Deflation

verfasst von Aristoteles, 10.07.2002, 22:15

oder wie dottore zu sagen pflegt: alle Preise werden fallen

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DEFLATION
by Bill Bonner


There is no greater genius than the man who bounces our
own ideas right back at us.

That was our first thought upon reading a subscriber's
letter to Richard Russell, on his website.

The subject was the fate of the dollar...and the
economy. Like Barron's and now Forbes, the writer had
come to the same conclusion we had: both are headed
down.

We take it for granted that stocks are in a bear market.

What goes up, goes down. That stocks are on the downside
of the cycle seems almost too obvious. Of course, it if
were any more obvious, the yahoos and patsies would have
seen it already and already forsaken stocks. They have
not yet; so the bear market must continue.

But what of the rest of the story? Whither the dollar?
What will happen as the Fed desperately tries to revive
the economy and the stock market? Will inflation
suddenly erupt, like a pimple on a 14-year-old...and
spoil the picture?

Most economists will tell you that the economic system
is controlled by mood changes at the Fed. When the Fed
governors feel the need for a little more bustling about
in the nation's shops and factories, they administer a
little"coup de whiskey", as Fed chief Norman Strong
once put it. When they are in the mood for calm, by
contrast, they take away the whiskey bottle and the
party soon dies down.

Since WWII, the Fed's mood swings do seem to correspond
with the ups and downs in the economy. But sometimes
things happen even if America's central bankers are not
particularly in the mood for them.

"Despite a flood of money and credit creation, and
despite widespread predictions of recovery, the markets
refuse to cooperate," writes Dr. Kurt Richebacher in his
July letter."Why? In short, because we are not
experiencing a cyclical recession, and therefore a
cyclical recovery is not on the way. Instead, the U.S.
economy is sick to the bone."

The sickness doesn't seem to yield to a shot or two of
whiskey."For the first time in the postwar period,
monetary easing - even the most aggressive easing in the
Fed's history - is proving a flop in kindling a stock
market rebound," Richebacher explains.

But all this extra money in the system is bound to have
some effect, right? Won't it show up as inflation - if
not in equities, at least in consumer prices?

Ah...maybe not.

"China is exporting deflation at a very rapid rate,"
explains Mr. Russell's correspondent. Almost no matter
what Americans or Germans can make - the Chinese can
make it cheaper.

Plus,"Russia is now moving towards becoming the world's
largest supplier of most industrial commodities
(including oil) and they too will use their competitive
advantage and sell their goods cheaper than anyone
else," he continues.

But as we mentioned above, nothing ruins a good economy
faster than too much easy money. Thanks to Alan
Greenspan and the Fed,"the U.S. private sector debt
alone is over 280% of GDP," Russell's reader explains,
"and is the largest debt pile in world economic history.
The U.S. telecom sector alone has more debt than the
entire Japanese property sector did or has."

"In the first quarter of 2002, consumers borrowed at an
annual rate of $695 billion - breaking all previous
records," Dr. Richebacher elaborates."Their incomes, on
the other hand, rose at an annual rate of only $110
billion. And for the 12 months ending in April of this
year, $5.9 dollars of debt was added for every $1 of
growth in GDP."

Adding debt to the system is inflationary: there is the
illusion of greater purchasing power, which boosts up
whatever market is hot at the time. Stocks went up in
the '80s and '90s; now real estate is having its turn.

If only it could continue forever! Alas, that is not the
way of the world. For each additional dollar of debt
produces less and less economic progress...and is
therefore a heavier burden than the dollar that preceded
it.

At some point, people realize that they cannot afford to
continue borrowing - their debt-service payments have
become too much of a burden. Instead, they have to cut
expenses and pay down debt. Then, prices fall...sales go
down...jobs are lost...and the economy sinks into a
deflationary recession.

This, of course, has been the economic history of Japan
for the last 10 years.

More to come...

Bill Bonner

p.s. There is another little detail to the Japan story
which the letter writer noticed:"It amazes me that most
people miss the appalling demographics in the Western
World," he continues."This is the thing that keeps me
awake at night. By the time a 31-year-old retires at 60,
almost 50% of the population of the Western world and
Japan will have retired before him..." (Hmmmn...)


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• Deflation - Aristoteles, 10.07.2002, 22:15