The Canary in the Coal Mine and the Death of Alarmism

Published on November 2, 2007 By Artysim In Politics

Although I have been accused of being a "liberal alarmist" I would like to ask you to leave your political opinion at the door and take into consideration the following. As the old saying goes, money talks:

1) Gold has surpassed 800 $ an ounce in value. Adjusted for inflation, the last time it was this valuable was 1980.

2) Oil now costs $ 95.69 a barrel, which adjusted for inflation is pretty close to the cost of oil in the big crunch that happened during the shortage more than 30 years ago.

3) One Canadian dollar is now worth 1.07 U.S. This is uncharted territory, it has never been this valuable before, surpassing the all time high of 1957 when the loonie traded at just over 1.06 U.S. The same is true for the relationship between the greenback and the euro.

4) Citigroup, Bank of America and Merryl Lynch are all having serious "liquidity" issues, to the effect that the CEO of Merryl Lynch is on his way out and the CEO of Citigroup is expected to be getting the boot soon.

5) The stock market is extremely volatile with several hundred point swings in either direction in one day starting to become the norm. Just yesterday there was a 360 point drop on the DJIA, with a similar drop less than two weeks ago. This is comparable to a heart that is beating too fast, and is starting to become erratic with such rapid highs and lows.

6) The federal reserve cut interest rates AGAIN by a quarter point and injected more than 41 billion into the economy yesterday which should have spurred a rally, but the opposite happened.

What does this all mean? These are warning signs that the economy is not healthy. It is like a sick patient and if not treated properly, the condition will get worse. Maybe a recession is coming. Maybe a depression. Maybe a complete upheaval of a lot of the things that people take for granted, who knows.

This is not a "the sky is falling article", but rather pointing out some rather concrete signals that things may not be all too rosy.

History, sadly, is full of examples of when the warning bell rang out for all to hear but everyone ignored it. Not because of people routinely crying wolf, but because it's human nature to ignore difficult problems so long as they don't appear to be affecting you directly. And if my alarmist attitude turns out to be completely wrong and there is no major catastrophe, then at worst these kinds of articles will have hopefully provided you some entertainment, and you can come back in the future and go right ahead and mock me for it! Go back and look at most of the major calamities that have befallen men in the past- most of them were predicted ahead of time. Not by psychics or such nonsense, but by un-biased observation and paying attention to warning signs.

Pearl Harbour was predicted as a likely scenario ahead of time by intelligence analysts- but the brass didn't think it would be feasible for the Japanese to be able to sail so far from home, or use torpedoes in such a confined, shallow area.

It was regularly reported years in advance that the levees of New Orleans were not capable of withstanding a major storm, and that it was only a matter of time before a calamity befell the city.

Why do major catastrophes happen when there are people literally screaming the warnings from the rooftops ahead of time?

Because they are not politically or ideologically convenient to the powers that be

In the movies, the good guy always discovers some dastardly deed about to happen, if only he can warn the right people! Of course the bad guy does everything in his power to stop him, but when the hero eventually stumbles into the office of the president/mayor/ceo/general and tells them about the problem they suddenly leap into action and the day is saved.

Sadly, life is not like the movies. Aside from the fact that I would love to have a limitless magazine of 5.56 mm ammunition that magically creates holes the size of .50 caliber shells when fired (as most action movies do) quite often legitimate warnings of danger go unheeded. The leaders, when warned of such catastrophe, quite often will refuse to listen to sound advice because it contradicts their ideological beliefs, or is not convenient to their personal agenda. Life is full of such examples, and when reality and ideology clash there is often a catastrophe.

Comments

Gideon MacLeish

on Nov 03, 2007

This article needs a bump, Artysim.

Every so often, though, I read an article that cannot benefit from anything I have to say. This is one of those times.

Nice job.

Artysim

on Nov 03, 2007

Thanks Gideon! Every one of my co-workers is currently flabbergasted at the rate that currency values are shifting.... the times they are a changing!

SanChonino

on Nov 03, 2007

Adroit article, and I, like Gid, am pretty much left without words.

But you've given me plenty of thoughts.

Draginol

on Nov 03, 2007

Just saw this. Featured.

Dr Guy

on Nov 04, 2007

Thanks for allowing me a forum to make a couple of points. I have been meaning to write oan article, but just have not had the time.

First point - the Stock market. The large swings are not large. From a historical perspective, they appear large, but then the index was not up at 14k. So that 360 point drop is less than 3%. Not even in the top 10. And 100 point swings represent less than 1%, so they are nothing as well.

