Financial crisis could have happy ending

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By Andy Serwer,CNN Money.

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NEW YORK (Fortune) — I was thinking about the financial mess the other day and I came up with this theory. I’m wary of it because it’s comforting, even uplifting, and by definition any economic supposition that has a happy ending is suspect. So with that caveat here goes:

I remember talking to a wise man at the end of the last decade who was pointing out to me how much the market had gone up during the 1990s and how stocks couldn’t possibly continue to go up at that rate. The market’s historical annual mean gain is about 8%, and yet between 1990 and 2000 the market had climbed some 15% per annum.

There is only one way to revert to the mean, the wise man pointed out, and that is for the market to go up less than that for quite some time. So we were looking at low single digit gains – or worse – for years.

But how could that be, I asked? Remember, the world looked pretty damn good back then. Sure tech stock prices were ridiculous, but other than that, what could possibly make the market tank? I have no idea, the wise man said, it’s just very likely to happen.

And of course it did happen. First tech stocks crashed – and for sure, a few people saw that coming. But who envisioned the horror of 9/11 and its fallout? Who saw Enron, Worldcom and the wave of corporate scandals? Who saw Hurricane Katrina? And who saw this current financial meltdown. No one did. Back then our big concern was Y2K.

At the end of 1999 the Dow was around 11,400. Today the Dow is at 8,400, which means the index has fallen some 26%, a decline of almost 3% per year. With just one year left in this decade – even if 2009 is a humdinger – it is increasingly likely that first 10 years of this century will be one big washout for investors. A lost decade. (Just fyi, if the Dow had climbed up 8% a year from 11,400, the index would be over 22,000 now.) As for the Dow since 1990 – the entire 19-year period – the market has climbed on average some 6% per year.

The next big thing: Green tech?

So what does this mean for us going forward? Well, we don’t really know, but we can make assumptions. First, at some point the carnage will end. The government and the markets will somehow figure a way out of this mess. Stabilization and confidence will return, and the economy will recover.

Second, at some point stock price returns will revert back up to the mean. In fact, to revert to the mean, stocks will at some point have to exceed the mean, in other words go up more than 8%. I know it could be years off, but you see my logic. It’s just math.

And there’s the rub. I believe that in order for the market to achieve a sustainable advance that is above the mean, we are due for some unforeseen positive event or events. Think about it. In the 1990s stocks went way up because of an unanticipated revolution in technology, i.e., networking and the Internet. In this decade we had a slew of unexpected negative events – bookended by 9/11 and this current meltdown. At some point, and it may be a few years from now, we will likely be subjected to an unforeseen positive.

What will it be? Of course no one knows. If we did, it would be priced in. But you could see how something like this might work. Take, for example, the discovery of a sustainable energy source or sources. You can see the incredible boost this would be to our economy and our markets. Imagine the geopolitical benefits. (And how it might defang our enemies.) Imagine the boost to our national psyche. And on and on.

I know you might think this is wishful thinking. And, of course, it is. Right now we are in for the toughest slog we’ve had in decades. We are going to have sacrifice in unimaginable ways. It’s probably even true that George Soros is right and that we are at the end of the era of American dominance. (That’s okay. Who wants to dominate anyway?)

The bigger point is this: Somewhere over the horizon is an unrealized economic benefit that will lift us up in a way that right now, in the gloom, we can’t even imagine. We have much work to do in the meantime, but some day it will come.

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Reference:http://money.cnn.com/

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The Glass Cliff: Are Women Leaders Often Set Up to Fail?

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by Sylvia Ann Hewlett

With the recent dismissal/demotion of Erin Callan (Lehman Brothers), Zoe Cruz (Morgan Stanley), and Sallie Krawcheck (Citi), a 2005 article in the British Journal of Management entitled “The Glass Cliff: Evidence that Women are Over-Represented in Precarious Leadership Positions” is being scrutinized anew.

In this article Michelle Ryan and Alexander Haslam confront the question: what sorts of jobs are women given when they finally make it into senior leadership positions? They make the case that more so than men, women are likely to find themselves on a glass cliff— dealing with situations that are seriously risky. In short, they are set up for failure.

