Monday, August 8, 2011

Free Market and Die

US markets lost 1.5 trillion USD in the previous two weeks and pretty much doubled that today. There are rumors that today’s plunge was fueled entirely by one big hedge fund that needed to make margin calls. The biggest losses were in US bank stocks with Bank of American losing 20% of its value. This may indicate that there are fears about the European banking crisis spreading here. This would be in spite of the European Central Bank’s plan to buy as many bonds from Spain and Italy as needed with several billion dollars spent today.

Commodities plunged in price today as well which the talking heads blamed on the fear of a weak economy after the US having been downgraded. This isn’t true of course, in reality the commodity markets have been seriously inflated by speculators and hedge funds that now need to meet margin calls. Exxon Mobil’s CEO testified before Congress that 40% of the price of gasoline is caused by this Wall Street speculation. It’s funny that the tea baggers aren’t worried about that sort of taxation without representation, of course their slogan is “free market or die” or really “free market and die”.

A steep drop in gasoline prices would be a huge stimulus for the economy. In fact the economy isn’t that bad, if the Republicans can be held at bay, we will recover eventually. The recovery will be slow and very painful for the unemployed however. Absent any government polices being turned back to pre-Reagan standards that is, so when I say “recovery” I mean out of the ditch and into a muddy rut, not into some libertarian dreamt of paradise with streets of gold. This sort of recovery will at best lead to the US being indistinguishable from Mexico, this being far better than Somalia.

The major point made in the S&P downgrade that isn’t reported is their decision was in fact based primary on the Republican’s unwillingness to ever raise revenue and that Congress has confirmed that with this new law. It doesn’t a take mathematical genius to figure out that you can’t cut enough from the budget to ever balance the budget. Even if you eliminated Social Security, Medicare and Medicaid payments entirely and taxpayers continued to pay the FICA tax anyway, it still wouldn’t be close to enough. This doesn’t factor in that revenue would also fall sharply as the economy collapsed around us.

In fact we wouldn’t be looking into the abyss right now at all, except for the austerity measures already forced through by Republicans. A million government jobs have been eliminated already (mostly in red states) which would put the unemployment rate below 8% by itself. This is without all the other jobs lost in the general economy that these jobs in turn supported.

As for all the doom and gloom forecast to befall us from the downgrade, it’s fallen on deaf ears down at the bond traders. The price of Treasuries continues to climb to new highs and thus driving interest rates down. The Government can borrow money for 90 days for almost free and the ten year bills that are used to determine consumer interest rates have set another new low.

Gold did shoot up spectacularly today, going well over 1700/oz but that’s more from people not being willing to sell than from any huge demand. People are mostly going into USD and bonds. Now might be a good time to sell gold, once the price starts heading for the floor, you won’t be able to get rid of it. If you bought it cheap of course, you have nothing to lose and it does give a certain peace of mind, like canned goods.


Anonymous said...

Note to Obama: Fed Reserve "death panels" for old folks getting no yield on so called "safe" investments... money market no yield, bank CD next to nothing, 3yr bill .34%, 5yr note .99%, figure in inflation can't even afford Alpo with these yields. .. forcing folks to take more risk or die.