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

To: ild who wrote (67936)	8/10/2006 12:27:46 PM
From: Lee Lichterman III	Respond to of 110194

Re: "how about inflation in consumables and deflation in assets?" Great point and a key one at that! Someone posted an article from Harvard called "Dark Matter" that tried to claim that our deficits didn't matter because the US was making more on the debt than the debt cost. My tit-for-tat was that while that may have been true in the past, the debt that used to fund FDI (Foreign Direct Investment) and earned higher returns on Latin American debt, venture capital for fast growth startups etc was no longer happening today. Debt back then was good debt gaining a higher return but today was fueling consumables like energy, services and war expendables. Unfortunately, I can not quantify the ratios of where the borrowed dollars go right now as I just don't have time to crunch all the numbers. As for asset deflation, it is tough to lump it all together. Some are rising now as overseas costs are rising and transportation costs to get them here is also rising. Others may decrease. To get a good read on the mix, one would have to pattern the collective average of who owns/buys what and how much of each to have the ratios in balance. I want to add that I am not totally against hedonic adjustments. They have some merit but not to the extent that so many want to use. Some things are better in quality and thus some increase in price is justified but competition and production improvements negate most of this. The substitution principle of hedonics is only a short term phenomonon and yet it is used in a circular argument too often to completely erase real increases in costs. ( steak goes up, so buy hamburger. Hamburger goes up so buy steak. End result, both steak and hamburger are higher but substitution makes it look like they are the same as before) Just plain silly! Good Luck and I am going back to lurking. Lee

To: ild who wrote (67936)	8/10/2006 8:02:52 PM
From: Perspective	Respond to of 110194

Ild, I think you're pretty close there. I've been saying for a long time that BOTH can happen simultaneously, and it's actually the worst of all possible worlds. Deflating assets (real estate, stocks, maybe even bonds) that squeezes aggregate demand via credit contraction, while the price of essentials and services rises due to overseas competition for dwindling resources. Net economic output shrinks as a falling amount of demand competes for an increasingly expensive set of essential goods and services. Anything discretionary is caught in the crosshares and gets ignored as a result. BC