Moon Kil Woong

Predicting the Next Great Bubble

Too many people misuse the term bubble as simply the rapid increase in values of a certain class of assets. There is nothing wrong with the slow or fast reallocation of assets. In fact, it is one of the great aspects of the capitalist system that favors flexibility and innovation over the stability and stagnation of a feudal or socialist economic system.

Many of the topics he speaks about are theoretical reactions of real world situations that either decrease supply or increase demand. Thus, the terminology bubble is an incorrect definition.

If you talk about previous bubbles you can say the Greenspan real estate bubble collapsed (proving it was a speculative bubble despite its naysayers) and was promptly replaced by a Bernake Paulson Long Term US Treasury bond bubble that collapsed (even though they like not to speak about the dollar's decline on the back of huge Long Term Treasury losses in a matter of months).

So where is the next bubble? I'll let you know when the US Treasury bond bubble stops deflationg and pushing tons of cash into commodities and US equities. If it goes too far it will cause inflation negating commodity price gains and possibly even stock gains in worthy sectors which will justify the price increase keeping them from being a true bubble. The point I'm bringing up is it's not a bubble if it is not speculative and is economically justified.

2009 Economic Forecasts Ignore Demographic Shift

Any GDP contraction bodes very ill for the US because it highlights our deficit relative to GDP which will grow with another round of stimulus. Overall continued deficit spending is unsustainable simply because the interest payments will become astoundingly huge when inflation bounces back to normal. The Fed's low rates will hold off the interest payment dogs but comes at the cost of a stagnant or declining GDP against a backdrop of the real threatening ration Government debt as a percentage of GDP.

Good article, good points. Pulling out of Iraq will strangely be just another deflationary event unless it is all shifted to Afghanistan. So no post war peace dividend benefits like we got after WWI or WWII.

Economic Efficiency Cannot Be Calculated

As always almost 100% with you on your posts. With all the mass unpredictable Fed and Treasury moves it will be extraordinarily hard to determine the effects of any one or combination of actions taken by them. It's like treating a patient with a fever with flue shots, antibiotics, ritual bleeding, depessants to make them sleep, and and stimulants to wake them up. The cure is more likely to kill them than the disease.

Thanks for the quote Confucius quote. High salaries for bailed out execs do make us all sick. Catapillar is still profitable and their execs took a voluntary pay cut. I'd be happy to bankrupt GM and put it under their management any day. The big question has always been, how do we replace the management without harming the business and industry. So far management's refusal to leave, cut their salary, or do anything else but hold their employees and companies hostage for taxpayers ransom has left no other option but bankruptcy to solve this issue.

Poor GM and poor America who has to bail them out. I doubt it will solve anything. I didn't in the 70's. That's why they are still in this predicament 30 years later.

What Happened to Demand?

3 things.

1) People want things. They recently figured out the one thing they really want is financial security. How more borrowing/credit grows out of this want makes me laugh. So far the Fed and Treasury have only been adding to the uncertainty due to a series of unfortunate bailouts that are far from uniform or with clear directives. It is more like offering everyone the "crisis du jour" with no real meal to sink your teeth into.

2) The credit system and money system are one and the same. Since 1913 there is no such thing as non credit currency in the US. Or money free and clear of counter-party liability. In fact there is more liability than dollars as people are starting to notice. But anyway, that's not here no there.

3) I agree with you that offering more credit isn't the answer. We need a concept of a safe level of credit/debt. This also solves the issue of topic #1. Until people have a clear hand on what's safe and who has a safe level of cash and debt there will be continuing crisis. So far the government has done nothing to force banks to show their CDS, CDO, or off book liability so we don't know who has safe credit. And sadly, banks have determined well most US households have too much debt so they aren't safe either. The housing issue is just a giant part of that equation. It is not the full problem.

There is no nirvana in the financial world. Like the weather there needs to be a balance of hot (credit) and cold (assets/cash) to make a temperate environment. There is too much credit from the past and not enough cash. So things are liable to get very cold. Prepare for winter.