Why Falling Gas Prices Are A Bad Thing!

You would think that falling prices, like for gasoline was a good thing.

However, remember the last time you were on a train stopped in the station next to another train or in a boat docked next to another docked boat and suddenly, one of the vehicles started moving? You were momentarily disoriented, because you could not figure out whether your train or boat was moving or the other one.

Prices are Not going down, the supply of money in the economy is going down!

This is called deflation and it is the one thing the Fed and other Central Banks fear even more than being found out that they are really private, profit making banks; well, almost.

Imagine if you lived on a little island with a small population and used a certain type of sea shells for money. The amount of shells stayed basically the same as the reef creature that produced them was pretty rare.

Lets say a gourd full of fresh water cost 7 shells, a new hut, 100 shells.

Now, a disease hit the reef killing all of the little money-shell creatures.

Since the supply of money was droped, the cost of everything had to fall. There was simply less money in the system.

Now the gourd of water cost only 3 shells, the new condo, er, hut only 50 shells and so on.

That is what is happening in this economy. The banks create money, then lend it into existence, you'll just have to take my word on this for now. I will give you a link to one of my resources at the end to explain it.

Now with the our banks unable to lend because they are not able to meet their capital reserve requirements, whose value has been devastated by the collapse in their value; money is draining from the economy, giving the impression that prices are falling. When All prices are falling, it is a deflation.

A prolonged climate of deflation is a central banker’s worst nightmare - it tends to stop consumers from spending as they anticipate prices falling even further.

Businesses cut prices even more to get people to buy, running up huge losses, closing, laying off workers, deeppening the problem the threat to the entire economy.

You see, about the only thing that grows in a deflation is debt. Falling wages and job losses, means that the debts are taking an ever growing percentage of the workers income, which is falling.

For example, your mortgage payment used to take 30% of your income, but now, since you had to switch jobs and make half as much money, the mortgage payment accounts for 60% of your income! Obviously this will lead to widespread defaults on mortgages, auto and credit card loans, further weakening the banks and driving the economy down further in a self-feeding death spiral.

Japan's Lost Decade was actually more than a decade, it is still lost, is a deflation that got out of hand. It is tough to undo.

If the Bush administration had taken steps to stop the housing bubble, we never would have had the collapse of housing and the concomitant collapse in mortgage backed securities. Secondly, the might have been able to mitigate its impact if they had stepped in and bought up the bad mortgages and refinanced them last summer.

Now the Obama administration, still in the thrall of the right wingers is still relying on half assed "voluntary" measures which will not fix housing and so the debacle continues.

Traditionally the cure for deflation is inflation!

Back on our little Island, an adventurous Islander sets out on a long journey to find a far off, fabled island whose reefs are teeming with those gorgeous little money-shell creatures!

After a harrowing voyage, whose details are beyond the scope of this little blog posting, he finds Nirvana!

He scoops up a canoe load of the precious shels and heads back home. With more money in the system, (inflation), prices seem to rise again, although we know of course it is the other train moving.

As long as there is not too much money added to the system (hear that Fed?) which would cause Hyperinflation, things will be OK.

It is finding that balance in the money supply that is the key.

What can you do to protect yourself and your family's finances in this chaos?

Get rid of all debt as soon as possible. Declare bankruptcy if you cannot pay. It is time to take matters in your own hands. Walk away from your home if it is seriously underwater, let the bank take it. You will not receive any substantial help from the government if you are not a Wall St bank.

Sell assets such as stocks and real estate as soon as possible, you can always buy them back much cheaper later if you follow this advice.

Buy as much gold and silver as you can. I recommend silver for reasons I spell out in other posts in this blog. Historically, gold rises in price to meet a falling Dow. In the First Great Depression in the 1930's gold and the Dow met at $36, in 1980, after huge stock crash of the 70's they met at $850. Now with the Dow crashing, (despite the recent Sucker's Rally) and gold probing the $1,000 oz mark it is likely that the two will meet again at say $3-$5,000. This is according to Peter Schiff, legendary investor and advisor.

See http://ChrisMartenson.com for a great explanation of how banks fool us into paying them interest on money that they create out of thin air! Ha, what a Hoot!