Ryan and Haslam examine a study by Elizabeth Judge that purports to prove that when women are appointed to boards of directors they have a negative impact on a company’s financial performance. First they demolish the basis for Judge’s case – pointing to flaws in the underlying data. They then move on to propose an alternative explanation. In their words, “rather than the appointment of women leaders precipitating a drop in company performance … a company’s poor performance is a trigger for the appointment of women to the board.” Women then become lightening rods–blamed for negative outcomes that were set in train well before they assumed their new roles.

There is a certain amount of anecdotal evidence for this “glass cliff.” Most famously Carly Fiorina (Hewlett Packard), Kate Swan (W.H. Smith) and Patricia Russo (Alcatel-Lucent) were all appointed to top positions at a time of “tumbling share prices.”Not that women are uniquely drafted into crisis ridden situations–plenty of male leaders find themselves in equally rough waters–but women can be especially at risk.

Recent research points to a clear-cut difference between men and women’s ability to weather risk and failure. Data contained in a recent Harvard Business Review report (see The Athena Factor: Reversing the Brain Drain in Science, Engineering, and Technology, June 2008) shows that when female executives wrestle with stormy weather and fail to right the ship corporate cultures can be unforgiving. Women leaders are seriously isolated, without mentors or sponsors or the equivalent of the “old boys’ network” they find it impossible to rally support in the wake of failure. More so than men they crash and burn. The Athena Factor research shows that a significant proportion of women in science, engineering and technology (SET) believe that when they fail they don’t get second chances.

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Reference:http://discussionleader.hbsp.com/

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Where business is booming

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By Jon Birger, senior writer

(Fortune Magazine) — Cold, landlocked, and boasting as its largest metropolis the city of Saskatoon, Saskatchewan may not be top of mind for most Americans. But the Canadian province is one of the richest spots in the world when it comes to natural resources. It’s the world’s largest producer of uranium. It’s the biggest producer of the fertilizer potash (current price: $1,000 a ton, up from $300 this time last year). It is the world’s largest exporter of green lentils and chickpeas. And it’s home to enormous supplies of oil and gas: The U.S. buys more oil from Saskatchewan than it does from Kuwait. No wonder the CEO of one Fortune 500 company – Jim Prokopanko of Mosaic, which has a potash mine near the town of Esterhazy – describes the prairie province as “the next sovereign wealth fund.”

Indeed, Saskatchewan – for the geography challenged, it shares its southern border with Montana and North Dakota – today enjoys Canada’s fastest-growing economy; its GDP is expected to rise 3.9% this year, compared with 0.9% for the country as a whole, and it has a $3 billion budget surplus. Entrusted with “not screwing it up” (his words) is Saskatchewan Premier Brad Wall, the pro-business conservative elected in 2007. Wall’s goal is actually much more than not screwing it up. He’s on a mission to tell Saskatchewan’s growth story at home and abroad.

I first met Wall – a glib and personable 42-year-old who’s as comfortable talking NFL football as he is quoting Thomas Friedman – when he was in New York City last spring to speak at an energy conference. He promised not to raise oil royalties, which won him a standing ovation from the bankers in the crowd.

But Wall’s top priority is at home: He needs to fix Saskatchewan’s labor shortage. An area the size of Texas, Saskatchewan has only one million residents. “For any business thinking about building a new mine or expanding an existing one, the top-of-the-list question [in Saskatchewan] is always going to be ‘Can we get the tradesmen?’” he says. Because of the shortage, Wall is reluctant to spend much money on new infrastructure projects, despite having the cash to do it. (The province doesn’t yet have a sovereign wealth fund, but Wall says it’s on his radar.)

Wall wants to grow the population 10% in ten years. So far, his government has launched splashy recruiting campaigns in Alberta, Ontario, and Manitoba, and has sent missions as far as the Philippines to recruit medical personnel.

In September Wall traveled to Toronto along with 50 Saskatchewan employers to sell the province at Canada’s national job fair. During breaks he delivered his sales pitch to reporters. “Saskatchewan is not just a great place to live, it is a great place to make a life,” Wall would say over and over to anyone with a notepad or a microphone, each time referring the listener to the 10,000 job openings listed at saskjobs.ca. (Diamond driller, salary $56,000, for example.)

