re: deflation:
1. we'll only have deflation, if the U.S. government is as inept as the Japanese have been for the last decade. Look at how the fed responded in October 1998. They responded quickly and massively. All they have to do is print enough money, and rapid deflation is avoided.
2. It is rapid price changes (either up or down) that are damaging, not the direction. The U.S. has had long periods of mild deflation (most of the 1800s), and mild inflation, (1960s and 1990s), which usually correspond to good economic growth. It is only large deflation (1930s) and large inflation (late 1970s) that correlate with economic contractions.
3. The liquidity crisis you see may happen, but it will be selective. Look at it this way. In late 1998, all the large South Korean companies had large debt-to-equity ratios. When the banks stopped lending, it was across the board. Everyone ran out of cash at the same time. In the U.S., something like that can't happen. Many large companies have no debt, and are growing the business out of cash flow. Intel won't stop building chip factories even if every bank in the U.S. stops lending. It is only the most leveraged companies/industries/individuals who will be hurt. I see a short, sharp correction, similar to late 1998. The worst excesses will be corrected, the strong will get stronger, and people will get a bit more cautious for a while. |
