so what is the more likely scenario...

[ret5hd]

i am particularly interested in the opinions of papau, Roger Ashton and Rapier2, as their knowledge was recommended to me but i am interested in all opinions.

(in your opinion)
after the coming crash what is the more likely scenario:

hyper-inflation - all those foreign owned (and newly minted)dollars floating around reducing the "value' of our money

or

deflation - nobody buying anything but necessities creating a surplus of goods with no money chasing them?

neither scenario very good but whats your (and others) opinion?

[RobertSeattle]

1. I think the GOP needs to GROW UP and raise taxes

They've boxed themselves into this stupid corner with their "no new taxes" mantra. We can't grow our way of of these structural deficits without raising taxes on those who can afford to pay them.

[ret5hd]

2. i agree but it is not just the govt that is running a deficit...

seems every month i hear that last months trade deficit was a record.

$2Billion in foregn investment a DAY needed to break even. that cant last forever.

edit:day not month.

[RobertSeattle]

3. Ahhh - thanks for the clarification

If you want a good laugh, read this Hertitage article during the Clinton Administration I just googled-up.

http://www.heritage.org/Research/TradeandForeignAid/bg1039.cfm

Trade deficits are more a sign of strength than of weakness.

[Starfury]

5. John Mauldin is predicting recession in the near future.

John Mauldin, another conservative, apparently disagrees with the Heritage
Foundation, at least on our trade deficits. If I understand what Mauldin's
saying in latest newsletter, he's predicting rising interest rates as well as
slumping housing and stock markets that will probably culminate in a recession
sometime in the next couple years. Anyway, hope you don't mind my quoting as
much as I did, I thought it was an interesting article.

The full newsletter covers a lot more and is here:
http://www.frontlinethoughts.com/printarticle.asp?id=mwo030405

...

"Except the vast majority of money coming to the US is not buying Apple, but US
treasuries, which are demonstrably low margin and if you are buying with a
foreign currency, a depreciating asset.

I can see the point if we were talking about a trade deficit of 2-3% of GDP, but
we are now talking about 6% trade deficits on our way to 7%. This is
unprecedented in world history. We are absorbing 90% or more of the total world
savings. Our deficits are growing faster than world savings. This is an
unsustainable trend. Thus it will end."

...

"Whether from rising US rates or simply the end of a cycle, the US will
eventually fall into recession. The engine of global growth will sputter, and
this time it will be the consumer that is the problem. Whether that is in 2006
or 2007 or even later, it will happen. The business cycle has not been repealed.

You can count on a major stock market decline in the next recession. The average
decline is 43% in a recession. Can we say Dow 6,000? That means many boomers,
who are only a few years from retirement, are going to be very disappointed, to
say the least.

Do you want to see an increase in US savings? Think 5-15 years to retirement and
not enough money to retire. The next recession will shatter the confidence for
the Boomer generation in the stock market. They will no longer be able to count
upon a rising stock market to enable them to retire at the level to which they
had intended to become accustomed. At that point, the long run for them will be
tomorrow.

This, along with a potential slump in housing values, will do more to change the
American consumer psyche than high rates or rising prices from a lower dollar.

This for me is the trigger for the Muddle Through Economy for the decade which I
am forecasting. Oh, I forgot to mention that a consumer recession in the US will
not be good for Asia or the world. This also forces Asia to find new sources for
sales. They will have to look inward. As will Europe.

I think the chances that we can skate through the trade imbalance with no effect
upon the world or the US to be a probability of only 10%. I think the soft
depression that Bill Bonner and others see is a 20% chance. Such a dire event
will require serious mistakes upon the part of governments, like protectionist
legislation and/or monetary profligacy. Of course, Bill has less than no
expectation for governments to get anything right, so his view is consistent
with a soft depression.

I think there is a 70% chance we Muddle Through. The dollar will drop (which
offers some good investment opportunities). It will not be fun, but then we have
all been through lots of recessions and such. After all, we did survive the
70's. The US economy will recover, as will the economies of China and Asia.

I am actually quite optimistic about the future, after we meet the challenging
times of global rebalancing. I think the boom after that could be even bigger
than the last one, but we have to cross the river of balancing world trade
first. It will be a difficult crossing."

[DU_ONE]

4. both

hyper-inflation - all those foreign owned (and newly minted)dollars floating around reducing the "value' of our money

and

deflation - nobody buying anything but necessities creating a surplus of goods with no money chasing them

[sendero]

6. Can you reallly...

.... have both?

Inflation is paying more dollars for the same goods/services, in essence a less valuable dollar.

Deflation is a nightmare scenario where there is so little currency its value increases so you pay less dollars for the same goods/services.

[German-Lefty]

7. My nightmare scenario: Inflation mostly

Money and bonds will get dumped back into the US economy, in exchange for whatever they can get over years. Financing the debt will lead to a tough choice/combination of printing more money to cover payments and/or paying really high interest on bonds.

Maybe America will have a yard sale where they sell off lots of strategic assets like technology, patents, intellectual property, military play toys, and oil rich areas like Alaska.