Of course, life in Saskatchewan isn’t for everyone. The average high temperature in Saskatoon in November is 29 degrees Fahrenheit. The average low in January is 9 below. “We need to focus on finding people who are looking for an economic opportunity,” Wall says. But like any savvy marketer, he knows his limitations. “We have to be realistic,” he says. “We’d better not be going to anywhere with a warm climate saying, ‘Yes, but it’s a dry cold.’”

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Reference:http://money.cnn.com/

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How to major in employability

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By Jennifer Barrett, Money Magazine contributing writer

(Money Magazine) — When Ed Koc’s daughter announced that she was thinking of majoring in music, he gulped.

As head of research for the National Association of Colleges and Employers (NACE), Koc knew her salary prospects weren’t good. Performing arts majors earn $35,000 a year, on average, right out of school – if they’re lucky enough to find work.

Koc didn’t want to discourage the talented oboe and flute player, but he urged her to consider other options. When she expressed an interest in medicine, they arrived at a compromise: major in music but take premed classes too.

In these tough economic times, you, like Koc, might be worried about investing $30,000 a year in a child’s college career only to have to support a highly educated waitress or busboy later on.

Certainly there’s no value in pushing a kid into a course of study just because it’s rife with job openings or offers higher salaries. “Students perform much better when they’re in a major of their choosing,” says Cal Newport, author of “How to Become a Straight-A Student.”

The trick is to assist your child in finding a middle ground between passion and practicality.

Help with the major decision

The jobs that are most in demand tend to be in technical fields requiring a specific degree, such as health care, engineering or computer science. (Chemical-engineering grads are almost guaranteed a job, and a lucrative one at that. Oil companies offered an average starting salary of $75,000 this year, reports NACE – nearly double what liberal arts students could expect.)

But a study published in Economics of Education Review in 2007 found that across all fields, new grads who were in jobs matching their majors earned more than those who weren’t.

Lesson: Pick the job path, then the course of study. Have your kid visit the campus career center, which likely offers resources to aid students in identifying work interests.

Talk prospects and pay

Once Junior narrows his options, make sure he has a realistic view of his future. Print out a hiring forecast for his desired field or fields at the Bureau of Labor Statistics’ site and go over it with him.

Also, take him to payscale.com and salary.com to research pay. Talk with your child about what the various numbers mean: If an apartment costs x and a car y, would the salary support the lifestyle he’d like? If not, is he willing to scale back his expectations a bit?

Suggest a backup

If your child’s top choice is in an area with fewer jobs or low pay, you may want to encourage her to pursue a dual degree or to add a concentration in a more promising field. That way she – like Koc’s daughter – will have a fallback option.

Put him to work

Give kids an advantage by having them work in the field before graduation. In a recent Monster.com survey of employers, relevant work experience was the most-often- cited top criterion for hiring.

For internship info, send your kid to the career office or internjobs.com. Your child will have more luck getting the first gig if she starts small – the local TV station vs. MTV.

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Reference:http://money.cnn.com/

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Why it’s time to buy stocks

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By Shawn Tully.

You didn’t hear this uttered very often, but over the past decade and a half, through bull and bear market alike, the value proposition for stocks could be stated succinctly: There’s nothing to buy.

The fact is that equities were over-valued for years, making them vulnerable to the kind of brutal, sudden sell-off we’ve just witnessed. But now that the S&P has declined 40% in 12 months, the question is whether equities are at long last a bargain. The answer is a qualified yes: Stocks aren’t exactly cheap, but for the first time in years you can expect decent returns, provided you’re patient.

“If you buy now and wake up in 10 years, you’ll probably get a return around the historic average,” said Yale economist Robert Shiller. In the near term, however, Shiller – who correctly predicted the implosion of the stock-market and real-estate bubbles – is more cautious. “There is a substantial risk that with all this economic turmoil, stocks will fall far lower,” he warned.

But make no mistake, stocks are now at levels where buying makes sense.

The best measure of stock valuation is Shiller’s own index of price-earnings multiples. Shiller uses a 10-year average of inflation-adjusted earnings to calculate an adjusted P/E. The advantage to the Shiller method is that it smoothes out the peaks and valleys in profits.

