I had thought to begin this column with a mea culpa, as on Dec. 2, 2002, the NASDAQ index briefly crossed the 1,500 barrier to peak at 1,521.44 before being again washed away by the Great Bear tide. After checking the archives, however, it turned out that my August prediction was that the S&P 500 would see 500 before 1,500. So forget the apology, I’m still on target like Luke Skywalker in the Death Star trench.
Why should you care about any of this? Because even if you belong to one of the 50 percent of households which don’t own equities, you are still profoundly affected by the financial machinations of the Political-Financial Cabal if you happen to have a job, a bank account or a house. And unfortunately, due to the idiotic and economically ignorant arrogance of this PFC, America is in for a very hard time in the coming decade and beyond.
In the immortal words of BTO, you ain’t seen nothing yet.
Here’s what happened. In 1996, facing the prospect of a bust cycle which was naturally following the expansion of credit that fueled the ’90s boom, Greenspan and the PFC chickened out. They chose to try avoiding the consequences of their past actions and delay the oncoming recession by massively expanding the amount of Federal Reserve credit available to banks, which is best understood as selling money for a penny a dollar. The banks loaned the money to telecoms, Internet startups and people refinancing their houses, thus creating a boom on top of a boom which resulted in the biggest financial bull market of all time.
This is why your house is worth twice as much as it was 10 years ago. It’s called asset inflation. Don’t get used to it.
Since the bust began in March of 2000, the three major markets have declined from an average price-to-earnings ratio of 67.43 to 28.87. This has led all the media cheerleaders to hope that the worst is over. But it isn’t. Prior to the Great Crash of 1929, the Dow’s P/E ratio was only 32.6, while the historical market norm is a ratio of 14 and the average bear-market bottom is reached at 7.6. In other words, even if one somehow concludes that the biggest boom of all time will not be followed by the biggest bust of all time, the markets still have to fall more than they have already fallen simply to remain in line with the expected averages.
Here’s another interesting indicator. In January 1980, one ounce of gold could buy the Dow – then at 820. In January 2000, it took 41 ounces of gold to buy the Dow at 11,723. Only three years later, it takes just 22 ounces of gold to buy the Dow at Friday’s close of 8,131. Dividend-yield analysis also supports these negative trends – the increase from 1.2 to 1.96 percent is still nowhere near the bottom average of 8.3 percent.
It is important to understand that this ongoing financial catastrophe is not only predictable, but inevitable. It is a natural result of paper money, which, since its introduction to the world in 1690 by the colony of Massachusetts, has always gone through a natural life cycle of credit-fueled expansion followed by inflation leading to either default or hyperinflation. In fact, the dollar can even be considered a successful anomaly, as its adoption as a global standard of trade allowed it to exceed the average lifespan for a paper currency.
It’s hard to know exactly how the imperial dollar will die. It is possible that the gold-backed Islamic dinar may replace the dollar as the global trading standard or that China or the European Union may seize the moment to offer the world a stable replacement currency. What I do know is that no amount of economic stimulus, be it tax cuts, spending increases or interest-rate cuts, will allow America to avoid paying the piper for four years of spectacularly ill-timed malinvestment.
The party is over. Prepare yourself.
If you are interested in reading in more detail than this column space can provide, I cannot overstate the importance of “A History of Money and Banking in the United States” by Murray Rothbard. Another excellent resource is 321 Gold which features the incredibly insightful essays of the invaluable Adam Hamilton.
