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

To: GST who wrote (50227)	1/19/2006 12:56:34 PM
From: John Vosilla	Read Replies (2) \| Respond to of 110194

The last credit bubble burst was such a disaster our entire banking system was on the verge of insolvency yet no deflation. Anyone remember the likes of Sunrise S&L, Amerifirst, Centrust?

To: GST who wrote (50227)	1/19/2006 3:34:21 PM
From: mishedlo	Read Replies (2) \| Respond to of 110194

Mish: The busting of a credit bubble is the essence of deflation. Period. GST: That is patently false when the credit bubble is financed by foreigners. A credit bubble financed by foreigners creates a currency bubble (the dollar bubble) -- and when the credit bubble collapses there is no way in the world that the currency (the dollar) will buy more goods than it would before the bubble bursts. As the de facto global reserve currency, the dollar bubble is by far the larger bubble -- the mother of all bubbles. Your inability to account for the dollar bubble renders the rest of your analysis pretty much useless in my view. (GST I am trying to see if heinz can explain it any better than I have tried) Mish to Heinz: This guy is 100% convinced the only bubble that matters is the "currency bubble" and that the US can not go into deflation when the $ collapses. To him prices MUST rise when the dollar collapses. We went round and round on this and finally I said well why didn't prices of goods from China rise by 30% when the US$ fell 30% and his answer of course is a peg by Japan and China. Of course there is the possibility that China stays pegged to the US$ for another 10 years and there is also the possibility (that he totally dismisses) that the RMB would collapse if it was floated, or that it just might not do a damn thing at all. You know and I know that Chinese banks are pretty much insolvent, for the time being. Anyway to me that is a side issue. To him it is the only issue. Of course no one can get around falling home prices, falling wages and collapsing credit. That is the "nut" of the matter and there never is an answer to it. They NEVER answer those points. NEVER. All that matters to them is some sort of perceived major collapse in the US dollar, totally ignoring how bad the pound is, the deflation problems facing Europe (rising age/shrinking population), and the soundness of Chinese banks. I explained that jobs will be lost in a housing bust and if prices rise, no one will be buying because the masses simply will not have money. The example I gave was: OK so a pair of pants doubles in price, no one will buy it as no one will be able to afford it. People will just make do and velocity of money will collapse. Unless there is an expansion of credit, prices can not rise beyond what people can afford to pay, regardless of what manufacturing costs are. Somehow I can not get that simple concept thru. What good does it do GM to (because of a collapse in the US$ and an increase in parts prices, and steel, aluminum and copper prices) to raise prices by $10,000 a car if they can not sell a single one at that price? It somehow goes over thier heads. GM would not sell a freaking car if they passed on steel, copper, and parts price increases if the US$ suddenly collapsed 40% tomorrow. In fact GM would go bankrupt, destroying billions in credit. POOF - Gone. Hundreds of billions most likely. Inflationary? Hardly! Asset prices on many books would be readjusted. Credits on balance sheets wiped out overnight. All they see is a bubble in the US$ and Treasuries as being highly inflationary. Of course they ignore the consequences to our economy if interest rates were to rise because of an attack on the US$. What would that do to housing and asset prices and jobs and in fact the world economy? How many cars would GM or Toyota sell? This person totally fails to see how things are inter-related and totally fails to see how anything matters but a perceived bubble in the US$ will force prices to skyrocket. Obviously his theory is fatally flawed except in a total vacuum of "the US dollar is overvalued". As long as one stays "in the vacuum" and ignores the other ramifications of the "dollar bubble" theory the idea that this is inflationary will live on. A complete scenario MUST include bankruptcies, wages, jobs, and a housing bust or at least plausible explanations or assumptions as to why they would or would not occur. Now if one wanted to argue that wages would rise, jobs growth picks up, there will not be a popping of the housing bubble, etc etc ect they would then have a complete theory that was defendable. But no one believes that. Belief in a housing bubble collapse, rising bankruptcies, falling jobs and rising unemployment is not compatible with inflation theories (not at a point where consumers are deep in debt and dependent on rising home prices for consumption). The dollar bubble theory thus collapses outside its own little vacuum. Care to work up a short reply to him that I can pass on? Mish Heinz to Mish: well, for one thing, against WHAT is the dollar supposed to collapse? the OTHER fiat currencies? the decline in the Japanese Yen from the '95 high to the '98 low (-50%!) already demonstrated that currency weakness does not necessarily stop a deflation. and there is not ONLY a 'dollar bubble'. in fact, money supply growth in China and Europe has far exceeded US money supply growth over the past two years. plus, as we have seen, a sharp increase in commodity prices has failed to translate into higher final goods prices. it has also failed to dent the bond market. the dollar remains far below its 2000-2001 highs, and inflation has yet to transpire. as it is often said, the market signals that are NOT readily explicable are the ones containing the MOST pertinent information. this is a good example for this phenomenon.