Sunday, April 10, 2011

Financial Crisis Obeservations

In a panic - financial crisis - people want to have more cash at hand. The future becomes uncertain for everyone. This means money is scarce, and its value relative to financial assets and consumer goods rise significantly. You can observe this from high bond yield, low stock price, and deflation.

High bond yield plus deflation imply high real interest rate. Credit contraction translates into output contraction. A big wave of unemployment will hit the economy soon. This is the tsunami after the quake.

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