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To: Joan Osland Graffius who wrote (3887)	12/26/2003 12:32:56 AM
From: mishedlo	Read Replies (1) \| Respond to of 110194

During the 1990's the system experienced monetary growth with a serious portion of this capital invested in non productive assets. My thinking is the money supply that went into these non productive assets must be destroyed. My theses is the US must experience a period of deflation. If this deflation is managed poorly, while the capital is under destruction, after the destruction of capital the system could experience massive inflation. Joan this is very helpful insight and tells me that I am 100% on the right track with my Eurodollar play. Thanks for posting and IF and when Japan ever does 100% (or nearly so) write off their bad debt, they might experience serious inflation. In the meantime, it can take YEARS before the US even gets around to admitting the problem. Japan has at least admitted the problem, but has done not very much to fix it. Would you be a big investor in Japan if they do write off all that debt, or will the whole world be F*d up until the US writes off it debt? Thanks again for your thoughts. BTW. If you have any thoughts on where Treasuries and the FED fund rate are headed, please post. Mish

To: Joan Osland Graffius who wrote (3887)	12/26/2003 1:18:14 AM
From: Wyätt Gwyön	Read Replies (3) \| Respond to of 110194

What is interesting to me is Japan has not as yet experienced inflation, which tells me they have not destroyed the capital that was misallocated during their bubble i believe Japanese capital misallocation, to use a pejorative term (it is really just mercantilism, a model which all the rest of Asia has adopted as they copy Japan), actually extends much further back, to at least the 1970s (and more broadly speaking, back a good 100 years). their structural current account surplus began in the 1960s and has continued since, interrupted only by the oil shocks of the 1970s. Japan's problem is that they have, since the 1970s, built up productive capacity vastly exceeding domestic needs. notice that this is far in advance of their 1980s bubble. the problem is that they must always recycle excess forex or risk a currency rise (recall that forex pressure from the JPY/USD cross way back in the late 1960s is what forced Nixon to close the gold window in 1971--they and we face the same issue now, but on a much larger scale). now this has reached ridiculous proportions--despite massive UST buying, the Japanese seem unable to stem the "weight of the yen" as the JPY continues to plow to higher highs vs. the USD. will they give up? who knows (not without trying, anyway!), but a very large part of their industrial base seems operationally doomed at 80 yen to the dollar. if such a level were to hold, one can imagine a tremendous deflation taking hold there and cataclysmic events here as they start to repatriate some of their $3 trillion plus in net foreign investment position. instead of trying ineffectual inflation, they should just repatriate the USD holdings. this will tank the dollar, spike the yen, cause massive bankruptcies in Japan, massive bankruptcies in the US, massive bankruptcies everywhere else...but no worries about any more "muddle through". oh, i wonder why they haven't done that. better keep playing the waiting game... don't think the Japanese are desperate to debase their currency? the MOF policy seems to be: Sell the Yen Early, And Often! i am astounded at how many Dollars they are able to buy without moving the Yen. Reuters Japan MOF asks BOJ to help beef up forex war chest Friday December 26, 12:23 am ET By Satomi Noguchi TOKYO, Dec 26 (Reuters) - Japan's Ministry of Finance (MOF), in a bid to quell speculation that it could soon run out of funds to intervene on the currency market, has asked the Bank of Japan (BOJ) for short-term funding, a government source said on Friday. The MOF, whose holding of U.S. Treasury securities has bulged with the hundreds of billions of dollars it has bought for yen in currency market intervention over the years, has asked the central bank to buy foreign bonds under a repurchase agreement to provide short-term funds in yen, the source said. The BOJ policy board met on Friday to discuss the issue and agreed to three-month repo pacts, for up to a total of 10 trillion yen ($93.2 billion), the source said. A BOJ official declined to comment on the issue. The move comes within a week of another move by the MOF to replenish its war chest for yen-selling intervention, aimed at preventing a higher yen from derailing Japan's export-led economic recovery. Last Saturday, the ministry drafted a supplementary budget for the fiscal year ending in March in which the borrowing ceiling for its forex account was jacked up to 100 trillion yen from 79 trillion yen. The ceiling was further raised to 140 trillion yen in the draft budget for fiscal 2004/05, also unveiled on Saturday. Because it would take until at least late January for the extra budget to be legislated, the repo pact with the BOJ would provide a cushion should the MOF see the need to step up its intervention. RECORD INTERVENTION Japan has conducted a record 17.8 trillion yen of foreign exchange intervention in the first 11 months of this year, raising concerns that it was nearing the limit for its issuance of short-term finance bills (FBs) -- the main funding tool for the MOF's forex account. MOF officials have sought to play down such worries, insisting they still had ample funding room under the cap but that they had raised the ceiling so as to retain the ability to respond flexibly in the event of an unforeseen development in the market. Earlier on Friday, Finance Minister Sadakazu Tanigaki reiterated that Japan would take appropriate action on exchange rates if the market strayed from economic fundamentals. The dollar, which has fallen more than 10 percent from early August heights above 120 yen, hit three-year lows below 107 yen (JPY=) earlier this month, fuelling worries that a recovery in Japan's export-reliant economy could be choked off. On Friday, the dollar was drifting around 107.10 yen in thin post-Christmas trade. ($1=107.28 Yen)

