Alle aussteigen!

As the Dow heads cheerily in the direction of 9,000, some may consider this an opportunity to get off if they missed the stop last time round.

Or have the wise actions of our leaders solved all?

Simple Science

The Laws of Thermodynamics for the layman:

First Law: You can't win.

Second Law: You can't even break even.

Translated to money terms, they are still true, but all too many didn't believe it. That's what put us in our present mess.

Once we clear up the meltdown, perhaps the sensible approach would be to base the economy officially on energy. After all, it effectively is already. For example, the price of gold merely reflects the energy expense of extracting it.

Bonner: 1966 - 1982 , and Dow 5,000

Bill Bonner, in the Daily Reckoning, confirms what I've said here many times: we need to measure investment performance in inflationary terms, and done that way, the last cycle ran from 1966 to 1982. The implication for us now?

We only bring this up to warn readers: these major cycles take time. So far, the Dow has only gotten down to the ’66 TOP. Now, it has to get to the ’82 BOTTOM…adjusted for inflation. Where would that be?

Well….as we recall, the Dow was barely at 1,000 when the bull market began. And if [we] adjust that to consumer price inflation, we come to a 2,000 – 3,000.

However, the 1982 bottom was higher than the 1932 bottom, so I'm hoping it will be no worse than 4,000. Having said that, the levels of governmental and personal debt now are quite unprecedented.

Here's the graph I did last October, again:

Good and bad borrowing

Karl Denninger covers a lot of ground - perhaps too much in one posting - in his attempt to clarify fractional reserve banking and its consequences.

What seems to me a major point in his conspectus, is the difference between borrowing for production, and borrowing for consumption. If you borrow at 5% to get a machine that makes you 10% profit, that's fine; but borrowing for a private house to live in, a car for personal use, music and TV, alcohol and weekly groceries - madness.

Quietly edging towards the exits, before the general panic

Htp: Michael Panzer, for this:

They are taking cash out of the bank in preparation for a long-haul bad time. A friend in Florida told me the local bank was out of hundred-dollar bills on Wednesday because a man had come in the day before and withdrawn $90,000. Five weeks ago, when I asked a Wall Street titan what one should do to be safe in the future, he took me aback with the concreteness of his advice, and its bottom-line nature. Everyone should try to own a house, he said, no matter how big or small, but it has to have some land, on which you should learn how to grow things. He also recommended gold coins, such as American Eagles. I went to the U.S. Mint Web site the next day, but there was a six-week wait due to high demand. (I just went on the Web site again: Production of gold Eagle coins "has been temporarily suspended because of unprecedented demand" for bullion.)

Like I said over a month ago: "this is a time for individuals to make their own quiet plans and preparations."

Did we make things worse?

I am by no means an expert on anything, except a small branch of mathematics. However, I have spent my life watching people and animals, and have come to my own conclusions.

We in the US prize the individual over society (until they do something really bad), and so are not very accepting of the fact that humans, like wolves, elephants, and most other primates, are mostly pack animals.

In a pack of wolves or wild dogs with a calm, assertive leader, there are very few fights, and co-operation is the norm. The common role for the alpha females is the nurture and protection of the young. For the alpha male, it is protection of the pack from outside threats, and control of the aggressive adolescent males.

The liberalization of divorce laws in the 1960's shifted the balance of power in middle-class homes clearly to the woman of the house. One wrong move, and the man could lose his family, home, and most of his earnings. The pop psychology of the time told us that 'fathers were not needed to raise children', partly to assuage guilt.

Is it not possible that the removal of assertive leadership over teenage males has made some of our social problems worse?

Unintended Consequences?

The launch of Sputnik in 1957 led to a major reform in US mathematics and science education. Motivated by that fear, and aided by massive immigration of well-educated people from Britain and elsewhere, we led the world in science and technology until the mid-1970's.

There has been a gradual and unremitting decline ever since. Many fixes have been proposed, and each has worked, in its own way.

Administrators and pundits said that the answer was more parental involvement. We had band and athletic boosters, the PTA, bake sales and the like. Middle-class parents did the homework for their children. In return for this work, they expected rewards, which fueled grade inflation.

Sociologists told us that teachers needed to be less authoritarian, and more nurturing. Students are now friendly with them, so much so that several hundred have been arrested in the past few years for sleeping and partying with them.

Psychologists assured us that the answer was to enhance self-esteem. In a recent study of mathematics achievement, the top 10% of Americans ranked at the 50% mark for South Koreans. However, the Americans rated their own performance as A/B, while the South Koreans rated themselves as C.

Teachers told us that increased pay was the answer. In many local districts, the pay and benefits for teachers exceeds that of college professors.

Education professors told us that the answer was to change teaching methods and curricula. Future teachers now take far more education credits than in the subjects that they will teach, and the teaching has changed so much and so often that we can't even compare student performance with a few years ago.

Politicians tell us that the answer is to reward 'good' teachers, and punish 'bad' ones. This had led to even more grade inflation, and encourages many to either cheat, or leave the profession entirely.