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Viewing the World Economy Honestly and with Practicality

Dec 01, 2009

Let us suppose that Zimbabwe had a stock exchange and that its level two years ago was 1,000.

Then inflation went through the roof, and it took a trillion Zimbabwe dollars to buy a loaf of bread today.

Question: What would be today's value of one share of stock in a corporation that owned something of real value, such as land or mines?

It is likely that each share would be worth more than a trillion dollars, whereas two years ago it might only be worth a few dollars each.

So if the Zimbabwe Stock Exchange shot up from 1,000 to 1,000,000,000,000, would you be able to retire on Luxury Street? If you bought one share of stock for $3.00 (the price of a loaf of bread) and later sold it for a trillion dollars (the price of a loaf of bread at the time), you made a profit of $999,999,999,997. Right?

Okay, that's a stupid example, but I'm trying to make a point. I am saying that shares of stock are like any other item of value. When a nation suffers from "inflation," it means that all prices of things go up--including shares of stock.

That is why the Dow goes up every time the dollar's value goes down. Since last March, the dollar has gone down about as much as the price of stocks have gone up. But has anyone really made any money out of it, in terms of real buying power?

I read an article a month ago (which I cannot find any more), which showed a chart of the Dow priced in terms of gold, rather than in dollar amounts. Basically, the Dow had gained little or nothing in terms of gold. Gold is the real historical constant, and all currencies simply go up or down relative to gold, it is more accurate to measure one's wealth factor in terms of how much gold your assets could buy, rather than how many dollars those assets are said to be worth.

Of course, if you made a 35% profit in the stock market since last March, then you broke even in terms of gold. In other words, you could have taken that same investment money and put it in gold, and you would have made the same "profit."

The real question is whether or not you kept pace with the overall rate of inflation. If you think in terms of real estate, of course, where the prices are deflating, then you have done quite well, because your assets could now buy a much better house than before. There are still a lot of bargains out there, because there is a shortage of money on Main Street, and stores have to slash prices in order to sell their goods and services.

But with the creation of a trillion dollars this past year of new money, there is talk of hyper-inflation. Fed chairman Bernanke is wanting to remove much of that money from the system by next June in order to prevent hyper-inflation. People say that this will crash the market. I'm not so sure.

We have two economies in America: Main Street and Wall Street. There is a depression on Main Street, with a shortage of money. There is inflation on Wall Street with that trillion-dollar injection of money. We have to start thinking on two levels, instead of viewing the American economy as a single unit.

Sure, there is the so-called "trickle-down"theory, which is the idea that if you make the bankers wealthy, they will spend money and some of it will trickle down to Main Street. But in today's world, where the big banks are using most of their money in "investments" and currency trades, it tends to keep revolving in a circle among the banks themselves, with very little of it trickling down to Main Street.

The consequence of this policy is that the middle class is being destroyed, and the gap between the rich and the poor is increasing so fast that we are beginning to resemble third-world countries. The real economic strength of America has been its large middle class. That has distinguished us from third-world countries up to now. The factories and auto corporations had a lot to do with expanding the middle class, particularly among minority groups in the past few decades. But when someone up there made the decision to make China the world's factory, and America the world's consumer, it was inevitable that eventually there would be a huge transfer of wealth from America to China. Ths created a great middle class in China and destroyed the middle class in America.

When the American middle class ran out of jobs and money, they began to stop buying those goods from China, and this is hurting the Chinese middle class. It's like killing the golden goose. The inevitable consequence is that the dollar goes down in value, making goods from America cheaper to export, and imports more expensive. It is nature's way of balancing things out. The problem is that there seems to be a political agreement to prevent this from happening.

That agreement is being broken by our government economists as they work to devalue the dollar; and China is angry with us for doing this. But stopping this devaluation would be like trying to build a wall against a 300-foot tsunami. It simply cannot be done. Sooner or later, the laws of economics take on a life of their own and thumb their nose at secret agreements.

Of course, the backwash of this tsunami is that when the American consumers stop buying foreign goods (when they become too expensive), then those other economies begin to crash as well, and their currencies drop in value. The wave goes back and forth across the ocean, destroying everything in its path.

It really all started with this religion of "free trade," which is great for Wall Street and bad for Main Street. The corporations were able to get cheap labor from across the sea, and they made a lot of money doing so. Congratulations were given, and large bonuses were paid. But in doing so, the corporations were eroding their own foundations, because ultimately their customer was primarily the American consumer who lost his job when it was "outsourced" to another country.

"Trade" needs to be FAIR, not FREE. Governments should negotiate to make exports and imports roughly equal. This is the only way to avoid the long-term collapse of world trade such as we see today. We should not send ships empty to China and return them full of cargo. That kind of "trade" can only end in disaster in the long run.

The world economy is still not bad enough to abandon the "free trade" mantra, but it is getting there. When it does, you will start to see trade wars and "beggar-thy-neighbor" economic policies. The Titanic hit the iceberg in 2007, and the ship is going down, even if it takes some time to sink. There is no way to plug the hole in the derivatives market. The band plays on. The President orders us to move the furniture to another deck. The government life boats are too few to handle everyone. Not many people are self-sufficient enough to look for jars, balloons, and tables to construct their own life boats.

It seems that most Americans today have drawn up their own Declaration of Dependence, vowing to depend upon the government for everything. That is like handcuffing yourself to the railing of the Titanic in order not to fall into the water. Such people are most vulnerable to the winds of change. I suggest a new mindset, not merely seeking independence from government assistance, but seeking to be fully dependent upon God alone. That is called Faith.

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Category: Financial

Dr. Stephen Jones

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