6 Questions You Should
Asking About the Financial Crisis
(And 6 Must-Read Answers)
March 11, 2009
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
Here the company shares 6 of the recent
critical questions on the financial crisis and 6 answers provided by their
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...
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
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?
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
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?
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?
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
When do you think the economic DEPRESSION will officially begin?
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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