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

To: bart13 who wrote (75236)	12/11/2006 10:27:48 AM
From: GST	Read Replies (3) \| Respond to of 110194

Our trading partners finance our deficits. We could finance our own deficits but we do not save anything and so must turn to others for credit. Our creditors in Japan and China finance our deficits to keep our economy growing. So long as we grow, they will provide the trade credit we need to buy. The price of what they sell to us is in no small way dependent on the purchasing power of our dollar. The purchasing power of our dollar is dependent on their willingness to finance our deficits. In the event of a slowdown in our economy our deficits will not go away -- indeed they are likely to persist and in some areas like our government deficits they are likely to grow. Even our trade deficit could worsen initially in the event of a slowdown as imported goods and services are cheaper than domestic goods and services. A slowdown in the US economy is a high probability event. As the economy slows our trading partners will have reduced capacity to finance our deficits, and decreased incentive to finance them as we become less central to their economic well being. China is on the cusp of developing its internal markets and will likely experience lower savings rates. As we slow and our sources of cheap credit dry up we will have two choices -- print money like crazy or raise interest rates, or more likely, we will do both. But whatever we decide, the global currency markets will make their own decisions. A slowing economy and reduced access to cheap credit will increase the pressure on the dollar -- pressure than has been building behind a dam of trade credit for some time now. As this dam shows signs of leaking and cracking, the dollar becomes a risky place to store wealth. To encourage people to holds dollars and buy more, markets will increase the currency risk premium. This increased risk premium will force rates higher no matter what we do -- and what we are most likely going to be doing is printing money like mad and that will add to currency risk. With the dollar perched on a precipice and heading downhill, all imported goods and services will be more costly. Look carefully at the labels of everything you buy -- made in America no longer exists. We are a nation that imports what it consumes and saves nothing. The Fed can do little in the future to stop all of this, and anything it can do will stimulate even worse inflation. The future is not made of an alternative between inflation and deflation -- the future is an alternative between bad inflation and really bad inflation. For deflation to exist in the US, the dollar will have to rise in value against other currencies -- that has as much chance of happening as bin Laden moving to the US and being elected President of the United States. The future of the dollar is fairly clear -- it will lose value. And as it loses value our interest rates will rise and our economy will slow, adding to dollar weakness. Inflation will reinforce the divide in the US between rich and poor -- but that is another story. For investors, those who prepare for deflation will be wiped out. Those who prepare for inflation will survive to walk on dry land, albeit in a land that shows the scars of bad policy and bad judgement on the part of Americans and their governments. As for the bond bubble, this is a subsidiary of the dollar bubble. Take away foreign credit and their is no bond bubble. The ultimate bubble is not bonds. rather it is the dollar itself that is the bubble of all time. The dollar bubble will burst. When it does you will want to know how to swim. If you have invested in the expectation of deflation you will be naked with rocks tied around your feet.