US Indices Traders Thread 2005

This is an interesting post from oospore in the EWA thread. Thought it makes good read.


Today I want to ask the trillion dollar question, that being how do you create 1 trillion dollars in fresh new assets with out destroying your currency by printing them? It’s an important question because in finding the answer you find the reason the world markets have been on a tear to the upside.

To understand the answer, you must first understand that all that is precious to us are assets- your home, stocks and even art and cars. They are assets and have no real value except that perceived value assigned to them by the buyer. Money is the same way. It replaced gold as the foundation of our monetary system, however unlike gold it is a piece of paper with no value except that which you place on it.

If you print too many dollars, the value placed on them are diminished because you have too many dollars chasing to few goods. Inflation is caused by this. As the number of buyers increases, so too do the prices. If you print too few, the reverse occurs with a strong dollar and no one who has very many. Print just the right amount and you hit the sweet spot where inflation is contained and growth is perpetual.

To keep an asset based system alive you need appreciation of assets to create what is called the wealth effect. People see their home value increase by 50 thousand dollars, so they borrow against the equity to buy a pool. Someone else sees the balance sheet moving up on their stock holdings and they go buy a new refrigerator. In any paper system, assets grow or the economy dies.

The housing bubble has reached its final inning and a new bubble must arise to take its place. The housing bubble was born out of the burst in market value after the 2000 crash. Since then, the markets have been largely ignored by smaller investors who were burned and unhappy with the result of the crash. Money has increasingly moved to homes as an investment. As the housing bubble starts to pop, we will be looking for a new way to create a trillion dollars without printing them. Hence the question- How do you create a trillion dollars? And do this without destroying the value of your currency. The answer is simple. Push up the financial markets and the value of stocks and money is created out of thin air. A stock certificate is valueless, but the owner perceives it to be ownership of a corporation. He feels the wealth of owning 1/1000 of 1% of IBM. It is becoming more and more clear that a manipulation of assets has and will continue to unfold as we see the value of homes ease in the coming years. The money lost will be shifted to another asset class, that being stocks.

The dangers of such a sudden shift in assets with a population drowning in debt will become evident in time, but that time is not here yet and we sit at the threshold of amazing returns in the markets as we see trillions shift from the value of the home to a worthless class of paper we call stocks. In the end, the imbalances in global spending and purchasing habits will reek havoc on our current monetary system and gold will be the keeper of wealth. Until that day arrives, we need to buy stocks and hold them so we can share in the trillion dollar lotto that is about to take place.