Subject:	My Best Guess
Date:	1999/10/24
Author:	Paul Milne <fedinfo@halifax.com>
	Posting History

I have had serious serious concerns about the economy and the direction in which it has been traveling, growing worse and worse, for the last ten years. The number one concern is debt. Eventually the piper has to be paid. Paid in full. There is a day of reckoning.   Our money is not wealth as  wealth has traditionally been known. Our money is 'borrowed' into existence. It is NOT wealth. It is DEBT. At its heart this is fraud, and assuredly this fraud is about to be caught out.   Our money supply, as reflected in M1, M2 and M3 has increased, in the last three years alone (96-99) as much as it has in the preceeding ten years (86-96). That is not merely an extra-ordinary expansion. In is beyond extra-ordinary. It is insane.   Normally, when you have a situation like this, that is, too many dollars chasing too few goods, infaltion is the result. That is, inflation in prices of goods and services that are more or less 'tangible' to the everyday person. But, that is not the case. So where is the inflation? Apparently we have no measuarble inflation where the inflation is normally felt. But the money has been pumped in. It had to go somewhere. Where did it go? If there is no inflation in goods and services, then the inflation HAD to have occured somewhere else, make no mistake about it. There can not be that much dough pumped into the system and something not blow up wildly out of whack. It did.  What is it that has inflated so much in the last few years way way out of balance with the rest of the economy? Asset inflation. All that money as a result of the increased credit expansion has gone into asset inflation. Bizarrely high salaries of CEO's. Ridiculous stock option packages. And first and foremost, the dizzying expansion of share prices in the stock market. This is where it has all gone.   What happens when it comes out? The same thing that happens every time that there are to many dollars chasing too few goods, inflation that you can actually feel.  Except this time,  The effects of that absurd credit expansion were masked. Not only were the effects masked, but BECAUSE they were masked,  the money supply continued to increase.  It continued to increase because the Federal Reserve Board manipulated interest rates to continue the advance of the credit expansion, and therefore the economic expansion.  They have done this unwittingly.  But, at what price?   The piper has to be paid. It is very hydraulic. The 'money' (debt) has been pumped in. It has to go somewhere. Sooner or later, it has to go somewhere.   What happens when it comes out of the markets? The same thing that would have happened if it had not resulted in an asset inflation in the first place. It will result in inflation in goods and serices. But, with a  HUGE difference.  Had the increase in the money supply NOT gone into aset inflation, it would have gone into traditional channels and would have been felt far sooner in the pockets of Joe sixpack. The Federal reserve Board could have done something about it by raising rates to curtail the expanding credit, heading off inflation at the pass, so to speak. But, it was masked, and they did not. So now, instead of having to deal with a small increment of the effects of the increased money supply, they willl be left to deal with the effects of every penny of the increase, all at once, and  in an amount far far far larger than they ever could have handled had they done so incrementally.   In other words, inflation will come back. If the stock market deflates, in a big way, and I believe it will, inflation will come rip roaring back as the flood of debt ('money' created by credit expansion borrowed into existance) come rushing out.  Not a creep up in inflationary values. It will come back with a screaming vengeance like never before. It is going to make the Weimar Republic look like a week at Disneyland.   This is the economic context of Y2k. Not only do we have an horrendous debt situation created by credit expansion that has had its real effects masked, we are going to have to face that in tandem with the technological dependencies kicked out from underneath us. We will see a huge decrease in goods and services produced at the same time that we see this huge amount of money flowing back out. So there will be wildly wildly wildy too many dollars chasing an incredibly decreased amount of goods and services. In other words, there will be MULTIPLES of the 'normal' amount of dollars looking for even MORE scarce amounts of goods. A double whammy. This is not a mere recipe for disaster. It goes way beyond that.   Even without the effects of Y2k, the insane debt driven credit expansion will have its day of reckonong. Y2K is the match that lights the fuse to the credit expansion bomb.   So long suckers.     -- Paul Milne "If you live within 5 miles of a 7-11, you're toast"

-- a (a@a.a), October 26, 1999

Answers

Some of the air in that bubble has been getting pretty rotten over the years. I know it will deflate, but only hope that it won't smell like the hugest fart in the universe!

