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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: piggington who wrote (31155)4/25/2005 1:43:19 PM
From: dpl  Read Replies (5) of 110194
 
Lets say the RE bubble bursts today.It will be months before anyone who is looking(us) to notice.For most who believe there is no bubble it will be a year or more before they say "yes there was a bubble and now it has burst".

The first thing that will happen is the Fed will do what it knows.It will lower ST interest rate to zero.This will do nothing about the deflation.It only worked the last time because there was another asset(RE) that was capable of having a bigger and more leveraged bubble than the one just burst(Tech).

By the time you get the "hair brained ideas" the debt bubble will have been contracting for a while.The whole credit machine will seize up.This is someting even the biggest RE bears seem to miss.The effect of lost RE jobs, etc is trivial compared to what will happen.The 38 Tril credit bubble will be deflating and the way credit is created now will almost stop.

What can the goverment do then?

Lets look at two examples.

1.The gov mails a check for $1000 to eveyone in the country today.What happens?The credit bubble gets supercharged.Most p eaple will not only spend it but will leverage the $1000.

2.The gov does the same AFTER credit starts to contract.What is the effect now that the unemployment rate is rocketing and millions of homeowners have missed several payments,etc.
They hoard the money or they make the mortgage payment from 6 months ago.

The bottom line is once we get true deflation(credit contraction) it will be too late.
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