Amid the Financial Chaos, Blessed Be the Name of The Lord

The Meltdown

Since the decisive defeat of Saddam Hussein’s army in March of 2003, the stock market had been on a roll in North America. By late 2007, the market had experienced about five and a half years of positive returns.

It was an unprecedented series of gains.

Statistically, the market was due for a breather; yet many optimists were eagerly calling for another year of positive returns. Only a few were hedging their bets.
A troublesome factor was an emerging, but little understood problem in the United States: sub-prime loans and its travelling companion, Asset-Backed Commercial Paper (ABCP). Some would later call these ABCP ‘assets’ liabilities.

Much later, many in the U.S. came to believe that the financial institutions which created these either lied, or completely misunderstood the risk associated with both toxic products. Nevertheless, it would take some time for the crisis to unfold, and the band, as they say, played on. At the beginning of the sub-prime mess, the fiscal problems associated with it seemed distant and unrelated to business affairs in Canada.

The first weak signal of trouble that I noticed occurred when my wife and I went out for dinner with a friend and his date in February 2008. During our time at the restaurant, my friend’s date complained bitterly about the losses she had accumulated in her mutual funds. At the time, I mentally assigned her losses to the bad advice of an inexperienced financial consultant.

When this same woman learned of my passion for the stock market, more questions followed. But I could not provide her with the comforting information she sought. Unbeknownst to me, the personal financial stress she was experiencing was intense. After hearing my negative take on the market, she immediately became agitated and sought comfort in another drink. Even now, I can still remember her anxiety when she realized that her losses would not be recovered easily.

Although I suspected that the near-term prospects for the market were not rosy, I never imagined the carnage that followed later in the year. No one, not even Warren Buffett, the ‘Oracle of Omaha’ did.

They couldn’t.

Only God knows the end from the beginning (Isaiah 46:10; Revelation 21:6). As I recall, it’s God who gives the power to get wealth, not the simple plans of men (Deuteronomy 8:18).

As I write this piece in early December 2008, the market is hoping for a powerful counter-rally from its autumn lows. This hope is based on statistical patterns and stock market history. Whether it will occur or not is moot. The underlying problems of the market will not be fixed by a simple rally, and the better market analysts and technicians know this, as do their bosses. Obviously, the first problem with the markets is paper fiat money. Simply put, this type of money is a non-gold-backed currency of which value rests in the confidence that pieces of paper can be exchanged for various goods and services.

Fiat money is produced by governmental decree and has existed in the U.S. since the creation of the Federal Reserve System. It has existed as a stronger more absolute form of currency as the world standard since President Richard Nixon closed the gold window to domestic and international markets in 1971.

The second problem is the greed and fear exhibited at times by various market participants. Fiat money allows the defacto agent of the government, the U.S. Federal Reserve, known as a central bank elsewhere, to create money, or liquidity, virtually out of thin air and worry about paying the bills later. The inflation associated with fiat money has been a concern for several decades, but massive Third World immigration and the import of cheap foreign goods have papered over the problems of inflation in North America.

Essentially, some of the First World inflation associated with fiat money has been exported to Third World countries in the form of excess liquidity, which has been used to build dynamic economies and raise the standards of living there. China and India have been two of the major Third World countries that have been blessed. They are now on their way to First World status and may reach it soon. I was truly amazed several years ago when my wife returned from a business trip to Shanghai. This region of China has become a showpiece of Chinese progress and rivals the position of business centers elsewhere in the world.

Up until recently, the only true negative for North America was the ever-declining manufacturing base and the loss of high paying manufacturing jobs. Later, some of the research and development jobs that congregate near manufacturing centers also began to disappear. As did the call center jobs. India was the net winner in this category. For the most part, Wall Street, Bay Street and North American governments seemed to care little. The rich got richer, workers were otherwise employed, and the various governments got their tax revenues. Even the unemployed got benefits, retraining, and handouts.

The trouble is that many of the financial tricks designed to mitigate the effects of inflation and clean up the problems of unemployment do not work over the long term. Eventually, inflation facilitated by fiat money works its way into the financial system as excess leverage or debt. At first, the effects are not noticeable, but at some point the toxic sludge builds and becomes very clear. The continued use of excess leverage or debt over decades produces profound credit inflation.

