xjo weekend zoomba lounge, page-93

Hi Andrew

Thanks for the detailed post and your thoughts

Regarding your Inflation vs Deflation debate my quick off the cuff simple response is this

Govts and central banks hate deflation even more than they hate inflation because as you have correctly stated inflation is by contrast an easier beast to tame you simply put your foot on the economic brake by raising interest rates and eventually things will screech to a halt and so will the threat of inflation.

Deflation on the other hand is an almost impossible beast to control once its let loose as Japan has seen with its lost decades and the US almost saw during the Great Depression.

The primary cause of deflation is a reduction of consumption, which can either be caused by the people choosing to save and reduce their debts (ie deleveraging which is what we are seeing) and/or central banks reducing the money supply. It was the combination of the above two factors that caused the US Great Depression and to an extent has resulted in Japans lost decades.

The problem we face at the present is one of a cautious thrifty global consumer who currently has a very high savings rate and is also paying down his debts ie deleveraging. What Ben Bernake is trying to do in the US is get the consumer consuming again by flooding the market with cheap easy money while also penalizing savers who earn next to nothing on their deposits.

Deflation is not an easy beast to tame but I think what we will find many years from now when we look back is that the beast was stopped, watch the bottoming of US Housing as the key indicator of this.

Of course the danger with all of this is that it will in the next 5-10years lead to another Asset Bubble, if there's one thing we should learn from history it is that it always repeats itself and Asset Bubbles are born out of cheap easy money. Just like the US Housing Bubble was born out of Greenspans efforts to keep the economy going following 9/11 so to will the next asset bubble be born from Bernakes current efforts to fight deflation and I shudder to think what the fallout from the next asset bubble will be and where the bailout for that will come from

The stage is set all it will take is a ready willing and able consumer

Just my thoughts