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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: mishedlo who wrote (61276)5/18/2006 3:01:58 AM
From: bond_bubble  Read Replies (2) of 110194
 
Mish, I agree with you that there is going to be credit deflation. But attendant to that, there is going to be some dollar depreciation or an expectation of dollar depreciation. Why would anyone buy dollar bonds at low yields if there is a possibility that dollar could depreciate? In 1929, the gold backing gave the US govt the benefit of not depreciating dollar (although dollar was depreciated then) and hence keeping the interest rate low then. I'm not anticipating 80% drop in USD. Something like 30% is possible. Also, how will Fed prevent all the current dollar holdings from being cashed (especially by foreigners)? I expect the Fed to do that by a) allowing GSEs to default and b) Keeping US interest rates higher and c) non-US-treasury bonds should be having very high interest rates.

Also, just as monetary inflation of 12% in M3 did not cause CPI to reach 12%, I dont think monetary deflation is going to cause CPI to fall. Let's say M3 fell 30% and dollar depreciates (say against Euro) 30%, then there should be no CPI fall right? i.e you can have massive credit bust and still positive CPI. For this reason, interest rates are not going to fall. US treasuries rate might fall after the credit bust is complete. However, until medicare and Social security are defaulted as well, interest rates are not going to fall...
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