CIRSES 1987 ANITA NIKAM

On Monday, October 19, 1987, stock markets around the world crashed, shedding a
huge value in a very short period. The crash began in Hong Kong, spread west
through international time zones to Europe, hitting the United States after other
markets had already declined by a significant margin. The Dow Jones Industrial
Average (DJIA) dropped by 508 points to 1739 (22.6%).By the end of October, stock
markets in Hong Kong had fallen 45.8%, Australia 41.8%, Spain 31%, the United
Kingdom 26.4%, the United States 22.68%, and Canada 22.5%. New Zealand's market
was hit especially hard, falling about 60% from its 1987 peak, and taking several
years to recover. (The terms Black Monday and Black Tuesday are also applied to
October 28 and 29, 1929, which occurred after Black Thursday on October 24, which
started the Stock Market Crash of 1929. In Australia and New Zealand the 1987
crash is also referred to as Black Tuesday because of the time zone difference.)
The Black Monday decline was the largest one-day percentage decline in stock
market history. Other large declines have occurred after periods of market
closure, such as on Monday, September 17, 2001, the first day that the market was
open following the September 11, 2001 attacks. (Saturday, December 12, 1914, is
sometimes erroneously cited as the largest one-day percentage decline of the DJIA.
In reality, the ostensible decline of 24.39% was created retroactively by a
redefinition of the DJIA in 1916.) Interestingly, the DJIA was positive for the
1987 calendar year. It opened on January 2, 1987, at 1,897 points and would close
on December 31, 1987, at 1,939 points. The DJIA would not regain its August 25,
1987 closing high of 2,722 points until almost two years later. A degree of
mystery is associated with the 1987 crash, and it has been labeled as a black swan
event. Important assumptions concerning human rationality, the efficient market
hypothesis, and economic equilibrium were brought into question by the event.
Debate as to the cause of the crash still continues many years after the event,
with no firm conclusions reached. In the wake of the crash, markets around the
world were put on restricted trading primarily because sorting out the orders that
had come in was beyond the computer technology of the time. This also gave the
Federal Reserve and other central banks time to pump liquidity into the system to
prevent a further downdraft. While pessimism reigned, the DJIA bottomed on
October 20. Following the stock market crash, a group of 33 eminent economists
from various nations met in Washington, D.C. in December 1987, and collectively
predicted that “the next few years could be the most troubled since the 1930s.” On
Monday, October 19, 1987, the Dow Jones Industrial Average fell to 1738 points
from 2246 points, triggering a reduction in the value of all U.S. outstanding
stocks and earning that fateful day the unenviable title of Black Monday.But while
much attention is paid to October 19 because of the harrowing situation, October
1987 in general was a trying period, as key stock indexes lost over 30 percent of
their value in the U.S. The response was quick and decisive as the U.S. central
bank and the Fed stepped forward to help during this event. Experts believe that
it was the quick thinking on the part of the two aforementioned entities that
enabled both the Dow and the S & P which had fallen to 225.06 points from 282.7
points on Black Monday to regain their lost value within 24 months. The relatively
quick recovery eliminated the very serious possibility of a recession. The stock
market crash of 1987, according to some reports, signaled the end of a five-year
bull market. But the market proved to be more resilient following the crash of
1987 than it had been following the crash of 1929. The day after the crash of
1987, for instance, the market posted a record single-day gain of 102.27. Many
explanations have been given to account for why the stock market crash of 1987
occurred, but none of them provide a full explanation for the happenings on that
blackest of Mondays. Also confounding to some experts is how soon the markets
rallied following a serious setback. A number of changes were introduced after the
1987 debacle. For instance, more stipulations were applied to program trading.
which involves computers programmed to automatically order stock trades whenever
certain marketplace conditions are present. Currently, if the Dow drops more than
250 points in a day, program trading is prohibited to provide enough time for
dealers and brokers to touch base with their clients. At the end of the day,
however, many believe that if the 1987 crash had one positive impact it was that
it warned the powers that be, yet again, that market discipline is necessary.
