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

To: mishedlo who wrote (27653)	3/2/2005 6:51:34 PM
From: patron_anejo_por_favor	Read Replies (1) \| Respond to of 110194

<<Now I know you will believe falling money supply when you see it, but you sure have to admit the entire scenario outlined above would be one of the worst possible outcomes>> ...and one of the most likely, with the fewest possible "investors" able to capitalize or hedge enough to survive (ie, the only way to win is with shorts, foreign government bonds and possibly some commodities).

To: mishedlo who wrote (27653)	3/2/2005 7:56:30 PM
From: Gemlaoshi	Read Replies (2) \| Respond to of 110194

Mish, Your scenario could very well happen, even with an increasing money supply. A "Debt Trap Dynamics" scenario, or a "seizing of the financial system" would result in a sharp drop in monetary velocity. Keynesian economists normally treat velocity as a constant, because over the long run it has been fairly stable. However, in the short-run, it can be quite volatile. In such an event, the Fed will try to flood the system with liquidity (ala LTCM). The key issue to the deflation/inflation debate, imho, is: how fast will velocity decline, and will it decline faster than the Fed can pump the MS? At some point velocity will stabalize and start to return to a more normal level, just in time to deal with the deluge of MS the Fed has used to "save" the economy. You and Russ are probably both correct! We could easily get initial deflation, then inflation in quick succession. Regardless of the timing of the triggering events, in the long-long run, one has to side with the continued destruction of the dollar. That is not an economic necessity, but a political reality. A fiat currency in a democracy is doomed!! Dave