Amid Pressing Problems, Threat of Deflation Looms

[David Farber <dave () farber net>]

Begin forwarded message:

> From: dewayne () warpspeed com (Dewayne Hendricks)
> Date: October 18, 2008 7:53:28 PM EDT
> To: Dewayne-Net Technology List <xyzzy () warpspeed com>
> Subject: [Dewayne-Net] Amid Pressing Problems, Threat of Deflation  
> Looms
>
> [Note:  This item comes from friend Charlie Brown.  DLH]
>
> From: Charles Brown <cbrown () flyingcircuit com>
> Date: October 18, 2008 10:46:36 AM PDT
> To: Dewayne Hendricks <dewayne () warpspeed com>
> Subject: Amid Pressing Problems, Threat of Deflation Looms
>
> Hi,
>
> Check these brief articles out for a brief discussion of deflation.
>
> <http://online.wsj.com/article/SB122428776277746551.html>
>
> <http://online.wsj.com/article/SB122419852898842701.html>
>
> And the article below, which describes the dynamic but misinterprets  
> what is actually happening.  Japanese banks' unwillingness to  
> transparently disclose the extent of their losses post their bubble  
> is analogous to the opaqueness of the derivatives market,  
> specifically, the Credit Default Swaps (CDS) market of $55 +  
> trillion.  Both situations display a clear lack of political Will.   
> IOW, I disagree with the implied conclusion of the article, i.e.,  
> deflation is not a risk in the US because it's financial system is  
> inherently transparent and the politicians can't hide the problems  
> in league with the banks.  Granted, the article was written on Aug,  
> 21 but explains my argument about how the US looks very much like  
> Japan post its 90's bubble in real estate and securities markets.   
> The CDS losses are not transparent, and the current policy of the US  
> Treasury is similar to that of the Japanese government in the early  
> 90's;  "de-leveraging" in Wall Street-speak, which is nothing more  
> than a policy of keeping the banks' equity wealth intact for its  
> shareholders and related parties - Wall Street.
>
> <http://www.economist.com/finance/displaystory.cfm?story_id=11964819>
>
> The deflation scenario is becoming more likely by the day, which  
> means that the Fed and the EU's central banks will be running the  
> printing presses overtime.  Thus, Bubble #3 is vying as the dominant  
> theme, drive by a psychological reaction of fear and greed.    The  
> printing presses are rolling 24x7.  The downside risk is hyper- 
> inflation, similar to the 80's reaction to the post-70's decade-long  
> recession.  The underlying political theory goes something like  
> this:  How do you discount American household and other debt and  
> keep the American middle class whole?  Inflation;  discount their  
> debt.
>
> Time to revise my top four scenarios slightly.
>
> Scenario 1 - Bubble #3 and post-bubble inflation/depression.  This  
> has always been my favorite.  The salient risk that could undue this  
> scenario is the collapse of the dollar, but if the other central  
> banks in the EU are also printing, which they are, then currencies  
> are more likely to adjust accordingly.  IOW, the Chinese yuan will  
> appreciate.  We need to watch how China plays this scenario since  
> they are holding $2 trillion in dollar reserves.  If the dollar  
> collapses all bets are off on the bubble #3 scenario and the US  
> moves directly to Scenario #2.  In any event, post-bubble #3 will be  
> the Mother of all Depressions unless the banking systems' balance  
> sheets have been completely repaired accompanied by a very heavy  
> regulatory imprint, worldwide.
>
> Scenario 2 - Deflation.  This is "The Weasel's" (Bernanke's) worst  
> nightmare.  It wipes out the American middle class and leads to  
> Great Depression #2.  For the wealthy, it is an opportunity to  
> accumulate more wealth.
>
> Scenario 3 - Very slow worldwide growth, gradual "de-leveraging"  
> accompanied by unabated risk of Scenarios 1 or 2 to the fore at any  
> time.  Japanese-style, decade long recession, accompanied by weak  
> dollar and healthy export sector competitive with much  appreciated  
> Yuan and Yen.  Possible stimulus to American manufacturing sector.
>
> Scenario 4 - The Mother of All Compression Parties forced by a  
> political Will to cleanup the derivatives market, losses subsidized  
> by government funding and effective regulation of the financial  
> system.  Big Question:  Can the world's governments afford it?  At  
> the moment, the US Congress doesn't even understand what is going on.
>
> To say that the world economy will remain on tenterhooks for the  
> foreseeable future is an understatement.
>
> The extent of the cynical damage these people and institutions have  
> caused hasn't sunk-in yet.  The reason that this is clear to me is  
> that if people really did understand the extent of the potential  
> damage to the social order, there would be necktie parties on  
> Capitol Hill and Wall Street.  For those who do understand, this  
> desire for justice and reform will be slaked by show trials.
>
> The combination of bad government and Wall Street greed can be  
> lethal to a capitalist system.   The principal difference this time  
> is that they managed to export it.  Japan and China were about the  
> only major banking systems not to take a bite out of the proverbial  
> apple, but then they have their own set of unique financial and  
> corruption problems.  You may surmise the political reaction to this  
> in the near future in countries around the world.   This should be  
> rather interesting to see evolve.
>
> With the likely exception of George Bush, most political leaders  
> around the world remember the German Weimar Republic during the 20's  
> and early 30's.  The various political systems and leaders around  
> the world will cooperate with each other out of fear, pure fear.  If  
> they fail, the mature democracy (US) among then may follow  
> historical pattern and enter the final stage of all Democracies and  
> Republics;  the age of the demagogues, or the the age of the  
> Emperors in the case of the Roman Republic.  Only the US in the  
> 1930's could have produced Huey Long;  Germany, Hitler, and so on.
>
> In the name of greed = ignorance, our inheritance has been  
> squandered and or posterity polluted.  If I had been completely  
> honest with myself I would have admitted years ago that the  
> Hamiltonian vision of this Republic had prevailed, even before the  
> Civil War.
>
> Charlie
> RSS Feed: <http://www.warpspeed.com/wordpress>




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