Is it just me or is it simply wonderful to again be getting regular missives from Mr. Practical?

If (or should I say when) you again move, please don't fall off the radar screen. You are of immense value and benefit to Minyanville and now more than ever we need your insight.

mr practical--

thank you for breaking these concepts down for us in a manner that is digestable. I, for one, am truly grateful.

minyan Eric Majeski

Mr. Practical: Have you ever thought about writing a book? (Of course, maybe you have.) Your ability to see to the core of the most important investment issues and then explain them in clear, understandable language is unparalleled. Do us all a favor a write a book on all this stuff. It would be of immense value. (I'm sure you could even author it with your nom de plume intact.)

Mr. Practical, we are extremely greatfull that you are writing regularly on minyanville.com. Thank you very much...

Question concerning QQQQ's inverse relationship to the dollar. If the "safety" of tech, has been the cash on the balance sheets and no need to finance. The drop in the dollar leds to possible more exports. At what point does the logic change to the cash on the balance sheet is worth less than the incremental increase in exports ? And are we seeing that begin today with the dollar down and the QQQQ's down? If you have the time, it would be appreciated Thanks

Mr. P,
Thank you for this article.

I too am in the deflation camp. More specifically the Japanese scenario (long period of weak economy, deflation, and higher gov. debt)

But there are two twist that concern me (that may not happen):

1.Julian Robertson discussed the possibility of foreigners not buying our debt (resulting in rising interest rates, rising savings, further weakened economy)
But there are two other possibilities:
a) The Treasury may simply pull back the stimulus (economy slips deeper into recession)
b) The over-valued equity markets could correct thereby providing a source of funding for Treasuries in a flight to safety.

I would say the key point, is that the money must come from somewhere

2. The dollar "reset" we previously discussed. The magnitude in the Great Depression was 60% switching the economy from (debt deflation, consumer price deflation) to (debt deflation, consumer price inflation). This of course did not happen till Fall 1933, a while after the crash. But now the berries do have the benefit of historic hindsight.

the dollar is down today, but it is down a very large amount against the yen (the dxy is weighted only a small 14% with yen). this is a special case. general weakness in the dollar all things excluded is a tailwind for stocks; but dollar weakness against the yen is very different. the yen over the last few years has been the source of the carry trade: people borrowing money in a weak currency to buy risky assets (a very stupid trade). as the yen strengthens that risk continues to be unwound. there was so much in this trade that it is still being unwound. this is a symptom of deflation, lowering risk. the yen was the most inflated currency of all. this is why i moved to japan: i expected yen strength as the most inflated currency goes through deflation. i caught the big part of the move from 120 to 95 while i lived there. looks like i moved away a littel early. better early than late. but this is what i now expect for the dollar: an inflated currency being deflated through debt destruction.

it all sounds like deflation to me: the reduction of the overall level of credit and money-debt. some prices of things may rise and some may fall: the riskier the asset the more it will tend to fall, the more necessary an asset (energy, food), the less it will fall relatively (and may even rise).

Mr. P,

Regarding USD vs. JPY, what made you favor USD more now than JPY? Previously, your favor on JPY was that JPY, as the dollar, was used as a carry-trade currency but JPY has the added element of huge pool of savings in Japan. Therefore, before you moved into the US a few months ago, you favored JPY over USD.

Could you explain in a bit more detail & depth why you favor USD more than JPY now? Do you expect that the huge amount of debt, unprecedented in history, to trump the effects of currency strengths due to savings?

Your insights will be greatly appreciated. Thanks for every great article you have written.

Hi Mr. Practical, is the Fed trying to offset the decline via a new carry trade with the dollar?

Mr. P.
Yes, I would agree. But I would say it's more a reduction in the standard of living. The real question being how to preserve wealth. Normal deflation is easy, but if the berries start to monkey with the dollar (counter the deflationary strengthening with a policy induced reset) then it becomes a timing and proper asset class game. The relative value of the dollar to foreign assets (of those countries with real wealth and sound fiscal policy) and commodities would in my opinion be key.
We all have been forced to become traders (in the past it was only investors, with the FED policy of inflation). Thank you FED/berries for the new poker game. We must bet which way they will play it.

All asset classes now carry a lot of risk.
Even the currency, which if deflation was left to played out, would not have any risk.

No guarantee any of this would happen.

I may not have stated his views with enough detail.

1.Julian Robertson discussed the possibility of foreigners not buying our debt ....

He believed it would lead to what I mentioned, and a dollar crash (so inflation of currency along with asset deflation).

I was countering by saying that if his scenario happened, a lot of money would come out of the equity markets, as people would be saving 25% and not spending at all. So I was not sure of the inflation, as I could see a massive flight to quality.

To summarize, I agree with the deflation thesis. But we shall see what happens to the dollar (short term and long-term). Maybe someone knows Prof Steve Keen, and he could plug these things into his models. Japan did not see any significant consumer price inflation, but during the G.D. there was (5-15%) after Roosevelt did his magic to the dollar/gold ratio.

Are we having fun yet?

