i agree with the demand destruction concept – babyboomers will not buy more harley’s or attend as many football weekends or nascar races. mr. gilani did not carry his thought process through the macro part but then he is trying to sell fear and how to get rich. mr scott if not for conspiracy theorists, soap box prognosticators, snake oil salesmen, and me there wouldn’t be enough people on the internet for google and if m?. goel is correct google is in trouble, isn’t their stock down a lot….

I admire your efforts to articulate the Treasury-Bond bubble in your article: “Obama’s New Stimulus Plan May Be the Needle That Pops the Treasury-Bond Bubble.”

I agree with you that the Treasury-Bond bubble is developing will grow in magnitude and will [someday] burst. However, we may not see the bubble burst for many years to come… if ever. And Obama’s New Stimulus Plan will certainly not be the needle that pops the bubble. Here’s why…

First, your analysis of Treasury-Bond Bubble is well thought and detailed. However, your analysis approaches the subject issue as a two dimensional model like… action and reaction… supply and demand… price and quantity… money supply and interest rates… and interest rates and Bond bubble. In summary, what your analysis is saying: “The injection of trillions of dollars in the US economy, by the FED, will eventually cause inflation and that in turn will force FED to raise the interest rates causing the Treasury-Bond Bubble burst.”

Unfortunately it is not that simple and it’s not just you, but most everyone approaches the “supply and demand” as a two dimensional economic model. The two dimensional approach to analysis seemed to have worked fine in the past because, even though the third dimension [demand destruction] existed in the past, its impact was not huge [because of population growth, immigration and rise in living standards from much lower levels] and it was not realized for a long period of time due to slow consumer reaction to changes. And when the impact of this third dimension [demand destruction] was realized, it had arrived slowly and since its impact was not felt immediately… it was, therefore, considered as the result rather than the cause in the economic models. In summary let me explain…

There is a third dimension [demand destruction] that needs to be considered in any economic model in this day and age… the age of instant communications and the Internet. This third dimension is the “permanent demand destruction” from today’s informed consumer… the buyer of products and services who is also motivated [now] with the desire to store money, in one form or the other, for the future. When you enter the permanent demand destruction in to the equation, your argument of money supply… inflation… higher interest rates… Bond bubble burst scenario will not hold in the near future. In my humble opinion, this time it will play-out differently from the conventional wisdom…

Permanent Consumer Demand Destruction for Products and Services:

When you permanently destroy huge demand [by the consumer], the supply side [businesses] make adjustment to their business model by cutting production, cutting CAPX, cutting operating cost and letting employees go. In this scenario when there is less demand from consumers [and businesses] for both cash and credit… the risk of Bond bubble bust is delayed if not mitigated altogether. The argument in favor of consumer driven demand destruction is as follows…

The consumer of today recognizes that the trillions of dollars poured into the US [from all over the world] and that is what supported their credit binge to spend and spend. The [almost] free money pushed the consumers to rush into buying products and services they did not really need, rush into tech stocks, then the rush into real estate, then the rush into commodities, and then rush into U.S. government bonds. Over the years all of these asset classes [except the U.S. Government Bonds for now] have blown-up in the consumers face. Not only that, the financial machinery that funneled trillions of dollars of the free worlds savings [from across the globe] into the US financial system has now blown-up as well and the money velocity has come to a screeching halt. Banks are over leveraged, they don’t trust each others financial health and they are not lending.

