Comments on: Outcomes for Deflationists and Inflationists

By: loan modification

loan modification — Tue, 20 Jan 2009 00:08:25 +0000

For the United States, a nation of debtors not savers, no truer words were ever spoken: inflate or die. – very well said.

By: gregor.us

gregor.us — Sat, 20 Dec 2008 03:40:53 +0000

I hold the view that printing in order to avoid default (not enough buyers for new US Treasury debt show up to successfully roll over maturing debt) is de-facto default.

I see your question alot.

Let me ask you: if all the debt of the UK was denominated in Sterling, and then when the UK tried to roll over debt and no one bought new debt, thus depriving the UK of funds to pay off the maturing debt, and then the BOE just printed up more Sterling to pay off the old bond holders and bought the new issue--what do you think other holders of UK debt would start to do?

They would dump the debt en masse. The game would be over, yes?

Monetization is a ponzi scheme, at some point, don't you think?

G

By: JE

JE — Fri, 19 Dec 2008 02:04:13 +0000

“US Treasury bonds will default eventually if deflation takes hold”. How can they default? Unlike 3rd world countries that have their debt denominated in currency (US$) that they can't print, the US can print $s to pay off their debt. It seems to me the result may be inflation but not default.

The calibration in quantitative easing needs to be just enough to reflate without triggering an inflationary spiral……a tricky business.

By: Jason Wood

Jason Wood — Mon, 08 Dec 2008 18:23:53 +0000

What do you think the tar sands do from here? Hard to believe COSUN was paying an annualized $5 distribution just a few months ago, now it's hard to see how they make money in the coming quarter at current prices.

By: gregor.us

gregor.us — Mon, 08 Dec 2008 17:42:50 +0000

Oh I agree that the existence of spare capacity will overhang the oil market all next year. The question is whether that perception forms a line to just OPEC, or, to both OPEC and non-OPEC. The perception will certainly form a line to OPEC as OPEC is currently making discretionary cuts. But it's in non-OPEC where the non-discretionary cutting is taking place, and will create a potential supply problem.

But I agree that the perception of spare capacity will overhang the market, for sure. That said, let's not forget the non-OPEC supply has been flat for 6 years, and global supply flat for 3.5. We are going to see that in Q4 2008, non-OPEC supply really made some advances downward.

G

By: Jason Wood

Jason Wood — Mon, 08 Dec 2008 17:30:06 +0000

Gregor, you know we often see eye to eye on these matters. But I must admit to less conviction than you about a spike in 2009. You haven't addressed the demand side much, and to me it's the X factor. You also have to consider places like Venezuela, that simply can't afford to give away 400K barrels of oil for free to China Fund and others at these prices, so they'll start charging too. And if OPEC follows through on a larger than expected reduction, that puts a tight lid on any speculation given the immediacy with which that supply can [and would] be brought back online.

By: gregor.us

gregor.us — Sat, 06 Dec 2008 13:03:14 +0000

Yes, that is the risk. The Argentina model.

In order to successfully reflate, the USA just like Japan needs to reflate the world not just itself. So, the USD simply has to fall as a mechanism that extends cheap credit to the rest of the world. Cheap Yen and Cheap USD are like credit, that the rest of the world has used for decades–first Yen and then the USD. That whole dynamic has to get going again for the US reflate as our own reflation is dependent in part on maintaining foreign consumption.

By: gregor.us

gregor.us — Sat, 06 Dec 2008 12:59:38 +0000

Yes if a generalized deflation takes hold, as I said, I think the debt will be destroyed through blanket default b/c there will simply be no way it can be paid back.

The big question for the US, assuming it will be able to service both the public and private debt and not fall into a generalized deflation, is what will we produce to generate the income? This is why alot of smart people are worried.

By: gregor.us

gregor.us — Sat, 06 Dec 2008 12:57:03 +0000

The FED and global governments will reflate until they get a signal that it's working–and then at that point they probably will have reflated too much.

By: gregor.us

gregor.us — Sat, 06 Dec 2008 12:55:25 +0000

Hi Brian. At this point, the first marker of success of reflationary policy would be to simply stabilize prices. I think the two main assets classes important to OECD countries are housing and equities. So the first test is to get those two stabilized.

I think food inflation will continue to moderate now. As for oil, well, 42 dollars a bbl is very dangerous to world oil supply.