The coronavirus is the catalyst, not the cause, of the market crash

Wall Street blames the coronavirus for the current crash for the same reason the Democratic Party blames Russia for losing in 2016: to avoid responsibility.
A month ago I said: "the stock market is massively overvalued. Right now the stock market is a bubble in search of a pin."

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If you want to know what's actually going on then you need to dig deeper than the headline.
Let's start with what traders are saying.

Fund managers are being faced with a collapse of liquidity as they try to handle record market moves...

“I have yet to find liquidity,” said Richard Hodges, a money manager at Nomura Asset Management, whose bets on Italian and Portuguese bonds last year put him in the top 1% of money managers. “There is none.”
The dry up in liquidity was seen across markets.

Why is there no liquidity (i.e. buyers in a down market)?
That comes down to three reasons:

#1) high-frequency traders:

“The liquidity in the Treasury market is bifurcated: sometimes very good, but when volatility picks up the high-frequency traders step away,”

Imagine that. The guys who front-run the markets are all gamblers, not investors.

#2) the Fed has crushed the short-sellers:
For the last 12 years, every time the stock market threatened to correct, the Federal Reserve printed mountains of money. In a normal market, short-sellers would provide liquidity in a downturn by buying back their positions (at a profit). After 12 years of having their faces ripped off by the Fed, professional bears are almost extinct on Wall Street.

#3) You. Yes, you, the retail investor:

The idea of "passive indexing" sounds harmless enough - buy an "index" and be an "average" investor.

However, it isn't as simple as that, and we have spilled a lot of ink digging into the relative dangers of it. Last week, investors saw those risks first-hand.
The biggest risk to investors is when "passive indexers" turn into "panic sellers."
...
Risk concentration always seems rational at the beginning, and the initial successes of the trends it creates can be self-reinforcing.
Until it goes in the other direction.

While the sell-off last week was large, it was the uniformity of the price moves, which revealed the fallacy "passive investing" as investors headed for the exits all at the same time...
For example, out of the 1750 ETFs in the U.S., there are 175, or 10%, which own Apple (AAPL). Given that so many ETFs own the same company, the problem of "liquidity" is exposed during a market rout.

If you want to know why stocks are having such wild swings, look no further than these three reasons.

But stocks isn't the whole story.
A much more important story was happening in the bond market.

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In a week that has already been record-setting in financial markets by any number of measures, the moves in the 30-year U.S. Treasury bond stand alone as jaw-dropping and unprecedented.

On Monday, the long bond opened at a yield of 0.99%, down 30 basis points from where it closed the last trading session and the first time ever it fell below 1%. About seven hours later, a relentless rally would push the yield to as low as 0.6987%, a drop of 59 basis points that Bloomberg News’s Elizabeth Stanton noted was the largest intraday drop on record.
...All told, in the span of roughly 36 hours, 30-year Treasury yields surged 62.5 basis points from trough to peak. Measuring from the intraday high on March 6 to the low on Monday, the drop was a staggering 85 basis points.

Those sorts of rapid swings don’t happen to long-term Treasuries. I mean that literally. Two-day moves of such magnitude have never happened before since the Treasury Department began issuing the 30-year maturity in the 1970s.

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To give you an idea of the magnitude of the moves in the Treasury market, consider these two things:

#1) the S&P 500 dividend yield just crossed above the 30-year US treasury by more than 10 basis points. In the last 60 years this has happened just once before: in 2008.

#2) even Wall Street banks are questioning the safety of Treasuries.

It's important to put these markets in perspective.
The stock market reflects the value of corporate America.
The treasury market reflect the value of the actual economy.
A stock market crash would cause a recession.
A treasury market crash would cause a depression, if not a revolution.

Finally, last week I said this about Trump's response: "We are on track to record the first $1 trillion deficit since 2012, and this is before a recession hits. And you want yet another tax cut for the rich?"

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Both the dollar and treasuries dumped on Trump's tax cut plan.
This wouldn't have happened if our deficits weren't already so large due to Trump's tax cut giveaway to the wealthy in 2017.
That it is having a negative impact on the strength of the dollar is not a surprise.

