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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: russwinter who wrote (6615)	1/31/2004 2:37:11 PM
From: mishedlo	of 110194

It asks the question, "If the output gap drives prices then why are prices rising when capacity utilization is unchanged? wachovia.com It merely states prices are rising? What prices? Prices at the producer level or the consumer level? The PPI did tick up, but if costs can not be passed on, so what? Where is the inflation? We have a profit squeeze on producers because there is excess capacity relative to demand. I accept the argument that some of that "excess capacity" is useless. It seem to me that is just more debt that needs to be written off that is more worthless than we thought. The writeoff of that debt will be a deflationary thing not an inflationary one. So we have totally useless capacity here and prices can not be raised because although the PPI is going up, there is so much capacity (somewhere else) compared to final demand that prices can not be raised. I see no meaningful inflation in that scenario. Mish

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