CRASH
There is no numerically-specific definition of a crash but the term commonly
applies to steep double-digit percentage losses in a stock market index over a
period of several days or A precipitous drop in market prices or economic
conditions also called crash. "A stock market crash is a sudden dramatic decline
of stock prices across a significant cross-section of a stock market. " "What goes
up must come" down are the simple lines but when it applies to stock market,this
old saying carry a lot of weight.because when a stock market comes down after
having went up over a long period, the devastation it sometimes leave behind is
horrible.Crashes usually occur under the following conditions: ➢ A prolonged
period of rising stock prices and economic optisim, ➢ A market where P/E ratios
exceed long-term averages, and ➢ Extensive use of margin debt and leverage by
market participants The Stock Market Crash of 1987 The stock market crash of 1987
was the largest one day stock market crash in history. The Dow lost 22.6% of its
value or $500 billion dollars on October 19 th 1987! In order to understand the
crash, we must first study the cause. 1986 and 1987 were banner years for the
stock market. These years were an extension of an extremely powerful bull market
that started in the summer of 1982. This bull market had been fueled by hostile
takeovers, leveraged buyouts and merger mania. Companies were scrambling to raise
capital to buy each other out, in essence. The philosophy of the time was that
companies would grow exponentially simply by constantly purchasing other
companies. In leveraged buyouts, a company would raise massive amounts of capital
by selling junk bonds to the public. Junk bonds are simply bonds that have a high
risk of loss, so they pay a high interest rate. The money raised by selling junk
bonds, would go towards the purchase of the desired company. IPOs were also
becoming a commonplace driver of the markets. An IPO is when a company
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HTTP://PAKISTANMBA.JIMDO.COM issues stock for the first time. “Microcomputers”
were also a top growth industry. People started to view the personal computer as a
revolutionary tool that will change our way of life, and create wonderful profit
opportunities. The investing public was caught up in a contagious euphoria,
similar to that of any other bubble and market crash in history. This euphoria
made people, once again, believe that the market would always go up.

THE CRASH OF 1987 In the days between October 14 and October 19, 1987, major
indexes of market valuation in the United States dropped 30 percent or more. On
October 19, 1987, a date that subsequently became known as "Black Monday,".The Dow
lost 22.6% of its value or $500 billion dollars on October 19 th 1987.The Black
Monday decline was the second largest one-day percentage decline in stock market
history. Initial blame for the 1987 crash centered on the interplay between stock
markets and index options and futures markets and many blamed program trading
strategies for blindly selling stocks as markets fell, exacerbating the decline.
Some economists theorized the speculative boom leading up to October was caused by
program trading, while others argued that the crash was a return to normalcy.
Market crashes are random, unpredictable events,certain warning signs exist, which
characterize the end of a bull market and the start of a bear market. By learning
these common warning signs, you can liquidate your investments and prosper by
shorting the market. New York - On October 19, 1987, the Dow Jones Industrial
average declined 22.6% in the largest singleday drop in history. Black Monday, as
it has become known, was almost twice as bad as the stock market crash of of
October 29, 1929 . The 1929 decline approximated 11.7% and started the Great
Depression.The Securities Exchange Commission, academic professors, financial
writers and every financial security firm has analyzed the stock market crash of
1987 in about every way possible. Some believe the market crash was caused by an
irrational behavior on the part of investors. Some analysts believe that excessive
stock prices and computerized trading were the cause. The key finding is that no
single news event occurred that could account for the crash. The stock market was
doing quite well for the first nine months of 1987. It was up more than 30%,
reaching unprecedented heights. That was after two consecutive years of gains
exceeding 20%. By 1997, interest rates began to climb. Three days before Black
Monday, the stock market gains for the year dropped by 11.6%, including the
effects of a 9.5% drop on October 16, 1987. The three day drop was caused be
several macroeconomic factors. Long-term bond yields that has started 1987 at 7.6%
climbed to approximately 10%. This offered a lucrative alternative to stocks for
investors looking for yield. The merchandise trade deficit soared and the value of
the U.S. dollar began to decline. After a speech by Treasury Secretary Jim Baker,
investors began to fear that the weak US dollar would cause further inflation. On
Monday, the Dow dropped about 200 points or 9% in the first hour and half. During
the day, most institutional investors implemented various computer-based portfolio
insurance programs. Portfolio insurance was destabilizing because it required
selling stock as prices declined. The more stocks fell, the more stocks were sold.
