dow closes below 8k

saveuplife · November 2008

DriftingByTheStorm wrote:

The biggest problem we have right now isn't even the DOW.
The HUGE red flag that just got hung in front of the globe is that CPI here just went DOWN.
Largest drop on record, in fact.

That means DEFLATION, and that is NOT what you want to be hearing about.

As bad as inflation is,
the fact that we are in such a severe slump that prices across the board are dropping like flies is a HUGELY NEGATIVE OMEN.

This is endgame scenario type stuff.

Turn on Fast Money right now if you want to hear some doom&gloom.

Big big problems.

By definition, deflation occurs 95% of the time after the economy slows or growth goes negative. Deflation was very very predictable and not a sign of anything more than prices adjusting to the decline in aggregate demand. I'd say it's more of a positive than anything.

Stagflation is the real scary thing. And we don't have to worry about that now at all.

Commy · November 2008

Inflation is inherent in the system as it is, seems deflation could only help to offset that.

sponger · November 2008

Anything above 6500 is inflation. The economy has been dormant for 20 years, only to be kept alive by bubbles. The bubble of all bubbles has just popped, and we're about to find out just what it is about our economy that distinguishes us from a third world country.

DriftingByTheStorm · November 2008

dmitry wrote:

Deflation can be good especially if you're not in debt.

all i can say is that, respectfully, you and saveuponlife are just flat out wrong.

YES.
Deflation accompanies downturns (almost by definition), but the point here is that the intention of the Federal Reserve is SUPPOSED to be to INFLATE OUR WAY OUT OF A DEPRESSION.

What an acknowledgement regarding oncomming deflation, and possibly RAPID deflation, means for the world is that The Fed has VERY FEW OPTIONS LEFT TO MITIGATE THE PROBLEM.

They already have the rate at just above zero ... and members of the FOMC are expressing, IN WRITING, their concern that the rate WILL GO TO ZERO.

AFTER THAT, THE FED IS ALL BUT POWERLESS.
They have effectively lost control of the market.
Lending rates at institutions can no longer be affected by outright manipulation (or by what the fed likes to call "policy").

Saveuponlife, you are CORRECT, inflating the currency through liquidity injections (t-bill auctions and currency swaps, etc) offsets deflation TO A DEGREE.
BUT THE TWO ARE NOT INHERENTLY EQUAL.

If REAL demand continues to decline, prices will fall further.
Falling prices -- in stocks and houses -- would be, BY ITSELF, nearly catastrophic for this market.

BUT GIVEN THE DELICACY OF THE SITUATION ... given that banks own a lot of houses outright, and a lot of mortgages ... and that if house prices go down they are fucked even worse ... we have serious problems.

As house prices trend downward, LESS PEOPLE BUY, ANTICIPATING FURTHER DECLINES ... thus ACCELERATING the spiral.

And then finally, the death throws ...
if the large institutions loose SO MUCH MONEY that they ARE FORCED TO SELL TREASURY SECURITIES ... we could fall in to the worst of it. Forced sales could beget more t-bill sales, driving the interest rates in this country (and around the world?) through the roof.

Again, you think its bad that housing prices are going down NOW?
How about a vicious cycle where low prices cause bank deleveraging and tbill sales, which cause rates to rise, which cause homesales to slow, which cause prices to sink, which cause banks to deleverage, and rates to rise ... ETC ETC ETC ...

DEFLATION CAN CAUSE A VIOLENT SPIRAL, where as inflation usually has more LONG TERM affects, deflation can have QUICK AND DEVASTATING effects on entire economies.

Remember Japan for over 10 years?
Or the Great Depression?

Those are deflationary events of somewhere NEAR the magnitude of what we could face.

Given that the fed is running out of ways to inflate, and given that banks simply aren't able to find lenders on the scale of leverage they need to reinflate their balance sheets ... i think we may be in a terminal illness here!

DriftingByTheStorm · November 2008

The Deflationary Spiral -- just a very short article in wikipedia showing you in simple words what i'm talking about.

Milton Friedman talking about the Fed and The Great Depression ... probably nothing most of you didn't know ...

but just remember, while the Fed has "responded properly" this time around ... well, in theory, and arguably (they sure were too slow for my taste on the easing) ... THEY ARE NOW DANGEROUSLY LOW ON ALTERNATIVES FOR INFLATING THE ECONOMY.

So while its all fine and dandy to say, "Hey, this time we have a Fed that knows the RIGHT things to do" ... it's another thing entirely when you realize that they have already DONE what they could do, in large part.

If deflationary pressures (and the ensuant spiral) get worse ... there is VERY little the Fed can do to combat the situation.

We would simply sit and watch as trillions more "dissapear", the real economy falls apart, and employees and employers both go hungry.

dmitry · November 2008

I have money in the bank which will have increased buying power if there is price deflation, and yet that is bad for me?

Other things may be bad, but that aspect certainly isn't.

What about the potential for increased liberty?

