A ton of discussion is going on regarding inflation and deflation. I understand the inflations arguments and I respect them all it is just that some confuse symptoms with the illness. For me the heart of the issue lies with the simple fact that the credit losses are overwhelming the ability of the Fed and Treasury to paper them over with money.
One can slice and dice the argument any way you want but the water (losses) are coming into the boat faster that the Treasury can bail (print money). Forget getting into all the mind numbing arguments regarding the velocity of money, (fractional reserve lending) which is moot because those qualified to borrow are not stupid enough to do it and those that desperately need the money, well one would have to be a complete moron to lend to many of them, even if your money stash was stolen ! Hey you would need to behave like Countrywide or Golden West or Citigroup but I digress.
Don't bond yields rising signal inflation. No as the U.S. is broke, the Fed balance sheet is a debacle, and rates might just be started to reflect the risk of default. Higher risk, higher rate.
Rather than blather on about this suffice to say that I am still in the deflation camp and do acknowledge the inflation and more probably hyperinflation risk that is there but is aways off on the horizon.
Often I come across pieces of work that describe a situation so perfectly I must share them, not to mention wishing I had been smart enough to pen them ! That said, veteran trader Rick Ackerman had this to say on the subject, back on May 28, 2009,
World Massively Short Dollars Scores of millions of homeowners who are mortgaged to the hilt have implicitly bet against the dollar. So have financiers who have used derivatives to borrow dollars in some leveraged fashion. There are hundreds of trillions of dollars worth of these instruments still in play, most of them denominated in U.S. dollars, an if they cannot be rolled forward, the borrowers will have to settle up in cash. Similarly urgent demand for otherwise shunned equity shares creates short squeezers in the stock market all the time, and there is no reason why a fundamentally worthless dollar could not be squeezed higher by the same implacable forces. A rising dollar is most surely not what the world needs right now, since it will increase the real burden of debt on all who owe dollars. that is the crux of deflation, not the increase in the money supply that inflationists have been blathering about for years.
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