But yes, the US economy has some serious problems. And damn me for saying this, but they have to work through the system. And that means we will have a recession (not a depression). The fed has been trying to stave it off with the rate cuts, but that is only going to heat up inflation. Why? Because of the money already pumped into the economy through the housing boom. Money that should be bled out and will be if the government keeps it hands out of the market. Some people will get hurt/have been hurt. But that is a truism in life. We cannot be protected from every contingency in life - especially the stupid mistakes we make, and the government trying to protect us from it is only going to make it worse.

I said earlier that the Fed here in America does not create money. It does not, but it does facillitate the creation as you pointed out, by monkeying with interest rates. The government can only make the situation worse by trying to stop the outflow of money from the economyn through bailouts. Basically rewarding stupidity, and eliminating risk. Both bad moves for any economy.

Recessions are not bad - except to the ones that become the statistics in them. They are a way for the economy to self correct. I know you and I have a philosophical difference about how the great depression was finally overcome, and I still think that the reason it lasted so long was because of the government programs, not in spite of them. The difference between a recession and depression is in making the wrong moves at the wrong time - always with the best of intentions.

The Fed can delay the recession - at the price of inflation. The government can only make it worse. IN the end, the economy, like a runner, has to take a breather, before going on its next run. At this time, we can have a short mild recession. But if we keep trying to fix a problem that essentially does not exist (people losing money through risky investments), we will only make it deeper and longer.

UBoB

on Nov 04, 2007

Very interesting and thought provoking article. The signs are all there, but are there enough people in the right places to interpret them and act?

One interesting fun fact. "According to a history of the dollar posted on the Bank of Canada website, the U.S. dollar plunged in 1864 as the Confederate Army approached Washington during the U.S. Civil War and the Union government temporarily shut down gold trading."

"On July 11, 1864, the Canadian dollar was worth $2.78 US." --- quoted source, cbc.ca

But those were extreme circumstances.

Cikomyr

on Nov 04, 2007

But those were extreme circumstances

amen to that

kingbee

on Nov 04, 2007

"mr herbert hoover says now's the time to buy,
so let's have another cup of coffee and let's have another piece of pie"
--irving berlin

Artysim

on Nov 05, 2007

Dr Guy,

I largely agree with most of what you have said. I think that all sides involved recognize the diagnosis of this problem, the great debate of course is what should be the next step? Currently all of the literature I have read has been very anti-Friedman, so now it's time for me to actually read some of his works to get a less slanted view. Which of his books would you recommend as a "starter"?

Jythier

on Nov 05, 2007

Nobody wants a recession while they're in office... it's a natural part of the economy, but people blame people instead of realizing the naturality of it. So they push it off so someone else can get the blame.

Dr Guy

on Nov 05, 2007

A starter? I guess his tome "Monetarist Economics", but it is long. He wrote on many aspects of economics, but I guess that is "his" text book on the subject. He does have a book on Galbreath (I admit I have not read it) as well as some on Keynes.

And to Jythier, that is a truism. The sad fact is that congress has more to do with Monetary policy, and thus domestic policy, than does the president. But as Harry Truman said, it is where the buck stops.

CharlesCS

on Nov 05, 2007

Great article. I enjoy (these days) finding out about the history I never cared for in the past while at the same time reading other peoples comments about it and enjoy the great debates that could form from them.

While I would rather these kinds of things don't happen and considering that people have a thousands of years of track record of not being capable of learning from their mistakes, I have to believe that sooner or later things like this will happen and I can only hope we can survive it and get passed it. But that's just my opinion, we have come back from it before, I can only hope we do it again.

Jythier

on Nov 05, 2007

Well, congress is made up of the same two parties as the Presidential election - nobody wants the recession when their party is in power, and nobody wants their party to be out of power, so nobody ever wants a recession and they always work to prevent it instead of working to keep the economy growing in good condition through the cycle.

CharlesCS

on Nov 05, 2007

Here's the deal, people accept that mistakes will happen because humans are not perfect, they just won't accepts that they are the ones who made the mistakes.

Jythier

on Nov 05, 2007

Now, repeat after me - "It's Bush's fault"

Welcome Guest! Please take the time to register with us.
There are many great features available to you once you register, including:

Richer content, access to many features that are disabled for guests like commenting on the forums.
Access to a great community, with a massive database of many, many areas of interest.
Access to contests & subscription offers like exclusive emails.
It's simple, and FREE!