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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: David W. Taylor who wrote (928)	9/21/2003 9:20:19 PM
From: glenn_a	Respond to of 110194

Heya David. Thanks. :) I look forward to when you are able to elaborate in further detail. A few quick replies to your reply - offered not because I think my analysis is correct, but to exchange viewpoints :) 1 - "Deflation is not a falling of prices." Actually, to my understanding, that is EXACTLY what deflation is. There are two aspects to this equation: (i) the supply/availability of goods and services, and (ii) the $ that is chasing those goods and services. Deflation is when there is less money or purchasing power chasing a given amount of goods and services. 2 - "Deflation ... is actually a demand for value usually expressed as demand for Dollars". I'm not sure I understand your meaning here, perhaps you could elaborate. However, I'll try to take a stab at where I think you may be going ... I would think that typically in a deflation, earnings power is no longer sufficient to meet claims on wealth ... most especially debt. If there is significant overcapacity in an economy, this is inevitably a very difficult situation to overcome, as households, companies, and governments must get by with minimal earnings power, to finance outstanding financial claims as well as provide for current cost of living requirements. This is the primary cause of "deflation", that current earnings power is insufficient to service outstanding debt. Naturally, all sorts of factors can compound this already damaging situation - e.g. over-valued financial asset markets (not that we having anything resembling that right now, LOL!), defaults and illiquidity in the banking system, and currency fluctuations. However, is deflation the only policy response here? If earnings power is insufficient to meet claims on wealth, a society always has the option to negate those claims - e.g. screws the creditor at the expense of the debtor. This is what typically happens in economies with an immature financial system. There is a tendency to reneg on their debts, and retreat back to their land and haciendas. However, in an economy with a well-developed financial system, with functioning bond and financial asset markets, it is not so easy to screw the banks and debt-holders. I feel that the current situation may be more biased towards screwing the creditor than the debtor, as was the case in the 1930's. That is, I would look for a "more balanced" screwing - screw the debtor, screw the creditor, screw the creditor, screw the debtor, deflate, inflate, deflate, inflate ... until after some years we are restored to a more solvent global financial system. It is for this reason that I feel both cash and gold are important holdings. Cash for liquidity pressures that come with deflationary pressures, and gold for handling inflationary pressure that come with relieving existing debtors. Also, I don't see any global currency strong enough to handle bearing the demands of a global reserve currency/store of value. I believe gold will serve this function to a significant extent. 3 - Interestingly, China and Asia will likely fair far worse because the US will almost assuredly inflate its currency against the Asian economies. This will keep U.S. goods and services "relatively" competitive against the rest of the world. The real deflationary ravages will likely take place in China and Asia, even as it sets the state for Asia to emerge as the next global super-region. In this respect, the China and Japan today resemble the U.S. in the 1930's. And the U.S. today resembles Great Britain in the 1930's. The 1930's were far harsher to the U.S. economy and society that to Great Britain. However, once you got out of the 1930's, the next 50 years were much kinder to the U.S. 4 - Just want to thank you for stimulating this discussion. You've helped me clarify my thoughts on the whole inflation/deflation thing ... and reminded me that the crux of the problem is a global lack of earnings power relative to outstanding financial obligations in the form of debt, and current global production capacity that assumes that the piper won't have to be paid. Both deflation and inflation to my mind are policy responses to this situation. I think it's fair to see we'll see serious bouts of both in the next decade. Best regards, glenn

To: David W. Taylor who wrote (928)	9/22/2003 1:05:23 PM
From: ild	Read Replies (1) \| Respond to of 110194

David, I agree with you on your take on inflation/deflation. People confuse inflation in prices and inflation as a monetary phenomenon. In fact rising consumer prices and stagnant wages is a very much deflationary because it squeezes the consumer. It RE bubble gets pricked it will also be very deflationary. It used to be that if a guy lost a job and filed bankruptcy he'd have $20K in bad loans. Now this number would be over $100K. Money will be destructed faster than Bernanke can print it.