Very good scenario, but let's not forget that the Fed acted to tighten money supply after the '29 bubble burst and kept it tight, despite a devaluation of the USD in 1933, and the confiscation of gold.
So while the causes of the '29 crash are still disputed, the antidote generally is not, namely increased liquidity in the system would have eased, and not exacerbated the economic healing.
And specifically, with regard to your scenario, the logic breaks down since the objects being auctioned have no value except that which people place upon them. Shares, on the other hand, represent a stake in an economic unit, ownership of a corporate entity with a value based upon corporate revenues and earnings.
Now if people start independently bidding up the price of those shares to an extent that the price no longer represents the value of the corporation, then inevitably greed will give way to fear and the value will return to historical models.
But we won't see the major companies go to zero value, and those who were smart enough to make their exits at the top (and even sell short) and accumulate cash will be in place to pick up the pieces and start the process all over again.
But with regard to money supply, when people are buying stocks, money supply shrinks as cash is exchanged for equities, which are not counted in M3. When those equities are sold at higher prices and the cash parked in money market accounts, it contributes to MZM growth. I also believe that short-selling, since it qualifies as debt (a loan from the broker of equities, sold and converted to cash), increases money supply as well.
When this cash is eventually redeployed back into equities, the money supply will shrink in a corresponding manner.
At least this is how I understand this part of the process. (but hey, if I understood it all, I'd be working for AG.. :0)..
The bottom line is that in '87 we also saw a market crash of major proportions, and the response by the Fed was to make liquidity and credit available so that assets were not sold off in a financial meltdown. And given growth of money supply right now, this is apparently what they're trying to achieve now (without lowering rates in a manner that appears to be a surrender to wall street). The Feds job is not necessarily sound money, so much as in maintaining economic activity, relatively low unemployment, and the conditions that permit the market to wring the excesses out without cannabilizing the economy in the process.
Btw, I think Karen Gibbs on FoxNews is right... She's predicting a .75 basis point decrease on Tuesday and no action in May.
Regards,
Ron |