As the market did not have the liquidity to support the sales, the stock market
fell even further. Buyers waited, knowing the more the market dropped, the more
selling would have to take place. By the end of the day, the Dow had lost 508
points. One important lesson came out of the stock market crash - is that
investors who sold, took a bath. Those who held and continued a disciplined and
systemic approach received rewards. In fact, by the end of 1997, total return for
the year, including dividends, approximated 5%.
TIMELINE Timeline compiled by the Federal Reserve. SIn 1986, the United States
economy began shifting from a rapidly growing recovery to a slower growing
expansion, which resulted in a "soft landing" as the economy slowed and inflation
dropped. The stock market advanced significantly, with the Dow peaking in August
1987 at 2722 points, or 44% over the previous year's closing of 1895 points. On
October 14, the DJIA dropped 95.46 points (a then record) to 2412.70, and fell
another 58 points the next day, down over 12% from the August 25 all-time high. On
Friday, October 16, the DJIA closed down another 108.35 points to close at 2246.74
on record volume. Treasury Secretary James Baker stated concerns about the falling
prices. That weekend many investors worried over their stock investments. The
crash began in Far Eastern markets the morning of October 19. Later that morning,
two U.S. warships shelled an Iranian oil platform in the Persian Gulf in response
to Iran's Silkworm missile attack on the U.S. flagged ship MV Sea Isle City.

TIME BEFORE CRISES Now it is turn to talk about the period before the crises of
1929 and 1987. What a kind of period was it? What were the conditions? Well,
almost each person in the United States of America was a participant in the
process of buying, selling different shares. Everyone thought about money. It was
the period of speculators. For shareholders the best way to save money, to their
mind, was stock. But it turned to be wrong. It was just a hypothesis. Was it
really safe?During the researching the situation in 1987, the situation was the
same. People were so stupidly involved in the process of buying stocks that they
forgot that terrible crisis. It was true endless process: big companied wanted to
be larger with the help of small one by buying the shares. After that they sold
unnecessary bonds to others with elevated interest rate. But that process was
under the risk as well. Also for that period the preposition that microcomputer
would be a great investment was wrong. But people could foresee so far and that is
why bought the stocks of those corporations which were connected with such kind of
field. One reason for significant supply-side outcomes was grounded on the fact
that employees waited that they could get large compensation from their
investments. And they
believed that Internet or work salary would be smaller compensation: they trusted
only in their stock. It is important to speak on the point concerning the place of
the biggest stock exchange market in the world - New York Stock Exchange, during
those crises. Well, this market is the head of dollar amount. Nowadays the amounts
are remarkable and shocking: the capitalization is more than 23 trillion dollars.

