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Pillars of deflationists' arguments disputed; entered at 2007-12-02 19:53:41

Agi
Posts: 194
Registered: 2007-10-21

Genesis wrote,

Quote:

[snip]
The bottom line here is whether credit creation can continue at the accelerating pace required to make debt service possible.

That is where the debate begins and ends.

In 2004, the answer was "yes". You saw it in subprime, option ARM, and other stupid loans which they got people to take and others to back. The root of all of this was creation of yet more credit (money) in order to prevent defaults the last time around (during the tech implosion)

Now, given that these are now defaulting, can there be another pump of credit?

Ask yourself one thing - "what's the collateral to be pledged, and how would you value it?"

In the end it all comes down to the credit cycle. When the collateral available to be pledged has been exhausted then the cycle must end and that end is by definition deflationary.

We may be there or we may not, but I believe the odds are increasing that the cycle has either reached or is very close to its terminus through the developed world.
[snip]

Maybe that's a good question to ask Schiff on his next show. He has a more thorough understanding of the issues than myself obviously, as he has a degree in finance and accounting, has had a company based on his ideas for several years, has a written a book on the subject, etc.

My guess is that he will say something like,
* private credit creation in the US is over for now,
* there will not be another pump of private credit in the US,
* there may be another pump of public spending, financed by monetization of the US debt. I think he'll say he doesn't know if increased public spending, if any, will be large enough to offset private debt default,
* yes what you've described is going to be deflationary, unless public spending is large enough,
* has the credit cycle reached its terminus throughout the developed world? I don't know but I'm guessing he'll say no.

But then I'm going to ask him, assuming public spending is not sufficiently big, what's going to offset those deflationary forces so as to make holding US dollars a losing bet. Then I think his answer is going to get back to some of the points I made earlier.

We'll see, I don't know for sure what he's going to say.

2007-12-02 19:53:41