Stock Market Crash! (merged)

[BabyPeanut]

http://www.humaneventsonline.com/article.php?id=5892

Deficit-Caused Dollar-Drop Endangers Stock Market; Possibility of a Major Stock Market Crash Cannot Be Ignored by Bruce Bartlett Posted Nov 29, 2004

For more than a year, I have been predicting -- not advocating, just predicting -- a significant tax increase to deal with the budget deficit. My hypothesis has been that sooner or later financial markets would put pressure on Congress to act on the budget deficit, and that the magnitude of the problem would be too great to deal with on the spending side alone.

I was unsure where, when or how this financial market pressure would arise. But it now seems clear that it will come through the foreign exchange market. The dollar has been dropping rapidly and this is setting in motion forces that eventually will impact on domestic stock and bond markets. The possibility of a major crash cannot be ignored.

The root of the problem is the U.S. current account deficit, which includes the trade balance for goods and services, plus receipts on U.S. investments broad minus payments to foreigners on their investments here. There is also a large negative figure for unilateral transfers abroad, such as those for military programs and foreign aid.

To show the orders of magnitude, in 2003 the U.S. exported $713 billion worth of goods and imported $1,261 billion, for a deficit of $548 billion. This was partially offset by a significant surplus in the export of services of $74 billion. U.S. companies also received more in income on their foreign operations than we paid out to foreigners on their operations here, giving us a surplus of $33 billion in this area. After subtracting $67 billion for unilateral transfers, we ended up with a current account deficit of $531 billion.

Basically, this $531 billion figure has to be financed by foreigners who are willing to invest in the U.S. directly or buy dollar-denominated assets such as stocks and bonds. In 2003, foreigners bought $829 billion worth of the latter, while Americans increased their ownership of foreign financial assets by $283 billion. The difference, $546 billion, approximately equals the current account deficit.

If foreigners were just interested in investing in the U.S. because they like our economic prospects and investment climate, this would not be a problem. Indeed, this unquestionably explains most of the private capital transfers. In places like Japan and Europe, economic prospects have been much worse than here for some time and investors there have had little choice except to invest abroad.

But lately, a considerable portion of foreign investment has been by foreign central banks in U.S. Treasury securities. From 1999 to 2003, these rose to $249 billion from $44 billion. The figure for this year will undoubtedly be higher than last year since foreign central bank purchases of Treasuries were already at $202 billion just through June.

As a consequence, foreign ownership of the U.S. national debt has risen to $1.8 trillion or half of the privately held debt. A decade ago, foreigners owned just over 20 percent of the debt.

The Japanese are the largest foreign holders of U.S. Treasury securities, with a total $720 billion in September, up from $317 billion just four years earlier. The Chinese have become the second largest holders, with $174 billion worth, a sharp increase from $62 billion in Sept. 2000.

The reason for these large purchases of Treasury securities is that the Japanese and Chinese have been trying to prevent their currencies from rising against the dollar. They have done this by using their own currencies to buy dollars, which are then invested in Treasury securities.

The problem is that this process cannot go on indefinitely. It complicates monetary policy and threatens foreign central banks with large capital losses should U.S. interest rates rise. (Bond prices move in the opposite direction of interest rates.)

There is growing evidence that foreigners are getting weary of financing the U.S. budget deficit. The Chinese and Japanese are both talking about cutting back on Treasury purchases and diversifying more into euro-denominated assets. In order to continue selling its bonds, the Treasury will have to increase the interest rate it pays.

Some other consequences are that the dollar will fall further against foreign currencies, which will raise the prices we will have to pay for foreign goods. This will raise the inflation rate, which will encourage additional tightening of monetary policy by the Federal Reserve. A lower dollar will also make U.S. goods cheaper in terms of foreign currencies.

Most economists view this as a natural market process for resolving current account imbalances. By raising the cost of foreign goods to us and lowering the cost of American goods to foreigners, it should reduce imports and increase exports.

The danger is that the dollar won’t fall gradually, but could drop precipitously, which could lead to a sharp drop in the stock market and a spike in interest rates in order to defend the dollar.

Mr. Bartlett is a nationally syndicated columnist and a senior fellow with the National Center for Policy Analysis.

[savethehumans]

Of course, as long as those narco-dollars keep getting invested, a 1929-like crash (or worse) probably could be avoided for awhile....

But if the euro becomes an alternate standard currency, used by most of the rest of the world, maybe those drug cartels will decide to switch to narco-euros, and then....

[TrueKaiser]

Of course, as long as those narco-dollars keep getting invested, a 1929-like crash (or worse) probably could be avoided for awhile....

But if the euro becomes an alternate standard currency, used by most of the rest of the world, maybe those drug cartels will decide to switch to narco-euros, and then....

also making those drugs legal and regulated would do the same thing.

[airstrip1]

But if the euro becomes an alternate standard currency, used by most of the rest of the world, maybe those drug cartels will decide to switch to narco-euros, and then....

