Jeffrey A. Miller

Where We Go from Here: Best and Worst Cases

Wait a minute, the overall problem is "solvency" not "liquidity" but the solution proposed is more liquidity? I generally agree that solvency is the bottom line issue but all the liquidity in the world won't resolve that key issue. Sellers must find buyers. Finding buyers in a deleveraging process is easy - but only at a price. And thus we find ourselves back at the solvency issue.

For a company to deleverage in the midst of a group deleverage is vastly more difficult than otherwise. If there is a group of companies trying to deleverage simultaneously and most have similar assets then prices for those assets must drop well below what any individual company wants to accept or would have to accept if it was the only company involved. Hence solvency is the issue not liquidity - or buyers.

Frankly, I believe that the price for the assets that will clear the markets is a value that leads to insolvency for many financial instituitions and not a few industrial cum financial (think GE and GMAC) companies. And the government cannot fund all the companies seeking to deleverage (and now states as well) but it doesn't want the political hit from having dozens of firms going belly up scant weeks before a major election. So we have bailouts that won't work, rescues of favored firms, bankruptcy for the few and a depressing sense of capitalism being sold out for a selectively socialized economy.

What the Sectors Are Telling Us

I'm a bit confused (well, a bit more than normal anyhow). If bond prices are falling then bond yields must be rising. How do rising yields translate into fear of deflation? Isn't it more likely a fear of economic weakness hand in glove with inflation (the proverbial stagflation scenario)?