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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 (61276)	5/18/2006 3:01:58 AM
From: bond_bubble	Read Replies (2) \| Respond to of 110194

Mish, I agree with you that there is going to be credit deflation. But attendant to that, there is going to be some dollar depreciation or an expectation of dollar depreciation. Why would anyone buy dollar bonds at low yields if there is a possibility that dollar could depreciate? In 1929, the gold backing gave the US govt the benefit of not depreciating dollar (although dollar was depreciated then) and hence keeping the interest rate low then. I'm not anticipating 80% drop in USD. Something like 30% is possible. Also, how will Fed prevent all the current dollar holdings from being cashed (especially by foreigners)? I expect the Fed to do that by a) allowing GSEs to default and b) Keeping US interest rates higher and c) non-US-treasury bonds should be having very high interest rates. Also, just as monetary inflation of 12% in M3 did not cause CPI to reach 12%, I dont think monetary deflation is going to cause CPI to fall. Let's say M3 fell 30% and dollar depreciates (say against Euro) 30%, then there should be no CPI fall right? i.e you can have massive credit bust and still positive CPI. For this reason, interest rates are not going to fall. US treasuries rate might fall after the credit bust is complete. However, until medicare and Social security are defaulted as well, interest rates are not going to fall...

To: mishedlo who wrote (61276)	5/18/2006 9:16:05 AM
From: russwinter	Read Replies (4) \| Respond to of 110194

Time for me to weigh in on the US inflation debate, and I'll say up front, "not so simple". Prices for US consumer goods are going to go much higher, because China can no longer produce goods below their true cost (when properly accounting for negative externalities like pollution and bad loans). xanga.com I also feel China is going retrench and shut down a good chunk of their bloated exporting base. They will do this via environmental controls, withdrawing credit and currency adjustments. They will also redirect resources and capital away from the failing export model and towards internal needs. Message 22457494 One irony of all this will be to take some of the wind out of the commodity bull. Bulls in that sector playing the endless China growth story will be disappointed. The other irony will be less product, at higher prices for US consumers, and less US consumer and housing Bubble vendor financing= higher interest rates AND higher prices AND fewer goods. This will of course over time diminish demand for Asian consumer products, and contract the trade imbalance. Net effect on inflation in different sectors: -commodity prices cool -US consumer goods prices increase -Owners equivalent rent begins to overstate inflation going forward just as it understated it in the last couple years = high CPI numbers and import prices, but cooling input goods prices