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Old 12-02-2012, 05:03 PM
Danny B Danny B is offline
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Join Date: Oct 2012
Location: L.A. Ca.
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market fundamentals

Everyone understands market fundamentals like supply-and-demand. Often, it is difficult to see these fundamentals at work.
Towards the end of WW II, it became obvious that the allies would win. Representatives met at Bretton Woods to form a new monetary system.
Bretton Woods system - Wikipedia, the free encyclopedia

It was obvious that America would exit the war in the best shape of the allies.
It was decided that the American dollar would be backed by gold and all other currencies would be linked to the dollar. Centuries of experience had proven that only a commodity-backed currency could survive. The average life of a paper currency was only 30--40 years.

At the end of the war, America had 3% of the population and 50% of the manufacturing capacity,,, in the free world. Post-war, America held about 20,205 tons of gold. It made sense to tie the dollar to gold and all other currencies to the dollar.

Around 1964, American politicians and war profiteers got visions of grandeur and set off to build the current America. The Viet-Nam war was ignited for no particular reason other than profit. President Johnson started the "Great society" project.
America became the welfare-warfare state. GOV printed dollars to pay for all this. The dollar became overvalued compared to gold. Various countries demanded gold instead of dollars in payment. By summer of 1971, gold was flowing out of the treasury at the rate of 100 tons a day. President Nixon shut off the redemption of U.S. debt in gold.

By the late 60s, the rest of the world had rebuilt much of it's manufacturing capacity. Low-wage producers were able to compete with America in several areas of manufacturing. This caused American wages to stagnate, starting in about 1971. As more countries competed, American wages fell even further.
Unwilling to lower their standard of living, Americans borrowed 80% of the savings worldwide.

With foreign competition, American wages stagnated. This situation ended when containerized shipping was perfected. The Emma Maersk can carry 11,000 containers at one time with a crew of 11. It can move a container from China to Long Beach, Ca for the same cost as it takes to move the same container 100 miles inland. ALL U.S. manufacturing was thrown into competition with low-wage markets.

American wages in Manufacturing should have fallen to a global mean wage.
Borrowing held wages up. There are 5 main areas of value-added commerce.
Mining,,, manufacturing,,, agriculture,,,, forestry and fishing.
All of these depend on energy (the master resource) for converting resources to finished products.

The non value added sectors like GOV, banks and lawyers are parasitical on the productive sector.
In the 40s, 1/3 of Americans worked in agriculture. When agriculture was mechanized and automated, they moved to manufacturing. Later, when manufacturing was mechanized, automated and outsourced, they moved to government dependency. Currently 53% of Americans depend on a check from GOV.

U.S. GOV printed the reserve currency and was able to enjoy quite an advantage. With the closure of the "gold window", there was great danger to the U.S. dollar. It was no longer backed by gold.
Kissinger convinced the House of Saud to accept only dollars for oil. Thus, the gold-dollar morphed into the petro-dollar. This bought a few more years of life for the dollar. In 2011, the U.S. dollar reached it's 40th birthday as a fiat currency. History says that 40 years is about the limit.

History also says that wages should fall to a mean. Not wanting to reduce our standard of living downward, Americans borrowed to keep their standards.
Originally, cars were bought with cash. A house loan was 5 years. No longer having our former purchasing power, we started using credit. We used tomorrow's wages to pay for todays goods. As we got (effectively) poorer due to declining purchasing power, we had to reach further and further into the future to pay for today. We promised tomorrow's wages. This worked out OK to a point. When low-wage competitors took our jobs, we couldn't pay what we had promised. The demand for American labor just isn't there.

The producing economy is what supplies the capital for taxes and bond redemption. When the producing economy contracts or dies, the parasitic economy must do the same. This can be avoided for a time but, not forever.
Ludwig Von Mises made it very clear. The end of the credit bubble can NEVER be avoided.
China, 2012 and Von Mises’ Crack-Up Boom | Darryl Schoon | FINANCIAL SENSE

In the end, the market will dictate the outcome. The politicians delude themselves.
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