Supposedly we're all fools and the central bankers have us by strings like we're puppets.
Everyone here dumping dollars and hording Gold. Is that the right play for everyone? This says otherwise. This has all happened before and we're suckers about to get scrapped over an open fire.
PLEASE read the following EYE OPENING report and interview and tell me how she/he is WRONG and Austrians are RIGHT?
http://europe.theoildrum.com/node/5917
As far as I see, their whole scenario rests on this assumption: as people default on their loans for certain leveraged projects, this somehow leads to price deflation across the board. However, ask yourself these questions:1) Did the digital money involved in the loaning process vanish with the loan default? I'd say it didn't. Imagine this: profligate person A borrows X from the bank to buy a car. X is now on the car manufacturer's account. A defaults on his loan. This is bad for the bank which is now lacking X, but X didn't evaporate. It's still here, circulating through the economy - unless the car manufacturer is hiding it under his pillow, which leads to our second question:2) As businesses default on their loans and productivity shrinks while at the same time the money that poured into the economy via loans still exists, why should we expect deflation? It's a relatively stable amount of money chasing a shrinking supply of goods and services. Sounds more like price inflation to me.To be fair though, they do have a point. Bank runs, as happened in the wake of the Great Depression, which lead to people actually hiding money under their pillows instead of putting it into another bank account, do tend to lead to price deflation across the board due to a decrease in the supply of "working money". We have a similar situation right now with commercial banks putting enormous amounts of money into the Fed system as excess reserves instead of actually lending them out to borrowers on the market. See this chart for more precise details. Banks get a fraction of a percent interest on these idle deposits. It's by far not enough to cover interest payments for these commercial banks' depositors. At some point, they will be forced to lend this money to cover their bills.
But maybe they loan out just enough to cover their bills, you say, and put the rest under the Fed's pillow. Can't this lead to serious deflationary tendencies? Yes. However, think about it: if there is one thing that the economic world view behind the central bank dreads, it's deflation. In the wake of this crisis, we have heard experts of all stripes warn about the perils of deflation. In post-WW II US history, there has been just one year of average consumer price deflation I think. The post-WW II Fed, Congress and academia have always, by and large, preferred inflation to the prospect of deflation. With nearly a trillion dollars of excess reserves idling around in the Fed's digital chambers, do you think they would hesitate to disincentivize this activity, e.g. by imposing a small fee on excess reserves, to make banks lend again if they think it will drive away the deflation beelzebub?
The problem is not deflation. The problem also is not inflation. The problem is government spending. Government spending and deflation are problematic because wages fall faster than prices. Government spending and inflation are problematic because wages do not rise as fast as prices. So who cares if we are in deflation or inflation? My concern is the government not cutting spending.
At most, 5% of the population would need to stop complying to bring down the government.
Spideynw:The problem is government spending.
Spideynw:My concern is the government not cutting spending.
You're right, but I wouldn't count on the government to cut their spending any time soon. It's been less than a year for spending to get to where it is now (3-4 times where the deficit was when Obama took office). How much more can they spend before the population can replace members of Congress to slow the spending?
Today they are focused more on the perception of the economy than the reality. The recession is over - yippee!!! How much damage is that going to do? Malinvestment on top of more malinvestment.
I think we're at the point that even if the government doesn't spend another dime, there's enough damage to see a correction of massive proportions. Now the right thing to do would be to let that happen so as to minimize the recovery. Such a recovery won't be due to government intervention (which includes government spending).
The market response would be higher interest rates and inflation - even hyper-inflation. A lot of people would be wiped out, but some would be prepared for the inevitable and the recovery would take years rather than the decade or more under government intervention.
I'm afraid we're in for something much worse because the government won't change its behavior. There will be more intervention: more spending, more monetary manipulations, more takeovers, higher taxes (transfers from private to public), etc. As people revolt from this, government will become much more direct in its limitation and control of liberty. Eventually, the government will collapse on itself. It's at this time where things could turn out even worse - the state that replaces the current state. I hope by then people are informed enough to move towards liberty and capitalism rather than away from it. So far, I don't have that much confidence in the people.
While it was interesting reading I am still not sold over to the deflationary front. Ever since this depression started I predicted a period of stagflation, with raising prices, contracting industrial output (except China) and saving rates and raising unemployment. Nominal GDP growth will most likely be fueled by the present stock bubble and increased government spending. What will happen next nobody can tell: we may have deflation, high inflation (but not hyperinflation) or something we never experienced before.
The big problem I see right now is the link between government spending and social issues. Central bankers may be geniuses in their own right but there are simply too many issues even for the world smartest men to handle right now. Even the dumbest politician knows that what should be done right now is roll back government spending consistently to allow for tax cuts which would fuel lasting economic growth and not just another bubble. The problem is spending cannot be rolled back: the economy has come to rely too much on government spending. Ordinary people in the street have come to expect "free" medical care and retirement benefits and won't hear the voice of reason saying them we cannot afford them anymore. Enterprises have come to expect nice fat government contracts, subsidies for everything from not firing people to building whole new factories and a being bailed out (by tariffs, legislation or whatever other mean) no matter how inefficient they have become and won't hear reasons if their bread and butter is rationed. Japan and Europe will probably be the first to take the hit because their social structure is much more rigid than the US and because of internal issues: Japan is beset by its enormous public debt and rapidly aging population while Europe economy has come to depend far too much on government spending and legislation is becoming too costly of a factor to be ignored. The US, despite the colossal debt, still has a chance but will probably throw it away trying to pursue the Soviet model. That's why no matter how intelligent central bankers are they are bound to fail and the Austrians will once again be proven right.
Yes, it's time for the Dr Goebbels show!
"Unlike inflation, which divides the underlying real wealth pie into smaller and smaller pieces, credit expansion creates multiple and mutually exclusive claims to the same pieces of pie."
i have read several times that inflation was an expansion of money and credit...the person writing the oildrum article now wants to call inflation only a money increase and the money unit-denominated credit specificaly 'credit expansion'.
if inflation involves adding money to an economy and (under a frb paradigm) the credit from that money, then inflation is just that money can be inflated and money + credit can be inflated.
i dont know why this idiot wont specify which aspects of the currency (money and/or credit) are the 'problem' instead of going on about some redefining of the inflation term.
probobly a fake article written by a very dishonest person.
I predict both inflation and deflation at unspecified points in the future. I also predict that the Sun will both rise and set at unspecified points in the future. *Waits to be correct*
Link working now but it's quite slow...
On the issue of deflation or deflation in Europe all I can say is this. I am not exactly what you call a shopaholic. Apart from supplies I use on the job my two main expenses are foodstuff and fuel (I even cut down on the amount I spend on books) so I may not be the best judge but prices on the average have increased this year. Energy prices are skyrocketing (and I've just signed a contract freezing natural gas prices for the next two years... thank God!), food prices are slowly but constantly rising (EU agricultural politics anyone?) and shipping costs are going through the roof. OK, rubber products prices have slightly declined but that's all I can think about right now. So if deflation is coming is surely not in retail and workshop supplies prices.
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