$4 Gas | An Explanation

I've been posting charts of the dollar index and articles relating to the price of gasoline. Some of you may not know the implications of such a move, so I thought it would be helpful to explain what this all could mean in the coming days, weeks and months.

Anyone who lives in the real world has been feeling a price crunch in everything from gasoline to milk and bread at the grocery store--especially over the last few months. Many people believe these price increases are due to inflation or speculation, and that is the fatal mistake most people are making in their thinking.

As part of an effort to shore up bankrupt financial institutions after the collapse of the housing sector, the Federal reserve has been engaging in what they call 'Quantitative Easing.' It's actually raw money printing. In a normal world, this indeed would cause inflation, but the Fed is actually fighting a massive deflationary spiral.

Back in September 2008, led by the collapse of Lehman Brothers, the world fell headfirst into a deflationary collapse. Deflation occurs periodically in free market systems. When prices outpace the market's ability to support them (asset bubble), they eventually collapse (pop). Because deflation causes asset prices to decline, it destroys debtors because they lose the ability to service their debt. Those bad debts must be defaulted and the creditors must take their losses.

In the case of the housing bubble, rampant speculation fueled by a failure in oversight by numerous regulatory institutions; regulators in bed with lobbyists; and many other failures, led to the largest asset bubble and subsequent collapse in human history. Credit growth fed by lax monetary policy at the Fed finally caught up to itself.

Deflation affects everything; that's why you saw a barrel of oil collapse from a high near $150 per barrel down to nearly $20 a barrel in the beginning of 2009. It's why you saw the financial industry nearly collapse in September 2008. Manias always end in collapse.

Fearful of having to actually watch their buddies on Wall Street go through the same pain as Lehman, CONgress decided to bail them out when then treasury secretary Hank Paulson asked for $700 billion dollars.

In a desperate bid to prop up housing prices nationwide, all kinds of accounting games and gimmicks have been employed. In addition to allowing the banks to mark their home prices to whatever they want, the Federal Reserve has been buying all the toxic, value less mortgage backed securities held by the banks at 100 cents on the dollar. The problem is that you can't reanimate a dead corpse, and any games you play will never forestall it eventually rotting away. That is our current housing and financial market--with one big caveat. Now all the losses are on the taxpayer's back.

The Fed's money printing--coupled with zero interest rates--flows one direction. Because only the big financial institutions get to borrow from the Fed at zero percent rates, they are the only ones getting the benefit of making money off of whatever they invest it into. Lately, this has been everything not tied down. The stock market, commodities, gold and silver have all been part of the buying spree. You get the benefit in the form of higher prices for everything you need to survive. This doesn't mean the dollar is dead or that cash is not king--this is a transitory period much like the summer of '08.

The end game is not for certain, but another massive collapse almost certainly is. Having plenty of cash and a healthy stash of food and other necessities on hand might not be a bad idea. When the big money is piling into 13 week T-bills at 1/10 of a percent in interest like they are now, something big this way comes.

Not since the 1930's has the U.S. been in a deflationary depression like we are now. Prices will again fall, but you may not have a job or the ability to pay them--that's deflation. And the longer we allow our representatives to ignore our problems, the greater they will become and the worse the pain will be.