By Justice Litle
Talk about whiplash! These markets have been shaken like a terrier shakes a rat. When my plane touched down on U.S. soil Monday, the first thing I did (after clearing customs) was find a newspaper stand. I grabbed a WSJ and a Financial Times from the nearest kiosk. I picked up the Journal, face down, my eyes darting to the first paragraph just below the fold.

This is what I read: “Wall Street, long a coterie of independent brokerage firms, has ceased to exist.”

Yikes. Wall Street is still there, of course. The WSJ was talking about the death of the independent investment bank, as Goldman Sachs and Morgan Stanley -- the final bulge bracket survivors -- rush into the arms of better-capitalized commercial banks.

There will be more to say on that -- but not today. This news cycle has been so fast and furious it’s almost impossible to keep up. First we have the most historic, gut-wrenching week in decades, during which markets gyrate the most in 20 years and gold has its biggest one-day upmove in history. Then Goldman and Merill give up the ghost. Then oil has its biggest single one-day move in history. (Will there be some other bit of eye-popping news hitting the wires as you read this? Probably.)

If paper assets go through the roof, connected players will benefit -- and the ones hurt the most will be the fearful savers left behind.

In contrast, reader David C. wonders aloud about the “depressionary syndrome” – the outcome where the whole world goes into a funk. In this scenario, all prices fall (including stock prices) as investors and consumers throw in the towel and hunker down. Nothing looks good in this scenario except money in the bank... or money in the mattress, for that matter.

I think it’s wise to keep an open mind about things. After all, no one has a crystal ball. But with that said, things have played out much as we’ve expected so far... and all my instincts tell me that we will most definitely not see the global slowdown scenario, where all prices fall and cash is king.

In fact, I’m more convinced than ever we could see the opposite -- a scenario where, in the next nine months, the price of stocks, commodities and paper assets in general explode into the stratosphere.

Agree? Disagree? Let me explain my reasoning -- again in point-by-point format like yesterday -- so you can decide for yourself. Here we go.

1) The U.S. and China have nothing to lose in pulling out all the stops -- and everything to lose if they don’t.

Imagine you run a small family business. The business is your main source of income. It’s provided you a decent livelihood for many years.

Now imagine that for whatever reason -- a series of bad breaks, a tough change in market conditions -- your business is on the brink of collapse. If things don’t turn around in the next few months, you won’t be able to pay the bills. You’ll be bankrupt.

It’s not a pretty picture. But there’s one more thing: Imagine that just as it appears all hope is lost, you realize you’ve got one last option. You have $25,000 worth of unused credit lines you could tap, between your personal cards and an emergency line of equity you have with the bank. If you tap the credit lines and pull a rabbit out of a hat -- come up with a brilliant marketing campaign or something like that -- then you just might be able to get sales back up and pay your creditors.

It’s a slim chance... but with the right gamble, the business might be saved. And if you fail, the $25K you borrow will just be swept up in the bankruptcy filing anyway. The reward is saving the family business. The risk isn’t really a risk at all; if you do nothing, you’re already headed for the courts. So why not throw the Hail Mary pass?

This is the same position the United States government is in.

Uncle Sam runs a balance sheet measured in trillions, so the scale of the business is much bigger. But otherwise, the choices are much the same. We are in such a dire situation right now, the whole kit and caboodle is headed for failure unless drastic action is taken.

It’s one of those weird situations where the risks are so extreme, only extreme action will suffice. In the WSJ on Monday, for example, there was a piece titled, “Consumers Cut Back on Health-Care Spending.” In this article, the CEO of Walgreens talks about how the U.S. has “the tightest prescription market” in his 27 years in the pharmacy business.

It’s so bad, people are cutting back on their pills. And it’s going to get worse.

A few years ago, I wrote about the doctrine of financial MADness in regards to the China-U.S. economic connection. China’s government is dependent on economic growth to keep down political unrest. If China can’t grow jobs fast enough, then millions of farmers and displaced laborers will literally riot in the streets, threatening to bring down the government. As far as China’s leaders are concerned, the calculus is “grow or die.” The civil unrest of a slump would destroy them.

Now, U.S. political leaders have to fear the same fate. Things are very bad for the U.S. consumer and about to get worse... and meanwhile the average Joe’s blood is beginning to boil as he reads about these trillion-dollar bailouts for fat cats.

Like China’s leaders, political leaders in the United States have to fend off a consumer collapse at all costs. They will do this by flooding the system with dollars. They really have nothing to lose... If the stimulus plan fails, the U.S. economy will not just slow down a bit; it will potentially collapse. And then China’s economy could collapse... and the world’s, too.

