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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 (62946)	6/7/2006 12:32:05 PM
From: westpacific	Read Replies (2) \| Respond to of 110194

BS it will be deflation. The FED will not destroy themselves and their game....... We will have our deflationary collapse, just like in 1929 and 1987. And out of that bottom we will again see a new rally commence. Of course there will be pain and failures, but the FED knows they have no other choice. And the smart money knows this as well. Hyperinflation is a failure for the FED. West

To: mishedlo who wrote (62946)	6/8/2006 7:07:26 AM
From: shades	Respond to of 110194

Bernanke is limp and Viagra won't help bankdersysrisk.blogspot.com Here was chromatics thoughts relating to bond bubbles questions - blumen seems to have copied him. The question of Hyperinflation Hyperinflation happens by circumstance, not by plan. It is a sign that the government has lost control of its financial resources. Also in a world economy no government can control their currency absolutely outside of their borders. Even the power of the US is dependent upon international consensus. Therefore to indicate in a major banking crisis that the US can control the value of the US dollar is not possible if enough countries decide to get rid of their US dollars. Hyperinflation is not a political popular option; however inflation is a very popular political option. Why the difference? Since politicians are in the job to get reelected, inflation is a good policy to follow because this provides additional money to the government in the form of printing money to gain price stability. Therefore in today’s situation whereas the US dollar is overvalued, the drop in prices by world wide deflation is countered by expanding the monetary base. This expansion of the monetary base is really a hidden tax on American’s. Prices relative to incomes should be much cheaper; however this hidden tax gives the government a hidden revenue base. Hyperinflation is avoided at all costs. This is because the amount of chaos it produces can easily destroy the political system of a country and destabilize the country. This would certainly not be the goal of any politician seeking reelection. The current political power structure would be in very serious jeopardy. Therefore when a country goes into hyperinflation it is definitely not by choice, but by circumstance. I would also like to point out that even though hyperinflation is really bad, it is much better than having your banking system destroyed through massive defaults. I prefer to think of it as the lesser of two evils. Both totally screw up your country; hyperinflation screws it up slightly less. I would hate to think what would happen to the US if we hyperinflated. Just think, in Germany they got a brand new political system complete with Adolf Hitler. Democracy and Debt Since we live in a Democracy in order to get and stay elected there is a huge pressure on politicians to overspend. This is due to the fact that the voting franchise is all encompassing and paying off groups of voters with through the accumulation of debt is a very popular tactic. This is true of both Republicans and Democrats. The voting population does not want an increase in taxes, or to cut existing services and government goodies in which are given and not earned. Therefore all Democracies accumulate debt until the debt load becomes too unstable. Too many financial promises are made, and when the country can no longer service its debts, the promises are still there. They just do not go away. The only option is a destruction of the countries currency as payments must be made on the government goodies promised, but which its society can no longer afford. Therefore governments come up with all kinds of ways to pay for the promises and to keep their voters happy. One very popular way is to lower lending requirements on mortgages. This provides more tax money, increases GDP (through debt), and makes everyone feel rich. In these periods government increase spending. The party only stops when the debt load can no longer be substance. However the country now goes into deficit spending to keep the people working and to stabilize the banking system. As a large unemployed population is a recipe for political unrest the government is very motivated to keep people employed in some way. Government spending goes on a binge, increasing when it should be decreasing. (chromatic recently sent me an email that this was happening in DC from what he saw) This uncontrolled spending, the return of currency from foreign banks in the form of bonds and other securities denominated in sovereign currency leads to a sharp increase in the money supply in general circulation in the country. Inflation is the plan, hyperinflation is what happens when government spending Raising the Interest Rate as a fight Against Inflation (or why bernanke is limp and viagra won't help) This technique does not work as well as it did 20 years ago due to derivatives and the securitization of debt into bonds. Now the banking system can get around almost all rules the government may implement just by selling the debt. (This is of course assuming there are buyers for the debt). Therefore as long as foreign banks continue to want US debt, then the international interest rate set by the bond market bypasses the federal funds rate. The short term rate set by the Fed just is not considered as supply and demand is really at work here. This is why you can get an inverted yield curve. Dr. Greenspan