Example: In the 2003 to 2006 period, earnings soared to historic heights, jumping from a normal 9% of gross domestic product to an extraordinary 12%. The profit bubble made P/Es look artificially low, handing the stock jockeys a logical-sounding reason to claim that equities were a buy, when in fact they were overpriced. Both the “P” and the “E” were in a bubble – the “P” even more than the “E.” When the “E” collapsed in the face of the current downturn, the outrageous valuations were rudely exposed.

To see how out of whack P/Es had gotten, let’s take a look back. From 1890 to the early 90s, the average Shiller P/E stood at 14.6. It dropped as low at 6 in the early 80s, and never went over 24. Then, in the late 90s, P/Es regularly stood at over 30, and at their peak in 2000 hit 44.

In the bear market that followed, P/Es dropped – but only into the low-20s. Then they took off again, averaging 25 to 28 from 2003 to the beginning of this year. Now they’re at 15.7, not far from their pre-bubble average. That decline is tonic for investors. Research by economist and hedge fund manager Cliff Asness shows that buying in at a high Shiller P/E usually leads to poor returns, while grabbing stocks at a low Shiller P/E is a reliable route to riches.

From today’s levels, what can we expect? Stocks’ future return is closely related to the inverse of the P/E, also known as the earnings yield. So at a P/E of less than 16, investors should obtain real, or inflation-adjusted, gains of around 6.5%, which is about what Asness found in his research. Add 2.5 points for inflation, and the nominal return comes to a respectable 9%. That’s about a point below stocks’ long-run return, but it’s far better than anything investors could expect for a decade and a half.

The rub is that getting even that 9% return won’t be easy. Assuming no escalation of P/Es, stock returns come from a combination of earnings growth and dividend income. Earnings per share grow only at about 2% a year after inflation. (Total earnings grow faster than that, but new issues of stock dilute that growth.) So add in our 2.5% inflation rate to 2% real growth, and you still need a dividend yield of 4.5% to get to that 9% goal. The yield on the S&P 500 is now around 3.3%, versus around 2% earlier this decade. That’s better, but not enough.

So simply buying “the market” at today’s decent valuations isn’t enough. You also need to choose stocks that pay higher-than-average dividends to reach the 9% threshold. Fortunately, that’s not too difficult to do now. Lots of stocks with predictable, reliable earnings streams now offer yields between 4% and 6%, including Consolidated Edison (ED, Fortune 500), Kraft Foods (KFT, Fortune 500), Duke Energy (DUK, Fortune 500), and Merck (MRK, Fortune 500).

You’ll also want to avoid most tech issues. Companies such as Oracle, Google (GOOG, Fortune 500), Symantec, and Research in Motion (RIMM) pay no dividends at all, and sell at pricey multiples between 16 and 23.

Finally, remember this: Shiller points out that stocks were cheap in the early 1930s, and investors who bought then eventually made good money. But it took them many years to get there. So if you buy now, stick with strong dividend-paying stocks, and fasten your seatbelts. It will be a bumpy ride.

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Reference:http://money.cnn.com/

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What is Hyperinflation?

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A 500 billion Yugoslav dinar banknote circa 1993, the largest nominal

value ever officially printed in Yugoslavia, the final result of hyperinflation

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Hyperinflation is inflation that is “out of control”, a condition in which prices increase rapidly as a currency loses its value. Formal definitions vary from a cumulative inflation rate over three years approaching 100% to “inflation exceeding 50% a month.” In informal usage the term is often applied to much lower rates. As a rule of thumb, normal inflation is reported per year, but hyperinflation is often reported for much shorter intervals, often per month.

The definition used by most economists is “an inflationary cycle without any tendency toward equilibrium.” A vicious circle is created in which more and more inflation is created with each iteration of the cycle. Although there is a great deal of debate about the root causes of hyperinflation, it becomes visible when there is an unchecked increase in the money supply or drastic debasement of coinage, and is often associated with wars (or their aftermath), economic depressions, and political or social upheavals.

