THE CAT IS OUT OF THE BAG!!

[Atash Hagmahani]

Faith has been broken. They will do damage control, but the horse is out of the barn and it's a little late to shut the barn door.

This will have cascading effects. As I mentioned to Yaromir, this will eventually trickle down to the rest of us. BATTEN DOWN THE HATCHES!!

Any more costs to cut, start cutting them. As Tom says, "if you can still see grass in your yard you haven't planted enough vegetables".

I have no idea how fast this will unwind. My best guess is "Japanese meltdown style", where they keep trying to prop up the system but it keeps sinking. Unlike Japan though I expect high inflation, because even without the bailout they have lost all budget discipline, and none of this is going into productivity, but into waste and misallocation of resources.

That's why the "Austrians" say to let the whole pile of cards collapse, so that it can be restructured from scratch.

[opsec]

So how did the Japanese manage to get out of their economic problem?

[Atash Hagmahani]

They didn't.

http://finance.yahoo.com/echarts?s=%5EN225#chart1:symbol=^n225;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

Japan is in long-term decline.

[opsec]

Japan is still managing to maintain itself as an organized society. How bad does their stock market have to get before civilization itself breaks down?

[Atash Hagmahani]

I don't know, but there is an old Buddhist story set in Japan during a severe crisis of some sort--a famine I think.

A young monk was expelled from his monastery because the temple fell on hard times. Having no skills and not knowing how to make a living, he decides to use his physical strength to rob and plunder.

He comes across an old woman committing what in Asian cultures would be a horrible crime: she is cutting off all the hair of a young woman she found dead. She intends to sell it (for wig-making I think).

He stops her and accuses her of desecration. She pleads with him, and points out that while the young woman was still alive, she cheated with the weight of the merchandise she was vending.

The ex-monk then proceeds to rob the old woman of the only thing she had--her clothes--offering the same excuse to her that she offered to him.

In general, I would say that Far Eastern cultures are more civilized than North America...although this is changing as the younger generations seem to have a lot of the same social problems as ours do--it just took longer to show up. Japan for example has had a rash of wanton, senseless, horrifically brutal murders. Not as many as we have, but it is shaking their usually disciplined society.

[Atash Hagmahani]

Now we are at the point where failures are starting to cause a chain-reaction.

Market plunges like this one result in de-leveraging. Leveraging refers to the use of borrowed money to invest. Here is how it works:

You buy some stock. The stock is worth $X. Now you can use that stock as collateral to buy MORE stock. You can't use the whole $X value because the value fluctuates, but you can use part of it.

Now, suppose that you used it for maximum borrowing power, and then the price of your stock FELL. Well, then you are in a state known as being OVER-MARGINED, and you get what is called a "MARGIN CALL". Your broker either calls you and tells you to put more money in your account, or he just sells your stock--at a loss to you--pays back part of the de facto loan, and calls you to cough up the difference.

Leveraging amplifies winnings during bull markets, BUT ALSO MAGNIFIES LOSSES DURING BEAR MARKETS.

Here is why:

Suppose that you borrowed $100, invested it, and doubled your money. Your return on investment is essentially infinite ($100/0) because you didn't put up any of your own money.

Suppose that you borrowed $100 and put up $10 of your own money, for a total of $110 capital. Suppose that you lost 10%, or $11. You still owe the lender $100, and you lose your whole $10. Your 10% loss is magnified to 110%--you lost 100% of your own money, and you still owe the lender $1 after returning the remaining $99.

So what is happening now is that losses are spawning losses. Stock has to be sold to pay back debt, but the sales are making the remaining stock worth even less, triggering even more sales!!

The Plunge Protection Team can't stop it, because it has "gone critical". The chain reaction actually accelerates as it continues.

Their circuit breakers have probably triggered a couple times, but the problem is that if they halt trading, they are just putting off the inevitable as there is now so much selling pressure. Like I said when I opened this thread, the cat is out of the bag, and investor psychology has changed dramatically.

I'll post more later.

[Atash Hagmahani]

Gold up:

 Bid/Ask     857.40     -     858.40
 Low/High    822.60    -    875.80
 Change    +22.60         +2.71%

Gold stocks DOWN, hard. Not too surprising; they are different markets.

