The Nixon Shock

Have you looked at the market lately? The Dow is pushing 11,000. The S&P 500 has broken out above 1,150 and seems to be going to 1,220. Gold is at $1,346 per ounce, another all-time high. Silver is at prices not seen since the Hunt brothers tried to corner the market back in the 1970s. Oil is threatening to break out of its range… Aluminum, copper, tin, Molybdenum , nickel — all up!  The price of cobalt has jumped from $24 to $40 per pound in the last three months. When pigs fly, pork bellies The prices of wheat, coffee, and pork bellies are going parabolic… “What’s going on?” you might ask. Could it be that investors are suddenly jazzed about tin, or think that hot dog sales will boom this Thanksgiving?  No, of course not. The answer lies with our own happy Federal Reserve. Brian Sack, a senior official at the New York Fed, said this about quantitative easing in a recent speech: “Balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.” Ponzi scheme In other words, the Fed is trying to prop up housing prices and the stock market (i.e. 401ks and other retirement plans) by keeping rates low, printing money, and destroying the value of the dollar. The fact that they admit this isn’t surprising… (It should be. I wish I was shocked, but I’m not.)  The U.S. economy has been run like a giant Ponzi scheme since the Asian Currency Contagion of 1998.  This was followed by a series of “crisis that will destroy the world economy”: Russian debt default, 9/11, Long Term Capital Management, dot-com bubble, housing collapse… Each one of these crises required the heroes at the Fed to step in and “save us” by printing money and creating the next bubble. This always reminds me of those Salvador Dali posters all the cool kids had in college: At some point, you have to pay the piper. Bills come due, and you can no longer prop up the empty corpse of the economy by adding another buttress. The flaming giraffe of debt will have his say. We wish, dear reader, that someone had the nerve to stand up in 1998 and let those who bet on LTCM take their lumps as a warning to the rest of the capitalist risk-takers. Make no mistake; the bailout of LTCM twelve years ago is directly responsible for the debt markets turning into a free-for-all five years ago. Heck, many of the same people were involved. And why not take risks?  If the Fed can bail out Long Term Capital Management, they can bail out AIG. And Wall Street was correct in its assumption.  Nothing has changed… No lesson has been learned.  The currency war Right …

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The Nixon Shock

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