Deflation puts a break--at the very least a temporary break--on the further concentration and consolidation of power in the hands of the federal government and in particular in the executive branch. It dampens the growth of the welfare state, if it does not lead to its outright implosion. In short, deflation is at least potentially a great liberating force. It not only brings the inflated monetary system back to rock bottom, it brings the entire society back in touch with the real world, because it destroys the economic basis of the social engineers, spin doctors, and brain washers."-Jorg Guido Hulsmann

sponger · November 2008

Again....

A big factor in the deflationary spiral is that employers can no longer pay the inflated salaries once the inflation has retracted. Employers either go broke or they start laying off employees.

The big difference here is that employers weren't really paying out enough to keep up with inflation. There was some increase, but not a lot. As as far the stats are concerned, the biggest increase in salaries was measured by increases in health care costs.

Normally when people aren't being paid enough, they either go broke or become homeless.

This didn't happen because for the first time in the history of our economy, 20 somethings all over the nation were living with their parents. We all know probably more than a few 20 somethings who were hard-working, intelligent, and even advanced-educated people who were just getting squeezed by the sky-rocketing cost of living.

And not only were they living with their parents, but they were also taking out huge debts to finance a standard of living well beyond their means.

This means that despite the set-backs in the economy, banks are still collecting interest on all that debt. And I doubt few would argue there's a whole lot of it. In fact, I wouldn't doubt that the interest from all that debt is what is actually keeping banks afloat right now when they should be crumbling to pieces.

As for slipping housing prices causing a deflationary spiral, I'd say it's not impossible. But, I think one thing to remember is that a house is an asset that is so fundamentally different from any other, that it really isn't entirely feasible to hold it up to conventional economic models.

Not only do houses put a roof over peoples' heads, but they have yet another intrinsic value that in it of itself actually appreciates in a deflationary economy: the mortgage interest tax deduction.

eekamouse · November 2008

More importantly... will deflation destroy the internet... and thus, this thread?

inmytree · November 2008

DriftingByTheStorm wrote:

Especially with not only the automakers on the brink, but also CITIBANK is around $7 a share!

hey, drifitin' with Citi so low, do you think this would be a good time to buy or should I just wait it out....?

my gf works for Citi and I've been watching the stock fall fall and fall some more...I've been wanting to jump in, but have been fearful...

I don't see Citi failing...but then again, who knows...

offigo · November 2008

Ok, so now I have a mortgage with Citi and a line of Credit. Now the line of credit could be closed and the interest sky rocket.

DriftingByTheStorm · November 2008

inmytree wrote:

hey, drifitin' with Citi so low, do you think this would be a good time to buy or should I just wait it out....?

my gf works for Citi and I've been watching the stock fall fall and fall some more...I've been wanting to jump in, but have been fearful...

I don't see Citi failing...but then again, who knows...

I wouldn't touch it.
Period.

Citibank may not "fail",
but if the waters get any rougher (certainly seems like it)
they sure as hell may end up as nothing more than a part of JP Morgan Chase or some such.

As for all this counterargument about deflation

1. Sure deflation can be "good" for resetting the system, but the key in your quote (dmitry) was this:

from dmitrys post wrote:

It dampens the growth of the welfare state, if it does not lead to its outright implosion.

Thats one HELL of a gamble!

2.
SPONGER -- I think you have some valid arguments as for what CAN cause deflationary spirals, but your analysis is so limited in scope that you fail to recognize OTHER valid mechanisms by which the deflationary spiral can be both triggered and exacerbated.

I'm not going to pick apart the whole post, because i don't feel it is my duty ... besides, you have some awfully strange connections in there -- somehow bringing 20 year olds staying at home in to the mainstream of the argument? -- but anyhow ...

When you say deflationary spirals are caused by employers stuck paying, and who "can no longer pay" inflated salaries to employees ... SURE that is accurate ... but fuck the line "inflated" salaries ... we don't need the qualifier ...
HOW ABOUT: EMPLOYERS CAN NO LONGER PAY EMPLOYEES, PERIOD.
THIS circumstance would be ENOUGH, BY ITSELF to at least start a round of demand-deflation-producing layoffs.

And THAT is WHERE WE ARE AT.
As liquidity and lending grind ever closer to a halt, large businesses are becoming STRAPPED FOR CASH TO MEET EVEN BASIC FUNCTIONS LIKE PAYROLL AND DISTRIBUTION. As THAT happens, you will watch the lay-offs continue to INCREASE.

Hell, THE FOMC ITSELF has this as a MAJOR concern going forward.

LATEST FOMC MINUTES wrote:

"generally expected the economy to contract moderately in the second half of 2008 and the first half of 2009, and agreed that the downside risks to growth had increased,"

AND

The FOMC now projects the unemployment rate will average between 6.3% and 6.5% at the end of this year and will average between 7.1% and 7.5% next year. Three months earlier, the FOMC had expected unemployment to remain below 6% throughout the period.

So.
Deteriorating economy in to and THROUGH 2009 ...
and INCREASING UNEMPLOYMENT through next year as well.

AND, THE FED MINUTES ALWAYS SEEM TO LAG THE REALITY OF THE DETERIORATION -- meaning that they say 7.1% to 7.5% next year, but by January, that number could be looking more like 8.5% to 9.5% ...

