Minyan Mailbag: We Will Get Deflation
If the politicians win the day the dollar will rapidly continue on its path to being worthless.
I am of the humble opinion that what we should fear is lower, not higher, rates. You know I read everything on the site, sans rhymes, at least twice - slow is as is slow does, and I think we all know the earned respect Succo has 'Jennifer Garnered' over the last several years.
While acknowledging John's thoughts that higher rates will create a chain reaction in the real new economy (the financials, for without them we'd have zip for job creation in the last several years), it is something I believe is manageable, painful but manageable. If higher is the path we are on it is something, I believe, that most have already considered as a risk and allocated resources toward. I think we - by we I mean the combined forces of society, government and the educated investment class - can survive higher rates as long as market intervention is perceived to be in our long term best interests, and the little piggies will be "saved" by the powers that be.
Yes it would be painful and difficult but such is the nature of a free market. And while I am no fan of stealing savings via inflation, my opinion is that it is the lesser of the evils which reside in the corner we have been painted into. And hopefully a lesson for those that come after us.
What scares the bejeezus out of me is if Scott is anywhere close to right on his analysis that projects deflation in the coming years. If this happens we are in for a struggle of epic societal discord. We are not prepared for this type of event, it is counter intuitive to everything that every baby boomer forward has learned and experienced in the last forty years.
This is not a stock market call per se; more a societal one, but it may be a bond market call. Buying longer term bonds for an investment here is considered stupid by ALL. But it is the nature of the bear to eat our lunch while we are out hunting it.
Pull up the March future on the 30 year CBOT: ZB06H, reminds me of March '03 in the spooz, defined risk at 110.
Scott Reamer and I go back and forth on this regularly.
We will get deflation, the hoarding of cash. We have to; there must be a credit correction of equal proportions to the credit expansion that the Fed has engineered over the last decade or so. People must hoard cash to pay down debt and to lower risk. So it will be a doozy. The only question in my mind is how it will play out.
The Fed's solution to the weeds they have sown is to sow more weeds. They are trying to make currency near worthless in order to stop people from hoarding cash.
The great debate is how far the Fed will go in destroying any value to currency. The argument against it is ironically due to the belief that they will not fully destroy their only base of power: control of the supply of money. If money is worthless they give up their power. Many smart people I have talked to say that this depends on who is really on the margin in control, the bankers at the Fed or the politicians they serve. If the politicians win the day the dollar will rapidly continue on its path to being worthless.
Jim Grant thinks rates are going higher as foreign investors will eventually lose what little appetite they have left for the dollar and the markets tire of currency debasement. But a Fed intent on destroying the dollar's value can always monetize, a desperate venture indeed.
I have stated that no real damage will be done to nominal asset prices (the key word is nominal) until rates rise. So far I have been right. But that could change, and probably eventually will.
If Scott is right, and there certainly is a significant probability of it, risk appetite will wane and cause rates to go lower and at the same time destroy even nominal asset prices. These are strange times indeed.
The risk is high however it plays out. I still think it is likely to be a combination of the two: deflation in goods we want and inflation in goods we need. In other words, stagflation.
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