This is one of those days your financial adviser never told you about. The Dow Jones Industrial Average dropped below 10,000, taking with it the savings of millions. How the money runs out and goes who knows where!
Below 10,000 is below a magic line, the line the hard-times barbarians were not supposed to breach. Since the Dow ascended the heights above the line in 2004, it has been an article of faith that it would not go below 10,000 again in our lifetimes.
The price of stocks is not the only thing that is going down. The price of everything is heading south. Corn is down 46 percent. Oil is down 39 percent, which means you will see the price at the pump continue to slide. But take no solace from that; there will be less money with which to buy gasoline.
Gold, which is supposed to be the last and safest refuge when trouble storms across the economy, is no haven of protection in this hurricane. People who bought gold are beginning to wish they hadn’t, as its price tumbles along with the others.
This is deflation, a word with which we may become as familiar as we are with inflation. Deflation usually comes as a result of the bursting of very large inflationary bubbles, with resulting strings of bankruptcies, foreclosures and failures. The last major deflation in the United States occurred during the Depression, when prices dropped much as they have begun to do now.
Deflation is a dragon, a wealth-destroyer, a fire-breathing eater of money. As it drives down prices, wealth simply vanishes as an estimated $3 trillion of people’s investments have already disappeared over this period of decline and fall.
American International Group (AIG), the recipient of an $85 billion loan from the government, just a few days ago has already run through $61 billion of it. That money was supposed to be a “bridge loan” to keep the insurance giant afloat while it sold off enough assets to right itself. But in a raging deflation, when everybody is calling everybody else up and demanding collateral on their loans, money disappears faster than a conjuror makes a rabbit vanish into a hat.
Hundreds of billions that were there last night can be gone in the morning. Hence the $700 billion over which Congress and the country agonized last week may soon go flying up the chimney before it can have an effect on the price avalanche, which is picking up momentum and thundering down the inflationary mountain peaks at us.
Deflation is not only a destroyer of wealth, it is also a creator of unemployment, which we shall see a lot of in the coming months. With a dismal holiday shopping season expected, with people scared to spend money and determined to hoard it just as the big financial institutions, which will not lend even to their best customers, we are tanking.
Thankfully we have a few brakes–such as bank account deposit insurance. We have an unemployment compensation system up and running and other such assists for people injured by deflation. But we have not found the tools to stop the downward fall itself.
Besides the $700 billion authorized by Congress, the Federal Reserve Board has been pitching even larger amounts into the nation’s financial system with the purpose of making money freely available again. These staggering amounts get shoveled into the maw and in a trice they are consumed with nothing left but the ashes of bankruptcies.
To stop the deterioration Ben Bernanke, the Board’s chairman, is using every device known to national bankers and new wrinkles as well, but nothing has worked. All the flawed, phony, bloated loans of these last years are being called in and found to be uncollectible. In enveloping disaster the good loans are turning into bad loans. Nobody is sure what is solid or safe.
Faced with a similar crisis in the early 1930s, President Franklin Roosevelt took the country off the gold standard and even devalued the dollar by 40 percent. Dramatic though these steps were, they did not seem to have had much of an effect on prices.
But all bad things must end. Sometime in the coming days or weeks or months–let’s hope not years–a point of financial and emotional exhaustion will be reached, a price floor will then be established and we can begin to climb back out of the hole.