Re: CNN Breaking News

Michael Pollak wrote:

You probably saw the article below in today’s NYT from your old pal James “Permabear” Grant. It seems to shed light on how such people think. It seems to be a combination of:

(1) Almost incredibly, bond holders don’t think deflation is such a bad thing, and hold against Bernanke a famous speech he made in 2002 elaborating the many tools the Fed might use to combat it if it ever arose;

(2) the background of a debt that has enormously increased, and will continue to do so, inspiring in bond holders a fear that inflating will inevitably become the irresistable logical solution to any central banker who hasn’t pledged their first born against it; and

(3) a background belief that uncoupling the dollar from gold has made faith the ultimate basis of value (as if the gold standard was different, an ultimate reality on which value could be more securely based). And that this makes absolute orthodox fealty the only guarantee, and every heretical gesture a sign of coming doom.

What a bunch of weird ducks. Some people have said the only difference between a cult and a church is success. It seems to hold also of economic orthodoxy — that if rich bondholders believe it, that makes it not crackpot.

But the weirdest thing of all is that Grant is a really smart guy and writes wonderfully well. The relation of the mind and its worldviews is weird.

Grant doesn’t represent the mainstream of the bond market. His is a relatively marginal and highly ideological view - and his forecasting record is pretty mediocre.

Point by point:

1) Bondholders don’t mind a mild deflation, but they wouldn’t want to see anything serious enough to threaten defaults. No sane person wants a rerun of 1929-32.

3) There is some inflation fear around, but nothing yet very extraordinary.

3) The bond mainstream isn’t goldbuggish. This also is the view of the ideologically motivated, like Grant (or Larry Kudlow). Take a look at the reverence for Greenspan, who’s engineered three and a half major bailouts (post-87 crash, post-80s slump, LTCM [the half, since it was a specific, not systemic, panic], and post-90s slump). There was no flight from paper after any of these bailouts, and no spurt in inflation either.


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