The U.S. dollar is set to lose a bit more ground against other major currencies next year, challenging a view among most foreign exchange dealers that aggressive tax cuts just passed by the Senate will have a positive effect on the currency.

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Typically traders sell stocks and buy bonds in bad times, and do the reverse on good days. This works 99.9% of the time.
Today was that 0.1% day.

The stock market’s faithful hedge failed when investors needed it the most.

As the Dow Jones Industrial Average plunged into a bear market and the S&P 500 approached that threshold with a 4.9% drop, longer-dated Treasuries were battered too, with the yield of 30-year bonds surging to 1.39% from Monday’s record low of just under 0.70%.

That produced a combined rout of 8.6% for long-dated bonds and U.S. equities on Wednesday, measured by adding the losses on BlackRock Inc.’s long-dated Treasury exchange-traded fund and the drop in the S&P 500 -- their worst combined daily drawdown since the ETF was created in 2002. For balanced portfolios, this session was worse than any during the financial crisis.

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PriceRip's picture

          because the word "Catalyst" implies a type of dependency that exists in "Reality" rather than "reality".

RIP

edit: gaslighting, smokescreen, ruse, or some other word.

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"I know you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant."
Robert J. McCloskey, U.S. State Department spokesman. From a press briefing during the Vietnam war.

Cassiodorus's picture

unless, unless, there is about to be a run on the dollar. And that could happen if the big owners of dollars start selling their dollars and dollar-denominated assets in a desperate search for some sort of purchasable escape from the coronavirus. That would entail some sort of race to the bottom to get at that which dollars can be made to buy.

Then, and only then, will the system of dollar hegemony collapse. Otherwise, dollar hegemony.

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"Scab of a nation, driven insane" -- Frank Zappa

@Cassiodorus
"None of these unprecedented moves in the credit markets mean much...unless they mean financial End Of Days."

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Cassiodorus's picture

@gjohnsit Oh sure, you might lose your life's savings if the dollar were to collapse -- but then you'd be where the rest of us are who don't have any life's savings. You know, like that 78% of workers who are living paycheck to paycheck already, no financial collapse necessary.

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"Scab of a nation, driven insane" -- Frank Zappa

Deja's picture

@Cassiodorus
Or those of us who are forced to have 7.7% of our wages put into a retirement account but are not allowed to move it around or have a say in the companies it buys stock in.

It, along with taxes, social security I'll never see, and Medicare I'll also never get to use is the fee I pay to be allowed to make less than double minimum wage at a job that requires at least an associates degree. Like when a stripper has to tip the house, except that I can't lie about how much I make.

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@Deja
guaranteeing a benefit when you retire you're a lot better of than most people trying to make investment decisions on their own.

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@Cassiodorus
The longest bull market in Wall Street history officially ended today.
Do you think that means the coming Bear Market will be shallow and short? I don't.

The longest economic expansion in U.S. history began in June 2009 (128 months, the longest in records maintained by the National Bureau of Economic Research going back to 1854).
I'm thinking that has ended too.

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Cassiodorus's picture

@gjohnsit for all I know. But I don't really think that the stock market is much more than the manipulation of numbers. When the US government prints trillions of dollars and hands them to the Pentagon, which then promptly "loses" them, the money has to go somewhere. Measuring where the money goes, then, isn't going to tell me a lot. In the end, then, the collapse will be a material collapse, a collapse in the physical structure of society. Coronavirus pandemic looks to me like the quickest route to that material collapse.

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7 users have voted.

"Scab of a nation, driven insane" -- Frank Zappa

@Cassiodorus
Wall St >banks and all the other sectors of the US economy that are and will be hard hit. Up first, the travel industry and health providers and insurers (heavily dependent on Wall St returns and limiting payouts and they're going to have a tougher time with the latter). The old geezers living high on all those super returns from Wall St will suddenly have less disposable income and forced to reduce their discretionary spending, but before then CoVid 19 is going to reduce their spending on travel and cruises. That leads to a lot of workers without jobs/income that won't return quickly when the threat of CoVid 19 is reduced because then the travel and cruise line customer base will be without all their extra disposable income. And that doesn't include all the trade losses from that those newly unemployed. Plus, consumer debt load is back to very high levels -- the good times are always going to last; so, spend, spend, spend.

