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The Fed - Picture of the Day

Tuesday, October 7, 2008, 3:56 PM

In 1998, the Long Term Capital Management (LTCM) blow-up (aka "the worst financial crisis of all time,") happened.  To fight the pernicious effects of this crisis, the Fed expanded its asset base, which is a fancy way of saying that they pushed a bunch of cash out into the banking system

Well, that crisis passed, and the Fed slowly re-absorbed that excess cash and returned to a more normal rate of exponential money expansion.

Then the Y2K 'crisis' came along and the Fed shoved tons of money into the banking system in anticipation of a crisis that never was.  (Hey, they didn't know that.)  Unfortunately, all this hot money poured onto an already-raging stock market mania and served to fuel the final blow-off that finally burst in the spring of 2000.

Then 9/11 came along, and this was by far a larger shock to the system than either of the prior crises.  Again, money was shoved into the system and then reeled back in later.

Well, then, this picture will help you put this current crisis into context.

Yikes.

The opportunity for this level of monetary monkeying to end up in the hyperinflationary ditch is very, very high.

 

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34 Comments

jrf29's picture
jrf29
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Worst financial crisis of all time?

The 1998 LTCM hedge fund bankruptcy was the worst financial crisis of all time? 

ashtonw's picture
ashtonw
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at the time
I think he meant up until that point, however the Great Depression looks like it was probably worse, seeing that I have no idea what the LTCM crisis was and have never heard of it. 
jdb123's picture
jdb123 (not verified)
Inflation as the solution

Looks like they may see inflation as--the best way out--or perhaps--the only way out----With hyperinflation---the $500K house bought in 2005 and now worth $300K......may be worth $500K again and may solve their asset/liability banking crisis.

Although it may mean that we wake up to the dollar being worth 25 cents ( e.g., Argentina ) but they may see that as the lesser of two evils.....

I don't know---as Chris stated in Chapter 19...."twists and turns along the way" .... buckle your seat belts!

 

 

pinecarr's picture
pinecarr
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Does this hyperinflation indicator change deflation assessment?

Chris, does this latest strong indicator of hyperinflation change your previous opinion about the data leaning towards an outcome of deflation? 

Thanks,

C

  

ninakat's picture
ninakat
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both inflation and deflation?

Isn't it possible to have hyperinflation of goods and services whilst at the same time having deflation of assets?

And what about the following article?

Still no deflation: Disinflation then lots of inflation

pinecarr's picture
pinecarr
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Thanks for link to article on inflation, disinflation, deflation

Thanks for the link to the article, ninakat!  It helps me start to understand the mechanics involved in inflation vs deflation a little better.

-C

machinehead's picture
machinehead
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Benny's Hot Jets

Beautiful graph -- puts it all in perspective. As did Bloomberg's market summary today: the S&P 500 experienced its "worst annual drop since 1937." That bear market ended in a 50% drop (basis DJIA) in less than 13 months (10 Mar 1937 to 31 Mar 1938). Well hey, counting from the peak on 9 Oct 2007, we're tracking 1937-38 pretty well. Only another 15% to go! By the time it's over, it won't feel any worse than a mosquito bite. Laughing

Ben's frantic King Canute effort to fight the tide shows just how far the Fed went "off mission" into market manipulation, instead of tending to its statotory knitting: price stability.

Dr. Martenson has described "The End of Money." If I may be so bold, I think he meant "paper money." Like Dr. M.L. King, I have a dream: "The End of Central Banking."

Bring it, Lord! Money mouth

srbarbour's picture
srbarbour
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According to the newspapers anyway

LTCM was probably the largest nominal fiscal problem in the history of the United States (prior to this year). As a percentage of the actual economy though, it was a laugh.

But newspapers sure like their worsts. Just like we recently had the 'worst drop in the Dow ever!' (in the nominal sense anyway.)

