To: TimbaBear who wrote (26354 ) 9/20/1999 11:31:00 AM From: pater tenebrarum Read Replies (2) | Respond to
TB, thanks for the kind words - btw, PPI and CPI are by no means constant measures, as the DoL is constantly 'improving' the way they are measured. there have been numerous changes applied in the 90's , as the DoL has been critisized for overstating inflation. another round of changes is about to be implemented, and my understanding is that the new changes will once again serve to lower CPI. as i have stated in another post, i believe that these changes will come back to haunt the dept. of Labor at some point, namely when the secular deflationary trend finally arrives in the U.S. as well. the reason why i believe this is close to inevitable is the incredible mountain of household and corporate debt. it is a feature of every credit bubble that in it's late stages the quality of credit tends to decline. considering that the economy is expanding rapidly, it is worrisome to note that both private bankruptcies and junk bond defaults have been rising sharply this year. these are the first signs that the misallocation of capital induced by the credit bubble is coming home to roost. at the end of every credit bubble occasioned by a period of disinflation stands a period of money destruction that is usually deflationary. since the Fed has the power to create as much money as it likes, many people believe that deflation cannot possibly take hold in the U.S. economy. that view is incorrect imo. often the more important factor determining the direction of prices is confidence - or the lack thereof. should stock prices and thereafter real estate valuations experience a sharp correction, there will simply be no takers for the liquidity provided by the Fed. from the PoV of lenders, the asset side of the ledger will have declined, but the mountain of debt will remain the same. this will lead to a tightening of lending standards exactly at a time when the economy doesn't need it...a classic liquidity trap.
