Wednesday, August 10, 2011

Dow Closes Down 519 Points; What's Ahead

The Dow closed at 10,719.94, down 4.6 percent for the day, mostly based on news out of Europe.
The S&P 500 finished the day down 51.77 points, or 4.4 percent, to 1,120.76. The Nasdaq composite index is down 101.47 points, or 4.1 percent, to 2,381.05.

Rumors circulated through out the day that Standard and Poors is about the downgrade the debt of the French government. This coupled with the problems with the PIIGS does not make a pretty picture for the eurozone. Most likely, the European Central Bank will reverse their current tight monetary policy at some point. The pressure on ECB president Jean Claude Trichet to do so is likely enormous.

The buying that the EU has done to date has been done from a pool of funds set aside for emergencies and has not resulted in any euro money creation. If new money is not created, the liquidation of malinvestments in the EU will intensify. If new money is printed, price inflation will accelerate.

The U.S. markets are reacting to this European crisis. However, the medium to long term prospects for the U.S. are entirely different. U.S. money supply has been accelerating. If this trend continues, any downside action in the stock market will be very short-lived and price inflation will continue to intensify.

Bottom line: Bernanke is already two steps ahead of Trichet as far as money printing goes. If Trichet joins the money printing league, price inflation make go global in a way the planet has never experienced before.

Gold hitting a new high over $1,800 per ounce is no accident.


  1. Dr. Know knows best.

  2. I wish I had nuclear bombs and jail cells so I could run a global counterfeit money racket to.

  3. Why is gold going through the roof while Treasury yields going through the floor?

  4. Robert Wenzel,

    Did you see Shostak's article today at He suggests that your forecast is correct only to the extent that capital consumption has not depleted the pool of real savings. He concludes that if the savings pool is too low then the new money will go towards replenishing that vs the stock market.

  5. Zach Bush said... "[Shostak] concludes that if the savings pool is too low then the new money will go towards replenishing that vs the stock market."

    I wonder, does that mean people still believe that prices one day will drop?

    "...There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.’
    “But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them..."