I noticed the Asian markets tumbling last night, but was unable to post, as my daughter, without prior warning, needed the computer to finish homework, therefor my wife yelled at me until I gave it up.

It looks like the PPT, perhaps helped by bargain-hunters, is going to do a last-minute push to control losses. However, I think one of the reasons the markets are falling so hard, is because defending the value of the dollar has been such a high priority.

I picked up some ATB (Arlington Tankers), tempted by the 20% return, and some Aussie dollars, tempted by high yield and likelihood that the $US will eventually continue its long-term bear market.

A word of warning on yields, though: they are likely to fall too!

[Atash Hagmahani]

Looks like the Dow closed at 10,000, up around 300-some points from its low of 800 points DOWN.

[Geoffrey R.]

Japan is still managing to maintain itself as an organized society. How bad does their stock market have to get before civilization itself breaks down?

A better indicator than stock market or GDP  might be per capita GDP, in which case Japan does a bit better, since their population is declining. 

http://www.nationmaster.com/graph/eco_gdp_percap-economy-gdp-nominal-per-capita

If you further adjust for working age, per capita GDP, you do even better, since the working age population is absolutely plummeting.

Furthermore, consumer prices keep (until recent years) getting better, as the "middle-man" culture is being eliminated as Japan's consumer markets globalize.

Maybe the best thing to look at would be one of those Standard of Living indices, although you have to look at them closely to be sure the factors they consider important are the same as those that you do.

It's interesting for those of us living here, no one seems to notice the so-called, long term economic slump.  Teenagers keep buying their Louis Vuitton bags, young couples  buy houses, people have jobs, etc.  Sort of the opposite of the U.S., where the pundits argue over whether or not there is a recession, and the man on the street says "What, are you kidding?"  The big worry now is  is that someday unemployment might significantly top 4%.

All that being said, there's only so much decline in exports, a totally energy dependent, arable land insufficient, crowded little archipelago can take. I don't know about rioting in the streets (they used to do it in the post war days), but things could get tough here soon. How to meet the pension and medical requirements of all the old people will be a big problem, although the answer is pretty obvious (devalue the currency, and provide poorer medical services, import foreign workers, etc.) 

All in all, though, I think Japan, with its high degree of social control and homogeneity, is pretty good at scraping through crises. 

[opsec]

Social order may save Japan from total meltdown. We don't have that here.

[karch03]

Have you ever seen the PBS documentary called the "Commanding Heights"? It's pretty interesting if you have a few hours. They talk about hyperinflation in Germany after WWII and how the money was being used to heat homes and wallpaper rooms. They introduce the Chicago School of Economics into the puzzle and after the crash people start trading goods and eventually over time the economy begins to grow. It reminded me of what Atash spoke about with the Austrians wanting all the markets to crash and start over. It's been a few years but it's worth watching again.

[Mike]

Yes!  The Austrian idea of a crash is akin to the realization that what we have been doing wasn't worth doing.

What was that?  What was it we were doing that wasn't worth doing? 

*Building houses on the suburban model out in the middle of nowhere.
*Building malls out next to the new suburban homes.
*Financing houses and retail real estate, i.e. burying ourselves in debt.
*Building and buying 4X4s to get us to the mall; then out to the country for therapy.

Then there was the industrial side of 'the wrong idea' that wasn't worth doing:
*Building huge container ships and container handling facilities at ports.
*Building ethanol plants & subsidizing ethanol production.

Then there is another wrong idea that will probably be exploited to the max:
"Wars are good for the economy"
Think of all the jobs that have been saved by our three wars (sarcasm): Iraq, Afghanistan, & The War On Terror (against Americans).  Things are getting so bad that our geniuses will start a war on everybody who isn't already defending themselves.

Gee?  Did I wake up in a bad mood or something?

What should we have been doing?
Probably we should have gone into our own back yards and started planting stuff; learning Do It Yourself techniques to grow food of a quality that can not be had at stores or expensive restaurants.  Re-designing our backyards and front yards, roofs, neighborhoods and transportation routes for an energy/food constrained world.

So an Austrian Crash is the market letting us know that we had a few bad ideas and that the effort and expense we spent on them is worth close to nada.

[silverseeds]

I know this is a old thread, but it is interesting.

