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

To: John Vosilla who wrote (47171)	12/13/2005 11:59:10 AM
From: westpacific	Read Replies (1) \| Respond to of 110194

Down cycles used to be good. Not now the dollar is worthless. Down cycles could get out of control, so at all costs they must be stopped. Better run away inflation that kills the saver and rewards the risk taker. West

To: John Vosilla who wrote (47171)	12/13/2005 12:30:45 PM
From: GraceZ	Read Replies (2) \| Respond to of 110194

There was little or no inflation, now I'm not so sure. We have both inflationary forces and deflationary forces. Higher costs aren't necessarily inflationary unless the Fed accommodates by increasing the money supply. Higher costs can be deflationary in that they put people out of business (destroying capital investments) or they can force companies to get more efficient and put downward pressure on wages. I have not been able to pass on increased costs in my photo biz for more than ten years because that industry is sunsetting. The only way I survived was by changing the fundamental nature of my business and becoming more efficient. The phrase "a little inflation" always reminds me of that Monty Python routine about the guy who doesn't like spam and the other guy in the restaurant keeps offering him dishes with multiple servings of spam and then finally offers him one with one two or three servings of it and says, "but it's not got much spam". A little inflation can still have a devastating effect on the purchasing power of your money over long periods of time. Someone who thinks we have little inflation isn't saying that we have zero inflation. 2-3% compounded over time can really squeeze you. That said a little persistent deflation can have a devastating effect on you if have debt. As Bernanke makes clear, he's determine not to allow deflation because of the way in which a deflationary spiral feeds on itself in an economy that is as leveraged as ours. Essentially what he is saying is that the Fed will always act to protect debtors and the savers better account for the inflation rate in their scenarios. He thinks that the Fed can control inflation more easily than deflation (although he also seems to think they can also easily control deflation). Looking at history nothing could be further from the truth. In an environment where the free market determined the price of money we'd have periods of both deflation and inflation. Debtors couldn't count on being bailed out so they'd have to be a great deal more diligent about keeping their debt levels well within the worst case scenario. Savers would also have to be diligent about not going too far out on the risk limb. The Fed creates the worst of all worlds always trying to err on the side of inflation. It makes it so the true cost of borrowing is never accounted for while punishing those who choose to live within their means and who don't want to employ debt.