Any first year economics student will be able to slowly and cogently explain the theory of maximum employment, or even give you a run-down on modern monetary theory. Certainly, most hobbyist economists will be able to fumble their way through an explanation of Keynesian stimulus theory. But where their book learning and theories and financial models break apart is during a crisis. Why? Because: you can’t model a currency crisis. You can’t say when one will occur. You can’t say how bad it will be once it starts.
A currency crisis occurs outside the realm of even the best mathematically correct theories. Such a crisis results from a massive, widespread loss of faith in a given currency. It doesn’t happen in textbooks or in charts, models or in Paul Krugman’s daily hack-job column.
It happens in the minds of men. It’s largely emotional. If you believe that the object of your life’s hard work will soon be worthless, then you may be allowed some small degree of emotional response. The response might seem irrational – and even completely unnecessary to the casual observer. But the response of everyone “irrationally” fleeing the dollar, need not fit into Nobel Laureate’s understanding of what should happen. Sooner rather than later, when governments and central bankers treat their currencies like waste-paper, regular people will begin to connect the dots, and all it will take is one large institution or country to set off the crisis.
People like John Williams, the San Francisco President of the Federal Reserve, believe that they can chart out the actions of the dollar as if the entire economy of the world and every individual holder of the dollar was a simple 3-step Rube Goldberg setup.
|How to profit when the market dipsThe Dow Industrials first broke 10,000 on March 12, 1999. Ten years later, on March 12, 2009, the Dow closed at 7,170.
That’s led many to refer to the last 10 years as America’s Lost Decade. And it’s led many investors to conclude that the American economy is broken and that investing for growth is a fool’s errand. Maybe you’ve felt this way yourself from time to time.
After all, how will America overcome 10%+/- unemployment?
$1 Trillion+ in annual budget deficits?
Record home foreclosures?
And most importantly, how can you, the individual investor, profit in the midst of this?
Invest in quality American companies, and buy their stocks at a discount. You can never go wrong investing in Great American companies, especially in times of crisis.
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After printing trillions of dollars over the past few years, and cramming billions more into existence, Mr. Williams thinks he knows exactly where all of those dollars will end up, and how they’ll behave. Here’s what he said yesterday when discussing the Fed’s ongoing bond purchases, aka Quantitative Easing:
“I estimate that these longer-term securities purchase programs will raise the level of GDP by about 3% and add about three million jobs by the second half of 2012.”
He actually believes he can accurately predict GDP and job growth by simply pulling levers at the Fed’s computer. According to bankers like Mr. Williams, inflation is of no concern. Why isn’t it of concern? He says that money supply, “has grown at a 5 1/2% annual rate on average, that’s only slightly above the 5% growth rate of the preceding 20 years.”
Remember his lack of concern as prices of nearly everything continue to spiral upwards. After doing little else besides print massive amounts of money for the past 20 years, inflation is of little concern! Amazing. What Mr. Williams is too incompetent or dishonest to be aware of, is that regular people are feeling less than confident in the dollar. The Chinese share that lack of confidence, and they’re dumping Treasuries. Other countries are beginning to settle trade in currencies besides the dollar. It’s getting late in the evening for the dollar’s hegemony.
Either way, look out below.
- Theories of the current crisis: John Williams prediction of hyperinflationary depression (pogoprinciple.wordpress.com)
- When Faith In U.S. Dollars And U.S. Debt Is Dead The Game Is Over – And That Day Is Closer Than You May Think (benzinga.com)
- Fed’s Williams: Econ Textbooks Need to Catch Up To Reality-2 (forexlive.com)