More off topic:
J. E. :
Thanks for posting the thoughts of old man. I too have come to respect his opinions. He has a way of plainly perceiving what is going on.
Here is a post from this morning from another whom I respect, giving the opposite side of the argument. I don't know which is correct, but they're both worth considering.
I wonder what Zeev thinks.
Date: Tue Jan 06 1998 11:03
D.A. (a.confluence.of.forces) ID#7568:
All:
There has been much talk of late of the possibility of global financial
collapse and the attendant deflationary spiral that would ensue. This is the
biggest fakeout the markets have seen since the predictions of $2000 gold
and $100 oil back in the early 80's. What we are seeing is the grand finally
of the disinflationary forces which have been with us for the last 17 years.
Cycles of this magnitude end with near unanimous opinion on future
expectations that under analysis are simply false. There is a great tendancy
to view market prices as harbingers of things to come when it is peoples
perceptions of things to come which are setting market prices. In these
extremal circumstances markets head for 'clearing' prices where the
analysis becomes so plain and simple that the few will take on the many.
The previous watermark in this cycle occured during the early 1990's
when the US was going through the savings and loan debacle. At that time
global growth rates were at a low for the cycle with all three of the major
economic areas ( Americas, Europe, Asia ) either near or in recession.
The dollar was a weaker currency, and the price of commodities
denominated in dollars was lower than today. There was some talk of
global recession ( which was true ) but nothing close to today's calamatous
call for a deflationary death spiral. In contrast, 1997 saw the strongest
world GDP growth since the late 80's with recoveries taking firm hold
throughout Europe, and a continuation of robust growth in the US. For all
the doom and gloom associated with Japan, that country will still have
positive economic growth for 1997.
What of things to come? In the face of above trend growth in the US and
Europe we are presented with exceedingly easy monetary policy. The
causes for this have been political. Europe, in its mad drive towards EMU
has run policies of fiscal 'tightness' ( if you could call budget deficits of 3%
of GDP tight ) and monetary ease. Look what has happened to interest
rates across Europe in the last 2 years. Short rates that were approaching
double digits are now in the 3-4 percent range. Long rates have dropped a
similar amount. An accelerating economy, combined with easy money and
a soft currency hardly seems like the recipe for a deflationary collapse. In
fact, taken at face value, any economist in the world would come up with
the exact opposite forcast.
In the US we have a similar set of circumstances. The strongest
employment situation in 30 years, rapidly rising asset prices, and a surging
money supply are not inputs for deflation. The only thing arguing for
deflation is the strong dollar. The strength in the dollar is however mostly
against currencies with which we do little business. The export sector of
the US accounts for around 10% of GDP. Similarly, SE Asia takes about
13% of our exports. Thus a little over 1% of GDP is at risk in the worst
case analysis where exports go to zero. Balancing this out has been a
gigantic decline in interest rates, lowering debt service costs and radically
changing capital costs for new proects.
The last and best hope for a deflationary collapse must then come from
Asia. The mechanism of the collapse is to be a rolling liquidity squeeze
where the worldwide banking system is brought to its knees. How can this
happen? Banks are regulated by governments, and are subject to minimum
capital requirements. This means that they must maintain some positive
cash balance against their outstanding loans as a reserve against loan
defaults. The fear is that the defaults of loans in Southeast Asia will cause
banks to become insolvent thus triggering a chain reaction of closures. The
question then becomes is this event probable, possible or impossible. In a
system where debt is denominated in fiat currency, the answer is
impossible unless the monetary authorities are hell bent on suicide. The
simple remedy for what ails the banking system is the pure and simple
creation of money. By simply creating money and giving it to insolvent
banks to replace their bad loans the problem is over. What is currently
going on is the allocation of pain and the realization that the moral hazzard
problem of banks being indemnified against all risk must be addressed. In
this process the banks will be made to pay somewhat for their mistakes as
will the borrowers of the money. However, the entire system will not be
sacrificed to prove a point.
Once it becomes clear that the Asian problems are going to be papered
over, attention will focus upon the massive amounts of paper being created
from thin air. It is this massive amount of fresh ammo which is giving the
illusion of deflationary expectations through the bidding up of the bond
asset class. This competition for a 'safe' asset is causing people to come up
with a thesis as to why bond rates should be so low. Because there is no
real economic reason for the rate decline, one has to be invented.
Economists would be hard pressed to say that bonds are going higher
because the debt is being monetized but that's it in a nutshell. The 'safe'
bonds will turn out to be just as 'safe' as gold and oil were at the begining
of the prior decade.
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