Dollar Swaps

Earlier this month, the Fed established $600B of swap lines with European banks, where the local currency could be exchanged for dollars. Yesterday, the Fed announced similar swap lines with Brazil, Mexico, Korea, and Singapore, at $30B each.

I understand that dollars are in scarce supply which causes problems with foreign banks paying their debt to U.S. banks. In essence, the swaps would appear to be an indirect way to further replenish the capital base of U.S. banks (by giving dollars to foreign banks who owe U.S. banks money), while the Fed ends up holding on to up to $700B in various foreign currences that could easily continue their decline.

I have a suspicion this is where all the newly minted currency since September is going.

Fed Cuts to 1%

In its ongoing effort to reinvigorate the economy, the Fed cut the overnight rate by 50 basis points to 1% today. Liquidity measures so far have done little to reverse the deflationary course for houses, stocks, commodities, and foreign currencies, though arguably it might be slowing the process down. Still, the Fed would be remiss not to exhaust its options, and so we fast approach the "tyranny of zero."

Carry Currencies

This post considers how the foreign carry trade affects cash value. To repeat, the carry trade is where a bank borrows money at low rates to invest in higher yielding loans; the foreign carry trade is where banks borrow money from a country with low interest rates, exchange it for a local currency where national interest rates are higher, and then lend that out.

Currencies which underwrite the carry trade will be referred to here as “carry currencies,” vs. “exchange currencies” which form the second leg of the transaction. To be a carry currency, interest rates must be suppressed by the monetary policy of their national central bank, such that it becomes an attractive source of capital for foreign investors. This is true of the yen since the early '90s and of the dollar since 2002.

Now, what we see in this credit meltdown is carry currencies strengthening, and exchange currencies falling off a cliff.

The strength of a carry currency would be similar to the strength of deposits in a credit crisis: e.g. savers are owed their deposits regardless of the performance of the loans they underwrite. Failed loans are a loss to the banks; but even uninsured deposits would only be threatened if the bank outright fails. Likewise, banks still owe back any foreign loans they take as capital regardless of the performance of their loan portfolio. So a carry currency is a safety bet, particularly if governments seem eager to bail out the banks.

During boom times deposits suffer because greater yields can be had elsewhere; and likewise anyone holding a carry currency would be better off converting that to an exchange currency and depositing it in a foreign bank at a higher interest rate.

A general problem for the exchange currency in this system is that if the carry nation is big enough, like the United States and Japan, then exchange nations like Europe would have a huge source of capital to over leverage themselves with risky loans. Whereas American banks had to go scrounging for commercial paper investors and securities buyers to expand their lending portfolio, the Europeans had two of the world’s largest economies to draw their capital from.

How the foreign carry trade plays out will be commented on as it unfolds.

The Foreign Carry Trade

The carry trade is simple in principle: borrow low and lend high. Pay depositors 3% on their savings so you can lend it out for mortgages at 7%. The 4% difference is profit for the banks. Internationally, it is a similar principle, and may explain some of the bizarre relationships now being seen in world currencies.

It goes something like this: If the Japanese central banks sets its lending rate at or close to 1% year after year, and if the European central bank sets it closer to 5%, and the two currencies stay fixed against one another, then wouldn’t it be sensible to borrow from a Japanese bank where loans are going to be cheaper, convert the yen to euros, lend out the euros at the higher interest rate, then when the loan is paid back in euros, convert those euros to yen, and pay back the Japanese bank?

That works, so long as (1) all currencies involved are readily available in a fluid market, and (2) everyone is paying back what they borrow, and (3) currencies are holding their relative value against one another and exchange costs aren't too high.

In a liquidity crisis, say the Japanese banks are holding on to yen because they are facing currency crises of their own, and don’t want to lend to foreign banks out of a general lack of trust in the creditworthiness of the system, then the yen becomes increasing scarce, and begins to skyrocket on foreign exchange markets in a scramble to make repayment obligations.

