Mish Should Ditch His Deflation Fears
We who are advocates of sound, free-market money need to get our story straight. Are we predicting hyperinflation or massive deflation? Personally, I am much more worried about the former problem. FULL ARTICLE
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Comments (83)
Dick Fox
Robert Murphy,
This is an outstanding article and one every Austrian should have to memorize. So many Austrians are more monetarist than Austrian. Thanks for doing an analysis that gets monetary economics right.
Published: July 13, 2009 8:18 AM
Sredab
I'm no deflationist, but you obviously don't understand mish's argument.
Of course, using a credit card doesn't increase the money supply. the whole idea of debt as money is that the claim on the debt is used as money - e.g. securitized credit card debt.
there is no clear differenciation between debt and money. you can already see that by the different definitions of money supply by the central banks. there is no objective reason why a 2 year bank deposit is considered money by the ECB but a 3 year deposit isn't. there is also no reason, why only bank debts are money but debts of other institutions aren't.
debt CAN act as money and CAN increase the money supply. an austrian economist should understand that, or why else would you call for full resere banking.
there are arguments against a deflation scenario because of debt destruction, but your article isn't one of them.
Published: July 13, 2009 8:28 AM
Emil Suric
According to Mises, credit is indeed money, money in "the narrow sense," as opposed to “money proper.” Expanding the supply of credit has the same effect as increasing the supply of money proper, at least in the short run; and it presupposes an arbitrary fall in the money/market rate of interest. But the circulation of fiduciary media increases the demand for money, as Mises explained. This creates an ever-expanding elastic supply of money, up until banks over-leverage themselves. In fear of panic, interest rates will rise back towards their natural rate, and the circulation of fiduciary media must eventually end.
So the natural reaction we should see would be massive deflation, or a correction. Unfortunately, the FED, and the Obama administration, are set on inflating a new bubble by further expanding credit. Mises explains that perpetual inflation must inevitably mean the demolition of the currency. Fluctuations in the purchasing power of money are entirely explained by quantity theory, at least in the long run.
“Recall that it's not the actual weight of gold that people care about, but rather its purchasing power.”
I’m not entirely sure about this. I think that the weight of the commodity money did play a very important role in previous societies. In fact, I think this how Gresham devised his law, namely that “bad money” drives out “good money.”
Published: July 13, 2009 8:29 AM
greg
I have been watching the bond and gold markets and yet to see any indication of inflation. The bond market gives you a 6 month look into the future, maybe it is around the corner, but there is no indication.
Published: July 13, 2009 8:29 AM
alan
> there are arguments against a deflation scenario
> because of debt destruction, but your article isn't
> one of them.
I thought it is because of debt destruction that leads to deflation?
Published: July 13, 2009 8:57 AM
Stefan
> I thought it is because of debt destruction that leads to deflation?
that's what I meant, read it like that:
there are arguments against (a deflation scenario because of debt destruction), but your article isn't one of them.
sorry if this was unclear, I'm no native english speaker.
Published: July 13, 2009 9:05 AM
Nathan Mayer
Murphy, you have it exacly backwards. No one has made a convincing hyperinflation case.
Look at Japan... oh the hyperinflation!!
US in the 1930s... terrible hyperinflation!!
"In fact, since a large chunk of credit was created out of "thin air" there is high likelihood that it will evaporate back into "thin air.""
http://mises.org/daily/1480
"Inflation, Deflation, and the Future"
http://mises.org/daily/309
"It is not my intention here to get into the interminable argument as to whether the US
faces a period of inflation or deflation. I have made my point in most of my past issues
that the Kondratieff winter is always the season of deflation because debt is deflationary.
And there is far too much debt in the US."
http://www.longwavegroup.com/pdf/V5_1.pdf
Austrian econ 101:
When banks increase the money supply, malinvestements form, creating "dead capital"
In order to prevent deflation of the bubble, more money inflation is needed.
This can go on for a long time, until the pool of funding starts to shrink.
Once the pool of funding shrinks, money pumping becomes sterile, as was the case with Japan in the 90s and the US in the 30s.
This hyperinflation nonsense is making Austrians look bad and it runs contrary to the theory.
Published: July 13, 2009 9:27 AM
roy
"Look at Japan... oh the hyperinflation!!
US in the 1930s... terrible hyperinflation!!"
actually, quite a bit of inflation in US in the '30s... just not in '29-31.
Japan is the only exception.. and I believe the carry trade explains about 80% of that.
Published: July 13, 2009 9:33 AM
Emil Suric
"This hyperinflation nonsense is making Austrians look bad and it runs contrary to the theory."
I don't understand; Austrians are quantity theorists. Increasing M, ceteris paribus, means a corresponding increase in P.
Printing money means inflation, ask Zimbabwe, or the Yugoslavians. Credit money is money, just not "money proper."
Published: July 13, 2009 9:37 AM
Nathan Mayer
Emil,
shame on you for thinking that Zimbabwe is a relevant comparison...
Japan, on the other hand is a perfectly valid comparison.
Roy,
every economist I have ever read defines the 1930s as a deflationary episode.
As far as the "carry trade" explaining away Japan's deflation... I'm not sure what you are trying to prove.
The Japanese didn't lower interest rates and blast money so that hedge funds could make money. The did it in an attempt to get banks to lend and consumers and business to borrow. Neither of these happened because the structure of production was skewed and the pool of funding was gone.
More Austrians should read Shostak:
http://mises.org/article.aspx?Id=1054
Published: July 13, 2009 9:52 AM
Spideyv
It is true that unused credit does not affect prices. However, used credit does, depending on the time frame for repayment. In your example, you use gold. Well, no one uses gold, everyone uses fiat money.
Published: July 13, 2009 10:06 AM
Emil Suric
Nathan Mayer,
"The Japanese didn't lower interest rates and blast money so that hedge funds could make money. The did it in an attempt to get banks to lend and consumers and business to borrow. Neither of these happened because the structure of production was skewed and the pool of funding was gone."
Inflation always skews the structure of production. The Japanese don't use credit cards, but when they do, they pay it off immediately. They also have a 25% savings rate. The elasticity of their money supply is not continuously expanding.
“shame on you for thinking that Zimbabwe is a relevant comparison...”
There is no “relevant” comparison. America is entirely unique, it has vehicle currency status. When a man in Vietnam wants to buy Chinese rice, he needs USD. The American dollar may have seen hyper-inflation 3-4 times by now if it wasn’t constantly propped up by foreign central banks.
