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(And 6 Must-Read Answers)
Elliott Wave International, the world's largest market forecasting firm, receives
thousands of questions every year from web site visitors and subscribers on
their free Message
Board.
Here the company shares 6 of the recent critical questions on the financial
crisis and 6 answers provided by their professional analysts.
For more free questions and answers or to submit your own question, visit Elliott
Wave International's Message Board.
Q: Can increased government spending help stop the crisis?
What do you think about the new mortgage bailout plan - or bailouts and proposals
for additional government spending in general? The opinions on whether or
not this will ultimately work seem so divided...
Answer:
In Ch. 13 of his Conquer the Crash, "Can the Fed Stop Deflation?",
Bob Prechter writes; quote: "Can the government spend our way out of deflation
and depression? Governments sometimes employ aspects of' 'fiscal policy,' i.e.,
altering spending or taxing policies, to 'pump up' demand for goods and services.
Raising taxes for any reason would be harmful. Increasing government spending
(with or without raising taxes) simply transfers wealth from savers to spenders,
substituting a short-run stimulus for long-run financial deterioration. Japan
has used this approach for twelve years, and it hasn't worked. Slashing taxes
absent government spending cuts would be useless because the government would
have to borrow the difference. Cutting government spending is a good thing,
but politics will prevent its happening prior to a crisis. ... Prior excesses
have resulted in a lack of solutions to the deflation problem. Like the discomfort
of drug addiction withdrawal, the discomfort of credit addiction withdrawal
cannot be avoided. The time to have thought about avoiding a system-wide deflation
was years ago. Now it's too late. It does not matter how it happens; in the
right psychological environment, deflation will win, at least initially."
Q: In deflation, what's best: to have no debts or preserve capital?
During a deflationary period, if you had to choose one or the other - debt
reduction or preservation of capital - which one is MOST important?
Answer:
In Ch. 29 of Conquer the Crash, "Calling in Loans and Paying off Debts," Elliott
Wave International's founder and president Bob Prechter writes; quote: "Being
debt-free means that you are freer, period. You don't have to sweat credit
card payments. You don't have to sweat home or auto repossession or loss of
your business. You don't have to work 6 percent more, or 10 percent more, or
18 percent more just to stay even. ...the best mortgage is none at all. If
you own your home outright and lose your job, you will still have a residence." Of
course, one could pay off some debts AND keep some capital - it all depends
on an individual's risk appetite and tolerance.
Q: Which news and events can move the market and which can't?
I've noticed that a lot of times, the stock market does the opposite of what
the news suggests it should do - or does nothing at all. Can you make a distinction,
if there is one, between news that does not move the market and the news
that does? I'm talking specifically about the news and anticipation of another
bailout plan plus stimulus package that is supposedly rallying U.S. stocks
right now.
Answer:
The subject of the news is almost irrelevant. What IS relevant is the state
of investors' collective mood at the time of the news release. If they feel
bullish (or bearish), they will interpret just about any news story as bullish
(or bearish) too. (Or "dismiss the news," as financial commentators often
put it.) If you need a good example, just compare the February 6 horrific
U.S. jobs report with that day's rally in the DJIA. Or, contrast the February
10 passage of the "$838 Billion Economic Stimulus Package"
with a 300+ drop on the Dow. The important thing to keep in mind is that while
the news can cause short-term price spikes, it has no effect on the longer-term
trend; only social mood does.
Q: If this deflation deepens, will the US dollar crash?
Bob Prechter's Conquer the Crash and your monthly publications like Bob's Elliott
Wave Theorist, you've been saying that in deflation, "cash is king" as the
value of the dollar rises. But won't the U.S. government's spending spree
cause the dollar to crash instead against the euro and other currencies?
Answer:
It's very important to make a distinction between the dollar's domestic and
international values. In a deflation, the value of any currency - the U.S.
dollar, in this case - rises domestically: As asset prices fall, each unit
of currency buys more domestically-available goods and services. "Cash is
the only asset that assuredly rises in value during deflation." - Bob Prechter,
Conquer the Crash, Ch. 18. However, the USD's international value (as represented
by the U.S. Dollar Index) in a deflation can rise OR fall relative to other
currencies. If, for instance, the euro is deflating faster than the dollar,
then the dollar's value relative to the euro will rise, and vice versa.
Q: Won't government bailouts turn deflation into inflation?
Trillions of dollars in bailouts "injected" into the economy - won't they reverse
deflation and turn it into inflation instead?
Answer:
Here is a quote from Bob Prechter's October 2008 Elliott Wave Theorist: "Believers
in perpetual inflation think that the government can keep assuming others'
bad debts infinitely. But it can't. The only reason that Congress has gotten
away with issuing this latest blizzard of new IOUs is that society is still
near the top of a Grand Supercycle, so optimism and confidence still have the
upper hand. But as pessimism and skepticism continue to wax and the economy
contracts, the bond market will figure out that the Treasury will be unable
to fund all these obligations with tax collections. Then Treasury bond prices
will begin falling as if they were sub-prime mortgages. A collapsing bond market
is deflation; it is a contraction of the outstanding credit supply. Recent
bailout schemes will not reverse the deflationary freight train. They will
serve only to confuse the marketplace and hinder the efficient retirement of
bad debts, thus exacerbating the crisis and aggravating investors' uncertainties
and thereby falling right in line with the declining trend of social mood."
Q: When will recession end - and DEPRESSION begin?
When do you think the economic DEPRESSION will officially begin?
Answer:
It took mainstream economists over a year to recognize the "official"
start of the recession! Because a depression is a much bigger and rarer event,
the delay with its "official" recognition will likely be even greater. Not
to mention the fact that, interestingly, there is no "official" definition
of a depression; even if there were one, ours here at Elliott Wave International
would probably differ. Rest assured, though: We intend to update subscribers
on any "progress" in that direction.
To read 30+ additional questions and answers on the financial crisis, investing,
capital safety and more, visit
Elliott Wave International's free Message Board.
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