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

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To: kris b who wrote (75902)	12/17/2006 10:18:54 PM
From: basho	Read Replies (1) of 110194

Kris B, I think your concerns are entirely valid. The almost universally held assumption that the Fed's possession of the electronic printing press will always, should the authorities so choose, be sufficient to ensure inflation and certainly to avoid deflation is I fear a potentially fatal delusion. Any attempt use “unconventional measures” to force the rate of monetary growth beyond that required to prevent a deflationary meltdown is likely in my view to end in complete catastrophe. It could only occur through what Bernanke termed “helicopter drops” -- in other words through massive growth in base money rather than via credit -- and would in my view quickly threaten the destruction of the currency as well as the credit markets. It would in effect be an attempt to superimpose an old and rather basic financial system -- such as those operative in the countries which have experienced hyperinflation in the last 100 years -- on top of an immensely complex credit based one already suffering from terminal confusion and grossly excessive leverage. Or, in Bob Hoye’s memorable phrase: “To go to paper inflation would require them (the central banks) to chew through the entire credit market . . . ”. Should people and businesses -- not to mention foreign creditors -- become convinced that the authorities are determined to keep on expanding the amount of currency at all costs a flight from credit instruments cannot be far away. Nor indeed can a flight from fiat money itself. This is Mises ‘crackup boom’. Most, perhaps all, financial markets (supported as they tend to be by debt) would suffer severely at the same time as many daily necessities soared in price. As far as I can see, the only remaining step if faced with that dilemma would be for the US to impose all manner of draconian controls on foreign exchange flows and markets more generally. To move, in effect, towards autarky. Possible, of course, but an even bigger step than for the Fed to bid for the lot. No, I suspect the practical effectiveness of the fed's armoury probably depend on it never having to be actually used in extremis.

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