Thursday, May 21, 2009

The Campfire

Imagine you are sitting at an enormous campfire known as the American economy. You're sitting with two gentlemen you are probably familiar with, Barack Obama and Ben Bernanke. Next to them are two gasoline canisters.

Imagine that one part of the fire begins to burn out. This part of the fire is know as Fannie Mae and Freddie Mac. They quickly pick up their gasoline and dump it on the fire bringing them back to life.

Another part of the fire begins to burn out, Bank of America. They quickly pick up their gasoline and dump it on bank of America. The bank comes roaring back to life.

Then other parts of the campfire begin to run into problems:

-J.P. Morgan....more gasoline
-General Motors.....more gasoline
-California.....more gasoline
-A.I.G......more gasoline
-Ford Motors.....more gasoline

Any part of the economy can be brought back to life. If the American people need help, the government can cut their taxes and even send them checks in the mail. If the treasury bond market starts to fall they can buy treasury bonds. If the stock market falls they can buy stocks.

There is nothing they cannot do. There is no problem they cannot solve with additional gasoline. The gasoline is the equivalent of printing money to bring all these problems back to life.

But what if something else happened?

What if the fire somehow spilled over the campfire walls and caught a portion of the grass on fire? What if that portion of grass then started to spread and grow?

This scenario is the equivalent of the value of the American currency falling.

Please understand this, and let it sink in for a moment.......

If the American dollar starts to fall in value, there is NOTHING the government can do to stop it. All they have is an unlimited amount of gasoline. All they can do is print more money, they have no other tools, NONE.



Now, many people may argue that they do have a weapon. They can raise interest rates and take money out of the economy. Let me tell you another secret.....

This will make the fire worse. It would completely collapse our economy and cause the people holding our debt to dump their gasoline on the fire.

The government can solve any problem, any problem you can think of, with additional money printed.

EXCEPT ONE.

Today, for the first time in a long time, the stock market, bond market, AND the US Dollar fell in unison. Bill Gross, the world's largest bond fund manager, said the fear was of the US losing its AAA rating.

That rating falling to AA or lower is the equivalent of the fire spilling over the campfire. Obama and Bernanke have one weapon to try and fix this problem, and when they use it our entire country will burn to ashes.

A look at the dollar index this week. (Measures our currency against a basket of five of the world's largest currencies)



The gold price has told a different story.

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