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

To: KyrosL who wrote (71319)	10/7/2006 1:12:43 PM
From: TimbaBear	Respond to of 110194

Bringing up Argentina or Brazil in this argument is wrong, because practically all of the US debt is denominated in US dollars, which can be created at will by the US Fed. I don't know the right or wrong of it, just that Argentina and Brazil seem to have more correlations to the US situation than does Japan. So, in a relativistic sense, it is a relatively better comparison to compare the US to Argentina than to Japan. In any comparison the situations of each will not be identical. It isn't identity that I seek, it is the valid range of potential outcomes using history of other countries as some kind of guide for listing the possibilities. Given that I believe the lack of fiscal responsibility on a national level, and speculative frenzy on the housing level, and excessive spending on the consumer level are not the hallmarks of a sound global reserve currency, I look more naturally what occurs in economies that bust when poor fundamentals go to extremes. I also look to countries whose currencies have severely suffered when excesses have been corrected. There are no perfect correlations that I am aware of. The US stands as the record setter in many areas of fiscal poor performance. What happens here if and when the excesses are corrected will likely add another alternative outcome to the books that book-thumpers in the future use to predict what will occur in their times. What's more, since most US government debt is held my foreigners, it is they, not US citizens, that will incur most of the pain of inflation via depreciation of their assets. And what do you think their feelings toward lending even more money will be? Remember we are borrowing close to $3 Billion dollars a day. If you lend money to a friend or family member and they discount how much they owe you (say only pay you back 80% of the amount lent)(chosen as a proxy to decreased dollar valuation), even though they pay on time, if you lend to them again, won't you demand a higher rate of return to offset the discount? What a lot of people seem to miss is that US interest rates are no longer set by the Fed, they are set by the foreign buyers of our debt.....and by the carry trade arbitrage. If the arbitrage goes away, rates go up. If the foreign buyers slow down more than the carry trade offsets, rates go up. If both occur at the same time rates go way up. If the Fed sees this, what will they do in response? That is the key. My guess is that Bernanke will not let another Depression hit the US on his watch. What will his efforts to fight it off consist of? If we answer that, we may get a glimmer of what wicked thing this way comes. Timba

To: KyrosL who wrote (71319)	10/8/2006 1:01:29 PM
From: GST	Read Replies (1) \| Respond to of 110194

<US inflation results in automatic reduction of US foreign debt as a fraction of US GDP> You make excellent points -- but none of your points would even begin to suggest that the US is in the midst of a sea change from long term inflation to long term deflation (and I know you make no such claim but it is related to the use of the comparison to Argentina). If we take the current situation as not that bad and extrapolate into the future, we could easily slip into a far worse financial position and indeed we seem headed in that direction. But nothing in our current direction suggests that we are headed for an about face -- a uturn. That was the central point of the argument. As for Argentina, you make an excellent observation. Argentina could not use inflation to pay its debts and so they had a crisis. We can use inflation so we are more likely to merely have a painful adjustment. However, neither our case nor the case of Argentina point to deflation.