--

Steve

Soulmaster's picture
Soulmaster
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LTCM Crisis
At the time, the LTCM thing was a pretty big deal but the point remains that it was only 1/100 of the amount that will be spent on the bailout.  Also consider the precedent that was set by the LTCM deal; large scale failures will be bailed out.  This of course only works as long as the monetary system is worth something...
nemnaisa's picture
nemnaisa
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Inflation vs deflation

This is how I would argue this debate.  Imagine that all the money in the world is like a giant growing swamp of bees.  It is getting bigger all the time by the actions of central banks (ie, the debt is getting bigger everyday).  Now, currently this swamp of bees is leaving the stock market, real estate and temporily residing in Treasury...so people who are in the stock market and real estate may feel "deflation".  But remember, the swamp of bees (money) is growing by the minutes (ie, debt is not being reduced).  When Gold and Oil (due to peak oil) go thru the roof, I believe that this giant swamp of bees will come back and land on any stocks associated with gold and energy.  Dumping gold and energy stocks right now is like dumping an oil well in exchange for pieces of papers that can be created by the government out of thin air.  How foolish are people.  So prices may decline, but this is definitely inflation in my view.
Judithkitty's picture
Judithkitty
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gold & energy stocks

Hello Pong, This year gold has gone up, and my gold stocks have gone down - way down. Also I've noticed that my energy stocks don't exactly correlate with the price of oil.

So I'm confused by your assertion that "dumping gold and energy stocks right now is like dumping an oil well." Please explain your thinking on this. I'm really curious.

Thank you.

 

Judithkitty's picture
Judithkitty
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Can you explain?

Pinecarr, I tried to understand that article, but it was way beyond me and I really want to understand deflation. Would you boil down what you got out of it for me?

 

nemnaisa's picture
nemnaisa
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gold & energy stocks

Hi Judithkatz,

Well I don't own oil wells...I wish I do because of peak oil. In my view, the next best thing is to own stocks with companies that own and develop oil wells or alternative energies. Once peak oil becomes a public topic, all stocks related to energy will be swamped by the public, institutions and sovernign wealth funds with tonnes of paper money. This is my view.

Thank you.

 

 

caroline_culbert's picture
caroline_culbert
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Money, Ethics, & Education
I think we, as a society, assume we need these ideas such as inflation, deflation, and etc to function in a first world economy.  But do we really?  If we have a system of a marginal amount of debt, due to the lack of debt available, then I say that system would eliminate the current problem of in/deflation we're dealing with at the current moment.  For example if there was only $100 in a community of 4 families and I had to borrow $5 from my neighbor who added interest to the $5, then I would have to labor harder this month or cut back on something else to repay the $5 plus interest.  The alternative would be to default and move out of that community (which is entirely burdensome) and have the lender recoup his loss by laboring more himself.  What we have done, in this country, is print an extra $5 plus interest to recoup the debt when the system is dependent upon labor to sustain it.  A simple but understandable example would be something like this: (I am extending my version of this example that ultimately began with Chris' example in his Crash Course.Family A  has $25Family B has $50Family C has $12.50Family D has $12.50If family A spends almost nothing into the system and hoards their money then it doesn't really affect B, C, and D…because B, C, D are commencing with only $75 (for 'x' length of time- let's say 10 years)... which becomes identical if all four families trade with $100... Either way they are always working with an ABSOLUTE number.------------------------My own objections below.......

