Wrap Up: Collapse of the System

It’s been ten days since the Junta met to discuss the crisis in the American system and the possibility of collapse, but I’m just getting around to writing it up for a number of reasons, chief of which being that I’m a top procrastinator.

Given the topic of discussion, Arrow Bar proved an appropriate locale – we were well-protected in what could pass as an underground bunker in the East Village, with at least a week’s worth of booze to keep us in good spirits while we rode out the rending apart of civilization, the social and political equivalent of what the analyst John Mauldin has called “The Great Unwind.”

Mauldin was referring to the massive deleveraging that has to take place for the economy to right itself – the great amounts of debt that must be paid back, refinanced, written off, or inflated away. J.P. started off ten days ago by stating that things were likely to get worse in this economy before they got better – don’t be fooled by the recent rally that’s been taking place in the markets.

We spent a good amount of time going over the events that brought us to this point, and a lot of it was stuff I had been reading for months. But one aspect I found novel was when Mark said that the truth about the “toxic assets” is that there is a market for this paper, apparently, but the going rates are so low that the banks are unwilling to sell them and realize massive losses. By keeping the paper, they are like the guy who bought tech stocks in March 2000 and then refused to sell those stocks in the hope that they would rebound.

Mark also went into a tangent about government action and the discombobulating effects it can have on how people choose to act. He had shorted some stocks on the apparently sound advice of a friend – but despite the companies looking miserable, their share prices rallied when Uncle Sam announced an imminent bailout. In the future, he said, he would be more likely to keep his money on the sidelines – where many thousands of other investors, large and small, are doubtless keeping theirs right now.

And what about gold, that all-time favorite of paranoid doomers everywhere? We had invited Tom, a longtime goldbug, to discuss the case for being long on the metal. He wasn’t able to attend, but recently sent this note:

That funky ol’ Ben Bernanke has been one wild and crazy dude, hasn’t he? He may look like your basic college professor dweeb but he certainly hasn’t been shy about doing unprecedented financial engineering. Any way you cut it, this smacks of desperation:

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One Federal Reserve item not receiving enough press is that the Fed starting buying recently issued Treasury debt, something like $300 billion to start with.  This is without question about as inflationary a policy as there is.  Now Bernanke got his nickname “helicopter Ben” by virtue of his statement to the effect that you could stop deflation by dropping $100 bills from a helicopter.” This guy doesn’t fool around.

President Obama’s budget projections call for trillion dollar deficits for at least the next few years. Clearly he is attempting to do what it takes to prevent the economy from sliding into a 1930’s style depression.  Can’t argue the motive but what he is doing is without question highly inflationary.

Right now the United States is trying to borrow its way out of economic malaise.  Kind of like that person you know running up the credit cards while they are looking for a new job or starting a new venture.  Things can work out but it is shear financial madness to bet on it – especially when the foreign creditors are probably worse than your friendly neighborhood financial services companies.

All of this is negative for the U.S. dollar and the United States overall.  The rhetoric has been along the lines of “it couldn’t happen here…..”  Don’t be so sure. Read this article on Argentina. It could happen here – we have all of the preconditions and arrogance that are required for real trouble.

That is why we believe in gold and gold stocks.  We see nothing that can match its safety and upside potential.  If only we weren’t waiting for the end of time.

Personal Views

We went around the table giving our own personal views of the recession, and found that mainly things weren’t so bad. Most were still employed, even if they’d seen others lose their jobs. Apparently down times are good for artists. Jeff – whose paintings have been selling well this year – recalled a cartoon showing a man falling into a hole marked “Recession.” He sees another man, already in the hole, painting a picture. He asks the painter, “What are you doing here?” The painter replies, “I live here!”

There was optimism all around, even from one attendee who had been laid off. A sense of adventure, an opening of the eyes. The realization that a person needn’t spend all his precious hours slaving away in a cubicle. A feeling that there will always be opportunities for the smart, the quick and the brave; there will always be something to be busy doing.

It’s not the end of the world, after all.

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