*** The bubbles continue - big one forming in China!
*** Money supply up big time... Dow steady... bonds stabilize...
*** Vacations... and more... including - Mogambo on Monday!
---------------------
"Unsustainable," say economists.
"Bubble," say the sourpusses.
"Buy," say the lumpeninvestoriat.
The average investor cannot bear an opportunity to lose money. He looks at a bubble like a starving cannibal at a fat tourist. The rest of us look on, too, not knowing whether to be appalled or amused.
"Housing prices hit a record in July," reports the LA Times.
"House sales hit record in July," comes the news from Toronto's Globe & Mail.
"Shanghai property prices soar," says a source from China. Apartments rose 18% during the first 7 months of the year, with their sharpest increase in July, our source continues. In the best neighborhoods, the annual rate of increase is running at 172%.
Bu... bu... bu... bubble!?
The Dollar Standard has had its effect all over the world. The flood of dollars first blew up the bubble in Japan in the 1980s... and then bubbles in Thailand... and Malaysia in the early '90s... and then in the U.S. stock market in the late '90s... and now in real estate... and especially, Chinese real estate.
These events seemed almost unrelated at first. But now, the pattern is becoming more obvious. The Dollar Standard allows Americans to spend more than they can afford. Foreign nations, seeing their opportunity, hustle to get a piece of the action. Before long, they are selling more to the U.S. than they buy from her. They are left with dollars in their pockets. What can they do with them? Build more factories! Buy more stocks! Lend, borrow, spend!
The resulting boom attracts more and more capital from overseas and gathers momentum until it has turned into a bulging bubble... which, sooner or later, blows up.
Why don't the bubbles stop? Because the source of them is still gushing up more and more dollars. And now the world economy depends on them. China, for example, has gotten in the habit of selling to Americans... who pay in dollars... which it then uses to build more factories, pay more workers... and buy more U.S. Treasury bonds. And when this peculiar economic arrangement comes to an end, most of the world will go into a gloomy secular recession/depression - much like what Japan has been through over the last 13 years. No politician or central banker wants that to happen... so they fight it with everything they've got. And all they really have is - guess what? - more dollars. To a world suffering from too many dollars and too much credit, they come with more!
In the week of August 4th, the U.S. money supply, as measured by M3, went up by $50 billion dollars. We had to rub our eyes when we saw the figure - we could scarcely believe it. But there it was... more evidence that if the world economy does sink into deflation, it won't be for lack of effort on the Fed's part.
Which is not to say that the Fed will avoid deflation.
Inflation begets deflation, we remind you. By inflating the world economy with dollars, the Fed has created huge debt and huge capacity. Sooner or later, prices fall... for there is just so much stuff people can afford to buy.
The Fed, aided and abetted by the credit industry, tries to keep people buying with lower interest rates... and ever- looser credit policies (we read in the paper that interest- only mortgages are becoming common... and that the average automobile is financed for more than 4 years) but this too begets its own perverse reward. The debt bubble must deflate, just like all the rest of the Fed's bubbles. When interest rates rise - as they have begun to do - the burden of debt becomes heavier and consumers must cut back their spending and pay down their debt. Many people will not be able to pay their debts; they will default, causing further default and bankruptcies up and down the credit chain.
As we said, this pattern is now becoming unmistakable - even to economists. But inside this Devil's Brew is the wild and mysterious dollar itself. How long will people accept these pieces of paper as though they were real money? How far down will it go? What will happen to the world financial system when its reserve currency collapses? "
