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Politics : Welcome to Slider's Dugout -- Ignore unavailable to you. Want to Upgrade?

To: surelockhomes who wrote (4627)	2/28/2007 11:09:08 PM
From: jim_p	Read Replies (4) \| Respond to of 50416

Inflation or deflation will depend on how serious the problems become resulting from the irresponsible lending practices we have had with virtually no credit standards for years now. The truth is it can go either way depending on how bad it becomes and how the fed responds. If the fed were to stick to its primary objective of fighting inflation and they don't lower rates and they decide to bite the bullet and get off this excess liquidity merry-go-round, I would agree with you that we could end up with deflation. At some point in time we will have to pay the price. This all started with the Y2K fears, then 911 came along and liquidity increased even further. The problems that have resulted are well known, but we have yet to face reality and take the excess liquidity out of the system and face the problems. Instead the fed has chosen to go from one bubble to the next. The fact that the fed has been increasing liquidity while telling the world that they are concerned about inflation and are keeping interest rates unchanged tells me a lot on how they will handle the next crisis. The problem with anyone trying to predict which way this will go is the fact that there has never been a period in history when lending has been so irresponsible. The unwinding will be very interesting and how the fed responds will determine if we end up with inflation or deflation. On the inflation side of the argument we have: 1. The feds track record 2. Higher commodity prices for food driven by an insane policy to produce ethanol. 3. Wage inflation running high in China and India which will need to be passed on at some point, especially since many of the factories in China are currently operating at a loss due to the governments objective of putting jobs ahead of profits. 4. A weak USD that will most likely get weaker, and 5 the fact that the deflationary forces of cheap foreign labor have pretty much run their course and we are now about to see the opposite effect. On the deflation side the fed would have to decide to endure the pain now and take out the excess liquidity. In addition now that we are in a global economy the rest of the world would have to join in. It could happen, but I don't think so. Anyone got popcorn??? Jim