While Japan has operated in a system of suppressed interest rates for decades, for America this has been true as well for the better part of this decade, and the dollar has become a carry currency. In other words, American banks have lent to foreign banks in dollars, and the foreign banks converted those dollars to, say, euros, and then lent euros out at higher rates to whomever for whatever, and when paid back they converted euros to dollars and paid back U.S. banks. Now as dollars are becoming scarce, it’s value in foreign exchange markets is quickly rising, which may be behind the Federal Reserves recent printing campaign, and its pledge to supply foreign banks with all the dollars they ever need with their own currencies as collateral.

The simultaneous plummeting of most world currencies against the dollar, except the yen which is swinging but mostly rising, suggests we are in the beginning phases of a collapse of an overleveraged international carry system. Details will be commented on further as the process continues.

8,000 Territory

Earlier this month, right after I made the 10,000 call for the DJIA trend line, and right after the $700B bailout bill was passed, the DJIA plummeted right through the 9,000s, and this week was hovering in middle 8,000 range. I'm not anticipating much steam in any recovery in to the 9,000s again.

On the other hand, last week Warren Buffett made a bottom call, reportedly moving all of his personal holdings from Treasuries to the stock market, and advising everyone else to do the same. Many feel this decline still has a little ways to go. There would be no doubt in my mind there is a long way to go, were it not for the spectre of inflationary printing.

$350 Billion Expansion of Base Money

The base money supply, according to this graph from the St. Louis Fed, had been holding steady at $850B for the better part of the last two years. Since September, it has shot up to $1200B—which is a whopping 40% increase in base money. Are we at the verge of the Wiemar Republic?

For now, the U.S. dollar is strengthening against: stocks, houses, nearly all commodies, the euro and nearly all world currencies except the yen, and now recently it is even strong against gold. Gold is trading strongly, it is just that it is priced in dollars, and the dollar is trading more strongly. The U.S. dollar seems to be in high demand worldwide. In short, we have both deflationary forces though the collapse of credit, and inflationary forces through printing in play.

My general investment strategy remains unchanged. With charts like we are seeing now I cannot advocate a cash position, but I still hold the belief that deflationary forces will outweigh inflationary ones as this drama unfolds.

MMIFF'd

Yet another bailout instrument from the Fed is announced today—the Money Market Investor Funding Facility—offering $540B for struggling money market funds now tight on capital. The word is they are having problems honoring withdrawals in a timely way due to difficulties redeeming commercial paper in the current financial environment.

Fed Printing

This uptick in base money supply is no longer dismissible as an artifact or a random miscalculation, and seems to be trending skyward.

For the past year the Fed has been trying to save markets by enhancing liquidity. As this economic machine has reached credit exhaustion where liquidity measures have little further effect, now the Fed is turning to printing to unfreeze the economy. If they print enough, the U.S. dollar collapses. This is not a safe market for anyone or anything.

The solution to the current market freeze is to lower prices. There is only one alternative: to inflate the dollar.

German Bailout

In a situation closely paralleling the U.S. $700 billion bailout, the Germans today passed a similar plan for $675 billion (480 billion euros). Other European nations are likely to soon follow suit. The European recession which had been lagging the U.S. situation by a few months has now just about fully caught up.

So Who's Fault is This?

Now that we are playing the blame game—and fingers are pointing at Wall Street—who really brought all this on? Greedy Wall Street types were just acting according to their nature when presented with the opportunity. This doesn't wholly absolve them, but their actions were predictable given the circumstances. Who gave them this opportunity? Without the 1-2% overnight rate set by the Greenspan Fed from early 2002 to late 2004, the mad scramble for credit that resulted in the mortgage bubble would unlikely have ever started. Securitized loans and structured investment vehicles (SIVs) arose en masse to take advantage of the situation, pouring in to the system ever increasing cheap credit relative to savings and GNP—and thus price disequilibrium.

Real estate and stock prices returning to their equilibrium values should be welcome. Those whose financial security depends on disequilibrium prices are the same ones demanding taxpayer bailouts.

Bank Announcements

There were a lot of announcements by banks today. The Treasury Department made some announcements how it plans to begin the bailout, which is pretty much in accord with what the bill states. European leaders announced an aggregate $2.3 trillion rescue package for the banks, where each country pledged a certain amount to its own banking system. The actual money has yet to be appropriated. Bernanke pledged as many U.S. dollars as foreign banks want. I'm not wholly sure of the significance of this but will keep eyes peeled for financial analysis of its relevance. Market traders were not disheartened by the news today.

