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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: John Vosilla who wrote (19600)12/27/2004 5:12:03 PM
From: mishedlo  Read Replies (1) of 116555
 
Heinz, John, & Mish discussion on Monetary Growth

John to Mish:
Am I now supposed to believe that high monetary growth over an
extended period of time leads to continued low interest rates? Median home prices affordable to only a small segment of the population in many bubble markets even with 45 yr low interest rates and a low unemployment rate is irrelevant? US being a nation of debtors in our new ownership society and massive twin deficits by our government is supposed to be a big positive to avert a serious downturn that occurred in Japan a nation with a high rate of savings, fiscally responsible government and a stronger work ethic than the US? So this time is different? Or perhaps the worst bloodbath is coming for the modern post WWII period in this country and those that export their goods to our beloved credit card happy consumers?

Mish to John:
If home prices collapse and bankruptcies soar, money supply is not going to be growing any more. Pray tell why would you want to borrow any? To invest in what? For that matter, who would want to lend? We can easily have a credit crunch and a destruction of money here.

Mish to Heinz:
Do you accept the answer I gave to John?

Heinz to Mish:
absolutely - the huge increase in money supply under Greenspan and the concomitant growth in credit/debt is what has laid the foundation for a deflationary debt collapse. had this growth not occurred, what would there be to deflate? people actually confuse cause and effect to some degree, as evidenced by the question "Am I now supposed to believe that high monetary growth over an extended period of time leads to continued low interest rates?" it is the other way around - persistently low interest rates during the disinflation period have led to high monetary growth over an extended period. when disinflation 'goes over the edge' and becomes DEflation, the cause-effect relationship reverses - a falling money stock then promotes lower interest rates, as demand for credit vanishes and money flees into the safe havens of government debt and gold. of course in this scenario interest rates for private debtors tend to go up rather than down, to compensate for the perceived default risk.
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