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Inflation or deflation?

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November 16, 2007 – Comments (13)

Which will win out?  The $42 billion cash injection by the feds is inflationary, you can't print money and not expect prices to go up, and the amount of that cash injection leaves me bewildered, kind of like how I was jumping out of my seat each day I saw the US dollar drop compared to the Canadian dollar until that trend reversed.  Certainly a big cash injection will prompt more devaluation of the US dollar.

But, what of this news, http://www.economicsbriefing.com/2007/11/goldman-sachs-predicts-2-trillion-drop.html, where it is being predicted a $2 trillion dollar drop in lending...   That is an enormous contraction in the money supply.

Some say that we've had enormous increases in asset prices because of the enormous increase in money supply due to credit.

$2 trillion reduction in credit, ie money supply, sounds like an enormous contraction and you've got to ask yourself if any "assets" will continue to be valued as they currently are with this kind of a contraction... 

13 Comments – Post Your Own

#1) On November 16, 2007 at 9:55 AM, dwot (40.33) wrote:

Here's another good read, http://www.nytimes.com/2007/11/16/business/16norris.html?_r=3&ref=business&oref=bondheads&oref=slogin&oref=slogin.

So, are banking stocks going to be hit today?  Anyone buying this poison needs their head examined. 

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#2) On November 16, 2007 at 10:01 AM, abitare (35.12) wrote:

Inflation or deflation?

Both. Things you own are going down in value, the things you have to buy are going up in costs. (ref Marc Faber on Bloomberg)

 

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#3) On November 16, 2007 at 12:17 PM, leohaas (31.12) wrote:

From the article dwot references:

"But we now learn that some banks also handed out liquidity puts, giving buyers of C.D.O. securities the right to sell them back to the bank if there was no other market for them. That risk may have seemed slight when the securitization market was booming. But now the banks are being forced to buy back securities for more than they are worth."

Weren't these "liquidity puts" anywhere on the balance sheet? If not, that sounds like fraud to me: after all, if you sell a security with a promise to buy it back if there is no market for it, you have a liability.

So have we just not been reading the balance sheets correctly (granted, I am no expert at this), or have the banks deliberately omitted this information? 

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#4) On November 16, 2007 at 12:34 PM, QualityPicks (24.65) wrote:

We are having deflation in housing, one of or biggest expenses. But that is of no help for 70% of current homeowners.

We are having inflation in food and gas prices.

But interest rates (10yr) seem to be comming down a bit now. That kind of means that overall inflation will be contained. Some things up, others down.

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#5) On November 16, 2007 at 12:52 PM, Imperial1964 (97.82) wrote:

Yeah, these things weren't put on banks balance sheets, just like the SIVs.  Is this reminding anyone else of Enron?

We've already had Netbank fail.  Now, I'm not claiming the sky is falling or anything, but I believe it is bad when banks have liabilities that are not on their balance sheets

And as for inflation/deflation, I agree that we'll have both (as we have for years).  I'm still have my money betting on inflation (though I'm less certain than I was) primarily because I think the devaluing of the dollar, causing imports (especially energy) to rise, should offset soft demand in most cases.

Right or wrong, that's my 2 cents. 

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#6) On November 16, 2007 at 4:43 PM, floridabuilder2 (99.33) wrote:

LMAO... i love the both comment abracadabracantina... 

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#7) On November 16, 2007 at 4:54 PM, abitare (35.12) wrote:

I should clarify my "Both" comment. 

Commodities are going up in costs ie gas, oil, food, electric = inflation

Asset values = real estate, stocks, etc = deflation

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#8) On November 17, 2007 at 12:13 AM, abitare (35.12) wrote:

dwot,

Since we are like minded in thought and points (my accuracy needs some work):

Patrick Buchanan his second negative article on the economy The Crash of 2008?

http://www.humanevents.com/article.php?id=23465

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#9) On November 17, 2007 at 5:12 AM, camistocks (< 20) wrote:

SuperBen will help us out... Oh he will...

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#10) On November 17, 2007 at 3:17 PM, GS751 (27.46) wrote:

"Is this reminding anyone else of Enron?"
Bingo  Im with ya on that one.

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#11) On November 17, 2007 at 5:19 PM, dwot (40.33) wrote:

Thanks for comments people.

 abracadabracantina I am thinking the same thing.  Housing, and stocks will go down in value while currency devaluation will make goods and services more expensive.  Where I live young people have been priced out of the housing market for years.  You get university educated couples barely affording one bedroom condos.  It simply isn't sustainable.  Practically all single people trying to enter the market are priced out of the market.  I can't see much more in the way of price increases being absorbed without this mess unraveling.  I do think we've already seen enormous increases in prices, however.  I think the strengthening Canadian dollar is going to give us some price increase relief, at least in the shorter term, but the opposite will be true for Americans.  I think my grocery bills have already close to doubled in the past 5-7 years and I don't think that is true for Americans.

Leohaas, When I think about the big economic picture, the "economic growth" which puts banking at about 1/3rd of the stock market, or whatever insane level it reached, has to be a lie.  How does stirring a pot of money do anything?  I just see banks contribution to economic grow more of a slug that something that give real economic wealth.  The more they are making, the more they are sucking out of the real wealth creators.

Qualitypicks, I don't trust those 10 years rates to stay low.

Imperial, I am Canadian and I know our exporters are hurting badly.  Some are shutting operations, and that is absorbing some of that softening demand.  Our forestry industry appears to be losing money right now, so there is no room for price declines, only work layoffs and shutting business segments down.  So, that looks like downward pressure on wages.  I couldn't help but notice Oregon has loss hundreds of forestry jobs as well, and that is with the weakening dollar.

floridabuilder, I thought the "both" was very well said.

Camistocks, I have no doubt that SuperBen will further devalue the US dollar...

GS751, I didn't follow Enron closely, but I did read an after the event report that described the average Enron investor.  You would have thought that the earlier investors would have been ok in that mess, but there was such a strong degree of investor confidence, earlier investors sunk more and more capital into it and ended up being the biggest losers.  Also, by all accounts Enron investors appeared to be fairly sophisticated investors.  The report was by Neil Boyd, an criminology professor at SFU.

My top opinion pick for sophistication going wrong is this one, http://krugman.blogs.nytimes.com/2007/11/17/long-run-budget-math/. I can't even properly express how much I disagree with this position.

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#12) On November 17, 2007 at 6:23 PM, dwot (40.33) wrote:

Here's an interesting one on bank rates...

http://globaleconomicanalysis.blogspot.com/2007/11/bank-borrowing-costs-rise.html 

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#13) On November 17, 2007 at 11:31 PM, abitare (35.12) wrote:

dwot,

Thank you for posting the Mish Shedlock website. He moved from a previous site. Mish is one of the best in the business.

Here is another good site for some economic and policy review: 

http://www.sandersresearch.com/index.php?option=com_frontpage&Itemid=97

Since your are Canadian there is an article. : Will the US invade Canada? I hope it is total BS.

http://www.sandersresearch.com/index.php?option=com_content&task=view&id=1283&Itemid=97

 

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