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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: SouthFloridaGuy who wrote (37062)9/13/2005 10:47:35 PM
From: GST  Read Replies (1) of 116555
 
Here is what you are missing (in my view) -- the impact of servicing trillions of dollars in EXISTING FOREIGN debt. New additions to debt will slow in a slowing economy, but the weight of existing debt will grow substantially as the economy slows. The government deficit will also grow as the economy slows and our foreign credit risk costs of all types will soar. The slower our economy the harder it will be to pay the interest on the existing debt obligations, and this is what will drive inflation from two sources: 1) A weaker dollar that will drive up both interest rates and the cost of imports (and many imports will still be far cheaper than domestic production, but either way prices go up), and; 2) A Fed with a big hose pumping dollars into a dead horse economy. The second factor -- the Fed -- becomes secondary as the economy slows in this case because the debt is simply too huge for the Fed to control on international markets anymore. The Fed can add to inflation by printing money but cannot stop inflation from this nightmare scenario because once confidence in the dollar is lost, the Fed will be powerless to restore it and keep a lid on interest rates. We are an import economy with a massive foreign debt and current account deficit -- the monster in the basment of our collective house that demands to be fed no matter what. That is a setup for stagnant or shrinking economy, rising goods and services prices and falling asset prices. Your assets will evaporate, your income will buy less in goods and services and the economy will stagnate. That is the endgame for the asset bubbles in stocks, bonds, real estate and the dollar -- a pathetic end to what could have been a very prosperous society indeed.
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