Oct 10 2008 6:40PM
Financial History in the making
So much has happened this month, where to begin? It’s been a month to end
all months with one monumental crisis following another. At times, events
were moving so quickly it was hard to keep up. Many analysts we know stayed
up all night, several times, as developments and markets spiraled out of
control in what’s being called a financial tsunami.
What lies ahead is unknown because massive changes are still taking place
as the worst financial crisis since the Great Depression unfolds. We do
know that this is clearly the end of an era and the beginning of a new one,
and we’ll all be affected in one way or another.
LENDER OF LAST RESORT
For now, opinions are running rampant and although we can make some valid
assumptions, no one actually knows how this will all end up. Here’s
why…
As you all know, the bailouts this month were massive and truly mind
boggling, but the big spending actually started before. First, there was
the $150 billion in stimulus checks, booming money supply, super low
interest rates and the Bear Stearns bust.
Then came the takeover of Fannie Mae and Freddie Mac, which made the
government responsible for about half of the mortgages in the U.S. ,
totaling about $5 trillion. This amounted to the biggest bailout ever,
costing $200 billion. But if just 10% of those loans have to be covered, it
would mean another $500 billion and this alone equals the size of the
entire annual defense budget... Then things really intensified.
A HOUSE OF CARDS
Lehman Brothers went bankrupt, Merrill Lynch agreed to be bought and the
foundation of the financial system took a serious blow. Wall Street started
to panic and the Federal Reserve, along with the world’s largest central
banks, poured unprecedented amounts of money into the banking system to
provide ever more liquidity as stocks fell sharply and the banking
situation grew more serious.
The government then took over AIG, to avoid the worst collapse in history
of the U.S. ’s largest insurer. Money market funds, which have always
been considered safe, came under pressure. Worried investors started
pulling out of these to preserve their savings, resulting in the Fed also
having to lend banks about $400 billion in guarantees to meet these
withdrawal demands. The bottom line was that in just one week, the Fed
spent over $1 trillion to keep things going.
Next, Washington Mutual failed, which was the biggest bank failure in U.S.
history. While all this was happening, the bailout package was a top
priority. Bernanke and Paulson were desperate to get it passed, and fast.
The President pushed for it too as they all warned that the alternative
would be far worse.
PANIC SET IN
But the House rejected it and this shocked the markets. The Dow plunged in
its biggest one day loss ever, dropping $1.3 trillion, which was way more
than the $700 billion requested in the bailout.
Seeing the market’s reaction, the package then passed quickly but stocks
continued falling sharply anyway. The general feeling was that the $700
billion won’t be enough and the plan is insufficient. Some feel this
could be like the initial low estimates for the Iraq war and the final
bailout tally could be $2 to $5 trillion, or more.
REALITY HITS MAIN STREET
Meanwhile, folks on Main Street were generally against the package. They
simply didn’t trust it or the politicians. Once they saw the stock
market’s reaction to the no vote, however, many people changed their
minds as it became more obvious hat this wasn’t simply a plan to bailout
the mistakes made by greedy Wall Street big shots. People saw the writing
on the wall and realized that this would affect everyone, resulting in a
worsening economy, more job losses and no credit. And since U.S.
retirement assets are already down $2 trillion in the past 15 months,
dropping 401 and real estate values, bank failures and insecurity are also
taking their toll.
The economy is the number one concern for most people and they’re
irritated at the mud slinging direction the election has taken while the
priority issues take a back seat. So it’ll be interesting to see how the
election unfolds too.
DELICATE GLOBAL FINANCIAL SYSTEM
There’s no question these are dangerous times and the financial world is
in uncharted waters. The global financial system is on very thin ice,
teetering on collapse. Yesterday’s coordinated interest rate drop by
seven central banks clearly illustrates this because it was the first time
ever that so many central banks lowered rates together and by half a
percent. They’re literally pulling out all the stops to revive lending
and the world economy.
Will these efforts work? Will they be enough? Those are the most important
unanswered questions of the day and only time will tell, but we should know
much more in the critical month or so ahead. Why?
HYPER-INFLATION OR DEFLATION?
The Fed is spending money at an astronomical rate. It’s creating this
money out of thin air by monetizing bad debts and whatever else it has to.
Remember, this is on top of all the other ongoing government expenses and
it’s extremely inflationary.
Normally, there is a lag of about a year or so between money creation and
inflation but eventually, what’s recently happened will result in massive
inflation, a much lower U.S. dollar and a soaring gold price. This is
inevitable but as our dear friend Chris Weber points out… not
necessarily.
The bottom line is this, if the banks start to lend again, then the economy
will be on the road to recovery and inflation. But we know the banks are
scared and they’re being extremely cautious, for good reason. So if the
banks decide not to lend and instead just sit on their cash, then the
inflation process will freeze.
In other words, the risk of deflation has greatly increased. Inflation is
not a given and much will depend on what the banks do, or don’t do in the
period just ahead. The Fed is providing the ammunition but the banks have
to use it. If they don’t, the outcome could be much different than what
most analysts feel is a done deal.
WHAT TO DO
At this point, it’s best to be prepared for either outcome. That means
gold for inflation and cash for deflation, at least until we see how things
unfold.
For now, important changes are taking place but that also means challenges
and opportunities. This may all end up differently than what we initially
thought, but we’ll adapt and keep an open mind. Whatever lies ahead, the
current challenge is getting safely from here to there relatively unscathed
and we’ll do our best.
*****
Mary Anne & Pamela Aden are well known analysts and editors of The Aden
Forecast, a market newsletter providing specific forecasts and
recommendations on gold, stocks, interest rates and the other major
markets. For more information, go to www.adenforecast.com
DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. The opinions in the Commentary section do not necessarily reflect the opinions of GoldIRAS.com. Past performance of any investment is no guarantee of future performance. All investments have risk.
TOLL FREE - 877-703-2193
Copyright 2007.GoldIRAS.com and Gold IRA's & Rarities, LLC. All Rights Reserved
![[Most Recent USD from www.kitco.com]](http://www.weblinks247.com/indexes/idx24_usd_en_2.gif)
Google 
Facebook 
Twitter 
MySpace 
Rss Feed