As far as the sound it will make, I think Gary North put it best...

"There will be no giant sucking sound, as Ross Perot has put it. There will be the sound of wailing and gnashing of teeth."

Ah yes, I will savor that sound of sweet revenge!

-- @ (@@@.@), October 26, 1999.

"sweet revenge"?

-- Lars (lars@indy.net), October 26, 1999.

You bet ya Lars! I'm tired of these bastards with the bucks calling all the shots. I hope they go bankrupt and end up out on the streets. Let them get some real work for a change.

-- @ (@@@.@), October 26, 1999.

The bastards with the bucks will do fine. What about the schmucks with no bucks?

-- Lars (lars@indy.net), October 26, 1999.

They should know better than to get into a game where the deck is loaded and the dealer has unlimited credit. It is unfortunate that some of the honest players will lose, but the game has to be busted up before we can get rid of the sharks and lay down new rules.

-- @ (@@@.@), October 26, 1999.

>> They should know better than to get into a game where the deck is loaded...<<

Sorry, @, they had no choice. All 270 million American (USA) citizens must hold dollars to some extent. It is *our* game. You can only get out if you have *excess* cash to buy something else, like Euros, gold or Cuban cigars. The folks with no excess are fully and completely in dollars. No way out.

-- Brian McLaughlin (brianm@ims.com), October 26, 1999.

I think you are talking about the economy and I'm talking about the stock market. Unfortunately the stock market IS the economy these days, and that's why it needs to crash in order to level the playing field a bit. Even people who are not in the stock market are being hurt by it because it has thrown the economy way off balance. A depression won't be pleasant for anyone, but for some, it really won't be much worse than it is now. If the stock market beast were to continue on its present course it would eventually consume every bit of productivity that allows it to exist, so theoretically it has to reach some point where it will collapse back in on itself. We have artificially inflated it beyond the breaking point and the more we do this, the worse the collapse will be. In other words, we need to let the infected fluid out of the blister before it turns to gangrene. It needs to be done NOW before the World gets even sicker. To the greedy bastards of the world... grow up and quit playing games with peoples lives. This ain't no frickin Monopoly game, it is REAL LIFE.

-- @ (@@@.@), October 26, 1999.

Milne is partially right. I'm not going to get into the comparison to Weimar Germany - I can't predict very well, and just thinking about it being that bad makes me break out into a cold sweat.

I'll just add two things, first, one major reason Greenspan and company have been able to inflate the hell out of the dollar is because the US Dollar is the "reserve currency" of the world.

This came about after WWII by the Bretton Woods agreement. Basically, our country was the only one undamaged, and we were able to pull it off.

What does this mean? Well, it means that through "dollarization" - where various countries peg their currencies against the dollar, the Federal Reserve gets to pump out M2 (credit) in spades.

The tandem of dollarization and the defacto world reserve currency, allowed the POOL of dollars to be so huge, that basically, the inflation was exported overseas. If the Federal Reserve had inflated that much, and the pool was ONLY the US, then we would have been hit with obvious signs of inflation 20 years ago.

The Euro is an attempt to change that. If they succeed, the dollar is going to have some turbulent times (to say the least). That of course is assuming it matters in 3 years or so.

The second issue is the so-called "low inflation" we've been experiencing for 17 years or so. That's a crock of poop. In a healthy economy, commodities and products fluctuate in price. Products have a tendency to deflate over a period of time. Commodities such as grain, silver, and such should go up and down with demand cycles. Eventually, products start to behave like commodities, and maintain a permanently low price. (e.g. computer scanner, disk drives, and VCR's)

The mantra we've been hearing constantly is that Greenspan has whipped inflation. We've had a steady 3%- 5% for almost a generation. I submit, that this is VERY bad, and VERY misleading.