The only other relevant portion of your post that i will counter is that of the houses being a special asset class that is more resistant to deflation due to its utility ... THIS IS OUTRIGHT FALSE.
Housing is tied significantly TO EMPLOYMENT ... and as employment deteriorates, you will see housing markets across the country further deteriorate in a regionalized fashion ...
ALSO, ONCE MARKETS RECOGNIZE DEFLATION AS A PHENOMENON, PEOPLE STOP BUYING!

Yep.
Ask yourself, If you KNOW housing prices are DECLINING, WOULD YOU BUY NOW? Or WOULD YOU WAIT?

Most people WAIT.
And that causes FURTHER INVENTORY BUILD UP, and FURTHER DEPRECIATION IN PRICES.

Of course ALL of this outright ignores MAJOR portions of certain deflationary spiral theory that concerns itself with the treasury markets and interest rates.
IF and WHEN we see RISING RATES and MASS TREASURY SALES in the bond market, the death knell for housing, and likely for the entire economy will have sounded.

I am just not sure you can argue against that using as your strongest points of contention, comments about 20 year olds living in basements and such.

inmytree · November 2008

DriftingByTheStorm wrote:

I wouldn't touch it.
Period.

Citibank may not "fail",
but if the waters get any rougher (certainly seems like it)
they sure as hell may end up as nothing more than a part of JP Morgan Chase or some such.

As for all this counterargument about deflation

thanks for the input...:)

I'll sit back, watch, and see what happens...

dmitry · November 2008

DriftingByTheStorm wrote:

"It dampens the growth of the welfare state, if it does not lead to its outright implosion."

Thats one HELL of a gamble!

I wish it was a sure thing, not a gamble!

DriftingByTheStorm · November 2008

dmitry wrote:

I wish it was a sure thing, not a gamble!

You do realize that in all probability, a general economic implosion would only serve to strengthen the statist interests and control?

I'd love to sit here and play revolutionary advocate,
believing blindly that, if the economy failed outright and the government reacted by implementing "continuity of government" (martial law) plans, that the "proud people of America" would unite and revolt -- reclaiming their rights and their government.

However, history tells us different.
Even when faced with troops in Boston, bloodshed at Lexington, and the outright destruction of Falmouth by bombardment ... even AFTER all of these atrocities, the vast disbelief that the mothercountry would really murder her children kept the Continental Congress from even being able to consider independence and real preparation for war.

What i mean to say is, even faced with 10 years of obvious rights violations, unrepresentative government, and outright acts violence against them from the British Government, THREE FOURTHS OF THE PEOPLE WERE STILL TORY AND WERE STILL HOPING FOR RECONCILIATION WITH THEIR GOVERNMENT.

I just don't see any reason to believe that this time around it would be any different. Especially since we don't have the physical separation of an ocean between our current oppressive government and the people, it is just that much harder for the masses to come to the recognition that it is no longer "their" government. Lets face it, revolutions -- real revolutions - are led by a small handful of infinitely dedicated and highly intellectual men.
I JUST DON'T SEE THOSE NECESSARY SEEDS BEING PRESENT.
And even if they were, the people are no where NEAR the necessary state of consciousness to accept the idea.

If the economy implodes, it will be every excuse "our" government needs to lay the screws to us plain, and clamp down on our liberties to no end.

sweet adeline · November 2008

fuck its going to be below 7k before we know it.

dmitry · November 2008

DriftingByTheStorm wrote:

You do realize that in all probability, a general economic implosion would only serve to strengthen the statist interests and control?

I'd love to sit here and play revolutionary advocate,
believing blindly that, if the economy failed outright and the government reacted by implementing "continuity of government" (martial law) plans, that the "proud people of America" would unite and revolt -- reclaiming their rights and their government.

However, history tells us different.
Even when faced with troops in Boston, bloodshed at Lexington, and the outright destruction of Falmouth by bombardment ... even AFTER all of these atrocities, the vast disbelief that the mothercountry would really murder her children kept the Continental Congress from even being able to consider independence and real preparation for war.

What i mean to say is, even faced with 10 years of obvious rights violations, unrepresentative government, and outright acts violence against them from the British Government, THREE FOURTHS OF THE PEOPLE WERE STILL TORY AND WERE STILL HOPING FOR RECONCILIATION WITH THEIR GOVERNMENT.

I just don't see any reason to believe that this time around it would be any different. Especially since we don't have the physical separation of an ocean between our current oppressive government and the people, it is just that much harder for the masses to come to the recognition that it is no longer "their" government. Lets face it, revolutions -- real revolutions - are led by a small handful of infinitely dedicated and highly intellectual men.
I JUST DON'T SEE THOSE NECESSARY SEEDS BEING PRESENT.
And even if they were, the people are no where NEAR the necessary state of consciousness to accept the idea.

If the economy implodes, it will be every excuse "our" government needs to lay the screws to us plain, and clamp down on our liberties to no end.

Alas you are right, and most people seem conditioned to believe the state is or necessarily must be their savior ("we" just need the right people in charge!), so they will willingly accept more.

I still want to see it.

dow closes below 8k

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