Published: July 13, 2009 10:11 AM
newson
to nathan mayer:
deflation prevailed up to roosevelt's devaluation, inflation ever after. japan had no monetary deflation in spite of falling/flat cpi and ppi. as roy says, you can print the money but you can't necessarily control where it goes. the money the japanese created went offshore in carry-trades.
it's likely the money being created now in america will go offshore, too.
Published: July 13, 2009 10:11 AM
newson
steve saville rebuts mish in these two worthwhile, austrian-style articles.
http://safehaven.com/showarticle.cfm?id=10804
http://safehaven.com/showarticle.cfm?id=12844
Published: July 13, 2009 10:13 AM
janiceck
"There is no “relevant” comparison. America is entirely unique, it has vehicle currency status. When a man in Vietnam wants to buy Chinese rice, he needs USD. The American dollar may have seen hyper-inflation 3-4 times by now if it wasn’t constantly propped up by foreign central banks."
..well, the spanish empire after Rocroi, the roman empire under Diocletian... also the russian ruble in the '90s is an interesting case...
Published: July 13, 2009 10:24 AM
Roy
Roy,
every economist I have ever read defines the 1930s as a deflationary episode.
----
you didn't read past the first chapter then...
Published: July 13, 2009 10:27 AM
Joe Calhoun
I don't think anyone can make a case for inflation or deflation right now. It depends on what the Fed does in the future and as far as I know, neither Mish nor Murph have a crystal ball.
I can come up with scenarios where inflation is the outcome and I can come up with scenarios where deflation is the outcome. Both cases depend on the actions of the Fed in the future.
As for charging a penalty on excess reserves, I'm not sure that would cause an increase in velocity. Banks cannot increase lending absent demand and an increase in demand will depend to some degree on inflation expectations.
Published: July 13, 2009 10:29 AM
Emil Suric
"..well, the spanish empire after Rocroi, the roman empire under Diocletian... also the russian ruble in the '90s is an interesting case..."
Yeah, I misspoke.
Published: July 13, 2009 10:36 AM
Nathan Mayer
"you didn't read past the first chapter then..."
-you clearly didn't read any of the articles I linked to or you would drop the silly hyperinflation argument.
Let me know when the CPI actually gets above 3%...
Newson, Japan had exactly what America has now... massive monetary printing by the central bank and a build-up in commercial banks excess reserves.
so-called hyperinflationists cannot absorb the fact that price inflation can only occur if those dollars actually enter the economy and bid up prices.
The Fed has given it's all and look at the result.
Until liquidation is allowed to unfold, there cant be any inflation because there cant be any lending.
It seems that a lot of Austrians *wish* for there to be hyperinflation so they can point the finger at the Fed, but they are missing the point regarding ABCT.
Now... I will not field anymore questions or comments until readers read at least the 1st link I posted.
http://mises.org/daily/1480
Published: July 13, 2009 10:36 AM
David Spellman
There are two kinds of deflation. The good kind is when some factor of production becomes more efficient or more plentiful and thus increases supply. This leads to lower prices and increased wealth.
The other kind of deflation is when a boom goes bust or a bubble bursts. People stop spending as they try to pay debts and loans. Prices fall as more assets are dumped into the markets in an effort to liquidate liabilities. Deflation continues in this scenario until everyone has covered their debts or gone bankrupt.
Currently we are seeing the deflationary unwinding of the credit disaster. Once that is completed, we can expect the inflationary cycle to pick up. The government recapitalized the banks and mortgaged the citizens twice (once for the debt owed the banks and again for the tax liability to recapitalize the banks). From now on the government is going to have to drive endless inflation because there is no more money to borrow or steal. Hyperinflation here we come!
Published: July 13, 2009 11:04 AM
Chad
"there cant be any inflation because there cant be any lending."
Huh?
There's plenty of "lending" to the US Gov't. currently, which they are furiously trying to spend "to get the economy moving again".
This is a Chicago School prop for stimulus if I've ever heard one.
Published: July 13, 2009 11:15 AM
Chris
The answer is it is BOTH. Your Rothbard Express (RE) card hits the nail on the head, but you leave of what RE is doing. RE not only offers a credit card for every day purchases, but mortgage backed securities. They are placing those MBSs as reserves with the Fed (illegally). They're using debt as money. They're doing this to decrease the leverage as it appears on their books. As they're leveraging is decreasing, they're restricting credit (higher rates, lowering credit limits). As soon as everything is hunky-dory (read sell those worthless MBSs to the taxpayer), credit card rates will lower, credit limits will rise and their leveraging will return to where it was, thus flooding the market with dollars and causing sharp inflation.
Published: July 13, 2009 11:16 AM
Eric
What was missed, I believe, is that credit increases the money supply but ONLY with LEGAL TENDER laws which force us to accept this credit denominated in FED NOTE dollars.
If we didn't have to accept FED notes as legal tender, then we'd all shift to something more stable, such as gold for measuring value. If we could discount PAPER notes, as was done when gold was in circulation, I don't think we'd have these problems that inflation causes (once everyone understood the difference between the two - which was somewhat obvious in the past).
I'm reminded of a scene in "The good, bad, and the ugly" when the bad guy is about to kill someone who's offering him his life savings for his life.
Van Cleef says, "hmmm, you've got a lot here - and some even in GOLD". That was an implied discount of the paper money.
Try that today, and you end up being prosecuted for money laundering.
Published: July 13, 2009 11:19 AM
Don Lloyd
Bob,
I find it extraordinarily unlikely that a credit card company will ever hold a significant amount of actual money or cash, as opposed to having an interest-bearing account in some form of institutional money market fund or equivalent. When a vendor places an obligation on a credit card company, the credit card company will, only when it absolutely has to, direct its money market fund to make a transfer to the vendor, possibly to his money market account. Whether or not this process may involve one or two conversions to or from actual money, the time holding of actual money will be minimal.
Consequently, the availability of consumer credit will, in all likelihood, reduce the consumer's demand to hold money, and there will be little or no offset produced by an increased holding of actual money by the credit card companies or anyone else.
Regards, Don
Published: July 13, 2009 11:25 AM
Jonathan Finegold Catalán
But, it does! Imagine Consumer A uses a credit card to pay for a consumer-good purchased from Company X. Let's say the product was purchased for $20. The money supply has been increased because Company X is allowed to use those $20 as if they were "real money". Those $20 are not non-existent; they have entered the money supply.
The concept of credit as money is well covered by Jesús Huerta de Soto (Money, Bank Credit and Economic Cycles) and Mises (The Theory of Money and Credit).
