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Alex Jantsch
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Anyone who is persuaded in one evening is not really persuaded. He can be converted by the next person of opposite views with whom he spends an evening. The only person who can truly persuade you is yourself. You must turn the issues over in your mind at leisure, consider the many arguments, let... More
  • Paul Brodsky: The Seeds of Our Destruction Were - And Still Are - Sown in the Bond Markets 0 comments
    Nov 18, 2011 12:25 PM

    This is the transcript of an interview with Paul Brodsky conducted by Chris Martenson, and published on Chris Martenson's website Paul is co-founder and co-managing member of QB Asset Management. Paul spent several decades trading bonds and other securities for such Wall Street firms as Drexel Burnham Lambert, Kidder Peabody, and Spyglass Capital, where he actively managed mortgage-backed derivative funds for over a decade.

    This interview focuses on his view of the bond market, how we got to where we are now, and how the Federal Reserve's current process is going to devalue the dollar. He points out that his view of oncoming inflation is in line with the policy of trying to deleverage, because there is two ways to deleverage when you have such unsustainable debt. One is to let credit deteriorate, which they won't let happen because of the very real consequences. The other is printing money to meet the notional value of the debt. It will incite inflation, and whether that becomes apparent now or a number of years later is almost irrelevant.

    The good side of this is that anyone who is indebted will experience this deleveraging. Because with inflation, wages and prices will rise. Nominal amounts of debt will not. So all who are indebted, including the government, will be able to pay back their debts with less valuable money. This may look like a good thing, because many like to point out that if wages and prices are growing, the economy must be growing. But his example points out that if such devaluation, and in effect inflation, does happen then it just gives the appearance of growth.

    As Paul points out, the credit crisis has all economic participants saying, can I service my debt rather than what do I want. So a company may be able to sell a product for more, but if they sell less than they did before, they might be forced to let some unnecessary workers go. It would still give the appearance of increased output due to the rise in prices. And in nominal terms there will be. But since one person has exited the workforce, the real economy has actually shrunk. And that's partly what we are experiencing already. It is why the private sector has already started to regain their earnings potential, while still laying off thousands. Sure, there are exceptions, but that doesn't make it any less of a reality.

    The Federal Reserves money printing policy is a double edged sword, because there really isn't any way out of this credit crisis without someone getting hurt. My brief explanation doesn't do this discussion justice, and for the most part may have left out major parts of the point he is trying to make. But in the end, his point is that he sees a currency crisis at the point for which the problems will leak their way into the bond market. He extrapolates the motivations for such policy actions with refreshing clarity, and the potential consequences. He refrains from making any definitive predictions about what will happen, and places his logic behind the troubling signs he has rarely, if at all, seen in his many years dealing with the bond market. Enjoy!

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