Tuesday, September 21, 2010

Circulating money, or not

The stock markets ended mixed today after the Federal Reserve announced they will keep the interest rate they charge the big banks at zero. This is intended to reassure investors that deflation will be held at bay but there was talk that the Fed would take other actions to stimulate the economy and they said they would pass on that.

The only other thing the Fed could do is buy paper off the market to reduce supply and inflate the value of existing holdings. Sweet if you don’t mind that they would just be printing money and passing it out to rich people. The same people that call Obama a wealth redistributing socialist want billions in free money printed for them because they can‘t drive the price up on their own. Surprisingly the Fed said no, this time.

So for now Wall Street is languishing in the doldrums just like Main Street. You see besides a money supply an economy needs to actually circulate the money or the economy can start to slow down and grind to a halt. On Main Street, the workers make things, get paid, go buy other things and the people selling those things hire more workers; you get the idea. Wall Street works by convincing people the products that they sell (things don’t really represent anything tangible) that these things will continue to go up in “value” and do that endlessly; you get the problem with that idea. If you don’t, you’re a Republican.

Banks aren’t loaning money because they can make more money doing high speed stock trading. Corporations are sitting on a trillion in cash because they are sure the stock market will crash and they can buy their own stock back for 10 cents on the dollar and make a killing when it rebounds. Assuming there is a rebound. The Fed refusing to bail them out may force them to consider making loans and building factories, maybe, unless they come up with a better scheme.

To end on a bit of good news; Obama is giving Larry Summers the boot (the economic adviser that was a prominent player in the Clinton Administration’s decriminalization (I mean deregulation) of Wall Street) , okay he’s quitting to spend more time in academia. Elizabeth Warren in, Larry Summers out.

Sounds good if the rumor the corporate media is circulating isn’t true that Obama is looking for a corporate hack to replace him. Likely it’s something corporate America is wishing for and not something they know for a fact. Elizabeth Warren was a surprise, maybe there will be more.  www.prairie2.com


Andrea Friedell said...

Oh, I hope so. I'm sitting on my money too, hoping for the same think.. to buy stock when it reaches $1.

Anonymous said...

Well if you truly are sitting on substantial sums consider putting your funds in a foreign currency like the Canadian dollar or the Swiss Frank because if the dollar is devalued from a 3rd crash as opposed to deflation your extra money won't be worth much if and when the bubble bursts. Some people also recommend buying gold. I've been paying extra on my mortgage for the last several years with what extra money I have saved so my reserves aren't much at this point. On the bright side I'll be done in a month and may actually have to consider what to do with extra money for the first time in my life. However leaving it in a US bank is not something I would recommend.

Anonymous said...

Is the Canadian dollar really independent of the US dollar to the extent it can retain value, in relation other world currencies, if (when) the US dollar tanks?

John Puma

prairie2 said...

The US is so big and dangerous that no place is safe. Gold does provide a sort of insurance policy against this but I certainly wouldn't put a lot of eggs in that basket.

Anonymous said...

"Is the Canadian dollar really independent of the US dollar to the extent it can retain value, in relation other world currencies, if (when) the US dollar tanks?"

Nothing is a sure thing but Canada's economy is more stable than ours if that is what you are after. By changing currency all you are really trying to do is preserve value. I wouldn't assume just because the US dollar crashes everything else will. That is just more myopic American exceptionalism. Not all governments have the house of cards we have here. Some countries still have regulations and protect their local industries. On the whole Swiss Francs may be safer than Canadian though I think spreading out between that and gold and Canadian dollars is the best bet. The Euro is what I could see going down with the dollar. And none of this matters if you don't have a lot of money but if you do its something I would consider. Some forecasters are predicting gold to go all the way to 2000/ounce by end of the year...if a crash does happen.

prairie2 said...

I would not recommend currency speculation as a hedge against a crash. Canada is living in the shadow of the US and the Swiss are even more so in the shadow of Europe. Gold is already high and is more likely to go down rather than up in crash whether or not it goes up to 2000 first. If you have a lot of cash, spreading out is not a bad strategy but don't think you can pick one thing that will pay off big. Likely they will all lose to some degree or another, that's why they call it a crash.

Anonymous said...

The big difference however is our debt levels. The size and degree is what sets us apart from many other countries and why if we crash we won't be taking everyone down with us. The countries that have protected their local economies and resisted complete deregulation of their financial systems will make it through relatively unharmed. Countries dependent on us like Mexico will feel it but many across the pond will do just fine.