Published: July 13, 2009 11:30 AM
Jonathon
I'm coming to the conclusion that there are three basic types of "money/credit" which many confuse:
1) Non-Credit Money - previously gold, now the monetary base (comm. bank reserves, FRNs). If you doubt this try taking a FRN to the fed for redemption.
2) Credit Money - money pyramided on the base: checking accounts, time deposits etc.
3) Non-Money Credit - debt instruments that are liquid assets but not technically a media of exchange: treasury bonds for instance
All three can have similar effects on the price level, especially when there is a liquid market for 'Non-Money Credit' or it can be easily re-discounted. Technically it seems 1 + 2 are "true" money but it becomes almost impossible to determine where 2 ends and 3 begins. It also seems to be a matter of degrees; t-bills with a few days to expiration seem much more like money than 30 year bonds, but at the end of the day just because the t-bill will be exchanged for bank credit or cash doesn't make it "true" money.
The obvious questions we need to ask are: at the end of the day as Credit-Money and Non-Money Credit contract can(will) the monetary authorities create enough new reserves to mitigate the drop in credit? What mechanisms and motivations are there to take that increase in base money, lever it into credit-money and non-money credit and push it into the economy rather than sitting as reserves or in checking/savings accounts?
Just because "true" money increases doesn't mean prices will follow, as money-demand can rise concomitantly. Banks need to be willing to take their reserves and loans, people need to be willing to take the cash from these loans and exchange it for things-other-than-money. (btw, if I'm not mistaken I believe banks could take their reserves and buy treasuries, no? Unless they are scared of something?)
For a while this rise in money demand/credit contraction can create a deflationary spiral(a correction until money prices fall far enough) but eventually the government's Keynesian policies will kick in and make money holders realize there is less incentive to do so, and money-demand will start to fall while the productive sector is contracting. This is one of the reasons(the contraction) why you see price inflation in countries that have high unemployment and slack in the economy(like Argentina); the rise in money-prices of less goods eventually turns into the drop in the price of money as people flee the currency. The wage mechanism and output gap theories of inflation are ridiculous and have been disproved in many a modern hyper-inflation.
P.S. comparing the U.S. to Japan is as pointless as comparing it to Zimbabwe. Oh, and the G.D. was deflationary until FDR devalued USD by %41 in '33/'34. Look at the price level between '33 and '37.
Published: July 13, 2009 12:30 PM
End the Fed
"Oh, and the G.D. was deflationary until FDR devalued USD by %41 in '33/'34."
Of course it was, if "dollars" were promises to pay in gold. Gold has pretty much always been deflationary (and still is). Of course, now a "dollar" is a promise to pay "a promise to pay".
Published: July 13, 2009 1:08 PM
Nathan Mayer
"P.S. comparing the U.S. to Japan is as pointless as comparing it to Zimbabwe."
the US is the world's largest economy. Japan is the 2nd largest. Zimbabwe is one of the smallest.
Comparing Los Angeles' economy to Atlanta's economy is more relevant than comparing it to Macon's economy. Why is that so difficult to understand?
Published: July 13, 2009 1:24 PM
Matthew Houseward
I didn't really think that Mish was talking about credit cards in his posts. I assumed he was referring to the fractional reserve pyramiding.
At any rate, in an effort to the dollars value, I would say that consumer preferences for holding cash, and the absence bank debt-pyramiding on the part of banks, are putting more upward pressure on the dollar than the Feds downard pressure.
I would say that Mish is correct in the short-term, there is no evidence that the banks are going to start pyramiding debt anytime soon, while Murphy is correct in the long-term, eventually the trifecta will be complete (Fed printing, bank lending, and consumer spending) and rising prices will result.
I always thought Mish and North were talking past each other. Mish acknowledges that all paper currencies become worthless, and North acknowledges that cash is king during a recession.
Published: July 13, 2009 1:26 PM
Bob Murphy
Nathan Mayer wrote:
"-you clearly didn't read any of the articles I linked to or you would drop the silly hyperinflation argument.
Let me know when the CPI actually gets above 3%..."
Assuming you mean the annualized CPI increase, the answer is, right now. From Dec 07 to May 08, the actual CPI increased by 1.7%. Since that 1.7% increase occurred over a 5-month period, the corresponding annualized rate of CPI increase has been 4.2%.
Of course, CNBC and Bernanke keep warning us that we're on the edge of a deflationary cliff, but they are referring to the BLS' "seasonally adjusted" CPI numbers. The actual numbers have gone up every month since December, and like I said, the average over the period has been an annualized increase of 4.2%.
So now what? (You wanted us to let you know when it was above 3%.)
Published: July 13, 2009 1:42 PM
Bob Murphy
Oops, of course in the post above I meant to say, from Dec 08 through May 09. I.e. over the last 5 months for which we have the numbers, raw CPI has gone up at an annualized rate of 4.2%, even taking the BLS's own figures.
Published: July 13, 2009 1:55 PM
Steve P
Zimbabwean hyperinflation might have lent more weight to the inflationist argument if it occured while public and private debt levels were high. I don't think the typical Zimbabwean carried much (if any) credit card or mortgage debt though. I think hyperinflation in the US is possible only after debt deflation has run its course.
Published: July 13, 2009 1:58 PM
Curious
$ is an asset, just like any other. When people prefer 1 asset over another, the price of that asset in terms of other assets goes up. At the moment, people prefer $, therefore the price of $ in terms of other assets goes up. This is called deflation. The government doesn't like that and counters this by printing and spending new $ (increasing demand for other assets, while also increasing the supply of $). Because its ability to print $ is unlimited, in the long run, I don't see deflation as a threat.
Published: July 13, 2009 2:09 PM
Nathan Mayer
"the corresponding annualized rate of CPI increase has been 4.2%."
yes, lets select a suitable time period and annualize it to fit our position.
2008-05-01 216.632
2008-06-01 218.815
2008-07-01 219.964
2008-08-01 219.086
2008-09-01 218.783
2008-10-01 216.573
2008-11-01 212.425
2008-12-01 210.228
2009-01-01 211.143
2009-02-01 212.193
2009-03-01 212.709
2009-04-01 213.240
2009-05-01 213.856
-deflation over the past 12 months per your data...
here is my data (notice the trend)
http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=CUUR0000SA0&output_view=pct_12mths
Published: July 13, 2009 2:35 PM
Econ Guy
Mish is clearly wrong. He needs to draw a few balance sheets and think through the money creation process. Imagine the Robinson Crusoe economy:
Crusoe initially has 100 dollars. The balance sheet consists of 100 dollars in cash on the asset side, and 100 dollars of equity on the L&E side.
