Paulson Plan: The Death of the Dollar & Free Markets

As virtually all stock market participants know by now, Congress has passed
the $700 billion bailout plan (Emergency Economic Stabilization Act of
2008). Let us quickly assess the implications for investors and traders.

First, those familiar with Austrian economics will know that this does
nothing but prolong the pain, and turn what could have been a deep
recession into a full blown depression. Financial planner Peter Schiff said it best when he said "we're going to die from the cure, not the disease." The poor
investments enabled by Greenspan's excessively loose monetary policy need
to be liquidated; interventions only further weaken the US dollar, as the
debt-ridden US economy will now need to raise more debt, which will further
weaken the dollar. Thus, US dollar weakness and stock market weakness are
inevitable in the long-term, even though we now appear to be in a
short-term dollar rally.

The real story, of course, is violation of proper legal recourse in passing
this bill. Consider:

Article i, Section 7 of the Constitution clearly states that all bills for raising revenue shall originate in the House of Representatives. The Senate spearheaded the latest version of the Paulson Plan, and attached it to a mental health and addiction bill already in progress (HR 1424). Violations of the Constitution always beg the
question of whose interests are really involved.

We may have gotten more insight into whose interests were really involved
when Congressman Brad Sherman said on the House floor that representatives were threatened with martial law if they voted against the bill.

The moral of the story? For one, short the dollar -- the economics of the
situation are pretty clear, in spite of the short-term rally. Secondly,
you're probably safer trading in foreign markets; the legality and
integrity of US markets is being severely compromised.

Comments

[mbr:]

Instead of relying on the US for selling and buying products and for investing their capital, Asian and Russian economies should start spending their USD surpluses on developing their infrastructures, their industries and their internal markets.
They should not waist time as the USD will depreciate.

2008 Oct 06 04:35 AM

[sieraromero:]

The senate mixing the bailout package in with a mental health spending bill, is entirely appropriate and IRONIC beyond all belief. The market should get a little relief before the election and end of the year. Then watch out below. The levels that this will eventually reach are not even being discussed yet.

2008 Oct 06 08:59 AM

[Simit Patel:]

yes sieraromero, I agree. DJIA and SPY still have a long, long, long way to go before we reach a bottom.

2008 Oct 06 09:35 AM

[Simit Patel:]

hi steve,

it is a battle of inflation vs deflation, right now the deflationary forces are certainly at work, though by any real measure -- MZM, M3, even M1 -- the US money supply is increasing, and it is increasing rapidly. at the same time, the US twin deficits are increasing. it is only a matter of time before asia, particularly china, realizes that the US will not be able to pay back those debts, and the US will no longer be able to raise capital via debt issuance. as this becomes more apparent we will see the fed monetize that debt and a hyperinflationary scenario will likely ensue.

we have seen this scenario before. the inflationary depression of argentina in 2001 is a precedent.

the EU credit crisis is interesting and of course a short EURUSD opportunity, which as an active trader I took advantage of and shorted EURUSD at 3720. this is a short-term trend, though, the long-term fundamentals remain unchanged and dollar weakness and inflation are pretty much baked in. USDJPY's decline is evidence of this, as is gold's relative price stability.

2008 Oct 06 10:49 AM

[Simit Patel:]

also, to argue the EU is utilizing austrian economics is a remarkably false statement, no country/economic region with a central bank and a fiat currency can really claim they are adhering to austrian economics from a monetary policy standpoint.

2008 Oct 06 10:51 AM

[carey_jim:]

Economics is a complicated "science" and there are many schools. Most investors are focused on driving their race cars and know very little about the engine in their cars or about the race track.

America has a strong socialist past that was brutally repressed (Eugene V. Debs, John Dewey) and therefore will almost certainly make a comeback if the economic crisis gets bad enough.

America has a strong institutionalist tradition (Thorstein Veblen, John Dewey, John Kenneth Galbraith)

America has a strong Keynesian tradition (Paul Samuelson, etc.)

America has a strong Austrian School tradition (Milton Friedman, etc.)

America has a long history of deep depressions starting somewhere around the year 1830. The Great Depression (1929-1945) was the last one. Economists are divided about why we haven't had a major depression since 1945 but we haven't.

Many observers have complained that America has been on a thirty year mindless consumption binge, fueled by excessive advertising, that has driven the average American into deep debt. These observers often say that a deep recession (depression) is inevitable and even necessary to bring the economy back to equilibrium (sanity.)

We live in interesting times.

2008 Oct 06 11:14 AM