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

To: UncleBigs who wrote (49411)	1/11/2006 2:00:09 AM
From: John Vosilla	Read Replies (1) \| Respond to of 110194

"It's possible that the dollar craters, import price inflation takes off and interest rates move substantially higher. If that happened, our economy would completely seize up and we would have a debt collapse. It's hard to completely think through a scenario where we get high unemployment, deflating asset prices, high interest rates (caused by low dollar), inflating commodities (and import price inflation) and debt liquidation (credit contraction)." A nice summary. Construction grounding to a halt will slow down increase in supply. Also costs to reproduce existing property, plant and equipment goes up dramatically that in part offsets asset collapse from the initial debt liquidation. In the 70's stagflation we had two brutal downturns but by the end of the next upturn prices were always much higher.. That happens in part due to consumers rushing in to buy today because prices will be higher next week. Perhaps like folks the past few years in this insane coastal housing bubble?

To: UncleBigs who wrote (49411)	1/11/2006 2:24:03 AM
From: mishedlo	Read Replies (3) \| Respond to of 110194

Mish, have you previously integrated your deflation thesis with a collapsing dollar vs. euro/yen/yuan? I have discussed that situation with Heinz on several occasions. We both agree that the scenario, however unlikely is possible. However we both feel it would be extremely unstable and would not last long. [It is late and I am very tired. The rest of this typing is my thoughts not his in sort of random fashion and I reserve to look at it tomorrow with a clearer head] For example lets say the dollar suddenly collapsed by 60% or whatever. Imports costs would skyrocket, building materials would be very hard to get, and of course interest rates would soar killing not only the US economy but the world economy. How long could that last before interest rates were slashed everywhere? Barring a war with Japan or China (and them dumping dollars and treasuries) what could possibly cause such a collapse anyway? In a sense sudden dumping is the economic MAD scenario. Possible but highly unlikey. Now we did not see total destruction when the Euro last hit 1.35 or whatever so I doubt it would happen if we hit that level again. So I guess we have to define "dollar collapse". How quickly and how low? But if the US acted to shore that dollar up (rising interest rates), housing would totally collapse. You know it and I know it and once again I think the world knows it. If that happened construction would stop and our economy would seize up and probably the world economy as well. (FOR NOW). Years down the road when China no longer cares about the US perhaps the story changes. Actually I think the problems with the US dollar (and currencies in general) happens AFTER we have a deflationary consumer credit collapse. In other words, what replaces Bretton Woods II? I think a deflationary collapse is the trigger for some kind of change. I sort of see the situation reversed from how others do. A dollar collapse happens near the endgame not now. I wonder if we are seeing it right now in Japan. Is there any reason the YEN should have been collapsing against the US dollar this past year? Well OK interest rate differentials but why is it mattering just now, right as Japan is getting stonger? what happens if Japan is 3% and years from now the US is at 2%? For now, what people fail to see is how much money everyone is printing, US, UK, Japan, China, and even Europe. It is only relative degrees of rottenness as far as I am concerned. I think that is what gold is saying right now. It has decoupled from the US$. In essence, a sudden collapse of the US$ would bring on deflation almost immediately and any sudden spike in interest rates would be EXTREMELY painful, as well as short lived. Not that it is impossible, I fail to see a catalyst for that given economic MAD. Mish