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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: BGR who wrote (78434)	3/23/2000 10:38:00 AM
From: Don Lloyd	Read Replies (1) \| Respond to of 132070

BGR - [[If it doesn't show up in increased CPI figures, why is that worrisome?]] If you put your hand on a hot stove and don't feel any pain, does that imply that there is no urgency to removing it? If your feedback signal system is broken, your control inputs to the actuators will be improper and will eventually lead to instability as they fail to damp out the system errors and may well reinforce them. Regards, Don

To: BGR who wrote (78434)	3/23/2000 11:00:00 AM
From: pater tenebrarum	Respond to of 132070

BGR, leaving aside the ongoing debate about the validity of the CPI statistics, it's worrisome because it leads to malinvestment and a lot of debt is supporting the malinvestments. this works fine until either for some reason confidence is receding (something that seems to be happening in the credit markets already, where 10-year swap spreads have widened to 116,5 bps, an unusually high level), or the credit expansion stops. if the central bank doesn't stop it, it stops when borrowers reach the limit of their capacity to borrow. as long as credit expands faster than GDP growth, we can be reasonably certain that such a limit will eventually be reached. once that happens, asset prices begin to fall, i.e. the collateral for the mountain of debt loses it's value. the best contemporary example for the resulting liquidity trap is Japan. once the system is saddled with bad debts, it is extremely difficult to get things going again. admittedly Japan has it's own Japan-specific problems which make it especially difficult to get out of the liquidity trap. however, it arrived there in the same manner, namely by leaving monetary policy too loose for too long and allowing an asset bubble based on debt to build up. this is the problem in a nutshell...note btw. that Japan's economic data in 1989, at the height of the asset bubble, looked almost exactly like the US data now, except that unemployment was even lower and the current account was in surplus. the problem with prosperity based entirely on credit expansion is its artificiality and unsustainability. many think that the duration of the current boom is somehow proof that it is desirable to never have recessions. this is not true, as recessions are a natural economic mechanism to weed out malinvestment and credit excesses. if they occur with regularity, they help strengthen an economy's long term potential. however, if the excesses are allowed to build ever more, the eventual adjustment is all the more painful and long lasting. hb