The main cause of hyperinflation is a massive and rapid increase in the amount of money, which is not supported by growth in the output of goods and services. This results in an imbalance between the supply and demand for the money (including currency and bank deposits), accompanied by a complete loss of confidence in the money, similar to a bank run. Enactment of legal tender laws and price controls to prevent discounting the value of paper money relative to gold, silver, hard currency, or commodities, fails to force acceptance of a paper money which lacks intrinsic value. If the entity responsible for printing a currency promotes excessive money printing, with other factors contributing a reinforcing effect, hyperinflation usually continues. Often the body responsible for printing the currency cannot physically print paper currency faster than the rate at which it is devaluing, thus neutralising their attempts to stimulate the economy.

Hyperinflation is generally associated with paper money because this can easily be used to increase the money supply: add more zeros to the plates and print, or even stamp old notes with new numbers. Historically there have been numerous episodes of hyperinflation in various countries, followed by a return to “hard money”. Older economies would revert to hard currency and barter when the circulating medium became excessively devalued, generally following a “run” on the store of value.

Hyperinflation effectively wipes out the purchasing power of private and public savings, distorts the economy in favor of extreme consumption and hoarding of real assets, causes the monetary base, whether specie or hard currency, to flee the country, and makes the afflicted area anathema to investment. Hyperinflation is met with drastic remedies, such as imposing the shock therapy of slashing government expenditures or altering the currency basis. An example of the latter occurred in Bosnia-Herzegovina in 2005, when the central bank was only allowed to print as much money as it had in foreign currency reserves. Another example was the dollarization in Ecuador, initiated in September 2000 in response to a massive 75% loss of value of the Sucre currency in early January 2000. Dollarization is the use of a foreign currency (not necessarily the U.S. dollar) as a national unit of currency.

The aftermath of hyperinflation is equally complex. As hyperinflation has always been a traumatic experience for the area which suffers it, the next policy regime almost always enacts policies to prevent its recurrence. Often this means making the central bank very aggressive about maintaining price stability, as is the case with the German Bundesbank, or moving to some hard basis of currency such as a currency board. Many governments have enacted extremely stiff wage and price controls in the wake of hyperinflation, which is, in effect, a form of forced savings.

Because it allows them to hide their spending and avoid an obvious tax increase, governments have frequently resorted to printing money to meet their expenses. However, during hyperinflation, the monetary authorities fail to fund government expenses from taxes or by other means, because:

(1) during the time between recording or levying taxable transactions and collecting the taxes due, the value of the taxes collected falls in real value to a small fraction of the original taxes receivable;
(2) government debt issues fail to find buyers except at very deep discounts

Theories of hyperinflation generally look for a relationship between seigniorage and the inflation tax. In both Cagan’s model and the neo-classical models, a crucial point is when the increase in money supply or the drop in basic money stock makes it impossible for a government to improve its financial position. Thus when fiat money is printed, government obligations that are not denominated in money increase in cost by more than the value of the money created.

From this, it might be wondered why any rational government would engage in actions that cause or continue hyperinflation. One reason for such actions is that often the alternative to hyperinflation is either depression or military defeat. In late 2001, the Argentine peso collapsed in value. Rather than printing sufficient cash for the public to carry, which they feared would start a run on the banks, the government took the peso off its dollar peg. Many international economists predicted that they would have to get a new loan from the IMF and impose shock therapy in order to avoid hyperinflation. Currency controls were imposed, tariffs were instituted, and the economy was allowed to fall into a severe recession during which unemployment hit 25%, homelessness and crime spiralled upwards, and the poverty rate peaked at over 50%.

The root cause is a matter of more dispute. In both classical economics and monetarism, it is always the result of the monetary authority irresponsibly borrowing money to pay all its expenses. These models focus on the unrestrained seigniorage of the monetary authority, and the gains from the inflation tax. In Neoliberalism, hyperinflation is considered to be the result of a crisis of confidence. The monetary base of the country flees, producing widespread fear that individuals will not be able to convert local currency to some more transportable form, such as gold or an internationally recognized hard currency. This is a quantity theory of hyperinflation.

