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

To: el_gaviero who wrote (36145)	7/16/2005 1:52:42 PM
From: mishedlo	Read Replies (1) \| Respond to of 110194

An interesting argument. But one I mentioned somewhere along the line. Yes if there is an overthrow of Congress and legislation is passed handing out new money by the powers that be, once that occurrs (the destruction of debt will be complete) and inflation can take off. That could be the end game years down the road, it is not going to happen quickly or easily. Those in power now are not going to easily do what it would take. As I 100% for sure mentioned: look at the passage of the bankruptcy reform act as proof. No doubt the FED will attempt to monetize (as will other nations with the same problems). The questions are 1) Will they do it faster that debt is destroyed in bankruptcies? 2) Will demand for goods and services remain constant? If not, and if the supply of goods exceeds the rate of printing (likely IMO) prices will not rise. There might be more dollars but will there be more dollars relative to the supply of goods and services (ie overcapacity)? Money supply went up in Japan but it did no good. People had a propensity to save. The US was once a nation of savers, what happens if we see a shift from 0% savings back to 6% savings? These are things that are going to take time to play out, and once the process starts, the FED is going to have decreasing power over time as the deflationary scenario escalates. Mish

To: el_gaviero who wrote (36145)	7/16/2005 2:02:59 PM
From: Crimson Ghost	Respond to of 110194

I pretty much agree with your take on inflation/deflation. But going "one step beyond" -- the manic real estate bubble has finally brought home to me the extreme dangers of a fiat money system. Allowing a handful of folks at the Fed and the other CBs to exert such enormous influence on the lives of billions of people must lead to disaster sooner or later. Especially when those folks are irresponsible inflationists and bubble blowers committed to helping the haves become have mores at the expense of the have littles.

To: el_gaviero who wrote (36145)	7/16/2005 2:04:46 PM
From: Mike Johnston	Read Replies (1) \| Respond to of 110194

Thanks for a very good post. You are correct, deflation/inflation will be strictly a political decision. It looks like all signs point to the possibility that this decision has already been made. We can all clearly see what has been happening in the last few years. Hyperinflation in housing, bailouts of JPM and possibly FNM, low Treasury yields "conundrum" ,massive tax cuts and deficits, swelling money supply, and to cover up the tracks, massive manipulation of inflation statistics. IMO the currency will eventually be destroyed and replaced. The reason is that the Fed will attempt to perform "some" monetization (political decision), if they are not doing it right now. However, there is no such thing as "some" monetization, because that creates only bigger imbalances and can only postpone inevitable adjustment. Eventually they will have to go all the way unless at some point they decide to allow the adjustment. IMO it would be better to hike rates to 6% now and swallow the bitter medicine, rather than having to hike them to 12% later. The longer the interest rates stay below the rate of inflation, the higher the inflation will be down the pike. At some point even 12% rates will be stimulative if inflation rises to 20 %, then you would need 25% rates etc I think the current situation can be described as inflate or die. I think destruction of currency is the more palatable option at this point rather than 20% unemployment rate, 50% decline in real estate prices, 20% of US housing stock in foreclosure and collapse of the financial system. The odds of hyperinflation dwarf the odds of deflation, although deflation will happen after the replacement of currency. Either in hyperinflation or deflation, both borrowers and lenders will get destroyed, the only difference is that in hyperinflation the lenders get destroyed first and in deflation the borrowers get destroyed first.

To: el_gaviero who wrote (36145)	7/16/2005 2:11:34 PM
From: jackjc	Respond to of 110194

Very good post. However it would take too long to get through elections and get new pols if deflation swept through. I have thought for yrs the system would destroy the most leveraged debtors regardless, and much of the savings of less sophisticated savers, hopefully meeting somewhere in the middle, not an either or defla/hyperinfla choice. It may be hard to know the actual situation of debtors vs real purchasing value of the currency in any emergency. And it would be called an emergency and invoke emergency gov loans to support certain classes of debts. And require several million new gov employees to administer FDR style, helping the unemployment prob. If gov went so far as to buy indexes and major stocks comprising indexes, it would leave smallcaps with relatively much worse losses, a thing to keep in mind.

