G'day Croupier Have to agree. Heres the first bit of todays "daily reckoning" cheers Rod
"It's fairly apparent that pricing power is gradually being restored and, as I'll indicate tomorrow, threats of deflation, which were a significant concern last year, by all indications, are no longer an issue for us."
Alan Greenspan was answering questions before the Senate Banking Committee. It was as good an occasion as any for him to make such a remark. He had no clue. But none of his interrogators would notice. Even if they had put his head in a vise and turned the screw as hard as they could, they would not find out anything more; Greenspan knows no more than we do.
Mr. Greenspan has lured the entire nation to stitch itself up in debt. A person who is deeply in debt loves inflation - because rising prices cut him loose from his obligations. What the debtor fears is deflation - a sinking economy and rising value of money - since it makes it harder for him to repay his debt. Already, with the lowest interest rates in nearly half a century, and unemployment at only 6%, bankruptcy rates are near record highs. Imagine how the voters would howl with unemployment at 10%... and prices falling!
How could the gods resist such an invitation to irony? It has been handed to them, engraved with the initials A.G., on a golden platter. Only minutes had passed after Greenspan's declaration of victory when the enemy, deflation, fired another round. The Dow deflated by 123 points. Bonds let some air out, too. And even gold went down... sinking once again below the $400 mark.
The dollar, on the other hand, went up. And so did oil.
A world of inflation is one in which things become expensive and currency becomes cheap. Debts, defined in terms of currency, are lightened by the in-rushing gas. But what if the gas leaks out? Couldn't one expect that those things most blown up out of proportion would be the same things that would shrink the most?
Is gold expensive? Well, not compared to the cost of a new suit; it is just about where it ought to be. Is oil expensive? Not when compared to the cost of an automobile. Oil and gold have merely followed the modest upward bent of consumer prices.
But stocks, and real estate in certain areas, have followed a more immodest course. An ounce of gold would have bought, say, four suits in 1980; now it buys just one. But a basket of Dow stocks - which would have bought the same four suits in 1980 - will now buy a whole closet full of them... about 25, by our rough guess.
In a deflationary period, which is more likely to be deflated - gold or stocks?
We will take a guess. Stocks and real estate - the assets most puffed up by inflation - are most likely to become cheaper in the great deflation Alan Greenspan tells you not to worry about.
As they used to say in the Soviet Union: 'nothing is to be believed until it is officially denied.' Now that deflation has been officially declared not to be a problem, our guess is that it will be a big one.
