Stock Market Crash… Again?

At the beginning of the week on the NYSE we saw another massive liquidation of assets, thus resulting in another “crash”. The question is, whether or not this is another crash or the long awaited hangover due directly to the easy money policy that has plagued us time and time again. Such as, when we hit the subprime recession, people initially decided to opt out of taking the hit and decided to go after the “Hair Of The Dog’ approach.

When you stay up all night drinking, the next day you will  pay the consequences of the night of partying. These consequences are being sick and possibly throwing up, in a sense it is your body rejecting all the alcohol that your body has retained. After a few hours, maybe the whole day, you will be regretting the night of drinking. When you hit the worst of the hangover, you begin to feel better and eventually get back to normal. What will make that hangover more harsh is when you resort to the hair of the dog, or the drinking of more alcohol to overcome the horrid feeling you have. In the long run, your body will reject more alcohol making the hangover last longer.

This is much like an inflationary boom and the consequential  recession, the night of easy money policy creates a sense of tranquility. That we can now live beyond our means in a stage of inflationary trends, and dollar devaluation. However, once the market creeps back up and decides that we really are not able to live outside of our means; we will hit a wall and have an asset liquidation. This liquidation acts as a hangover, in the same sense that our body is rejecting the alcohol, the market is now rejecting the bad assets created by an inflationary boom. The best way to deal with the liquidation of assets, much like the hangover, is to allow the bad assets to escape the market. Thus, after the grueling process of liquidation, we will be back to a state of stability.

The worse thing to do  in the case of asset liquidation is to expand easy money, because all it will do is prolong the “hangover” and, much like the hair of the dog, cause a longer harsher recovery. This is what we see happening in the stock market right now. What’s even worse is the market is rejecting the 0% interest rate the Fed decided to continue.

Since Q.E we have seen spontaneous price inflation in financial assets, resulting in liquidation, which has sent us into a perpetual stage of constant easy money and constant liquidation. However; now our fiscal tools are preventing the easy money policy. Plain and simple, there is such high leveraged debt in the market, no one trusts the fed and their interest rate scheme anymore. The stock market took a nose-dive, and things really are not looking up for the United States right now. Now, the bureaucrats are coming up with excuses for the constant easy money policy, though what really needs to occur is for us as a society to bite the bullet, take the hit, then re-establish tight money policy to offset the years of inflation. After such has occurred, we can start allowing long term investment to take place and reintroduce actual capital into the market, rather than over-valued assets.

Janet Yellen, and the Fed, will refuse to allow this to happen. Why? Because it is her job to lie to the people in an attempt to let them know the Fed actually benefits society, rather than causes harm to it. So in the next few days, while the liquidation continues, the people at the Fed and in Washington will scramble to figure out what caused it. Anywhere from the GOP possible Gov. shutdown, or looking to blame China or Russia, in the same manner an alcoholic will say “my neighbors upset me so I’m going to get drunk tonight”. Without realizing, the market has grown dependent on the easy money policy and is now at a stage of rejection; or as the alcoholic negates to realize it is due to their excess drinking that is causing alcohol dependency.

This, the liquidation, is because of the QE policies in place to respond to the inflationary boom and the continual recession of 2007. Just as the elongated hangover is a response to the hair of the dog. We can deduce, through sheer logic, that the biting of the bullet of 2007, as opposed to the bailouts and QE, would have already corrected itself and we would not be in the sense of market turmoil we are in today. I see, QE 4 looming around the corner. Which will only prolong the inevitable.

GOP “Debate”

After the grueling 3 hours of banter between the top republicans over who can lie and bribe the public more “effectively”, Carly Fiorina has moved up in the poles to second place. The disgruntled Donald Trump did not hesitate to attack her on her previous business experience as the ex C.E.O of H.P. Accusing her of “running the company into the ground” by expanding the company too quickly then hitting the tech crash, causing a massive H.P. liquidation. She responded with “we doubled the size of the company”. Donald Trump responded with “the company [HP] was a disaster”

While the two discussed both business ventures during the “debate”, Donald Trump missed the point on all of this. The fact that Carly Fiorina was able to expand her company so quickly makes her a great politician. The fact that she was capable of expanding her company, means she can expand government. If elected, she can continue to expand the government right on track and will not hit that pesky market to restrict the growth.

