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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: jmiller099 who wrote (80162)6/14/2008 9:32:04 PM
From: stockfiend  Read Replies (4) of 116555
 
The epic fail of the deflation call is that it...

1) Failed to quantify how much credit and money would be destroyed relative to total money supply. If I burn a dollar bill then I've created monetary deflation. If there are $20 trillion more dollars behind it then how useful is the observation?

2) Failed to predict where money would go once the credit bubble burst. All the money tied up making more money in credit leverage is now running wild all over the world bidding up the price of everything that's not nailed down. This plays back to point #1. The bottom line is there's still way too much money and credit in the world relative to its productive capacity. Calling monetary deflation in this environment is utterly lacking in context, scale, and utility.

3) Failed to account for how aggressive U.S. monetary and fiscal policy would act to stave off deflation. The Fed doesn't want its banks to fail and the government doesn't want to pay back its debt. The Fed is about to burn up its $800 billion and Uncle Sam is standing in the ready to backstop. Uncle Sam's other hand is busy sending out $160 billion in checks and there's already talk of another stimulus. These are drops in the bucket relative to money supply but they're serving their purpose: the world is on notice that the U.S. will not stand for deflation. And the world is obliging.
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