The Europeans have already kindly introduced a 500 Euro note to make the drug cartels life easier.

http://news.bbc.co.uk/1/hi/events/the_l ... 225428.stm

[KevO]

[Lots of great discussion but it needed to be condensed, Tyler_JC]
as I type. check the column on the right at link

[Bas]

"just" 2 to 3% losses, we've seen plenty of days like this before in the past 6 months...

[EnergyUnlimited]

I'm sure trading curbs will be implemented shortly, then.

And this will cause even more panic and further drop of indexes. I can foresee funny situation, where governments are trying to "rescue" markets and buying shares using printed money. All that could easily lead to renationalization.
Nevertheless, regardless what they do in short term, overall effect will take a form of closing down large sectors of industry, perhaps most of industry, and allowing workers to enjoy angling.

[Troyboy1208]

That link is dead...and I cant get MSNBC.com to come up

[Revi]

Ouch! My ESLR stock is down by about 2 dollars just today! I guess I won't be retiring after all... On the other hand, silver is up 13 cents.

[EnergyUnlimited]

"just" 2 to 3% losses, we've seen plenty of days like this before in the past 6 months...

My personal belief is that we are unlikely to see a crash aka 10% (maximum permissible?) drop in a single day.
Market collapse will rather take a form of long bear market with sequences of drops and incomplete recoveries.
It may go this way for quite a long time measured in years but never take form of a cliff.

[Zardoz]

The Dow is only down 213 at the moment. Could be much worse, considering what's going on.

We'll see where we are at the end of the week. The potential for a real bloodbath is there, of course, but it may not be as bad as we fear it could.

[Revi]

Who knows, but I was hoping that solar stocks would outpace inflation. I guess it will be a while longer before the solar world comes about. I'm not giving up on them, though.

[RdSnt]

If some of your investments are in solar cell manufacturers then I would recommend caution. It is a very energy intensive industry and there is a severe shortage of high grade silica sand.

Who knows, but I was hoping that solar stocks would outpace inflation. I guess it will be a while longer before the solar world comes about. I'm not giving up on them, though

[Iaato]

And this will cause even more panic and further drop of indexes. I can foresee funny situation, where governments are trying to "rescue" markets and buying shares using printed money. All that could easily lead to renationalization.

Here's another link.[ur=http://finance.yahoo.com/intlindices?e=europe]link[/url] Wow. That's what happens when you throw bad money after bad money. Circular reasoning never got anyone anywhere.

[whereagles]

Stockmarkets were in for a sizeable correction anyway. The subprime only triggered it. Expect to go like this for a while.

[Tyler_JC]

Gotta look at the big picture folks. The Dow lost nearly 90% of its value between 1929 and 1932. The S&P, a better measure of the value of the stock market, declined by about 40% during the dot-com collapse. We are no where close to those levels.

A 2% fall in one day is hardly a "free fall" and a 10% correction over the course of a few months is neither unusual nor unexpected. The hyperbole on this website harms our credibility. (No offense to the poster who made this thread, I'm just trying to get people to focus on the big picture)

[Niagara]

To quote Bachman Turner Overdrive: "B-b-b-b-b-baby you ain't seen nothin' yet!"

Intel disappointed. It's a total bloodbath in the after hours market, the stock is down $3.50. Tomorrow should prove to be an "interesting" open

[UncoveringTruths]

Gotta look at the big picture folks. The Dow lost nearly 90% of its value between 1929 and 1932. The S&P, a better measure of the value of the stock market, declined by about 40% during the dot-com collapse. We are no where close to those levels.
A 2% fall in one day is hardly a "free fall" and a 10% correction over the course of a few months is neither unusual nor unexpected. The hyperbole on this website harms our credibility. (No offense to the poster who made this thread, I'm just trying to get people to focus on the big picture)

Are you trying to convince yourself of something? Even when the stock market tries to make a comeback oil will be over a $100 a barrel in a microsecond beating it back down. So I see us making a few blips down one blip up so on and so forth forever or until we might find a new liquid fuels energy source.

[Eli]

He is right.

This is just the beginning we really haven't seen anything yet but a fairly typical correction so far.

The cliff is further out there yet, Citi needs to file Bankruptcy or Country Wide. There deal with BOA is most likely not going to go through.

[Tyler_JC]

Are you trying to convince yourself of something? Even when the stock market tries to make a comeback oil will be over a $100 a barrel in a microsecond beating it back down. So I see us making a few blips down one blip up so on and so forth forever or until we might find a new liquid fuels energy source.

I'm not trying to convince myself of anything.

I'm just pointing out that a 10% correction is not the end of the world.

Declaring that THE MARKETS ARE COLLAPSING!!! every time we see a 200 point dip in the Dow reminds me of the little boy who cried wolf.

The Dow fell by more than 10% in one day Black Tuesday (1929 crash) but this "crash" is over the course of several months. I'd call that an orderly decline, not a crash much less a "free fall".

Don't get me wrong, it's going to get worse before it gets better.

In my opinion, the difference between the doomers and the non-doomers is that the doomers don't believe it will EVER get better.