To: Joan Osland Graffius who wrote (3887)	12/26/2003 1:34:33 AM
From: MulhollandDrive	Read Replies (3) \| Respond to of 110194

If this deflation is managed poorly, while the capital is under destruction, after the destruction of capital the system could experience massive inflation. In other words if the central banker floods the system with fiat currency a John Law type of environment could then be experienced. hello joan... let me add my concurrence to your view...i am curious though what you believe would constitute managing the deflation poorly and which monetary policy would ameliorate the deflationary forces. if using the classic definition of inflation being too many dollars chasing too few goods, we know we are far from that scenario. on the demand side we have an aging demographic (as does the eurozone) which will be responding to ever increasing pressure to accumulate savings (exacerbated by the need to "make up" losses resultant from the bubble years)....so not only do you have the scenario as you described whereby higher (or even static prices) for essential goods and services (taxes, insurance, etc) diverting monies which could be spent on nondiscretionary goods and services or........... less $$$$ chasing more goods....deflation. i think this scenario plays out perfectly with the idea promulgated in long wave analyses or kondratieff winter, from what i understand the money supply flooding you describe may change the winter cycle somewhat from a deflationary cycle to a stagflationary cycle....but i don't really believe that will happen. i am more and more convinced that the so called helicopter drop will prove fruitless when it comes to increasing real demand. i'm going to call it my "you can lead a horse to water but you can't make him drink" scenario <g3>, because when you get right down to it, the broader economy is made up of individuals making individual investment and spending choices based on their personal best interests.... if that personal best interest means savings, and therefore less consumption and less demand, the winter will come of necessity. i found this year old opinion piece interesting in positing the view that our awareness of the cycle will change it...i believe it's an arguable point, i'm still thinking about it, i'm just not sure i believe we can really alter the winter, i tend to believe the demographics are just too compelling a force to mitigate against it. gold-eagle.com financialsense.com

To: Joan Osland Graffius who wrote (3887)	12/26/2003 11:02:20 AM
From: russwinter	Read Replies (2) \| Respond to of 110194

<My thinking is the money supply that went into these non productive assets must be destroyed.> Yes, but I think that's only part of it. We have what I would now call "trading desk" based capital allocation, defined as hot momentum money moving around making trades, not real investments. fool.com That's the fallout from years of Greenspan engendered moral hazard monetary policy (see James Grant's "The Trouble with Prosperity"). Of course this creates a system that poorly allocates investment, stuffing some channels, making nonproductive assets, and neglecting others still. When you have a corrupted allocation mechanism you get the maladjustments I keep alluding to. One form of maladjustment is exactly what you describe: overspeculation, overcapacity and of course deflationary trends. That CAN NOT be dismissed. But the other side of the coin are the shortages that evolve from the overheating, and from the neglect (underinvestment) in other sectors that aren't as favored by the trading desk crowd. The neglected sectors can set off powerful inflationary forces, that put even more pressure on the formerly "hot sectors" as a result of unexpected cost squeezes. I've been posting regularly what I feel the inflationary sectors are and I don't feel they can just be dismissed either: energy, shipping/transportation, steel, metals, food, and on and on (see my posts). In fact we should be focusing closely on them, because the problems coming out are evolving rapidly now. My fundamental investment stance focuses on shorting the sectors prone to liquidation and deflationary trends (consumer, retail, financials, tech), and staying long the previously neglected prone to inlation areas like energy, food, and until recently metals. I'm in effect trying to arbitrage them.