Uncle Al's Conundrum Part Three
Scenario Two:
Economies start heating up a little, most importantly ours. Commodities prices would increase, creating a combination of energy stagflation and genuine inflation, forcing interest rates up, strengthening the dollar, increasing borrowing costs, tempering rampant yield chasing speculation and asset bubbles.
With increasing return on bonds, our debt in the form of already existing bonds, would be reduced substantially. Issuance of new bonds and payment of older low yield bonds with strengthened dollars would cut the debt quickly. Increased dollar value would negate the effect of the rise in commodities prices.
Existing low grade corporate, emerging market and junk bonds would take a hit. The housing bubbles would slowly deflate over a 3 to 5 year period. Increases in wages and the drop in prices would return housing to a somewhat saner proposition.
There might be a couple of institutional crises, but nothing worse than the S&L scandal, Enron, Worldcom or LTCM. The weak hands, classified as naked speculators, those leveraged to the hilt, those who did not mitigate their interest rate risk exposure would be shaken out of the system. And justifiably so.
At worst should the brakes be put on too much and too quickly, this scenario results in a mild recession, from which one could always recover, by taking their foot off the brake.
Stay tuned for the evidence supporting Scenario Two in Uncle Al's Conundrum Part Four
See: Uncle Al's Conundrum Part Two February 22, 2005
http://naybob.blogspot.com/2005/02/uncle-als-conundrum-part-two.html
Economies start heating up a little, most importantly ours. Commodities prices would increase, creating a combination of energy stagflation and genuine inflation, forcing interest rates up, strengthening the dollar, increasing borrowing costs, tempering rampant yield chasing speculation and asset bubbles.
With increasing return on bonds, our debt in the form of already existing bonds, would be reduced substantially. Issuance of new bonds and payment of older low yield bonds with strengthened dollars would cut the debt quickly. Increased dollar value would negate the effect of the rise in commodities prices.
Existing low grade corporate, emerging market and junk bonds would take a hit. The housing bubbles would slowly deflate over a 3 to 5 year period. Increases in wages and the drop in prices would return housing to a somewhat saner proposition.
There might be a couple of institutional crises, but nothing worse than the S&L scandal, Enron, Worldcom or LTCM. The weak hands, classified as naked speculators, those leveraged to the hilt, those who did not mitigate their interest rate risk exposure would be shaken out of the system. And justifiably so.
At worst should the brakes be put on too much and too quickly, this scenario results in a mild recession, from which one could always recover, by taking their foot off the brake.
Stay tuned for the evidence supporting Scenario Two in Uncle Al's Conundrum Part Four
See: Uncle Al's Conundrum Part Two February 22, 2005
http://naybob.blogspot.com/2005/02/uncle-als-conundrum-part-two.html
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