The Collapse of Managed Markets
Stocks Rally As Collapse Nears
Darryl Robert Schoon
Dec 5, 2007
The stock market surged
upwards upon hearing the US Federal Reserve may cut interest
rates to save the economy. This is tantamount to heroin addicts
rejoicing their morphine will be increased because doctors are
concerned about their rapidly failing health.
Recently, Bloomberg News noted:
U.S. Stocks Rally for Second
Day; Citigroup, Google Shares Gain By Elizabeth Stanton
Nov. 28 (Bloomberg) -- U.S.
stocks staged the biggest two- day rally in four years, led by
financial shares, after Federal Reserve Vice Chairman Donald
Kohn reinforced expectations for another interest rate cut.
The record 331 point gain in
the Dow reinforced the fact that the fundamental driver of today's
markets is not productivity, profitability, or growth but rather
the availability of cheap credit.
Prices depend on buyers
and when buyers depend on credit and credit becomes dear, prices
page 3, How To Survive The
Crisis And Prosper In The Process
Since August, central banks
have been pouring credit into financial markets in Asia, Europe
and the US in the hopes of containing a credit contraction that
is threatening the stability of capital flows and global finance.
It is not working. The current credit contraction is the beginning
of the end of credit-based capital markets as we know them.
ALL MANAGED MARKETS
COMMUNIST MARKETS COLLAPSE SOONER
CAPITALIST MARKETS COLLAPSE LATER
In August as credit markets
were beginning to fail, I spoke at Professor Antal E.Fekete's
Gold Standard University Live (http://www.professorfekete.com/gsul.asp)
in Szombathely, Hungary. In my speech (available at http://www.drschoon.com/media.asp),
I pointed out that capitalist and communist markets are not
free markets-both are managed and both are destined to collapse.
Communist and capitalist markets,
while fundamentally different, are both managed markets-though
for different ends and in very different ways. Communist markets
are managed by governments setting production goals and price
controls. Capital markets are managed by central banks issuing
credit in the form of debt, thereby indebting producers, savers,
and governments with unsustainable levels of debt-which is where
we are today.
WHAT WE DON'T KNOW ABOUT HISTORY EXPLAINS
Capitalism, sic credit-based
economies, first appeared in England in 1694 when King William
III chartered the Bank of England, the world's first central
bank. The legal issuance of credit-based money by private bankers
via a central bank enabled England to dominate global commerce
and world power for the next 200 years.
But by 1900, even the spoils
of imperialism could no longer pay for England's mounting debts
and expenditures. In the 1870s, increasing military costs combined
with a negative balance of trade began to drain England's treasury
of its gold and England's reign as a world power was over.
England was then succeeded
by the United States whose economy, at the time, was savings-based,
not debt-based. However, in 1913, this changed. In 1913, private
bankers accomplished in the US what they had previously achieved
in England-the creation of debt-based money by a central bank
and the implementation of a national income tax now necessary
to pay for America's increasing debts. Mike Hewitt's revealing
article on this subject, America's Forgotten War Against Central
Banks, is a must-read and is available at http://www.dollardaze.org/blog/?post_id=00255.
Also on this subject, movie
producer Aaron Russo (Trading Places, The Rose,
etc) made a stunning documentary, America: Freedom to Fascism
which can be viewed at http://video.google.com/videoplay?docid=-1656880303867390173.
Russo's film is as chilling it is disturbing; and just as Hewitt's
article is a must-read, Russo's documentary is a must-see.
HOW HIGH DOES A BALLOON RISE
WITH A HOLE IN IT?
W. Edwards Deming
The cheap credit made available
by the Federal Reserve was to soon ignite the largest speculative
bubble in history, a bubble so large its collapse was to bring
down the entire global economy; something that had never happened
before in the history of the world-for the Great Depression of
the 1930s was caused by the collapse of the 1920s US stock market
bubble fueled and inflamed by cheap credit provided by the US
Federal Reserve Bank beginning 20 years before in 1913.