To: el_gaviero who wrote (36145)	7/16/2005 2:42:18 PM
From: Haim R. Branisteanu	Read Replies (1) \| Respond to of 110194

Would agree with you concept and I would like to note that the process already started under the Clinton administration and possibly orchestrated by Rubin. The political establishment chose inflation and low employment rate - just to keep the masses hungry and be busy searching for a decent job or get completely frustrated depressed and disinterested in the "State of the Union". They did so by changing the way the government statistics are released if underreporting the real cost of living via the CPI and unemployment numbers or overstating the GDP via hedonics or "seasonally adjustments" to avoid currency and debt shocks or a run on the finacial institutions Inflation won already if it is reflected in the prices of financial assets (stocks and bonds)or RE or services which are "of superior quality" regardless that the actual real life quality is down substantially. Democratic governments can easily deal with inflation but have no cure for deflation therefore over 10 years ago the US chose the inflationary path as a way to keep the masses satisfied in implementing a classic Leninist / Communist principle of “spiting in ones face and claim is raining” or blaming outside factors for the un-explicable. Best proof can be found in the confusing speeches of AG which few understand what he says in most of his public testimonies before Congress or public bodies, and on the other hand claiming of transparency at the FED That is also why the US must keep military supremacy to survive, never mind that this military supremacy is classic inflationary

To: el_gaviero who wrote (36145)	7/16/2005 3:17:22 PM
From: Mike Johnston	Respond to of 110194

The essential problem is this: if the FED wants to save the debtors, it is going to have to destroy the lenders --- or of course vice versa. If the FED wants to save the lenders, it will have to stand aside while borrowers get sucked into increasingly oppressive circumstances. On the surface that looks to be the case, at least initially in the process. However it seems to me that under any scenario both the borrower and the lender will be wiped out. Here is why: 1. Deflation - obviously the borrowers get into hard times and default one by one. But if enough borrowers default, the lender goes down as well (unless the Fed bails out the lender) 2. Hyperinflation - the lenders get shafted, but it seems to me that the only way for a borrower not to get wiped out would be to sell all assets, pay of the debts and shift into gold, just before the replacement of currency. Here is how it would happen: Joe 6-pack earns an average wage of 50K/year and buys a house in CA for 500K with a 450K interest only mortgage . After a couple of years of very high inflation Joe's wage went up 2 fold while prices of everything went up 3 fold. Now his house is worth 1.5 mil. The Fed works overtime to pump out enough money, keep interest rates low and keep housing bubble inflated. Inflation accelerates and as people flee the currency, temporarily his house is worth 5 million, but there are very few transactions taking place, because mortgage market ceases to function. Now the currency collapses and the dollar is denominated by a factor of 10 and called "the New Dollar". So now Joe earns 10K new dollars per year has a 45K mortgage and a house worth 150K. So he came out ahead, right ? No. The new currency, in order to be accepted. must be subject to tight monetary policy and lending standards must be tightened. A buyer with a 10K/year average wage, 20% downpayment and 10% interest rate can only support an average price of a house at about 25K. So the market price of Joe's house overnight collapses to 25K (250K in old dollars-50% less than he paid). He still owes 45K on his mortage, so technically he is bankrupt. And this scenario did not even assume that he cashed out any equity, which would make his situation even worse.

To: el_gaviero who wrote (36145)	7/16/2005 10:35:39 PM
From: John Vosilla	Read Replies (2) \| Respond to of 110194

We went through this with the commercial RE bubble 15-20 yrs ago and tech/telecom bubble of the late 1990s. Everybody involved in the process gets hurt real bad. Leveraged speculators plus debt holders as the main bagholders. Easy access to capital, excess supply constructed, overvaluation of equity, too much debt, too little cash flow and unrealistic optimistic future projections assumed by the everybody in the game seem to be common denominators every time. The savers who are not involved in the process come through unscathed and those few that are smart sift through the rubble after the crash and really make out best of all besides those who got out early in the original bubble which are very few. Life goes on and other things pick up the slack. Inflation, devaluation and time value of money always take their toll on any saver who never takes the chance and puts their money into a productive investment. Nothing new there but timing is everything in the end.