has spoken on this issue before and he has publicly exposed doubts about any real effects of adjusting the federal funds rate. In a time before derivatives this would have been more effective as debt holders would have been inside the country. The Question of Dr. Bernanke and Fed Policy I do not think Dr. Bernanke is an idiot. He is very well studied on the mechanics of the Great Depression and his book can be found at Borders Books in Downtown Washington DC. Dr. Bernanke thesis is that we did not inflate enough to prevent event the very few years of mild deflation we experienced during the 1930’s during the depression. He also believes that a country can grow their way out of a debt crisis. Given the right circumstances I do not disagree with him on this point if the growth is not dependent on the accumulation of debt and adds to the real economic base of the country. I do no feel that this economic recovery fits that mold as just building houses with debt, and they increasing the value of the houses by flooding the market with debt doesn’t in any way really add to the economic base of the country. If the country had increased the debt with jobs in manufacturing, engineering, and other real economy and wealth building functions that create an income stream I would expect the US to be in better shape than a society based on the expansion of credit. Of course if the money for manufacturing didn’t get allocated correctly, then massive oversupply would ensue. Can Dr. Bernanke fight hyperinflation, I doubt it. Just like every other country that faces hyperinflation the government has too many promises to keep, and too much money abroad. In our case the shear amount of money abroad and the speed of transition for foreign banks to get rid of US currency is far faster than any government in the history of the human race could deal with effetely. Dr. Bernanke does not make decisions on military, social security, or any of the other goodies that the government is giving to its people through the assumption of debt. He could not limit or get rid of these programs. I don’t think the President could either. So we are really stuck at our current spending level. How would Dr. Bernanke even be able to deal with the collapse of the negative trade balance? It’s not like you can run a massive negative trade balance for ever. At some time your currency devalues due to it proliferation all over the world. A sharp decrease in the purchasing power of currency is hyperinflation. If foreign banks stop buying our mortgages, then this US money coming into their countries through debt payments and a negative trade balance will no longer be trapped in a lending loop, it will now be free to devalue on the international currency market. There is no way out side of war that the US could stop this. This is precisely why we have this international lending loop whereas our money keeps coming back to the US in the form of credit. In many ways I feel sorry for Dr. Bernanke. He will go down as the Chairman of the Federal Reserve when the world goes off the US dollar. I cannot imagine what history shall show him as, but it will certainly not be positive. ....The question you should really be asking is why did the money supply grow so fast after the US left the gold standard. Obviously Vietnam pumped money into the US economy, but without a huge negative trade balance, the money borrowed and created stayed in the country, causing inflation in everything. During this time financial derivatives where not really in wide use, therefore international holding of US consumer debt was not nearly so widespread. I could be therefore argued that raising the federal funds rate was effective in the 1980’s as most of the holders of consumer debt (i.e. mortgages, car loans, credit cards) were inside the country. At this period of time the securitization of debt into bonds easily defeats loan requirements and interest rates on credit are now far removed from the federal funds rate for the same reason. Once the debt left the country the Feds ability to manipulate it downward was dramatically decreased. I could only see direct intervention by the government to limit the expansion of credit through the limits on selling debt. This would put the fed back in power. ....Certainly when a person takes out a HELOC loans and purchases something this adds to the money supply. However this money is transported via a negative trade balance to another bank outside of the country. When US bonds are sold by foreign banks, does this affect the purchasing power of money? It certainly gives the buyer of the bond cash stream of US money. If the bond is bought at a discount then this effetely lowers the purchasing power of money. If the bond is bought at a premium this effetely raises the value of money. Therefore securities held internationally in terms of debt do in fact adjust the buying power of the US dollar in terms of those countries desire to hold onto that debt. At this time the money paid on this debt is transported out of the US and to the foreign countries, where it is mostly sent back to the US in the form of mortgages. This held excess US currency out of our money supply by trapping it in MBS and ABS. HOLC money was sucked up by a comparable negative trade balance. This money also came back to the country in the form of MBS and ABS. Therefore I would argue that the money supply is really much higher than the Federal Reserve is recording it to be since effective money substitutes are now everywhere thanks to new check writing rules and derivatives.