It gets tricky when you enter in the factor of morality with that of commerce.  For example if all four families work commercially with exactly $100 but family D lost their currency because their currency burned in a house fire, then Family D should get his $12.50 back.  But who will make the money?  What if it really didn't burn and they hid their money in a barn but claimed it did burn with the house?  What if Family D was extremely negligent and it so happened that was their fourth fire in the last five years, and each time the other three families had to increase their labor to build them a new home and furnish them with food and necessities lost in the fire.  What if the person printing the money was unethical and printed himself a few extra bills.  But this shouldn't happen since everyone should be documenting all monetary activity on ledgers.  But what if someone found some really neat ways to cook the books?  What if... what if... what if... The hypotheticals are endless and in the end someone will get burned.  It is inevitable.  If the crooks aren't getting stiffed, then who is?  Us?  Yep.  Someone, by the very nature of a system of un/accountability and loopholes, will ALWAYS get burned.  The question remains as to whom.  If we're dumb enough to let the crooks stiff us, AGAIN, by printing more money then we're getting the short end of the stick.  Since there is no way to ensure a flawless system where there will always be ethical and honest people, then someone will always lose.  It seems as though everyone is trying to outsmart the next guy and by doing so we've dug ourselves into a mire of shit.  The only perfect system is one where every hypothetical example, attempting to disprove the hypothesis, is included.  But… since we cannot predict the future very well, then that will never happen.  I say get a new system, stop printing money, and educate ethics from birth.  Our system and hence our lives depend upon it.

pinecarr's picture
pinecarr
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I'll try!

Hi Judithkatz-

    I'm learning, too, so what I got out of the article is more of a surface-level impression and hopefully the beginning of basic understanding.  I hope this helps!  And if  I am not explaining it right, I welcome someone who understands this better to help us out, so we can both get a better understanding of what's going on. 

   Ok, so what the article helped me see more clearly was the actual relationship between the amount of $ being created, the amount of that $ that actually makes it through the banks to become credit available to the economy (liquidity?), and how this increase in liquidity (money supply) can make the difference between an outcome of deflation (a decrease in the money suppy) vs inflation or hyperinflation (an increase in the money supply).     

   I guess the analogy that came to me was that deflation is like a plane heading straight down, and the pilot pulls up as hard as he can to gain altitude and keep the plane  from crashing down.  In this case, the fed is the pilot, and he's pumping $ into the system as hard as he can to try to increase  the $ available to the system, and keep our economy from crashing due to a loss of $ supply (lack of liquidity/credit).  But, like a pilot or driver trying to pull out of a crash, if you pull real hard, you can over-correct.  So if the fed keeps pumping out $, $, $, $ to keep our economy from crashing, there is the danger of an over-correction in the opposite direction, into hyperinflation (a spike up in the $ supply, which results in the dollar being worth less). 

   I feel like someone learning a foreign language (economics) and I can kind of follow some of it when I  read it, but am not at all sure if I can speak the language correctly yet!  So I welcome corrections/clarifications by others!

    -C

Dr. John's picture
Dr. John
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Due to the current crisis...
   ... I think we need more links in the "Lighter Side" section.   Look at my picture, I could use a good laugh!
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but what about the defaulted
but what about the defaulted debt? if debt = money, then money is leaving the system as debt money erodes. that is deflation, not inflation. additionally, "non-liquidity" must also be considered a form of deflation. With respect to non liquid paper assets, without a valuation on the paper assets, in an open, non liquid market, one must assume the paper asset is worth Purchase price - some variable x, which is deflation as well. That describes the market we are in. However, it can be assumed there will be a baseline achieved between 'actual liquid value' and 'speculative acquisition cost'...once this happens, we will start seeing our hyperinflation again...and one has to assume this is an inevitability, with the fed and the gov't pushing hard to reach inflation again.
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johndaniels
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reminds me of the tidal wave
reminds me of the tidal wave in 'the day after tomorrow' yikes!
davefairtex's picture
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fed playbook

In that article (an awesome article btw) there was a link to a fed publication detailing their strategies for handling a deflationary situation.  They all involved printing money to buy something in the real economy.  Here's a summary of their options:

  • buying foreign currency - targeted dollar depreciation
  • monetizing a massive tax cut - the "helicopter drop"
  • buying real goods & services
  • buying longer term government bonds (reducing incentive to save, encouraging consumption)
  • buying mortgages or equities

Some of the options the Fed can do on their own, others require coordination with the government, whereby the government buys the item and issues debt to do it, and the Fed prints money and buys the debt.

According to the paper, the foreign currency option seems least likely, since the foreigners could simply do the same right back to us.