Taxes will have to be raised and spending will have to be cut dramatically. Banks will be compelled to buy lots of T-bonds, so investment will be hit hard.

Nobody will know where the dollar will stop falling so it will be kind of like deflation for other currencies. This year my euros can buy me a house in America, next year maybe a plantation with some slaves(working poor) on it.

Politically everything will go to hell. Republicans and democrats will blame each other, the Mexican immigrants, the EU, etc. A civil war will break out, with states trying to break away to leave the national debt. The uncertainty of property rights and security will further hurt investment.

Dogs and cats living together. Mass hysteria. .........................................................
Ok, maybe it won't be that bad.

[Rapier2]

8. notes

Firstly a 'crash' cannot be assumed. Besides which the term is vauge. There was a stock market crash in Oct. 87 and the economy was not affected much at all and the market quicly recovered. The 29 experience was of course much grander and is I suppose the scale of thing you ask about.

My personal opinion which is of no real preditive value is that a major crash will only come from an event or events external to the markets. Things such as nuke terrorism on NYC or DC, or some grand ecological or geological event or some war type thing which causes massive intermediate term oil supply disruptions.

While the world economy is beset with massive inbalances and from them might spring some sort of market panic, the nature of the current system and indeed the root of the inbalances, and out of control credit system creating rolling bubbles in various assets classes and entire countries, contains within it a mechanism to stop or mitigate a major crash. That mechanism is the ability to create ever larger floods of money in order to keep the markets from freezing up.

A crash or panic in modern financial markets always means one thing; a liquidity freeze up. Liquidty meaning money. Central banks worldwide led by the mother central bank, ours, are set on a course which guarantees they will do whatever it takes, which essentially means creating enough money to throw into the financial markets and even intervene directly into the markets, in order to prevent any liquidity freeze up in the financial markets. In the common parlance that means they will print money in any quantity in order to keep a bid under any distressed market in order to prevent a seize up or panic.

Now comes the inflation/deflation thing. That 'printing money' will (as it essetially has been years) be for and aimed at inflating financial markets. The economy might suffer big setbacks but the intent is for the prevention of big losses on financial markets like stocks. They will inflate financial assets. THe thing to recognize however is that they will do it by deflating the currency. In fact one might say that all inflation is the result of debasing the currency.

This is the moneterism arguement. The one Friedman won a Nobel prize for. The theory he abondoned in 2000 because he refused to acknowledge that rising stock and financial asset prices were inflation.

At any rate if they can stop any panic in the markets then any 'crash' , any one or few day decimation of markets, will be impossible. That does not mean we cannot have a slow crash in the real economy where jobs disappear and huge numbers of people approach impoverishment. WHere the majority of Americans see an obvious loss of income versus prices.

I'm argueing that I anticipate something of the latter, a weakness of maybe profound degree for many workers but for holders of financial assets a comfortable floor will be built. In other words socialism for the rich will be enforced. The very act of inflating assets will only make things worse in the real economy but that worse will be slow in comming and lots of excuses will be used to keep the little guys distracted. It will also prevent a 'crash' in the financial markets which would forment a political crisis.

Deflation seems almost impossible with money being created in a flood world wide and that fluood could be a tsunami on a moments notice.

[papau]

9. from the above posts I would summarize - folks do not kmow the future?

Seems reasonable!

A japan like economy with very low interest rates as money floods the system but there is little to invest in so the rate of interest goes to zero is one senario. "stagflation" is another. "Growth" based on accounting games like product improvement and increased "productivity" meaning fewer jobs with more and more folks locked into being poor is yet another.

And inflation - always a question. :-( more dollars chasing the same goods should raise prices, while a Japan like flood will bring interests rates to near zero as there is nothing to invest in, causing current corporate costs to drop - and current prices to be stable.

My best guess is the inflation and higher interest rates and recession and job loss - but a small dip - not 40+%.

The Clinton "tax the rich, deficit under control, stop stealing gov contracts for corporate welfare" keeps one on a path for prosperity -
but is easy to fall off of that path if you chase BS like consumption taxes lead to more growth than income taxes (ask someone why there is less "friction" and and more growth - and don't laugh when - after you point out all they have said is the a collection method for funding government that affects/takes less from the rich will by magic produce more economic activity - the conservative you are talking to starts to tell you that despite the lack of studies that prove his point, the conservative just KNOWS that not taxing earnings on savings is the key future growth!). The stat correlation - and math relationships - that say more more savings make more investment which makes more growth - are never forced to explain the situation in Japan. The stated relationship exists - but we obviously are a few Nobel's away from really understanding it!


hyper-inflation via the trade deficit is unlikely as trade is not that big a deal in our huge economy - although it is a big deal- and inflation can be/will be caused.

deflation - nobody buying anything but necessities creating a surplus of goods with no money chasing them - is the crazy world Bush and Greenspan were pushing us toward - but I think that has ended - even the GOP is talking about ending 25% of the Bush 3 tax cuts!