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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 (49497)	1/11/2006 8:20:37 PM
From: UncleBigs	Read Replies (3) \| Respond to of 110194

100% rock solid, Mish. The only thing I might add is the following: There is a signicant human psychology to inflations and deflations. As debt saturation sets in and asset prices begin to fall, human emotions will add fuel to the contraction. Risk seeking behavior can fairly quickly stampede into risk aversion. This is why the unwind of bubbles is rarely orderly. Today, I see Americans collectively at a risk level never before seen in our nations history. It's as if the entire country has gone "all-in" on a risky bet. At best I see a long drawn out deflationary contraction over a period of years. At worst, this unwind has a potential to be catastrophic in terms of cascading events (hedge fund blowups, pension blowups, etc.).

To: mishedlo who wrote (49497)	1/11/2006 9:41:37 PM
From: TimbaBear	Read Replies (2) \| Respond to of 110194

That is the deflationary case and I feel it is 100% rock solid. Those of us who are arguing with you are not disputing that this part of the scenario is very likely to unfold. We are disputing your myopia about this being the only major thing impacting our economy at that time. Speaking for myself only now, I believe we get into a dollar crisis because of the rest of the story that you are not telling, to whit: The US Government is running huge deficits that are only going to get bigger. It is using the buying by FCBs to finance that debt cheaply. Concurrently with that, huge hedgers believe that Treasuries are safe and use them as an integral part of their massive hedging strategies. When the US economy slows down, there is less incentive to buy US debt (after all would you buy debt of GM right now, no matter how great their past has been?), this slowing down of FCB buying will lead to more Fed monetizing which will make our balance sheet even worse. US Treasury rates will become more volatile which will cause the hedgers to look for other venues to use to hedge risk which will make the rates even more volatile.....but ever higher. Meanwhile this will impact the major source of jobs and income in the US....housing....with less and less equity extraction available and rising unemployment cutting most sources of cash for consumption (the dovetailing with your scenario) and less incentive for FCBs to want to purchase US debt or to own more USD. At some point, the weaker FCBs will start to more rapidly "diversify their holdings" which at some point will reach a critical mass and panic will ensue. It isn't really your issue of "They would have to be MAD to sell USD and debt!" It will become, rather, that they can't afford not to. It appears to me that you see these two sets of scenarios happening consecutively while those of us who disagree with your deflationary take on things see them happening concurrently. It won't be the question of "but sell off in favor of what?", it will be "Sell off, no matter what!" They'll spend USD to buy oil reserves, to buy commodities, to buy gold, to buy anything just to get rid of USD. It is already happening but if one is blind to it, it's invisible. So, to me, the deflationary tendencies will be overwhelmed by higher rates and major US currency problems. Inflation and perhaps hyperinflation being the result. The third part of the scenario is that Asia has a brand new manufacturing industry, has jillions of college grads, has learned from our outsourcing much of the service business. Asia is more capable of withstanding a major US economic downturn than anyone gives them credit for. Moreover, they have enough people to make up much of the slack from the US. I'm not saying the adjustment period won't be painful. It's just that it used to be that what is coming at the US would be totally devastating to Asia, now it might just sting for a while. Timba

To: mishedlo who wrote (49497)	1/11/2006 10:27:23 PM
From: FiveFour	Read Replies (2) \| Respond to of 110194

it would be helpful if you could provide some sort of time line, are you talking about 1 year, 1 decade, or what? also, how do we know when we have arrived at deflation, i.e., what is the measurement? 0% interest rates or what?

To: mishedlo who wrote (49497)	1/11/2006 11:30:48 PM
From: kris b	Respond to of 110194

You fail to explain our position and continually point to a straw man that does not exis. Mish, stop wasting your time. He is as stubborn and ill informed as communists of the world who were praising Stalin in the 1920's and 30's until the learnt, to their great surprise, about the truth .... mass murders. He needs to be hit over the head by economic reality to understand Kris

To: mishedlo who wrote (49497)	1/12/2006 10:55:45 AM
From: mishedlo	Read Replies (1) \| Respond to of 110194

Heinz offered this opinion on those 10 points: one should perhaps add that while the Fed is certain to fight a deflationary credit collapse by monetizing government debt, thus maintaining a slightly positive skew to money supply growth, this will be overwhelmed by the commercial bank credit shrinkage. a lot of credit creation in modern times is OUTSIDE of the Fed's purview (see e.g. the GSE's and the entire securitization enchilada). corporations will be forced to enhance their productivity by any means at their disposal, which is a long term positive, but will combine with negative private sector growth to produce FALLING PRICES in spite of continued money supply growth. malinvestment liquidation will also liquidate the other side of the ledger (the credit that supported the malinvestments), but the state will continue to create MORE malinvestment (a la Japan), thus delaying the liquidation process considerably. this means that the period of falling prices for goods and assets could last a very long time.

To: mishedlo who wrote (49497)	1/12/2006 2:19:38 PM
From: GST	Respond to of 110194

In a "closed economy" you would have deflation. In an economy running a huge current account surplus you would have deflation. But in an open economy running a huge current account deficit you will not have deflation. Our economy will no longer be able to grow and prices denominated in our currency -- the dollar -- will go up. Stagflation. Your frequent comparisons to Japan reveal the flimsy nature of your logic. Japan was and is an export-oriented economy running a current account surplus. The US is an import oriented economy running a current account deficit. That makes our currency vulnerable in a way that was never an issue in Japan -- on the contrary, their issue was how to stop their currency from appreciating. China faces the same issue for the same reason. Our issue is how to depreciate our currency without turning it into hyperinflation. If we succeed, we will settle for inflation and will be in a poor position to maintain growth because the consumer will be restrained by debt issues -- stagflation. There is nothing deflationary about a slowdown in an economy such as ours that is running a massive current account deficit. At some point we will lose our ability to finance our deficits - and that point will be hastened by a slowdown in the US economy. It is unacceptable to approach the US economy as a closed economy, and even worse to make believe that the US will follow in the path taken by Japan -- a country whose situation was the exact opposite of our own.