14.0 A Fool's Gold

At first sight of an economic or financial collapse, financial investors and traders, or simpy those with money scurry out their funds from the stock market and into investments considered as safe havens such as bonds, swiss francs, or gold, among others. The rush into these safe havens increases the price of bonds, the appreciaton of the swiss francs, and the increase in the value of gold. This, in turn, precipitates the stock market crash. At the outset, the first movers will find themselves justified in making the early exit as panic and gloom trumpeted by mass media induce more of the the resilient stock investors to pull out their funds from the stock market and join the fray into safe havens. As the exodus continues, these safe havens become too overcrowded that late comers then realize that the house of cards that everybody has gone into soon come crashing down. Panic and gloom has created a sucker every minute. Safe havens has become a legalized Ponzi scheme where the last movers are always left holding the bag.

Safe havens are a Fool's Gold in that it creates an illusion that these will continually grow in value. Any growth in the value of an investment that is fueled artificially by either fear or greed will eventually die down and reverse itself. This self-correcting mechanism of the market does not fail. Unfortunately, when it is time for the market to correct itself, the gap between, as well as the numbers of, winners and losers will have widened by multiples such that the distribution of wealth has become even more skewed than ever before. The rich become richer and they become fewer as well.  

While the safe-haven investments enjoy continuing growth momentarily, the stock market crash is nothing short of a self-fulfilling prophecy. But as a leading indicator to economic growth, the real economy, already stricken by fear and more fear every day, soon finds itself in a straight-jacket of unemployment and inflation. Expecting the worse is yet to come, corporations start laying off workers in an attempt to cut down cost. As output pulls back, the availability of goods decreases. Coupled with rising cost of fuel, inflation ensues. Suddenly, more and more people find themselves without jobs and home. Consequently, the prophecy that the economy will someday collapse has now become all too real. The collapse of the stock market, which started as a psychological flight to safety, is now justified.

With the few having more money and the many without any, it is clear as day that money is not going around as in the days of plenty. Money velocity determines economic growth and with weaker velocity, you can expect the economy to  grind painstakingly slower than before. If you are wondering why money is not circulating, it is because they are being parked unmoving in a Fool's Gold.