Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: mishedlo who wrote (71401)	10/8/2006 2:49:16 PM
From: bart13	Respond to of 110194

Your points are well taken on Japan. My counterpoint is basically that the BoJ simply didn't try hard enough to "print" - and probably wisely too. I have studied this issue from every angle that I can think of and unless and until inflationists can come up with answers 1. that will allow US consumers to take on more debt 2. that will provide jobs enough to cover a housing bubble bust 3. that will provide rising wages in the face of global wage arbitrage 4. that will prevent a collapse in consumer credit associated with rising foreclosures and bankruptcies 5. that will allow a negative savings rate to continue 6. that deals with now tightening lending standards that will slow mortgage credit 7. that deals with the continued outsourcing of jobs now expansing to medical and teaching professions 8. that deals with the clear overbuilding of restaurants and other services I've added numbers to your points to make it easier to respond, and do note that I'm not wedded to either scenario although I am looking at disinflation (and perhaps a short bout with real deflation like in 2002) leading towards much higher inflation. 1. A helo drop or similar, plus relaxing the standards. Items like 40, 50 or even 100 year mortgages apply too. 2. War and similar is the primary one, large tax credits to encourage it is another but smaller one, also WPA type programs are quite possible. There are very likely more, but I think I'm just not well enough educated or have a broad enough scope to specify them. 3. A given - I have no answer other than some off-the-radar very low probability item. 4. A helo drop or similar 5. A helo drop or similar 6. A helo drop or similar 7. A given - I have no answer other than some off-the-radar low probability item 8. Some of it via a helo drop or similar. I have little idea precisely what form or forms a helo drop would actually take, nor when it would start to show up, but its likely to include tax rebates like was done in 2003. As an aside, do note that lending standards per the Fed's Loan Officer Survey are still quote loose... and yes, they are lagging too and probably bottoming. bullandbearwise.com

To: mishedlo who wrote (71401)	10/8/2006 5:36:00 PM
From: TimbaBear	Read Replies (2) \| Respond to of 110194

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. Please provide the link from which you are quoting the above. Timba

To: mishedlo who wrote (71401)	10/8/2006 5:54:43 PM
From: TimbaBear	Read Replies (1) \| Respond to of 110194

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! Why is that the answer? Did you see the housing bubble on the horizon when the dot.com bubble burst? I'll assume you'll answer honestly and indicate you really weren't even looking at economic issues very much back then but were still heavy into your engineering career. That aside, just because you don't have the vision to predict the next bubble does not mean there won't be one. As far as the Fed pumping money, it will always work in a society that spends more than it makes, and the US is such a society. We will not have deflation here until inflation is (re)proven not to work. What we will do instead is keep tweaking how it is measured so we can have higher inflation without reporting it as such. Timba

To: mishedlo who wrote (71401)	10/8/2006 10:08:18 PM
From: Fiscally Conservative	Read Replies (1) \| Respond to of 110194

Mish: Who controls inflation ?

To: mishedlo who wrote (71401)	10/11/2006 4:53:14 PM
From: forceOfHabit	Read Replies (3) \| Respond to of 110194