COMMODITY PRICE EFFECT In 1987 the situation for commodity prices was very
different. The CRB index had made its all time high of 338 in 1980, a year of
surging metals prices, and a 20% prime rate. But the price action since then was
not in a consistent decline, but erratic with large rallies and declines, and from
August 1986 it had been rising strongly. Furthermore after two wild days in the
CRB pit caused by the stock exchange crash, the CRB index resumed its erratic
rise. Commodity prices both before and after the 1987 crash were therefore a
strong indication that the crash problem was specific to the mechanics of the
stock market, and not a general monetary or economic phenomena. In particular it
was related to derivatives trading. The money managers had not fully understood
the lack of liquidity in the futures pits. Their rush to sell created 10, 15, and
20 and even 40 handle discounts in the futures pits, compared to cash prices (a
“handle” represents 100 points in the index). Those who bought futures from them
at these discounts, then rushed to offset their positions by selling the
underlying stocks, “at the market.” This process was repeated all day for two
days, and that’s what caused the meltdown of the New York Stock Exchange in
October 1987. Also attached are chart #5 - the US Dollar Index, 1987 crash; and
chart #6 - the % year Treasury bond, 1987 crash, for your information on their
behavior during this crisis.The daily trading limits established by the Stock
Exchange and the Chicago Mercantile Exchange (the S& P pit) as a means of breaking
panics gave participants a moment to think about what they were doing. One last
unfortunate 87 crash incident from the NYFE floor should be mentioned to
Europeans, to show the mentality of much of the exchange trading community. On
Friday afternoon the week of the crash, one of the NYFE clerks hired a
professional stripper, to perform in the NYFE Lounge. I watched most of the
traders and clerks again abandon the exchange floor
to mob the lounge entrance to ogle the stripper. They considered this a “cool”
event. Their mentality was as shallow as the exchange’s liquidity. PRASHANT KADAM
CAUSES Potential causes for the decline include program trading, overvaluation,
illiquidity, and market psychology. The most popular explanation for the 1987
crash was selling by program traders. U.S. Congressman Edward J. Markey, who had
been warning about the possibility of a crash, stated that "Program trading was
the principal cause. "In program trading, computers perform rapid stock executions
based on external inputs, such as the price of related securities. Common
strategies implemented by program trading involve an attempt to engage in
arbitrage and portfolio insurance strategies. The trader Paul Tudor Jones
predicted and profited from the crash, attributing it to portfolio insurance
derivatives which were "an accident waiting to happen" and that the "crash was
something that was imminently forecastable". Once the market started going down,
the writers of the derivatives were "forced to sell on every downtick" so the
"selling would actually cascade instead of dry up."

As computer technology became more available, the use of program trading grew
dramatically within Wall Street firms. After the crash, many blamed program
trading strategies for blindly selling stocks as markets fell, exacerbating the
decline. Some economists theorized the speculative boom leading up to October was
caused by program trading, while others argued that the crash was a return to
normalcy. Either way, program trading ended up taking the majority of the blame in
the public eye for the 1987 stock market crash.

New York University's Richard Sylla divides the causes into macroeconomic and
internal reasons. Macroeconomic causes included international disputes about
foreign exchange and interest rates, and fears about inflation. The internal
reasons included innovations with index futures and portfolio insurance. I've seen
accounts that maybe roughly half the trading on that day was a small number of
institutions with portfolio insurance. Big guys were dumping their stock. Also,
the futures market in Chicago was even lower than the stock market, and people
tried to arbitrage that. The proper
strategy was to buy futures in Chicago and sell in the New York cash market. It
made it hard -the portfolio insurance people were also trying to sell their stock
at the same time. Economist Richard Roll believes the international nature of the
stock market decline contradicts the argument that program trading was to blame.
Program trading strategies were used primarily in the United States, Roll writes.
