"History is a wonderful thing, if only it was true"

Saturday, May 08, 2010

Why Inflation may not be a problem

Defaults shrink money supply, and banks are not lending.
But that will change sometime, then the central banks will have to soak up the excess liquidity... and the the politicians to where to shove it.

Andy Kessler: The Markets Have Good Reasons To Be Nervous - WSJ.com:

"When debt payers default or banks fail, it is deflationary as money disappears. The Federal Reserve learned its lesson to either be the lender of last resort, or if defaults occur, to print enough money by buying bonds to make up for the lost money supply. It has worked so far over the past 14 months. Ben Bernanke, to his credit, knew when to stop printing by not extending the March 31, 2010, deadline for mortgage security purchases. Still, I think he overshot a bit by boosting the stock market past 11,000.

But bank debt and sovereign debt are two different beasts. A rising market won't allow Greece to refinance like it did Bank of America. It's the sell-off that could help."

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