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This Crisis Was Preventable

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October 01, 2008 – Comments (9)

Steve Moyer has a post on Safehaven that takes quotes goes back a few years warning about what was happening.

I love the title:

Real Estate/Credit Bubble Deflation 17: Foresight Is 20/20

What is happening was absolutely foreseeable.  Amazing the king of the snake oil sales men is now at the helm of the bailout and this time the snake oil will cure your ails...

People that were warning got a lot abuse from other people.  I was at an investment conference getting close to 2 years now and one of these snake oil sales men ranted on against a speaker that was warning about the melt down in the base metal.  His method of response wasn't to show the err of the data being presented, but to present a rant that did not have an ounce of foundation, just that this guy had been warning for a while.  

This is a 20 year bubble that is popping.  It may have accelerated under Bush, but the makings of it started 20 years ago.  It's a very big bubble.

9 Comments – Post Your Own

#1) On October 01, 2008 at 11:38 PM, StatsGeek (29.39) wrote:

Dwot,

Congrats again on your brief moment in the spotlight today.  I'm sure it won't be the last time.

Can you explain a little more about your deflation thesis?

What I believe is that the price of nonessential consumer goods, homes, industrial metals, etc. are going to go down in price.  But  I also believe that the dollar is going to lose value dramatically and that the cost of essentials like food, gas, etc. are going to go up dramatically for Americans.  So while in the short-term we will have deflation due to a global recession, in the long term we will have big inflation problems due to a precipitous drop in the dollar.

How do you see things?

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#2) On October 02, 2008 at 1:56 AM, dwot (72.69) wrote:

StatsGeek, inflation is a measure of the money supply and inflation is a lagging indicator.  The money supply increases and then you price increase.

To me it looks like based on the existing money supply prices need to about triple to catch up.  There is so much paper wealth out there people can not possible trade it in for goods and services. 

Right now there is a contraction in the money supply, which is deflation.  

The money supply was being increased beyond reasonable because of the securitization process.  Reserves holds the money supply in check.  The securitization process did not and that increased the money supply.  

Not everything increases at the same time in response to the increasing money supply.  Homes did, and they are probably at the top of the money supply food chain as it was increased through credit.  The rest takes time to work through the economy.  There are factories and businesses that have been existing for a long time so they don't have to cover the cost of inflated purchase prices in their sales.  But someone entering the business will have those inflated entry costs.  Raw materials is only part of the cost producting things, so price increases to money supply are lagging. 

Because price increases are lagging you can see them still increasing once the money supply contracts.  Looking at money supply I my sense is prices should triple.  I think some things will continue to go up, but that isn't inflation.  Inflation is about money supply.  I think prices on the things you mention will continue to go but because the money supply is contracting now they won't go up as much as the money supply suggests they should.

Deflation will be because of credit contraction and I think it will exceed devaluation of the dollar.  This past week can make you wonder...

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#3) On October 02, 2008 at 3:16 AM, DemonDoug (85.49) wrote:

Right now there is a contraction in the money supply, which is deflation. 

Oh really? where is your evidence?  here is my evidence to the contrary:

Fed Pumps Further $630 Billion Into Financial System

"The Federal Reserve increased the size of previously arranged currency swaps with foreign central banks to $620 billion from $290 billion to make more dollars available to banks worldwide."

What we are experiencing is a debt deflation, there is a difference between debt deflation and monetary deflation.

You are a great caps player deb, but you are still wrong about inflation.  Add another .7-1.2T of money that will be created out of thin air if the bailout gets passed.  That will end up being a total of at least 1.5T that has been created by the US government alone just this year.

Watch gold and oil skyrocket in the coming weeks if it passes. :(

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#4) On October 02, 2008 at 10:42 AM, fransgeraedts (99.92) wrote:

Dear Dwot,

i wanted to congratulate you for reaching top spot. I follow you -both the blog and the thumbing with a keen interest.

fransgeraedts

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#5) On October 02, 2008 at 10:59 AM, ctojeira (38.97) wrote:

Congrats on #1!  Good work!

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#6) On October 02, 2008 at 11:18 AM, d1david (29.36) wrote:

on a side note:  #1, nice job!!!

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#7) On October 02, 2008 at 11:25 AM, FoolishChemist (97.05) wrote:

What does it mean when a Canadian is # 1 ? :-)

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#8) On October 02, 2008 at 12:48 PM, GeekLaw (53.13) wrote:

Congratulations Dwot!

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#9) On October 02, 2008 at 7:36 PM, dwot (72.69) wrote:

FoolishChemist, Canada rocks?

Doug, I am going to disagree that the money supply is limited by the cash they print.  The money supply has been increased enormously due to increased leverage and I am betting that the speed of the deleveraging will be much faster than the speed at which they print money.

Will you ever send me an email so I can send you something?

 

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