Now suppose Friday wants a 10 dollar loan from Crusoe. Crusoe makes a 100% reserve loan to Friday (0 interest for simplicity). Total assets don't change. Crusoe has a 10 dollar IOU and 90 dollars cash on the asset side, and a 10 dollar demand deposit plus 90 dollars equity on the L&E side. Here's my point: Credit doesn't necessarily increase the money supply.
Now suppose there's fractional reserve banking, so Crusoe creates the 10 dollars out of thin air. Crusoe's balance sheet now expands by 10 dollars: On the asset side, the cash account is 100 dollars and the IOU account is 10 dollars. On the L&E side, demand deposits is 10 dollars and equity is 100 dollars.
Now suppose Friday's loan goes bad. The money supply does not contract when the loan goes bad. The IOU is written down to 0 on the asset side, and Crusoe's equity is written down to 90 on the L&E side. Here's my point: equity is destroyed when loans go bad. The money supply does not contract. The newly created money is still out there in the economic system. The newly created money doesn't disappear because the loan goes bad. In short, credit destruction is not deflationary.
Now suppose Crusoe responded like Bernanke. When Friday's loan goes bad, Crusoe drastically increases new money. This would be inflationary.
Published: July 13, 2009 2:36 PM
Emil Suric
People are so caught up on the Zimbabwe comparison, which of course is not very relevant. My point was simple; inflation is solely determined by the creation of money in the broader sense. If we create more money we will see inflation; similarly, if we decrease the supply of money, we will have deflation. As I have already stated, comparing Japan to the U.S is as useless as comparing Zimbabwe to the U.S; the size of the economy is not what's important. The distinction lies in the role of the USD as the world's reserve currency. And as janiceck has already mentioned, a better comparison would be between the U.S now and with Russia (in the 90s), or Rome (under Diocletian).
Published: July 13, 2009 2:46 PM
Curious
Econ guy,
100% reserves: If Crusoe has $100 and lends Friday $10, he's left with $90 cash + $10 IOU, but his equity is unchanged, no?
Let's take it step further, what happens when Friday deposits his $10 with Crusoe for safekeeping?
Now Crusoe has $110 in assets, $100 in equity and $10 in deposit liability. Same result as under fractional reserve. Where am I making a mistake?
Published: July 13, 2009 3:10 PM
Jon Robinson
It seems like people are forgetting about money demand. It doesn't matter how much banks and credit cards are allowed to lend, if people don't borrow and spend, the prices won't go up. So ya, there is inflation in the sense that there is more money (loosely defined) but not in the sense of prices increasing.
How much people are willing to borrow and spend depends on their mood and the emotional climate of society. If the general mood is such that more people want to save than spend, then prices go down, regardless of the the actions of the Fed. If people are optimistic and they want to spend and borrow, then prices go up. Mood is hard to measure and can change overnight, but most people don't pay attention to it. This is why I'm intrigued by Prechter and the Elliot Wave gang. There model takes social mood into account, but he is also familiar with Austrian economics and libertarian tenets.
The problem I have with the Austrians that are always predicting hyperinflation is that we don't always have hyperinflation - so the model is granular enough to tell us more about what we are experiencing.
Published: July 13, 2009 3:20 PM
Bob Murphy
Normally I don't jump in on these things, but this is (obviously) a really important debate and I think people are missing certain things.
First, I am not claiming that I just blew up Mish (the way I usually think I trounced Krugman). He might be right, I'm just saying that invoking "credit economy" isn't enough.
Second, people here (and to me in email) are saying, "Yeah your article showed what happened in 100% reserve gold system, but we have FRB." Of course, but it's not the money supply--supported by FRB--that is shrinking right now. In fact, M1 was up 17% during 2008. (It fell during the early years of the Great Depression.)
So if you want to say that shrinking credit is going to cause large price declines, you can't be talking about the money supply as supported by FRB, since that is up. I was trying to simplify by focusing on 100% reserves, since the FRB is a distraction here.
Third, it's possible that the credit cards act like a different type of fractional reserve banker. I.e. even though Bernanke pumped up the base so much that M1 itself rose 17% (while people were freaking out and adding to their cash holdings), maybe the analog of M1 that includes credit has been falling. That's what I was alluding to in my article when I said maybe the credit cards act as "pseudo fractional-reserve bankers." So if that's what people mean, OK please spell it out. In particular, what do I look at for the analog of M1 or M2? In other words, with a fractional reserve banking system, I understand how an injection of reserves pyramids into a 10x (or whatever) expansion of the overall money supply.
So, if we are going to be more sophisticated and now bring credit into it, what exactly happens? People securitize credit card debt and then what? They can buy cars with these derivatives, rather than using money? And what has happened to the total stock of this credit money? (I'm not being sarcastic.)
Some people seem to link the "debt deflation" with the fact that under FRB you need to expand M1 through expanding debt. Yes that's true, but what I'm saying is that Bernanke has more than offset that. To repeat, M1 increased 17% during 2008, so whatever the mirror debt is to support the FRB money stock, has also increased.
Last point: Yes Nathan prices are down year/year. But hasn't the alleged debt deflation process been in effect since December? Isn't it odd (from your point of view) that prices are rising at a brisk clip every month since December? Are you saying that that is a temporary blip that will turnaround? If so, what has been keeping it from turning around for the last five months?
Published: July 13, 2009 3:35 PM
Emil Suric
Jon Robinson,
If people save the inflated money there will still be inflation. It would increase the price of production goods relative to consumption goods, at first, and then increase the price of consumption goods relative to production goods. The money would permeate down to the lower levels/phases of production, and prices would rise. But I'm not sure if this would hold true in our current economic climate, since interest rates are already practically at zero. But this is generally what happens.
The Japanese case is very interesting. They lowered their interest rates to zero, but their savings rate is extremely high, somewhere around 25%. Their natural rate is a lot lower than ours; so simply reducing the interest rates to zero does not have the same implications everywhere. America's savings rate is somewhere around 4%.
Published: July 13, 2009 3:40 PM
Eric
Consumer prices should be getting lower every year. Why are computers, and other electronics getting cheaper all the time while their output is increasing?
Everything in the economy should be going down in price. After all, everything uses computers nowadays.
In fact, cpi is just another government propaganda device. But for the real monetary inflation, we'd have a gradual lowering of prices every year - as was seen from 1800-1913, about 30% overall (excluding the blips from wars).
