I don’t have the attention span to read every post on this thread, so I apologize if I address something someone else already did.
Yes, deflation is winning the day. The day. But the month, the year? Back in 2005, housing was winning the day. Better analogy, back in early 2000, tech stocks were winning the day. Could home prices go to infinity? No. Could tech stock prices go to infinity? No. The home price bear has been slow because housing is an inefficient market. But the Nasdaq bear went out the window pretty quickly. And currency is a pretty efficient market too. The bear can go out the window any day, and in a hurry.
The US has a debt that is the mother of all neg-am loans. Everyday its growth accelerates at an unprecedented pace. All of that treasury debt is as good as printed greenbacks, and is rapidly replacing loans that would otherwise be written off as the bailouts grow in scope. Our trade deficit remains at a $700 billion annual pace. Our current accounts balance (accumulated trace deficit) is in the trillions and continues to grow. I pose the same question to this as I did to housing and tech stocks: Can it go to infinity? Of course not.
Why is the dollar strengthening against other currencies, gold and commodities? Why was housing strengthening against the dollar a few years ago? Irrational exuberance!! Flight to “quality” is winning the day, but what happens on the day that people realize that the dollar has as much quality as housing and tech stocks did? Where do you want to be on that day?
As for me, I take deflation with a huge grain of salt. It may persist for a while, just as the housing bubble did. But I’m in the “tsunami” camp. I do not want to be standing on the beach when the water comes rushing back. I’ve read that over 90% of all dollars are outside of the US borders. If all those come rushing back to our shores, the dollar destruction currently occurring from debt writedowns will not keep pace.
All that said, one caveat I must admit. I saw the housing bubble for what it was in 2002, and the tech stock bubble in about 97 or 98. I’m often wa-a-a-ay early on these things. But I’d rather be early than late…..
