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

To: pogohere who wrote (50626)	1/21/2006 2:53:40 PM
From: mishedlo	Respond to of 110194

Thanks pogo Duncan most assuredly influenced my thinking as did Heinz, ScottReamer on Minyanville, Roach, Paul Kasriel, Marc Faber, Shostak, and others. The reason monetary injections by the BOJ had no effect is there was a collapse in credit that was even greater. It is debatable whether money and credit are the same thing, or different components of the same thing but I like to make a distinction from an Austrian perspective simply because it seems that a contraction in real money leads to an even greater contraction in credit. That makes sense from a fractional reserve standpoint as well. We have witness a severe turndown in what Shostack would call "real money" even as M3 and other components were still heading up. A contraction in "Real Money" has always led to a contraction in credit and a recession down the road. In a sense the yield curve is telling us the same thing. Things are much tighter that they seem, and Kasriel tells me the same thing even though he is watching M2. Once a credit contraction gets underway, especially if there is a turndown in jobs or wages or spending, it is likely to run the course. That is arguably the weakest link in my overall theory. Indeed, the FED acted to prevent that and did so once, producing a housing bubble. That said, I think they are unlikely to do so again. Home prices are too stretched for too many even with these declines. Wages are falling too many jobs depend on an ever expanding bubble in housing. 35% of the homes sold in 2004 were for second homes or "investment". That is a lot of potential supply is it not? With the dramatic repricings we have seen cash out refis will slow to a stall. The BOJ was powerless to turn it around once the ball really got rolling. At some point we will see coupon passes but if they happen at a slower rate than credit is being destroyed by bankruptcies and other credit contractions we will be in a technical state of deflation. Housing prices are going to suffer. I suspect all of the people that screamed INFLATION because of rising housing prices will not utter a peep about how much more house you can get for your money in many places that just a couple months ago. Why is it that inflationists were screaming about home prices are now silent about stuff like this? Poof - 25% Underwater Overnight globaleconomicanalysis.blogspot.com From the perspective of GST I can argue his purchasing power just went up 25% overnight. Prices dropped 25% on a massive portion of consumer expenses. I expect home prices to keep falling. Do I hear any deflation calls? Gasoline prices dropped after Katrina from $3 to $2. Was that increase in purchasing power deflation? If people want to talk purchasing power there was a DRAMATIC increase in purchasing power from last Autumn. Gasoline prices have fallen by 1/3 and home prices have fallen 25% in some places. Not everywhere, not YET anyway. That is why I prefer to look at money and credit and velocity instead of prices. But if someone strictly insists that prices are all that matter then I expect them to be consistent and to tell me their purchasing power on the US$ just went up 25% overnight on housing. No I really do not expect that simply because they will not be fair. They will instead bitch about crude even though crude prices have not been passed along. They will ignore corn at lows of the 1940s. Expansion of money/credit doesn't necessarily lead to price rises in all instances. Witness Japan. In Richard Duncan's "The Dollar Crisis," pp216-222, he writes about Japan's experiment with monetarism, by which he means expansion of the money supply. (Duncan does refer to deflation in conjunction with falling prices.) As long as we understand what he means when he uses the word "monetarism," we can have a discussion within the context he wrote about. Since in Japan in the era about which Duncan was writing businesses wouldn't borrow and banks wouldn't lend, velocity (the speed at which money moves from one hand to another) became a crucial variable. The amount of liquidity available was a factor, but not the decisive one. Duncan (p.226): "The world is flooded with financial liquidity . . . and this excessive liquidity has fueled a global credit bubble that permitted overinvestment, brought about excess capacity and asset price bubbles, and now is culminating in deflation. Central banks cannot overcome deflation in this post-bubble environment by lowering interest rates and bumping up the money supply. You can't fight liquidity with liquidity. Monetarism is drowning." Arguably, Duncan uses expansion of liquidity/credit when he means inflation and declines in prices when he uses the word deflation. As long as I can track what he means, I can follow the argument.

To: pogohere who wrote (50626)	1/21/2006 8:22:43 PM
From: TimbaBear	Read Replies (1) \| Respond to of 110194

I note that he has said repeatedly that there will be both inflation and deflation and that he can't/won't predict the order in which they appear. Actually, he has predicted the order: deflation first. Timba

To: pogohere who wrote (50626)	1/21/2006 10:53:58 PM
From: GST	Read Replies (1) \| Respond to of 110194

Mish is not even in the ballpark to understand inflation and deflation in a global economy for two reasons: 1) The terms inflation and deflation have zero meaning unless they include reference to prices. If you think every addition to money supply is inflation, period, then you are nuts. Same thing for deflation -- a contraction of money supply does not constitute deflation. 2) Money supply in a single country is only one of many factors in determining prices and purchasing power in a global economy. Our prices, denominated in dollars, do not depend solely on our money supply. We import $2 billion dollars a day in capital. A currency crisis in the US is fully capable of creating conditions for shrinking money supply AND rising prices. Mish can't handle that because his view of inflation is so extraordinarily simplistic -- i.e. money supply = inflation.