As for consumer prices - well, I've never seen sunglasses so expensive in all my years. They've gone up quite a bit since I bought my last pair a few years back. The same brands, same quality, all are 50% more at least. I don't think the sunlight has changed any.
And anyone who shops the 99c and other dollar stores knows that much of what is on the shelves now has to have a price tag, since they're no longer selling for a dollar.
So, if the cpi is rising by 4% and it should have been lowered by 2% because of increased productivity from automation, this means the true price inflation is more like 6%
Published: July 13, 2009 3:44 PM
Jack
1. Japan: They are one of the world's largest creditor nations (maybe the largest). The US is the world's largest debtor. Therefore how is the comparison with Japan fair given that Japan can afford their ongoing, wasteful stimulus?
2. If banks didn't lend another penny, would that be enough to avoid inflation? Can't the gov't act as the "spender of last resort" and bid up prices through its own spending?
3. I have been wondering if this current state of affairs will be forced to end soon. Unemployment is going through the roof and voters are taking notice. Therefore it seems to me likely that the gov't will force lending (e.g. by not paying interest on reserves held at the Fed). Barring that, it will give the money directly to people. I just don't buy the idea that the gov't can't force inflation.
Published: July 13, 2009 4:14 PM
Stefan Karlsson
I have analyzed this issue at length here:
http://stefanmikarlsson.blogspot.com/2009/07/mish-bob-murphy-on-deflation-money.html
Published: July 13, 2009 4:14 PM
bedwere
So why CPI skyrocketed in the Weimar Republic or in Zimbabwe? How did the money end up in circulation? Was it used by the government to pay for debts, salaries or what?
Published: July 13, 2009 4:34 PM
Econ Guy
Curious,
When Friday redeems his demand deposit, Crusoe credits his cash account (goes from 100 to 90). The demand deposit is debited by the same amount (goes from 10 to 0). The end result is 90 cash and 10 IOU on the asset side, and 100 equity on the L&E side.
Now, you asked what happens if Friday deposits that money back with Crusoe. Crusoe debits the cash account (goes from 90 to 100) and credits the demand deposit account (goes from 0 to 10). Total assets increases, but equity doesn't change.
Bottom line: Credit destruction is not deflationary. Credit destruction destroys equity and only constitutes investment losses Credit destruction does not lead to a contraction of the money supply.
P.S. Don't get bogged down in the CPI data. Most people agree that government production processes are inefficient. Why doesn't this apply to economic statistics? Don't trust government statistics.
Check out shadowstats.com, where John Williams says the CPI is currently 6%. He calculates the CPI the same way it was computed during the Clinton administration.
Published: July 13, 2009 4:57 PM
Eric
# bedwere
#
"So why CPI skyrocketed in the Weimar Republic ....? "
One explanation was that Germany had little other choice as to how to pay reparations from WW1. So they paid it with useless new paper money - sorta how the US is going to pay it's debts.
Another explanation is that in order to pay the reparations, the US lent them the money all leading up to the crash of 29.
With all that money floating around, people realized that it didn't pay them to hold onto cash, so it was spent as quickly as possible helping to reduce the demand for the paper money, and spiraling out of control, into the final stage of hyperinflation as Mises has written.
Published: July 13, 2009 5:37 PM
Emil Suric
Eric,
"So, if the cpi is rising by 4% and it should have been lowered by 2% because of increased productivity from automation, this means the true price inflation is more like 6%"
This is wrong, production gains are included in the CPI. The CPI is bullshit, but not for that reason. The CPI just measures the price levels of the most used commodities. The core CPI doesn't even do that.
Published: July 13, 2009 5:50 PM
bedwere
So I guess the deadly combination for price skyrocketing is when central bank and government act together, one printing and the other spending.
Published: July 13, 2009 5:54 PM
ABOM
Brilliant newsom - you're exactly right. Money is being created, but it will flow to where it can get a return.
Mish and Murphy are partially right. You need to add geography and it all makes sense.
Money is being created and inflation will be the result. Japanese "inflation" caused a credit boom in the USA.
Now that the US cannot sustain a credit boom, money creation in the US will need to go somewhere else.
That will not be in the USA.
Perhaps it will be in arable land overseas, oil, China, Thai rice fields....
Published: July 13, 2009 7:32 PM
Rick
That's an accurate and concise way of putting it. I think what many people are forgetting when the Federal Reserve is injecting all this 'unused' credit / cash into the Banking System is this.
Yes, while this money is not directly being flooded into our US Economy due to the lack of lending going on, this money is still being created in the form of debt. When our creditors start calling our debt and then releasing it into the global market it will ultimately come back to bite us in the rear. Prices will be driven up on many / most consumer goods inflation in this case will be directly correlated to the printing / debting we're doing now.
Published: July 13, 2009 8:24 PM
Nick Bradley
ABOM,
Thank you for the insight -- I didn't think about the possibility of inflation exportation. But if all these new dollars do get exported, they'll need to be converted and the dollar will suffer.
Published: July 13, 2009 9:31 PM
ed smith
This is a very confusing topic for me. It seems that a number of concepts are being mixed together: What will the Fed do? What is money? What is deflating/inflating? Geography? Mood? What happened in other countries? World reserve currency? Short-term vs Long-term? Why do prices fall in one sector but rise in another? What is vs. what ought to be?
I haven't read anything that has helped me to draw a final conclusion. I feel like I'm discovering an animal in a dark room, but the animal keeps shap-shifting. What is clear to me is that alot of people think they are talking about the same animal, but they are NOT!
I would like to see more articles that simply define the problem.
Published: July 13, 2009 9:56 PM
newson
hazlitt debunks "velocity" (dr murphy's italics hint that he is of the same mind):
http://mises.org/daily/2916
Published: July 13, 2009 10:38 PM
newson
mises on "velocity":
"In analyzing the equation of exchange one assumes that one of its elements--total supply of money, volume of trade, velocity of circulation--changes, without asking how such changes occur. It is not recognized that changes in these magnitudes do not emerge in the Volkswirtschaft [political economy, or more loosely `economy'] as such, but in the individual actors' conditions, and that it is the interplay of the reactions of these actors that results in alterations of the price structure. The mathematical economists refuse to start from the various individuals' demand for and supply of money. They introduce instead the spurious notion of velocity of circulation fashioned according to the patterns of mechanics." (Human Action, p. 399)
Published: July 13, 2009 10:47 PM
Econ Guy
"Loan losses are, in effect, investment losses, and investment losses are not deflationary per se" (Saville).
