Yesterday’s stunning stock market drop signals that the looming world financial crisis everyone has predicted for months has finally arrived with a vengeance.
Historically, the stock market has traded around a Price-to-Earnings (P/E) ratio of 15 times the earnings of traded companies. Knowing this, one would wonder why investors would forget this principle and speculate during times when the market’s average P/E ratio has soared above 15 times earnings, but this ignores the fact that investors are not the cold calculating rational beings assumed in most financial theories. Investors are people, subject to the same flights of fancy, irrational exuberances, and emotions as are we all. How else to explain why investors have continued to pour money into a vastly overheated stock market whose P/E ratio hovered above 21 over the past few months.
Actually, investors were forced to continue pouring money into the stock market because the Federal Reserve’s easy money policy of low interest rates left them little choice. Along with the Fed’s easy money policy of practically zero interest rates, has come the predictable inflationary effect despite assurances by establishment economists that the laws of economics were no longer relevant and the discredited theories of John Maynard Keynes were somehow magically applicable again. Easy money from the Federal Reserve in the form of zero percent interest loans have meant that banks were not forced to pay interest to savers to borrow their money. Unable to earn a decent rate of return from their money, savers were forced to take on additional risk to achieve their earnings targets by investing in the stock market. This problem was compounded by the inflationary effect triggered by the Fed’s easy money policy of zero percent interest rate loans to banks through the discount window.
Inflation is a pernicious tax levied on money through the destruction of its purchasing power. As money loses its purchasing power, more and more of it is required to purchase the same basket of goods. Those who borrow expensive money with greater purchasing power are able to repay their debt with much cheaper money that has lost its purchasing power. We’re all aware of this principle at work when we see rising incomes spurred by inflation while our mortgage payments seem to get smaller in comparison to the scale of our increased earnings. Those who earned $50 a week in the 1950s while paying a $50 mortgage payment every month woke up in the 1980s to find the several hundred dollars a week they were earning meant that their $50 mortgage payment suddenly didn’t seem to be the burden it once was. This works out well in the area of debt repayment, but it wreaks havoc upon one’s purchasing power as price increases outstrip one’s lagging income. As inflation robs the purchasing power of money, savers require an interest at the rate of inflation to protect the value of their money and above the inflation rate to actually grow their money.
The inevitable result of market distorting inflationary effects is the creation of bubbles whereby investors pour into a hot sector of the economy only to suffer a crash when the bubble bursts as savvy investors take their profits and abandon the bubble to its fate. We saw this bubble effect at work in the housing sector during the last decade as investors drove up housing prices while lenders packaged shaky mortgages into securities which they then dumped back onto a market eager to get in on the bonanza without questioning the underlying assumptions behind these increasingly complex securitizations of mortgage debt. The politicians and government economists all assured the public that their money was safe despite mountains of data and historical intuition screaming that the end was near.
That end was finally realized in late 2008 when the housing bubble abruptly collapsed and threw the economy into a tailspin. Homeowners were suddenly underwater as their housing values plunged far below the amount of their mortgage debt, leaving them unable to unload their overpriced homes. Those who had used Adjustable Rate Mortgages (ARMs) to finance their homes with lower upfront payments in the expectation of unloading the property at a profit before the higher payments kicked in were left ruined in the ensuing debacle.
In pursuit of the easy money policies favored by politicians unable to grasp economic theory and unwilling to put in the sweat equity required to achieve economic growth built upon a solid foundation, the Federal Reserve has lurched from one bubble to the next as investors have been burned repeatedly and trillions of dollars have evaporated all to keep their political masters looking competent for the next election. The housing bubble has been followed now by the stock market bubble which we are currently watching implode. Ironically, it was preceded by another stock market bubble involving the tech sector back around the turn of the century.
Financial experts have been warning about a coming slowdown in China as its building boom was undertaken not because of demand, but because the government struggled to keep its people employed so as to avert political calamity. Millions of unemployed and starving Chinese tend to make the totalitarian government nervous as these millions of hungry peasants realize they have nothing to lose by storming the government and killing off their leaders. We’ve watched China’s leaders attempt to subvert the U.S. dollar as the world’s reserve currency and replace it with their own creation of a market basket of currencies. This was designed solely to place America at a competitive disadvantage in world trade as we would then be forced to pay the exchange premium other countries now pay to trade in the global economy by first acquiring dollars as the preferred medium of exchange that comes with being the world’s reserve currency. Those unknowledgeable in economics fail to appreciate the trading advantage that comes with the dollar being the world’s reserve currency and take for granted this advantage having never known its loss.
China’s troubled economy finally tipped into meltdown with the sudden announcement that the government was devaluing its currency after years of avoiding such a move. China’s refusal to devalue its currency has been a poke in the eye of America as it allowed the Chinese to export their goods more easily due to their strong currency allowing them to purchase raw materials cheaper. The Chinese were finally forced to admit that their economy wasn’t as strong as they had been saying, and investors suddenly began to panic realizing that if China’s economy was in that much trouble, America’s was probably in more trouble.