Since the government has free access towards monopoly power, and does not require on bending towards consumer demand, means she will no longer need to worry about hitting a tech bubble to stop her expansion from occurring. However, not one candidate even discussed the fact that the Fed was adjourning to discuss the raising of interest rates!

Considering the fact that the Fed will not raise interest rates, means that dollar devaluation will continue to flourish. Initially, the access to easy credit is there for investors. This means that the traders within the stock market are still able to leverage debt continually on top of previous financial assets, which will speed the ultimate fall of the US dollar.

The fact that not one single nominee even discussed this, shows the complete lack of care the runners really have towards how devastating this can be for our standard of living. Leveraging debt on top of other highly leveraged debt, has caused a leverage effect. When the dollar fails, that will liquidate a majority of US financial assets, due to highly pyramided debt, which is based on a US Dollar, that is quickly being devalued.

All we need to stop this from occurring is to replace the dollar with specie. Seemingly since the leverage ratios are so high, no one will replace the dollar with specie. This is the inevitable destruction of the dollar, the fact that Carly Fiorina is excellent at expanding business, and excellent at missing the mark on bubbles, makes me wonder that if she is elected will she expand the government even more in the face of this currency bubble, like she did with HP?

Big Week For The United States

At the beginning of this new week, again we saw a minor bear market in the NYSE. The DOW Jones only fluctuated roughly 100 index points within the span of the day, comparing the openings of the past few weeks it seems more stable. Is the market really “stable”? Was this past few weeks a minor liquidation of bad assets, that resulted in a crash in the markets, or is there a more serious underlying issue?

Considering the Fed is going to decide on whether to finally give some sort of “tightening” to the markets, might be the major role in this seemingly speculative stability. The question  is whether or not the 0.25% interest rate hike, if allowed, will actually do anything at all? As stated earlier this will not do any significant change, it might cause a speculative bubble at the most. This is because, now that interest rates have gone up a tiny bit, it will show traders that maybe there is still some value to the dollar after all. Considering the interest rate will only be a 0.25% rise, it will not be significant in its aims at contracting the expansions the Fed made in the rounds of QE.

But the underlying issue still remains on what is currently happening to the markets, its like a wheel falling off of your car, all the nuts and bolts are missing ,besides one last very loose one, and you decide to tighten it by cranking the tire iron a couple times. Will that honestly achieve any hopeful results?

The fact is that the monetary printing of the federal reserve has gone on for far too long, and is now in a stage where all of it’s assets are pyramided so tremendously that it can only end in a bust. It can only truly collapse, and it will be a bad collapse. This is because the United States has been leveraging loans continually, for free, for over 6 years straight, yet we have not seen any significant growth! Considering the PPI has not had any significant change over the past 5 years, compared with stagnate new order capital goods shows us that people are not spending money on capital goods. Also, not creating more capital goods where prices should be falling. In a healthy economy prices should fall! This is because over time technology will produce more of a given product, causing the supply to shift rightward, which will correlate to a fall in prices. The fact that the index has not had any significant fluctuations over the past 5 years, keeping supply constant and increasing the demand for capital goods, shows that the rise in asset prices has not gone to any real production, rather just an over-valuation of the asset prices.

If you look at the GDP we see a steadily rise, yet that is only the asset prices rising. Asset prices rising, without any increase in capital, means there is an asset bubble. This asset bubble, as stated before, comes from the strictly easy money policy of the Fed. Can the rate hike help? At best it will prolong the economic disaster for a while longer, and people will be duped yet again by the “omnipotent” cartel we refer to as the Federal Reserve.

Also, strangely enough, we will be tuning in to watch the Republican debate on September 16th. This debate will go along the same lines as every other debate, where politicians are capable of dodging questions, and not giving clear decisive responses. I doubt the actual cause of the stock market turbulence will even be brought up, as the politicians do their best to lie to the American public as to which one of them is better for the “job”. Obviously, for sound economic theory, I must support Rand Paul. The nationalists, like Trump, will continually blame the natural division of labor that brings us all the amazing things we use today, and it will be interesting to watch. This week will be a big week for the United States’ Political Economy.

Trump, Tarrifs and Trade

I recently critiqued Bernie Sanders’ welfare ideas in the article, “Bernie Sanders’ Welfare Trap”. In the spirit of being fair, this article will address the crazy notion that populist Republican Donald Trump came up with. Namely, a 25% tariff on Chinese produced goods. In this day an age it’s remarkable how many people still do not understand the negative affects of tariffs, regulations and other trade barriers.

