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Elephants in the Room



There were several points that Greg Weldon, John Succo, and I made on the macro panel in Ojai that are worth reiterating here, simply because they dominate the landscape in a massive way such that ALL other analysis must take them into account before reaching any conclusion:

(1) Bond yields and inflation have been coming down since the early 1980s: a secular deflationary trend. What this means is that aggregate time preferences are decreasing and not increasing and thus the Kondratieff cycle is not at all complete. What makes this long term deflationary trend so alarming and dangerous is that central bankers everywhere are trying desperately to ward it off - to reflate our way out of the Kondratieff cycle. Austrian economics (and common sense) suggest that you can't get something for nothing, which means that such reflationary efforts will (1) fail and (2) prove to make things worse at the extremes: at the credit-contraction, deflationary low and eventually (next decade by our analysis) the hyperinflation peak.

(2) The last 20 years (and most pointedly the last 10) have seen a massive credit bubble. This massive credit bubble - sourced from aggregate individual actors' time preferences (again, decreased) and aggravated by central bankers' willingness to steal from savers and 'lend' to debtors - has misaligned production and consumption patterns throughout the world and thus caused massive capital misallocations globally. Too many cars, homes, and George Foreman grills are being made, and too few mines, timber sources, water purification technologies, and oil reserves being built/explored. This misallocation will become patently clear once the central bankers have re-directed and depleted enough of the 'real' savings in the world economy. Once that happens, no amount of reflation will suffice: they will be pushing on a string because - as John pointed out - for every dollar/yuan/euro printed up, you gotta have a person willing to use it; you must have a debtor willing to take it. Once you don't; once the velocity of money gets critically low and 'real' liquidity declines meaningfully (which it already has since July 2003), the gig is up.

No amount of inflation, earnings, or GDP parsing can subsume these 'laws' of economics. And no amount of arm waving can dismiss these secular trends in time preferences.

Those two elephants are already in the room. The only question is if you recognize them or not.

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