FW: GMO's James Montier On The Rise Of The Aust(e)rians: "Any Deflationist Victory Would Result In The Rapid Arrival Of QE2"

GMO's James Montier On The Rise Of The Aust(e)rians: "Any Deflationist
Victory Would Result In The Rapid Arrival Of QE2"

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The ever insightful James Montier of GMO presents a short, sweet, certainly
controversial (he espouses stimulus over austerity) and to the point essay
on what everyone at Zero Hedge realizes (or should by now) all too well: "If
the Austerians and their ilk win the day, we may see some short-term
deflationary pressures and, as noted above, they will be even more dangerous
than they were previously because we are starting with no margin of safety
in terms of the inflation rate. However, the U.S. at least has a central
banker who seems to understand the risk. Despite his complicity in getting
us into this mess in the first place, Ben Bernanke has shown he understands
the risks that deflation poses, especially in a debt-laden economy, and
believes that he has sufficient tools to prevent deflation from gaining
traction in the economy (even with rates at zero). Indeed, he has given
speeches where he has laid out a menu of policy options in the event of
deflation risk. First on the menu was aggressive currency depreciation;
second was the introduction of an inflation target; third was money-financed
transfers (effectively, tax cuts financed by printing money); and, finally,
quantitative and qualitative easing. Ergo, the "good news" arising from an
Austerian victory would be the rapid arrival of QE II. Thus any short-term
deflation will ultimately lead to long-term inflation pressures." Montier
once again brings up the ever more critical Current Account equation. By now
it is more than clear that deleveraging by both private and public sectors
will not end well, however throw in the inability to fund the Current
Account, and you can see where our concerns about the $1.3 trillion collapse
in shadow banking lending in Q1 2010
<http://www.zerohedge.com/article/will-record-plunge-shadow-banking-liabilit
ies-impair-shadow-funding-us-current-account-defic> , and the ramifications
on our CA as foreign banks null and void their shadow exposure, will soon be
the most discussed topic by pundits. So aside from the obvious investment
choices, how does a professional money manager (it is kinda tough to tell
your LPs "all your 2 and 20 generating assets are tied up in zero cash
yielding gold" unless one's last name ends in -aulson, -horn or -rott), how
does one plan for "A flight path that contains short-term deflation and
long-term inflation?" Read on to find out (and no, it's not US Treasurys).

h/t Adam

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