Consumers are not borrowing either; they are downsizing and cutting cost…

• Banks are not lending to qualified consumers… but that could change;
• Consumers has little or no equity to borrow against… not going to change anytime soon;
• Days of free money are gone forever… because the savers from all over the world are now wise to the financial shenanigans of American financial wizards and are not looking to send their life savings to America any time soon;
• Consumers are now motivated, by the blow-up of almost all asset classes in their faces, to start saving money for their future commitments and retirement… going from negative savings to almost over 6% now;
• Consumers finally realize that they don’t really need three of everything [homes, cars, jewelry, minks/furs, TVs, cell phones, computers, and electronic gadgets].
• Consumers finally realize that they don’t need to buy a Hummer or new model car every other year;
• Consumer finally realizes the rising cost of energy for driving, heating and cooling… the present drop in cost is temporary we all know;
• Consumer finally realizes that the increasing cost of real estate taxes even though their homes are 40% less in value to-day… taxes always go up and not down;
• Consumers finally realize that they don’t need to re-model every five years and buy new appliances every three years;
• Consumers finally realize eating home can save them thousands of dollars over the course of the year;
• Consumers are loosing jobs left and right in all sectors of our economy… there are no safe heaven… not even in the health and consumer goods;
• Consumers are de-leveraging en-masse and there are no asset classes worth investing [speculating] at this time… and perhaps for a long time.

The studies indicate that by the end of year 2008, there will be over 1 billion Internet users. That means, most all of the educated population of the world, will be globally connected by the Internet. And the boundaries of time and space will disappear. People will gather in public forums of their common interests to network and share information. These people will be the consumers, investors, vendors, partners, friends, enemies, management, or employees of the public companies. In a public forum like this, that allows us to maintain our anonymity, there will be no place to hide for the incompetent or the unscrupulous.

Add to this Internet phenomenon the instant communications afforded by the TV, and its producer’s desire to provoke debates on issues, that in the end, when all is said and done, informs and educates the public at large. What you have is a well informed, wiser and more responsible consumer that is all set to “destroy demand” for the un-necessary, unscrupulous and the irrelevant.

Permanent Businesses Credit Demand Destruction:

Businesses now see this consumer demand destruction as a clear reality and are adjusting their business models accordingly by cutting production, cutting CAPX, cutting operating costs, de-leveraging finances and letting employees go. And as such, eventually, after the initial denial period to accept demand destruction, there will be less demand for cash and credit from these businesses.

On surface it seems that if these businesses could borrow money earlier, like in the August/September time frame, they might have postponed downsizing and waited a little longer before letting employees go. However, that window of opportunity is gone and the reality of wide spread “demand destruction’ has become a reality. The reality of demand destruction is apparent in thousands of employees being laid-off by bellwether companies like Microsoft, Google, JP Morgan and the like.

Granted, that in due time the wealthy consumers and businesses will come back into the credit markets to borrow so they can speculate in products, plants, production, stocks, commodities and real estate. But that time is years away, when there are clear signs of stability and growth in any of the known asset classes for investment.

Permanent Destruction of Asset Values at the Financial Institutions:

To this witches brew, let’s add the cause of our current credit crises and see what it means for the free supply of money in our financial system. I’m sure you and I both have our own set of facts, analysis and opinions. But the core fact that no one denies is: “the leverage used at financial institutions world-wide and lack of regulatory oversight was the main cause for this global credit crises.”

The regulatory oversight, or lack of it, will be debated and some day there will be rules and regulations in-place to prevent future systemic met-down and risks. In the meantime, however, either because of banking laws or because of banks own desire to mitigate risks in this financial environment, the banks and financial institutions out there are busy trying desperately to de-leverage. This means banks [and financial institutions] will first try to shore-up their equity/debt ratios before lending out the money received from TARP and other FED bailouts. There is, by the last estimates, over $3 trillion dollar in systemic losses in the US alone. The money losses did not change hands… it just vanished in thin air. What’s left behind, however, is the un-acceptable levels of leverage, risk and vastly impaired equity/debt ratios at US financial institutions.

In summary, before we see inflation we will first see deflation due to permanent demand destruction for products, services, and credit. If we are lucky and the trillions of dollars in FED money does work, in the best case scenario, we may see stagnation and not reach full-fledged deflation. That is our hope!

Inflation in the short term does not seem possible in view of huge permanent demand destruction for products, services and credit. The 10 year note is currently trading at 2.67% yield. That doesn’t sound any inflation bells in my congregation.

Anant Goel