Of course, any time the Fed prints money, everyone holding dollars has their holdings instantly devalued.  But according to their playbook, these are the options open to them to deal with a deflationary situation.  Here's the link to the fed playbook.

Fed deflation play book (pdf) 

It seems like any of these actions would be gold-positive, oil-positive, and dollar-negative.  And it seems like it would spike interest rates as well.

They didn't discuss gold confiscation, or capital controls with a foreign exchange rate peg, which I found interesting.

 

pinecarr's picture
pinecarr
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Here's a good article re recent strength we saw in the dollar

Here's another good article from itulip.com that may help explain why the dollar was recently looking stronger vs weaker, as you'd expect with all the $ being pumped into the system.  They believe  that it is a symprom of massive deleveraging and unwinding, not an indicator of deflation.   http://www.itulip.com/forums/showthread.php?p=52818#post52818

-C

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The graph
Forgive a dumb question, Chris, but where are the numbers coming from for this graph?  How do we actually know how much money is being released into the system?  During what period of time did that huge spike happen?  Thanks much.
DanS's picture
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Good Question, not dumb

No, it's not a "dumb question."  What Chris doesn't make clear here is that the graph shows Total Consolidated Assets of the 12 Reserve Bank balance sheets, not the aggregate supply of money or debt of the US government.  What the spike likely respresents is the recent "Open Market" action of the New York Federal Reserve in purchasing T-bills from the largest commercial banks.  This action increases money stocks and floods the markets with liquidity.  He attempted to explain this "action" in one of the Crash Course episodes.

Go here -->  http://www.federalreserve.gov/monetarypolicy/default.htm

and then explore under the "Policy Tools" tab on the left.

The extreme spike reflects the global magnitude of the current problem.

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DanS
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Physical Gold vs. Gold-related Paper vs. Fiat Paper Currency

True, the market price of gold has modestly gone up, but various forms of "short selling" and "short sellers" are intentionally suppressing the price.  If the shorting went away, the price of both gold and silver would explode.  The core reason for the short selling is the concerns of the Western World's central bank system that gold and silver will make a resurgence as a rival monetary system.  Figurately speaking, the central banks have locked the fire exits to a burning building.  NO ONE ESCAPES!  Got it?

"...and that no one may buy or sell except one who has the mark or the name of the beast..."  Revelation 13:17

   

See http://www.gata.org/

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ShawnPaul
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Re: "Swamp of Bees"

Hey pongssw,

 I regret to inform the group that I am unable to use the "swamp of bees" metaphor due to the colony collapse disorder that has been happening in the real world.   I recommend the use of fire ant behavior during a flood.

 

caroline_culbert's picture
caroline_culbert
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too deep and/or too negative?

I don't follow you, Dr. McLoughlin.  I was not attempting to daunt people with a doomsday scenario.  Realistically the scenario may be daunting and the problem too deep.  But shouldn't we try to solve the problem, the right way, regardless of how long or hard the effort may be?  I was not an economics major but a philosophy major.  I tend to aim directly to the root cause of problems even if they seem too deep to grasp.

Are we blogging just to blog and get things off our chest?  That's well and good, but if there is no long term effort in solving problems, then endless complaining and/or lecturing about problems will be futile.  Thanks to all who have provided information so that we may have more tools accessible for attempting to fix the problem.

My responses are long and drawn out and I'm sure your comment was just in jest but un/forntunately I take everything, especially now, seriously.  I fear for my son's future, in that, his will be full of debt, war, and misery that was willed to them by his previous generation.  I have this sense that everyone around me has given up.  It seems as though we've lost our own will to do the right thing because the right thing seems too distant or too naive.  Are we all becoming nihilists in some sense?  Has capitalism turned into a failed state of supercapitalism (~the negation of capitalism) and competition turned into greed, first come first serve, and dog-eat-dog world?  That is not the world I want my son to face.  He is so happy, so smart, so enthusiastic, so energetic, so focused, so motivated, so alive right now.  For me to think what will "sober" him up, is our legacy to him, is criminal and shameful.

