A Battle Between a Natural Market correction and an Artificial Attempt to Avoid it

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“I’ve never seen anything like it,” said Capital & Crisis’ Chris Mayer.

The Dow rose more than 400 points. Gold was up $46 at the close of the day. The dollar is falling…oil is holding steady.

We’re hosting a meeting of financial analysts here at our conference center in Normandy. Last night, after dinner, we all gathered around a computer screen – amazed, aghast and appalled.

“I can’t believe it…” “Incredible…” “What will they think of next?”

Your Daily Reckoning editor loved it. He didn’t know what to laugh at first!

From England came word that the financial regulators had banned short selling of financial stocks. What did they think…that they could keep prices up by decree?

But the Americans did the same thing, only dumber. The SEC issued an emergency edict prohibiting “abusive” short selling. What the heck is that, we wondered?

Maybe it’s when you sell a company when the share price has already fallen more than 10%… Like kicking a man when he’s down; it’s not very sporting.

The feds announced a program of coordinated intervention…with $250 billion to be made available to the financial industry to cover its bad debts…

And get this…CNBC: “Bad Debt Plan May Cost up to a Half a Trillion Dollars.”

Where do the feds get that kind of money? Ha…ha…ha…

But we’re not the only ones… Russia is new to the ways of late, degenerate capitalism. But it’s getting the hang of it fast. It too is manipulating markets with a $20 billion injection “to boost the stock market.”

And then, there’s this item from Bloomberg:

The latest crises “expose the flaws” and “tarnish the image” of the U.S. economy.

They’re missing the point completely. It is not “flaws” that are being exposed – it’s the whole consumer economic model and the whole generation of jackass economists who created it. They rejected the insights of classical economics. Instead of encouraging saving and capital formation, they thought they could nurture growth by luring consumers to spend more money.

“Tarnish the image?” No, this crisis will eventually destroy the image altogether, not tarnish it.

But let us return to the story as we’ve been telling it. There’s a war going on…a battle between a natural market correction…and an artificial attempt to avoid it. On the one hand, Mr. Market wants to correct the excesses of the boom/bubble period that began in 1982. On the other, Misters Bernanke and Paulson want to prevent him. Mr. Market takes down asset prices. Mr. Market Manipulators push them back up.

We know who the ultimate victor will be. Mr. Market never loses. One way or another, real prices must come down. That’s just the way it works. Night follows day…whether you like it or not. Stocks, bonds, property, art become expensive…and then they become cheap. Recently, they’ve been expensive…soon, they will be cheap.

As recently as a few months ago, it looked like the feds might be able to hold off a correction. Government-caused inflation was pushing up prices all over the world. Oil hit $147. Gold shot over $1000. Investors were getting rich in Chinese stocks and London property. Consumer price inflation was rising everywhere. Back then, it looked like consumers would be the big casualties of this war. They were facing much higher prices…with declining incomes.

But then, financial institutions began to take incoming…and pretty soon…the whole battalion of investors, worldwide, were getting beaten back. Stock market investors suffered flesh wounds in the United States; the Dow is down about 17%. In China, investors have practically had their heads blown off; the Shanghai index has lost 67%. Commodity investors got whacked too. Oil is down a third from its high. Yesterday, it closed at $97. Gold lost a quarter of its value, from the high. And investors in many of the safest, surest and smartest companies on earth – investment banks, mortgage lenders, and other financial institutions – have been wiped out.

But this week reminds us that the war isn’t over. The feds still have some ammunition left. The Fed has 200 basis points left to zero; it can cut rates further. The government can intervene directly in markets; it can seize companies; it can lend to anyone at half the rate of inflation; it can send out checks… In fact, judging on recent evidence, it can do anything…

…but the one thing it cannot do is create real money. Every intervention costs money. And money is the one thing the feds don’t have. Not real money. They only have phony money. And when investors finally realize the difference – between real money and funny money – that’s when things will get very, very interesting.

So far, only one major asset class has escaped Mr. Market’s correction: bonds. U.S. Treasury bonds have gone up (meaning, yields have gone down) as investors sought the safety of what used to be, and should be, the surest credit on earth. But bonds depend on not only on the ability of the issuer to repay…but also the value of the money in which they are calibrated. And if that money starts to sink in value, bonds take a hit.

U.S. Treasury bonds are unique. They depend on the value of the dollar…which the issuer itself controls. But as the war between Mr. Market and the feds continues, the U.S. Treasury will have a harder and harder time maintaining the value of the dollar. Because wars are costly. The feds will have to stretch the dollar farther and farther in order to meet the expense. Eventually, the elastic dollar will snap…and bonds investors will have their turn. Bonds will crumple over too…

Dear Reader, this war has already caused millions of casualties…from Wall Street’s masters of the universe…to the little guy with a sub- prime mortgage on his double-wide. But when the shooting stops and the smoke clears – only one man will be left standing. That man will be gold. Make sure you are standing next to him.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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