| On October 10, 2008, I posited four possible | | | | well broadcast and has been absorbed by almost all |
| scenarios regarding the outlook for our general | | | | players. The Pound may be oversold. |
| economic future. Of those four scenarios, it may be | | | | Since the dollar is still the world's primary reserve |
| that we are experiencing the most chaotic and | | | | currency (though that is in a state of adjustment), it |
| potentially destructive scenario, one that may be | | | | is unlikely at this time that countries such as China |
| difficult for many to envisage: | | | | and Japan who buy our Treasuries and sell us |
| That is the third outcome posited in the article: "In | | | | manufactured goods (taking our dollars in return as |
| this case, the deflationary forces would win the | | | | I.O.U's, increasing the supply of dollars outside the |
| battle against Federal Reserve easing and | | | | U.S.), will give up on us completely. However, they |
| government action, at least temporarily. In response | | | | may look upon their massive U.S. investments with |
| to a deflationary calamity, the Federal Reserve may | | | | trepidation as we have lowered our living standards |
| run the printing presses until an inflationary recovery | | | | by accumulating massive public and private debt |
| could take place. Gold may do well under this chaotic | | | | which must now be deleveraged. And there is no |
| scenario." | | | | guarantee that the deleveraging will go smoothly. It |
| Currently, U.S. consumer demand for goods is | | | | certainly has not up until this point. Our foreign |
| abetting and consumers are retrenching as a result of | | | | creditors may shudder when they see us run our |
| the drying up of the credit spigot. Credit is now only | | | | printing presses to stimulate our domestic economic |
| available to the soundest of borrowers. Money may | | | | growth, which may turn the current whiff of |
| not be readily available to many borrowers to buy | | | | deflation in our economy into a galloping inflation and |
| new homes, refrigerators, and automobiles. The | | | | gold price, with double digit interest rates, and may |
| consequent deleveraging of the average consumer | | | | result in the fall of the dollar in future years. During a |
| (who is over his head in debt and who cannot | | | | time of severe stress on the dollar, the Obama |
| borrow more to finance purchases) is a powerful | | | | administration could conceivably restrict the |
| wave in the U.S. Without the proposed mortgage and | | | | movement of U.S. capital to and from our shores. As |
| bank bailout by the Obama administration, millions | | | | has happened with nations who have followed such a |
| more Americans might be on the cusp of losing their | | | | policy, our stock market and the dollar might react |
| homes. | | | | badly. |
| In addition, significant layoffs (from the likes of IBM, | | | | On the subject of free trade, should we enact a |
| Intel, and Macy's) have the potential to lead us into a | | | | protectionist trade policy, such as the trade barriers |
| downward economic spiral of decreasing demand and | | | | enacted in the 1930's, we could see additional |
| employment. Further, in this economy, we are also | | | | shuttered storefronts and increases in |
| experiencing price decreases caused by retailers | | | | unemployment, amplifying the current recession. |
| selling off goods as they liquidate their businesses. In | | | | Demand for goods by displaced workers could dry |
| a normal economy where credit is available, these | | | | up. Given that so many of the goods used in this |
| retailers might have been able to go into bankruptcy | | | | country have been produced entirely or in part |
| and then receive financing to operate until they | | | | outside the U.S., the net effect of increased |
| emerged out of it, saving valuable jobs. | | | | protectionism could be inflationary, reflecting the |
| Weakened banks are receiving huge cash injections | | | | higher costs of producing more goods by better paid |
| of Federal money, turning them into partial wards of | | | | American workers. The big risk is that our tariffs |
| the State. Tens or hundreds of billions of dollars may | | | | might be reciprocated by our trading partners, which |
| ultimately be spent by government authorities in | | | | could be a real disaster for the world economy. |
| bailing out the countless owners of three- or | | | | A misguided Obama administration might enact strict |
| four-bedroom houses whose mortgages are under | | | | regulations or increase taxes on industries that are |
| water. | | | | currently performing well (at least relatively): the oil |
| The Federal Reserve under Chairman Bernanke and | | | | industry and the railroads are possible targets. Some |
| the Obama Administration has used and may utilize | | | | see the railroads as price gougers because they are |
| further the myriad tools at their disposal to extricate | | | | making excellent profits on hauling a variety of |
| our economy from this slump that has shown | | | | commodities. And last time I checked, at least one |
| deflationary characteristics. The Fed can simply print | | | | railroad was hiring. Before they were deregulated in |
| all the dollars that are necessary to stimulate | | | | 1980, the rails stagnated for decades and many rail |
| domestic growth, which in the long run makes the | | | | lines were unprofitable. The deregulation allowed the |
| dollar worth less. The dollar may simply be inflated | | | | industry to dynamically alter its business: reducing |
| away, with the current deflation turning into a great | | | | costs and improving service performance, laying the |
| inflation in the coming years, damaging the dollar's | | | | foundation for a deregulation success story. |
