I wonder why we couldn't have a currency crisis, credit crisis, severe economic recession, and inflation, all at the same time. I remember the "stag-flation" of the 70's, where inflation exploded without concomitant economic growth.
Our model for economic crisis is always the Great Depression, when economic contraction resulted in deflation. But in the current environment, the deflationary aspects of contraction might apply most strongly to financial instruments that have absorbed the brunt of our out-of-control monetary growth during the last 7 years.
We could still have a mad scramble out of equities, bonds, and mortgaged-backed securities and into "cash," while the global purchasing power of the dollar collapsed at the same time, due to the twin deficits and the excess supply of dollars globally. As a result, all of the imports that we consumers have come to rely on will increase in price. Voila! You have a toxic mix of currency crisis, inflation of imported commodities and consumer goods, and deflation of paper-backed financial assets.
I don't think there is much standing between us and this combination-of-evils scenario except the Bank of Japan.
/BSG |
