Okay, I'm a bit confused about all this recent talk of deflation. I have read several articles about it on Mises.org and recently read Hulsmann's "Deflation and Liberty." I understand that deflation does not really refer to falling prices, but to a decrease in the money supply, thereby leading to an increase in the purchasing power of each dollar. My question is, what is really going on with the money supply today? Lew Rockwell's article, "The Force is With Us" claims that "depite the Fed's effort to expand, the money supply today is actually shrinking." I understand that with banks not lending to their fullest potential, the money supply is actually shrinking, but what about this huge pool of reserves that has recently been injected into the banks? Yes, they may not be lending it all right now, but once confidence is restored they will presumably begin lending those funds, which could potentially lead to massive inflation. Is it possible that this increase in reserves can counteract the shrinking money supply without leading to massive inflation, or is the money supply not shrinking quickly in contrast to the huge amount of new reserves? I assume that the monetary base has greatly increased while at the same time loans are being contracted/paid back, thereby shrinking the effective money supply. So are we really experiencing deflation at the moment? Thanks a lot!
Falling prices (aka deflation) can be caused by any of the following:More goods/services in existanceLess money in existanceLess Fractional Reserve BankingHigher demand for money (to hold on it)
Hope this clears up some confusion.
Schools are labour camps.
Yeah to add on to the original question, I don't understand how deflation would happen after the trillions of dollars in bailouts.
While it is true that Austrian Economics state that deflation is a sustained contraction in the supply of money and credit, if you look at history, that if is possible to have, under certain circumstances, specifically a free-market gold specie, both falling prices of goods and services while there is economic growth. At this time, we are witnessing the BUST portion of a business cycle being deflated from the BOOM that was basically manufactured by the monetary policy of the Federal Reserve, and government interventionist economic policy.
There are several factors within this BUST cycle that are very distinctive in terms of deflation, perhaps one of the more interesting contradictions is that gold prices have not deflated drastically to levels that would indicate a classical deflationary event. There may well be several reasons for that, perhaps the main is declining public confidence in both the monetary system and the Federal Reserve. Also, we must understand that while there has been the relative steep drop in prices in some sectors, it is not, at this point consistent across the economic board.
It also is important to remember that there is a time element involved with the expansion of the money supply. At the moment we have had a vast de-leveraging in the credit markets, thus a type of log-jam has been created contracting the flow of credit while the FED is greatly expanding the monetary base. The problem is that the FED is taking a dangerous direction in its attempt to expand through what is commonly known as quantitative easing. It is more like direct creation of fiat monetary injection, side-stepping the normal monetization of debt through the sell of Treasuries. It is also purchasing commercial paper directly, along with all the other innovative measures it is currently taking.
The real danger is what happens when the credit log-jam breaks free and the vast amount of liquidity begins to flow through the economy. At that point there is a very real possibility of extremely high inflation or perhaps worse. It is also important to remember that hyperinflation always occurs during a deep deflationary event as the central bank and government attempt to divert their dread of deflation. Hyperinflation is more than just a monetary event, it is also a psychological and political event. Confidence is everything under a fiat monetary system, without it the system cannot remain viable long.
I like the confidence is everything....... Sad but true...
Just hope that bank's dont start lending out those reserves again....
Republicae:if you look at history, that if is possible to have, under certain circumstances, specifically a free-market gold specie, both falling prices of goods and services while there is economic growth.
expansion of goods and services with no corresponding increase in money supply is the same thing as contraction of the money supply. you are never more likely to have deflation than in times of great economic expansion.
Ludwig von Mises Institute | 518 West Magnolia Avenue | Auburn, Alabama 36832-4528
Phone: 334.321.2100 · Fax: 334.321.2119
contact@Mises.org | webmaster | AOL-IM MainMises
Mises.org sitemap