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

To: Mike Johnston who wrote (75272)	12/11/2006 1:12:34 PM
From: mishedlo	Read Replies (2) \| Respond to of 110194

Mish, I appreciate the great effort you have put into this. Great interview with Mr Kasriel. Thanks Mike. I also thanked you earlier for attempting to keep the debate civil. I attempted to reach out to both GST and John Vosilla the latter of who would not respond to either a public apology or a private one when I asked to bury the hatchet. That told me right then and there that I was in for a lot more grief from the "tag team" This was a perfect setup as I had that interview sitting in my pocket all weekend watching the team pour it on to the point of complete inaneness. It is indeed a simple economic fact that debt increases the likelihood and intensity of deflation once it reaches the point where consumers and businesses no longer want more of it. I doubt there are many reputable economists who would disagree. In fact the challenge might be to find one. Yet I am told by many here "Mish you are so far off the mark with your economic thoughts they are useless!!" That was in fact one of the more polite disagreements. GST carried the banner to nearly insane heights and everyone found it convenient to pile on. Oddly enough I volunteered on many occasions the two biggest differences between Japan and the US when it comes to deflation. Here they are: Consumer debt Demographics It is demographics that is the single best argument as to why and how Japan is different, yet everyone piled on to the single biggest point increasing the risks in the US. It is likely demographics that helped prolong the deflation in Japan: no immigration and and aging population with no real propensity to spend on the latest gadgets etc. I have pointed out many times those differences between Japan and the US from BOTH sides of the coin (one is in favor of the US one in favor of Japan) yet the debate fell on deaf ears. People can believe whatever they want about what inflation is, but my position must now be considered far from "insane" when one of the most prestigious economists in the country happens to agree with it. I did not even know that in advance either. Seriously, when I wrote Kasriel last Thursday I did not realize until the phone interview portion of our interview how much our views were in agreement. I was almost shocked when he used the word "masked" when it comes to how Greenspan got away with what he did. I have been saying that for something like forever but no one here bought into the idea. Well I hope this at least ends the taunts to me over the subject, but I will believe that when I see it. Finally, we can debate until it happens either way what "will happen" but hopefully this ends the debate on what CAN happen with various members of this board thinking that deflation is virtually impossible because of consumer debt when it is that very debt that makes it far more likely. That is a simple economic fact as well and the logic should now (I Hope) be easy to understand. As long as the Fed can keep debt growing (people buying more houses, and junk, etc etc etc) then there will (by definition) not be deflation. Once people stop buying stuff and are maxed out on credit that is how it ends. Mish: How does inflation start and end? Kasriel: Inflation starts with expansion of money and credit. Inflation ends when the central bank is no longer able or willing to extend credit and/or when consumers and businesses are no longer willing to borrow because further expansion and /or speculation no longer makes any economic sense. Mish: So when does it all end? Kasriel: That is extremely difficult to project. If the current housing recession were to turn into a housing depression, leading to massive mortgage defaults, it could end. Alternatively, if there were a run on the dollar in the foreign exchange market, price inflation could spike up and the Fed would have no choice but to raise interest rates aggressively. Given the record leverage in the U.S. economy, the rise in interest rates would prompt large scale bankruptcies. These are the two "checkmate" scenarios that come to mind. So hopefully we can move well beyond discussing whether or not it is possible as well as why it is possible, to a discussion as to what the signs are or are not as to whether or not "consumers and businesses are no longer willing to borrow because further expansion and /or speculation no longer makes any economic sense". Thanks Again Mish

To: Mike Johnston who wrote (75272)	12/11/2006 7:43:08 PM
From: kris b	Read Replies (3) \| Respond to of 110194

The very minute they start massively monetizing the bond market or buying assets, hyperinflation is "baked in the cake". Mike, could you please explain how will FED get money/credit to the consumers (Deposit directly into private accounts? Everybody will stop working and wait for the next welfare cheque from the FED) and how will FED force the people who are already broke and sinking financially to spend that money. They might decide to pay their debts down instead. So far liquidity pumping by FED since June just isn't working. The juice isn't flowing where they want it to flow. Pig man are sucking it all, while J6P is starving financially, down to 20 days of funds on transactional balance. It is easy to print but hard to get it to the economy through the channels that need it the most. Thanks