[MRM]

Dollar bills are woven tightly enough that they will not burn. Put a match to one. It will burn as long as you have a good flame under it. No matter how you try, it will not keep burning when you pll the flame away.

We have had this conversation before, so we'll just have to agree to disagree. You really need to run a few basic equations on the money supply and growth of the economy. Here is a quick look at the fundamentals of this economy.

The worldwide economy is contracting. The drop in demand and production is nothing short of startling. One bit of data for you to bring it home. In third quarter 07, Volvo's commercial truck division sold a little over 40,000 heavy trucks. Not bad. In the third quarter of 08 they sold 128 trucks. That's right, one hundred and twenty eight trucks. October of 2008 was like someone shutting off the faucet. Fourth quarter data hasn't hit the street, of course, since the fourth quarter isn't quite over, but when it does it will be worse than the worst anyone is saying now.

The economic contraction is world wide. There is no bright sector and no safe spot on the globe. There is excess manufacturing capacity worldwide that is being made worse by the reduction in demand. Manufacturers are no longer worried about raw material prices; they are worried about over capacity. With over capacity comes price wars. It's just classical supply and demand.

We have not seen the bottom yet. The situation will deteriorate through the first quarter of 09 and will hit bottom about mid summer 09. It will stay there until about the firt quarter of 2010 when things will pick up to the point where people will notice.

So the logical result is at least 24 months of serious deflation.

The problem with all the new money that was "created out of thin air" is that for every dollar being put into the economy with one stimulous package or another, more dollars are being lost and are coming out of the economy. There simply isn't the wealth in the country or the world that there was six months ago, let alone a year ago. And then there is the velocity of money. At the height of the bubble, the mortgage backed securities could leverage $400 of risk for every dollar invested. You can't do that anymore. You almost can't leverage anything. The velocity of money has been reduced to a trickle, so the billions injected into the economy had a marginal effect.

So, as you say, the feds are pumping money into the economy, and someday demand will pick up. So what happens then? Well, it takes time for the effects of the improved economy to show, and the feds will certainly keep pumping momey in until the economy feels like it's improving, which is to say, too long. At that point, we will see inflaion because the economy will be expanding again and the money thrown at it will cause price instability. The feds will react normally for them by raising interest rates briefly and sharply.

So what does that mean for us in the real world? It means that you should hoard cash for the next year or so, and delay major purchases, and not go into debt if you can help it, because prices are falling and repaying debt with tomorrow's dollars is more expensive than today's dollars (the oposite of inflation). The stock market will stay tanked until at least mid 09, and will remain depressed for years. And when inflation does kick in, you should take all those piles of cash you've been saving and buy those nice juicy Treasury Bonds that will have returns in the 9% range. And then sit on them as the economy gets back to normal and the stock market starts returning a puttering 2-3% above inflation again.