I agree with Russell, and am not in the camp with those who think a deflationary and/or debt collapse is unlikely. I think it is very likely. There are several reasons.
Play a little mind game with the market.
Assume the TA'ers, chartists, EW'ers are correct and that the DOW will bottom below 3000 and maybe even a good deal lower. The chartists do this by pure chart work, without concern about the fundamentals. Their chart work is valid enough that it can not be tossed out the window, and I assume most of us are in agreement on that. Thus the probability is pretty high that a huge market dump, over the next year or two, will occur.
Assume it does. Now ask yourself why would this occur? I feel one can only conclude it would be because of something much more severe than stagflation, i.e. severe and continued deflation, or a debt collapse. Any other scenario makes no sense, as in these other scenarios (stagflation then inflation for example) the market would probably continue down but not to the depths it would during a deflationary one.
Shift courses here now and ask yourself why Greenspan and cohorts have suddenly been going around giving a lot of speeches, saying they have the tools to fight deflation and will not let it happen? Why a few months ago did Greenspan warn the congress about continuing with outlandish deficits? Why did GW come out with a stimulus plan whose primary purpose is to pump up the market?
Because:
a) the fed is extremely worried, and they do not know exactly what they are doing. They are in uncharted territory, and they know it. To assume they can pull the right levers to solve the present problems is almost a dream. It was they who created this problem. Why should one suddenly assume they are smart enough, and have the power, to reverse course to the extent that the problem will slowly melt away.
b) the fed and the Bushers are worried about fear and what it can do. It is fear and human psychology that have very great impacts during a deflationary spiral. They are trying desperately to reverse a course already in motion. They will need more than luck imho.
McCulley of Pimco has written several good articles about all of this, over the last year or so. |