UPDATE: it seems the Treasury Department is moving away from the idea of exchanging toxic securities for Treasury bonds, and toward purchasing preferred stock in banks. Both hand taxpayer money to the banks who created this mess; however the preferred stock might hold value better than securities. The whole idea of "free market" in the financial industry is such a laughable notion by now that I don't find nationalization of the banks particularly troubling. So who knows... this change of policy still fits to the letter if maybe not quite the spirit of the $700 bailout bill.

Otherwise there is a mystery brewing as to why U.S. dollars are in such urgent demand in Europe.

Market Amplitudes

After a week of huge downswings, today the DJIA lept 936 points, or 11%, which was the biggest point gain and percentage gain in its history, and other markets followed suit. What this means is the amplitudes of the sinusoidal variances are growing. This is not a sign of market health.

Price Disequilibrium Theory

Classically, prices are driven by supply and demand. The Austrian School of economics adds the influence of money supply, as defined by the sum of printed currency and credit. This post will consider the influence of all these factors on price stability and instability.

The present theory of pricing begins with the assumption that the sum of all prices for all goods, services, investments, and anything for sale in an economic system is exactly equal to the money supply. This assumption does not require that all sellers conspire to price their wares such that the sum total equals the supply of printed currency and credit. Rather, the system resolves itself spontaneously: if prices are set above the relative demand for the item, then velocity of sales will slow such that inventory builds and prices are forced downward to clear the excess supply.

Explaining it in mathematical terms, we start with the identity that money supply (M) equals inventory (I). This position was defended earlier in the post "The Cash-Inventory Equivalency." Inventory then can be broken down to the sum of all classes things for sale, with a desire coefficent (d), and numerical supply for each category of goods. The fraction of money supply that goes for each subcategory (x) is d(x)*M. This would be divided by the number of goods in each subcategory to calculate the price per item: or d(x)*M/I(x). This is the equilibrium price for the item so long as demand, money supply, and inventory remain constant.

Now sellers are free to set prices at whatever they choose, but if they price it above this equilibrium point then unsold inventory will start to accumulate.

If money supply were only printed currency, then if money supply were inflated by printing bills, then equilibrium prices will adjust upward to reflect the increased money supply. A printing campaign could wreak havoc on bonds, deposits, and other kinds of savings, but the active elements of the economy simply adjust to the inflationary pressures by raising wages and prices.

Now, let us examine how prices may be pulled from an equilibrium state through the injection of credit. Consider the truism that money supply is the sum of printed currency plus credit. If banks start lending out their deposits, but those deposits are still fully available for withdrawal, then by definition there is a fractional reserve banking system. If regulators or legislation dictate that fractional reserves must be kept at 10%, then if $1000 is deposited in a bank, then money supply is increased by 9 times the deposit. The bank, who must keep in reserves 10%, or $100 of the deposit, can still lend $900. After the $900 is borrowed and spent and redeposited in another account, then 90% of that, or $810, can be lent again, and so on, until that $1000 expands the money supply by $9000.

So in a 10% fractional reserve system, assuming banks hold on to all deposits, the money supply is expanded 10-fold through lending, and price equilibrium adjusts to the reality of fractional reserves.

The problem with fractional reserve lending is that it leverages money, and any kind of leverage increases sensitivity to economic downturns. What might otherwise be a small downturn becomes a financial catastrophe if one is over-leveraged. Economic stability in a fractional reserve system requires a government willing to bail out banks in these sorts of events. However, when things are going smoothly, fractional reserve banking does not cause price disequilibrium. It merely expands the money supply by the reciprocal of the fractional reserve.