The articles that Newson posted are essential for understanding this topic. Mish has argued that debt destruction has dwarfed the money supply increase, so we can expect deflation. This view is flawed: Loan losses decrease the shareholder equity account on the balance sheet. This means there is no direct decrease in the amount of money in circulation because of the loan loss.
http://safehaven.com/showarticle.cfm?id=10804
Published: July 13, 2009 11:17 PM
Emil Suric
Newson, thanks for that link! I missed that point completely.
Published: July 14, 2009 12:02 AM
alan
re: emil suric
I think the point is that the purchasing power of money depends not only on the supply of money, but both on the supply *and* demand. (as Jon pointed out previously)
i.m.o. we could see surges of inflation, but hyperinflation is almost impossible for the short-medium term outlook. The USD as the world's reserve currency has tremendously aided America in that regard.
Published: July 14, 2009 4:04 AM
Rick
re: alan
I agree, supply of money along with the combination of demand (Global Demand) will drive prices higher. As creditor nations eventually call our debt, as I mentioned in my previous post, you will see money supply grow as well as their increased demand, as they will too become wealthier and more productive nations.
Instead of lending the U.S. money so we can consume their products, wait until they start realizing they're better off keeping their own money &consuming their own goods. That will, as you said, drive demand up, and all that money that is being printed now will come home to roost.
Now, as for Hyperinflation? If the United States / FED stays stubborn with their belief that they must continue to print money to either maintain this unsustainable standard of living and/or they wish to unhonorably pay back their debt to their lenders. Facts are this. Hyperinflation will occur if those in power fail to believe, realize, or be the culprits who will have to tell this Nation, "I'm sorry but, No. We can't give you any more"
Any Politician worth his salt could tell their American Public that, but my money is on Politicians, the majority anyway, continuing this welfare state and then blame previous administrations when the dollar finally collapses.
NO ONE - wants to be the one who's hand is forced to turn the faucet off. They'd rather the pipes burst before they do that.
Published: July 14, 2009 8:36 AM
Emil Suric
Alan,
Yeah, but I was taught that the demand for money is represented by k, or 1/v. I always had a hard time understanding that, and confused T for V. My professors told me that instead of T, I should just use Q; It never really cleared up the confusion.
Published: July 14, 2009 9:53 AM
Brian Gladish
Well, PPI was up 1.8% last month - .5% core rate. So, even at the core rate we are looking at 6%+ if it keeps up.
Published: July 14, 2009 11:43 AM
mikey
High marks to Newsom for recognizing that the demand for cash holdings is now in the drivers seat.
Published: July 14, 2009 12:16 PM
Nick Bradley
I think the question here, which has not been answered, is "is credit money?" Or, more accurately, "is credit acting as money under our current monetary system?"
If you believe that credit is acting as money in our current, you would have to be on the side of the deflationists. If you don't believe credit is acting as money, then you would be in the inflation camp.
Personally, I believe that credit is acting as money -- credit is serving as a dollar-denominated medium of exchange. As a result, the total number of dollars available for economic transactions is affected.
Published: July 14, 2009 1:08 PM
flix
regarding Zimbabwe... usually in the FRB induced credit cycle the bust phase is deflationary... but this stage is brief... and, if reflationary policies are followed with the virulence that US authorities have done, followed soon by renewed inflation.
But hyperinflation?
Well look at US mortgage rates since the 1980s... every boom-bust cycle they've ended up lower and lower... and there is a real possibility that we a re close to a vanishing point, the final stages, the crack-up boom in which fiat currencies die.
How high a probability? could we have another.. or even two more mini-cycles before the collapse? Maybe. But for the first time in a generation we have to take the possibility of US hyperinflation seriously.
Bear in mind things move very fast in todays world.
Remember... once a currency collapse starts, credit destruction is not deflationary, it just adds to the panic...
Published: July 14, 2009 1:26 PM
Praxeologue
Bob, agreed credit is not money but it acts as money. Remove credit and effect on prices is comparable to removing money. Put it this way, many Austrians spent years banging on about increase in credit and related effect on various asset prices. These price rises were the Austrian evidence of inflationary policy missed whilst central bankers obsessed over narrow range of prices in CPI. Now if this credit disappears and is paid off (ironically this is a bid for the dollar which most Austrians including Schiff woefully missed) we see a consequential collapse in asset prices. This is exactly what has happened yet still we have to quibble about the technicalities of how money is different than credit. The point is surely that credit plus money effect prices. Whether you pay for a house with cash or credit affects not the vendor but surely affects the price.
Published: July 14, 2009 3:13 PM
Tim B.
Regarding the question of whether credit is money, I think a useful way to conceptualize this is by considering credit as an increase in "velocity" of the current stock of money. If I want to hold $100 as savings over a month, I can either put $100 cash under my mattress, lend out $100 for that period of time (either directly or indirectly through a bank deposit), or some combination of the two. In the first scenario, each dollar that I have gets spent zero times in that month. In the second, each dollar gets spent one or more times before it is "returned" to me by the end of the month. In this example, the money stock has not changed at all, but in the second scenario it is possible for my $100 to increase "demand" for goods by putting it into the hands of someone who wants to spend it during that time instead of me. I cannot spend the same $100 during that month (which is fine by me, or else I wouldn't have lent it in the first place). If my borrower defaults, I have lost my $100 but it still exists in someone else's pocket.
"Velocity" is of course a faulty term that nevertheless is based on a legitimate concept. I think there is a more Austrian way to describe the frequency with which each dollar is spent and its implications. At any given time, each dollar in circulation could be said to have a "time preference" proportional to the length of time between the last time it was spent and the next time it will be spent. The time preference actually exists in the mind of the owner of each dollar, but you get the point. This is all purely conceptual and could not be measured in any meaningful way.
The time preference of all of the dollars could be averaged. During periods of time when many people want to save money and few people want to spend money, the average time preference of money will be low. Each dollar will be exchanged less frequently. When more people want to spend money, the average time preference of money will be higher. Each dollar will be exchanged more frequently. Assuming a fixed supply of goods during such a period of time, prices will likely be higher during periods of high time preference.
Credit markets tend to increase the average time preference of money by moving dollars from people with low time preference (savers) to people with high time preference (spenders) for a period of time. Savers are willing to pull their cash out from under their mattress and lend it because they believe there is a high probability of being repaid by the time they will want to spend it, usually with a profit (interest). This can increase demand for goods, and thus prices, during that period of time beyond what it would have been if the loaned cash had stayed under mattresses. However, it does not increase the supply of money. If all of the loans default, the original savers will have lost their expected "future" money, but the same original amount of money remains in the economy in someone else's hands.