Thanks,

Caroline

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Xflies
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Question: with Global money supply up, is Gold feasible?
When currencies were backed by gold, the overall global money supply was multiple times lower than it is today.  Without causing mass devaluation in currencies, wouldn't they have to switch to something that's more plentiful yet still rare like Silver to accomodate the change in overall global money supply?
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capesurvivor
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purpose and legacy

I suspect that you have done what you can to live a moral and decent life, Caroline. It is no fault of yours (or mine) that our system is corroding and that we have been failed for decades (a la Chris' teachings) by those who "represent" us. The world has always been an uncertain place and my 26 y.o. son is going to have to make his way in it the best he can, without me for most of it, as will yours. We give them access to info, solid emotional upbringing to develop personal resources, and encourage them to associate with like-minded folks. I don't think there's much else you can do. If a Mad Max scenario develops or some other decline in social organization (seems possible, no guarantees, look at the Romans), they will need to be even more resourceful. Money and some knowledge of how to take care of yourself in a physical confrontation are not bad things either, IMHO, to bring it to the basic level.

 

I guess people will get a variety of things from this blog...info, a chance to ventilate, a sense of community, who knows? 

 

SG

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switters
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I don't agree with Clive

I don't agree with Clive Maund some of the time and I think his views can be quite extreme.  But then again, we are living in extreme times and there is no doubt that the crisis we're facing is worse than anything this country has yet encountered. Clive had this to say in a recent newsletter:

"both men and women are encouraged to work long hours and coerced into accepting work with virtually no vacation time, and a sizable proportion of their free time is eaten up by bureaucratic concerns, such as paying bills etc. With what little time they have left they are often too fatigued to do much else and end up doing something like watching a movie. The long working hours and lack of vacation time also mean more profits for the politicians' pals and associates in the business world. Another technique involves what is called atomization in order to undermine the sense of community and the empowerment that a sense of community brings. This is achieved again through distraction, the principal weapon being the television, but also trivia such as video games. A simple example of the way this works would be a person choosing to stay home and play a video game rather than going to have a chat with a neighbour. Still another important technique employed is obfuscation - making it hard for ordinary citizens to connect them with particular actions by acting as a group or through intermediaries. Perhaps the greatest factor contributing to the concentration of power and impending end of democracy in the US however is comfort. The majority of citizens have lived comfortable, affluent lives for many decades. This has led to unquestioning trust in politicians and a "leave it to them" attitude. Many people have more important things to do than keep tabs on what their politicians are up to, such as watching the ball game, drinking with their pals or going to the racetrack." 

I agree with him on this.  Most Americans are stuck in a consumer trance.  They're working long hours to support a lifestyle they cannot afford and buy things they don't really need.  Their primary concern is figuring out how they can sustain this unsustainable arrangement, because from the time they were born it was packaged and sold to them as the "American Dream".  

The irony is that, although people are primarily engaged in an effort to preserve this lifestyle, studies show that they are actually unhappier as a result of it.  This reminds me of how monkeys are trapped in certain places.  Trappers make a trap with a banana inside of it.  The monkey comes along and puts his hand in the trap and grabs the banana.  As long as he's holding the banana, he can no longer withdraw his hand from the trap.  One would think the monkey would just let go and walk away.  However, in general the monkey will not let go of the banana and will therefore remain trapped.

Most of us are monkeys in this respect.  I don't mean to be flippant or cynical in saying this.  Rather, I'm acknowledging the fact that most of us are actually addicted to our current lifestyles.  And, like many addicts, most Americans are in complete denial about their addiction and its consequences.  This is the real reason why so few people stay stuck in the consumer trance and are unwilling to accept the reality of the "three Es".

caroline_culbert's picture
caroline_culbert
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i disagree on some things...