However, when cranks are pulled and buttons pushed on the financial machine such that credit is piled in to the system in an unsustainable manner, beyond the level of the deposit base plus fractional reserve credit, to the point where the system cannot borrow any more regardless of how available the credit is or how favorable the interest rates are, we have the essence of price disequilibrium. Here, money supply is inflated by unsustainable levels of credit, where prices break from equilibrium to readjust to the expanded availability of credit. Predictably, this increase in the money supply is only temporary, and as the credit expansion is paid back or defaulted on, and the burden of paying back loans is such that now credit cannot be lent to match the peak rate or even the baseline fractional reserve rate, then prices of goods, services, and asset investments must fall to a new equilibrium that reflects the contracted money supply.

This post defines price disequilibrium and its general underlying mechanism. Further posts will consider the limits and timing of price shifts and the related phenomenon of speculative runs on commodity and asset investments.

Sinusoidal Variances about the Trend Line

Today is the one-year anniversary of the DJIA closing at its highest point ever, at 14,163. It had gone higher than that—the 52 week high is 14,279.96 in midday trading. As of this writing, it is a full 5000 points off from peak, struggling in the low 9000 range. 8000 territory is just a hiccup away.

There have been wild fluctuations of peaks and troughs on this downward pathway, and there is always plenty of financial analysis why it is up one day and down the next. Try as I might to resist, on occasion I succumb to correlating an up or downshift with a current event.

What matters, though, is the trend line. The market, being an imperfect tool for knowing the trend line precisely, will predictably cycle around it in a sine-wave fashion, with day traders knowing this and going long and short to play off of these inevitable rhythms.

Despite the day-to-day financial craziness lately, the DJIA trend line over the past year has been very stable, falling constantly at a rate of—eyeballing the chart—just under 3000 points per year, with it bucking that trend only in the last few days in a serious downward shift. Crashes tend to start slow and accelerate in the middle—and then what happens at the end varies case by case, so it is possible we might be entering the accelerated middle phase.

So, I welcome financial commentators to explain why the trend line is dropping at a rate of almost 3000/year (with peak-to-trough being 2000 points higher than that). If they say it is because of the credit crisis, then I’d ask if there is any reason to believe the current trend will not continue for the next year. If they answer because the financial industry is getting a bailout, then I would say, lets get some popcorn, kick our feet up on the desk, and watch the action as it unfolds.

But I’ll try to avoid getting excited about short-term fluctuations, including this current one. This is a deep spike downward, but I anticipate there will be some recovery before proceeding with its steady downward course.

ADDENDUM: ...and what an anniversary this was, with an already bottomed-out DJIA dropping an additional 7% to 8579, mostly in late-day trading. Not long ago any bottom calls in the 8000s were considered radical, and there is plenty of steam left in this bust.

National Debt Passes $10 Trillion

Congress is wasting no time taking advantage of the new, recently passed, debt ceiling. And Treasury Bonds I hear have been selling like hotcakes at bargain interest rates.

In "a sign of the times" the Times Square national debt counter has run out of digits and cannot handle the newly-dinged $10 Trillion that taxpayers are now on the hook for. As a stop-gap, the dollar sign will be changed to a one. Almost more ominously, not one, but two digits will be added.

I would hope maybe we would think about... once this economic crisis settles... of taking away a couple digits.

IMF Predicts a Global Economic Downturn

All I gotta say is... isn't it a little late to be making this prediction? How about people make their forecasts before these things actually happen? Academically popular theories miserably failed to see this economic course of events. The Austrian School has predicted it for years and has been telling us exactly why.

Multinational Rate Cut

The central banks of the U.S. and Europe today dropped overnight lending rates by 50 basis points. For the Fed, that is now 1.5%—the first change since April, where it had been steady at 2%. ECB's new rate is 3.75%, Canada 2.5%, UK 4.5%, and Sweden 4.25%. China lowered its rate by .27%, and Japan, who has already been through the credit unwind, kept rates the same.

Given current deflationary pressures, this step is not surprising. Now whether it will help, or if these liquidity measures are just kicking a horse already dead from credit exhaustion, remains to be seen.

Fed to Buy Commercial Paper

Commercial paper refers to short-term bonds used by corporations for quick cash to cover temporary deficits. Typically it has a term of about a month with 3% interest, and historically has been regarded as "safe as cash."