It's bad, because it distorts the market for certain kinds of debt - such as bonds - in lieu of others - such as stocks. This distortion's immediate effect is to inflate stocks. It's intermediate effect is to create an environment where speculation is fostered instead of fundamental evaluations such as P/E. Long term, the classic "boom" part of a "boom/bust" cycle occurs. The most salient aspect of the boom is that "nobody loses money". This fosters lots of bad habits in businesses and personal finances.

As for inflation, and inflationary signs. Inflation is defined as an increase in the money supply. Period. What most people think of when they think of inflation is the CONSEQUENCES of inflation. The consequences are the price increases we experience in property, commodities, and stocks.

The fact that the inflation has already occurred, is not in dispute. What is curious to most people, is why it ostensibly has not had any deleterious effect on prices.

I submit that it has. Try to buy a brand new car for less than $7,000. In 1990 you could. Now, the prices really start around $10,000. And that's a whopping 40% increase.

And the other factors that never seem to get examined are service industry prices - such as the price of insurance - medical, vehicular, and so on. These are all up a minimum of 33% (in my view. I'm just looking at my old bills here)

On the other hand, we've had astounding drops in price for consumer goods. A 25" TV purchased in 1990 easily cost $500. Now, the same TV can be had for around $250. VCR's are down more than 50%. Computers are down more than 50% for a typical system. (My Apple Macintosh in 1984 cost $2,000. In 1999 it cost 1,300).

Since we still experiencing "modest" inflation every year. And since much of our products are cheaper, the REAL result is significant price increases throughout the period. But because it was gradual, and because it was offset by falling prices elsewhere, we didn't perceive the inflation.

Once the dollars start coming back to the US, we'll get all the effects of price inflation all at once. Though I don't think it will be as bad as Paul Milne, I certainly think it will be easily double digit inflation.

As for the economy, my only question is if there is a deflationary period BEFORE the inflation. And if so, how long and how bad the deflation will be before the inflation hits.

Jolly reads too much.

-- Jollyprez (jolly@prez.com), October 26, 1999.

Self-fufilling prophecy.

That's what this is. But of course it will be the messenger's fault. In reality, it has already begun. I am currently in the middle and probably last management consulting job of the year at a large trucking company (employees over 2000). They have finished all of their remediation over 6 mos. ago thanks to some forward thinkers in their I.T. department. However, this does not mean they are not hunkering down for the economic reverberations. This company, plus about 8 others that I know of have initiated hiring freezes except to replace key personnel. All of these companies, have frozen any software, hardware, equipment, real estate, and capital improvement purchases until Q3 2000. Once this impact has disseminated from the corporate level to the consumer level then DEFLATION will become the key word. What does Y2K have to do with that??? Simple. If Y2K is extremely disruptive, which I think it will be, then the economic recovery will not be fast enough to prevent the downward spiral. If the Fed raises interest rates in November, it will be the trap door, similar to 1987 and 1929 which slams shut on the stock market.
I would be very interested to hear from other consultants to get their feedback on what the companies they are working at are doing regarding capital improvements and purchases into the end of this year and first of next year. My gut feeling is the same as what we are seeing in the I.T. field; total freeze. This will initiate deflation at some point, and Y2K will be the linchpin which accelerates this process. If Q1 is a disaster due to Y2K, then those purchases frozen to Q3 will be moved to Q4 and so on. The ripple effect from this even will be frightening. And crazy as it sounds, even on the household purchase level, I see my friends as well as myself postponing major purchases now. Of course most of my friends are a little bit more enlightened about Y2K and the economy also.

"The main point which I want to emphasize is the fundamental soundness of [the] great mass of economic activities."----Herber Hoover, 1929

Just some more quotes of historical importance...John

-- John Galt (jgaltfla@hotmail.com), October 26, 1999.

