For the first five days of trading of 2009, the Dow has fallen from opening around 8800 to closing today at 8750. Gold’s down some $40 too as its Comex price has fallen to $844 an ounce. No Earth shaking moves in these first few days of trading, but the investors are watching each other and trying to gauge the mood. A lot of people are expecting 2009 to be an up year for stocks. The logic is that last year was the second most horrible on record, so this year should see a big bounce after a big fall.
As for me, I feel that making a prediction about how stocks will do in 2009 is a luxury I can ill afford at this point. It just seems so far away and there are so many unknowns that going to have to develop over the course of the year before a clearer picture emerges. Markets are, after all, made of people, and people are unpredictable. At this point in I feel like I’m watching the Super Bowl warm-up show. I’m sure the hardcore football fans will know what I’m taking about- that show that comes on before the Super Bowl where the sport’s commentators fill up airtime talking about all of the players, their strengths and weaknesses, and the game plans they tend to use. Those shows take almost as much time as the Super Bowl itself, because you can endlessly debate how the teams should match-up, but no one will really know until after the fact how they will match-up.
Well, here’s Preston’s pre-Super Bowl commentator show. The players that are going to be squaring off this year are many. We’ve got “Helicopter” Ben who’s certainly proven to be true to his nick name. He’s showering money down upon anyone and everyone who could possibly ask for it. Recently he went so far as to essentially eliminate short-term interest rates and he’s said that he won’t rest until he uses more newly created money to crank down the long-term interest rates too.
Joining Ben’s team are two new players, Barack Obama and Timothy Geither. Both are talking a big game. Obama in particular is saying that he wants to run up the deficit score another trillion dollars over the course of this year and “for years to come.” That’s quite a powerful inflationary combination. The ultimate Keynesian fantasy of monetary stimulus complemented with a strong fiscal stimulus. The classic team of the banking system and government working in combination. One makes the money and the other spends it. Together they represent a potent inflationary team that is dedicated to pumping up the stock market.
But the inflationary team is up against some tough competition this year. The biggest concern I’d have for team inflation would be that the other nations of the world refuse to soak up the dollars they are going to throw off. In particular, I’d be concerned about China. China has been the primary consumer of newly created US Dollars over the last few years, but lately, according to a NY Times Headline, China Losing Taste for US Debt. If that’s the case, then I’d say this inflationary team is about to meet it’s match; the Fed can print all the money they want, but if people don’t value it, it’s not going to do a damn thing but cause spawn runaway inflation.
Obama seems to feel that he’s stepping into the shoes of Roosevelt, but Roosevelt ran against Hoover by saying that his policies of taxing and spending were reckless. It was only after he gained power that he developed a taste for it himself. Obama’s coming onto this stage not only broadcasting his love of inflation, but just how much inflating he’s willing to do. For a President-Elect to announce to the world that he intends to run trillion dollar deficits “year after year” is simply unheard of and I’m sure it’s quite a gut-check for the current holders of our debt. Are they really going to just stand by and continue to loan us another few trillion?
Inflation has always needed a bit of subterfuge to exist. In his book, Human Action: A Treatise on Economics, Ludwig von Mises wrote:
Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes.
He didn’t get that exactly right. It would seem that people tolerate a little inflation far more than Mises anticipated. Still, I doubt the Fed is going to be able to keep inflationary expectation well “anchored” with these trillion dollar deficits coming down the pike.
And if our foreign lenders decide to stop loaning us the money, then the whole inflationary plan will be wrecked. Then, and only then, will Ben, Barack, and Timothy, have to contend with how to get us out of this mess without the trusty tool that’s worked time and again since the 1980s. In that eventuality, fasten your seat belts because it’s going to be a bumpy year.
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