In neo-classical economic theory, hyperinflation is rooted in a deterioration of the monetary base, that is the confidence that there is a store of value which the currency will be able to command later. In this model, the perceived risk of holding currency rises dramatically, and sellers demand increasingly high premiums to accept the currency. This in turn leads to a greater fear that the currency will collapse, causing even higher premiums. One example of this is during periods of warfare, civil war, or intense internal conflict of other kinds: governments need to do whatever is necessary to continue fighting, since the alternative is defeat. Expenses cannot be cut significantly since the main outlay is armaments. Further, a civil war may make it difficult to raise taxes or to collect existing taxes. While in peacetime the deficit is financed by selling bonds, during a war it is typically difficult and expensive to borrow, especially if the war is going poorly for the government in question. The banking authorities, whether central or not, “monetize” the deficit, printing money to pay for the government’s efforts to survive. The hyperinflation under the Chinese Nationalists from 1939-1945 is a classic example of a government printing money to pay civil war costs. By the end, currency was flown in over the Himalaya, and then old currency was flown out to be destroyed.

Hyperinflation is regarded as a complex phenomenon and one explanation may not be applicable to all cases. However, in both of these models, whether loss of confidence comes first, or central bank seigniorage, the other phase is ignited. In the case of rapid expansion of the money supply, prices rise rapidly in response to the increased supply of money relative to the supply of goods and services, and in the case of loss of confidence, the monetary authority responds to the risk premiums it has to pay by “running the printing presses.”

In the United States of America, hyperinflation was seen during the Revolutionary War and during the Civil War, especially on the Confederate side. Many other cases of extreme social conflict encouraging hyperinflation can be seen, as in Germany after World War I, Hungary at the end of World War II and in Yugoslavia in the late 1980s just before break up of the country.

Less commonly, inflation may occur when there is debasement of the coinage — wherein coins are consistently shaved of some of their silver and gold, increasing the circulating medium and reducing the value of the currency. The “shaved” specie is then often restruck into coins with lower weight of gold or silver. Historical examples include Ancient Rome, China during the Song Dynasty, and the United States beginning in 1933. When “token” coins begin circulating, it is possible for the minting authority to engage in fiat creation of currency.

As noted, in countries experiencing hyperinflation, the central bank often prints money in larger and larger denominations as the smaller denomination notes become worthless. This can result in the production of some interesting banknotes, including those denominated in amounts of 1,000,000,000 or more.

* By late 1923, the Weimar Republic of Germany was issuing fifty-million Mark banknotes and postage stamps with a face value of fifty billion Mark. The highest value banknote issued by the Weimar government’s Reichsbank had a face value of 100 trillion Mark (100,000,000,000,000; 100 billion on the long scale).One of the firms printing these notes submitted an invoice for the work to the Reichsbank for 32,776,899,763,734,490,417.05 (3.28×1019, or 33 quintillion) Marks.

* The largest denomination banknote ever officially issued for circulation was in 1946 by the Hungarian National Bank for the amount of 100 quintillion pengő (100,000,000,000,000,000,000, or 1020; 100 trillion on the long scale). image (There was even a banknote worth 10 times more, i.e. 1021 pengő, printed, but not issued image.) The banknotes however didn’t depict the number, making the 500,000,000,000 Yugoslav dinar banknote the world’s leader when it comes to depicted zeros on banknotes.

* The Z$100 billion agro cheque, issued in Zimbabwe on July 21, 2008, shares the record for depicted zeroes (11) with the 500 billion Yugoslav dinar banknote.

* The Post-WWII hyperinflation of Hungary holds the record for the most extreme monthly inflation rate ever — 41,900,000,000,000,000% (4.19 × 1016%) for July, 1946, amounting to prices doubling every fifteen hours.

One way to avoid the use of large numbers is by declaring a new unit of currency (an example being, instead of 10,000,000,000 Dollars, a bank might set 1 new dollar = 1,000,000,000 old dollars, so the new note would read “10 new dollars”.) An example of this would be Turkey’s revaluation of the Lira on January 1, 2005, when the old Turkish lira (TRL) was converted to the New Turkish lira (YTL) at a rate of 1,000,000 old to 1 new Turkish Lira. While this does not lessen the actual value of a currency, it is called redenomination or revaluation and also happens over time in countries with standard inflation levels. During hyperinflation, currency inflation happens so quickly that bills reach large numbers before revaluation.