Auction rate securities are one kind of commercial paper discussed before, which were floated by the financial industry, who cycled short-term bonds at low rates to fund long-term mortgages at higher rates. The failed auction-rate security system is now subsidized by TAFs, PDCFs, and TSLFs, arranged by the Fed and underwitten by the U.S. tax base.

Today, the Fed announced it would start to buy commercial paper from outside the financial industry. This market is drawing fewer investments from fund managers, and American businesses need it to operate. This was just an announcement; how much the Fed was willing to buy per business or aggregate was not disclosed.

Public Law 110-343 "bonuses"

It's like twenty bills in one! The Emergency Economic Stabilization Act came bundled with such an eclectic array of additional legistlation that it defies summary. Here are a few of the measures that were tied in to the bailout bill:

Most relevant would be increases of FDIC deposit limits from $100,000 to $250,000 until December, 2009.

Then there is a wide array of tax breaks for some very specific and localized interests, which is ironic considering what this bill could cost. Tax breaks for the use of alternative energy and plug-in hybrids stands out, and to those affected by recent hurricanes. Then there are tax cuts for "certain wooden arrows designed for use by children" and plenty of other focal beneficiaries of random tax cuts.

Approximately 20 million Americans will be protected from the Alternative Minimum Tax. It has never applied to me so I don't know much about it.

Insurance parity for mental health and substance abuse treatment services was thrown in; I suppose this isn't wholly unrelated since the government is funding a good chunk of those services now, perhaps it will permit a little "cost-shifting."

So, in conclusion, a lot of deals were made with a lot of congressmen to sugar coat the bill and get this bailout package through.

The Emergency Economic Stabilization Act of 2008

Last Friday Congress authorized a $700 bailout package in hopes to contain the overall economic turmoil from the meltdown of the financial industry, mainly centered around bad mortgage loans. A summary of the legislation is as follows:

The bill is divided in to three titles: The Troubled Assets Relief Program (TARP), Budget-Related Provisions, and Tax Provision. The core of economic rescue provisions is in the first title.

It authorizes the Secretary of the Treasury to purchase "troubled assets" from any financial institution, including the FDIC, and also from foreign financial authorities and central banks. It asks the Secretary to manage assets in a way that minimizes costs to the taxpayer, in terms of their purchase, holding, and sale. Purchase premiums should be in accordance with credit risk, and assets cannot be bought for more than their cost to the originating firm. For mortgages held by the Treasury Department it mandates they be managed in a way consistent with the Hope For Homeowners Act including reductions of loan principles and interest rates, and term extensions; as well as loan guarantees and credit enhancements to facilitate loan modifications. General limitations are advised for executive compensation and golden parachutes, and recovering bonuses and incentives from financial firms participating in the program. All transactions under the authority of this bill must be reported to Congress in a timely manner, and an oversight committee must be appointed.

$250 billion in funding is immediately available to the Treasury Department. An additional $100 billion can be authorized by the President, and an additional $350 billion can be authorized by Congress with fast tracking provisions.

The upper limit of federal debt is expanded to $11.3 trillion.

European Resistance

In the face of similar problems facing its financial sectors, including a credit freeze and banks on the edge suffering from mortgage loses, the Europeans are showing more restraint than the U.S. in bailout measures. Their solutions so far of deposit guarantees and bans on short selling are trivial compared to the hundreds of billions of dollars flowing out of Congress.

I don't think this is because Europeans support laissez-faire free market principles more than Americans do—rather, I think getting the member nations to agree on who-pays-what will be more of an obstacle than with Congress.

Further TAF Expansions

In an effort to boost liquidity in the system and reverse the ongoing and persistent credit freeze, the Fed is increasing TAFs again to $150 billion in 28-day cycles and $150 billion in $84 day cycles, which will bring TAFs to an even $300 billion.

Before today, to my knowledge there was $75 billion in 28-day cycles, and $75 billion in 84-day cycles. So today's action increased TAF funding by $150 billion. This action brings the Fed's cycling liquidity to $1160 billion both domestically and off shore, summing up all the citations I've found from news sources.

We'll see if this unfreezes markets. When a system is credited out, no amount of cheap liquidity is going to increase lending.