Markets where program trading was not prevalent, such as Australia and Hong Kong,
would not have declined as well, if program trading was the cause. These markets
might have been reacting to excessive program trading in the United States, but
Roll indicates otherwise. The crash began on October 19 in Hong Kong, spread west
to Europe, and hit the United States only after Hong Kong and other markets had
already declined by a significant margin. Another common theory states that the
crash was a result of a dispute in monetary policy between the G7 industrialized
nations, in which the United States, wanting to prop up the dollar and restrict
inflation, tightened policy faster than the Europeans. The crash, in this view,
was caused when the dollar-backed Hong Kong stock exchange collapsed, and this
caused a crisis in confidence. 1. DERIVATIVE SECURITIES :Initial blame for the
1987 crash centered on the interplay between stock markets and index options and
futures markets. In the former people buy actual shares of stock; in the latter
they are only purchasing rights to buy or sell stocks at particular prices. Thus
options and futures are known as derivatives, because their value derives from
changes in stock prices even though no actual shares are owned. The Brady
Commission [also known as the Presidential Task Force on Market Mechanisms, which
was appointed to investigate the causes of the crash], concluded that the failure
of stock markets and derivatives markets to operate in sync was the major factor
behind the crash. 2. COMPUTER TRADING :In searching for the cause of the crash,
many analysts blame the use of computer trading (also known as program trading) by
large institutional investing companies. In program trading, computers were
programmed to automatically order large stock trades when certain market trends
prevailed. However, studies show that during the 1987 U.S. Crash, other stock
markets which did not use program trading also crashed, some with losses even more
severe than the U.S. market. 3. ILLIQUIDITY :-
During the Crash, trading mechanisms in financial markets were not able to deal
with such a large flow of sell orders. Many common stocks in the New York Stock
Exchange were not traded until late in the morning of October 19 because the
specialists could not find enough buyers to purchase the amount of stocks that
sellers wanted to get rid of at certain prices. As a result, trading was
terminated in many listed stocks. This insufficient liquidity may have had a
significant effect on the size of the price drop, since investors had
overestimated the amount of liquidity. However, negative news to investors about
the liquidity of stock, option and futures markets cannot explain why so many
people decided to sell stock at the same time. While structural problems within
markets may have played a role in the magnitude of the market crash, they could
not have caused it. That would require some action outside the market that caused
traders to dramatically lower their estimates of stock market values. The main
culprit here seems to have been legislation that passed the House Ways & Means
Committee on October 15 eliminating the deductibility of interest on debt used for
corporate takeovers. Two economists from the Securities and Exchange Commission,
Mark Mitchell and Jeffry Netter, published a study in 1989 concluding that the
anti-takeover legislation did trigger the crash. They note that as the legislation
began to move through Congress, the market reacted almost instantaneously to news
of its progress. Between Tuesday, October 13, when the legislation was first
introduced, and Friday, October 16, when the market closed for the weekend, stock
prices fell more than 10 percent -- the largest 3-day drop in almost 50 years. In
addition, those stocks that led the market downward were precisely those most
affected by the legislation. [Ultimately, the legislation was stripped of the
provisions that concerned the stock market before being enacted into law. 4. U.S.
TRADE AND BUDGET DEFICITS :Another important trigger in the market crash was the
announcement of a large U.S. trade deficit on October 14, which led Treasury
Secretary James Baker to suggest the need for a fall in the dollar on foreign
exchange markets. Fears of a lower dollar led foreigners to pull out of dollar-
denominated assets, causing a sharp rise in interest rates. One belief is that the
large trade and budget deficits during the third quarter of 1987 might have led
investors into thinking that these deficits would cause a fall of the U.S. stocks
compared with foreign securities (this was the largest U.S. trade deficit since
1960). However, if the large U.S. budget deficit was the cause, why did stock
markets in other countries crash as well? Presumably if unexpected changes in the
trade deficit were bad news for one country, it would be good news for its trading
partner.
5. INVESTING IN BONDS AS AN ATTRACTIVE ALTERNATIVE :Long-term bond yields that had
started 1987 at 7.6% climbed to approximately 10% [the summer before the crash].
This offered a lucrative alternative to stocks for investors looking for yield. 6.