Today, in 2007 we are in a
similar situation. The cheap credit policies of the Fed under
Chairman Alan Greenspan in the 1990s created the spectacular
rise and collapse of the US dot.com bubble in 2000 and the subsequent
rise of the US 2002-2005 real estate bubble-a bubble which is
now collapsing and destroying investor confidence in debt-based
capital markets all over the world.
This collapse of capital markets
is soon going to become far worse as defaulting subprime CDOs
are joined by defaulting corporate debt. The Next Dominos:
Junk Bond And Counterparty Risk by Ted Seides from www.peterlbernsteininc.com
available at http://www.investorsinsight.com/otb_va_print.aspx?EditionID=619
is an insightful and excellent read on newly emerging risks as
enormous and once safe capital markets implode. This extraordinary
collapse of capital markets presages perhaps another global great
GOLD & THE COLLAPSE OF MARKETS
The role of gold in the collapse
of credit markets is clear. The unraveling of today's credit
markets is due to the erosion of investor confidence in debt-backed
assets. Falling confidence in debt will give way to chaos in
the markets; and gold in its role as a safe-store of value has
been the ultimate hedge against monetary chaos in any form at
The growth of debt since 1913
when central banking was established in the US has exceeded belief.
Global debt markets, i.e. treasuries, asset-backed securities,
munis, etc. and its derivatives are far larger than today's equity
markets. This is because the end result of a central bank debt-based
system of money is debt, more debt, and even more debt.
As credit markets collapse,
wealth previously invested in interest-bearing debt will seek
liquidity and safety no longer to be found in debt instruments
dependent on constant economic expansion for repayment.
It is here John Exter's inverted
pyramid models our expected future. According to John Exter,
the former central banker who passed away last year at 95, gold
will be the ultimate destination for wealth and savings when
the economy implodes.
CAPITALISM DISTORTS COMMERCE
Now, almost 100 years after
the US adopted England's debt-based money system, we are learning
the expensive lesson that capitalism's cheap credit comes at
a far higher cost than expected.
In the end-an end that is rapidly
approaching-cheap credit undermines market stability giving rise
to speculative excesses that destroys the balance between producers
and consumers and savers and borrowers, a balance that exists
naturally in free and open markets.
The collapse of communism's
managed markets happened in the 1980s. Twenty-five years later,
capitalism's managed markets are now also collapsing. The collapse
of capital markets is going to be difficult and painful and will
bring hardship and heartache in its wake. But have faith, for
the reappearance of free markets may follow-and with them, the
return of gold and silver currencies.
Darryl Robert Schoon
About Darryl Robert
In college, I majored in political science with a focus on East
Asia (B.A. University of California at Davis, 1966). My in-depth
study of economics did not occur until much later.
In the 1990s,
I became curious about the Great Depression and in the course
of my study, I realized that most of my preconceptions about
money and the economy were just that - preconceptions. I, like
most others, did not really understand the nature of money and
the economy. Now, I have some insights and answers about these
2005, Marshall Thurber, a close friend from law school convened
The Positive Deviant Network (the PDN), a group of individuals
whom Marshall believed to be "out-of-the-box" thinkers
and I was asked to join. The PDN became a major catalyst in my
writings on economic issues.
When I discovered
others in the PDN shared my concerns about the US economy, I
began writing down my thoughts. In March 2007 I presented my
findings to the Positive Deviant Network in the form of an in-depth
148-page analysis, "How
to Survive the Crisis and Prosper In The Process."
to my presentation, though controversial, generated a significant
amount of interest; and in May 2007, "How To Survive The
Crisis And Prosper In The Process" was made available at
www.survivethecrisis.com and I began writing
articles on economic issues.
in the book and my writings has been gratifying. During its first
two months, www.survivethecrisis.com was accessed by over 10,000
viewers from 93 countries. Clearly, we had struck a chord and
www.drschoon.com, has been created
to address this interest.