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Tuesday, February 10, 2009

The DOW Drops ... Like a Lead Balloon

It started with the opening bell. Actually, it started overnight in the DOW Futures markets. And the DOW Jones Industrial average continued to fall all day long. At the time of this writing? The DOW Jones Industrial Average is down 400 points.

Equities are deflating. Home prices are deflating. Food prices are deflating. Oil prices are deflating. The Dollar is rising. Unemployment is rising.

We are already within a liquidity trap. Liquidity has been provided to the system, and that liquidity was used to de-leverage and accumulate troubled assets (therefore, the money is gone) and people have begun to save any cash they have for themselves, to prepare for what they feel is going to be a worsening recession, or possible Depression.

It's Lucas' works all over again. Robert Lucas provided the basis for an explanation of what is occurring about 35 years ago. I simply feel that Lucas did not go far enough. You cannot direct an economy from the top down. It will not work. An economy works from the bottom up. This is not new information.

But you have lawyers, pretending to be economists; who feel they can fix the problem, as if they were economists. You have these lawyers and politicians listening to one camp of economists (Keynes and his massive infrastructure spending theory) and if anyone argues against this idea? Then the lawyers simply claim that such people have 'ideological blockage'. Never mind the fact that they are absolutely stuck within a neo-Mercantlist, Keynesian mindset. And plenty of other solutions have been offered. Karl "the Ticker Guy" Denninger all but begged for over the counter derivatives to be put on an exchange.

What's worse? Is I heard a reporter ask the lawyers who are drafting a stimulus plan ask: "Should it be part of the bill (and therefore law) that the banks have to lend credit?"

So ... in other words, should the government tell private corporations how to profitably run their business? Does the government know more about profitability, than the companies themselves?

When are people going to understand that this eventuality cannot be stopped? I've said it for a long, long time. Free market forces are too powerful. This cannot be stopped. It is deflation and a liquidity trap. Risk must be priced into the system. It must. People will price risk, one way or the other. You could turn the entire economy into a communism tomorrow and you know what will arise on Thursday? A black market.

Free market forces are too powerful. Personal preferences on the micro-economic level will price that risk one way or another.

And since for years we have been told that over-the-counter derivatives do not need an exchange? That the rest of us suckers do not need the ability to properly value those derivatives? We were left to guess as to what that risk should be. The trigger was pulled. We are dealing with the effects.

Let me tell you right now. Until everything that a corporation holds is transparent? The market will price that risk as severely as possible. It has no choice. And until that happens? Consumers will continue to hoard cash. Consumers have always held all of the power. They will continue to spend less. Which means earnings will continue to drop.

A deflationary trap.

Hoard cash. That's what the market is doing. As I pointed out in August in September, it's where the market would run.

Myself? I'm just waiting for the scapegoating to begin.

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