Everybody panic!

January 21, 2008

As stock markets around the world descend into oblivion on this joyous holiday, I thought I would take the opportunity to remind everyone that bankers will never let their empires slip away into the abyss.

When you operate in a system that can only be sustained with exponential growth of the money supply, the occasional recession is necessary to flush out excess speculation and return the market to more sound investment practices. People need to be reminded every once in a while that markets can also fluctuate on the down side.

Our current reality is that politicians are uneducated idiots and they will ultimately be convinced to nationalize some banks or bond insurers and use this crisis as an excuse to take massive deficits for public works projects. Governments around the world will spend hundreds of billions of dollars on roads, railways and bridges to prepare for the next round of excess consumption.

Expanding the money supply should normally cause inflation, but a slowdown in lending could also cause significant disinflation or deflation in some assets, like automobiles and real estate. But what may separate this difficult period of adjustment from others in the past is that commodity prices are likely to continue rising as Asia continues to grow. This will make an American recovery much more difficult and probably delay any market resurgence a few more years. We may experience a few years of stagflation, but ultimately this is not the end of the world and civilization will survive.

When all the speculative money is gone and only investors remain, long term upwards trends will continue for many commodities and precious metals, including food, oil and gold. I think people often forget that China’s contribution to global growth surpassed that of the United States last year for the first time. China may begin to grow at a more manageable pace, but there is no indication they will experience any roadblocks on their way to the top.