Some banknotes were stamped to indicate changes of denomination. This is because it would take too long to print new notes. By time the new notes would be printed, they would be obsolete (that is, they would be of too low a denomination to be useful).

Metallic coins were rapid casualties of hyperinflation, as the scrap value of metal enormously exceeded the face value. Massive amounts of coinage were melted down, usually illicitly, and exported for hard currency.

Governments will often try to disguise the true rate of inflation through a variety of techniques. These can include the following:

* Outright lying in official statistics such as money supply, inflation or reserves.
* Suppression of publication of money supply statistics, or inflation indices.
* Price and wage controls.
* Forced savings schemes, designed to suck up excess liquidity. These savings schemes may be described as pensions schemes, emergency funds, war funds, or something similar.
* Adjusting the components of the Consumer price index, to remove those items whose prices are rising the fastest.

None of these actions address the root causes of inflation, and in fact, if discovered, tend to further undermine trust in the currency, causing further increases in inflation. Price controls will generally result in hoarding and extremely high demand for the controlled goods, resulting in shortages and disruptions of the supply chain. Products available to consumers may diminish or disappear as businesses no longer find it sufficiently profitable (or may be operating at a loss) to continue producing and/or distributing such goods, further exacerbating the problem.

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1923 Weimar Republic inflation: A German woman feeding a stove with Papiermarks,

which burned longer than the amount of firewood people could buy with them.

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German children playing with worthless banknotes in 1923

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After the hyperinflation in Hungary

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References:

http://econlib.org/library/Enc/Hyperinflation.html

http://en.wikipedia.org/wiki/Hyperinflation

http://shadowstats.com/article/292

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Stock selloff accelerates

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Dow falls as much as 430 points as weak earnings, slumping oil and gold prices add to recession fears.

By Alexandra Twin, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) — Stocks tumbled Wednesday afternoon as weak corporate results and forecasts – and slumping commodity prices – amplified fears of a broad recession.

Global markets slid, with Asian and European stocks ending lower. Treasury prices rose, lowering the corresponding yields. The dollar was mixed versus other major currencies. Oil, gas and gold prices fell.

With roughly an hour left in the session, the Dow Jones industrial average (INDU) had lost 373 points, or 4.1%, after having lost as much as 430 points earlier.

The Standard & Poor’s 500 (SPX) index lost 4.9% and the Nasdaq composite (COMP) lost 3.7%.

Lending rates improved, helping to reassure investors that the efforts of world governments to stabilize financial markets are starting to work. But any relief about the improvement in the credit market was overshadowed by recession fears.

In economic news, the number of layoffs impacting 50 workers or more rose to the highest level in September since the month of the 9/11 terrorist attacks.

Stocks fell Tuesday as weak quarterly results and forecasts underscored the depth of what many think is a recession. Wednesday’s reports, including a big, surprise quarterly loss from bank Wachovia, added to those worries.

There is an increased focus on results this week because 140 of the S&P 500 companies are reporting, giving investors the best sense yet of the health of corporate America.

With 21% of S&P 500 companies already having reported results, third-quarter profits are currently on track to have fallen almost 10% from a year ago, according to the latest estimates from Thomson Reuters.

“Pound for pound, the reports and especially the guidance have been disappointing,” said Terry Morris, senior equity manager at National Penn Investors Trust.

Morris said that it’s not surprising that companies are giving conservative guidance, in light of the uncertainty about the economy. However, the weak or sometimes non-existent forecasts are adding to the bigger worries.

Earnings: Wachovia (WB, Fortune 500) reported a huge $24 billion quarterly loss versus a profit a year ago. Analysts expected the bank to report a slim profit, despite the turmoil in financial markets. Wachovia is being bought by Wells Fargo (WFC, Fortune 500) and part of the big loss is related to charges associated with that merger. Shares dropped 4%.

Dow component Boeing (BA, Fortune 500) reported lower quarterly earnings that missed forecasts on weaker sales that managed to top estimates. A strike and supplier problems hurt profits. Shares fell 7%.

