It was a great run since 2003, wasn’t it? The economy was running smoothly, employment in the construction industry was at a peak, stock prices reached new and higher levels time after time, sales of wide-screen TV’s and hand-held telephones were hotter than ever, luxury goods flew off the shelves. It was easy to borrow money for almost any purpose. Cash was plentiful. Everything was rosy.

An early hint of trouble on the horizon was the significant drop in the Dow Jones Transports Average in July 2006. Then sales of new and existing homes began to stabilize and fall off in the Spring of 2007. Initial public offerings peaked. Major hedge funds sold off parts of themselves to offshore investors, some of which are “sovereign funds” owned by the governments of deep-pocketed nations. It is not unreasonable to suppose that those who sold saw handwriting on the wall and elected to cash in while the time was right. One prominent hedge fund manager threw a glorious birthday party for himself at a fancy New York hotel at about the same time as he sold part of his company to a Chinese investment fund in what appeared to be a bit of a rush to get the deal done before the roof caved in.

Now, of course, the “subprime crisis” has hit with a vengeance. CEO’s of major institutions have been invited to leave quickly, although with princely golden parachutes which will enable them to live the rest of their lives in supreme luxury without ever having to work again. All of this was the result of a foolhardy attempt to create “value” where there was none. Financial engineers, with the willing cooperation of the rating agencies, produced investment packages which, in their quest for “return,” major banks snapped up in pursuits which seemed like feeding time in a barrel of fish. And now the decline in the markets for new and existing houses has slammed on the brakes throughout the economy.

Who pays for all of this? Ultimately, of course, it is the people, because the people are the targets of last resort. Much of the damage will take form in the decline of the value of the dollar, to be caused in large part by the manufacture of dollars out of thin air by the Federal Reserve. Our so-called “money” is not money in the classical sense, because it is not backed by gold, or by silver, or by anything of tangible value – only by a promise made by the same agency which is printing dollars!

Even in prosperous times, the Fed maintains an inflation target of about 2% per year. That means that there is a deliberate plan to devalue your money, already designed into the system. Over centuries, paper money schemes have always failed, sooner or later. This time, here and throughout the world, the result will be no different.

The paradox is that we are coming to the end of an inflationary era and the beginning of deflation. One of the hallmarks of deflation is the contraction of credit, which is already apparent in mortgage financing. Deflation will carry most prices downward along with it, including the price of staples, as demand declines. Even the price of gold will decline as the value of the dollar increases in a deflationary economy.

A word should be said about the ethanol craze, which is a fraud. Now we hear, as we suspected, that to make a gallon of ethanol requires the input of more energy than the ethanol will produce. Something is wrong with this picture. The Government subsidizes farmers to grow corn, so that subsidy is taken from the people in the form of taxes (or, more likely, borrowed money), which in turn produces ethanol, the production of which is also subsidized, and that subsidy is also paid for by the people. And now we find that not all of the ethanol which is being produced can easily be marketed, since it cannot be delivered by pipeline because it is corrosive; whereupon the market price of ethanol is falling below the cost of production and the viability of the plants which make it is imperiled. Undoubtedly, there will be calls to “bail them out,” adding to another long list of bailouts, all at the expense of “the government,” which means you and me.

Where is the sense in all this corn-based ethanol business? There isn’t any, and there never was. It’s nothing short of a boondoggle foisted upon a gullible public by those who grow the corn and those who refine it, all with Government as the Chief Enabler. However, the party is slowly coming to a close.

All of these financial disasters, booddoggles, deceptions, and delusions will lead to a sorry end. One of the best plans that the man in the street can do while he works as hard as he can to feed and house his wife and children is to try to get his debts paid off, cut way down on fancy things, and try to keep putting some money away – fully insured by the FDIC – which itself is no paragon of ultimate safety either, but probably reasonably safe for at least a little while longer. Right alongside that program, he should educate himself about the workings of the stock markets so that he may add to his storehouse of defenses in bad times and prepare to take advantage of truly cheap prices in first-rate investments when the economy begins to turn up again. One of the best ways to accomplish that is to subscribe to an investment newsletter or two, or three, and learn as he goes. Many of them are free, and many of them are written by veterans in the industry who have decades of practical experience, some even going as far back as the Depression of the Thirties. It pays to listen to those who have “been there” and have learned the hard way, in the school of hard knocks.

William G. Kurtz Jr. http://www.candlewave.com/candlewave.htm

Article Source: http://EzineArticles.com/?expert=William_Kurtz