Summary
Financial engineering caused the mess The REal economy feels the pain Collapsing markets and confidence increase the pain Only Government Intervention Can Solve the Problem Sell the Gold and Buy Stocks is the Best Advise
Analysis
Financial engineering by the "Masters of the Universe" created the mess we are in. Over zealous adherence to shifting investments overseas to meet ever higher profit expecations of Wall Street reduced the purchasing power of individuals. The result was a squeeze on the consumers and a forced increase in borrowing to meet everyday needs.
Of course this result was predicted and anyone taking Econ 101 would understand that without the continued circular flow that comes from workers getting adequate pay, then even the demand for the lower cost Wal-mart staples is diminished. It is a vicious cycle, but in an economy where the "ownership class" as Business Week called them could exist without a growing a ever richer Middle Class, could prosper was a Grand Illusion fostered by academic economists who worried that any divergence from the orthodoxy would lead to a sudden reimposition of Smoot Hawley tariffs. Well, I have news for you, that is coming and it is coming because they couldn't face up to the fact that the largest and most dynamic economy was borrowing more than 10% of its GDP from abroad to finance its appetite.
The solution is not necessarily to throw globalization overboard, but to understand that David Ricardo didn't exactly condone allowing free markets to reign. The laws of comparative advantage are quite simple, but they don't mean that a country only produces port and another only produces wool. They suggest that trade must be balanced to insure optimality. When one nation only consumers and another only produces then this creates an imbalance. That has been the case since the United States first started running a trade deficit in its real account in the mid-1980's. Tobelieve it could continue was to believe in the tooth fairy.
The solution in the short-run is to sell monetary gold held in vaults and break the downward slide of the market and the upward march of gold and othe precious metals. The Treasury should sell the gold which is immaterial in terms of its value relative to the size of the US economy and purchase stocks. It would drive up the market, change psychology, and make holding precious metals less valuable. Once gold begins to collapse and holding real assets in companies that employment people and produce goods needed for everyday life, then the real economy will recover. If the government owns a share of the private sector, then it can force changes in industrial policies that have led to the imbalance between mainstreet and Wall Street.