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@Marie

Perhaps big pharma can quickly develop a new drug
to inject into the veins of the investor class
while insulating them from the various civil virus
attacks

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@QMS
in isolation, but immensely complicated to describe the interactions among the threads and at various points along the threads.

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PriceRip's picture

          I tried to explain to a large group of college professors what was wrong with deregulating financial institutions.

          I was told I didn't know what I was talking about.

          Welcome to the world I predicted!!!!

          You are so very welcome!

          If I sound bitter, guess what! I am bitter, but who cares.

RIP

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"I know you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant."
Robert J. McCloskey, U.S. State Department spokesman. From a press briefing during the Vietnam war.

@PriceRip

ya' know

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PriceRip's picture

@QMS

          I just need to vent from time-to-time.

          There are (believe it or not) a few gas-lighting trolls here at c99p. And, I am not anonymous, never was and never will be.

RIP

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9 users have voted.

"I know you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant."
Robert J. McCloskey, U.S. State Department spokesman. From a press briefing during the Vietnam war.

@PriceRip @PriceRip

good place for it
supportive audience
and... fill in the blanks

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@PriceRip
at about the same time with a group of ECONOMISTS leading to the same result. "It can't happen as long as the market is truly free and actors are allowed to make their decisions without restrictions." I learned it is never a good idea to challenge someone's deeply held religious convictions. Today you can barely see most of the scars.

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earthling1's picture

greenbacks into Yuans.
Paying off so far. Hope to start investing in BRI/Silk Road infrastructure projects soon.

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11 users have voted.

After six years, still getting robo-calls from Marriot Hotels.
They're like herpes.

@earthling1
I wish you luck.
I'm still without a plan.

I've been shorting the stock market, but I did it way too early so I'm just getting back to even.

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@earthling1

troy .999 pure rounds
trading value is now 38% more than the dollar
than when purchased
small stuff, but has trading value
when the dollar goes to poo

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@QMS
Pisses me off that gold is outperforming. But you aren't going to trade gold for a loaf of bread and a quart of milk. For reasons I fail to understand a US 1 oz. 99.9% silver coin always sells for more than a 1 oz. 99.99% silver Canadian coin.

Don't forget circulated true silver coins in small denominations--dimes, quarters, and half dollars. They may be more liquid.

I also suggest using a local dealer you can trust. I once went into the store moments before a very angry man walked out. The dealer shrugged his shoulders and said "What am I supposed to do? It wasn't 99% gold." Apparently he'd purchased it through the mail.

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earthling1's picture

@FuturePassed
have enough silver content to be the go-to currency in a colapse.
I can picture a loaf of bread going for a silver dime.
It's ironic that in 1964 a quarter would buy a gallon of gas. Today, that same silver quarter would buy......a gallon of gas!
I have enough to get by.

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After six years, still getting robo-calls from Marriot Hotels.
They're like herpes.

cashed-in during the last financial 'crises'
this is about the same thing

financial coronaries only benefit the sturgeons
or cronies and surgeons
good to see you back

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@QMS
I don't know.
I could see some violence happening.

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@gjohnsit

far as I can see (not too far) the next crash response is going to grow out of the lessons we learned from occupy. Expect heavy boots. Think it is going to be the next battle against the royals.
Yellow vests and green C99 caps may become a fashion.
See ya in Milwaukee.

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CB's picture

@QMS
We're going to start seeing more strict quarantines put in place within a week. But Americans don't like to be told where and when they can come and go so that's not going to sit well with many. They take The Land of the Free and the Home of the Brave as a God given right and they are well armed by global standards.

It's a perfect storm brewing - global pandemic hand-in-hand with global financial meltdown.

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earthling1's picture

@CB
just prohibited assemblies of more than 250 people in three counties.
Imagine taking it nationwide.
What better time to crash the market and invade Iran and/or Venezuela.
Pillage, plunder, and bail.

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8 users have voted.

After six years, still getting robo-calls from Marriot Hotels.
They're like herpes.

CB's picture

@gjohnsit
Instead of pulling out after Obomba bailed them out in 2008, they have burrowed right back in ten times deeper.

You can be damned sure the fuckers are also smart enough to have stashed billions in hard assets to weather the coming storm.

