The Down Jones Industrial

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The DJIA is opening to further jitters, and if I had to guess it’s going to be another high volume trading day – yesterday was the highest in history. It dropped 700 points in the first ten minutes of trading, and has since recovered to only down around 200… but who knows what will happen as the day goes on.

Granted, it’s not a happy thing for you if you have money in stocks, but fundamentally strong companies will almost certainly remain afloat no matter how choppy the waves become. I am sure that many traders with houseboat sized balls will make fortunes from buying strong companies selling at a premium in this market. Share prices declining are not “good” or “bad,” – economics is a value-free science. Cash is flying out of stock and into more conservative investments.

Self-Portrait in Blue Jacket - Max Beckmann, 1950

Contrary to what you’ll read in the papers, consumption is most emphatically not the engine of economic growth. Savings helps to produce capital goods which in turn increases the productive capacity of the economy.

That being said, the Icelandic case – which I explored briefly yesterday – illustrates how rapidly a currency collapse can happen – even in the modern world, in an economically advanced country. Granted, the Krona isn’t exactly the world’s reserve currency, but as Eric Pfanner reports for the New York Times, their funny glacier-money is worth roughly half of what it was at the beginning of this week – and as it has ceased to be actively traded on the global market, its actual value is an unknown quantity – but if I had to guess, I would place it somewhere below toilet paper.

According to Christopher Barker’s cogent analysis in the Motley Fool – and Peter Schiff’s of EuroPacific Capital – the massive amount of government creation of money and credit from these bailout package will have an irresistably powerful inflationary effect on the dollar. Stefan also has a great video out that helps to explain what’s going on.

I’m actually rather surprised that the inflation vs. deflation debate is still ongoing among economists and commentators. It’s clear that the deleveraging of financial institutions is a deflationary event, but the government has proven itself to be such an unpredictable actor that hyperinflation seems to be the only route that can be taken to pay off the national debt and to finance these mad “bailout” plans.

Where else can this near $4 trillion outlay come from? You can be well assured that there will be more coming. They can’t raise taxes, and no foreign country is in any state to lend that kind of money to the US government.

I haven’t been comfortable throwing my full voice behind either projection in the past, but it seems to me that the deflation analysis does not accurately price in the massive risk that the government introduces – it’s predicated on the false assumption that the government is restricted by law, principle or regard for the citizenry. They “can’t” force banks to accept loans – until they can, at the point of a gun – as discussed yesterday, they perhaps only need to threaten nationalization to ensure compliance.

You know damn well that the captains of the banking industry are reading about Iceland – they see the writing on the wall.

As Dear Leader is set to meet with finance ministers from the Gang of Seven Dwarves later today to pursue greater “stabilization,” I think it is safe to bet on the exact opposite occuring.

Hunger - Käthe Kollwitz, 1925

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