S.G., I have not done everything I can to lead "a good life"  I learned this too late in life.  Better late than never, but... Everything that happens in the world, good or bad, has been because of my triumphs or faults.  I have a fractional part in everything that happens around the globe.  I may not have a huge part it "the system" but I will not delude myself or displace blame upon others.  I am to blame as well as the Enron CEO.  Our blunders may not weigh the same but are on the scale nonetheless.  All I'm saying is that I learned about ethical behavior too late in life.  I wasn't born ethical and had to be taught in college.  I was taught little by my parents but not systematically or theoretically as it should have been.  I guess I wouldn't call that teaching since their explanations were the authoritarian response of "because I said so".  I know the surface problem are what grabs most people but I truly believe the fundamentals must be examined in order to understand the surface issues.  I grew up Catholic but currently do not hold any religious beliefs.  I don't want to introduce religious morality into my argument and believe that secular, ethical teachings are necessary and should never warrant any type of religious opinion.

I agree, this is a great place to vent and obain a sense of community.

I don't like the idea of settling.  I think we cop out when we say we do the best we can but really don't do what we say.  When we do the best we can, I think we'll know.  Right now and so much of our recent past, ALL OF US, should have been marching in the streets to protest the "bailout".  Most of us didn't.  I don't think we did the best we could.  It's easier to sit here doing this, i.e. typing to you or watching t.v. (which I do not) instead of getting together and demonstrating on the street with our Constitutional Right to protest!  We have become an obese, fast-food, t.v. watching, myspace, prescription, diabetic, facebook, World of Warcraft, Playstation, Hollywood, and a debtor nation.  If the pharmeceutical and advertising industries are the top two industries of the world/nation, then those industries are the most successful and bring in the most profit.  What does that say about us?  That is what scares me about this country.

Caroline

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switters
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psychology of trauma response

I should also mention that I am 34 years old.  I live in a very progressive community (Berkeley, CA) and have a group of friends that are very socially and environmentally conscious.  However, even within this group there is a shocking lack of awareness about and responsiveness to the current crisis we're facing.  This is not because these people are unintelligent, and they are definitely not in the mainstream consumer trance I described in the previous post.  

The problem, I think, is that many of them are struggling to get by as things are.  The last thing they want to know is that it's going to get even harder.  That's a really painful thing to take in, and I think many just get overwhelmed by the pain in that and they go into denial.  This is a natural and predictable response to pain, and as I've mentioned elsewhere it has been written about by authors like Kubler-Ross in the context of being confronted with something like terminal illness.

So, how do we encourage people to accept this pain and move past the strategy of denial?  We really need to figure out a way to do this on a personal, local, national and even global level.  Of course, at some point if things get bad enough denial simply won't be possible.  But I sure would like my friends and my country to respond before it gets to that point.  I wish I had faith that they would. 

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dcary
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Silver versus Gold

Given industrial demand, and reduced efficiency of mines, some claim silver is actually in shorter supply than gold. 

Unrelated, gld the etf that hold gold in a vault has had higher than normal volume lately...people buying and selling.  I understand the buying, but I can't understand why anyone would be selling given the news.

pinecarr's picture
pinecarr
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Oops, I mean karla659!

Hi Karla659-

    Sorry! The response I gave to judithkatz today, 10/08 ,at 00:05 was meant for you, karla659!  That's what I get for trying blog  after midnight!

    Anyhow, I think I've learned a little more since then that I can add.  Per Chris's current article "Central Banks Cut Interest Rates", the problem was not liquidity, it was solvency.  I believe Nouriel Roubin of rgemonitor.com says the same thing.  So the analogy I gave in my earlier response, of the the economy being like a plane crashing, may not work because it is based on the assumption that the problem iwith the economy was not enough liquidity!

   -C

logBurner's picture
logBurner
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Is this the 700 Bn$
That is one hell of a spike - is that the new $700Bn payoff? If not then WOW!!
peergroves's picture
peergroves
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What about abolishing the Fed?

The film The Money Changers talks about the need to close down the Fed and create a new currency as Lincoln did, the Greenback. How would that scenario look in today's world?  As I understand it, Congress would have the right to print money, as stated in the Constitution, which sounds encouraging, but how would this affect the value of say... our houses?

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