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

To: GST who wrote (71198)	10/6/2006 2:56:28 PM
From: John Vosilla	Read Replies (2) \| Respond to of 110194

We are in many ways another Argentina only the biggest debtor nation in history with the rest of the world caught needing to continue supplying our bankrupt government and our consumers with even more fuel for their continued growth. What's the saying if you borrow $10k from the bank and can't pay it you are in trouble but if you borrow $100M from the bank and can't pay then the bank is in trouble.

To: GST who wrote (71198)	10/6/2006 3:33:09 PM
From: mishedlo	Read Replies (2) \| Respond to of 110194

I have addressed all of those issues. Many times in fact. When you say I have not done so what you really mean is that you do not agree with my answer. I have provided a logical step by step scenario supporting my position. Many times. You have pretty much only expounded on your belief that the US$ will crash and that will cause massive inflation, without really giving a timeline or steps of progression like I have done. As I have pointed out many times you have no answer for the destruction of wealth and credit that will come with collapsing housing bubble and debt bubbles. It is not worth my time actually to answer your questions as I have done so already many times. Mish

To: GST who wrote (71198)	10/6/2006 3:33:18 PM
From: UncleBigs	Read Replies (4) \| Respond to of 110194

Mish has never dealt with several of the key aspects. Your case about how a credit bubble leads to more severe inflation has nothing to do with Mish. It needs to stand on its own. Now let's critique all of your "key aspects": 1. We are a debtor nation with a zero net savings rate. True. A higher savings rate means less spending, less employment, inability to service existing debts, popped asset bubbles leading to even less spending and more unemployement. How does that lead to more severe inflation? 2. We have a huge government deficit. True. How does that lead to more severe inflation? 3 We have a huge current account deficit. True. This is because consumers are temporarily living above their means. Once consumers are forced to live within their means, the current account deficit will decline. How is that inflationary? 3. Our lack of savings and debts make us extremely dependent on foreign credit to service our debts. True. What's your point? If we need to save more and pay a higher interest rate for foreign capital, that will lead to popped asset bubbles, drastically reduced consumer spending and much higher unemployment. How does all that lead to more severe inflation from today? 4. The risk premium we pay on credit is very small. True. Credit spreads blowing out causing higher interest rates would lead to popped asset bubbles, less consumer spending and higher unemployment. How does that lead to more severe inflation from today? 5. The slower our economy the more we will pay for credit -- the risk premium is a function of how fast we grow. Less growth means more risk. Let's assume this is true. A slower economy leads to higher interest rates leading to popped asset bubbles, less consumer spending, higher unemployment, loan defaults, a slower economy, even higher interest rates, even less consumer spending, even higher unemployment. Sounds more like a deflation debt collapse to me. 6. The slower we grow the more both fiscal and monetary stimulus is added. Let's assume this is true. Why does this necessarily lead to more severe inflation than today? What if borrowers have no ability to take on additional debt to service existing debt and increase their spending at a continual rate? 7. Housing will slow our economy. This is one of your arguments for more severe inflation? Your logic is lower prices lead to more severe inflation? 8. A slower economy will be persistent as our credit risk rises and the cost of debt incurred adds to our current account deficit. Slower economy leads to less consumer spending leads to higher unemployment leads to higher interest expense leading to inability to continue spending and servicing existing debts leads to loan defaults, less consumer spending, more unemployment and on and on. Sounds more like a deflationary debt collapse to me. 9. Even as our long rates rise, our dollar will go down. This will add to the currency risk, adding to the cost of foreign credit. Let's assume you're right. Consumers experience higher interest costs and higher import prices which lead to less consumer spending, more unemployment, inability to service existing debt, popped asset bubbles, loan defaults, less consumer spending, more unemployment, higher interest costs, more loan defaults, and on and on. Again, this is a recipe for deflationary debt collapse. 10. A falling dollar will increase the cost of imports. Let's assume you're right and we experience a falling dollar versus the currencies of our import sources. Higher import prices leads to less consumer spending in other areas, leads to higher unemployment, inability to service existing debts, popped asset bubbles, less spending, more unemployment, loan defaults, and on and on. Deflationary debt collapse. 11. Slow growth and rising interest rates will add an enormous burden to existing public debt. As the economy slows, the cost of foreign borrowing rises and the federal debt will soar due to lower tax receipts. Let's think through this carefully. Higher interest costs means slower economy means less consumer spending meand more unemployment means inability to service existing debts means popped asset bubbles and loan defaults leading to even less consumer spending and even more unemployment. Deflationary debt collapse. 11. We face stagflation -- no compelling case has ever been made for deflation -- and certainly not by Mish who has never addressed these issues. We face stagflation? That is one monumental gap in logic to arrive at that conclusion. No compelling case ever made for deflation? You've just made the most compelling case for deflation in points 1 through 11 above that I've ever seen.

