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Non-Tech : Deflation -- Ignore unavailable to you. Want to Upgrade?

To: JF Quinnelly who wrote (346)	8/8/2007 8:40:24 PM
From: Maurice Winn	Read Replies (1) \| Respond to of 621

jfred, Deflation spotted lurking over here: globaleconomicanalysis.blogspot.com <I was surprised to see Bill Fleckenstein, a long time believer in inflation, state the case for a Japanese style deflation in the US. But it's right here in America follows Japan's misguided path. ....Given all our problems related to debt, I thought it might be worthwhile, particularly for new readers, to provide a brief history leading up to where we are now. Taking a big step back, the Bank of Japan acted foolishly throughout the 1980s, which caused that country to experience enormous real-estate and stock bubbles. Japan's stock bubble was really a residue of its real-estate bubble -- actually a credit bubble, as the banks lent money to any corporation with a pulse. (Does that sound familiar?) Then the institutions that lent the money took forever to write off the bad loans. That's why Japan's real-estate market, stock market and economy did so poorly for more than a decade. Free money exacts a price After [the dotcom] bubble, Greenspan took a page out of the Bank of Japan's book and lowered rates to 1%. That helped precipitate the housing bubble here that ended in 2005. As to why the unwinding has taken so long to commence, only recently has the cause become clear: the mark-to-model fantasy employed by those who have bought the sliced-and-diced mortgage paper. But the fantasy is unraveling as these structured-credit products are now slowly being marked to market. Just as virtually every subprime-mortgage lender has blown up, Alt-A lenders (the next rung up the ladder creditwise) will blow up -- and, ultimately, many hedge funds will blow up, though we're in the early days of that process. In the years since our equity bubble peaked, trillions of dollars' worth of debt have piled up throughout corporate America. So now, as we enter recession, we will experience not just a weak economy, real-estate market and stock market, but the exacerbating effect of a mountain of bad debt, completing the analogy to Japan of the 1990s. Like it or not (and I suspect he might not because he did not use the D-Word itself) Fleckenstein described how and why a Japanese style deflation is headed for the US. Economist Paul Kasriel at the Northern Trust also describes how a Japanese style deflation can occur in the US. Please read Interview with Paul Kasriel if you have not yet done so. The D-Word Two of my favorite professors on Minyanville are not afraid to use the D-Word (deflation). Point #1 in Kevin Depew's daily dose of Five Things was FOMC Preview: Their Greatest Fear. ..... Stocks may still be up but as Professor Bennet Sedacca noted on the Minyanville Buzz and Banter this morning, financials rallied huge yesterday, but what about corporate spreads, the true barometer of the health of the financial industry? "Believe it or not, spreads on brokerage and bank corporates are actually wider than yesterday morning," Sedacca said. That means someone has it wrong. Either equity investors haven't woken up to credit market problems, or credit markets are overestimating the risk of owning corporate debt. "My guess is the credit market has it right," he said. This explains in part why it feels so treacherous right now. If the markets have decided that too much credit is too easily available, as it appears they already have, then the Fed can simply lower rates to make credit more available. Problem solved. But what if there are two separate but related forces at work: tightening lending standards and reduced credit appetites? Then the Fed has something more serious on their hands. The key in all of this is not inflation, as most believe. The Fed says they are most worried about inflation risks, but the reality is that they are most worried about deflation risks. Always. Always deflation. The Fed has no choice but to always remind us that the risks are tilted toward inflation, just as the Treasury Secretary, whichever one happens to be in office at the time, must always say that the U.S. maintains a strong dollar policy, even if monetary policy and fiscal policy are conspiring to devalue the dollar. As for equities, when the dollar begins to rise, and it appears the Fed finally will begin to cut rates, as they inevitably must to try and sustain credit consumption, then it's time to worry. That means deflation is winning. ...continued.... > Big Ben will no doubt be loading the helicopters. Mqurice