The problem with USD carry trade is where you go for yield. All the usual suspects are having same problems we are only lagged – see comment in FT by Europe industrialists that they will get the disease on 6-12 month lag. Maybe Loony/AUD on a pure hard currency play + responsible central banks. As for the over touted long dollar short euro trade if Trichet sticks to his guns that may be a loser. here is hoping there is some sanity left in the world. The performance of the US Central Bank is an abomination and is worthy of a permanent downgrade.

The problem with inflation as a strategy is that it has multiple outputs. Yes, the ‘value’ of fixed debts seems smaller, but as pointed out above either wages for the small debtor or profits for the big one have to also rise to make use of the presumed advantage. There is nothing to suggest that either will occur in the near term, and not much cause for optimism mid-term. Neg rates in Japan didn’t ‘melt off’ that mountain of congealed debt because economic ‘metabolic’ activity dropped to comatose levels. Then as Max mentions, if foreign capital dumps the dollar or simply walks away from it because it’s soft and shrinking, we get huge cost increases and downward pressure on actual capital. Inflation as a debt-write down only works if furriners are so stupid as to keep paying in money to be written down which we can use to pay off each other’s debts. Boy, is that NOT going to happen. Find me a country which has inflated it’s way out of trouble; most just change the nature of their problem without eliminating the existence of a problem.

The point at which we will know that we have a grip on ending the long bad patch now starting is when we _raise_ rates to attract capital and firm up real profits in the credit markets. Only then will we find out what assets are really worth and what companies actually are capable of turning a real profit without floating along on cheap credit. I don’t necessarily mean raising rates a lot, or tomorrow, only that an inflatathon is the definition of a non-solution. The longer we toy with neg rates as a denial strategy, the longer off that day is.

Oh, and S, money supply is the _least_ important of several inputs to price vectors (unless we’re talking Zimbawaean or post WW I Deutschland level printing)—and our money supply is presently shrinking. Credit availability, credit cost, asset value vectors, and demand vectors are just as significant inputs. Classical definitions are inadequate, which I think you know. ‘Inflation’ is a multi-dimensional state space, and ‘collapsing’ one’s perspective to lower dimensionality only results in distortions; things seem to bounce funny away from analysis for reasons which don’t seem obvious, something symptomatic of inadequate dimensionality in perspective.

http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/ess_nixongold.html

And I won’t bring up the subject of convenient changes in CPI measurement.

Longtime lurker–Love your site, Yves.

R

5% inflation for 5 years will prop up the housing prices and get us back on track after the housing bubble faster than any other solution.

I disagree, in that there is no way to know if the (intentional) weak dollar policy will work as intented. The most possible scenario that is playing out now (and why doesn’t anyone talk about it ?!) is that the USD becomes the carry-trade currency, replacing the yen.

What’s the point investing in the oversupply of US real-estate, when there are far more attractive yields elsewhere (like exploring oil, and developing agriculture)? This will spell disaster for the Fed.

The assumption that the policy of “inflating-away” our debt rests solely on an outdated view of the continuing dollar hegemony. It’s a dangerous view.

It is interesting that Wachovia projecting net interest income up 5-7% in Q2 on back of deposit growth and likely some NIM expansion. The reflation of the banks is coming at the expense of the consumer. So no wage growth and no return expansion – zero impact to affordability ratios – means zero impact to consumers. Add on that incremental credit isn’t flowing to anyone and again consumer getting short end. BOE head today urging banks to pass on the mortgage cuts to consumers – probably populist jawboning but nevertheless interesting.

I have seen this inflation argument in lots of places and excuse my ignorance but could someone please explain how inflation for five years does anything for the consumer (unless than banks are handing it out. That only serves to help Home depot’s wheelbarrow sales. It didn’t work for Germany, it hasn’t worked for Zimbabwe and will not work for USA. Explain please…or lets put this argument where it belongs for good: the ash heap.

It is interesting that all these long term institutional investors are buying these bank issues – as the WSJ put bluntly long term loses purchasing power. This is a stretch but perhaps the feds could be leaning on the major asset mangers (Fidelity, Wellington tc) to take this equity/convert/debt down. Who will eat it, the 401K holders who have for all intensive purposes passive fixed equity asset allocations which will continue coming over time as they have been conditioned to believe that it is a “good” investment? This is a perfect annuity vehicle for the Feds to go after to bail out the system. It is long term capital (in theory) and it is captive and relatively benign. They have drained FHLB (see article on Chicago bank ratings downgrade per failed merger with Dallas), Fed Window, auctions, rebate programs etc.

Sinister for sure.

Berkshire Hathaway Inc. spokeswoman Jackie Wilson said Monday that there was no one available to discuss the leadership change at General Re..

Re: Psychological mechanism

http://en.wikipedia.org/wiki/Harbinger

The actual mechanism of harbingers appears to be a quirk of human psychology. There are two general categories of symbolic prescience, both of which are subject to an individual’s awareness of laws of probability. Whether one is cognizant of the direction events in their life are headed, the subconscious keeps account of what is likely to happen in one’s future. Depending on how aware a person is of these subtle instincts, their anticipation of imminent events will vary.
An aware person will be able to explicitly imagine specific events, while someone who is less aware, or in denial, will not sense, or will ignore, the anticipatory signals their subconscious sends to prepare them in how they will respond to unfolding events.
Someone who is less than fully aware, but more than blindly ignorant, may encounter some sort of symbolic image which embodies the course of events their subconscious is trying to make them anticipate. Such an encounter may enhance the person’s understanding, or in some other way make it easier for them to understand and accept the probability of unfolding events in their life. Subjectively, the person will have felt they had no previous intuition of events unfolding as the “sign” indicated. Should events then unfold accordingly, the person may be predisposed to believe in omens.

5% inflation for 3 years and a decrease in home values of another 15% should hit the nail on the head! Great point! The main issue three years out will be the impact on savings accounts and jobs which will bring buying back into vogue, so more than likely we see 2 years of forced “positive inflation” which ben has said he is in favor of, then a faster decline of home values. The thinking seems to be get the exorcism over with as fast as possible and get the garden growing as soon as possible, so this will seem more like stagflation IMHO and may take 2 years of intense pain, i.e, cash will be king in a liquidity trap and then out of the bottom will come slow growth

The availability of cheap money will continue to retard (but not prevent) any future corrections.