Have your concerns about deflation and credit bubble dynamics been adequately discussed here? I wandered over just now to Nouriel Roubini’s blog just now and found this in a 1/27 post titled “Global Imbalances, the US Dollar and Globalization Challenges at Davos…” which in my mind doesn’t discount what you’ve been arguing. At least I don’t think that Stephen Roach would deny the possiblity for a deflationary outcome post bubble burst, and I suspect that Nouriel Roubini would not either.

“… At the initial panel on the global economy only long-term bear Steve Roach from Morgan Stanley repeated the bearish outlook on dollar, the US economy and the risks of a disorderly adjustment triggered by the bursting of the US housing bubble. I happen to share the concerns of Roach even if, now, rather than a hard landing I predict for 2006 a significant US and global slowdown and a significant fall of the dollar but not a free fall. …

“[Larry] Summers argued that the two forces driving markets are “hope and fear”. His concern is that, on cyclical issues there is too much hope – i.e. complacency about the global imbalances – and not enough fear that asset bubbles and imbalances may lead to a disorderly adjustment. On long term issues such as the emergence of China and India he argued that there was too much fear (that China and India will take over the world with severe effects on unskilled labor in advanced economies) and not enough hope that the emergence of China and India and their intregration in the global economy will have long run beneficial effects. Summers went as far a suggesting that the emergence of China and India (and more broadly of the BRICs and emerging market economies) may be the third most important development in the last millenium, next to the Reneissance and to the Industrial Revolution. This is quite a bold statment that may have some truth.

“But Tyson warned of the potentially negative implications of the emergence of China and India for unskilled labor in the advanced economies. With two billion plus workers in China and India joining the global economy this increase in the global supply of labor should lead, based on simple trade theory, to a long run reduction in the relative equilibrium real wage for unskilled workers in advanced economies. This reduction in real wages and increase in income inequality such as the once observed in the US in the last few years is a source of fraying of the ‘social contract’ that, in exchange for accepting globalization and freer trade guaranteed to manufacturing workers good wages and good benefits; for auto workers and other blue collar workers such manufacturing jobs were the ticket to entry in the middle class but both employment, real wages and benefits are being significanttly erored by globalization.
Summers echoed the concerns of Tyson when he said that we have a serious problem when globalization is associated with ‘local disintegration’ in places such as Flint (home of former now closed down US auto plants), with the emergence of failed states and with with struggling middle classes. To be successful globalization needs to lead to local integration not local disintegration.”

PS.. Brad.. I don’t think I’ve participated in any of your discussions since you change formats. For whatever reason I only see a partial “preview” rendering of my comment. Perchance that is intended to keep comments short. Or perhaps not.

Just so we have it straight, I’m not giving one hiota of my future wad of USds, say what you will…

Suppose, suddenly, all wage earners start to save 10% of their wages, bam, consumption falls to 74. That may happen because say they fear for retirement, they have debts, whatever.

What happens to production ?
Suddenly there’s too much production, then prices fall, lay offs etc. The example looks like the USA now.

You may say : OK but it started because people saved not enough.

True in that case, but the opposite can happen,

If there is a production of 100, 50 final goods, 50 investment goods, Investment of 50, Consumption 50 wages 60 And people who earn returns on their assets get 40, wage earners save 20 and spend 40, asset holders spend 10 and save 30.

The next year, production has doubled because of investment, but people encouraged by the success, save even more : there’s not enough demand for the products, the country needs to export, then, there’s not enough demand,… And suddenly the country realises it has tons of new plants coming on the market, and there are no consumer for them…

Saving more than your neighbour is always good, however when dealing with a country and even better with a world economy, it’s better to have a balanced saving rate ensuring stable growth.

It’s exactly the same as university and shooling, if all people go to university and get a bachelor then you have to go their and get a master. That’s how

So, additionaly there are demographic reasons for a low long term rate too. BTW, China has an enormous aging population…

BTW, I woudn’t discount totally the significance of the inverted yield curve.

It is basically saying that the Fed’s effort to hamper liquidity through short term rate increases is being unravelled by a loose end at the long term rates; where the PBoC and other foreign CBs are using a different method to remove liquidity, long term lending at very low rates to promote present consumption.

It further says that the Fed cannot sustain these rates in the face of an increasing trade deficit, brought about by an increase in the USD due to higher Fed rates.

I understand what you’re trying to convey.

