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March 26, 2009

Can the Zimbabwean School of Economics SAVE THE WORLD??...
by Clive Maund

Originally published March 25th, 2009.

The bearmarket rally in the broad US stockmarket is thought to have about run its course, although it could run as far as 900 on the S&P500 for reasons set out below. The rally had its origins in extremes of negative sentiment before it started, so that once it got underway it was fuelled by short covering and media hype, especially the Obama optimism effect. In particular the big jump on Monday was portrayed almost as the start of a new bullmarket. Actually, Wall St had good reason to celebrate on Monday, for as Dr Housing Bubble makes clear in his article Public - Private Investment Plan for Dummies , the PPIP as it is known is just another gigantic scam to funnel taxpayers money into Wall St's pockets. We should therefore bear in mind that due to this latest highly successful fleecing of the taxpayer by Wall St, we could see the rally continue even further to the 900 area on the S&P500. However, upcoming earnings are expected to be AWFUL and this should pull the rug from under this rally before much longer. So if we see any significant further progress by the broad indices it will be time to go short.

There are two central problems that prohibit the return to normal healthy growth of the US economy. One is that natural cyclical recessionary forces have been obstructed for so long that they have built up to disastrous proportions, especially as speculation and pyramiding via derivatives have ballooned the excesses to astronomic proportions, and as is already plainly obvious, these forces are now unstoppable. Like King Canute trying to stop the tide coming in, the response of the system to these devastating corrective forces is to try to beat them back by employing more of the excesses that created the problems in the first place. Hence the continued bailouts and the buying up of Treasuries etc. This is like a gambler on a losing streak finally going down in a blaze of glory as he throws everything he has on to the table, only to lose anyway and be shown the door. The ultimate outcome of all this will be a hyperinflationary depression - money becoming worthless and most everyone and everything broke and dysfunctional. The other central problem is that the country is essentially run as a gigantic crime syndicate - corruption at the top, across the government and throughout the banks and Wall St is now so deep rooted and endemic that there is only one way that the people can rid themselves of it. Right now, after years of soft living the population don't have the stomach to do what is necessary to rid themselves of these parasites, and it will only be when the television flickers and dies and the supermarket shelves are empty that the average American hauls his weighty posterior out of the armchair with the intention of "doing something about it" only to find himself being taken down to one of the large compounds already organized where he can meet and chat with plenty of people like himself.

With last week's announcement by the Fed and subsequent developments, the powers that be have "nailed their colors to the mast" and made it plain that they are going to manufacture as much money as they think is necessary to prevent the system from imploding - in particular to stop the Treasury market from collapsing and to keep the zombie entities at the center of the crisis limping along. What they have neglected to mention, and what you have to figure out for yourself, is that given the magnitude of debt and especially the enormity of the derivative deleveraging going on, they are going to end up creating blizzards of money to battle the monster, and that means that we are on the road to hyperinflation. Yet, despite the intent to exponentially increase the money supply to battle the deflationary juggernaut, there is no guarantee that they will succeed - on the contrary, due to its enormity, they are likely to fail, and their obstinate and misguided attempts to block the necessary cleansing forces of contraction, obstructed for so long that they have built up to disastrous proportions, will only make the inevitable collapse that much more total, and involve the destruction of Fiat currencies worldwide, and the forcible elimination of the old order that created this enormous mess by a deeply discontented populace, who will by this time be highly motivated by a lack of food, water and electricity.

If someone told you that the the broad stockmarket will double over the next 2 years you might reply "Great - I can recoup my huge losses!" Trouble is, if you sell for your stocks for twice their current price in 2 year's time and go into town to spend the proceeds you are likely to find that your dollars will only buy a quarter as much as they would today, or less. Doesn't sound so great now, does it? Forget the Austrian School of Economics - welcome instead to the new era of the "Zimbabwean School of Economics" which has been field tested and proven in the country which inspired its name. Proper application of the schools' precepts will ensure that there is always enough money for everything - problem with a budget deficit? - no problem, just create the money and pay it off, problem with insufficient demand for Treasuries? - no problem, just create the money and buy them, problem with interbank liquidity? - no problem, just pump money into the banks until they have so much they are throwing it out of their tall buildings by the binload, problem with restive workers pay demands? - no problem, just create the money and pay them more, problem with not being able to pay the CEOs of bankrupt companies their accustomed huge bonuses? - no problem, just create the money and pay them their bonuses, and why not double them? So we see that there really is no excuse for a liquidity shortfall at all - the problem until now is clearly that those responsible for creating the money have been too conservative, too timid, they have not been bold and imaginative enough - perhaps this is because they have not fully realized the power at their disposal, not fully appreciated that without the restraint of a gold standard, the sky is indeed the limit - why should anyone who wants anything go without? - especially if they are big and powerful and have intimate connections with influencial figures in the government. Fortunately, as the events of the past week have shown, they are waking up to the error of their ways and starting to see the light. We can therefore look forward to 100% cooperation from the US Treasury and Fed in the fight to beat back the demons of illiquidity. The general stockmarket went wild on Monday celebrating the adoption of the Zimbabwean School model and the unveiling of another plan to siphon taxpayer Money into Wall St. The Precious Metals sector, overbought after last week's spike, has had to surrender the limelight temporarily, but don't expect that to last long. Gold and silver are going to go nuts as a result of implementation of the Zimbabwean School's precepts. This is because an unfortunate flaw of the Zimbabwean School's model is that it is more difficult to expand the supply of goods and services in an economy than it is to expand the money supply. This really is a shame because with so much money flying around many people should by rights be rich, but instead they are going to spoil everything by bidding up the price of good and services across the board, so that those who want to preserve the purchasing power of their money will have to convert it into something whose supply is finite and cannot be significantly expanded at short notice, the ideal choices being gold and silver. When the world of Fiat hyperinflates into oblivion the stampede into tangible assets will accelerate and drive a huge parabolic spike in prices with those tangible assets that are compact and durable being the most favored, these of course being gold and silver. It is to be hoped that the stewards of the Fiat money system do not wait until it collapses in smouldering ruins before they restore sanity and order by reinstating The Gold Standard.

Clive Maund,
CliveMaund.com

The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

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