The media has had a heyday with Trump these last months. His popularity, especially among the blue collar class, has skyrocketed. To many he’s an amusing departure from the typical dull and boring establishment candidate. He talks off-the-cuff and spouts his opinions without a second thought of any political fallout. His stance on issues from immigration and foreign policy to international trade has made him the populist candidate, not unlike Theodore Roosevelt some 100 years ago. But are his fans even listening to what he promotes? Do they understand the consequences of electing an individual who’s intention is to amass even more power in the executive branch, ala Roosevelt?

Trade and Tariffs

To get a handle on what the fallout may be on a 25% tariff of Chinese goods is to look back to those glorious years of The Great Depression. Shortly after the stock market crash in 1929, the Hoover administration signed the Smoot-Hawley Tariff Act of 1930 into law. Economic historians, the world over, can tell you how departmental that was for the US economy and world economy as a whole. It kicked off a series of trade wars that left the industrialized nations weakened. They became economic islands of autarky. An autarky is a self sufficient economy. The problem is, no nation can sustain its economy under the severe conditions of an autarky. The Great Depression deepened and spread around the world. Post WWI Germany, in particular, was harshly affected by these trade barriers. Without the ability to export what manufactured goods they produced, they fell into a series of hyper inflationary bouts that destroyed their currency. A decade of isolation and alienation from world markets gave rise to the sentiment that elected The National Socialist Workers’ Party of Adolf Hitler. A key plank in Hitler’s economic plan was an autarkic fatherland that would conquer her neighbors in order to provide for her citizenry. To hell with trade, free or otherwise.

After Adam Smith became famous with his book, “An Inquiry Into The Nature and Causes of the Wealth of Nations”, other classical economists continued where he left off. One of these economists was David Ricardo. Ricardo famously postulated that through the specialization of trade, even when a nation has an absolute advantage, both trading partners became better off and the standards of living for their respective citizens increased. To illustrate, imagine Costa Ricans wanting to have maple syrup for their pancakes. They could attempt to grow maple trees in a tropical climate and harvest the maple syrup. They might even pull it off with enough capital investment, but at what cost? Simultaneously, imagine Canadians having a craving for bananas. They too could attempt to grow their own banana trees in giant greenhouses. What would the immense cost be to undertake a project of that scale? The answer is for each country to specialize in what it can produce at the lowest opportunity cost. In our example, Canada specializes in maple syrup production and Costa Rica trades in bananas. Both nations can then allocate their scarce resources in other more beneficial projects. The price for each good would also be cheaper for consumers as there would be a net increase of the traded goods in each country.

Although free trade became fashionable after Adam Smith among British intellectuals, it didn’t catch on with the US government. The government continued to impose protectionist tariffs on other nation’s goods as a chief source of revenue. This is a part of what is known as mercantilism, where the government controls trade between nations and businesses as it was in the colonial days. In the mid 19th century, the newly formed Republican Party under Abraham Lincoln proposed high protectionist tariffs to protect the fledgling industry of the northeast, in particular the railroads. After his election, Lincoln signed the Morrill Tariff which increased the import tariff from 21% to 31% overall on goods imported from Europe. Before the Morrill Tariff, the US had enacted a 55% tariff that almost led to the secession of South Carolina under the Andrew Jackson administration. A compromise was struck and the tariff was eventually lowered to 21%.

Protectionist tariffs had hit the agrarian southern states the hardest, as they depended on good trade relations with their European partners. Cotton was the nation’s key export and garnered great wealth for southern growers. The Republican Party incorporated a plank into their platform that would funnel some of that wealth to their friends in the northeast by way of a higher tariff and subsidies. In his 1st Inaugural Address, Lincoln stated that he would enforce the collection of “… all duties and imposts…” much to the southern states’ chagrin. It’s no surprise the first shot fired was at Ft. Sumter, an import duties post that controlled shipping into Charleston Harbor.

Free” Trade

Our above example of maple syrup and bananas pertained to specialization in trade where each trading partner had an absolute advantage. But what happens when both nations have comparatively the same opportunity cost and resources to produce comparable goods? Let’s take automobiles as an example. After WWII, the US had dominated the world market in automobile manufacturing. It wasn’t until Europe and Japan had rebuilt their economies that they became competitors in the global automobile market. How does the advent of new competition affect world trade? The same way competition affects trade on the local level. Each producer must compete with the lowest prices and at the best quality in order to please consumers. Similarly, this is the same with consumer electronics, textiles, agricultural products and a myriad of other goods. Some developing nations compete with other more advanced nations through lower labor costs. Others through natural resources such as, lumber, oil or rare earth metals for lithium batteries. The end affect is higher standards of living for the globe through better allocating scarce resources into their most productive uses.

