On Monday, the Dow Jones Industrial Average – the bluest of Wall Street’s blue chips – lost 4.4% in a single day. Fannie Mae and Freddie Mac have been “seized” by the government. Oil continues to drop while gas prices rise. Inflation runs high while jobless claims continue to soar and gold falters. What a strange economic cocktail! Let’s look at the issues one by one:
First, “Black Monday.” It was prompted by the announcement that investment-banking giant Lehman Brothers would be filing for bankruptcy protection. This, after a weekend spent trying to negotiate a government bailout. For once, the government blinked. A week earlier, the markets soared on the news that the feds had “seized” control of the mortgage industry through Fannie Mae and Freddie Mac. Smart traders who hadn’t already taken the hint knew that those gains were illusory.
Now how is it that oil can continue to fall while gas prices have been on the rise? Two words: Hurricane Ike. It threatened refining capacity, which has nothing to do with the price of crude oil but everything to do with your pain at the pump. The real question is why does oil keep falling? That’s actually a troubling sign given the inflation being felt elsewhere in the economy. And the answer is: demand is softening…even in the face of monetary expansion. That does not bode well.
Is there really any question why consumer prices continue to rise? It can’t be blamed on OPEC (oil is dropping), or greedy corporations (profits are down), or labor unions (they hardly exist anymore), or the greatest scapegoat of them all, illegal immigrants (they’re moving back to Mexico!). No, instead, we’re finally confronted with the reality that the Federal Reserve creates “price inflation” (higher prices) through monetary inflation (creating new money). Just this past Tuesday, they unleashed another $70 billion into the economy. Think that won’t find its way into the price of your milk? Think again.
That jobless claims continue to rise shouldn’t confuse anyone unless they’ve had an economics class recently. Just three years ago, when I was taking introductory Micro- and Macroeconomics courses, my professors still taught the widely discredited Phillips Curve – the Keynesian idea that there’s a “trade-off” between inflation and unemployment (i.e., if you have high inflation you should have low unemployment and vice versa). Of course, this was objectively destroyed by the 70’s stagflation, and we’re headed there again.
But how is it that gold, presumably a measure of the dollar’s value, is falling even as dollar-denominated consumer prices rise? Well, as I stated earlier, it’s because gold was overbought – with Fed-created fiat money – and became its own bubble. As the Fed continues to inflate, though, look for gold to rise.
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it’s hard to object to the government’s mass bailouts from a historical standpoint since similar debt-producing methods were put into action to save the U.S. from the Depression; maybe we’re really socialists at heart and don’t want to admit it…
I don’t agree with that at all.
The government and its central bank caused the Great Depression. Even mainstream economists like Milton Friedman and Freidrich Von Hayek (both Nobel prize winners) say this is the case. And if you want to know the real deal, read the book on the subject by Murray Rothbard.