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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 (39773)	8/25/2005 4:30:19 PM
From: GST	Respond to of 110194

<1. Falling home prices:> Asset deflation -- that is what we all expect. <2. Falling wages:> Stagnant at best, falling is also possible, almost all expect this. <3. Stagnant employment or rising unemployment:> Most expect this as well. <4. Slowing world economy:> Most expect this as well ______________________________________________________ So far, your "logic" is based on a slowing economy leading to deflation -- all these points support the logic that demand will be soft and growth will be slow -- but there is no logic so far to substantiate that this will lead to deflation. _______________________________________________________ <5. No incentive for the FED to bail out consumers at the expense of banks> This is highly debatable and I have not seen you make this case at all. <6. The K-Cycle is not likely to be defeated by throwing more money at the problem.> Again, you go back to your assumption about demand slowing automatically leading to deflation. <7. At some point lenders refuse to lend or borrowers stop borrowing. That time will be at hand when housing plunges. Look at current events in the UK as a prelude for what will happen here.> Again, more of the same "logic" assuming that housing prices will go down -- no logic to support the deflationary impact, just more of the same assumption. <8. Overcapacity> Overcapacity for what? Not for oil. Not for credit. For ipods? Poor people will stop buying many things. Companies will go bankrupt. People will be fired. Wages will be cut. But what will your US dollar buy you? -- that is the heart of the matter when confronting "inflation". You assume that overcapacity means your dollar will buy you more -- so where is the overcapacity you refer to? Is it in California? Is it in the Pearl River delta? If it is in the Pearl River Delta, what will the exchange rate be? <9. Glut of cheap labor> There is likely to to be high unemployment here and abroad -- but you have already concluded that we have stable exchange rates and that the Fed will do nothing. You also assume that Asia will say "well if the US won't buy our junk I guess we will just close up shop and wait for ten years for them to straighten out their economic affairs". I do not assume that. Having assumed away three of the key elements of any likely outcome -- i.e. a lower dollar (current account effect), a Fed pumping like crazy, and Asia reducing their dependence on our consumers -- and then you assume your case is made -- but it is anything but made. You make an assumption and dismiss the circumstances most likely to point in the other direction -- US staginflation. The onus is on you to do more than assume away the more likely outcome.

To: mishedlo who wrote (39773)	8/25/2005 5:44:44 PM
From: russwinter	Read Replies (1) \| Respond to of 110194

No one to date has come up with a plausible scenario other than "helicopter drop" and I do not find that plausible.> You may not think it's plausible, but once again in the real world, that's to a large extent what has happened. The Fed has expanded it's balance sheet by 10-13% annually in a high-low channel, back and forth. That's about how credit has expanded as well. The Chinese have done so even more. In my view that kind of loose monetary expansion is pushing the envelope of a helicopter drop, and is and has been very inflationary, and if they goose it more, even hyper-inflationary. I think you may see alot of dead savings mobilized in Japan too, which will really set off an inflationary there as well. I think Japan has Weimer Republic inflation potential if they aren't careful. I'm constantly on the lookout just in case there aren't any takers for borrowing this fuel, but it just keeps getting more and more distorted and lopsided. On point two, the Wizards find religion, and suddenly become responsible, again I don't see much hint of that at all, other than for a brief two-three months in the 1Q, 2005. Then Uncle Ernie returned with a vengeance. The scenarios you propose as the inflationists case aren't mine, because monetary fuel and maladjustment trumps that. Economic conditions historically in bad inflations are awful and hardy robust, as you apparently presume.