See @mikestiller on Twitter for some of the work he is doing on the Output Gap. He is less convinced that we are headed for a classical, idle factory driven deflationary paradigm.

If you are suggesting that China could have an inflation problem, I agree.

G

See @mikestiller on Twitter for some of the work he is doing on the Output Gap. He is less convinced that we are headed for a classical, idle factory driven deflationary paradigm.

If you are suggesting that China could have an inflation problem, I agree.

G

From WSJ a few days back:
“The lending surge came as China's broadest measure of money supply, M2, jumped 25.51% at the end of March from a year earlier. The growth rate was well above the median 21.8% rise forecast by 11 economists surveyed earlier by Dow Jones Newswires, and up from the 20.48% rise at the end of February.”

http://online.wsj.com/article/BT-CO-20090411-70...

Everyone is printing. That said, buy some gold to hedge. Regardless though, we are monetizing to fund stimulus spending, the most efficient way at making sure this new money (with intent to reflate) circulates rather than accumulates as inert bank reserves (ie Japan).

The current price level we have today is based on an arbitrary credit multiplier we've been so adapted to. With US assets at 50T or so, give or take 10T, against a monetary base of 2T, that is 25:1 leverage on the monetary base. With the loss of faith, lets say that multiplier chops down from 25:1 to 5-15:1… That gives the Fed permission to print another 2 or 3T and that just achieves a reflation and short run increase in global output.

That said, expect the Fed to announce another 500B of treasury purchases soon, continue with long term agency debt monetization (1250B to chip away at), etc. etc.

When money supply increases, interest rates fall. Right now, long duration treasuries are only a tad weak because the stimulus spending is ahead of debt monetization, at least at these interest rate levels. We need more money, not less.

Inflation 5-10 years out, just when everyone has given up on stocks, their only accessible inflation hedge will start performing … Until then, misery.

The Treasury's newly minted cash, as you've indicated, is phony — not tied to real assets or productivity. The Treasury's bet seems to be that magic will occur and productivity will somehow climb to give their fresh cash adequate validity. Given your analysis of energy's future and the current down trends in real productivity, the Treasury's bet seems pretty sketchy, even desperate.

I hope I'm dead wrong.

I have to prepare that this does not unfold quickly. Just as you appear to be thinking, in your 2011 to 2012 timeline.

G

Cheers,

G

Consider the currency crisis, below-margin energy pricing, declining oil outputs, and the evaporation of real working capital. These factors are eventually going to converge and the “Everybody is worse off than us, so we'll be OK” myth will implode.

The timing is still a guess, but 2011-2012 are starting to look like Apocalypse Now.