OVERVALUATION:Many analysts agree that stock prices were overvalued in September,
1987. Price/Earning ratio and Price/Dividend ratios were too high [Historically,
the P/E ratio is about 15 to 1; in October 1987 the P/E for the S&P 500 had risen
to about 20 to 1]. Does that imply that overvaluation caused the 1987 Crash? While
these ratios were at historically high levels, similar Price/Earning and
Price/Dividends values had been seen for most of the 1960-72 period. Since no
crash happened during that period, we can assume that overvaluation did not
trigger crashes every time. 7. GENERAL FACTORS :-

Talking about general factors concerning the appearance of two crises it is very
essential not to forget one of the major factors that play one of the important
roles – human one, or to be more concrete – psychological. Its impact on
economical system is very strong, and that fact was introduced through many
newspapers. They underlined that very psychological factor was not probably
noticeable, the economists didn’t pay attention to it, but the prices were managed
by that very human factor. In order to get something new and to have the
possibility to compare we should research the views of different representatives
from that epoch. As for the year of 1929, well, John Kenneth Galbraith said that
in the stocks there was an extreme speculation and Federal Reserve had to control
the usage of the credits. From another point of view, the specialists told that
the process of price-investing selling was activated by the markets. But that
action promoted the aggressive institutions to vend in anticipation of price
changes. In order to make a conclusion concerning the same lines of the crises in
1929 and the one of 1987 we should underline the next point: a number of same
reasons, the major and more important was of course the changes in prices; but the
changes also were present; they were connected with the consequences and the
character of the governmental actions. And the most
invisible but very powerful factor presented and in 1929 and in 1987 was of course
the psychological, or in other words, human factor, which made a great sign in the
history of two greatest stock crises.

PRAJAKTA AUTI

Financial System in Collapse, Credit Crisis Worst Yet to Come :Fundamental Causes
of the Crisis Beginning in 1971, for the first time in the history of global
finance, no currency in the world has been backed by anything. This monetary
experience should be properly called an experiment, which is now reaching its
logical conclusion. This includes some curious facts, such as the Estonian kroon,
which is backed by a reserve currency, primarily the Euro, while at the same time
the Euro itself is backed by nothing. And the Estonian Kroon is not backed by euro
banknotes, but instead, in all likelihood, is backed by a mixture of German, US,
and Japanese treasury bills. These are only government promises to pay that will,
at the end of the crisis, make Estonia's entire foreign reserves, gathered for bad
times, almost worthless. If money is backed by nothing more than government seals,
decorated paper, and strongly voiced promises, greed enters into play. No army in
history has hindered central bankers and governments from creating money out of
thin air and then spending it according to their own vision. The modern term for
this is credit money, the loaning of credit by the central bank that becomes money
itself. In normal and stable systems, bankers have only been able to loan out
money that they have in their own vaults, and they were also always ready to
exchange issued paper money and obligations for the gold bars stored in the vault
of the bank. However, there has come a moment when bankers realised that people
were not coming back to request gold, the result of which was that worthless
pieces of paper (read: banknotes and electronic impulses) were placed into
circulation and if they issued supplementary paper currency, which lacked any
coverage, nothing happened, at least initially. In the old days, the mess would
eventually surface and the matter ended with either the bankruptcy of the bank or
the destruction of the state's monetary system through hyperinflation.
Currently, the entire monetary system is global, and therefore has lasted longer
than usual. The process, which took place in Germany in the 1920's over a period
of 3-4 years, will last for 3-4 decades on the global market. Throughout history
there has been no monetary system that was not backed by a precious metal or some
other equivalent accepted by all, ever, without exception, that has remained
standing. The current experiment cannot remain standing either. We have created
financial “capital” in a heretofore unseen extent. This “capital” is incorrectly
believed to be wealth, because it could be exchanged for actual wealth during
certain historical stages. Unfortunately, all this financial “capital” and all of
this financial “wealth” have little backing in real goods or productive assets.
This is an inherent property of our modern-day fractional-reserve banking system.