It is incorrect that 'dollars are destroyed' when debt is defaulted upon. Let me give you an example. Bank XYZ lends Joe $1,000, creating 'money' from thin air. Joe spends the $1,000 , buying a car from Carl. Later on, Joe defaults. Have the $1,000 magically disappeared? No, they remain in the economy (if Carl hasn't spent them, he remains in possession of the $1,000). The only way the money could disappear were if 1. Joe pays the loan back or 2. banks were to go bankrupt in such a way that their deposits disappear (this would require not only the bankruptcy of the FDIC, but also the bankruptcy of the US treasury, which backstops the FDIC).
The most strictly defined measure of money supply, money AMS , which avoids the double-counting inherent in broader money measures that count not only money but also credit transactions, and also avoids counting the 'idle bank reserves' on deposit at the Fed, recently stood at an annualized growth rate of 14,5%.
This means that today, there is 14,5% more money in the US economy than one year ago. This is not deflation. Deflation would be a decrease in the money supply - no such decrease has occurred. Interestingly, in spite of the fact that bank credit growth and consumer credit growth have actually turned negative, there is also not less debt in the economy than a year ago - on the contrary, total credit market debt has exploded in parabolic fashion, as the government has increased its outstanding debt (much of it immediately 'monetized' by the Fed) at multiples of the decrease in private sector debt.
There may be deflation at some point in the future, if private sector debt repayments were to overwhelm borrowing by the government and the monetization of assets by the Fed, but this remains highly unlikely in an unfettered fiat money system.
What is definitely certain is that there has been no deflation to date - all that has happened is that a fall in asset and commodity prices has created fear of deflation (ironically at precisely the same time as monetary inflation went through the roof). A 14,5% increase in money AMS in one year is among the highest inflation rates of the post WW2 era (although still 5,5% shy of the Greenspan record set in 2001).
Debt defaults will forcibly decrease the amount of credit in the system, and will lead to impairment of lender capital through losses, but they will not destroy the money that has been issued. This money will remain in the economy. It remains to be seen whether debt defaults and credit repayments combined can actually overwhelm government borrowings and lead to a net decrease in outstanding credit (the Japanese experience says no, it won't happen).
In a pure fiat money system, inflation is a political decision; as an example, consider for instance that Zimbabwe managed - in spite of not a single private loan being issued by the banking system for two years and industry in a state of complete paralysis - to engender hyper-inflation. The central bank siimply monetized enormous amounts of government debt, and the government pushed this money into the economy.
This is not to suggest that the US is going the way of Zimbabwe, it merely serves to illustrate that as long as the government and the central bank are willing to do so, inflation can be created anytime.
However, no-one expects the nominally independent Fed to go down this path; it is correct, in principle, that falling asset prices and negative economic data pressure the dollar higher at present, as debt repayment becomes more difficult, resulting in a temporary scramble for dollars. In addition, due to zero percent interest rates, the dollar has become a funding currency for speculation in stocks, commodities and higher-yielding currencies. Falling stock and commodity prices thus create margin pressure that increases the demand for the major funding currency for these carry trades.
None of this changes the fact that as of yet no deflation has occurred - both the money supply and outstanding debt have continued to increase at vigorous rates over the past year.

Dear Mr. Tenebrarum,
In your example above, you are forgetting a crucial aspect of how money was created in the first place! The fractional reserve system multiplies money creation. So say your grandmother dies back in 2005 and you find $1,000 in her cupboard that has been saved up over the years. You take it down to the bank and deposit it. Over the next few months, the bank multiplies this $1,000 through fractional reserve banking to about $10,000. Anyway, then your "Joe" defaults. Since this is CAPITAL that the bank has lost through default, they must REVERSE the process of fractional reserve banking, and $10,000 of existing loans must go away (essentially by not lending more when loans come due). So through Joe's default, $10,000 in "money" vanishes. Now when a bank goes down the tubes, certainly money is re-created by the Fed (Fed buys Treasuries from Treasury, Treasury gives money to FDIC, FDIC give money to depositors). It is my contention that this mechanism will also fail, and probably before 2009 has ended. Clearly this is money destructive as well.

Julian Robertson discussed the possibility of foreigners not buying our debt

I've heard this for 30 years

We all need to close our open lines of credit to help the process.

I meant to say unused and unnecessary lines of credit

it's amazing to me how bewildering the whole question of deflation becomes -

i think i start to feel i have a handle on it, then poof, my confidence gets inflated (pun intended) away by counter arguments and maybe-if's -

but i'm not complaining, to say it's interesting is an understatement -

to say it's useful, well, i'll take mr practical's word for how well it's served him in regard to where he chooses to live, and when...

what "i" would really like to hear about is, how these choices have helped him prosper, plus, where he thinks he might go next, if that's not too soon to think about that is ;-)

i simply expect the degree of deflation at this point to tip to the dollar: there is at least twice the debt to gdp or by any other measure in usd versus jpy. the usd has now become the darling of the carry trade but i do not expect it to last very long,

i unfortunately agree...i am only human and have no idea when deflation might turn to hyperinflation. i just believe it is not soon because i don't believe even the berries will pull the full monetization trigger unless they have to. who knows. as you imply, we live in a manipulated world. one thing for sure, the standard of living of all will come down. the standard of living for those with little debt and savings should have been safe, but with government response they are spreading that around: those that have too much debt are being supported by those that didn't...the only way for that to occur is for government to confiscate that wealth from one person and give it to another.

True, One wouldn't want too much chaos (like a dollar revaluation) before a mid-term election in 2010 (Just a guess on my part, but who knows what will happen, and what the situation will be like in 2010).

We shall see. That's what makes this so much fun.