Fellow Dow component AT&T (T, Fortune 500) reported higher earnings that were short of estimates, though higher revenue met forecasts. The company also said it added almost 2 million new wireless subscribers, at the high end of analyst estimates. Shares fell 6%.

Merck (MRK, Fortune 500) reported lower quarterly earnings that topped estimates on lower quarterly revenue that missed estimates. The drugmaker also said it will cut 7,200 jobs as part of a restructuring program. The Dow component also lowered its full-year 2008 earnings forecast. Shares fell 5%.

Late Tuesday, Yahoo (YHOO, Fortune 500) reported lower quarterly earnings that met estimates on higher sales that missed. The company also said it will cut at least 10% of its workforce, or around 1,500 people, through the end of the year as a result of the weak economy.

Looking forward, Yahoo warned that 2008 revenue won’t meet its earlier forecasts. Shares gained 5% Wednesday.

Also late Tuesday, Apple (AAPL, Fortune 500) reported fourth-quarter sales and earnings that jumped from a year ago due to strong sales of its new iPhone. Earnings beat forecasts, while sales missed expectations. Apple also forecast fiscal first-quarter sales and earnings below analysts’ earlier projections. Shares gained 5%.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by over five to one on volume of 870 million shares. On the Nasdaq, decliners topped advancers by over four to one on volume of 1.74 billion shares.

Commodities: U.S. light crude oil for November delivery settled down $5.43 to $66.75 a barrel on the New York Mercantile Exchange, a 16-month low.

Oil prices have been dropping since crude peaked at an all-time high of $147.27 a barrel on July 11. But the decline has been a mix of speculators leaving the market and investors betting that a slowing global economy means weaker oil demand. As a result, the falling oil prices haven’t helped stock investor sentiment much.

Gasoline prices fell another 3.1 cents overnight, to a national average of $2.858 a gallon, according to a survey of credit-card activity by motorist group AAA. It was the 35th consecutive day that prices have decreased. During that time, prices have fallen by nearly $1 a gallon.

A variety of oil services, metals and mining shares fell in tune with the drop in commodity prices. Dow components Chevron (CVX, Fortune 500), Exxon Mobil (XOM, Fortune 500) and Alcoa (AA, Fortune 500) all tumbled.

Baker Hughes (BHI, Fortune 500) reported higher quarterly earnings that topped estimates and higher quarterly sales that missed expectations. Shares of the oil and gas services firm slumped 17%.

The decline in commodity prices and the underlying stocks is essentially “forecasting a recession,” Morris said. “

Credit market: Lending rates continued to improve Wednesday, extending the recent recovery. (Full story)

Libor, the overnight bank-to-bank lending rate, fell to 1.12% from 1.28% late Tuesday, according to Bloomberg.com. That kept the rate below the Fed’s benchmark lending rate of 1.5%, a good sign for the credit market. Libor hit a record 6.88% earlier this month at the height of the market panic.

The 3-month Libor rate, which banks charge each other to borrow for three months, fell to 3.54% from 3.83% late Tuesday.

The TED spread, which is the difference between what banks pay to borrow from each other for three months and what the Treasury pays, narrowed to 2.51% from 2.63% late Tuesday. The spread hit a record 4.65% earlier this month. The narrower the spread, the more willing banks are to lend to each other.

The improvement in bank lending over the last week is seen as key to stabilizing financial markets. However, analysts say rates must continue to come down in the months ahead. Credit froze up in the wake of the housing market collapse, subprime fallout and contraction in the bank sector.

The lack of available credit has punished the already weak economy, making it hard for businesses to function on a daily basis and for consumers to get loans.

Treasury prices rose, lowering the yield on the 10-year note to 3.62% from 3.70% Wednesday. Treasury prices and yields move in opposite directions.

The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, slipped to 0.98% from 1.19% late Tuesday. However, the yield remained above recent lows as investors began to pull money out of the safer investment and put it back in stocks.

Last week, the 3-month fell to below 0.2%. Last month, it reached a 68-year low around 0% as investor panic hit its peak.

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reference:http://money.cnn.com/2008/10/22/markets/markets_newyork/index.htm

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