But, I don’t see Warren Buffet hurting too much b/c he’s gone too far to one side of the road, nor China for that matter; and yes I do see the hurting on the guy that’s taken too much debt and is spending more than his income.

I tend to think we should be leaning a bit more on this strayed poor fellow than the Buffet Treasury saving kind…

Middle of the road? Why?
Could it be the tainted glass perspective of the guy in trouble?

Is it bad to have a wad of USDs in your purse?
I’m looking forward to someday being able to answer this question with first hand experience.

THis article offers another self deserving explication : rising retirements and changing pension accounting rules explain rising demand for long term bonds. Hence the fall in long term rates. And there fore the inverted yeld curve does not mean anything

Joe rotger you wrote
n sum, I don’t feel it’s correct to preach different roads to heaven to different people; it’s either that it’s good to save or we all go out on a spending spree?

I think you need to realise that when you say to one guy save more and to another save more you are not preaching different roads to heaven. You are teaching exactly the very same road, the middle road.
It’s dangerous to oversave overinvest, this create overproduction crisis. It’s dangerous to undersave under invest, this creates stagnation.
And it’s dangerous to overlend overborrow, this ensure future crisis.

if there’s one road to heaven and some are on the left of it, you ask them to move to the right … and vice versa.

Borrowing is a way to spend today, future income.

There’s a lot of room here, mortgaging future generations to continue present spending.

I also feel long term bond sterilization is an excellent way to remove USDs from the present…which is why long term bond buying is crowded and their rates low.

Borrowing by mortgaging the future can go on for a very long time…

On your rabbit hole evacuation measures,

- I agree that the US govt should reduce its overspending. I would recommend this to anyone that is or will not be able to match his expenses…

- On the other hand, I can’t agree with your recommendation to emerging high surplus economies to go out in a spending spree… b/c they’ve worked hard and saved too much? They’re already doing a lot for the irresponsible spenders; they’re lending them at extremely convenient low rates… And, they in turn are putting away — or SAVING –their hard earned USDs for leaner years — in US Treasury bonds and such. In sum, I don’t feel it’s correct to preach different roads to heaven to different people; it’s either that it’s good to save or we all go out on a spending spree?

- In regards, to asking China et al to raise their prices, or to raise their currencies; heck, I can’t see the US moral right to ask this from anyone? These people are only willing to do the same or more for less pay; is that a crime? And BTW, US consumers also have been benefiting from low prices; they continue to enjoy a better standard of living.

Of course, what I’m saying solves nothing; but, sets the moral tone, if anything.

I guess I’m trying to present how easy it would be for China et al to counter your arguments…

On the more general judgment day discussion, I think somebody said it a few days ago, it’s not going to happen; the creditor is already too far into the debtor’s quagmire of debt. The bank will have to help out the debtor out of his situation — if it’s not being already coordinated as we speak.

Maybe some refinancing to the reappearing US 30 year bond to lower cash flows…
+ a little loosening in the Yuan/USD rate to help the trade deficit…

Finally, it seems that everybody thinks the USD is going to drop. I don’t – or just a little.

In relation to what?

As I see it, most countries try to conserve (even increase…) employment. Raising local currencies is a sure way to price themselves out of the market, which leads to deflation, and counter to governments which feel accountable to the unemployed voters…

I’m sure this is the reason why USDs from oil producers and other surplus economies, inevitably find their way into the US; no one wants to hold the USD cash hot potato, they all would rather help the USD Treasury sterilization to preserve its pricing.
In conclusion, no shocks, slow grinding “a la Gross” for the next 10 years while the US accommodates to what the PBoC et al bankers say. Low rates, low prices…

Basically, the model seems to explain why Japan and Europe might be financing the US, but the big shift since 97 is not a surge in Japanese/ European financing of the US, but a surge in emerging market financing of the US –

I also have trouble getting past an introduction that list capital market imperfections in emerging markets as an explanation for the US current account deficit (presumably b/c those imperfections drive private savings away from emerging markets) and ignores reserve accumulation in emerging markets. seems to me that the surge in reserve accumulation from $100b a year to $500 b a year in the emerging world might have more to do with the current global flow of capital than capital market imperfections. Last I checked, private capital was flooding emerging markets at about the same pace as 97. See Philip Coggan.

Maybe I am bitter ‘cuase i didn’t see a roubini/ setser reference. but in general terms, i tend to be more impressed with models that suggest the authors are familiar with the data tables at the end of the IMF’s WEO than more speculative exercises that assume away the emerging world.

rant over!