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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: mishedlo who wrote (66988)7/28/2006 11:52:29 AM
From: bond_bubble  Read Replies (1) of 110194
 
The key is inflation through imported goods and especially raw materials. My theory has been inflation is NOT at all the issue. The real issue is Jobs. As PPI (I actually refer to the production cost, not the manipulated PPI) maintains high price compared to CPI (cost of goods sold), then jobs will be lost. This job loss is what Fed tries to minimize (and Bush cares about jobs alone and not about the inflation). The credit deflation will really drive the PPI significantly higher than CPI - hence a significant job loss [In credit deflation, PPI and CPI might fall against year earlier PPI and CPI respectively. But PPI will fall less than CPI and hence the overall profitability will be negligible!!].

Also, I dont predict 50% USD fall. Maybe 20-25% USD currency fall is probably the worst we are going to see. But the most important thing is the inflation EXPECTATION. Paul Volcker is supposed to have said: Inflation ceases to be stimulative once the economy anticipates and prices in the inflation in the goods. This expectation is the "key" (and how this inflation affects the jobs). When USD fell in 2002-04, lot of commodities in the world were priced/contracted at fixed USD for long term. i.e the currency fall (USD monetary inflation) was not part of the contract. Today, there is lot hedging against USD. Hence, anyone selling raw materials in the world will be pricing in USD fall as well (in the contract)!! This is what I believe is inflation expectation in USD!! Hence, inflating USD will NOT benefit US any more. I believe we are at that stage as lot of people are expecting USD to fall badly.

So, Fed will not want USD to fall just because 1) USD inflation is NO more simulative as the world economy starts pricing in the inflation into the price of the goods 2) There is going to be significant inflation (i.e higher PPI than CPI) without even USD falling. USD falling aggrevates the "higher PPI than CPI". i.e it aggrevates the job losses in US economy.
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