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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: Bid Buster who wrote (241129)5/18/2003 12:28:49 AM
From: UnBelievable  Read Replies (2) of 436258
 
Deflation Is A Myth

In an economy with a fiat money supply and a government that is allowed to operate with a deficit, such as that in the US, the idea that deflation is an unavoidable possibility is ridiculous.

This is easily understood by looking at an extreme example.

Suppose that the Federal Income tax is eliminated. The Federal government continues its current level of spending by financing its activity with debt.

This would result in significantly more dollars chasing the same goods and services and would drive prices up.

What cannot be changed is the contraction in the economy that is going to occur while we work through the malinvestment and debt that developed over the last decade.

The Fed can and will trade a deflationary recession for an inflationary one (stagflation) as the lesser of two evils.

As a consequence the dollar will continue its fall. Interest rates will rise as the significant amount of debt that is going to be incurred to finance the government comes to market. Any attempt to suppress long-term interest rates in such an environment will be both folly and futile. Representations that increased government spending will help the recovery are similarly ridiculous

The long bond is going to be next years dot bomb. One thing the Fed does very well is creating bubbles.
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