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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: mishedlo who wrote (38121)	8/8/2005 11:27:22 PM
From: GST	Read Replies (1) of 110194

<Stagflation is a wimpy term that Gnazzo did not address but is generally used to describe rising interest rates and a stagnant economy> No, it refers to an economy that has stagnant or declining aggregate demand combined with declining currency purchasing power. You assume that a drop in aggregate demand will result in a drop in prices. In the US we face a potential decline in demand combined with an increase in prices. You simply deny that it is possible for prices to go up if demand is going down. Not so. The source of the increase in prices has been pointed out repeatedly -- it is the declining purchasing power of the dollar. You truly do not appear to grasp the idea that there is a market for the dollar and that a decline in demand for the dollar can increase our interest rates, stall our economy and raise our import prices, all at the same time. The market for the dollar is likely to go into a tailspin in a housing bubble deflation, and the number of dollars it will take to buy anything from a person outside the US is likely to go up. Rising interest rates are also increasingly a function of currency risks and less a function of the market for goods, as you assert. The currency markets are dominated by the debts we have already racked up that need ongoing refinancing even if we buy nothing more from now on. You speak as if the US was a relatively closed economy going through a pretty standard asset inflation-deflation cycle. This is somewhat naive in my view. Stagflation is the most likely scenario in my view. The fact that we will have fewer dollars to spend does not mean prices will go down -- it means living standards will go down. It means we will be poor, with deflated assets, and debased currency and a ton of debt to work our way out from under. We are the world's trailer trash.

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