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The Inevitable Market Correction Of 2011

By: Steve Johnson

2/8/2011 - 126 Comments

The economy and the stock market appear to be headed in the opposite directions. The unemployment rate remaining high as food and energy prices continue to climb, yet the DOW just keeps on rising.

What is going on?

Here are a few of the most difficult questions:

1.  Do we have deflation or inflation, with falling housing prices and rising food and energy prices?

2.  Where are the jobs?  Why are companies not hiring?

And here are my answers:

1.  We have both deflation and inflation.  The challenge is to try not to get clobbered by either one, and to find a way to benefit from both.  For example, this is a great time to find desperate sellers of real estate that you can purchase for as low as 20 cents on the dollar.  But if you are one of those desperate sellers, you are in a very difficult position. 

Likewise, food and energy inflation are going to be very difficult to avoid.  Investing in Agricultural and Energy is the best strategy to avoid getting clobbered by inflation.  Wealthy investors may have an advantage in profiting from rising commodity prices, but there are many ways that the middle class can protect themselves from inflation.  For example, purchasing precious metals like gold and silver coins or gardening or bulk shopping discounted items to fill your pantry are all great ways to fight inflation.

The source of inflation is the Fed’s money printing. The Fed is printing money in order to fight the deflation of the housing market, both to stop housing prices from dropping and to keep interest rates as low as possible so that more people can purchase houses.  

The housing market collapse that started in 2008 was such a large bubble, that the Fed’s money printing has still not been able to put a floor under the housing market.  The reason the housing market is so important is because the years leading up to the start of the 2008 collapse, housing became the largest part of the economy and the underlying support for the global financial system.  Without strong housing prices, the banks are insolvent. So the Fed believed they must keep printing money.

The result of the Fed’s money printing has resulted in several other major problems, including the lack of jobs. This leads to my answer to the next question.

2. Where are the jobs?  In response to the collapsing housing market, the unemployment rate remains at nine percent.  High unemployment means that businesses don’t have to complete for labor and instead have been able to get more production out of fewer employees and at less pay.  The flood of money from the Fed has kept consumers purchasing goods (other than houses), which has resulted in many businesses to remain profitable and even increase their cash reserves. 

Businesses are sitting on over 1 trillion dollars in cash reserves. The Obama Administration wants businesses to spend their cash on new jobs, but businesses are reluctant to hire because they do not have a sound business model for growth because of the uncertainty of the global economy and political changes and growing influence of the US government. 

The business community would like to spend some money and hire some good people while they are available, but without a sound business model their investors will not let go of the funds.  The future is just too uncertain, and Obama has no one to blame but his policies to grow to government’s influence into the economy, with the takeover of the automotive industry (GM), healthcare (ObamaCare), the financial system (Bank bailouts), the higher education industry (student loan takeover) and the housing market (Freddie Mac and Fannie Mae).

What is going to happen?

The recent elections, in which the Republicans won the largest number of seats in modern history are about the change the situation. 

They realize that a central planned economy by the government will only continue to bleed the wealth of the nation and will never be able to create real jobs.  They are making plans to get the government out of the economy so businesses can once again find sound business models that their investors can sign off on to hire new employees.   The only problem is that when reality is faced and the government stops propping up the economy with trillion’s in debt, it will cause the collapse of the phony stock market bubble that Obama and the Fed have been able to create over the last two years.

The real economy will show the real value of corporate stocks. 

All of this is leading us to a market correction, because the consumers cannot continue to purchase products without paychecks, credit cards, student loans or unemployment checks, which will lead to a sudden drop in corporate profits resulting in dropping stock prices.  

The good news is that jobs will return.  They may not pay what they did during the housing market bubble, because the high wages during the housing boom where as fake as the housing prices.

Inflation will also become a major problem as the trillions that the Fed has been printing will be unleashed into the economy, the US will begin to face what China, India, and much of Europe have already been dealing with.  The Fed will respond by raising interest rates, which will make purchasing a home even more difficult. 

Perhaps the best news will be that innovation will regain its important role, as we turn to capitalism to once again save the world.  

Perhaps one of the best explanations of what happen in the past can be found in Thomas J. Dilorenzo book, "How Capitalism Saved America".

How Capitalism Saved America: The untold history of our country  

"How Capitalism Saved America"

 

 

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How Capitalism Saved America

This book is an excellent presentation on the problems of government 'regulations' into free market mechanisms. This book illustrates simply and clearly how many chaotic economic problems were caused by interference from government regulations and how capitalism has overcome them. Master this book and you have overcome most of the bad economic thinking of our time. Government is the cause of capitalism failure.

Day of Reckoning

In Day of Reckoning, Pat Buchanan reveals the true existential crisis of the nation and shows how President Bush's post-9/11 conversion to an ideology of 'democratism' led us to the precipice of strategic disaster abroad and savage division at home. Ideology, writes Buchanan, is a false god that seeks vainly to create a paradise on earth. While free enterprise is good, the worship of a 'free trade' that is destroying the dollar, de-industrializing America, and ending our economic independence, is cult madness.

The Coming Economic Earth Quake

Larry Burkett explains how the financial troubles in America started back in the 1930s. Larry explains the economics of huge goverment and public deficits and how it leads to hyper-inflation. We may be headed for another great depression.

Debt is Slavery

Michael gets to the point in just over a hundred pages. Most people do not have a good relationship with money. They have never taken the time to figure out how to use money to provide no only the essentials of life, but freedom and opportunity. Michael explains how to have 50% of your salary and gives a step by step example of how to create a budget and eliminate debt.