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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: Elroy Jetson who wrote (45113)	1/10/2009 9:13:43 PM
From: THE ANT	1 Recommendation Read Replies (2) \| Respond to of 217740

May have started in 1980 but is about one in 70 year phenomena.My thoughts are as follows.The Fed did a fair job of controlling inflation as measured by their measures of PPI/CPI.They just missed another whole dimension of inflation,that being asset price inflation.Now lets look at assets in isolation.Asset prices should over the long run rise or fall based on the return on these assets.Over the long run houses tend to trade at 4-5X average family income or 0.7% a month rent and stocks at PE 10-12.Any increase or decrease from these ratios is likely short term and speculative(could be positive or could be negative).If stocks rise but PE stays at 10-12 then productivity/return has increased and this should not be inflationary.Now there is the possibility of a paradigm shift.What if the financial system creates a series of novel products that somehow allow debt to GDP ratios to go from a long term 130% of GDP to 380%.Houses now trade at 10X family income and stocks at PE 20.Asset holders have in effect doubled the value of their assets relative to wages.Lets give the Asset/Wages ratio as 1/1 for the period 1940-1980.During the recent bubble the ratio goes to 2/1 and asset holders feel like the have doubled their claim on wages.They can retire on these assets and live on asset return and gradual sale of assets.The new ratio of 2/1 distorts all decisions made by the public as they think the ratio is permanent.Now Lehman goes belly up and overnight the emperor is seen to have no clothes.The asset/wage ratio must return to 1/1.Lending freezes up and borrowers do not want to borrow (both good economic decisions)The govt steps in to try to return Debt/GDP ratios towards 380%.They can not recreate this masterpiece which required two generations to die in the desert,20 years of Minshkys "stability creates instability",absent regulation,and tens of thousands of our best and brightest working on Ponzi schemes.A 2/1 Asset/Wage ratio can not return.Any attempt to create inflation would only raise both assets and wages and not change the ratio.Infact I will argue that inflation will decrease Debt/GDP and make the Asset/Wage ratio go in the direction of 0.9/1 by furthur driving down real asset prices.Since the Fed did not monetize all these years they only stretched the rubber band and it is snapping back with a vengence as there was no paradigm shift.I agree with you that debt liquidation and deflation is the best course as it should allow lower rates and a Asset/Wage ratio in the direction of 1.1/1 vs .9/1 for the inflationary route.Lower rates will keep Debt/GDP ratio from falling so far.Just like the Great Depression there is no true way to avoid the pain.Just like the Great Depression income disparity will fall as the rich go down towards the poor