The Real Problem with Money and the Stock Market

The Real Problem with Money and the Stock Market

It’s Friday afternoon, and I’m writing this at the close of one of the worst weeks in the stock market in a couple years.

Yesterday, Thursday, August 3rd, the Dow took a 500 point nose dive, putting it in the red for the year. Today, the stock market rallied a little, gaining back 61 points.

Overall, the week was a financial blood bath.

  • The Dow is down 5.75 percent
  • The FTSE is down 9.77 percent
  • The Nikkei is down 5.42 percent
  • Oil is down 9.22 percent
  • 10-year yields are down 0.25 percent
  • Unemployment is still at 9.1 percent

Only gold came out unscathed.

It’s up 1.26 percent for the week.

For months, I’ve warned about the coming showdown between democrats and republicans regarding the debt ceiling. And this week’s show didn’t disappoint, complete with a last-minute deal that nobody likes.

In the end, the debt-ceiling deal didn’t address the real problems in our economy. This week’s crashes in the stock market are evidence that investors are beginning to realize we’re in for another recession - and possibly even a depression.

The chatter in the mainstream media is picking up regarding a double-dip recession. And everybody is jumping at the bit to point out the real problems in the economy.

Tim Fernholtz writes in Good magazine in an article entitled, “Don’t Call It a Comeback: We’re Not Too Far from Recession 2.0”:

“The real problem is deceptively simple: We’re not making, buying, or selling enough stuff. People are still focused on paying off their mortgages and credit card bills to spend money at businesses the way they used to, and businesses are reluctant to hire or increase wages until sales go up.”

The Economist writes in “Bernanke to the rescue?”:

Ask why if you want; there's no shortage of reasons. American growth dropped to stall speed in the first half of the year, and the government is content to saddle the recovery with substantial fiscal tightening over the next year. Europe is on the brink, and its leaders are on vacation. Falling markets will add to reduced confidence. At this point, the self-fulfilling spiral back into recession is underway.

I’m sure a whole host of other reporters and experts will come out in the coming weeks to point out what’s really wrong with our economy now that the double-dip recession bandwagon is in full swing, especially as the Fed prepares to meet next week.

This week’s activity is expected to force the Fed into action, many are guessing… should be an interesting week.

What you’ll find is that the general consensus is that the problem with the economy is that we don’t have enough spending, and therefore not enough inflation, a.k.a. debt.

As such, many are expecting the Fed to inject some sort of stimulus into the economy… perhaps a new asset buying program.

One thing we know, the Fed fears more than anything else is deflation. And Helicopter Ben has shown he’s willing to do almost anything to push inflation… perhaps, that’s why Gold is the only thing rising this week.

And why central banks are buying the yellow stuff en masse. Something that Ben Bernanke apparently can’t explain. Or maybe he’s just playing dumb.

And that gets to the heart of the real problem with our economy. It’s built on funny money.

The reality is that the dollar isn’t money, it’s debt.

And the debts are piling up.

As a currency, the dollar is toast. All currencies eventually are.

The Fed could save the dollar for some time by allowing deflation. But they won’t. They’re more concerned with growth than they are with sustainability.

So, you’ll continue to see the printing presses rolling at full speed. You’ll continue to see big swings in the markets. And you’ll continue to see gold, a true safe haven from inflation, rise.

Buckle your seat belts. It’s going to be a wild ride.

Original publish date: August 10, 2011