The bubble will burst and it should -- only question is when.

In "defense" (I put that in quotes advisedly) of the Fed and the string-pullers, if you knew that the economy had become a massive "confidence" game, wouldn't you do everything in your power to keep SME biz and consumer "confidence" up about Y2K?

"It is your civic duty to keep your money in the bank, in the markets (cf the way biz media report the market) and to keep 'investing in America'".

One of the cruelest aspects of this is the role the market now plays as a holder for retirement income. It both help keeps the bubble inflated (and remember Clinton's desire to take over the markets long- term with centrally-controlled investment of social security funds?) and ensures that the final impact will be felt for a generation.

-- BigDog (BigDog@duffer.com), October 26, 1999.

Milne:

The way I see it, the money may not "come back out of the market" in any big way. The market may simply wipe out much of the money pumped into it by crashing. If a stock falls from $100 per share to $1.00 per share, that wipes out one heck of a lot of price inflation.

-- Y2K Pioneer (Pioneer@aol.org), October 26, 1999.

John,

I agree with you in the fact that most companies are freezing their computer purchases etc. It's a lot harder right now to place consultants then it was 6 months to a year ago. Lot's of freezes.

Multiple people I know are putting off major purchases until 2nd quarter next year. Just to have some extra cash on hand. Just in case.

Personally I am putting off the purchase of a new vehicle and buying a house until I know I am still in good financial shape in April, May next year.

-- STFrancis (STFrancis@heaven.com), October 26, 1999.

JG:

manufacturing has been tanking the past few quarters; [cf. any of the machine tool trade monthlies; i.e. 30%+ declines in sales of machine tools]

machine tool prices are dropping; no one has any money to buy, nor any projects to justify taking on debt; I'm bombarded with offers of machines to sell.

a company I know has a sister company in Russia: I'm told the local company can do a sketch, fax it to Russia, have the parts machined there and shipped back here for less than they can do the same job in- house.

I'm told Russian machinists currently make +/-$30/month - slightly less than a degreed engineer i.e. $37-39/month.

but, none of this is news to those who are observant

Galt's Gulch beckons...

-- Perry Arnett (pjarnett@pdqnet.net), October 26, 1999.

JOLLYPREZ:

If you read the book "At The Crest Of The TidalWave" 1996, it clearly spells out the course, and YES, there will be massive DEflation, followed by a massive INflationary holocaust to finish things off, IF the governments pump up the printing presses in a (futile) attempt to stop the DEflation.

That said, there can still be a short period of INflation before the deflation starts, and that is the case now.

As for the scenario of money leaving the markets in droves to drive up inflation due to all that money chasing too few goods, THIS CANNOT HAPPEN THIS TIME.

The reason is simple... a massive crash is intensely deflationary, especially at this degree. The wealth effect reversed will be fearsome.THERE WILL BE NO MONEY LEAVING THE STOCK MARKET THIS TIME AROUND TO DO WHAT USUALLY HAPPENS IN A BEAR MARKET. That is simply because this MANIA was spawned as a child of the bull market, which is a rarity. Usually, a bull market spawns a BEAR market, which cleans out excesses. BUT, in a mania, the excesses are so huge that they CANNOT BE PURGED without SEVERE damage (READ:CRASH/DEPRESSION).

I am very well aware of the study to which you refer to back up your claim...it was done by Brousman, who writes the newsletter "CROSSCURRENTS". I have the exact issue where he makes this point, that was never picked up by all the point-head academicians.

BTW, as I write this, the GLOBEX is down fairly big, and remember, this is AFTER the big announcement today of the market manipulators trying to give the DJIA some juice by adding MSFT.

BUT, has anyone asked themselves, just HOW can that help the DJIA? Every mutual fund and his dog already owns MICROSLOP, and it already has a P/E OF 70! Even the DJIA has a P/E of "only" 30+!!

-- profit of doom (doom@helltopay.ca), October 26, 1999.