Te result is that, whether we want it or not, the entire global financial system
will fall into chaos and will destroyed, and hopefully a new and better system
will be created. What will happen is another important question, and impulse
psychology comes into play here. People have a tendency to view things, above all,
with a short-term time horizon. This “shorttermism” can be seen on the stock
markets and by the developments in the financial world. Even though the crisis had
already been predicted at the end of the 1990's, financial analysts were guided by
“mystical” numbers and assessed the condition of the current situation as good.
This type of analysis reminds of the anecdote where a man falls out of a
skyscraper; when asked by someone from the fifth floor window how things are
going, he answers “so far so good, I'm simply moving quickly”. The Initial Phase –
Financial Crisis Unfortunately, the depth and length of the crisis are currently
being discounted. At the moment, the crisis is in its initial phases. What is
taking place only has affected mostly the financial sector; there has been only a
minimal effect on the real economy. However, at the latest by next year, the
second phase of the crisis will begin, with spillover effects into the economy. In
2009, the weakness of the global economy will become central. The current economic
system is built on providing loans in ever increasing amounts, not on saving and
the repayment of debt over time. If a private person builds his life on a series
of new loans, where he repays old debt with new debt, then he would be considered
crazy and would inevitably end up either in debtor's prison or bankruptcy. If the
same thing were to take place at the corporate and state level, then nobody would
dare say anything. It would be considered perfectly normal. Where is the child
from the fairytale who wasn't afraid to cry out that the king was naked!
Companies have become accustomed to taking new loans, although the financial
system is attempting to correct. A contraction of bank credit to the private
sector is in place, and inevitably the economy will not receive the money (read:
credit) that it was planning on receiving. In addition, financial companies are
unable to sell financial securities to finance themselves, since even the
currently successful companies that kept free funds in shares and securities in
order to earn a higher return, have lost over half of their value. This first
initial phase is well familiar to us. We have lived with it for almost two years.
The media has called it by various names: “The Subprime Crisis”, “The Credit
Crunch”, and “The Credit Crisis”. The Second Phase – Economic Crisis The lack of
money becomes evident in the second phase of the crisis – the financial crisis is
replaced by an economic crisis, triggering massive bankruptcies that would spread
globally in a chain reaction. After the series of initial difficulties encountered
by home borrowers and the construction companies, there have been no bankruptcies
so far in manufacturing, shipping, media, food processing, not to mention luxury
goods like luxury cars, yachts and watches, or exotic businesses like space
tourism. But their time will come. During the second phase of the crisis, another
large sum of capital will “evaporate” from the market, because a company which is
going bankrupt will leave nothing for shareholders and very little for its
bondholders. In the second stage of the crisis, unemployment will begin to grow
along with the wave of bankruptcies. The final quarter of 2008 is only the
beginning. Remember that in 1931-1932, the unemployment rate in the USA was 20%,
with one in five people unemployed. The Third Phase – Hyperinflation Throughout
the series of crises, politicians will attempt to interfere in the game, but the
third stage of the crisis will nevertheless begin. Since banks were “saved” with
large bailouts, politicians will also begin to lavish corporations with various
aid packages. The recent charade of automakers begging for money is only the
beginning. Thus, measures will be undertaken that, in the opinion of politicians,
will help the economy and save jobs, something that will likely become known as
Obama's “ New New Deal”. This will include a multitude of spending programs and,
above all, the loaning of credit with astronomical increases in the money supply,
together with the classifying of the corresponding numbers into the trillions.