When left alone, this laissez-faire globalization of trade benefits everyone. It helps to stay off conflicts which lead to wars and supplies less affluent countries with goods that may otherwise be unattainable. But laissez-faire capitalism is in short supply these days. Just as large protected crony corporations intervene in local exchanges, they also intervene in global trade. Trade agreements such as NAFTA, GATT, SAFTA and the recent TPP are anything but examples of free trade or capitalism. These managed trade agreements hamper competitors by incorporating the use of political force. They cause trade imbalances, shortages and lowered standards of living for everyone involved. They give the crony corporations an absolute advantage by hampering smaller competitors on both the national and international level. Those who scrutinize the concept of free trade are mistaken if they think a multi-thousand page trade agreement represents free trade.

Conclusion

Donald Trump’s idea of slapping a 25% tariff on Chinese goods wouldn’t protect anybody. The idea behind a tariff is to protect a certain national industry. Like a tariff on steel is an attempt to protect less competitive steel producers in the US. But the goods that are imported into the US from China aren’t even manufactured here. A tariff will only cause Walmart and other retailers to raise prices. How is that going to help the American worker?

Trump seems to believe by enforcing the tariff he will compel manufacturing to return to the US. Those goods that China exports are produced with low-cost unskilled labor, by and large. As I had written in my article, “Creative Destruction, Technological Unemployment and Choice”, what manufacturing that does return to our shores is largely being manufactured by advanced robotics and automation. This is little help for the mass of displaced unskilled US workers.

Starting a trade war with a country that manufactures most of your stuff and holds most of your debt is extremely foolish. Trump claims that he’s not all that smart, but the key to his success is surrounding himself with smart people. Maybe he ought to consider finding some smarter people. After all, even if a hole is surrounded by a doughnut, it’s still just a hole.

Did anybody see that Dead Cat Bounce?!

After another start to a dreadful week in the NYSXE we can now see the market truly clinging to life as it reaches out for air, yelling “Save me low interest rates!” If only the market knew that those low interest rates are the dreadful cause as we watch it bounce further and further towards a recession. Historically speaking, the Great Depression was in full force by 1933, then 4 years later in 1937 the news was reporting on how a recovery was occurring and the pipedreams were about as successful as a toilet drain. The markets truly ate that load of crude up, people even suggested that the depression was over and after 1937 it was just a recession, the depression was not over. Does this chain of events sound familiar? No? Not yet? Well lets just wait until the end of the year.

We have seen the market drop from 17500 to near 15500 in around a week. Within that week, the market raised from 15500 to 16526, then closing at 16062. Then we have people, our lovely keynesians, saying the market has been stabilized. Yet anyone with an understanding of economic theory could predict the Dead Cat Bounce. How many times have the austrians been suggesting that QE4 will be arriving soon? This is due to the fact that it is impossible to revive from this recovery.

We can not expect to see any recovery in the markets, and they will continue to curtail downwards. However; the worse is yet to come. People have not been noticing that the Chinese central bank has been stocking gold, and the seemingly reason for this is to make a future power play against a weak dollar. This is what the Chinese government is betting on, and it seems very possible. However, how far will China go? Will they be able to overthrow the dollar with a massive gold backed currency? At this stage, probably not, and what’s even worse now is the fact that China is succumbing to an even more dangerous area in the global economy.
In June of this year the chinese stock market crashed from a little over 5000 to 3500. It has maintained within a 500 range of 3500 for the past 3 months. This is because the Chinese government forced sale suspension on shares! It is illegal to sell major stocks in the chinese stock market for 6 months! We are witnessing a very contractionary stage of economic “growth”, and now when faced with QE, if the chinese lift their cap, the market will be hit very hard. Why? Because the entire economy of China is in one giant bubble based on an overvalued government propped up export sector. What does this mean? It means get ready for a global recession, because when the Chinese market collapses we will see more bubbles pop up in places like the United States and Europe, and the fact that those bubbles are not based on any actual economic growth, it will act as a ripple effect causing market hits throughout the world.