What a month! Since September 1, the credit economy was revealed for what it is: without substance, a mirage in desert. Previous assurances by Paulson and Bernanke that the U.S. financial system is sound have proven to be horribly misguided if not complete lies. Bailouts are now measured in the hundreds of billions, and evidence of bailout fatigue was shown in the last house vote. On this blog, up to three posts per day were hurriedly written during breaks at work. There has been so much news, encapsulating it has been my focus lately, however it is not the intention of this blog to echo news reports but to advance a theory that the value of cash is distinct from the health of credit markets. Summaries of news events are intended to capture relevant data, either supporting or refuting the theory.
To summarize: as credit markets contract, which they have, and the inventory of the economic system remains about the same, then prices will have to fall to capture what cash in the system is left, unless money is printed to compensate for the loss of credit to the total money supply. Now, the value of cash remains at the mercy of those who operate the printing presses, however I have argued those in power will work to preserve the strength of the dollar for their own economic self interest.
The month of September offers evidence in favor of this position. It was a calamity for the credit industry, and both the public and the congress have shown resistance to extreme bailout measures. Through all of this, the U.S. dollar has held steady against general investment classes—notably real estate, stocks, oil, and the euro—and I think it may be fair at this point so say it has even advanced slightly. Concurrent with the dollar, treasury bonds and gold have traded strongly as well. September is not proof of the theory, but offers a little factual support.
Ideas presented on this blog are heavily rooted in the Austrian School, but differ in their overall attitude about the strength of cash. The Austrian School of economics (mostly situated in Atlanta, GA), has predicted the collapse of the credit economy for years. The Austrian School also predicts the final outcome of the recent credit expansion, where investments are justified by their dividends rather than the silly expectation of permanent capital gains. When all is said an done, the DJIA will be trading close to the 6000 range, and real estate will fall on the order of 50% from peak, assuming there is not a hyperinflationary event.
What the Austrian School was unable to conceptualize was how far this credit expansion would go, and when the collapse would occur. Further theoretical developments here will address these questions. But if October is anything like September, attention will stay on current financial events.