Just like now nobody talks any more in terms of millions, so in the not so distant
future no one will be talking any more in terms of billions. Trillions will be the
order of the day. Perhaps bank lending
standards will be relaxed. Perhaps the government will lavish the banks with a lot
more money than it does today, just to keep them lending. Perhaps the central bank
will directly monetize private debt. Perhaps the government will guarantee many
more corporate loans, just like it recently guaranteed the securities/loans of the
GSEs. Perhaps GSEs will proliferate throughout the economy, transforming the U.S
economy into the “GSE Economy”, transforming a former great capitalist economy
into a modern-day nationalsozialistische economy. Perhaps the government will
implement all of the above. It will seem for awhile that peace has arrived, that
the crisis has been overcome, as if the bankrupt companies have been “saved”,
although this will only be the calm before the storm. If there is already more
money in the financial system than actual goods, then after the subsequent
injections of money, more like dropping money from helicopters or showering
corporations with money, the economic ship will begin to heel. In this stage, the
third stage, the hyperinflation scenario will begin when people realize that the
money in banks will buy them next month half as much as it did this month. Then
panic will ensue. People will begin to buy essential and non-essential items, just
as long as there is something of value that can be obtained in exchange for their
colourful pieces of worthless paper. Manufacturing enterprises would no longer
want to sell goods, because the money received in exchange for the sale of their
goods is not sufficient to purchase the new raw materials. Everyone who sells an
actual object or good for paper money is a loser, since the same money is no
longer enough to purchase again the same goods. Money created out of thin air
electronically has brought tremendous benefits to the initial users and issuers,
but at the expense of the wider masses through the collapse in their standards of
living in this stage. The third phase will be chaotic and difficult. The details
are difficult to predict, but if history is any judge, the politicians won't be
asleep. They will likely pass a number of important laws, prices will be fixed,
wages will be standardized, foreign currency accounts will be frozen; in general,
everything that could be done, will be done, and this will only serve to extend
the agony. Social upheaval and riots will be suppressed by brute force; many
democratic freedoms and values will likely be lost. As of today, the
hyperinflation spiral and Zimbabwe Syndrome have reached the point of no return.
Final Phase – Monetary Collapse In the event that democracy survives, then the
fourth and final phase will begin, a phase which can be called The Darkness before
Dawn, the final agony before the rising of the sun. This is the
ultimate destruction of the monetary and financial system, the loss of all
electronic and financial values that is accompanied by monetary reform throughout
most of the world. In the worst case scenario, this will result in the creation of
a Global Government; in the best case scenario, the process will take place
separately in each country. For example, at the end of the Tulip Mania of the 17th
century, all futures transactions with which tulips were bought and sold for
millions of florins were declared void. Similarly, all electronic assets,
contracts, securities, and futures contracts will be declared void, because the
world doesn't have a court or executive power which is capable of enforcing
bankruptcies and debt collection resulting from millions of non-performing
contracts. Only the actual collateral for loans will be demanded land, houses,
apartments. The losers will be private persons, while legal entities, along with
their debts and non-existent collateral, will be lost in the virtual world, the
place from whence they came. Things will begin again with a clean slate. We will
once again all be on an equal level. Railroads and planes, bridges and houses
won't disappear. All real wealth will remain, lost is only the paper wealth, those
things that people believed they had and that they believed someone else (read:
government, banks, pension funds, etc) will preserve for them. At that moment,
faith will truly have been lost, as the fruits of a person's life will have,
through several metamorphoses, been transformed into banking sector profits and
executive bonuses that had been spent by the suits long before the crisis even
began. The new economic system will be different than the current one. Its type,
shape, or form is impossible to predict at the moment. Similarly to the end of the
slave-holding system, it was not possible to see the creation of the feudal
system. It was also impossible to foresee the blossoming of capitalism before the
industrial revolution in England in 1785. So, it now is impossible to predict all
the changes, although those changes are inevitable. Each process must go through
its historical development and must reach its natural conclusion. History shows
that every changeover from one organisation of society to another has been very
painful. Nevertheless, each following step, no matter how painful, has moved
humanity forward and offered a better life to more people. Hopefully it will also
go forward this time. All we have to do is hang on.
BINOD PRASAD & SACHIN KADAM (Please divide this part in between you tow) GRAFICAL
PRESENTAION

For a few short days in October 1987 the U.S. financial system came perilously
close

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