The Long Crisis

As I write this the Dow Jones averages are up over 250 points after the G20 communicate gave gullible investors a warm fuzzy bullish feeling by announcing a $trillion pledge to beef up the world’s financial system.

The gold market took a quick hit, dropping from about $928 to $894 after G20 asked the IMF to bring forward sales from its gold reserves, raising funds to help the poorest countries, Gordon Brown said. Gordon Brown, the British Prime Minster, of course, is an expert on gold as under his leadership as Britain’s finance minister he sold off most of the British government’s stockpile of gold holdings at about $300 an oz. Gold has gone nowhere but up ever since. Brown is typical of a smart world class meddling politician who wants to do good but often makes a mess of things.

Another factor driving the stock market higher today is that in the United States an industry body announced a major change to accounting rules that would give banks more flexibility on how they value toxic assets. This would relieve pressure on banks with impaired balance sheets, which has been a major driver in financial market distress.

This change in accounting rules would allow the banks to mark their boat loads of largely worthless toxic assets to “model” rather than mark to market. That means the banks will be able to hide worthless assets until such time as they mature. This is a sure fire way to let the banks postpone the losses on trash assets for years and years. It is irrational for the market to rally on this type of news but who says the stock market is rational? The move will extend the depression, probably by many years, as insolvent banks suddenly appear to be solvent.

The move also sinks Tim Geithner’s bailout plans as few banks will want to sell assets at anywhere near what they are actually worth when they can just mark them to model and show them on their balance sheets as being perfectly fine.

In this long crisis we are seeing an incredible amount of stupidity emerge from the US government, banks, and world do gooders. No doubt their collective actions are going to make the crisis much worse than if capitalism were given the opportunity to work as it is supposed to work. Rather than let insolvent banks and businesses fail G20 nations are committing another trillion dollars to bail them out. Har! Since there are nearly 600 Trillion dollars in questionable derivative instruments floating around the world just waiting to blow up that measley trillion will not go very far.

The real problem with G20 is that they are trying to do the impossible. The great G20 dream is to take us back to the world that existed before the financial bubbles started popping. In a world moving towards scarcity and the fact that the US economy, the economic “engine” for the world, was build on the quicksand of consumerism and rampant unwise debt creation neither G20 nor any other entity can rebuild the bubble sand castle.

In time the stock markets of the world will figure this out and the big bad bear will return. But not today, dear investors, not today. The markets think that G20 has saved the world. For now.

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