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

To: sciAticA errAticA who wrote (62564)	6/2/2006 5:22:58 PM
From: mishedlo	Read Replies (1) \| Respond to of 110194

... in my view, attempts to draw inferences from a Japan - US parallel is deeply flawed... I disagree with that statement. One merely needs to account for the differences. The fact that Japan had savings to draw on makes the consumer situation in the US much much worse. With less consumer savings there will likely be far more foreclosures and bankruptcies relatively speaking in the US. That is MORE of a deflation problem in the US. Because of US demand for Japanese goods remained high Japan did not lose jobs like we will with an economy tied to housing and retail spending. Again that should make the deflationary period in the US worse. I suppose one has to take into consideration the bankruptcy reform act of 2005. I personally think that is similar to Japan's refusal to write off bad debts. IMO Japan prolonged deflation by continually pumping money into the system rather than declare insolvency on their banks. That legislatiuon is attempting to do the same to US consumers - refuse to alllow writeoffs of debts. That could prolong the agony here. On the other side of the equation, Japan (and Europe) have a bigger demographic problem than we do. All of the above things I mentioned make our situation worse, but demographics makes it better here. My take is that if you balance everything out, the plusses and minuses might cancel and thus the actual effect might be very similar even if individual pieces are dramatically different between the US and Japan as are demographics. Rather than saying they can't be compared as plenty of people here asserted, I believe I just proved they can be compared and one can make judgements about which is worse here vs. there and what is likely to happen as a result. Most here look at one aspect (savings) ignoring all of the other implications and in my mind even come to the wrong conclusions about the affect of that savings (it allowed Japan to pump more than it will allow us - unless of course we become a nation of savers again - which is not out of the question). We were a nation of savers and that was a mere 10 years ago or so. So you see, comparison to Japan as well as understanding the differences is a VERY VALID thing to do. What is wrong is to say that the US can not follow the deflationary path of Japan because of the differences, when one makes no effort to understand the COMBINED effects of all of those differences. Mish

To: sciAticA errAticA who wrote (62564)	6/2/2006 6:24:00 PM
From: shades	Read Replies (2) \| Respond to of 110194

was that Japan was sitting atop massive wealth in personal savings. Hold up - I just read a piece posted by Mish on M2 verses M3 - people are writing checks against thier Heloc's. Now from what I have seen posted by many here - large numbers of americans have huge stores of equity/savings in thier houses that can QUICKLY be monetized - so that kinda nullifies your belief eh? Of course if housing blows up tomorrow - then we all get much poorer pretty fast. How quickly were the japanese monetizing the equity in thier homes? nahbblog.blogs.com I definitely expect another year of positive real (inflation-adjusted) growth for residential remodeling, supported by a record level of homeowner equity (more than $11 trillion at the end of 2005). Everything included, the residential fixed investment component of GDP should top out in the first quarter of this year and then recede gradually during most of the 2006 - 2007 forecast period. Although home sales and housing production will be waning, ongoing increases in household wealth generated by positive (albeit slower) rates of house price appreciation will continue to provide solid support to consumer spending. The wealth effect will materialize whether or not housing equity is “withdrawn” via cash-out refis or home equity loans. econbrowser.com Economists define "money" as an asset that is used to pay for transactions. Thus, for example, we don't include your credit card in any measure of the money supply, because it's not an asset. (now shades has many friends that LIVE with the belief there is still VALUE to the bank account because you can overdraw it by another 300 bucks - the credit card is money too.) (I just had some friends in cordele Ga buy a hotel room for a week because they were able to overdraw thier account by 500 dollars - that really helped them out and they counted on it) From the comments: Since it is aggregate demand (a flow) that we relate in theory to price increases-prices increase because supply cannot adjust in the short run to increases in demand- would it not be more correct to include the overdraft limits on checking accounts as well as credit card drawal limits to take into account the amount of purchasing power that can come onto markets in a short time? PERHAPS economists ought to reexamine the convertibility of stock equity assets to spendable cash. What once took days and involved fees of hundreds of dollars can now be done in minutes for very few dollars. An eTrade account with enough in it qualifies for pretty low transaction fees. Cash pools into Money Market. One can write eTrade checks at any time. Such delays as eTrade imposes on access to cash are mostly arbitrary. Thanks for the reply. I have serious misgivings about how you draw the line between money and credit. Or maybe you aren't drawing the line... but based on your own remarks, we're coming to a different set of conclusions. Firstly, I assume you have noticed that hundreds of billions of dollars of consumption in the US per year rest on home equity extraction. In other words, people are writing checks on their houses. So mortgages are money. I routinely write checks on my credit card (though not to stay afloat, as many others do). The heritage foundation recently published a piece "debunking" poverty that made its case by showing that the poor spend far more than their income. Someone is doing a lot of "check-writing" on credit. So, credit cards are money. Whether this is all sustainable, of course, is another matter. My point is: the lines are not as clean as the textbooks would seem to assume. Maybe regular folks have a different interpretation of money than economists. I think there is a huge question right now of how to interpret money, which has ramifications for the understanding of the economy in the short term vs. the long term, and asset bubbles vs. broad-based inflation. My worry is that the economy has been based on so much "M3 money" that when it is taken away, only a severe downturn could be the result. It seems obvious to me that more of the population is reaching further that ever before into this "fake" money for everyday living--not for investing/speculation. Posted by: algernon at May 31, 2006 06:51 PM “I routinely write checks on my credit card” I never do that because they tack on a hefty fee. I do, however, write checks on my home equity account for large purchases to tide me over until I can liquidate an investment. These lines of credit have blurred the distinction between cash and assets such as stocks, bonds and mutual funds. Posted by: knzn at May 31, 2006 09:32 PM I'm among those (like, for example, eTrader above) who think that traditional money supply measures are growing obsolete due the the increasing ease with which nearly any asset can be monetized. I put up a semi-formal presentation a while back of how I think this plays out; I'd certainly be interested in any feedback. (You'll have to click past the "Read more" link to get to the meat of the post.)