BoA Settles Countrywide's Loans

While talks about Bank of America acquiring Countrywide have been in consideration for awhile, it seems I missed the actual event, in July, for $4 billion. That one seems to have slipped under the radar. Its stock (BAC; the five year spread is probably the most informative) took a pounding in July but has recovered. Today, it sounds from this article that state attorney generals are pressuring a reluctant Bank of America to abide by the loan modification terms of the mortgage rescue bill passed in early August and to be enacted starting this month. Given the scope of the problem, the $8.6 billion price tag seems small. In related news, today BoA announced a 68% decline in profits from last year, and an issuance of 10 billion in common stock to firm up its balance sheet.

10,000 Territory

Periodically I'll keep note of the correction of stock market values, and thought I better post the DJIA is trading squarely in the 10,000s—in a way that I don't think will be going back in to the 11k range for any sustainable duration any time soon—before it hits the 9000s.

As it dipped below the 11,000s last July we saw bailout after bailout keeping things afloat. Ironically, the DJIA closed at a multi-year low yesterday after the mother-of-all-bailouts was passed. I don't see what they have left when it hits the 9000s—but I won't be surprised if they surprise me. I need to watch what I say... there is always the H-word.

$700 Billion Bailout Passes

Last Monday we saw the House make a laudible effort to represent their constituency responsibly and vote against a taxpayer bailout of Wall Street. It was a nice effort, but financial power asserted itself Wednesday with the Senate vote, and again today with the House vote where it passed by a sizeable majority of 263-171. It was signed by President Bush about an hour later. Some politically expedient amendments were added in the Senate version to give House members an excuse for changing their vote.

Now, if the farmer leaves foxes to guard the chicken coop, and all the chickens mysteriously "disappear," I question the wisdom of bailing out the farmer for being dumb enough to let foxes guard the chicken coop, but at the same time one doesn't want to let the farmer starve. I can see the need sometimes to bail out duped farmers. But what I cannot see is bailing out the foxes, which is exactly what this bill does.

It was suggested the House "caused" the Wall Street crash of 777 points last Monday by voting against the bill—however the DJIA downward trend line has been steady since its peak last October. It was also suggested that without the bailout, credit will freeze and government and private operations wouldn't be able to access necessary credit lines to make payroll—however the Fed had already injected an additional $630 billion liquidty in to the system last Monday.

So, I can understand the need to bail out retirement funds that are in jeopardy. But I cannot agree with bailing out the system that caused the problems in the first place. This bill bails out people and organizations that brought us this financial turmoil.

I will comment on details of the bill once the dust settles.

Fighting Over Wachovia's Carcass

The acquisition of Wachovia by Citigroup is not going as smoothly as planned. Today, Wachovia sold itself to Wells Fargo for $15 billion dollars. Citigroup wants to keep the deal arranged by the FDIC, where it acquired Wachovia's assets for $2.2 billion. Wachovia obviously thinks it is better off with the Wells Fargo deal than a government seizure. I'm pretty sure Wells Fargo is anticipating the passage of the $700 bailout bill by the House this afternoon, where Wachovia's bad mortage debt will be bailed out with taxpayer money. At this time, the matter is unsettled.

ADDENDUM [10/4/08]: And the winner is... the lawyers! Looks like who gets Wachovia is going will be taken to court. Since Wells Fargo is now subsidizing Wachovia, Citigroup just has to play a waiting game until that become unfeasable and the FDIC has to formally seize Wachovia. [10/6/08]: The FDIC is going to have to be more authoritative about its "seizures" from now on; the Citigroup injunction against the Wells-Wachovia sale was turned down in court. The Fed is urging the two banks to come to an agreement. [10/9/08]: Wells Fargo prevails. [1/1/09]: The purchase of Wachovia by Wells-Fargo was finalized today for $12.7B.

Bailout Bill Sails Through the Senate

The pleasant surprise last Monday—the defeat of the $700 billion Wall Street bailout by the House (205-228)—remitted to politics as usual today when the same piece of legislation was crafted by the Senate and found easy passage there (74-25). So it returns to the House shortly. Hopefully, representatives who voted against the bill before don't change their convictions.

September Postscript

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.