--><font size="5">Debt Deflation, Godzilla-style </font>

The Daily Reckoning
Weekend Edition
May 31 - June 1, 2003
Paris, France
by Addison Wiggin

All"this talk of deflation/inflation is confusing," writes a
reader from Australia,"it is as if we are going to get one
or the other in spades depending which way we fall of the
cliff.

"Here is my thought - could this happen?

"Prices of large asset like houses, businesses, etc. fall
heavily (deflate) as demand dries up - for various reasons -
like no credit availability, lack of employment needed to
meet repayments, lack of cash-flow to service existing debt.

"At the same time we get hyperinflation due to collapse of
the US dollar, as it is dumped by foreign holders, resulting
in prices of life staples - for which demand is rather fixed
- ratcheting up steeply oil, gas, food, etc."

The short answer is: yes.

On my recent sojourn to the States, I had the good fortune to
meet up with Bob Prechter, author of the recent best-seller,
Conquer The Crash, at his offices in Gainsville Georgia.

Bob, who was kind enough to give us a critique of a book
we've written ("Financial Reckoning Day" John Wiley & Sons
due in bookstores in September), is one of the foremost
experts on the subject of deflation writing today. During our
discussion Bob suggested, while it's hard to get your head
around, the prospect of deflation on big ticket items in the
face of hyperinflation in commodities and"life staples" is
very real.

The problem is how you define your terms.

On the one hand, as Lew Rockwell points out this week on the
Mises.org site,"price deflation" brought on by competition
or innovation is good for consumers and businesses. If you're
in the market for a new car, a new house or you're about to
get whacked with a tuition bill for your children's college
education -"price deflation" will come as a"glorious"
surprise.

Likewise, if you're a producer of finished goods, price
deflation is a welcome development in the marketplace."You
are a manufacturer and your main expense is steel parts,"
suggests Rockwell,"After many years, even decades, of rising
prices for ball bearings and other machine parts, your costs
suddenly decline. That leaves more money for investment,
marketing, paying employees and enticing investors with
dividends. It's a win-win situation for everyone."

"What deflation does," writes Rockwell,"is provide a
disincentive to borrow and an incentive to use current
savings for purposes of investment. It means a reward for
well-capitalized companies and individuals."

Therein lies the problem.

Looking for insight in"the lessons of Japan" over the past
decade (an activity we're rather fond of ourselves), Morgan
Stanley's Stephen Roach pointed out on Friday that while
Japan's banks are perceived to be the speed bump on the road
to recovery there... historic levels of debt in America play
a similar obstructive role here at home.

"America," writes Roach,"has record debt loads, especially
the household sector, where debt-to-GDP currently stands at
80% -- fully 15 percentage points above the ratio prevailing
in the recession of the 1990s."

American consumers are not of the"well-capitalized" variety
that Rockwell suggests will fare well in a deflationary
environment."Should deflationary risks get to the point
where Corporate America needs to slash labor costs more
aggressively -- both headcount and compensation," warns
Roach,"that would severely impair the household sector's
debt-servicing capacity. The result would be a sharp increase
in non-performing loans and a concomitant outbreak of
distress in the American banking system."

In other words, a banking crisis of Godzilla-like proportions - and
credit contraction across the board despite the best intentions of
Greenspan and his merry band of printers. The Fed has indicated they
intend to do everything in their power to stave of the"remote"
threat of deflation; including destroying the currency they had been
chartered to protect.

"Since 1913 and the founding of the Fed," Rockwell writes,
the dollar has lost 95 percent of its value. It is far more
likely that this robbery will continue rather than for our
lost purchasing power to be restored to its rightful owners:
you and me."

Of course, we're only guessing, but chances seem high that
we're facing a drying up demand for high-ticket items that
require financing... and a continuing destruction of the
nation's paper; resulting ultimately in a rapidly declining
standard of living for those bearing it.

Regards,


Addison Wiggin,
The Daily Reckoning

P.S. With interest rates at 40 year lows, you already know
your bank is paying nothing... and now, with the dollar
falling, even if your money is sitting in the bank - you
actually risk losing a great deal of your wealth.

And we are talking about all your money. not just your actual
spendable wealth - cash in the bank - but the underlying
value of all the U.S. dollar denominated assets you own -
including your house, securities - everything.

But you know what? You don't have to lose it, just because
the dollar is falling. In fact, if you play your cards right,
you could even make a buck or two. There are many countries
where you can find higher interest rates AND see the value of
the currency rise against the falling U.S. dollar.

On Wednesday, I wrote to tell you about Everbank, a bank we
work with in the US, offers FDIC insured foreign currency CDs
- in all of the major currencies.

With Everbank's foreign currency CDs, you can take advantage
of both the higher INTEREST available on many overseas
currencies. and any RISE of that currency against the US
dollar. For example, if you earned 5% interest and the
currency you purchased goes up against the U.S. dollar by 10%
you would make a 15%+ return in a year - on money sitting in
the bank.

Everbank, which has over 25,000 clients distributed across
all 50 states, has been offering its World Currency accounts
since 2000, and the team that manages their currency division
were pioneers in this area, starting together with Mark Twain
Bank over a decade ago.

While the stock market has been falling out of bed and bond
investors scraping for pennies, Everbank's currency accounts
and certificates of deposit have been hitting home run after
home run. The following returns are calculated by adding
together the interest earned and the currency appreciation:

Currency YTD '03 Past 12 mos*
Australian $ 19% 22%
British Pound 3.25% 16%
Canadian $ 18% 16.25%
Danish Krone 12.5% 29.5%
Euro 12.25% 29%
New Zealand $ 13.5% 30%
Norwegian Krone 5.5% 27%
South African 15.5% 41.5%
Swedish Krona 12% 30.25%
Swiss Franc 7.25% 22.5%

How's that for money sitting in the bank?

Contact Chuck Butler or one of the other specialists at
Everbank World Markets right now by calling 800.926.4922.
Mention that you heard about Everbank from Addison and
they'll be happy to send you a copy of the comprehensive
"Decline of the Dollar" research report Chuck wrote earlier
this year.

(Everbank is the nationwide division of First Alliance Bank,
ranked"superior" by IDC Financial Publishing, and it's FDIC
insured, just like your local bank.)