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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: Perspective who wrote (90091)1/4/2008 4:00:08 PM
From: GST  Read Replies (2) of 110194
 
Sigh <falling demand lowers prices and inflation>

1. We are in the middle of a period of time where roughly 50 million people enter the ranks of global urbanized consumers each year. That drives demand on a global basis -- and yes, they have money, actual money. The odds of sharply falling demand are in part mitigated by the simple demographic facts of life on planet earth.

2. Falling demand in the United States and Europe and Japan etc. could indeed cause us to slip into a very very nasty recession. In a nasty recession the commodity that is in most severe over-supply is the dollar -- the world is awash in dollars that have been floated as a means of greasing the global economy. Less growth means less demand for grease.

The dollar is rotten to the core thanks to our absurdly high current account deficit, government deficits and lack of personal savings in the US. The only thing that allows us to service our debts and rack up new debts to fund current consumption is the prospect for continued growth, and the demand that creates for us to supply new grease.

Falling demand -- as in a global recession -- kills the demand for grease -- it kills the dollar faster than you can say "sell that sucker". Suddenly there is grease everywhere and nobody wants it. That for us is extremely inflationary. We sold grease to balance our books -- to import everything under the sun and pretend it was all perfectly normal to consume far more than we produce. If global demand continues to grow and we stagnate, as seems likely, then we have bad but not horrendous inflation. If however the global economy really tanks, we get to wear a hat that says the US is the "banana republic of the century" and we have a currency crisis -- and need I say it, runaway inflation.

As for US policy, given the horrible debt trap into which we have climbed, default is the only way out -- inflation is default. Our policy, the policy of the US government and the policy of the Fed is default -- it is only a matter of how bad we will let it get. The faster we default, the deeper the hole we are digging ourselves into.
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