To: GST who wrote (71198)	10/6/2006 7:07:17 PM
From: mishedlo	Read Replies (2) \| Respond to of 110194

Mish has never dealt with several of the key aspects. That is false but I changed my mind. I will address each and every point AGAIN and hopefully it will unclog some memories. 1. We are a debtor nation with a zero net savings rate. 1a. The US was once a creditor nation. In fact we had a savings rate of +6% or so not that long ago. A negative savings rates is not sustainable and the US will once again have a positive savings rate. Book it. 2. We have a huge government deficit. 2a. Government debt is not the biggest problem. Not by a long shot. Japan has a national debt of 150% of GDP. The US is about 70% of GDP. Japan is not in hyperinflation but deflation at that rate. This shows you just how out of whack things can get before a currency collapses. Consumer debt is the biggest problem we are facing now. The reasons should be obvious. 3. We have a huge current account deficit. 3a. If we stop spending like drunken sailors that will change. One of the ways to fix that is for the US to save more and spend less. Obviously a deflationary force when that happens. 3. Our lack of savings and debts make us extremely dependent on foreign credit to service our debts. 3a. Yes. But you are repeating. I suggest the US savings rate will go up. But it hasn't yet. But shouldn't the dollar be collapsing then in your model? Note too that there is now less buying by FCBS of treasuries. Most here thought the US dollar would crash and interest rates soar when that happened. Instead the reverse has happened. 4. The risk premium we pay on credit is very small. 4a. This is a new one but adds to my case. Yes it is small but increasing. Evidence is easy to find in the new credit lending guidelines for mortgages and recent widening of credit spreads to treasuries. 5. The slower our economy the more we will pay for credit -- the risk premium is a function of how fast we grow. Less growth means more risk. 5a. I disagree. More importantly so does the bond market. You are simply wrong. 6. The slower we grow the more both fiscal and monetary stimulus is added. 6a. It is certainly a hypothesis on your part that is not proven. But I must note that it seems you are concerned only about the monetary stimulus (an Austrian credit issue) while conveniently ignoring a collapse in credit by bankruptcies and foreclosures, etc. Which way do you want it? 7. Housing will slow our economy. 7a. Obviously. A point enormously in my favor. 8. A slower economy will be persistent as our credit risk rises and the cost of debt incurred adds to our current account deficit. 8a. Again you are making unproven hypothesis with which the bond market disagrees. 9. Even as our long rates rise, our dollar will go down. This will add to the currency risk, adding to the cost of foreign credit. 9a. Long rates have been sinking or haven't you noticed. In spite of that the dollar has been rising or haven't you noticed. One of us predicted that and one of us predicted the opposite. 10. A falling dollar will increase the cost of imports. 10a. An unsupported hypothesis. Prices of goods from China and India, and Vietnam, or wherever have been continually falling in spite of what the dollar has been doing. It is called overcapacity, cheap labor, and global wage arbitrage. 11. Slow growth and rising interest rates will add an enormous burden to existing public debt. As the economy slows, the cost of foreign borrowing rises and the federal debt will soar due to lower tax receipts. 11a. Once again you overlook everything around you that suggests differently. Do you follow the bond market by any chance? 11. We face stagflation -- no compelling case has ever been made for deflation -- and certainly not by Mish who has never addressed these issues. 11a. I have now addressed all of your issues as in fact I have many times before. You can keep on repeating nonsense or you can remember this post. I have repeatedly answered your questions many times and if you are honest you will have to admit that you have heard me say all of those things before except for #4 which seems to be a new question, now addressed. I decided to address your questions (for the nth time) to put you on the spot. I have asked you at least 5 times to define your basket of goods and services as well as the weightings by which you want to measure inflation. Step up to the plate and tell me your basket of goods and services and your reasons for including or excluding the stock market, housing, etc, as well as your weightings. Now I answered your questions (multiple times), will you answer mine? Mish

To: GST who wrote (71198)	10/7/2006 10:10:55 AM
From: Tommaso	Read Replies (1) \| Respond to of 110194

To me, the key to the whole thing will be a falling dollar. The loss of purchasing power by people in the United States for goods produced outside the country--and commodities--will encourage competitive devaluations and a worldwide rise in prices denominated in fiat currencies. But because of the enormous external debt, the U. S. dollar will sink faster against other currencies and therefore faster against commodity prices. Wage inflation within the United States may be slower to kick in that in the past, since there are plenty of people who want to hold jobs. During the Vietnam War, the military not only was absorbiong material goods, but was taking a noticeable fraction of able young men off the job markets. That is not true now. So the lower-income segments of the U. S. population may just be content to become poorer. There are also lots of illegal (and legal) immigrants ready to take low-paying jobs. Unions no longer seem to have much power at all. The United States can effect a gradual repudiation of the huge external debt by inflation of the money supply. Once the sentiment of international bankers and governments turns against the U. S. Treasury as a safe haven to store profits, the dollar could begin a slide that will take many years to recover from. Many people in the United States will find themselves poorer every year. One bright spot might be farmers, many of whom may become (very deservedly) wealthy. At any point, the United States could start to reverse this situation with policies that encouraged self-sufficiency in energy production, mainly nuclear power. There is still a huge fund of ingenuity, inventiveness, and intellectual energy that could be applied to solve problems other than how to kill people as efficiently as possible.