[tpark]

I got this from page 351-352 of the book "The Great Reckoning" 1994, Touchstone Press, James Dale Davidson and Lord William Rees Mogg.


The Inflationary Stage

1. Some shock, often a war, sets the process in motion by disturbing the system. It alters property rights, encourages monetary instability, and raises real asset prices

2. This leads to extraordinarily high rates of return in real assets, especially for debtors, who gain disproportionately. The high rates of return seem to justify massive new investment.

3. A credit binge ensues, as people borrow at accelerated rates to capture the extraordinary profits. Real estate, in particular, rises in value.

4. Institutions and contracts are adjusted to reflect the inflation. Debt maturities shorten. Nominal and real interest rates rise.

5. Nonetheless, a credit binge continues, as investors now accustomed to high rates of return calculate that they can continue to earn supernormal profits.

6. Financial as well as real assets are purchased on a basis of increasing leverage, and a bull market in stocks follows, though not yet a drooling frenzy.


Then comes the deflationary stage...

7. Profitability declines towards more normal levels as investment matures and new output is brought onto the market.

8. Commodity prices decline.

9. The farm economy goes into recession.

10. Interest rates fall, and as they do, hot money moves into financial assets, further stimulating the stock market.

11. As opportunities in the real economy subside, investment is concentrated on financial assets, leading to a stock market blow-off.

12. the boom is self-limiting because debt contracted at high interesst rates compounds faster than income, eventually requiring that owners of leveraged assets liquefy their holdings, thus driving asset prices down.

13. Real estate sags.

14. Some trigger such as credit squeeze, a major bankruptcy, fraud, or simply the slowing of the real economy reveals the overvaluation of assets.

15. The stock market crashes, credit contraction intensifies, the money supply implodes, and depression ensues, with returns on previous investment fallling to subnormal rates.

16. Real interest rates skyrocket, even as nominal interest rates fall, further reducing economic activity.

17. Unemployment skyrockets because real wage rates rise.

18. Wages and prices are cut as the system winds down.

19. Bingo. You have been in deflation for some time.


This seems like a fairly reasonable analysis to me, step 12 could be somewhat alleviated by the "refi madness" which we've seen, but I suspect it's a possible outcome even if the HyperTiger scenario doesn't play out right away. I've seen it suggested in this book and elsewhere that deflation will play out first, and hyperinflation will occur once the credit of the nation is destroyed. Thoughts?

[threadbare]

T Park, Sounds good to me. Though the introductory line about this process being set in motion by a shock of some kind, war, etc... doesn't seem necessary. Some idiot in control of monetary policy just has to drop interest rates, against a background of moral hazards created by the bailouts of the thrift industry in the 80's, LTCM in the 90's. Add to that the relaxed policing of Wall Street through regulatory bodies, and you wonder why we're not all eating beans and rice and living in huts at the present time.

Most people on this board wouldn't argue with a bleak future scenario, but whether they'd agree with all the details is debatable.

This probably isn't your typical business cycle. It's a long term change in economic status and living standard for the developed nations. Much of the remaining wealth will concentrate at the very top, and the majority of humanity will fight for scraps off of the table.

The vision the average person had of "one world", where the third world would be slowly brought up to the developed nation's standard, will probably be reversed. Sad, but true. The wheels have been set in motion. Whether there is actual design in this process or it's a confluence of unhappy coincidences involving peak oil, and natural gas, greed and organized opportunism is a question. But by the time it becomes abundantly clear what is happening, it probably can't be reversed, not for decades, perhaps centuries. That's my thinking, anyway. Any attempt to reverse it will result in new forms of tyranny. It just has to play out.

[Pee Brain]

so, are you saying it too late to get a credit card, max-out cash advances and use the money for the downpayment on a $1,000,000 tract home?