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Like I said, people stop spending because prices are dropping. Would you buy anything non-essential if you knew it would be cheaper next week? It is almost the exact reverse of hyperinflation (where people rush to buy things before price goes up). Since people aren’t buying, business slow production, leading to unemployment, even less demand, lower prices still. And so on.

The whole idea is to keep inflation reasonable, which is not too high, not too low. Too close to zero risks deflationary spiral. Too high is unpopular, and may risk hyperinflation.

As many have pointed out, it is possible to simultaneously have high consumer inflation, but deflating investment assets. That is bad, because your home is going down while food may be going up.

Again, I can’t under emphasize the role of productivity. All the other stuff isn’t nearly as important. Can we as a society influence productivity? Hard to say, but bubbles hurt it by misallocating resources. As do protectionism, strong labour laws, high taxation etc.

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What is generally thought of as undesirable is UNEXPECTED inflation. Even that isn’t as bad as thought. Contrary to popular belief (and what gold bugs and coin collectors like to tell you), it doesn’t devour wealth. It simply redistributes wealth between long term lenders and long term borrowers. That leads to nervousness and excessive risk premiums, but other than that no big deal.

High inflation does “tax” cash, so one has more incentive to keep as little around as possible (think hot potato). If inflation is TOO high, we do risk an inflationary spiral, but that is fairly extreme and easily remedied. The other danger is of course a deflationary spiral, which I think is a tangible risk at this time. In one of those, nobody buys anything because prices are falling, stalling the economy. Cash literally earns a real return (and tax free to boot).

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Not necessarily. Our grief is the result of excess liquidity and the related bad lending and excess consumption.

Low rates need not be bad. If productivity is high, we can have low rates AND a strong economy. This is the missing link that all the talking heads are oblivious of.

Productivity growth is THE true reason why we have had a rising standard of living, and is truly the fruit we’ve been picking. But how many times do we hear it in debates? Never. Instead it is about consumers driving the economy, RE going up up and up just because. Tragic really.

Our problem stems from Greenspan’s miscalculation. He felt that he could keep rates lower than what previously was thought prudent because he felt that productivity would increase sufficiently to provide goods to absorb all the liquidity. He though this because of:

a) The IT revolution finally bearing fruit.
b) The fall of communist Soviet Union.

He calculated WRONG and we are all paying the price.

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That said, isn’t one of the major components of our grief right now because of easy credit, ie., low interest rates?

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When the interests rate became laughable ie 1/2 to 1/3 of what they one were….many people shifted their investment focus.

You are forgetting that it is real interest rates that matter, not nominal. What good is 13% savings rate when inflation is 12%?

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My message was about sharing few observations with readers of this blog. Everyone is free to interpret them.

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I am old enough to recall the days (not that long ago)when one received double digit interest for a basic savings rate.

When the interests rate became laughable ie 1/2 to 1/3 of what they one were….many people shifted their investment focus.

Many were literally forced to enter the stock market, and later the real estate market, in order to attempt to acquire returns on par with what they once had with “safe” bank deposits.

In my view, this forced rampant speculation, ie we saw this over the past 20 years is based on (i) phoney money with the ink still wet “off the presses” that is also ( ii )lent out cheap. This is the equivalent of a loaded gun to a drunk.

The only ones that gained were the ones who pimp it…ie Gov’ts with bogus economies to placate the masses,and stock brokers and realtors, whose vested interests is to sell this fantasy and walk away like this was an economic equivalent of a one night stand.

When I see the CEO of Lehman brothers before Congress and admitting they will walk home with $400 Million for running a 100 + year old company that is now , finito…history…thats pretty much sums it up.

Solution is to raise the interst rates and keep the speculation D-O-W-N !!!!

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Partisan Spectator, What do you mean? I’m admittedly old, and … well I just don’t get what your message is here.

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1, Nationalizing banks
2, Buying up toxic loans
3, Propping up dead businesses and faulty banks instead of letting them go
4, Preventing the housing bust and the asset price deflation by keeping people in homes that they can’t afford

All of that Japan had done so for 10 long years! That’s 10 years and still they couldn’t fix it. We were laughing on the tube when we heard Japan said they were cutting interest rates with the rest of the banks. Yeah, from 0.1% to what?!?