mish, I'm no economist, just a poor dumb trader, but I'll take a crack at how you can have the kind of debt driven collapse you envision combined with hyper-inflation (rather than deflation). A little perspective first: <sarcasm> all those people due to retire and collect SS benefits are drooling at the prospect of the deflation you think is inevitable. Imagine how much further their meager pensions will go! </sarcasm>. Realistically, the US govt has to deal with those unfunded retirement obligations. (So do any number of US corporations, e.g. the auto companies, but I expect they'll deal with them by going bankrupt and dumping them on the govt.) Lets see, I owe these retirees a bunch of money. Not to mention all those pesky foreigners who own my bonds. I own a printing press. What to do? What to do? First: end the SS indexing to inflation. Your government will not renege on the promises to you, its highly valued senior citizens who built this great nation, but fiscal prudence, and fairness to the youth whose taxes have to fund your retirement, demands that we freeze our obligation to you at the current level. Second: inflate the hell out of the dollar. How? Print money! How to inject it into the economy? Simple! Make work projects. Build another Hoover Dam. Build bridges and highways to nowhere. Give work and pay wages to all those over-leveraged, bankrupt real estate bubble losers and unemployed youth. Its the compassionate thing to do. Not Welfare but Workfare! Plus, expand the armed forces - ideal make work project, plus we might have an increased need to "keep the peace". What happens to interest rates? They go sky high, because foreigners will not otherwise lend us money, and internally, inflation and default risk is so high that banks will be very reluctant to lend businesses/consumers money. What happens to the dollar? It loses its status as a reserve currency, and retains only its intrinsic value as toilet paper. What happens to prices/inflation? To teh moon!!!!!! I have studied this issue from every angle that I can think of and unless and until inflationists can come up with answers [1] that will allow US consumers to take on more debt [2] that will provide jobs enough to cover a housing bubble bust [3] that will provide rising wages in the face of global wage arbitrage [4]that will prevent a collapse in consumer credit associated with rising foreclosures and bankruptcies [5]that will allow a negative savings rate to continue [6]that deals with now tightening lending standrds that will slow mortgage credit [7]that deals with the continued outsourcing of jobs now expansing to medical and teaching professions [8]that deals with the clear overbuilding of restaurants and other services Taking your questions in order, [1] irrelevant, consumers can (and will) drown in their debt [2] jobs by the millions as described above [3] government sponsored make work projects can easily require domestic labor, wage arbitrage impossible [4] irrelevant, see [1] [5] savings rate will go to 0: no credit => no negative savings rate, hyper-inflation => no positive savings rate [6] irrelevant, see [1] and [4] [7] same as [3] [8] irrelevant, same as [1], [4], and [6] Now like I said, I'm no economist, but if I get the time I'll read up on the Wiemar Republic. Who survives/thrives? The wealthy who can a) move assets out of the country into other currencies, b) own productive assets and can surf the wave of inflation, c) are in a position to take a cut from government projects (Can you say Halliburton?). Who suffers? Everybody else (domestically), including other countries (who were dumb enough to hold our debt). I'm not saying this scenario is inevitable, but I think its unfortunately possible, maybe even likely. And I have a thick skin (plus I just finished putting on my asbestos jammies) so, flame away. As you do so, please remember to explain to me how the government deals with its unfunded SS liabilities (and its absurd deficit, and rapidly expanding debt) in the deflationary scenario you describe. foh

To: mishedlo who wrote (71401)	10/11/2006 5:57:35 PM
From: Perspective	Respond to of 110194

I must agree on this, Mish. While the inflationists are right that the Fed could drop money from helicopters, that is just a distraction right now. Until they are actively doing so, what we have is a very classic cyclical inflation in progress, compounded with unprecedented liquidity sources in the form of hedge funds employing ludicrous amounts of leverage and a runaway Chinese boom. Think either of those trees will grow to the sky? BC

To: mishedlo who wrote (71401)	10/12/2006 9:37:10 PM
From: GST	Respond to of 110194

Dead wrong IMO -- the US consumer will not be the one setting prices in global markets. We are due to be price takers for all that we consume. <that will allow US consumers to take on more debt> We will collectively borrow money to pay interest on what we already owe. This is known as being poor because we are already too far in debt. Interest payments will suck up cash flow and prevent us from building savings. <that will provide jobs enough to cover a housing bubble bust> We won't. Unemployment will rise. This will be especially painful for the poorly educated who will see their incomes stagnate even as prices rise. <that will provide rising wages in the face of global wage arbitrage> Wages in the US will rise, but not as fast as in other parts of the world where people are paid in appreciating currencies. <that will prevent a collapse in consumer credit associated with rising foreclosures and bankruptcies> A collapse in consumer credit due to defaults will send international borrowing rates up and will add to the debt service problem -- sucking up cash flow and preventing savings. <that will allow a negative savings rate to continue that deals with now tightening lending standards that will slow mortgage credit> There is not one shred of evidence pointing towards a higher savings rate in the US -- on the contrary, risk premiums will rise. Interest payments on existing debt will rise. Government deficits will rise. Savings cannot rise in that environment. <that deals with the continued outsourcing of jobs now expansing to medical and teaching professions> Outsourcing (offshore) will reinforce stagnation, poverty, debts that can't be serviced, debt defaults, a higher current account deficit and a higher cost to finance it, and all of this will cause further weakness of the dollar and higher inflation. <that deals with the clear overbuilding of restaurants and other services> This will just be one more dying business in the US -- and this point simply reinforces the stagnation we face. Once again -- your compass is off by 180 degrees. We are an import oriented economy with massive deficits and a zero savings rate. The world will no longer subsidize our consumption with cheap credit, cheap commodities and cheap labor -- prices are going to go up as the cost of credit rises to reflect the risk of lending to us. No more free lunch.