The score card up till now, and tomorrows forecast.

Ben Bernanke has stuck religiously to his play book during the current crisis. He has inflated the currency, and stopped bank failures at any cost. If you read his writings, from before his ascension to the throne, nothing so far will have surprised you.

The situation:
The housing bubble popped, the banks were shown to have no clothes, all branches of government were asleep at the wheel, and the only active players on the field are the banks and the Federal reserve.

Will government react to this crisis? No, or at the very least, not before a crash. You will hear plans and platitudes, investigations and calls for reform, but the two major parties need big buck for the election fight this year. There will be no perp walk for the people who bundle campaign contributions. (Or at least not till there are riots in the streets.)

At a chaotic inflection point in history, it is almost impossible to see which forces will triumph, but we can at the very least look at the major players.

Banks, Investment houses and the fed:
The banks aren't illiquid, they are insolvent, bankrupt, broke, a collapsed Ponzi scheme. They bet their investors money on the fantasy that growth will continue indefinitely, and lost. They are just a meaningless facade left in place to fool/fleece the public while gulping from the Federal Reserves tit. Their last big play will be by the individuals who looted them, as they try to bribe the politicians and the Federal reserve into a bailout/pardon.

A really important sub-thread of this, is that having an “account” with one of these institutions is just a promise, to give you money or shares. Until you close out your account, it is all just a promise, backed up by an insolvent institution.

Stocks:
The stock market crash of 29 did not cause the depression, it was caused by the depression. You really have to laugh at people who think stocks will hold value during a crisis. If your broker goes belly up, you are just another creditor. Even assuming you took physical ownership of your stock certificates, 1929 showed what happens to stocks. Add in the growing hatred of “speculators” and you will be lucky if you not arrested for shorting a stock.

Commodities:
It is my opinion that there is a general commodities bubble, and it is bursting. However, some commodities may continue to go up in price. Namely grains and energy. After looking at the data, it appears there are genuine shortages in these areas, and those shortages may even survive a major economic down turn. Although they will take an initial beating with all the other commodities, a real shortages trumps a bubble.

Unfortunately, the process used to invest in commodities isn't as straight forward as opening up a bank account “in oil”. As calls to reign in “speculators” rise the government may finally act (or conspire) to close the market to us humble mortals. (Poof! Goes your money!)

Gold, dollars, euros and yens:
Only a fool would keep his money in the constantly debased dollar at this point. The only problem is where to put savings, if not in dollars? Should we keep them in a bank/investment account? (Hell no!) How about a foreign bank? (You know, the ones that bough all the sub-prime mortgages.) Should you believe in the decoupling fairy? How about federal reserve notes stuffed under your mattress? (Not if a new currency is issued.)

The answer (unfortunately) is to invest in actual stuff. Even more unfortunate is that you can't keep you life saving in spam and bottled water. It won't fit in your house, besides, who the hell wants a house full of spam, and the utility company refuses to take payment in spam (or euros, or gold, or 9mm ammo........).

Foreign Investors:
These are the real wild cards in the equation. At what point do the foreign investors just leave? And if they leave, what happens?

A market crash will be the least of our problems if the foreign money takes a hike.

The federal government runs at a deficit. It spends more than it takes in, then borrows the rest. Much of that is borrowed from other countries. Will higher treasure rates lure them back? They might, if everyone and their brother weren't fleeing to treasures already, driving down the returns. If they loose faith they will ever be paid back, who would invest in a failing government?


My personal strategy is as follows:
Treasuries = 99% of my savings is in treasuries (I don't real have a choice all my saving is in a 401K.)

Home = Up till now, I have been paying off my home at a greatly accelerated rate. But I am pretty sure the loan is held by a “publicly-owned corporation chartered by Congress”. Can my loan get called in if the holder goes belly up? If the payment system locks up because of bank failures, will I be on hook for penalties?

Federal reserve notes and gold/silver = I have a little in a safety deposit box, but it is damn small amount. I may accumulate more, but I really don't know right now.