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

To: Mike Johnston who wrote (51180)	1/24/2006 3:28:22 PM
From: bond_bubble	Read Replies (1) \| Respond to of 110194

Just a comparison between Gold std market and Fiat Curr markets: 1) Inverted yield curve is normal in gold standard. Steep yield curve means recession will hit in gold std (as money is drained by one/few industry). In Fiat, Steep yield curve means normal and inverted yield curve forcasts recession. The current inversion should cause recession in 10 months. 2) Deflation is normal in gold std. Inflation is normal in fiat. 3) Interest rate stability Vs price stability in fiat. 4) Low interest rate in recession in gold standard. High interest rate in recession in Fiat!!! In 1980s, even though it was a recession, interest rates were high. So why was interest rates low in 1930s when US practiced Fiat? Because the pseudo gold standard protected them from currency run off!! Hence, there was not significant higher inflation in PPI in US (In UK, which officially dropped of gold standard and hence had currency depreciation, commodity prices were rising in pound even though commodities were falling against gold!! And as you guessed, UK had higher interest rates as well during their deflation - So did Germany in 1930s which also experienced deflation!!! the rate fell later in the deflation after banks were busted and excess credits were extinguished!!) and hence Fed could lower interest rates (just as if they are in gold standard!!). Now they are not in gold standard. So interest rates will go up. Did 20% in interest rate in 1980s cause run on dollar? No. Was there depreciation? Yes. something like 30-40%. So, there you have it. Inspite of US falling of gold standard, USD did not run amok in 1980s. Why now? It will run amok only if the Fed tries to lower interest rates in this recession!! As certainly, it would have been the case in 1980s! And Fed wont lower rate as PPI in USD will go higher (even though commodities might fall against gold). The FEd will lower interest rates, as Mish predicts, ONLY after ALL excess credits are extinguished in defaults!! If credits are not allowed from extinguishing, rates will stay high!!! Why were there no default/deflation in 1980s. I've explained this earlier. Because in 1970s, 1930 was fresh memory for the public and hence they did not go into debt. In 2005, 1980 is a fresh memory and people go into debt!! (the K-cycle reason probably). In 1980s, there was lot of room for debt growth - in the hands of people - hence Fed could inflate to allow debt growth in public besides the usual debt growth in Govt. In the earlier history of Rome, China under Kublai Khan, Argentina, Turkey etc. there was only Govt debt - Hence hyper inflation. Today, the financial sophistication has allowed "people/public" debt. There is no more debt growth possible to cause inflation. Hence deflation occurs. What happens if everyone is in fiat currency? What this means is that - their population and govt will continue to spend in non-productive avenues and keep the PPI higher and cause higher unemployment!!! In the 1930s, many countries were in gold standard and they printed money and spend it on public works. And I think this is what got them out of the recession. Although, people talk a lot about begger-thy-neighbor in 1930s, I dont think this will happen now. Just as trade was brought to standstill in 1930s, it will happen now as well. Under the non-gold standard, every country will try to boost its currency so that they can buy raw materials cheaper. That's how countries can bpoost demand in their local country. I expect every country to ratchet up interest rates - China, Japan, US, Europe - everyone....Until ALL/MOST of the credits created go worthless - and then interest rates will try to fall based on the then dynamics.... Also, people think inflation as synonymous to recession. It is not. Why should we care what the inflation is? Let it be -ve or +ve. It does not matter. What matters in unemployment. It is this that govt will try to reduce always. It doesnt care if inflation is 5 or 9 0r 100%. Why should it? The only reason the govt keeps mentioning is that it is a surrogate for unemployment in the future!! The Fed thinks, if inflation (whatever it measures) is 3%, printing press wont cause unemployment. That is why they try to stop inflation at 3%. But if they fool themselves saying inflation is only 2% and print a lot, what they are really doing is pusing unemploymeny higher in future!! They are misguiding themselves in the future. I think that is all the significance of inflation number reported by Fed.

To: Mike Johnston who wrote (51180)	1/24/2006 3:59:16 PM
From: Tommaso	Respond to of 110194

That's exactly my take on what is going on, and very well put.

To: Mike Johnston who wrote (51180)	1/24/2006 5:04:26 PM
From: mishedlo	Respond to of 110194

Deflation warning in the UK UK gilts were also lower and yields higher, with two-year yields up 2.3bp at 4.249 per cent and 10-year notes yielding 4.025, up 1.7bp. However, attention was focused at the ultra long end, where the government sold 50-year inflation-linked gilts at a record low yield of just 0.46 per cent. Demand was worth 1.75 times the paper on offer. news.ft.com

To: Mike Johnston who wrote (51180)	1/24/2006 5:16:34 PM
From: mishedlo	Respond to of 110194

Oil is soaring because of peak oil. That is the predominate reason. If you think oil is soaring because of a sinking US$ then explain why beans and corn and wheat are near prices of 1943? Why did it not cause a recession? Because less money %wise is spent on gasoline. That said it is starting to pinch. The amount of monetization by the FED has not been that great. (this year) Anyway it certainly is not the reason behind oil prices. The FED pumped more money into the economy in 1995-2000 than it is doing now. Oil was dropping then? Why? Because China was not the factor they are now and we are 10 years deeper into Peak oil than 1995. Inflation is simply not 8%. If you prefer to believe that based on house prices or whatever, then you should be screaming deflation now based on 25% home price reductions in some areas, and soon to be much of the country. as for: But i think the Fed and the Feds are cornered. The more they intervene, the more intervention is required which creates even bigger mess which in turn will require even bigger intervention, which is exactly the point of your post. Bottom line: there is no free lunch, never will be, and you can steal from Peter to pay Paul only for so long. It is like a giant balloon that springs leaks constantly, as soon as you plug one leak a bigger one shows up on the opposite side, because the structure of the balloon cannot take any more pumping. I could not possibly agree more. The FED is finally cornered. Furthermore the US housing bubble is the end of the line. The structure of the balloon can not take it and the pool of stupid buyers has run out. Mish