Mid March Market Rally, OR Voodoo Economic Resurrection.

The economic turmoil of late 2008 to early 2009 has created much unrest in our world.

Destabilizing Global trade, economic stability, and Investment inputs into industries.

Ever since the Dow's Great plunge of Late September 2008, the markets have been wildly fluctuating, Politicians have been scrambling to stem the unrelenting collapse of the global economic system known as the "Breton Woods"

The Bretton woods agreement was created after the LAST great market crash in order to maintain and ensure market stability.

It effectively pegged the value of the US-Dollar to the Value of gold, at $35 to one troy ounce.

The agreement ALSO pushed and insured the Dollars place as the World reserve currency.


Unfortunately for our currant situation, the Staple of the Breton woods (The fixed value of the dollar relative to gold) was revoked in the early Nixon administration when he removed this direct value correlation.


And our current economic problem, on a global scale, is the fallout of that decision, compounded by actions taken from outdated, and non applicable financial theories.

The first bailout in late 2008 was based on the economic models of John Maynard Keynes... and Involved the introduction of new money into circulation.

The theory of this "Stimulus" is the direct remedy to the *Apparent* problem.

And that Apparent problem, is a lack of consumer confidence.


When people have less confidence in the market, they save instead of spending.

When the people spend less, the companies they normally buy goods and services from MAKE less money.

If these companies make less money, they cannot afford as many employees, and thus, they begin downsizing and laying off their workforce.

And this is when the spiral begins.

For when large amounts of people are laid off, they spend overall less money back into the economy (because they have no money)

Thus, companies make less, they hire less, people have less money and spend less.


The stimulus theory, is that if the government injects a large amount of capitol (money) into the economy (by buying LOTS of stuff) that money will encourage increased spending, and increased hiring.


And on paper, the theory is absolutely beautiful.

There is, however... only one problem with this approach.


The problem with the economy is NOT a loss of confidence.

The loss of confidence in the US economy is a BYPRODUCT of the Acuall problem.

That, of currency inflation.


Since the value of the dollar is not fixed, it is basically a free floating ammount.

That amount is based off of two factors.

1. Total economic output of the Nation (GDP)

AND

2. Perceived Value (Demand . Investor confidence)


So, the total value of the Nation (determined through the looking glass of demand for the dollar) is the basis for the VALUE of the dollar.

And since the value of a currency is based primarily off of what you can buy with it...

You probly already see the problem, don't you?


Ok, follow me around the park for a bit.

In 1993, the North American Free Trade Agreement was passed.

This little bit of legislation removed protective tariffs from imported goods (or reduced them) and simultaneously applied penalties to domestic manufacturing companies for pollution and environmental damage.

This made manufacturing inside the USA more costly than anywhere else.

And made business in other countries (where these same standards were lacking, and labor cost significantly less) much more economically appealing to all manufacturers.

Thusly, many manufacturing companies were off-shored to other companies.

So, with a reduction in Gross domestic production, you have a reduction in the amount of goods that you can purchase with the US dollar.

And thus, you have a reduction in the overall VALUE of the dollar.

So, with the REAL value of the dollar (based on purchasing power) undermined, and a overall reduction in employment in the US (undermining domestic spending, and thus, domestic employment) You create a situation where the only thing keeping the value of the dollar at levels that still have purchasing power, is investor confidence in the dollar as a safe haven for wealth.

This is not necessarily a PROBLEM, unless you begin DELIBERATELY undermining the value of the dollar on PURPOSE.

And one surefire way to do this, is to start making MORE of it.

By the Billions, and Trillions.


You see, the value of the individual dollar is a set percentage of a sum total of goods/services that are available in the united states.

And, as the total amount of dollars in circulation increases, you devalue each individual dollar by a proportional amount of how much more (percentile) that you have added to the total money supply.

This also would not be that bad of a situation, if (AND ONLY IF) Domestic wages kept up with inflation.

Which they did not.


So, as the value of each individual dollar decreased by a large amount, people in the US were still making the same numeric amount of dollars.

Thus, overall what they could purchase was diminished, and since they could not buy as much, companies could not afford to hire as much, and people got less money, etc, etc, etc...

So, while it may seem that the market bottomed out around March 10th (2009) and is beginning to resuscitate...

What you are ACTUALLY seeing, is a temporary increase in spending (and associated increase in confidence based investment) fueled by the Infusion of new money into the economy.

Which is precisely what the legislators wanted.


The only problem, is that this infusion of CASH into the system is merely agitating the original condition that CAUSED the economic crash.

That, of Currency Inflation.


So, my prediction:

The market will rally up to maybe (8500DJIA) and then, as the currency circulates into the economy, and business begin readjusting their prices to accommodate the decreased value of the dollar (based on inflation) the market will resume its downward plunge.


There are already talks in Washington of Another spending bill.

A bill designed to alleviate "Toxic" assets from the books of investment firms, and hedge fund managers.


The problem with this, is the same problem that caused our little mess here.

Buy having the Federal Government purchase bad debt, with money that they DON'T have and have to borrow, they are FURTHER devaluing the dollar.

And if they FURTHER devalue the dollar, then OTHER "Non-Toxic" assets (like mortgages) will BECOME toxic, as people are able to afford less and less, higher up the Fiscal "Food Chain"

So, by purchasing these toxic assets, The US Government is ENSURING that MORE "Assets" will become "Toxic"


-Redshift the Rave Rabbit