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To: Terry Maloney who wrote (188210)	8/15/2002 11:00:53 PM
From: Secret_Agent_Man	Read Replies (3) of 436258

morganstanley.com Global: A Deflationary Mosaic Stephen Roach (New York) Morgan Stanley I continue to believe that the balance of risks on the price front has shifted away from inflation to deflation. The evidence, in fact, is building that more than a casual whiff of deflation is already in the air in the United Sates. Unfortunately, that’s exactly what the model of the post-bubble economy would predict -- an overhang of excess supply that could lead increasingly to widespread price destruction. How serious is this risk? +++++++++++++++++++++++++++++++ Roach paints the deflationary picture. A post-bubble(s) predicament that features a declining general price level. Gibson’s Paradox stipulates [Recall we are now in a six-year forced gold standard due to manipulation] that real interest rates and the general price level vary inversely while on a gold standard. IF, as Roach indicates, we are headed for deflation and a declining general price level, then EITHER real interest rates OR gold MUST rise to compensate. Real interest rates are plummeting and the FED simply cannot raise the Fed Funds rate without devastating the stock, credit and mortgage markets…which is the US and World economy. Wait longer and see real rates fall further and further. In reality there is no bottom to the rate fall until the countervailing force is applied. That leaves gold to rise. But it can’t be allowed to rise without destroying the Fed’s second largest bank JPM due to its outlandish gold derivatives position. The BIS is far worse off with 27, 000 tonnes of gold derivatives hanging. The Fed is trying to fight hundreds of years of economic data that supports Gibson’s Paradox. The Master of the Universe finds himself in a no-win situation: (1) Raise gold to re-establish Gibson’s economic equilibrium and wreck JPM, the BIS and severely damage the FED itself…or (2) Raise real interest rates and wreck the US and World economy. Greenspan’s fatal personality flaw has always been an inability to make timely decisions. LTCM proved this as he mistook the DEFERRAL of a solution to BE a solution. Now he has come face to face with a decision that cannot be pushed aside. Do we have a year? A Quarter? A Month? The answer is found instead by asking how much damage falling real interest rates can be accepted. Money will and IS flowing to the historic safe harbors of gold and other hard assets…in spite of the manipulation of corrupt United States cronies. The above is true if Roach is correct an deflation envelopes the US. -END-

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