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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: mishedlo who wrote (76021)12/19/2006 11:54:07 PM
From: bond_bubble   of 110194
 
Marginal cost concept is valid ONLY in a hedging environment. When the hedging turns into speculation or ponzi (as per Minsky), I dont think supply, demand plays any part in setting the price (this is what Mises calls as mispricing). The price contuinues to SOAR until all the speculative finance supporting them are sent to money haven. If the speculative/ponzi finance is not sent to money haven (by increasing the interest rates), supply and demand will fail at all prices and the mispricing will be obvious. So, just as all the additional credit created initially channeled into RE/Stocks (because the tax benefit, GSEs for RE, accounting write offs, off balance sheet etc for investing in stocks and bonds etc) - it could as well spill into other markets like commodities at some later stage!! Just as there is no reason that housing prices should have a home run in a credit bubble (besides the fact that Govt support like GSEs and tax incentives) - commodities can also have a spike (when all the supply are taken for hoarding/speculating and consumption). I think, this is what happens in depression including 1929. Steel prices in US did not fall much in 1929 (you can call it govt support, just like you call OJ price increases due to weather - instead of labor shortage). You havent yet seen the fictitious capital/"hot money" in play in US in a serious way. I think, you will see it before Bernanke chooses credit deflation. If Fed, lowers interest rate, I can bet that house prices will continue to rise just as it did in UK in the last year.
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