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@CB

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@gjohnsit about a Wall St. bail in, where depositors savings were considered bank assets.

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earthling1's picture

@Snode
And it includes our 401s too.
Thanks Obama!

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7 users have voted.

After six years, still getting robo-calls from Marriot Hotels.
They're like herpes.

@Snode
Customer deposits are bank liabilities. Wall St. can fiddle around with many aspects of finance, but they can't change the basic rules of accounting. Assets never convert to Liabilities or vice-versa.

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CB's picture

@Marie
They had started using bank deposits as operating cash - paying expenses and operating costs as well as funding for loans and other bank products. This gave them a lot more money to invest gamble with.

A normal bank would use the spread (between what they pay in interest and what they earn by loaning out the money you deposit) to pay their operating costs and profits to the shareholders.

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@Marie if it's law now but this article touches on it.

https://www.investopedia.com/articles/markets-economy/090716/why-bank-ba...

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@Marie .
with income statement accounts. There is but one intersection between the two, and that's the capital accounts. Cash flow statements detail that cash asset account over an accounting period - formally quarterly and annually. In simplified terms which is all we're discussing, the source of the cash doesn't matter that much.

Bank deposits -- which are only in cash form as of the initial deposit transaction -- are deployed in various ways by banks. Primarily loans - short and long-term - and investments - short and long-term. Minimizing idle cash (non-income producing cash) and maximizing returns on investments and loans. Overnight intra-bank loans and borrowings limits idle cash.

Primary book entries for all bank transactions don't vary and accounting can never transform a liability account into an asset account, income account, or expense account. Business accounting is always double-entry (except perhaps in the case of Madoff, but he's now in prison) and not like single-entry personal checking accounts. Every business (including banks) transaction is recorded with an equal dollar amount of debits (left) and credits (right). Every account is predefined (for about four hundred years) as an asset, liability, capital, income, or expense. Assets always equal liabilities plus capital.

A consumer $100 bank deposit hits the bank's books as: Cash debit $100 and customer deposit credit $100. Assets: cash = Liabilities: deposit

If that's the only cash the bank holds and it needs to meet $100 payroll, that transaction is recorded as: Payroll debit $100 and Cash credit $100. Note that the second transaction doesn't change the customer deposit account. However, assets no longer = liabilities. That's reconciled by the income and expense statement:
Income 0
Payroll Expense 100
Net loss 100

The year-end closing book entry for the loss is: Capital debit 100 and net loss credit 100. And the balance sheet is now:
Assets: 0
Deposits: 100
Capital: -100
Technically bankrupt. The depositor is SOL.

Glass-Steagall 1933, in addition to splitting commercial and investment banking, created the FDIC to protect ordinary depositors from irresponsible banksters. No more SOL for depositors, and the bankrupt bank ceases to exist. That hasn't changed, but it was a huge mistake to gut Glass-Steagall with Gramm-Leach-Bliley, socialism for reckless and incompetent banksters.

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PriceRip's picture

          I find it disturbing to read people here are trying to "weather the storm" (should be about avoiding the iceberg). But I will not be giving financial advise, other than to say I am on very good terms with my contacts at the credit union. This group of activists are very like the last group I worked with mid-continent. They always watched my six.

          Credit Unions are the closest thing to Public Banking that we have. Just do the best you can with what resources you have, and for what it's worth: Good Luck …

RIP

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"I know you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant."
Robert J. McCloskey, U.S. State Department spokesman. From a press briefing during the Vietnam war.

earthling1's picture

@PriceRip
I just cannot imagine anyone still using a bank.
But I'm not sure a credit union is any safer in a crash. They are in the SWIFT system also.
At least your money is kept local.

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9 users have voted.

After six years, still getting robo-calls from Marriot Hotels.
They're like herpes.

PriceRip's picture

@earthling1

          I don't put financial advice "out there" into the aether. But I will say that I live a life wherein I don't worry about financial issues. But, hey, maybe I am just a "What, Me Worry?" sort of cartoon character …

          Oh, and I like the fact that the local board is big on getting high school students engaged in the system. Done right it helps develop an informed next-gen.

