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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 (71269)	10/6/2006 11:06:08 PM
From: TimbaBear	Read Replies (1) \| Respond to of 110194

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. List any sources of data that support the change in the US from debtor to creditor at this junction. If you cannot, this is no more than a pipe dream, and certainly not addressing a point. 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. Nowhere did GST claim that Government debt was the biggest problem, this is your strawman. The huge government debt is one of many problems....one of many pieces of the mosaic. Japan is a creditor nation, not a debtor nation, Japan even in the worst of times was running at trade surpluses, so the comparison of the these two countries is not a valid refutation of the point regarding debt. It would be like comparing someone with a net surplus between income and debt load and a healthy savings account to someone with no savings and not making enough each month to meet the nut. Perhaps comparing the US to Argentina exorbitant debtor to exorbitant debtor would be more in order. As far as consumer debt being the biggest thing we face, it is big, but again, only one piece of the mosaic. 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. Again, you do not address the argument. If the current account will go down, please explain how much it will go down in comparison to the debt service to foreigners going up and why there might be a net decline. That, if logically done, might address the point here, but certainly not just Mish's opinion that it will decline because....well because....it must! 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 You missed the point here, or just chose to address one aspect of the argument, I don't know which. The risk premium for US debt will go up. The debt service takes dollars out of the US economy which stagnates the potential of the economy which drives up the risk premia, etc. etc. That translates into higher interest rates. It also translates into higher prices for imported goods as fewer and fewer will want to sell to someone who is on the edge of being a deadbeat. Look at Argentina prior to their currency devaluation. I think they called it a death spiral. Which comes first to the overextended debtor: higher rates on the debt he's delinquent on; or lower rates because he's gone bankrupt and cleaned up his act? 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. Again, you give an opinion and don't back it up with fact, that is not addressing the point. At least, I hope your readers would hold you to a higher standard than that, if you don't for yourself. 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? You claim his point is hypothesis. You consider that refutation? Again, it would seem his point would be that as the US economy slowed down, more money would be printed and credit terms amended. Since that seems to be the US pattern in the last decade or so, can you point to a reasonable rationale as to why that wouldn't be repeated? 7. Housing will slow our economy. 7a. Obviously. A point enormously in my favor It may be, then again if it is not, then what would have to happen? 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. Not unproven, our debt service costs are increasing as rates have risen. That is fact. What motivates the bond market may or may not be inflation outlook. Given derivatives and hedge funds and the carry trade, I would have to see an argument that effectively shows why the bond market movement has any relevance. Our debt service is going up both on a consumer level and on a national level. 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? I guess since you asked first, let me then ask back: "Do you follow the bond market at all?" How much of current bond pricing is reflective of the transfer of interest rate risk to other parties? How much of current bond activity is borrowing Yen and buying US Treasuries and using the yield difference to pay the costs and make a profit? Wouldn't this strategy be more reflective of the ease of the trade rather than the outlook of the economies? Given the growth of hedge funds from 800-ish a few years ago to 8,000ish now, and given the amount of leverage they use, please elucidate for us their impact of the carry trade phenomenon and the risk transfer trades and how they collectively impact on the ability to rely on bond movement as predictor of economic direction. Since you use the bond trade twice in this "rebuttal" that should be easy enough for someone with your bond acumen, no? 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. Is this really all you've got on your side of the argument? If so, it is really much weaker than I thought. Timba

To: mishedlo who wrote (71269)	10/11/2006 10:57:15 PM
From: GST	Read Replies (2) \| Respond to of 110194

Oh Mish -- you engage in fantasy, not logic: <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.> There is nothing whatsoever to back up your fantasy that the US is on track to become a nation of savers. <Government debt is not the biggest problem. Not by a long shot. Japan has a national debt of 150% of GDP.> You again show your inability to grasp the basics -- Japan finances its government debt with domestic savings -- we don't. <We have a huge current account deficit. 3a. If we stop spending like drunken sailors that will change.> More unfounded fantasy. There is no reason at all to expect a smaller current account deficit, and plenty of reason to expect it to spiral out of control (as if it was not already there!) <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.> Again, you just sidestep the dollar issue as if it does not exist and inject some fantasy about how we are destined to suddenly become a nation of savers. <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?> This is no mere conjecture -- government deficits soar as the economy slows -- Washington will do what all US governments have done since the great depression and open the fiscal pump to the max. <7. Housing will slow our economy. 7a. Obviously. A point enormously in my favor.> Only if you have no clue as to the damage this will do to the dollar and interest rates. <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.> The debate here is over the impact of a recession or at least a serious slowing of the economy -- I have never suggested that long rates will rise in a growing economy as we have seen in years past -- quite the contrary, I have argued that our low rates are a result of our recent growth. <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.> You have now ducked, avoided and fantasized your way around the issues without even addressing a single one -- only in your imagination have you addressed the issues I have raised. An import oriented economy with a massive government deficit, a massive trade deficit, a massive current account deficit, a huge accumulated debt, and a zero savings rate does not slip into deflation when its economy slows -- and you have done absolutely zilch to lay to foundation of any logical argument that might suggest otherwise. Your idea that out of the blue and in the midst of a painful recession (brought on by a housing crunch and consumer debt crisis) we will suddenly have a high savings rate is pure unsubstantiated fantasy. Without this weird assumption, everything else just becomes hollow mumbo jumbo. We will have a recession -- or at least stagnation -- but the outcome is not going to be a sudden reversal of a fifty year inflationary trend. We are not on the verge of being rewarded with lower prices after a half century buying binge. The dollar is not about to soar in value and buy more goods for fewer dollars. On the contrary -- we debased our currency and we will receive our just reward -- economic stagnation, mounting debts, and a world less willing to subsidize our standard of living, our dollar and our prices. The future is inflation.