E The Markets Are Shocked, And That Means Economies Are In Jeopardy

The economics websites came out regarding China's currency devaluation with the term "Shocked". Shocked is an economics term. Demand shock is a  term describing an event that reduced or threatens to reduce demand for goods and services in the world. Shock puts economies in danger, and shock can lead to deflation.

Bill Gross was on the money when he warned of deflation and currency wars, and China obliged by lowering the value of the Yuan. The shock could get more pronounced if the currency is devalued more, over time. This would signal a real race to the bottom amongst central banks of the world.

And, certainly, deflationary expectations can work to destroy economies all over the world. Consumers worldwide are already fragile. The US consumer, who I once called the golden goose of financial stability, was destroyed in the Great Recession by hot money entering and then leaving the housing market. Even America was ripe for the picking, and not shielded from activity that was mostly seen in developing nations.

So, then, shock is a code word for sell. The consumer is weak, but too smart to fall for easy money lending. The millennials cannot be conned into investing in stocks, or houses, in this environment. Could no-money-down, interest-only mortgages overcome that, as money escapes the stock market to the housing market? I don't think it could.

Mistrust in the financial system at the same time the financial system is weakened by demand shock could spell massive distress in world economies, including the US economy. If people don't want loans, there is no powerful economic recovery. We are in a mortgage depression, still. And there are laws to overcome to let the easy money flow again, to those who may not want it this time around.

Not only that, we have derivatives needing more collateral. The Fed needs to move those bonds off the balance sheet at attractive rates. That is necessary as these bonds are necessary for sound collateral. But that movement will not happen if China keeps devaluating, or the dollar will become too strong. This is what is meant by the Fed being caught in a box. It is boxed in by the value of the dollar and the need to get the bonds back into circulation.

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I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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