RE: RO in RENO
"If anytime recently you bought some screws only to have your power driver rip their little heads off you know what I'm talking about, in short you can no longer get a good screw in this country. And regardless of the purchase price it was a waste of money."
I had to really laugh at this comment "in short you can no longer get a good screw in this country." Because in all actuality...that is exactly what we are getting in this country!!!
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Recovery Killer?
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Prices for basic commodities, the feedstock of modern economies, attest to a major break. Since early summer, they'd drifted down from historical highs that were usually attributed to strong demand from China and India. Suddenly, prices nose-dived. It wasn't just oil, now about $60 a barrel, down from almost $150. Copper fell from about $8,900 a metric ton in June to $3,800, aluminum from $3,000 a ton to $1,900. "I've never seen markets turn this quickly or violently," says economist John Mothersole of IHS Global Insight.
In theory, lower commodity prices could be a boon. If the propensity to spend among consuming nations is greater than among producing nations, lower prices would promote a global recovery. But in practice, lower commodity prices might herald a broader deflation. We don't know.
But we do know that a severe deflation could abort any recovery. Its harm would operate through two channels, says economist Desmond Lachman of the American Enterprise Institute. First, debt: As prices fell and old debts stayed fixed, companies would have a harder time repaying; bankruptcies and unemployment would increase; banks would suffer more loan losses; the same process would happen to household debts if wages fell. Second, deferred spending: If people believe prices will be lower next month, they may wait to buy; if too many shoppers wait, the economy spirals downward.
The specter of deflation explains much of what many governments are doing. Government central banks—the Federal Reserve, the European Central Bank, the Bank of England—are cutting interest rates. But given the reluctance of many banks to lend and many households to borrow, the effect may be muted. A "stimulus package" of more spending increases and tax cuts would provide extra insurance against an economic free-fall. The trick for Obama and other leaders is to ensure that new commitments are temporary—and don't worsen grim long-term budget outlooks.
© 2008
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