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

To: Box-By-The-Riviera™ who wrote (30827)	4/17/2005 10:24:58 AM
From: SouthFloridaGuy	Read Replies (1) \| Respond to of 110194

I wouldn't really consider 1998 a true reflation. It was more akin to throwing gasoline on a fire. Nevertheless, the premise is right. The foundation of each recovery becomes shakier and is based on speculation and an increase in risk taking. The Fed can keep this game going for a while. They did it in 1995 and catalyzed the technology boom which got a further boost in 1998. They've done it since 2000 and ignited a housing bubble. However, their ability to do this was based on an increasing price level, low interest rates, thereby creating a 0 cost of capital. But this cannot last as was evidenced last week. Prices rising without wages and when debt burden is way too high means debt service becomes harder. The inability to service debt creates a feedback loop and price rises become limited. This is what the 10 year is beginning to price in - lower inflation on a going forward basis. As we get closer to 0 on the interest rate chain, real interest rates can actually increase as is happening in Japan since the autumn of last year. The market effectively accelerates what was previously a slow grinding liquidation. Your stagflation argument is correct so long as the Fed has the ability to foster credit creation when needed while at the same time balancing the liquidation of bad investments. Had Greenspan cut rates in an effective manner, he could have taken us into a cycle of booms and moderate busts, with some type of mild deflation cleansing cycle at the end. We may have been able to take out the excesses of the late 90's with 3 or 4 recessions of 1990 magnitude. In fact, this is what the Japanese have done for themselves; I'd give them a B-. Greenspan, on the other hand, has actually increased the mania and put the system more at risk now than it was in 2000. The mildest post WW2 recession was considered a success when in fact it was a complete failure because it didn't go nearly deep enough. Morons. So now we start all over again with a bigger bubble, and if we're lucky, 300 basis points of interest rate cuts. Greenspan gets an F.