iTulip: Flow of Funds Q4 2008: Debt Deflation confirmation

I’m still not clear on how debt deflation is going to lead to inflation precisely as outlined in the article, which I took to be:

  1. Primary production capacity is being removed which will lead to a price squeeze on primary goods which will then feed into the rest of the production chain.
  2. There aren’t going to be buyers for US agencies and treasuries leading to a balance of payments crisis.
  3. The balance of payments crisis will lead to a decline in the dollar and will result in further inflation.

2 & 3, I don’t have huge problems with, although I do think they are overstated. Agencies and treasuries are what foreign countries use their excess dollars for. If they don’t buy them, but still want to export to the US, more than they import, they (the foreign countries) will still have to do something with their excess dollars. They could hold them in cash or buy beans and shotguns, but the dollars would still have to find their way somewhere back to the US?

It’s in particular, though, 1. that I can’t get my head around. As I understand it (which may be a mistaken understanding) the big costs and time-lags in primary production are in getting new production capacity online. Reactivating mothballed facilities (where the whole facility has been closed down) or increasing production (where the facility has reduced it) do not have the same lag effects. So the result of Le Crunch has been to cause a large buffer of underutilised capacity rather than to ‘destroy’ capacity. If Le Crunch continued for a long time, perhaps this would be a problem as there wouldn’t be an incentive to break ground on new facilities and the existing overcapacity would be worked off, but this presupposes a ‘lift-off’ back to previous levels of usage. I really don’t see this happening, more a slow recovery that will flag capacity demands in the normal manner - I see this as a reset to a lower level of activity, not a temporary reduction from ‘normal’ levels.

This view, I think, fundamentally affects my thinking on where property, stocks, commodities will go in the near term, so I would like some contradictory arguments!

I’m of the same opinion, and I think this is where the global policy makers are going wrong and why their responses thus far make no sense and will probably end up doing more harm than good.

They’re trying to fix the wrong problem, trying to get back to “normal”. It wasn’t “normal” and it isn’t coming back any time soon.

See my sig!

I am not and economist but from my work over the years I understand systems and control protocols and theory and these idiots dont have a clue. daltonr’s “whackamole” theory seems more and more international by the week!