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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: zonder who wrote (1785)	3/11/2004 10:32:14 AM
From: Wyätt Gwyön	Read Replies (3) \| Respond to of 116555

established through an excessive lowering of the interest rates into negative real levels the problem with deflation is that eventually you can't achieve negative rates since nominal rates are limited to 0%. despite the 25bp Fed decrease last year, the real Funds rate increased from slightly negative territory into positive territory through the year, about a 70bp climb, as measured by core PCE deflator which the Fed watches closely. the utter lack of follow-through of the PPI to consumers is evinced by 156,000 Wal-Mart SKUs, which fell 2% YoY. so in fact the Fed "hiked" last year, in real terms. the impact of that hike was the historical plunge in the monetary aggregates at the end of last year. this is what happens when you run into a deflationary wall. it's called "pushing on a string". through installing the fear of deflation in the heart of American nation, despite 4% PPI in 2003 PPI is not the inflation rate. to the extent PPI does not translate into higher end prices, it is DEFLATIONARY, since it forces makers to cut costs elsewhere (e.g., workers) to protect margins. as are things like higher oil prices, which are just a tax on businesses and consumers lacking pricing and wage power. in other words, higher commodity prices simply reduce discretionary income in a "zero sum game". the scenario between "credit bubble will have to deflate" and "setting in motion a deflationary debt depression" is not all that clear to me just look at the 1930s. when you unwind debt, which is to say, when you have a period of net credit contraction, you will have a severe recession. it's baked in the cake. call it a recession if "depression" is politically incorrect. , this transition does not have to be so harsh as to lead to a housing market crash and most consumers having to declare personal bankruptcy the phrase "most consumers having to declare personal bankruptcy" is rather extreme, don't you think? what matters is what happens at the margin. and marginally, there could be a SIGNIFICANT increase in bankruptcies (there already has been!). with 54% aggregate home equity, and with 39% of homeowners at 100% equity, the remaining equity is just 25% for those with mortgages. it doesn't take much of a push before a goodly number of these folk may want to leave the keys on the table. quite interesting that Snow and Greenspan are adamant in saying the GSEs are not too big to fail. However, the scenario between "credit bubble will have to deflate" and "setting in motion a deflationary debt depression" is not all that clear to me

To: zonder who wrote (1785)	3/11/2004 12:46:32 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

However, the scenario between "credit bubble will have to deflate" and "setting in motion a deflationary debt depression" is not all that clear to me. The scenario is quite easy: How can bills be paid when we are losing jobs by the hundreds of thousands and new jobs that are being created pay on average 10,000 less than jobs lost according to govt stats. My hunch is that it is far worse than that. The only thing holding this economy together is easy credit and that is why Greenspan can not hike. If and when we reach the tipping point on jobs, it will not matter what hapeens. I think we are close if not there. Perhaps another round of refinancings will tide people over to the election. Then it's lights out and it will NOT take a hike to do it. Mish