Some are thinking The Bottom is In...

The stock market has recovered a bit, commodities have stabilized, and some economic statistics appear to have paused in their free-fall. Anxious workers and investors are quick to grab at any shred of hope, but is it real?

Conventional wisdom holds that stock prices will lead actual recovery by 6 months or more, as fundamental factors fall into place to produce the next rebound. In "normal" times, this might include lean inventories, once excesses have been wrung out, along with pent-up consumer demand. These conditions usually pave the way for the next expansion.

The current situation differs greatly from "normal" recessions in one important way: the giant derivative bomb is still ticking away over everyone's head. Large banks and financial institutions have used some of the government bailout money to begin unwinding their "counterparty holdings", but the task is akin to draining the swamp. The major banks have been reduced to zombie status, kept alive by bailouts. A comprehensive audit would show most to be hopelessly insolvent, once the derivative obligations are accounted for. The house of cards totters, but still has not collapsed.

Thus, governments around the globe continue to play the game of pretending to have things under control, hoping at best to delay the inevitable collapse. When the true grim reality is considered, present stock prices might look more like a ceiling than a floor.

Even putting the effects of Paradigm Shift aside, it appears that the recent series of bubbles created enough oversupply of everything to push "pent-up demand" far into the future. Since the bubbles were financed by debt, our system is essentially bankrupt. Whatever stimulus the government musters is quickly swamped by continued evaporation in paper wealth.

I have subscribed to the theory that the Treasury would soon encounter difficulty in auctioning bonds to finance government debt. The Chinese and Arab oil exporters had acted as bankrollers of the expansionary bubble, in effect recycling our burgeoning debt with fresh capitol to import goods and finance mortgages. It was good while it lasted, but no more; the bubble has burst for everyone involved.

Thus it came as no surprise to see the announcement last week that the Fed will begin to buy Treasury bonds, ostensibly to reduce mortgage interest rates. What this signals is the watershed point at which the Fed and Treasury begin to print unlimited amounts of money to finance monstrous deficits that are projected to grow into the foreseeable future. They really have no choice, with the derivative bubble burst, and all other remedies having been tried and spent. Now all that is left is the prospect of creating a final inflationary bubble in desperate attempt to avoid a major depression.

Will we go the route of Zimbabwe, and carry around billion dollar bills? In the present deflationary environment, this seems the least of concerns. Cheapening the currency may be the only way out of crushing debt for most people, and it could help stabilize real estate values. However, this solution will result in the much-anticipated “death of the Dollar” as the world’s reserve currency. Not that it matters, with the Euro and other currencies swirling down the toilet too.

One concern is that these sorts of economic dislocations are often accompanied by major warfare breaking out. Since the dollar’s value has been propped partly due to military posturing by the American Evil Empire, the temptation may linger in the minds of our Warmonger leaders to keep it rolling a while longer.

The best bet is to begin preparing for life in the new Paradigm. The false hope of recovery may beckon over the next few months, but like the Coyote, we may find the bottom is a lot farther down than we thought.

-Darkwave