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The scary part is deflation. alot of people are staying away from the stock market right now because they remember the dot com boom so well. They are waiting for prices to become cheaper. Why buy Citibank at 16 when you can wait a few months and it'll be even cheaper? That same philosophy is hitting main street as well. Why is anyone going to buy a car right now? The fear they may lose their job or cars may even be cheaper are causing people to cut back on their expenditures. This is causing a self fulfilling prophecy of prices coming down - that in turn will lower revenues of the companies, causing their stock price to come down, causing more unease, causing people to not spend. With governments all over the world pumping TRILLIONS into the market to break the credit freeze - it's still hard... lowering rates will only help...
Unfortunately, we have gone through a credit expansionary period through the early 2000’s. This caused enormous leverage that people couldn’t follow through with – Now that is getting handed over to the governments of the world – realistically passing it down to the people who were responsible with their spending. The question now lies – what is going to happen to the governments when they are not able to pay the debts they have taken from consumers? (http://www.thetruthofbanking.com/economy.html
NoUse..,
You said, "...The scary part is deflation...."
And YET, some clowns here on zillow actually "thought" that real estate "deflation" could occur without causing deflation in financial markets and job markets.
I guess they have to learn the "hard way" that markets are connected nowadays. Like it or not.
I say: "Be careful what you wish for."
But Tagei, aren't we talking about being subjected to an economic correction that is an order of magnitude greater than it should of been? Due to the financial gyrations that were played using MBSs and their derivatives? I may be missing the boat completely, but that's where I'm ending up - the RE correction had to happen, but the negative impact of that correction could have been/should have been much, much smaller and severe.
mikal - quite the opposite, my friend. The problem lies in the fact that banks are willing to lend to an asset that increases in value... Be it due to inflation or asset prices going up. The opposite is now true - With the price corrections in real estate, the banks now have lost alot of capital. What capital they do have to lend aren't being lent to homes - because they will lose value, of course there are circumstances, but for the most part, they are VERY picky... Okay, rebuttal - what about cars? That's why car interest rates are so high, because they make up for the annual loss in depreciation. So, when the credit markets dry up, it filters through EVERYTHING... The banks are needed by everyone and everything to get/buy anything... without them, the economy comes to a halt.
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What the Fed Rate Cut means
randy321
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This is to clarify the points for anyone who doesn't know what is really going on. This is not just a credit freeze, but a liquidity crises. The lowering of the Fed Funds rate today is merely attempting to build the capital in the banks so that they will be able to lend. Why aren't they lending? It's because they don't have enough money to lend anymore. Their spreads are so narrow, that they needed this rate reduction in order to recapitalize. Realistically, rates WILL come down below 1% without any fear of inflation. Why is that? Well, inflation can only happen when there is excess liquidity in the market. The problem right now is that there isn't enough money to go around. The people who had home equity lines to use are now gone - if not from foreclosure or the market falling, it's from the banks taking it away. For those of you who have money in the market, there is alot of money lost in the past month or two... The hedge funds are slowly deleveraging themselves after losing nearly everything... the yen carry trade is narrowing, proving that point. (www.thetruthofbanking.com/economy.html)
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