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

To: John Vosilla who wrote (21841)	1/20/2005 3:08:26 PM
From: Tommaso	Read Replies (2) \| Respond to of 116555

The great deflationary episodes of the past occurred when gold (or gold and silver) were the medium in which debts were ultimately settled. To say this is not to endorse a metallic standard for money, but the constraint that existed--at least in some tenuous form--until about 1970 has vanished. In the deflationary contractions that occurred in the United States during the 19th century, and which culminated in the great 1929-1933 contraction, economic activity slowed in large part because people chose to hold money rather than spend it, and were rewarded for doing so as prices dropped. It may turn out that by forcing a high enough interest rate on a fiat currency, a central bank can cause a slowing in business activity and a general drop in prices, or at least a stabilizing.This is what happened during the decade surrounding the year 1980. If someone can get a return of 15% by just holding dollars, they are likely to do that. The Turkish government has recently done that (though it remains to be seen if they persist with such tough policies). I doubt that there will be a general deflation such as occurred periodically between about 1820 and 1935 in the United States. I think that there could be drastic deflation of stock prices and real estate prices (especially in some areas) in the United States. By "drastic" I mean 40% to 60%) and that this could lead to numerous personal bankruptcies that would seriously damage the markets for many new consumer goods, especially automobiles. I think there will be a general lowering of the standard of living in the United States, with many large houses standing empty and many unfilled swimming pools and undriven SUVs.