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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 (75230)	12/10/2006 11:40:50 PM
From: pogohere	Respond to of 110194

I don't speak for any school of economics, I just find some concepts more useful than others. But I'll take a stab, nonetheless. As I recall, and you can correct me if I'm wrong, the decline in consumer creditworthiness and therefore the decrease in credit availability--relatively speaking a "tightening" of credit, in my lingo, deflation, in 1929 and thereafter was followed closely by falling prices, which I believe you prefer to call deflation. And that was in the face of expanded money supply following the collapse!!! I want to know today if the Fed will raise or lower interest rates and what the Fed will do to influence M3, a money supply figure the Fed won't share any more. I wonder why? Would that be because the fringe elements at the Fed don't agree with you (sorry, I couldn't resist--kinda like Mae West: the only thing I can't resist is temptation) ? Hmmm. Does it try to provide assurance with a rise in interest rates that the US$ will remain steady or rise in value (this could easily fail) vis a vis other fiat currencies (the only kind there is today), does it maintain its 3 month rate, or does it lower that rate in the face of the severe problems surfacing in subprime mortgage lenders, and thereby continue the expansion of credit (it would expand because it's more "affordable" at lower rates)? I think these actions will affect the amount of credit/money available and these affects will carry over into the price level. I don't think prices will soar if credit/money contracts with a raise in Fed controlled rates. More likely, prices will fall as employment and incomes fall as the cost of doing business (employing people and borrowing money to keep the doors open) rises because consumers will be hard pressed to keep up their purchasing with less money and credit available to them. With incomes not rising, if their houses don't maintain value, much less increase in value, what will they borrow against to finance their purchases, which borrowing has been the engine keeping the consumer side of the economy going? Houses and goods will remain on the shelf. I believe this is called "pushing on a string." I bet prices fall under these circumstances. If credit/money expands (inflation to me) with a decrease by the Fed in controlled rates I believe prices will rise as there will be more of both to purchase everything. The US$ will likely fall in value versus other fiats and prices of imports will rise. I believe you would call that inflation. And money will purchase less and less of what it used to purchase. I sure wish it was that simple, but of course, it's not. Would foreign investors continue to buy US notes/bonds at the same interest rates if the exchange values of the currencies went against them with an expansion of credit/money and lower Fed rates? Would they stay in the US stock markets? Will the Chinese stand pat with $1 tril in US denominated reserves, perhaps hoping to make it relatively intact past the '08 Olympics and that other world class shindig they're planning? Or do the Chinese send everyone back to the farm? What happens to the price of gold, oil, commodities? What about the carry trade in yen? Und so weiter. If you want to weigh in on what happens if credit/money supply expand or contract, have at it. The Fed doesn't control prices, but it does have influence over credit/money supply, especially the credit available through its owner banks, some of whom are up to their scuppers in mortgage lending. Non-financial institutional credit creation is a whole nother thing and I can't begin to address that here. Like I said, I don't speak for any school of economics. I want to know what will happen to purchasing power and prices, and I think any economic school of thought that addresses credit/money supply has something useful to offer. Your turn: if credit tightens and the economy slows, what do consumers use for credit and money to chase goods at the soaring prices you are anticipating? Can these prices hold?