you are asking exactly the right questions.
we don't know for sure if the Fed will manage to re-inflate the bubble once more. i personally doubt it, but they have pulled it off before ('98), if under different circumstances.
a possible development i envision is a mixture of inflation and deflation, with sectors that are beset by overcapacities falling prey to a deflationary spiral, while sectors that have seen a dearth of investment in recent years will inflate due to supply problems. and thereby INCREASE the deflationary pressures elsewhere, as both consumer demand and corporate margins get shot.
overall, i'm in the deflation camp, in spite of my expectation that the dollar will get hit too. i think that will mean little once the current trends toward dissaving and overconsumption reverse.
the trade deficit is very large, but should diminish quickly in a deflationary recession as consumer demand plummets.
as for what has happened with all the debt that has been created in recent years, most of it was for consumption and leveraging speculation in financial assets. lots of malinvestment too, like e.g. the proliferation of new sports stadiums, or the insane bidding for 3-G licenses.
<<Overall, we say we expect the piper to be paid, and excess capacity created by low cost capital to be revalued. Can the debt burden used to create this excess capacity be served by the reduced income levels? If not, then the debt must also be revalued, destroying part of the capital. >>
yep. the debt and asset shredder is already humming greedily. the economy will be unable to produce the cash flows needed to service the debt/leverage pyramid.
btw, 29-32, the copper producers did badly, however the gold producers rallied big. FCX produces both. i do expect demand for copper to fall, however i believe supply will diminish even faster. |