One thing to keep in mind is Japan, has industry. It was mainly industry, and a war that pulled us out of the last depression. Look at rome. these things can last a LONG time. Any war we fight now is only a drain as well. Since we do not produce most of the equipment now.

There are some factors we face Japan did not. Namely that our dollar is all over the place. It was not a wise thing to do long term. As we will likely learn the hard way.  Others will decline with us. All the while we want to try to tie other countries to this bogus co2 limitation, halting growth. Likely with leaders insane enough to war over it, and a population who is divided, and cant even form their own thoughts in most cases. There are legitimate environmental concerns, many actually, but not co2.

This part is to Mike....

ethanol and bio diesel, can indeed be cost effective without subsidies even in our borders. The problem is corn lobbyists, lobbied for us to use corn, which literally takes roughly as much energy to make as we get out of it. Then we also have to pay for it at the pump, a second time. Completely ridiculous. However other crops can be well worth it, keep money in our country, and we do not even have to use prime farmland AT ALL. Sugar beets, are four times as productive as corn, and need way less input. but there are many other things that work as well.

Pretty much any open land in any part of the world, even the most barren deserts, can grow ethanol, even sustainably, with some crop or another. Most any organic matter works, to make some type of alcohol. Mesquite for instance, needs to only be planted and harvested, and produces as much ethanol per acre as corn, with really no input once established, is perennial(its a bush) and grows in places where there simply is not agriculture. We could easily retain bio diversity, and grow our fuels, keep the money in our country.

I think they are having issues with bio diesel last I heard. It works just fine, and is cheap to make, oxygen as a byproduct even, they use plankton I think it is, problem is it doesnt always stay stable for long periods.... But Im sure something could be done to remedy that, with some funding.

Thing is the profits would be spread far and wide, our current owners do not want that.... So dis info is rampant. But your right, our current policies on ethanol are simply insane.

[Beeherder]

Silverseeds you are so so sooooo right. Our current policies are insane, and Mike has very nicely outlined some of the bad choices that have been made and I think it has been because all these "bad ideas" were in fact about the futher consolidation of power into the hands of a few. And Mike is so right, what we need to do is go into our own yards and produce something of real value.

Personally I like biodiesel made by interupting the waste stream that already exists. Perhaps the best thing ever done with all that french fry grease is to make it into biodiesel. Eating those french fries, well maybe that's not so good but I don't really do that. This is only one example of change that can be done by everyone just stopping doing all those things that continue the "bad ideas" Mike outlines, stay home grow your own food instead. Great idea.

The real freeholder could do as Darwinslair says, grow it, make it, or do without, use it up, wear it out. Maybe if we buy only quality and buy it from somebody we know personally, in all things especially food. Maybe then those central contol points can be eliminated or diminished.

[Atash Hagmahani]

I was reading an editorial by John Pugsley the other day, and he said something to the effect of "It is a myth that World War 2 ended the Great Depression. I should know because I lived through the Depression, and I remember that our standard of living didn't rise; it fell. You could still buy chocolate bars during the worst of the Depression, but not during the War."

I wondered about that, so I asked some relatives in my grandparents generation about that. They concurred that their standard of living fell precipitously during the war years; all of the sudden a lot of things like tires and silk stockings became unavailable, sugar, eggs, and a lot of other foods were rationed, gasoline was rationed, but still insisted that the war ended the Depression. I asked them how it was possible that a war ended the Depression if the economy had in fact contracted not expanded.

My father chimed in and scolded me for not paying attention in high school history class, when they told us that the war ended the Depression. I remember that lesson, but that doesn't mean that I understand how the mechanism was supposed to work. So he said "well, the war was inflationary and that canceled out all the bad debt". So I asked "does that mean that everybody who lost their life savings in bank failures got their money back?"

My grandfather chimed in and said that they were living a lot better by the early 1950s. But I asked "the war ended in 1945. You mean that times remained hard until the early 1950s?" He said yes, but still insisted that the war ended the Depression because of all the war spending. I asked him how the war spending benefited him. He couldn't think of any specific way, but insisted that it did indirectly.

I asked if the soldiers coming back and boosting productivity had anything to do with it. He remembered that, yes, things got much better a few years after the war. So I asked if ending the war might have had more to do with the economic surge of the 1950s, but he said, no, it was the war.