Note that I have not addressed the fractional reserve banking system here, which complicates but does not invalidate this concept.
Published: July 14, 2009 7:10 PM
Brian Macker
Tim,
I have credit cards and it doesn't make me buy things any faster than with cash, or check. I still buy the same number of peas, carrots, corn and potatoes at the store even though I use a credit card. I do so at the same rate. I'm certainly not eating any more. My decision to consume is indepent of a credit card.
What might matter to my speed of consumption is if I rack up a higher and higher balance on my card. But I could accomplish the same via a loan, and besides someone else has to reduce consumption in order to lend me the money. So it's a wash.
Published: July 14, 2009 9:18 PM
Paul
People who focus solely on CPI figures are missing the boat. Look all around you. Housing cost (normally the biggest expense) is still plumeting, people are losing their jobs, people are saving more and spending less - hardly inflationary signs. And lastly, look at treasury rates, probably the best barometer of inflation. Short term rates are barely above zero percent. I doubt that the folks who invest trillions in those instruments will accept those low rates if they feared inflation.
I agree with Jon Robinson. The problem with many Austrians is that they don't often take human psychology into account. There is just too much x + y = z type of analysis. Behavioral finance has been gaining acceptance for a good reason. Prechter (who has posted articles on this site) is a staunch deflationist and gives good arguments supporting it in his book "Conquer the Crash - You Can Survive and Prosper in a Deflationary Depression ". One of his arguments for deflation is the switch from people's desire to consume to their desire to conserve. No matter what government policies are instituted, they can't force people to spend.
Rothbards book "The Mystery of Banking", while a good read, missed the boat on deflation because it failed to take mass psychology into account. He, like many folks, assumes continuous inflation because of their belief that the fed can simply expand credit forever when in fact it cannot. There is a tipping point where people are over saturated with debt.
Published: July 14, 2009 11:19 PM
roy
and again US CPI beats estimates... +0.7% MoM vs. 0.6% exp.
expect inflation to stabilize over summer, jump in Q4.
There's a Tsunami coming.
Published: July 15, 2009 7:38 AM
matt
Paul
"No matter what government policies are instituted, they can't force people to spend" is clearly incorrect when a government has monopoly control over money as they do. Let me demonstrate an example of how the government could force people to spend..... instigate a policy whereby they mail every person a cheque for an exponentially increasing amount of money every week.
I think your criticism of Rothbards book by saying that it "missed the boat on deflation" isn't valid.
The Fed *can* expand the *money supply* without limit regardless of "mass psychology" or the "tipping point where people are over saturated with debt". Surely the Fed buying US Bonds directly (monetising the debt) has the effect of increasing the money supply and leading to inflation in the long run (more money, less real consumer goods)? There doesn't seem to be such a "tipping point" with regard to "saturation with debt" with the US Government - ie. they desire inflation and I agree with Robert Murphy that in the end they'll get it.
Published: July 15, 2009 10:56 AM
Matt
Sorry Paul but your statement "no matter what government policies are instituted, they can't force people to spend" is clearly incorrect when a government has monopoly control over money as they do. Let me demonstrate an example of how the government could force people to spend..... instigate a policy whereby they mail every person a cheque for an exponentially increasing amount of money every week.
I think your criticism of Rothbards book by saying that it "missed the boat on deflation" isn't valid.
The Fed *can* expand the *money supply* without limit regardless of "mass psychology" or the "tipping point where people are over saturated with debt". Surely the Fed buying US Bonds directly (monetising the debt) has the effect of increasing the money supply and leading to inflation in the long run (more money, less real consumer goods)? There doesn't seem to be such a "tipping point" with regard to "saturation with debt" with the US Government - ie. they desire inflation and I agree with Robert Murphy that in the end they'll get it.
Published: July 15, 2009 10:59 AM
Matt
Sorry Paul but your statement "no matter what government policies are instituted, they can't force people to spend" is clearly incorrect when a government has monopoly control over money as they do. Let me demonstrate an example of how the government could force people to spend..... instigate a policy whereby they mail every person a cheque for an exponentially increasing amount of money every week.
I think your criticism of Rothbards book by saying that it "missed the boat on deflation" isn't valid.
The Fed *can* expand the *money supply* without limit regardless of "mass psychology" or the "tipping point where people are over saturated with debt". Surely the Fed buying US Bonds directly (monetising the debt) has the effect of increasing the money supply and leading to inflation in the long run (more money, less real consumer goods)? There doesn't seem to be such a "tipping point" with regard to "saturation with debt" with the US Government - ie. they desire inflation and I agree with Robert Murphy that in the end they'll get it.
Published: July 15, 2009 11:01 AM
Matt
Sorry Paul but your statement "no matter what government policies are instituted, they can't force people to spend" is clearly incorrect when a government has monopoly control over money as they do. Let me demonstrate an example of how the government could force people to spend..... instigate a policy whereby they mail every person a cheque for an exponentially increasing amount of money every week.
I think your criticism of Rothbards book by saying that it "missed the boat on deflation" isn't valid.
The Fed *can* expand the *money supply* without limit regardless of "mass psychology" or the "tipping point where people are over saturated with debt". Surely the Fed buying US Bonds directly (monetising the debt) has the effect of increasing the money supply and leading to inflation in the long run (more money, less real consumer goods)? There doesn't seem to be such a "tipping point" with regard to "saturation with debt" with the US Government - ie. they desire inflation and I agree with Robert Murphy that in the end they'll get it.
Published: July 15, 2009 11:01 AM
Matt
Sorry Paul but your statement "no matter what government policies are instituted, they can't force people to spend" is clearly incorrect when a government has monopoly control over money as they do. Let me demonstrate an example of how the government could force people to spend..... instigate a policy whereby they mail every person a cheque for an exponentially increasing amount of money every week.
I think your criticism of Rothbards book by saying that it "missed the boat on deflation" isn't valid.
The Fed *can* expand the *money supply* without limit regardless of "mass psychology" or the "tipping point where people are over saturated with debt". Surely the Fed buying US Bonds directly (monetising the debt) has the effect of increasing the money supply and leading to inflation in the long run (more money, less real consumer goods)? There doesn't seem to be such a "tipping point" with regard to "saturation with debt" with the US Government - ie. they desire inflation and I agree with Robert Murphy that in the end they'll get it.
Published: July 15, 2009 11:02 AM
Tim B.