| local and international purchasing power. It may be | | | | Reregulation may restrict the railroads' profits and |
| that the "cure" for our disease--massive government | | | | would likely lead to more layoffs and cuts in service. I |
| spending and easy money from the Federal | | | | believe that under some circumstances, regulation can |
| Reserve--will be our undoing. | | | | be effective, but the problem lies when regulations |
| In Meltdown: A Free-Market Look at Why the Stock | | | | stay on the books for many years or even decades, |
| Market Collapsed, the Economy Tanked, and | | | | hamstringing the industries they were meant to "help" |
| Government Bailouts Will Make Things Worse, | | | | as the old regulations become increasingly obsolete. It |
| Thomas E. Woods, with foreword by free market | | | | appears to me that more regulation leads to less |
| thinker Ron Paul, describes the real causes of the | | | | overall potential in the economy and could result |
| current economic and stock market collapse. Woods, | | | | either in inflation or deflation. The case of the |
| "a senior fellow at the Ludwig von Mises Institute and | | | | struggling airlines is instructive. Prior to deregulation, |
| winner of the 2006 Templeton Enterprise Award," | | | | airline profits were guaranteed and the public had to |
| shows how government is not the solution to the | | | | swallow the cost. In this instance regulation inflated |
| current economic crisis, but is actually making the | | | | airfares. |
| slump worse. Buy this one to gain greater insight into | | | | In conclusion, the deflation of many asset class |
| today's economic disaster. | | | | values and some prices at the retail level that we |
| A demonstration of how quickly an economy can | | | | currently see may be followed by a longer period of |
| change is in the example of the Icelandic financial | | | | increasing price inflation caused by excessive growth |
| calamity of 2008. As reported on Wikipedia, Iceland's | | | | in the money supply. This scenario could further |
| three largest banks failed and Iceland's government's | | | | destabilize our stock market, economy, and our |
| central bank was not large enough to guarantee the | | | | currency markets. If the Obama administration makes |
| banks' bad debts (something that may not happen | | | | economic policy blunders as I have discussed, many |
| here: theoretically, our Federal Reserve's balance | | | | market participants may lose confidence in U.S. policy |
| sheet is infinite). | | | | and continue selling the stock market. |
| Iceland's stock market fell 90%, the local currency | | | | However, if there are limited economic policy |
| inflation rate rose into double digits and the value of | | | | mistakes, the stock market may find a bottom in |
| the Icelandic krona sharply declined. Unemployment | | | | 2009 and may rally powerfully from that trough, and |
| increased. The savings of many citizens were | | | | then may continue in a trading range (a similar |
| decimated. The movement of capital to and from | | | | pattern occurred in the rally after the nearly 50% |
| Iceland is permitted only with permission from the | | | | 1973-1974 decline). Reflation winners who may |
| authorities. Citizens who hold foreign currencies must | | | | benefit most from the rally are major oil firms and |
| hold them in an Icelandic bank. Iceland's transition | | | | gold firms as well as physical gold. Gold is also |
| from an enviable success story to utter financial | | | | insurance should the unthinkable occur and the |
| collapse all happened in the span of less than a year. | | | | economy melt down into a broad deflation without |
| Great Britain's government authorities have | | | | near term recovery in sight. |
| effectively nationalized much of the banking sector in | | | | This article contains the opinions and ideas of its |
| response to insolvencies among many formerly | | | | author and is designed to provide useful general |
| powerful banking institutions. The British currency has | | | | information to the reader on the subject matter |
| fallen 30% from about $2.00 to $1.40 per Pound. The | | | | covered. The author may or may not have current |
| Pound does not have world reserve currency status, | | | | positions in the investments mentioned in this work, |
| which may explain why so many market participants | | | | and the author may from time to time make |
| are more able to bet against it: it is not widely owned | | | | investments in a manner that is not described here. |
| throughout the world and may be available in the | | | | Past investment performance is no guarantee or |
| scheme of the currency market to be sold heavily. | | | | prediction of future results and any investments |
| Britain is seen as a declining power in the midst of | | | | made, based on the opinions and ideas contained in |
| crisis and its currency is merely reflecting this. | | | | this work, may or may not be successful. The |
| However, Britain suffered mightily from the | | | | strategies contained herein may not be suitable for |
| stagflation years of the mid 1970's, when inflation | | | | every investor or situation, and the author is not |
| rose to 25%, but its economy was later revived by | | | | engaged in, and should not be construed to be, |
| the free market policies of Margaret Thatcher. So I | | | | rendering legal, accounting, investment advisory or |
| would not count Britain out just yet. Much will depend | | | | other professional services to the reader or any |
| on future U.K. economic policy. That said, I would not | | | | other person. Readers should consult their own |
| be surprised to see a short term rally in the Pound as | | | | advisers for advice particular to their individual |
| the difficult reality of the current situation has been | | | | circumstances. |