In other words, prices for financial assets rise dramatically and become unsustainable.

When credit is cut off, as it has been recently, asset prices financed by leverage (debt or credit inflation) sag, since buyers now must rely on their own resources or reduced credit to purchase items. Stocks, cars, houses, artwork, and the like, fall in price under these conditions.

This is what has happened.

Left unchecked, deflation in the form of a depression can follow the bursting of massive credit bubbles. This is what happened in the U.S. during the 1930s after the credit driven inflation of the 1920s. If the symptoms of credit inflation are treated incorrectly by means of massive trillion dollar bailouts, the credit bubble shifts to other asset classes and grows larger. The day of reckoning is postponed but not eliminated.

This is what may happen in most First World countries post 2008.

The present financial carnage with more to come as the decades roll by is not unpredictable. The Bible hints at this. Scriptures in both the New and Old Testaments suggest this. Revelation tells us of a time when a day’s wages buy only enough wheat or barley (that is bread and by extension poultry and beef which are fed various grain stocks) to feed that same worker for a day, and nothing more (Revelation 6:6). This is inflationary, reminiscent of the problems in Weimar Germany back in 1923. It could also be deflationary, that is too many workers and people competing for limited resources force real wages down. This is like China’s market in 2008.

However, the second part of the verse suggests that wheat is harmed deliberately while other food items are left untouched (Revelation 6:6). As the supply of wheat and barley is decreased, inflation sets in if demand for grains (that is mouths to feed) is left unchanged.

Why is this?

War, famine and pestilence come to mind (Revelation 6), but I also suspect that fiat money has a role too. Isaiah states that men shall throw out their idols of silver and gold (Isaiah 2:20; Isaiah 31:7). Some say that this verse means exactly what it says and no more. Some say that these verses have implications for the future financial worth of precious metals. I agree. Erroneously, they say that gold will be rejected because it becomes worthless. I disagree.

I say that these verses describe a time when a generation will exist which cannot determine what is valuable, and will foolishly make paper fiat money their store of physical wealth. Inflation will result. Gold has been and always will be a store of physical value. Easily created paper and electronic money is not. The problems of the fiat money financial system that we live under today, demonstrate this fact.

Another problem with our financial system is the greed and fear exhibited by market participants. When an economy rocks along, as it did from 1993 until 1999, and again from mid 2003 until the fall of 2007, everyone wants more, gets more and then throws greater amounts of money at assets, whether it’s stocks, houses, or cars. They can do this because credit or borrowed money is plentiful. Everyone hopes for gain and pleasure. The attitude of something for nothing abounds. This is greed and it creates unhealthy asset bubbles as well as unhealthy spiritual attitudes of avarice and pride (1 Timothy 6:10).

How many families were unable to buy houses during the last housing bubble while others, who owned or built, demanded more and more? Even within the church during these times, greed can be present. Some imagine godliness as a means of gain (1 Timothy 6:5). This can feed the prosperity message taught by some and rebuked by the Bible (1 Timothy 6:10-11).

When fear sets in, as it did, during the fall of 1987, the summer of 1998, the period of 2002 to mid 2003 and again in the fall of 2008, people hold their money tightly and refuse to lend or give. When this occurs, business lending and charitable donations lock up. When business lending declines to unnaturally low levels, as is currently the case, businesses fold and unemployment increases. When tithes and charitable donations are withheld, the work of the church and charities remain undone. Those in need of spiritual and physical help suffer.

What is the end result? In this environment of fiat money and asset bubbles, greed and fear set in and the phenomenon of stock market volatility emerges. Large pools of money begin to slosh about from one asset class to another, distorting prices and causing financial chaos as the tide of cash ebbs and flows. The average citizen is unable to cope with the high level of asset price volatility and is unable to understand why.

One thing that many average investors do realize is this: money laboriously accumulated over many years can vanish quickly when market confidence sags as fear replaces greed. Following this, many workers will soon experience the same in the employment arena. Under these conditions, people suffer loss and retirement timeframes lengthen. Misery soon follows.

(To be continued in the next issue of Prevail Magazine, as I discuss the Government’s ‘Quick Fix’ versus God’s plans for the future.)

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