We are saddened to see that all the central bankers had done were to try and inflate the money supply again in the desperate attempt to jump start the economy. But if there is anything to learn from Japan is that, banks weren’t afraid to lend money. It is the borrowers who the lenders believed have no credibility whatsoever to lend to. This is happening now. We just recently came back from our vacation and visited our bank and spoke with our bank manager. She had this to say..

1, Loans of all kinds will be more difficult to obtain.
2, Interest on loans will be prime rate + 1% or more
3, Loans will be evaluated via traditional lending terms and determination (the old fashioned way)
4, Credit line will be chopped to high risk borrowers without notice

If many of you think our economy is in good footing, why are banks now so unwilling to loan money easily?!? Isn’t this an omen to possible trouble coming ahead..

What happens to individuals and businesses that rely on line of credit to run their daily operation?!?

Again, this happened in Japan and is ongoing, because all the excessive liquidity sloshing around were used to build up a cash reserve against the mounting bad debt and failing asset bubbles (inflated real estate) that deprive lending capital to other growth businesses around.
When growth businesses are starved of running capital, they will capitulate and wither.

We are in this stage that we rather see the economy stagnate and wither slowly rather than a big chop on the head if the Fed and the US government didn’t approve the rescue package. Either way, we are sinking Canada included. There’s no escaping as our Canadian banks will keep its liquidity in check to hold their own fort. With Canadians saving nothing, it means Canadian banks will have no way to raise extra capital to finance other private capital projects. Which leaves only the government to fund projects, and when they do, they will ALWAYS fund to those of the elected and well connected business associates, which then further distorts the economic reality.

Again, this had happened in Japan..

I suggest that everyone learn from what happened in Japan and prepare yourself for it.

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A plan originally earmarked for Friday morning would see the government assume some mortgages currently held by the banks by giving them to the Canadian Mortgage and Housing Corp., a Crown corporation. In turn, the banks might receive CMHC paper – possibly bonds – against which they could use as collateral for their own loans from other banks.

Oh, this looks real good. Banks are “giving” mortgages to CMHC. How fabulous is that?

Thanks for the link, man.

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CMHC has been doing this for years (Canada Housing Trust). So just what is new about this?

http://www.financialpost.com/s.....mp;k=20957

But is that really the right thing to do? I think the last thing Canada needs right now is to supply more cheap capital to an overvalued asset class – housing.

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It’s not “so much higher”. To put things in perspective look at AUD- less than three months ago it was almost equal to USD, and now it is trading at 1.51… Don’t be surprised if CAD follows the same trajectory.

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Hey cool, so gas should be about $0.82 per liter real soon now, right? Right?

Anyone? Bueller?

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Nikkei (-862.48)
Oil $82.00

Canucks/Flames 4-0

Gonna be an interesting day in the makets tommorrow.

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A plan originally earmarked for Friday morning would see the government assume some mortgages currently held by the banks by giving them to the Canadian Mortgage and Housing Corp., a Crown corporation. In turn, the banks might receive CMHC paper – possibly bonds – against which they could use as collateral for their own loans from other banks.

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Nikkei (-888.48)
Oil $82.49

Canucks/Flames 3-0

Gonna be an interesting day in the makets tommorrow.

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http://www.reportonbusiness.co.....m_mostview

The real estate industry has gone into damage-control mode to try to quell fears Canada’s housing market could enter into a U.S.-style freefall.

“We want to draw attention to the fact that despite some recent stories that suggest the Canadian housing market is heading for a crash similar to the States, that just isn’t in the cards,” Gregory Klump, chief economist at the Canadian Real Estate Association (CREA), said on the call.

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People lining up to buy gold coins? Hey,just like in 1980. Come to think up it, people were lining up to buy condos around that time as well.

So what happened over the next few years?

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Lehman Bros was around for 158 years before people figured out it was crap.

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