Seems that one of the markers for hard times is the economic cycle, so
it is back to the fundament, so here is the classic scenario of a
fall.

The Inflationary Stage


1. Some shock, often a war, sets the process in motion by disturbing
the system. It alters property rights, encourages monetary
instability, and raises real asset prices.

2. This leads to extraordinarily high rates of return in real assets,
especially for debtors, who gain disproportionately. The high rates of
return seem to justify massive new investment.

3. A credit binge ensues, as people borrow at accelerated rates to
capture the extraordinary profits. Real estate, in particular, rises
in value.
4. Institutions and contracts are adjusted to reflect the inflation.
Debt maturities shorten. Nominal and real interest rates rise.

5. Nonetheless, a credit binge continues, as investors now accustomed
to high rates of return calculate that they can continue to earn
supernormal profits.

6. Financial as well as real assets are purchased on a basis of
increasing leverage, and a bull market in stocks follows, though not
yet a drooling frenzy.

Then Comes the Deflationary Stage . . .


7. Profitability declines toward more normal levels as investment
matures and new output is brought onto the market.

8. Commodity prices decline.

9. The farm economy goes into recession.

10. Interest rates fall, and as they do, hot money moves into
financial assets, further stimulating the stock market.

11. As opportunities in the real economy subside, investment is
concentrated on financial assets, leading to a stock market blow-off.

12. The boom is self-limiting because debt contracted at high interest
rates compounds faster than income, eventually requiring that owners
of leveraged assets liquefy their holdings, thus driving asset prices
down.

13. Real estate sags.

14. Some trigger such as credit squeeze, a major bankruptcy, fraud, or
simply the slowing of the real economy reveals the overvaluation of
assets.

15. The stock market crashes, credit contraction intensifies, the
money supply implodes, and depression ensues, with returns on previous
investment falling to subnormal rates.

16. Real interest rates skyrocket, even as nominal interest rates
fall, further reducing economic activity.

17. Unemployment skyrockets because real wage rates rise.

18. Wages and prices are cut as the system winds down.

19. Bingo. You have been in deflation for some time.

From Great reckoning Mogg & Davidson

It is October time!
LB