In the world of finance, market sentiments can shift drastically and unpredictably. Bulls can swiftly turn into bears, leaving investors questioning the cause of such abrupt changes. What ignites this sudden panic and transforms feelings of greed into fear?
There are countless theories for these market swings; ideas can arise just as quickly as the market moves, often focusing on current events. Analyzing data and sentiments can yield perspectives as valid as those from professional analysts.
For instance, last Monday, the stock market experienced significant selling, with the Dow Jones Industrial Average (DJIA) plummeting 410 points. Analysts attributed this decline to congressional gridlock over a new stimulus bill. However, the following day saw the DJIA recover, gaining 113 points as negotiations resumed.
Yet this was short-lived. On Wednesday, the DJIA fell by 97 points, despite ongoing discussions about stimulus. By Thursday, the market bounced back, rising 152 points amid more favorable talk regarding the stimulus.
Can you trace the patterns? Do the numbers direct you to a conclusion? Is there indeed a correlation or merely an elaborate sequence of chance events?
Furthermore, if the proposed coronavirus bailout bill is approved at $1.9 trillion instead of $2.2 trillion, does that reflect a less optimistic outlook for the stock market? This type of speculation highlights the convoluted nature of a market heavily influenced by government measures.
Understanding Government Intervention
Government intervention manifests in various forms. A prevalent method today involves the creation of trillions of artificial dollars that are distributed liberally. The Treasury effectively borrows this money from the Federal Reserve, which creates new credit from virtually nothing. Although this fiscal and monetary stimulus appears beneficial in the short term, it is ultimately destined for failure. Nevertheless, for now, the stock market seems to thrive on it.
As more artificial dollars flood the economy, the value of existing dollars dilutes. This devaluation erodes purchasing power over time. John Maynard Keynes discussed this phenomenon in his 1919 work, The Economic Consequences of the Peace, stating:
“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”
Today’s counterfeit dollars mimic genuine ones, appearing in your bi-weekly paycheck and bank account. However, when you try to use them—perhaps for groceries or utility bills—you’ll notice their diminished value. They’ve been compromised by inflation orchestrated by the government.
The Societal Impact of Inflationism
This debasement of currency isn’t new; it has persisted for thousands of years. The current erosion began with the Federal Reserve Act of 1913 and intensified after 1971 when Nixon abandoned the dollar’s convertibility into gold.
To date, the dollar’s value has plummeted by over 96% since 1913—what could be purchased then for a dollar costs substantially more now. The future of this currency devaluation remains uncertain, but limits do exist, even if they are ambiguous.
How much additional currency can be injected into the market before it’s rejected by global trade partners? As the national debt in the U.S. exceeds $27 trillion with a GDP of only $19.5 trillion, it raises urgent questions about sustainable fiscal policy.
The budget deficit alone reached $3.1 trillion in 2020, exacerbated by ongoing stimulus efforts that are set to add at least another $2 trillion to the debt in 2021.
This debt will not be transparently repaid; instead, it will be covered through inflation—something that you are already experiencing. The very dollars you’re earning and spending have been compromised.
Keynes, echoing sentiments similar to Lenin, articulates this process well:
“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
This fundamental truth holds: as the integrity of currency declines, so too does society. With every passing day, this principle becomes increasingly evident.
Sincerely,
MN Gordon
for Economic Prism
Return from Inflationism Has Overturned Society to Economic Prism
