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

To: mishedlo who wrote (34496)	7/29/2005 12:31:25 PM
From: Bid Buster	Read Replies (1) \| Respond to of 116555

Housing was clearly in a bubble in Japan but bursting bubbles doesn't always equate to deflation as we saw with the tech wreck of 2000 in the U.S. as seen against the CRB. Prices have been rising in Yen and another example can be seen here... gold.org

To: mishedlo who wrote (34496)	7/29/2005 1:07:24 PM
From: TimbaBear	Read Replies (1) \| Respond to of 116555

mishedlo I haven't made up my mind which scenario (or in which order) will unfold. I have seen you make some very cogent arguments for deflation, and I have seen some very cogent arguments made for inflation. Here is my take. Hyperinflationists refuse to respond to the implications of a housing bust in conjunction with overcapacity and a blowoff top in credit speculation for one reason only. They can't (at least not in any logically believable scenario). This conclusion, however, strikes me as a bit disingenuous. Not speaking for anyone but myself, I'll say that there is an underlying thread of argument that holds merit for me. In all of the scenarios you have presented: US in 20s and 30s; Japan in the last 15 years, etc. the underlying currency foundations and economic foundations were much stronger than currently exist for the US currency and economic foundations. The US had a gold standard and trade surplus, Japan had tremendous savings and trade surplus. The US has neither now. If the US consumer dries up because of housing bubble implosion, there will be no incentive for foreign central banks to buy dollars or dollar-denominated debt. This will mean the cost of imports to the US will increase both from the cost of buying them (debt service) and from the exchange rate differentials. This will translate into much higher costs here in the US. The slow-down in US consumption will not necessarily mean (IMO) that those cost increases won't be passed on. To me, it is a question of timing, not of which comes first (deflation or inflation) but the timing of the repricing of the USD and US interest rates in response to no foreign buying. In an internet world and global economy, I suspect the timing of these events will be unbelievably quick, thus I lean toward the inflation side if I lean any way at all. Your scenarios are well thought out, and I am no economist. I just believe that the loss of reserve currency status is already underway and that some amalgam of Asian origin will be the replacement. I believe this will, ultimately, be the defining difference between what happened in the US in the 20s and 30s and Japan more recently and what will happen in the US in the future about to unfold. As I said at the start of this, I haven't really decided which will come first: inflation or deflation. However, I do believe that the hyperinflationists have made more of a case than your referenced quote gives them credit for. Timba