Nervous investors began looking for the exit this week and rushed towards it beginning Thursday as the stock market shed 358 points from the Dow. These nervous investors were in full panic mode Friday as the Dow lost another 531 points. The last two days have seen $1.4 trillion evaporate into thin air as the stock market has begun its collapse. The lies of the politicians are no longer being believed by investors suddenly jolted into the reality that there was never any solid foundation to their speculation. As desperate as these investors were to preserve the value of their money by taking on the additional risk of an overheated stock market, the realization that holding dollars whose value is being slowly eroded through inflation is preferable to being left holding no dollars at all through rapidly eroding stock prices.
As a Christian, I see the hand of God behind the events of the past few years. America has consciously turned its back on God by embracing the false religion of secular humanism and worshipping the false idols of wealth and celebrity. As a result, God has taken pains to remind us of His power by orchestrating lessons designed to demonstrate His power over Creation and the utter uselessness of those things in which we have placed our faith. We worship the false idol of wealth believing it to be the source of our comfort and safety despite its inability to control anything. God has patiently reminded us that our wealth exists only at His pleasure, and that it is in Him in which we should place our trust as He causes a large portion of our wealth to evaporate as if it never existed.
We ignore God’s commandments believing the secular humanist lies that there is no absolute truth and the only truth that matters is the truth we conjure up in our own minds to justify our wickedness. God allows our society to break down and decay before our very eyes as urban rioting, moral decay, and selfishness undermine its ability to remain the cohesive force for good on which we’ve all come to depend, even if we aren’t willing to admit as much. We see casual disregard for the law with our political leaders being the leading examples as they ignore the Constitution, boldly break the law, and stonewall the investigations of their wrongdoing, sending a clear example to all Americans that obeying the law is for suckers.
America is in decline just as surely as Rome was in decline before the Visigoths gathered outside its gates preparing to sack the city to recoup promised payment for services rendered which Rome failed to deliver. So frightened were the Romans, and so hollow was Rome dependent as it was upon the services of mercenaries due to its lazy abandonment made possible by its enormous wealth, that they threw open the gates and allowed to Visigoths to plunder the city at will to spare their pathetic lives. America’s wealth, that mistaken source of security worshipped by Americans who spend such inordinate amounts of time on its accumulation that it has become their false god, has lulled Americans into their own false sense of security and also caused them to grow lazy much as Rome’s wealth did to their citizens.
Black Friday warns us that our wealth is an illusion which provides a false sense of security and lulls us into a lazy abandonment of our civic duty, and also reminds us just how quickly and easily that wealth can evaporate into thin air. We should heed the warning that God is sending, but we probably won’t, because it is much more amusing to continue down the path of leisure than to undertake the hard work of rebuilding that which we have allowed to so deteriorate. One lesson revealed in the collapse of great civilizations is that it is always easier to maintain a civilization at high levels than to rebuild it once it has deteriorated. Another is that great wealth always corrupts a civilization by freeing its citizens to engage in all manner of debauchery which it never had time for when it was busy building itself up and raising its standard of living.
History reveals the pattern of self-destruction of civilizations in decline, and America is not at the end quite yet, but it has definitely entered into a period of decline which will result in its eventual fall. The forces of evil have seduced the population into believing that it is entitled to a portion of the wealth America generates despite their refusal to participate in that wealth creation. This is a completely unsustainable situation repeatedly demonstrated throughout history, yet our leaders pointedly ignore its lesson in pursuit of power and living only for the moment as their secular humanist religion teaches. Their gospel of redistribution does a great disservice to a compliant citizenry all too willing to believe the false teachings of their prosperity religion.
Once America is gone, the world will enter another dark age whereby the forces of evil in the form of tyrannical warlords will rule over men and the high standard of living which we now take for granted will fade into the distant past. Life will once again become “solitary, poor, nasty, brutish, and short” as Thomas Hobbes so pointedly observed. Future generations will rise up and repeat the historical cycle as their wealth lulls them into the exact same complacency as past civilizations. There will always be those who believe they can ignore historical precedent and create their idealized Utopian societies in their image while ignoring God and His power over His Creation.
Meanwhile, we must live in the present, and Black Friday has ushered in a demoralizing immediate future we must fret over in this present. Take note as God disrupts our wealth, destabilizes our society, and generally wreaks havoc among the things in which we’ve placed our trust in lieu of trusting Him. Study of the Old Testament reveals this same pattern repeated several times with the Israelites who refused God’s entreaties to turn from their wickedness back to Him and His commandments so that they might once again be His people. But hey, we’re much more sophisticated than that and all that Old Testament stuff doesn’t apply to us in this day and age of enlightenment, or so the secular humanists would have us believe.