JohnAl

Thoughts on an Inflationary Depression

I think you may be right. The new money may flow into the economy only slowly, since borrowing demand is low and may remain low while individuals and businesses save and cut costs. But the inflow of new money should raise the general price level anyway, at least to the degree that it exceeds any further credit contraction still taking place. I'm not sure that I agree that prices will rise rapidly though, since in this scenario the new money flows into the economy slowly.

Also, there IS something that government CAN do to help, though the likelihood that they will do it is absolute zero. They could cut taxes and CUT spending. The benefit of cutting taxes is obvious. Taxpayers would be more flush. They'd save more and they'd spend more. Cutting spending, I contend, would also help because it would send a powerful signal to investors that the US government is serious about putting it's fiscal house in order.

Of course cutting spending is not going to happen since Keynesianism predominates political thought at the moment. And it's true that cutting spending WOULD hurt those who would have received the spending, but as far as the general economy is concerned it would simply be putting the purchasing power back into the hands of those who earned the money - the rightful owners.

Treasuries Struggle Alongside Stocks

Yep, sit and watch is my strategy at the moment too. All I've been doing is getting myself in position to move and move quickly. That and educating myself on what the heck is going on.

Bernanke and the new administration seem to be ready to try anything and Congress more than willing to let them try whatever they propose. Little is predictable at the moment, other than that they will be doing something. People expect them to "do something", so they WILL continue to "do something".

The only thing they WONT try is doing nothing.

De-Leveraging Is Not Deflation

"Consider_this", your conclusion says it all:

"None of that is sure, so don't be so sure to take a fixed position in this market. I wouldn't bet my fortune one way or another, the key in this market is to be either crazy nimble, or incredibly still and calm."

Here's what I see (and I'm sure I'm missing a lot):

We have consumers, their 401Ks decimated and their housing values in free fall, acting rationally (for a change) and saving rather than spending.

We have banks, having just been burned badly and not knowing who is and is not solvent, also acting rationally, and not lending (much... yet).

We have investors, both domestic and foreign, some in treasuries or simply cash for safety, some in gold or other assets, expecting inflation.

Finally, we have the fed and the government, trying desperately to reinflate the credit bubble.

And the way I see it, there are many possible next scenarios, but nobody really knows what's going to happen next or when.

If the consumer starts feeling chipper, he may start to borrow and spend again, banks willing, which will mean inflation. If that happens and it really heats up - given how loaded up the banks are with reserves - we may see raging or hyper inflation.

But then again, we may just be stuck in a Mexican standoff for awhile.

Inflation seems really likely at some point, but how much and how soon?

Best action now... wait... watch carefully... get ready to move quickly... and continue reading Paco's interesting columns and the insightful commentaries he draws out!