A Conspiracy Theory

Discussion in 'Economics' started by AFterburner, Feb 16, 2006.

  1. I tried to post this on the other thread, but there was some sort of computer problem. When I hit submit, it said that my post was too long. Then when I tried to go back, the entire post was lost.

    Good thing I had copied the whole thing over to Word in order to do a grammar check.

    So I'm posting this in two parts...

    Part One:

    LOL indeed.

    Besides, if you are going to make a conspiracy theory, at least make it a good one...

    The stock market will not crash. The stock market crashed in 1929. Shortly thereafter, in 1933, President Roosevelt signed an executive order that basically made it illegal to own gold.

    The next steps involved the government taking possession of this gold while issuing paper currency that was based on a gold ratio, i.e. the gold standard. For example, one troy ounce of gold existed for every $35 in circulation.

    This effectively put a fix on the price of gold as well.

    Then in 1971, President Nixon abolished the gold standard in favor of a floating, fiat currency. A few years later, it was once again legal to own gold, and the price of gold began to climb steadily and dramatically.

    Now the government can just print more money, but this money really has little or no intrinsic value.

    Nevertheless, gold is actually quite impractical. Gold does not earn interest. In fact, gold poses several storage problems, and it is also difficult to transport, especially across borders. It is also difficult to use gold for purchases. For example, you might start out with gold coins, but pretty soon you are cutting them in half and half again. It is messy and inaccurate.

    Furthermore, while the price of gold does increase, this is a somewhat difficult concept to understand.

    Gold does not necessarily increase in value; gold increases in price. It is more accurate to say that the currency used to purchase this gold decreases in value, thus more currency must be used to purchase the same amount of gold.

    Also, the world population continues to increase at a rate that exceeds the rate of gold levels. For example, the world population may double in number, but it is very, very, very unlikely that new mining efforts will yield a double in the existing supply of gold. And it also becomes more and more expensive to pursue, mine, and extract the few remaining sources of raw gold.

    Like any other form of payment, gold only has the value that people attach or assign to it. What is gold? Only metal. What are dollars? Only paper. The only difference is that it is rather easy to produce more and more and more paper dollars through the printing process, but the amount of gold is relatively fixed in quantity. Not to mention that all previous attempts at alchemy have failed, which basically means that it is much easier to counterfeit paper money than gold.

    Nevertheless, gold is only a metal, and a rather impractical metal at that.

    When the average person sees what is happening in the world and with the economy, it would be easy to assume that the stock market would be headed for a crash. But stocks are dollar denominated assets.

    Meanwhile, the government continues to run up enormous debts to the point that these debts will be almost impossible to repay. Not to mention that the government seems absolutely unconcerned about these spending practices. No worries at all.
  2. Part Two:

    Here is where the conspiracy starts...

    Eventually, it will be necessary for the government to start introducing more and more currency. Normally, this would lead to immediate and obvious inflation. But not this time...

    The economy is moving towards full integration into the global economy. This should in theory lead to deflation. In other words, in a completely free global economy, it would be likely that the dollar would become more valuable and prices would go down.

    So if you combine the two elements (printing more money while encouraging global free trade) you have a way to hide the immediate effects of inflation. The prices of goods remain relatively constant. Prices may even decrease somewhat at first before increasing gradually thereafter.

    Meanwhile, something interesting is happening with all of these excess dollars. Your trading partners start accumulating massive dollar reserves for the purpose of manipulating currency markets for trade purposes. So instead of coming back into our own economy and creating inflation, these dollars stay overseas. But they are not just a reserve in some foreign central bank. They are actually lent back to the country in the form of bond purchases. That means they help support the national debt.

    So instead of printing money outright to support the debt, the government encourages foreign trade and the dollars eventually come back to support the debt anyway.

    They also come back in the form of foreign investment. These foreigners can use dollars to purchase stocks. They can buy mortgage-backed securities or invest outright in the real estate market.

    So then housing prices go up. Stock prices go up. And the average American person will turn a blind eye to what is going on beneath the surface. After all, these American citizens think that they are becoming more and more wealthy. Their stock portfolios increase in value. Their homes continue to increase in value.

    But do increasing home prices really benefit anyone? Sure you can sell your house. But you have to live somewhere. So you sell your house at an inflated price only to buy a new house at an inflated price. In the long run, you actually gained nothing. Sure, maybe you kept buying bigger and bigger homes to put this leverage effect to work. Coincidentally, the capital gains tax structure encourages as much. But in the end, you simply made yourself wealthier in comparison to those who did not own such dollar denominated assets. That is the perk of being a member of the ownership society. Or is it?

