Emil, I think it is hard to predict what will happen, other than it wont be good. So much depends on what government, business and individuals do. It is easy for people to become so risk adverse that the economy virtually stops. For example instead of taking a holiday, people will stay home and save the money if they feel their jobs are at risk.

As to playing this crisis out
- avoid debt, especially on real estate
- cash held in major banks, splitting is a good idea
- if necessary, try to find recession proof employment
- last resort, buy a tent and find somewhere cheap to camp. Eating rice and vegetables is cheap and has health benefits.

I believe that deflation is the most likely outcome from this mess, but there are a lot of people who are talking up the chance of hyperinflation.

Their rationale is that the US (and the West in general – Australian being no different) is a net debtor nation. They have literally been loaned oodles of money but do not have the required capital means to pay it back. For this reason, when push comes to shove, the government will always go down the path of printing their way out of the situation: Here you are foreign creditors, take your money we have just printed for you – it is all worthless now but at least we don’t have any debt.

How realistic is this? Apparently the US treasury is about to issue an emergency T-bill sale to shore up the FED reserves. The FED has been bailing like crazy. It certainly looks like those printing presses are about to fire up and if the political machinery goes down the isolationist path, who cares if an old currency is worthless they may well just start with a new one.

My take has always been that if they tried this, yields on treasuries would spike and the market would not allow this to happen. The government would literally have to put dollars in the hands of people to go pay off their debt (stimulus checks of $100K per person anyone?). Also, banks would not want to see hyperinflation – if debts are too easy to pay back, their right to your future earnings just became severely diminished on a relative scale. However, a lot of them are fighting for their survival at the moment – perhaps they would prefer the hyperinflation than their death. Didn’t Bernanke say he would drop money from helicopters under this scenario?

I know that this is simplifying things and some of this sounds a little crazy, but it does worry me. I have personally positioned myself for the deflationary scenario with some slight hedges for the hyper inflationary route but I would love to know what thoughts Steve Keen (or anyone else) has on how this whole mess is going to play out, because it is definitely going to play out one way or the other. How are others planning to play this crisis out?

I seems to me that a CDS on a large company is like betting on the end of the world – if you win the bet you and the issuer won’t be there to collect and pay. You just made a charity donation to AIG or whoever. Donations to the Salvation Army would be better spent.

He must have started reading this blog!

Steve Keen is spot on – Glenn Stevens is now calling for debt deflation. It’s coming.

I guess what I wonder about is if those who review and analyze these markets look at data in a way that attempt to give support to his or her bias? Perhaps we are really at a stage where “doom and gloom” is a foregone conclusion, but are we?