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

To: TimbaBear who wrote (71390)	10/8/2006 12:17:59 PM
From: mishedlo	Read Replies (7) \| Respond to of 110194

Japan keeps being brought up here as well. They printed money like there was no tomorrow to try to jump start their economy. You guys define inflation as the increase in money supply, so point out where their inflation was over the last 10 years. How many times does this need to be answered? I probably have posted the following snip 6 times on this board alone: Inflation: What the heck is it? Japan 1982-2004. Some argue that Japan never went through deflation. One basis for that argument is that "money supply" as measured by M1 never contracted over a sustained period. The other argument is that prices as measured by the CPI never fell much. Once again we have a flawed argument about consumer prices and a flawed argument that only looks at money and not credit. Although Japan was rapidly printing money, a destruction of credit was happening at a far greater pace. There was an overall contraction of credit in Japan for close to 5 consecutive years. Property values plunged for 18 consecutive years. The stock market plunged from 40,000 to 7,000. Cash was hoarded and the velocity of money collapsed. Those are classic symptoms of deflation that a proper definition incorporating both money supply and credit would readily catch. Those looking at consumer prices or monetary injections by the bank of Japan were far off the mark. The fact is that in spite of mammoth printing by Japan to the point now where Japan has national debt that exceeds 150% of GDP (far bigger than US's national debt to GDP ratio I might at which is closer to 70%), credit collapsed faster than that printing. If one looks at credit in the US vs M1 you will find the same situation.Japan TRIED to the tune of 150% of GDP to stop deflation. It did not work. I am tired of rehashing all of the reasons why Japan is not the US (and yes that is true) but the two biggest differences are US consumer debt (much bigger in the US) and demographics (much more deflationary in Japan). I believe that consumer debt is the limiting factor especially in an age of globalization and global wage arbitrage (a factor that Japan did not have to deal with). So it is not just printing, but printing and velocity that matters. As for coming up with "unique ideas" all we ever hear from the hyperinflationst crowd is that the US will print its way out of it (without explaining the process). We never hear much of anything else other than a rehash of balance of trade and the US dollar. Well in spite of a dollar that has actually already crashed, prices on impoted good sfrom Asia simply have not risen much. That includes all kinds of gadgets as well as cars and trucks. That has happened in spite of soaring input prices (copper, lead, crude). If that combination and a housing market that doubles in 5 years did not cause hyperinflation what will? (especially now that commodity prices are falling and house prices and # of transactions are crashing). Let me ask you something then: "When we had the S&L crisis that resulted in historical numbers of foreclosures, the death of the S&L industry and the formation of the RTC to handle the sheer volume of foreclosed properties, did we experience deflation? I mean, if you guys are defining deflation as the reduction of credit, credit surely did dry up then! Where was the deflation you seem to be Oh so certain will occur this time? Once again I believe this has been addressed but perhaps only once before. The answer is the ability of consumers to take on more debt was relatively unlimited at that time. The propensity of the Fed and the govt to bail out businesses was relatively unlimited at that time. Today we have bankruptcy laws designed to make people debt slaves forever. Today we have a situation where it is not the solvency of banks that is in question but solvency of consumers that is in question. At the time of the SL crisis we had rising wages. We also had an internet bubble to look forward to and a hosuing bubble to look forward too (off into the futures from that point). I keep asking what bigger bubble can the fed blow that would create rising employment and rising jobs and rising wages? I have no answer do you? If there are no answers to that question then how does the Fed pumping money cure a consumer debt hangover? The answer is that it doesn't! Bankruptcies and foreclosures are close to historical lows too. Unemployment is close to all time lows. What happens when those both turn up sharply? What happens to credit when people can not pay bills. The ramification of a housing bubble bust are barely even felt yet. We have not even seen the effect of a rate reset yet. The answer is that it is NOT different this time. Once debt levels hit maximum they have only one way to go and that is down. That is a far cry from the situation in the 70's and 80's and that is why comparison of now to those times is ridiculous. Now consumers are strapped with interest rates on their house at 5-6%. That of course is another factor that put wind at the back of consumers in the 80s' Mortgage rates were crucified over the years adding to the ability of consumers to spend. I have studied this issue from every angle that I can think of and unless and until inflationists can come up with answers that will allow US consumers to take on more debt that will provide jobs enough to cover a housing bubble bust that will provide rising wages in the face of global wage arbitrage that will prevent a collapse in consumer credit associated with rising foreclosures and bankruptcies that will allow a negative savings rate to continue that deals with now tightening lending standrds that will slow mortgage credit that deals with the continued outsourcing of jobs now expansing to medical and teaching professions that deals with the clear overbuilding of restaurants and other services then inflationists are simply barking up the wrong tree. Instead all we here is the Fed will print its way out of it. Please tell me how addressing all those points. The odd thing is that most inflationists think housing will crash, and they can not address the ramifications of that one point alone, let alone everything I mentioned above. Mish

To: TimbaBear who wrote (71390)	10/8/2006 12:31:45 PM
From: bond_bubble	Read Replies (1) \| Respond to of 110194

Are you saying there was no inflation in Argentina? Or are you saying there was hyperinflation and then the prices started to fall? I'm saying overall there was deflation in Argentina. Millions of prices (like salaries, rents, services, prostitution, assets like bonds and stocks, taxi costs etc) fell and some FEW prices increased (like food, medicine etc). Suppose, I calculate an aggregate CPI as 40% rent and 5% food. And food prices increases 300% and rents fall 50%. What will be net effect in CPI? It will be negative!! (-5040+3005). If people believe in such CPI, it is a negative value. Wouldnt you call that a deflation? In one of the links, a women says Buenos Aires has become affordable after the bust!! That is deflation. i.e if someone had money to spend, they will find that overall they are spending less, primarily because rents fell - even though food prices increased!! What do you call that? Inflation? If you want to call food price increase ALONE as inflation - then sure, US has had food price deflation in the 90s. I hope you dont call 90s as deflation in US. BTW, I would consider 1929 as deflation inspite of meat and oil price increases!! And I would call 1970s as inflation as I can not recall which prices fell!! BTW, if you read the Argentina articles, you will find that government employees seemed to be having no problem at all!! It is only non-govt jobless guys who had problem as in 1930 deflation in US. BTW, my definition of deflation is credit deflation. I was trying to look for charts on credit growth in US. I've Peter Warburton book and it only has charts from 94 and obviously credit has been growing since then - including after 2000 bust in stock market (but it misses the S&L crisis. I'm not sure what happened to total credit then). But interestingly, Peter Warburton has charts for Japan!! Japan had DOMESTIC credit fall about 5-10% (again not as badly as Argentina) - However, TOTAL PRIVATE debt (i.e corporations, fin. inst. credit creation etc) was ALWAYS POSITIVE!! i.e Total PRIVATE CREDIT NEVER DECREASED in JAPAN for the LAST 20 years!! I dont call that as deflation. I only say, it is yet to come!!