Thursday, March 12, 2009

All New Ground?

Laurel Magri: lying, deceptive, manipulative whore.

Increasingly it is becoming clear we are living in a once-in-a-multi-generational time.

Concerns abound that we following a similar path that followed the 1929 Crash and lead into the Depression of the 1930s.

We aren't.

This is not like that Great Depression because the economy is being taken over by governments. In many ways we are entering into an entirely unique situation, which is what baffles our economic experts.

We have never had this much debt, this type of real estate decline or such a rapid collapsing of employment all convergent with a worldwide financial meltdown and a rapid withdrawl of consumer spending.

It's all new ground.

And because the entire world has been drawn into this maelstrom, the US Dollar continues to hold it's value.

Some speculate that one of the main reasons the dollar's strength is a perverse result of so much dollar-denominated debt being created in the past couple of decades.

As hedge funds, for instance, are forced to liquidate their investments, they have to pay off dollar-denominated debts, which means they have to acquire dollars. This drives up the exchange rate of the dollar.

Another reason for the dollar's strength is the fact that the dollar, as the currency of the world's economic superpower, is a safe haven. This drives investors around the world to accumulate dollars in times of crisis.

But this strength is fragile.

A great many economists are concerned that the only solution that the US government seems to have for the current financial troubles is to print more and more dollars.

Now Britain and Canada are jumping on the dollar printing bandwagon.

In the short term it will be an effective strategy. All those newly printed dollars will offset the collapse in asset values and bank balance sheets. But what comes next? Many economists are sounding the alarm that the relative calm those actions are creating will turn out to be - not the solution - but mearly the eye of a massive storm.

And that eye is about to pass.

They worry that the growing mountain of paper currency is set to trigger a collapse in the value of the dollar against real things such as gold and oil, if not against the other paper currencies.

If that happens, the fear is that we will enter the next, much more serious stage of the financial crisis, in which falling currencies will push up long-term interest rates, which in turn will crush what's left of the world's financial system.

If the dollar falls in value to the point where no one wants to hold it, North America will feel a tsunami of accelerating inflation as their currency buys less and less.

And this time around "inflation has the potential to be worse than the double-digit rates of the 1970s", said Warren Buffet.

It's all leading to a furious economic debate about the path the Timothy Geithner, Alistair Darling and Mark Carney have embarked on. It appears the US, British and Canadian governments see no choice but to try to revive the old borrow and spend system, even though soaring debt levels make that path prohibitive, if not impossible.

So where are we headed?

One thing is for certain, all this money printing is going to juice the economy in the short term like nothing any of us have seen in our lifetime. Look for commodities in the stock market to take off like a rocket.

And down the road? Is the inevitable result a currency crisis of historic proportions?

It's all new ground.

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