The panic is that liquidity dried up last week in the secondary market for debt notes. Foreign funds are heavily invested in these markets, and Europe essentially ran out of cash last night.
That triggered the ECB, Canada, and Fed to make large emergency injections of cash into Europe this morning.
...and all of the above is happening not because of sub-prime notes (a minority of the market), but rather, happened because the Fed and ECB raised interest rates to banks too high and kept them too high for far too long.
By keeping rates too high, private liquidity has dried up. This means that the world is staring deflation in the face.
Deflation is a far worse problem than inflation. Deflation eats actual wealth. Housing prices decline, for instance. Prices for existing debt notes decline, for another.
When deflation appears, large masses of people would rather hang onto their money (because everything will be cheaper tomorrow). This in turn slows down the speed of money, which makes economies less efficient and less prosperous.
In short, people want cash when they see deflation. They sell their homes. They sell their stocks. They don’t buy as much. Consumerism disappears.
Jobs disappear. Wealth disappears. Problems abound.
Thanks for the explanation..
“In short, people want cash when they see deflation. They sell their homes. They sell their stocks. They don’t buy as much. Consumerism disappears.
Jobs disappear. Wealth disappears. Problems abound.”
LOL, eskimoes disapear... harp seals give birth to squid.... monkeys in diapers run around the city biting women.... Hillary Clinton runs for president.
Absolutely. Every time I see deflation I sell my house and live in a cardboard box hoarding my cash to buy something when prices are higher. Buy high, sell low is my motto.
Since the slowdown in new house starts there's a shortage of the big refrigerator boxes. Looks like I'll have to downsize this time round. Maybe I can snag one of those double walled washing machine boxes.
What source are you using that shows this sort of activity when there's deflation?
Deflation eats actual wealth.
In this consumption mad society, I highly doubt we will see consumerism “disappear”. With over 300M+ people in this country, real estate is not going to decline that much—although some decline might be health after the rapid runups of the last 7 years or so.