    Because now your home is going up in value, but then again, so are your property taxes. In most cases, these property taxes are based on the assessed value of your home. So a fixed percentage against a $100,000 home yields less tax revenue than the same tax rate on the same home that is now worth $250,000. So the government wins yet again. Those tax dollars keep coming. The homeowner can grumble, but at least the value of the home is increasing. Or is it?

    Because sure, home prices are increasing, but are home values? That 50 year old house that keeps increasing in value is made from materials that are slowly but surely rusting and rotting away. Sure, prices will increase naturally due to several factors, but the increase in actual value is not keeping pace with the increase in price. In other words, home prices are inflated. Because how will the next generation afford to purchase these homes when jobs (or at least real wages) fail to keep pace or are in decline? Can you continue to just keep trading up when the bottom is falling out? When those at the bottom cannot afford to enter the market, suddenly it all falls apart.

    Because those at the bottom just don't have that kind of purchasing power. The jobs just aren't there anymore. Paychecks don't go as far as they used to.

    So then you need to lower interest rates. After all, most people don't really think about economic concepts. They just worry about that monthly payment. So make the monthly mortgage payment more affordable. Lower interest rates. Then introduce 40 and 50 year mortgages.

    Just make sure that you can keep lending them those dollars for those homes. Create government agencies for home ownership. Allow the government to actually back mortgages through mortgage-backed securities. Print the money and then deploy it. After all, how can a government that is trillions of dollars in debt afford to not only back these mortgages, but also lend the money?

    What about stocks? Ever really take the time to look at some P/E ratios? Do those valuations (the key word here is valuation) really make sense?

    But why are we seeing the effects of inflation in home prices and stocks? Because that is where the dollars are coming back. We run huge trade deficits, and this means that foreign countries are selling us goods, but they do not use this money to buy goods from us. Instead, they use it to purchase stocks and bonds and real estate.

    And we are beginning to notice it most in the housing market because of a little thing called leverage. If you put a 10% down payment on a house, you are leveraged 10:1. It was actually quite common for stock investors to be leveraged 10:1 during the run up in stock prices that preceded the market crash of 1929. It was also quite common for the banking system to be hopeless mired in loans for stock purchases. Sound familiar?

    But back then, there were those issues with gold that kind of got in the way. In other words, values eventually caught up to prices.

    But we don't have to worry about that anymore. Well, we in the collective certainly do, but a conspiracy would not be a conspiracy if served the common good.

    The point is that the stock market does not necessarily have to crash. If the government keeps spending and running up the national debt, our currency will eventually be ruined. The stock market could go to a zillion, but the money wouldn't be worth the paper it was printed upon.

    Remember, price is not the same as value. Our paper money really no longer has any intrinsic value. It is ultimately all based upon the fiscal responsibility (or lack thereof) exercised by our elected and appointed leaders.

    But shouldn't a conspiracy benefit a select few at the expense of the many? Yes, it should. Otherwise, what's the point?

    So all of the people who owned extensive real estate and stock holdings are now getting extremely rich from the inflation in these prices. Not to mention that corporations benefit from a weakening dollar. They can sell goods in foreign countries and make a handsome profit from the exchange rate.

    But in order to capitalize on this situation, these elite few will need to begin to liquidate these assets and go to cash. So you create an ownership society. Push home ownership. Get people to invest more and more in the stock market. Returns will be good because this whole conspiracy has sort of a self-fueling effect. It actually works towards its own end.

    But when the dollar ultimately becomes worthless, won't everybody get hurt? No, not exactly. Enter the reserve currency. Gold just doesn't quite cut it anymore. So you need a stable reserve currency. Something like the Euro might do.

    Wealthy individuals can begin to trade in these doomed American dollars for Euro dollars. And then they can begin the slow process of taking this country for everything it's worth and abandoning the currency on which the citizens ultimately depend. Cash in, and then cash out. Then when everything finally implodes (while prices crash in the upward direction due to hyperinflation), a few final wire transfers and a plane ticket out of the country are all that will be needed.

    Find a good cover story, start a war or two, and the unsuspecting masses will never figure out what really happened.

    Now this is just a conspiracy theory. And besides, it's not even a conspiracy until someone gets killed.
  3. So where's the conspiracy theory?
    I must have missed it.
    The main worth of gold perhaps, is that it never, ever corrodes or oxidises-making it ideal for bullets or projectiles in the post-apocalyptic society.:) And what is your freedom worth, after all?
  4. After all, it will be pretty difficult to get gold on a plane with all of the heightened "security" measures that will be in place. What is gold? A metal.
  5. Just remember, freedom isn't free.

    America is an absolutely great place to live. Especially when you have money.

    "If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be." - Thomas Jefferson

    All I'm saying is that we have a pretty good thing going. Let's not mess it up. Or let someone else mess it up for us.
  6. Anybody ever see any of the Leprechaun movies? Makes you wonder...