To: Knighty Tin who wrote (230099 ) 3/21/2003 3:16:48 PM From: ild Respond to From contraryinvestor.com Inflate Away The Problem Of The Day?...We've all heard about Fed governor Bernanke's "printing press" comments over the last few months almost to the point of nausea. The Fed has telegraphed the message to the financial markets that should deflation become a problem, they'll simply inflate the issue away. No worries, right? If nominal debt and/or debt service becomes a serious overhang for the economy, we simply inflate and away goes all that bad debt with a flood of new dollars. But is it really that simple? Forgetting the dollar for a moment, and what would probably be incredibly negative foreign reaction to massive domestic monetary inflation in the US (which is excluding an absolutely huge piece of the puzzle), it seems to us that inflation in two areas will be key to an attempt at successful prolongation of the current credit cycle. The first is price inflation of significant household assets and the second is wage inflation. As you would imagine, debt will become a problem when borrowing (credit creation) slows. We've already seen this exact experience with the corporate sector. They've hit the wall for this cycle. On a rate of change basis, the need for borrowing has been reduced to a trickle. The real debt problem comes when and if households also hit the wall of leverage. And it sure appears as if we are seeing early anecdotes of that very thing. The very cycle of interest rates tells us it's "out there" at some point.
