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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (76530)	3/19/2008 9:03:27 PM
From: Real Man	Respond to of 116555

I know the story, Mish. Money on credit. Ka - boom, and credit evaporation. That is deflationary. Happens every time in currency crises. 98% of the banking system collapsed in Russia in 1998. T-bonds are not risk-free. In fact, I would argue T-bonds are in mania, driven by safety/credit risk concerns, since real Yields are very, very negative. However, prices won't drop, they will rise, as US imports everything. What usually happens? Currency crash, stock market crash, as the credit crisis spreads to government bonds. Complete mess. These are not risk-free - US government GAAP liabilities are - 57 trillion.

To: mishedlo who wrote (76530)	3/19/2008 9:21:44 PM
From: Real Man	Respond to of 116555

I guess the crucial difference is Japan's current account surplus, that remained structural in spite of the Yen rise. As the Japanese economy crashed, the current account surplus obviously had to widen, since internal demand sagged, leading to continued rise in Yen. US has a similar story, with deficits. Those seem to be structural, unfortunately, and don't seem to dissipate as the dollar drops. My hope is they will, eventually, otherwise we are in for a big mess. Lowering rates in this environment creates more of a currency drop, not less.

To: mishedlo who wrote (76530)	3/19/2008 9:38:26 PM
From: Real Man	Respond to of 116555

I think the Fed's big jokes with SOMA drains were aimed to contain the currency crisis, which has reached rather epic proportions ever since the Fed started cutting. The effect of the huge drains is obviously dollar-positive, but it caused only a small goose bump for the dollar, 71 to 72, so the Fed is failing there as well. They can't do it forever - 60% of SOMA is lent out, and if they drain the other 40%, they run out of securities to lend. They will have to print if they want to keep the rates low. That will produce a sort of Weimar experience, along with debt and stock market collapse.