The Rise and Fall of Prices

Monday was a no-action day on Wall Street. Tuesday was dead too. Except that gold dropped $16.

The killing of Osama bin Laden was supposed to raise prices. Especially the price of the dollar. The buck has been going down for 3 years. It’s now within a few cents of its all time low, registered back in the ’70s.

We were prepared to advocate more killing, maybe even mass murder, if it would lower the unemployment rate…but the ‘killing lift’ was short lived. It lasted only a few hours. Then, things returned to normal.

But normal is very strange. No matter what happens, investors take it as good news.

Investors’ sentiment is overwhelmingly bullish. Stock prices are unquestionably high. Dividend yields are low.

It is almost enough to make you think we weren’t really in a Great Correction after all. But as near as we can tell, the Great Correction continues.


If we’re right, most investors are wrong.

If we’re right, stock prices will come down – hard.

If we’re right, real bond yields will go up sharply.

If we’re right, commodities are over-priced.

If we’re right, gold should correct.

But wait. There’s more.

If we’re right…the Great Correction is only part of the story. The other part is the feds’ reaction to it.

That’s why all of these Great Correction phenomena could soon give way to another phenomenon – inflation.

If we’re right, the feds are just waiting to see what happens next. They know that there’s something very wrong with their ‘recovery.’ But they don’t know what. They’re just hoping that it picks up enough steam to continue on its own, without the need for more towing.

Because they’re watching prices rise too. Bernanke says this inflation is ‘temporary.’ He’s probably right…to a point. Inflation is rising because of the feds. When the feds stop force-feeding liquidity into the system, prices should fall again.

Asked what would go up after the Fed announced its QE2 program, a shrewd analyst replied – ‘everything.’ Now, everything is up – except real estate. And now the Fed says its program of QE2 will come to an end in June.

So we ask. What will come down when QE2 ends? The answer comes as quickly as a pizza: everything.

If we’re right, the feds have not really laid the groundwork for a genuine economic recovery. Instead, they’ve pumped up government spending…and re-inflated the financial sector. This has put more money in voters’ pockets. Usually, about 12% of personal incomes come from the government’s programs – such as Social Security, unemployment comp, food-stamps and the like. Today, the figure is 18%.

In 1949, 70% of national income came from wages. Now, the figure is barely 50%…with the other 50% from finance and government giveaways. The trouble with income from speculation and government handouts is that it reflects no real increase in wealth. It is ‘funny money.’ For every speculative gain, there is a speculative loss. And for every dollar given in government payments, there is a dollar taken away somewhere else.

QE2 was the funniest kind of money. It was created – by a computer – in order to ‘pay’ Wall Street for US bonds. If we’re right, it was this funny money – combined with other comic acts, including zero interest lending and trillion-dollar deficits – that caused ‘everything’ to go up. And if we’re right, everything will go down when it is taken away.


Bill Bonner

For Markets and Money Australia

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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QE2 has resulted in something interesting nonetheless – there is now a bunch of people who have made a personal fortune from bailing out their banker mates with what would have taken about a week or so of sitting in an office filling out paper and making some phone calls. For them, QE2 means they have an infinite supply of money to buy up assets at bargain prices from people who have not had any relief from the crisis by the government. Very nice.

Why do we have to always assume that the Fed is stupid? They are not stupid!

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