won’t that bring on the ‘too fast’ adjustment you were talking about?” That’s a good question, the answer is the more that buy now the better, because I guarantee you that “everybody” is not going to be doing that. The vast majority of people will buy when things get ugly. So the more that buy now, the more that serves to spread the distribution. So not only is it the best thing for you to do, it also serves to help the economy overall.
I don’t claim to be prophetic by any means, but I reserve the right to say “I told you so.” I also reserve the right to be wrong. :)
