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Monday, September 29, 2008

Why is the Economy Faultering? A Simplified Explanation of What Led Up To the $700 Billion Bailout

"Nothing is true, but that which is simple" - Johann Wolfgang von Goethe

I still run into folks, from time to time, who do not understand why it is, that the United States economy is faltering. What's liquidity? What's the housing market got to do with it? What is a CSO? What's a CDO? Is the sub-prime mess over with? Is this a credit crisis? Is it a solvency crisis? Will the bailout help? Is a Depression looming? Is it a bailout for the rich? Where will that money go? Is hyper-inflation looming? Is hyper-deflation looming?

Well, I put something together here, in which I try to explain the overall problem, as succinctly, and easily as possible. There are many facets that I have tried to simplify. I do not discuss bonds. I don't get into treasuries. I simplify the concept of leverage quite a bit. I don't even discuss the problem that the value of the debt obligations isn't understood by anyone. But for an macro-economic view? The following illustrates what is going on ... (Video Included)

So after viewing that video, will someone mind telling me how this $700,000,000,000.00 is going to help lower inflation? Lower unemployment? Lower credit card bills? Encourage folks to save money so that they can purchase a house? The term "Main Street" is being used like a 'flavor-of-the-month' buzzword to engender sympathy. But the facts are, that your average citizen is not only suffering, but also indirectly causing the problem.

That $700,000,000,000.00? It's simply going to disappear into the black hole of what is in essence? A bad trade. And folks, I do mean, it will disappear. The market is going to eat that capital infusion like a mid-afternoon snack. Although the taxpayer will still have to foot the bill for that $700,000,000,000. It will accomplish? Nothing.

Imagine you're in a losing trade. What have I taught folks for the last 10 months? Control and manage your risk! Control and manage your risk! But that's not what is going on here. We have, in essence, a bad trade. And instead of controlling and managing the risk? Instead of companies being forced to lower their leverage? Instead of moving CDO's to an exchange where they can be tracked and properly valued as stocks are? They're crossing their fingers and assuming that "It'll turn around! It'll turn around!". Haven't I said, for the last 10 months - that this is the worst possible thing that any trader can do?

It can't turn around until your average citizen is no longer over-consuming. It can't turn around when it's harder and harder for your average citizen to make a living. It can't turn around when your average citizen isn't saving their money. It can't turn around when your average citizen is exacerbating the problem, by living off their credit cards.

In essence, many of the 'powers that be' are trying to manipulate the market, in the belief that they can 'control it'. They are trying to manipulate and instigate a massive short squeeze? In the thought that they can turn a profit of trillions of dollars down the road.

But it's as if we are staring at a bad trader who refuses to give up on a losing trade. They think that if they just throw enough money into the 'account'? The trade will turn around. The fault with this line of thinking? Is that this is in essence a 'leveraged trade'. The problem with the line of thinking is that the trader does not realize they are in a vicious circle, that is feeding off of itself.

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Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.

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