How does one distinguish between the effects of the popping and appropriate responses to the discovery of inflated valuations?

You're really having a hard time internalizing what I'm saying, don't you?

No, I'm just having a hard time communicating my point to you. If you really think that assets are worth a third less than they were before then I think I'm unable to express what I mean by "economic fundamentals".

The dollar valuation is meaningless except in a relative sense. Whatever REAL assets people have title to, the fundamental value of these assets is not known until they trade them for whatever they consume.

They may not be worth even a third less than before. Many of them may actually be worthless.

The valuation of these assets may have dropped to a third, but the real question is why they were valued at 3X the current valuation.

Austrian theory suggests that the reason these assets were overvalued is because credit expansion by the FED substituted speculative value for real economic growth.

People aren't buying less because they're scared (although I'm sure that has made a dent) – it's because their assets are worth a third of what they were before.

Their assets aren't worth a third less, they just became aware that their assets had been erroneously valued 3X their real worth. They were never worth 3X.

Right… isn't that always the best way to approach assumptions rather than hang too much on any single assumption?

RE: "The bubble popping may have caused a shock to people who thought everything was fine, but the popping of the bubble is not the fundamental problem, not the fundamental issue."

To reiterate, I agree. I have always agreed. Just because I think ABCT, which I know is what you're getting at, is weak doesn't mean I don't agree that the pop itself isn't eveything.

RE: "You seem to be thinking that the conditions that have so far culminated in the bubble popping have been superseded as a problem by the psychological effects of the popping on consumer behavior."

No, no no. It's not a psychological effect – nobody's saying it is – it's a real effect. People aren't buying less because they're scared (although I'm sure that has made a dent) – it's because their assets are worth a third of what they were before. And that REAL drop in consumption reduces job security, which in turn does it's part to reduce consumption of those who had low wages and no assets to begin with, but now also have a reason to cut back because their employers are potentially in trouble.

RE: "Tell me, what is the fundamental economic problem facing U.S. residents?"

Again?!?!?!?! You're really having a hard time internalizing what I'm saying, don't you?

You have a really gray view of the assumptions. Just thought I'd say that.

The bubble popping may have caused a shock to people who thought everything was fine, but the popping of the bubble is not the fundamental problem, not the fundamental issue.

You seem to be thinking that the conditions that have so far culminated in the bubble popping have been superseded as a problem by the psychological effects of the popping on consumer behavior.

This impact is a political problem, not the real economic problem.

Tell me, what is the fundamental economic problem facing U.S. residents?

You have a really black and white view of the assumptions.

The cause is done and gone in the sense that the bubble is popped and it won't pop again.

It's not done and gone in the sense that the conditions that built the bubble are largely still there, and the feedback loops set in motion by the bursting bubble are still with us.

I think your attribution of the naive "the bubble is popped so everything is ok now" view to me is a little hard to follow… where do you get that?

You explanation that the bubble itself was the cause rests on the assumption that the "shock" as an original cause is some transient blip on the economic screen that occurred as a result of some transient crossing of curves.

IOW, the bubble was the result of regular cycles that occur in an economy, and now that we have passed through that time, we are only suffering some sort of psychosocial trauma from that event and that a bit of therapy is all that is required to get the economy back on its feet.

Yes – I've never shied away from the fact that this is taking a chance. I've never been the one claiming to have gospel truth here. And I've always advocated a more middle of the road stimulus to avoid deflation, but not to fill the entire shortfall in GDP, precisely because I'm concerned about overcompensating.

RE: "The stimulus is based on the assumption that original conditions that brought about the bubble and the collapse have gone away with the collapse. Another "if"."

You might want to explain before you assert.

The trade deficit didn't create it — it just funded it.

Agreed. The problem is not that Chinese people want speculatively to exchange present goods for future goods or the means of producing future goods here. The problems are twofold.

First, their statesmen (and possibly ours as well) inhibit their purchase of real means of production here.

Second, our statesmen sell them entitlement to tax revenue instead.

On the other hand, our statesmen can't sell them entitlement to tax revenue unchecked, because we're nominally "democratic" and hopefully need not tolerate arbitrarily high tax rates. Therefore, our statesmen really only sell the Chinese entitlement to dollars that our statesmen can and do create at will.

The resulting inflation arguably costs the Chinese more than it costs us, but I'm reluctant to think in these collectivist, "us" vs. "them", terms. The inflation could cost me more than some Chinese individual and presumably does cost me more than Chinese statesmen constructing the rules of this game along with U.S. statesmen.

The debt is horrendous, Congress and the President must be blamed for that. The trade deficit didn't create it — it just funded it.

That's what we are all about now: focus on the short term, and make it through the next election. If we have to cook the books to get the bonus, well, we'll burn that bridge when we get to it.

What is Bernanke going to do? How is he going to flatten the yield curve without raising expectations for inflation even further?

Bernanke only cares about common wages and consumer prices, and neither shows signs of upward pressure. He's willing, even eager, to stimulate inflation otherwise. If he reinflates house and share prices without raising the CPI-U too much, he's a hero.

Was the inflation rate in Weimar Germany as bad as it is now in Zimbabwe? I know that in Germany, you needed a wheelbarrow full of marks to buy a pair of shoes, but in Zimbabwe, you need to be a trillionaire to buy a loaf of bread. I don't know how you compare the two, but Von Mises clearly stated that he thought an inflation rate of a million percent was theoretically possible, but would never happen. I have to wait till I get home today to look up the exact quote.

Zimbabwe's inflation rate was at over 200 million percent at one point.

Can anyone believe the stock market went up today?

Click through to the NY Times article that Baker discusses, and you find this statement.

"China … is changing laws to make it easier for Chinese companies to invest abroad the billions of dollars they take in each year by exporting to America."

Barker basically says that the resulting U.S. trade deficit with China is good for the U.S. in financial terms, because China expects to lose value in the process. So is he right or not? Yes or no? Why avoid the point by addressing issues he never raises?

Why does China buy entitlement to U.S. tax revenue expecting the U.S., via inflation, to return less valuable dollars, rather than buying U.S. real estate, U.S. corporate shares or other dollar denominated assets?

If the Chinese sell MP3 players to the U.S. today expecting to buy food from the U.S. in the future, why don't they buy midwestern farmland or shares of Archer Daniels Midland rather than entitlement to U.S. tax revenue that continually loses value to inflation?

If they buy entitlement to tax revenue because they can't buy the other assets for some reason, then how is the trade "free"?

You simply ignore these question.

It is going to cause massive pain as it gets unwound over the next few years.

The squeeze play is already starting. Quantitative easing is finally catching up to the bond market, triggering the steepest yield curve on record. Housing still has not bottomed, and here we go ready to raise interest rates again.

It's going to be wash, rinse, repeat with the banks and their 'assets'.

What is Bernanke going to do? How is he going to flatten the yield curve without raising expectations for inflation even further?

Can anyone believe the stock market went up today? Can anyone believe the stock market? I feel dirty even following it.

Maybe China can start a direct consumer finance program for us. Adjustible at US prime plus 7%. They can strike a deal with Treasury to garnish the wages of anyone defaulting.

Saul you had me until you said the above. I think Von Mises did see this in Weimer Germany. If not he saw it in the Hungarian inflation of the post-war period. Von Mises predicted it in the Theory of Money and Credit and then he saw it many times over. That being said, I think you comment quite good.