Brian,
By using your credit card rather than paying in cash, your cash savings have not been reduced during that period of time. If you wanted to keep $100 under your mattress as cash savings during that time period, your credit card allows you to do so by allocating someone else's (the credit card company's) savings to you during that time for the purpose of spending. If the credit card company decided to keep their cash savings in their vault during that period of time rather than lend it to you, you would have had to choose whether to refrain from your purchases in order to maintain your $100 savings, or to reduce your own savings during that period of time in order to make the purchases. In other words, your access to credit allows you to increase your time preference. This does affect your decision of what to consume and when to consume it.
Note that there is not much difference to the saver (credit card company) if they lend to you or not during the period of time. Whether the cash stays in their vault or they lend it to you, they expect to have the same amount of money at the end of the loan period (plus profit & interest balanced against risk of default). Their time preference is the same in either scenario, while your time preference increases if they lend to you. So a well functioning credit market tends to increase time preference throughout the economy, as compared to an economy in which everyone keeps their cash savings under their mattresses. As time preference increases, prices of scarce goods and services tend to get bid up more quickly, as people willing to spend are given additional dollars that would have otherwise been under mattresses.
A clearer example is a home loan. If a saver wanted to keep $300,000 under his mattress for 30 years rather than loan it to you, you would have to save up your own money for years rather than purchasing the home now with cash borrowed from him. His loan allows you to increase your time preference for purchasing a home. This increases the demand for housing in the present time.
Published: July 15, 2009 11:13 AM
Tim B.
Brian,
By using your credit card rather than paying in cash, your cash savings have not been reduced during that period of time. If you wanted to keep $100 under your mattress as cash savings during that time period, your credit card allows you to do so by allocating someone else's (the credit card company's) savings to you during that time for the purpose of spending. If the credit card company decided to keep their cash savings in their vault during that period of time rather than lend it to you, you would have had to choose whether to refrain from your purchases in order to maintain your $100 savings, or to reduce your own savings during that period of time in order to make the purchases. In other words, your access to credit allows you to increase your time preference. This does affect your decision of what to consume and when to consume it.
Note that there is not much difference to the saver (credit card company) if they lend to you or not during the period of time. Whether the cash stays in their vault or they lend it to you, they expect to have the same amount of money at the end of the loan period (plus profit & interest balanced against risk of default). Their time preference is the same in either scenario, while your time preference increases if they lend to you. So a well functioning credit market tends to increase time preference throughout the economy, as compared to an economy in which everyone keeps their cash savings under their mattresses. As time preference increases, prices of scarce goods and services tend to get bid up more quickly, as people willing to spend are given additional dollars that would have otherwise been under mattresses.
A clearer example is a home loan. If a saver wanted to keep $300,000 under his mattress for 30 years rather than loan it to you, you would have to save up your own money for years rather than purchasing the home now with cash borrowed from him. His loan allows you to increase your time preference for purchasing a home. This increases the demand for housing in the present time.
Published: July 15, 2009 11:15 AM
Gerry Flaychy
Robert P. Murphy wrote:
It could be possible if in practice the sum total of the credit lines that the credit cards companies give to their customers, is bigger than the sum total of the cash they hold as reserve, more or less like the goldsmiths are said to have done in the past with their own gold.If it is so, then we should call it 'fractional reserve lending', to distinguish it from the fractional reserve system of the commercial banks.
Published: July 15, 2009 5:55 PM
Steve
If the Fed was implementing a policy of +10% inflation through the expansion of the money supply, what about the US bond market? The long end of the bond market whose prices are not determined solely by the Fed would see rates sky rocket. Weimer Germany and the emerging markets who printed money without restraint never had the largest most liquid bond market in the world to contend with. I can't see how the Fed can do a run around of this. Perhaps some of the more knowledgeable hyper- inflationist proponents can enlighten me on how money could be debased at such a rapid rate while interest rates skyrocket and the value of government debt made worthless?
Published: July 17, 2009 11:46 AM
Steve
Lets say the Fed, prints money and starts buying bonds every day to prevent rates rising. First, they have tried this in 09 and as soon as they stopped, long rates rose.
So lets say they continued to print money and buy long term bonds every day and every minute, other people and institutions could just keep selling, even sell short. At that point, the only buyer left would be the Fed. How is that for a whopper, bond market short sellers would have a license to print money!
If the US government bond markets goes the way of all flesh, what would all these blood sucking politicians and government employees do? Get real jobs? I doubt it.
Also, the Wall Street/ Pentagon connection would be devastated. They would have to look for real work too. I think there will be moderate inflation (which is too much imho) over future years as there has always been, but the US Empire cannot afford a bond market collapse under any circumstance.
Published: July 17, 2009 12:11 PM
stojan
Non-credit money is the only real money. Non-credit money is the necessary additional quantity of money in circulation (dM) as percentage (k) of existing quantity of money in circulation (M). dM = kM ;
k = (supply - demand)/demand ; If non-credit money is emitted according to the cited formula, inflation cannot exist. Also, taxes are annulled for the amount of non-credit money. The consumers pay less and producers get more than today, in the order of credit money. All get! Non-credit money is the way for solving both national and world economic crisis. We must create both national and world order of non-credit money.
Published: July 18, 2009 12:00 PM
Nima
Robert Murphy is almost there. He left out the crucial piece that leads to outright deflation in his example: It is the fact that Rothbard may treat the claims to future money as if they were money, and spend all the rest of his money accordingly. Let's say the person he loaned the money to does the same thing and again loans it out to someone else. Let's say the final recipient in this chain defaults and everyone else in the chain follows. Each of the people involved will suddenly realize that their claims to future money were actually never as good as actual money in their pocket. They will start appreciating true cash again. All the necessary results of deflation will ensue.
I explained it in full detail here: http://www.economicsjunkie.com/inflation-deflation-revisited/
Published: July 20, 2009 2:32 AM
stojan nenadovic
Non-credit money is not debt than gift. No inflation, no deflation, no economic crisis. If there is non-credit money. We must create non-credit money.
Published: July 20, 2009 6:00 AM
matt
Stojan,
Any non-fiat currency such as a commodity based currency (like gold) will perform it's role in an economy suitably well. There is no need for a "necessary additional quantity of money" and/or emitting "non-credit money" according to a formula. The concept of managing money's purchasing power or trying to achieve price stability is futile and in fact counter-productive.
Any suggestion of "a national and world order" is also a really bad one in my opinion!
Published: July 21, 2009 9:13 AM
stojan nenadovic
Matt,
Formula is better than gold. Non-credit money must be both national and world money. Without inflation, without deflation, without debt, wthout economic crisis, without gold and without Federal Reserve.
Published: July 22, 2009 6:59 AM