I think we need a name for all this. "Credit Crisis" is lame. "Great Depression 2" is not only lame, but it misrepresents what is happening. It keeps us in the mindset of fighting the last war. For me, we are in "The Econolypse" (must credit my good friend V.R. on that one).
The Econolypse will twist our heads off. It is the The End of an era, and therefore a massive disillusionment is in store. No, it's not the disillusionment you thought was coming because that wouldn't be a disillusionment, would it? Unless you are already insane, the Econolypse will make you doubt what you know, who you thought you knew and why you ever believed you knew either of them. People who read economics are always modelling everything. This is that thing you can't model. Look, you're smart. If you could have modelled it, so could other smart people. And if they could have modelled it, it wouldn't have happened.
Nobody consciously chooses an Econolypse. Believe me, if anyone were to choose an Econolypse, it would be socialists. I know socialists - real, actual socialists, not liberals or Progressives - and they are very, very unhappy with what is going on. Oh, and if you think this was all caused by Greenspan and that the government is acting outrageously by bailing out all these firms - so do they. That's right. You probably agree with socialists.
I agree with...almost nobody, I guess...but such an attitude can help one pick one's way forward in this kind of darkness. It's a pretty simple algorithm: you go completely contrarian. Look at the pervading beliefs. List them. Now list their opposites. Now try to stitch together a world where all those things are true at the same time. Looks weird, huh?
Fortunately for you (and unfortunately for me) I have already been living in this dark world for some time. I've been waiting for you. Others of you think you have a good idea what this dark world looks like. No, you haven't. I dare say this because vast majority - or even all - of the people who are as least as smart as you are and who predicted the downturn also predicted something else - something big - that not only did not come true, the opposite came true. And that was the "Fall of the Dollar". This summer, they thought they were seeing it unfold before their eyes. Finally the imbalances had become too great. Finally it was all coming apart. The new Weimar Republic was here. Hyperinflation was just days away.
They thought this as the dollar (here I use the Dollar Index) went from 88 in 2006 to 78 in 2008. They were sure of it when the dollar went from 78 to a miserable 72 in just a few months. They still thought it when the dollar went from 72 to 80 (just a blip). They were sure of it when the dollar went from 80 to 76 (that's more like it) and they were still pretty sure of it as the dollar went from 76 to 88, although they were starting to put together some caveats like "flight to safety". Now that the dollar has fallen from 88 to 84 (and may head down even more), they are sure once again that they know what's going on.
If only it was true.
Because even a rip-roaring dollar inflation would be welcome right now. It would ease a lot of minds and show that we were in just the kind of plain, old stagflation we're used to. It's probably not going to happen and that is pretty frightening. The Fed and Treasury are doing literally everything they can think of to re-inflate the dollar and it is just not working. The fundamentals are just too strong and the dollar shortage is just too acute.
It's simple supply and demand. The market needs dollars, the world's credit system is no longer producing them and even the U.S. government cannot supply enough right now. The huge Fails To Deliver in the Treasuries market are no accident. The demand is enormous. The market has spoken. Treasuries are where the large players want to hold their money. So after this pause, it pains me to predict that the dollar will head much higher - like to 97-100.
Along with this breakout, we should expect panic and disorientation. Actually, the cause for the breakout - the bankruptcy of yet another huge firm (I'm worried about Banco Santander, personally) or some major collapse of yet another credit market - will cause the panic. Things will move from bad to incomprehensible. That should help gold. You have to respect the fact that gold is a highly emotional market that can move 10% in any given day. Gold could easily go through $850 and even spike to $900 intraday. Or, maybe, gold is done here at $820. Either way, gold is a commodity and in a deflation, it will deflate. The deflation of gold is long overdue. Gold is radically overpriced in terms of silver, oil, the dollar and even the gold lease rate. Basically people across the world will be given a choice among three things: U.S. dollars that can buy anything, their own currency that buys less and less, or gold that might hold value but can't really buy anything on its own. Once gold stops holding value, there is no investment thesis for it.
I hope I'm wrong. I really do. As scared as people are now, they are going to be even more scared when they find they have to sell a commodity they do understand - gold - and buy a currency they know, but don't understand - the dollar.
Will it happen tomorrow? Probably not. Will it happen in the next few months? Look, we are only at the beginning of this thing. It will happen and, much sooner than we would like,...
...We will all live in very interesting times