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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 (88565)	11/7/2007 3:23:03 AM
From: basho	Read Replies (2) \| Respond to of 110194

Agree that credit contraction is a clearer and more accurate term than debt deflation. I just tend to accept other's terminology so long as I understand what they're getting at. Or at least think I do! As for whether deflation is possible, I continue to think it is but accept this is a true minority position. Even the doom and gloomers lean towards inflation, largely I think because they all believe the Fed will do what has to be done. I have my doubts. Not about their intention to prevent deflation but about whether they'll manage to pull it off. I wouldn't be surprised if they end up chasing events as they unfold. To see why this might be the case, try to imagine yourself actually taking the detailed decisions (in real time and under the microscope) that would be necessary to counteract a snowballing credit contraction with derivative bombs going off in entirely unpredictable ways, massive data and market confusion and immense pressures from all sides. Including within your own institution. Ultimately, they'd have to be willing to stand in the market and "bid for the lot", I suspect. Once panic passes a certain point and genuine risk seeking capital is shrinking by the minute, the temptation amongst players of all kinds to hit the bid could get almost overwhelming. I don't envy them if the levees break, that's for sure. P.S. As for the great 'flation debate, should such a scenario unfold, I'd guess that asset prices would severely deflate, in rough proportion to the gearing in each asset market. Prices on everyday goods might well go the other way, however, much as happened in many countries during the Asian crisis in 97-98 when their currencies collapsed.