"They" wouldn't let the worst thing happen, right?
In the last few weeks, the "subprime" mess seemed to come out of nowhere and cause panic in the stock market, the mortgage market, hedge funds, banks, precious metals, and consumer spending. Of course, as I've said in my newsletters, daily updates, and book, it didn't just appear out of nowhere. Freddy should have been able to see what was coming. It wasn't sudden either. I never thought it would take as long as it did.
As of the date of this writing (August 18), central banks around the world, with the European Central Bank (ECB) being the most panicked, have put hundreds of billions of dollars into "the system" to try to stop the sudden fear that has stopped lending, even between banks. Now, the Federal Reserve has cut its "discount rate" by 0.5 percent. This is the last place banks can turn for loans if they have nowhere else to go. How about this? Will this stop the bleeding in the credit markets, which threatened to send mortgage rates through the roof and stock and other financial markets down, not to mention the economy?
Simply put, NO!
Many people make the mistaken assumption that "they" (usually governments and/or central banks) can do whatever it takes to stop any financial or economic disaster that seems to be coming. People think (hope) that we will never have another depression like the one in the 1930s because we have so many "safety nets" and our leaders are so much smarter and the global economy is so much stronger than it was 75 years ago and technology keeps getting better and China, India, etc.
That makes no sense at all! Few people who believe this pipe dream can back it up with facts, numbers, historical evidence, or economic basics.
Before I explain why "they" can't stop a speeding locomotive that's out of control, let's look at a couple of recent events that show how helpless governments and central banks are when the public mood turns bad and a crowd starts to rush.
Example 1
At the beginning of the 1990s, against all odds, first the Japanese stock market, then the Japanese real estate market, and then the Japanese economy went into a freefall and have stayed there or close to the bottom ever since. The stock market and real estate market both dropped by 80%, and the Japanese economy has been in a recession or depression, with deflation, for the better part of two decades. How this could happen when in 1990 Japan was the "modern-day economic miracle of the world" (like China is today, take note) is another story that I have not only written about but also strongly predicted back in 1989. The important thing here is how helpless "they" turned out to be when they tried to stop it and when it broke.
The Bank of Japan cut interest rates all the way down to zero. The government of Japan spent trillions of yen on infrastructure that was mostly useless. Did they manage to get the economy going again? No. Did they get people to start spending again? No. Why?
Example 2
The US economy "hit the brick wall" right after Thanksgiving Day in 2000. It was amazing. As if people stopped spending all of a sudden. No one noticed that this happened nine months after the stock market started going down, but that's another story.
Alan Greenspan, who was in charge of the Fed at the time, got scared. On January 3, 2001, the Federal Reserve cut interest rates on short-term loans by 0.5%. The effect was felt right away. The S&P 500 went up by 5% in just one day. Yee-hah! The Fed was the winner.
Did it? Over the next 18 months, the Fed cut interest rates another 12 times in a row, and they didn't stop until the Fed Funds rate reached 1%. Wow, that must have made the stock market go through the roof. How far did it go up? The S&P 500 dropped by 44%! Why?
This is because governments and central banks don't lead, they follow. Any action they take will have at best a short-term effect, and any "reaction" the public has in the short term will always be completely undone. At worst, it will always add to the mountain of debt, which was the main reason why the problem started in the first place.
What gives? Socionomists know how to figure it out. The most powerful force on Earth is the living, moving mass of people who go back and forth and up and down like waves in the ocean. Growth happens during times of hope. But like a worm that has to go backwards before it can move forward, these times of progress must be broken up by times of going backwards (backwards). There is nothing that governments or central banks can do to change it. The problem is made worse by the way our money system is broken.
The amazing thing is that there are patterns to how people act as a group. Mainstream economists don't pay attention to these patterns, which is why they are so good at getting things wrong. The last Great Depression wasn't even called that until 1933, which was four years too late to keep people from going broke. They also didn't see this one coming.
My book is called "How to Make Money from the Coming Great Depression." If you look at the first three words, you might figure out that it's not a sad book. If you read that, you'll know what I'm talking about.
I want to say again that the "subprime mortgage crisis" will cause a disaster, no matter what the central bank does to stop it. Subprime is just one sign of what's really going on. The real cause can only be explained by the Wave Principle.
(These thoughts are based on my daily update for Monday, August 20, 2007.)
Happy to watch the waves
