vincecate wrote:
I had been thinking flash crash and then market closure. But flash crash and market bankruptcy is a very real possibility. If the market drops a factor of 2 or more in a very short period then all kinds of margin calls would never be paid. Again, I worry that it might not be possible to get out in a timely manner.
Think how much money will evaporate in a situation like this. If the QE2 money is ending up in futures accounts for commodity speculation, which I think a lot of it is, it will go poof. People who are on the winning side of trades may not be able to get their original money out, to say nothing of their winnings. I noticed something unusual awhile back. The wires for my futures account were going into JP Morgan Bank. Now they go into a different bank. That money supposedly sits in segregated accounts set aside in the account holder's name/number. Some months back there was talk about commissions going higher. In the formal letter, overheads were the reason given. I gave a quick call to my broker. He said, well, there's no interest being paid on the deposits now. If there's a flash crash, the banks could go under and all that money could get wiped out. To get it out of there, it has to be settled in the afternoon settlement, wired out to your bank the next morning, and in your bank by afternoon. I guess what I'm saying is the whole banking system is tied into this.
Another problem I see is, since the futures markets trade around the clock, a crash that hits at night when the margin clerks are sleeping could be especially problematic. I think China may very well trigger a crash.
Then there's the problem with options. If things get crazy, the option sellers may end up bankrupt. A lot of traders do spreads on options where they might buy a put/call and sell a put/call at a slightly higher or lower level to capture a small gain. It they don't get paid, then they won't be able to pay.
As far as the inflation/deflation question, this reminds me of the oil debate in 2008. The debate was whether the oil price at $147 per barrel was real demand or speculative demand. Here, we have two pretty much separate money systems that interface less and less. There is no shortage of money in the financial system. At the same time, in the non financial system, there is a shortage of money. Within the financial system, there is definitely inflation of exchange traded assets and exchange traded real items. I think, as in 2008, the effect of inflation of exchange traded real items will be to reduce their demand. As an example of that, even as gas prices have come down, US miles driven have not recovered to the 2007 highs. That didn't even happen during the 1970s fuel price spikes when fuel comprised a much larger share of the household budget. In the 1970s, unemployment was high, interest rates were high, but wage increases were given and people drove off to the gas station and said fill 'er up with premium!