The stakes are far too high to let this happen. That’s why it won’t happen. China has more than a trillion dollars in U.S. reserves to throw at the problem. The United States has a handy little device called a printing press. Politicians in other countries have no desire to be tarred and feathered either... They would much rather join in and support a paper mania than be carried out by rioting voters.

2) The next president of the U.S.A. will have a window to take even MORE drastic action -- and blame it all on his predecessor.

When a new CEO takes over a troubled company, it’s customary to get all the bad news right out in the open. Why? Because for a brief window of time, it’s possible to blame all problems and issues on prior management. Before the new broom sweeps clean, it lays blame at the feet of the idiot who just left.

Whoever gets elected president of the U.S.A. is going to be in a hell of a jam. They will be inheriting the most godawful economic mess in generations. Republican or Democrat, the challenges will be huge and the advantages slim.

But the new prez will have the chance to do something big -- something drastic -- right off the bat. He’ll have the chance to blame it all on Bush... to say, “This had to be done, and I don’t like that it had to be done, but now we can move forward.”

Chances are high, too, that the next president will embrace his inner socialist and bail out the voters of the land. So far, all the bailouts have been oriented toward Wall Street. The next step is to throw huge sums of money at Jane Consumer and John Q. Homeowner.

This action will be dramatically inflationary, of course. The Fed and Treasury will have to print, print, print... and then print and print some more.

3) Remember who Paulson and Bernanke’s friends are.

In politics, it’s very important to remember who your friends are. If you are lucky and talented enough to climb the greasy pole and make it to high office, chances are your friends helped put you there. And once you slide back down the pole and retire back into private life, your old friends will be waiting to receive you with open arms again. So it’s best to keep them happy.

Hank Paulson, the U.S. Treasury secretary, used to be the head of Goldman Sachs. It’s pretty obvious who his friends are. Ben Bernanke, the chairman of the Fed, came from the Ivy League academic world. His circle of friends is a bit less obvious. But think for a moment -- where does all that Ivy League wealth come from?

Harvard, Yale, Princeton and the like are not just America’s most elite universities. They also practically qualify as the world’s most elite hedge funds.

For example, the “Harvard Management Co.,” a wholly owned subsidiary of Harvard University, has nearly $40 billion in assets. Yale and Princeton are not too far behind.

All these Ivy League money managers have heavy exposure to paper assets. There is really no place to hide when you’re handling that much capital. Do you think Ben Bernanke would leave his old friends hanging out to dry? And Paulson his friends, the elite of the investment banking elite?

America’s biggest pension funds, too, have serious skin in the game. CALpers, the California Public Employee Retirement System, has nearly $250 billion in assets under management. They are loaded to the gills with paper assets (and a fair share of commodity investments, too).

These deeply connected players, with their hundreds of billions in paper asset exposure, would be skinned alive if markets were allowed to head into long-term decline. To Paulson and Bernanke, they are not just constituents... they are friends. They will be a lucrative source of wheeling and dealing down the road.

And Paulson and Bernanke both know full well that, if somehow the system were allowed to implode and paper assets to fall, their friends would be lost. They would have to endure the sad eyes, the harsh words, the forlorn looks -- and most of all the question, “Why didn’t you do all you could?”

4) Remember that the U.S. is addicted to bubbles.

Let’s take a whirlwind bubble history tour. How did we get through the crash of 1987? By flooding the system with money. How did we get through the Mexican peso crisis and the Asian currency crisis and the Russian default crisis? By flooding the system with money.

How did we get through the bursting of the dot-com bubble? By starting up a follow-on housing and private equity bubble... which turned into a massive subprime bubble.

So how will we get through the subprime bubble (the popping of which has led to greater financial destruction than generations have seen)? Any guesses?

If the past 25 years are any guide, we’ve figured out that America is addicted to bubbles... and that when one bubble pops, the solution is to inflate another, even bigger one.

Eric Janszen, a former venture capitalist, put forth an intriguing theory in Harper’s Magazine earlier this year. Janszen theorizes that we are addicted to bubbles. He has come up with an acronym, FIRE, to describe the nature of our addiction. “FIRE” stands for Finance, Insurance, and Real Estate.

Janszen argues convincingly that the nature of the system demands that each bubble be bigger than the last. He thinks the next one could be in alternative energy... and that it could be bigger than anything the world has ever seen:

The next bubble must be large enough to recover the losses from the housing bubble collapse. How bad will it be? Some rough calculations: the gross market value of all enterprises needed to develop hydroelectric power, geothermal energy, nuclear energy, wind farms, solar power, and hydrogen-powered fuel-cell technology—and the infrastructure to support it—is somewhere between $2 trillion and $4 trillion; assuming the bubble can get started, the hyperinflated fictitious value could add another $12 trillion.  Continued...