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To: PAUL ROBERTSON who wrote (87716)	7/8/2002 9:38:29 PM
From: long-gone	Read Replies (1) \| Respond to of 116770

The respected Bank Credit Analyst writes: "This raises the specter of a debt deflation, where the combination of high indebtedness and falling prices trigger a highly destructive self-feeding downward spiral in activity. Deflation becomes a dangerous force when it undermines the ability of individuals and companies to service their debt. Deflation can cause declines in nominal incomes and in asset prices, but the nominal value of debt does not change. This may result in forced selling of assets in order to make debt payments, unleashing a vicious spiral of falling incomes, imploding asset prices and even greater real debt burdens. Meanwhile, even if monetary policy is eased aggressively, deflation can cause real rates to increase. When there is deflation, a central bank cannot engineer negative real rates. " The renowned Yale economist Irving Fisher described the destabilizing interaction of deflation and debt in his famous 1933 article "The Debt-Deflation Theory of Great Depressions". In Fisher's words, "the very effort of individuals to lessen the burden of their debts increases it, because of the mass effect to liquidate". That leads to what Fisher called the great paradox and the chief secret of most, if not all, great depressions: "The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not righting itself, but is capsizing". "Are there any signs that such a scenario is unfolding? With the GDP price deflator only 1.3% above year-ago levels, it is not far-fetched to speculate that deflation might unfold. The goods sector of the economy has faced deflationary pressures for years, but this has been offset by sticky inflation in the services sector. However, inflation in services is now slowing and this trend would intensify should the economy fall back into recession. Debt deflationary dynamics could perhaps unfold even if aggregate price levels did not decline. For example, a major drop in house prices could be the trigger for serious problems given that home mortgages accounted for almost three-quarters of the increase in household sector debt during the past five years. A broad-based fall in home prices would be a more potent force than lower equity prices in terms of undermining consumer balance sheets. The Great Depression was not caused by the stock market crash but by a series of serious policy errors, including overly tight fiscal and monetary polices and the introduction of protectionist trade polices. The Fed is not making that error in the current cycle, and rates will be cut further if necessary." Irrational Assumptions (And Other Earnings Problems) $50 billion in Phantom Earnings The Chickens Will Come Home to Roost A Few Quick Comments A Guy's Night Out and Much More 2000wave.com