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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Steve Lokness who wrote (53093)	7/7/2006 10:56:19 AM
From: YanivBA	Respond to of 116555

The people working for the government are somewhat like bond holders. They have traded the chance of doing really well in an up turn for the prospects of doing relatively well on a down turn. Incidentally both bonds and a government position are a contract on the future cash flow provided by tax payers. Taxes are ultimately collected by gun bearing men and since guns work pretty much the same at all economic weathers such a contract can be considered relatively safe. It is therefore obvious that both bond holders and government employees are relatively better off in any economic slowdown, deflation included. We can even note that because bond holders and government employees have shown that they are risk averse by their choices, the rise in the purchasing power of the dollar orchestrates a transfer of wealth from the risk loving to the risk averse (which by the time deflation hits are also known, respectively, as the rich and the poor). Since the root cause of deflation is over-supply, this is actually a good thing. The risk averse would never take his life savings to open a new business. Furthermore, the risk averse hates to change his consumption habits and therefore provides support for the demand curve. Unfortunately, government operations destroy value. As the economy contracts the relative size of government to GDP increases. The contraction of the tax base poses a dilemma for the ruling elite. They can either take the road of spending cuts or the road of fiscal expansion. In the short term spending cuts will only weaken demand, sending the economy into deeper territory. If you believe that all deflations are bad you will never chose to cut spending in a deflationary episode. If you believe that deflations are a natural phenomena playing the vital role of purging excess debt from the economic ecology you might want to react by a cut. This is where the man at the helm actually counts. If he is wise, powerful and brave he can opt for spending cuts, signing simultaneously a change of power at the next elections. If he is either stupid, weak or cowardly he will opt for fiscal expansion. More value will be destroyed but the GDP numbers will recuperate, the ruling elite will maintain its position of power and demand will be artificially kept alive until supply gradually declines through inefficiency and neglect. YanivBA