RIP

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"I know you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant."
Robert J. McCloskey, U.S. State Department spokesman. From a press briefing during the Vietnam war.

CB's picture

That's $1,000,000,000,000,000

Interesting times ahead for sure. Good thing I've stocked up on TP. I figure I will be able to get at least $1.00 per square when the shit hits the fan.

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@CB

may be the petro dollar
and now trumpet is trying to bail out
the frackers
not a good idea, but then

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CB's picture

@QMS
in the last 15 years. Nobody knows how many billions have disappeared from bankruptcies, stock frauds and write offs in this industry. The major oil companies used their deep pockets to buy these leases and associated drilling equipment for pennies on the dollar. If the true cost of bringing this oil to market was factored in, break-even would be in excess of $60 bbl.

Russia can pull oil out of the ground for $24. Even less now that the ruble has dropped 10%. Russia can thank the US for all the sanctions they applied in the last 5 years. It made the country somewhat immune to the financial shocks in the west and forced them to stand on their own feet and produce their own necessities. Having wisely invested in a shitload of gold during these years is icing on their cake.

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@CB

with chocolate frosting
(obomber / hillary)
pointed us into this
financial fight with the
ruble and yuan

petro dollar is weakened
by us hegemony sanctions

que suprise!

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CB's picture

@QMS
The Rooskis used it to fuel three of these beauties.

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@CB

Clintons' uranium deal.

spoils of the feet, fleet, fleece

and

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PriceRip's picture

@CB

          this is very scary.

RIP

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8 users have voted.

"I know you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant."
Robert J. McCloskey, U.S. State Department spokesman. From a press briefing during the Vietnam war.

@CB
would people pay you a dollar a square for TP when they can just use the dollar?

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CB's picture

@FuturePassed
is not Kitten Soft TM. But they do make good fire-starters when the gas and electricity is cut off.

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mhagle's picture

I am a woman, 62, masters degree, 28 years of teaching and several years in business. But as life went down, no savings, no retirement, lots of cc debt and a bit of equity. Divorce. Family members died. The usual shit. Although I currently live a pretty happy life. We are OK. Investing is not in my sphere of experience.

I make my own laundry soap.

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Marilyn

"Make dirt, not war." eyo

@mhagle

is wise and healthy
it comes down to
what we have done
for ourselves and others
in the end

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@mhagle Same here. Was going well and then series of events. I greatly admire the financial insight of john and other posters. My aim is to understand the big picture as for the little picture in terms of personal investing is not possible.

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won't go away, causing a systemic failure. Everything gets dragged down. When the market hits a local bottom what is the psychology that will drive up a recovery? The virus keeps its finger on the down button. It's also unearthed the truth that the US is a second-world country when it comes to health care. We were and are totally unprepared. Our effort is pathetic and we can't change it by throwing money at it at this late date. This has also unearthed the market as a Ponzi Scheme. The workers put their retirement money in and the wealthy take it out to cover their very expensive lifestyles, and finally as it crashes they scramble to save their wealth and nothing is left.

The question in my mind is - will this be a deflationary depression like 1929 or an inflationary depression like Germany in the 1921-23? If it's inflationary then all of your savings are worthless and we will have a country that has been effectively nuked. If it's deflationary then all of your assets will be worthless and you will have to sell everything at a fire sale just to survive.

If you think that this will stop, please explain the mechanism.

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Capitalism has always been the rule of the people by the oligarchs. You only have two choices, eliminate them or restrict their power.

karl pearson's picture

@The Wizard I am wondering if we will see both inflation and deflation. Prices will rise for certain necessities, but people's assets will be worth less. Not sure what this situation is called in financial language.

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earthling1's picture

@karl pearson
Frame it as: Does the greenback go up in value and harder to get, or go down in value and harder to get.
Either way we lose.

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After six years, still getting robo-calls from Marriot Hotels.
They're like herpes.

@karl pearson

in acceptable financial language to describe
money as a weapon of the wealthy
to protect their ill-begotten spoils

Marx probably had a descriptive passage

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is true socialized medicine -- and some beneficiaries like it very much:

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Cassiodorus's picture

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"Scab of a nation, driven insane" -- Frank Zappa

@Cassiodorus
step up and cover the wages to all the low wage people that service those games?

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