Current Events

Re: Why the Next Crisis Will be Deflationary

Jon Irenicus — Wed, 08 Aug 2012 19:23:04 GMT

I think we're getting closer to seeing govt's collapse entirely than the opposite.

Re: Why the Next Crisis Will be Deflationary

RobinHood — Wed, 08 Aug 2012 03:45:45 GMT

Jon,

Doesn't your link seem to say that the govt has it in its power to drive the country into total economic collapse? That the correction may never come?

Re: Why the Next Crisis Will be Deflationary

Jon Irenicus — Tue, 07 Aug 2012 21:28:25 GMT

http://www.independent.org/publications/tir/article.asp?a=430

Whatever crash comes round the corner, I am hoping there will be a market correction for some commodities/stocks etc., good time to buy when it's all cheap.

Re: Why the Next Crisis Will be Deflationary

RobinHood — Tue, 07 Aug 2012 20:38:26 GMT

Because eventually the economy will recover; eventually there will be a restructuring and a liquidation of malinvestments. This must necessarily occur, even in the face of vast government intervention...

How do you explain the Great Depression then? It only ended when govt spending ended. But should a govt decide to spend forever, the economy may never recover.

What is your take on this?

Re: Why the Next Crisis Will be Deflationary

Al_Gore the Idiot — Tue, 07 Aug 2012 20:25:31 GMT

Because eventually the economy will recover; eventually there will be a restructuring and a liquidation of malinvestments. This must necessarily occur, even in the face of vast government intervention, and when it does, the risk associated with lending will fall and the demand for loanable funds will rise dramatically. This, in turn, will mean higher real interest rates.

Agreed. But the period of adjustment and deflation will likely be more painful than anybody can imagine. At that point, you'll see a real recovery.

Re: Why the Next Crisis Will be Deflationary

Esuric — Tue, 07 Aug 2012 17:54:10 GMT

"the FED cannot keep this condition going in perpetuity."

why can't it?

Because eventually the economy will recover; eventually there will be a restructuring and a liquidation of malinvestments. This must necessarily occur, even in the face of vast government intervention, and when it does, the risk associated with lending will fall and the demand for loanable funds will rise dramatically. This, in turn, will mean higher real interest rates.

The interest rate that the FED is paying the banks not to lend, therefore, will be way too low. In other words, the banks will decide to lend that money (putting it in circulation) rather than keeping it "parked at the fed" at a relatively lower rate. The FED, if it wishes to prevent that money from entering circulation, must pay a higher rate which, in turn, will lead to a more rapid acceleration in money supply growth.

In order to drain those reserves, the FED must sell the bonds that it has purchased (fed has tripled its balance sheet over the last 3 years) which would send interest rates through the roof, destroying the bond bubble it created, leading to massive capital-losses and interest rates that are way too high for most businesses, home-owners, etc. Foreign investors would dump U.S. bonds which would lead to a relative devaluation of the USD. This is, of course, something that the FED will try to avoid at all costs.

The more the FED expands the supply of base-money, the more of a shock it will create when it begins to undo this process and remove the excess reserves from the banking system. Some people have said that this isn't a problem because the FED can gradually remove the excess reserves over time so that it doesn't produce a shock. This, unfortunately, will fail because investors will anticipate this and trigger a massive sell-off from the private market (people will want to get out before they take capital-losses or in order to minimize their capital-losses). The same way that today investors are purchasing government bonds en masse in anticipation of FED purchases in the future, they will sell en masse in anticipation of FED sales.

[EDIT]

The key, again, is that that money must eventually enter circulation, either via loans, the purchasing of securities, or the banks may just increase their own remunerations tremendously.

Re: Why the Next Crisis Will be Deflationary

Autolykos — Tue, 07 Aug 2012 15:36:13 GMT

Why do you doubt that figure? Have you looked at John Williams' methodology? If so, how do you think it's flawed?

Re: Why the Next Crisis Will be Deflationary

Al_Gore the Idiot — Tue, 07 Aug 2012 15:01:50 GMT

I doubt that 10% figure. Anyway, I believe what we've experienced during the last three years was "reflation" - a rally in the prices of commodities, real estate, and stocks after getting beaten down so badly during the `08-09 crisis. Commodity and oil prices are still well below than their 2008 peak. Real estate are well below their peaks as well:

Re: Why the Next Crisis Will be Deflationary

Autolykos — Tue, 07 Aug 2012 14:20:22 GMT

Al_Gore the Idiot:
Agreed, somehow the libertarians missed the boat. Paul, Casey, and Rothbard have been predicting imminent hyperinflation for the last 30+ years, yet it hasn't materialized. I don't see any signs either. I am in Europe right now and everyday I see businesses folding and people holding back on purchases. People are worried about NOT having enough money. They are not worried about shortages. That being said, I do believe we'll see hyperinflation, but it will be after the debt bubble has collapsed.

Hyperinflation of a currency occurs when the demand for that currency collapses. As long as that doesn't happen, there won't be hyperinflation. That being said, I think persistently high inflation - what Gary North calls "mass inflation" - can trigger such a collapse in demand for a currency. According to John Williams of ShadowStats.com, actual inflation figures in the US are higher than before the Panic of 2008, at about 10% per year, but the official inflation figures are significantly lower. In any case, I'm not sure that the (presumably) actual 10%/yr. inflation being known to most people would lead them to lose faith in the US dollar. But I think they would if inflation was at 100%/yr. (i.e. prices doubling between one year and the next).

Re: Why the Next Crisis Will be Deflationary

Consumariat — Tue, 07 Aug 2012 13:34:46 GMT

So indeed if everyone just pays their debts and nobody takes out new loans, then the money supply created by FRB will shrink. But this is not happening. nobody is repaying their debts; on the contrary, everyone is getting deeper and deeper into debt.

Could you provide some evidence to back this up? From what I can find, it seems you are incorrect on this point:

As you can see, since 2008 private sector debt as a percentage of GDP has been heading downward.

Re: Why the Next Crisis Will be Deflationary

RobinHood — Tue, 07 Aug 2012 12:58:05 GMT

Japan has done just what you've described for two decades, yet no inflation.

No. See http://mises.org/daily/5170/

I agree about banks in catch-22.

Re: Why the Next Crisis Will be Deflationary

Al_Gore the Idiot — Tue, 07 Aug 2012 12:05:01 GMT

This is why I have trouble with Ron Paul's/Bob Murphy's predictions on imminent hyperinflation. Even if it's something his haters are taking his words out of context, which they are (ie "OMG he's predicted it since the 1970s but it didn't happen he's wrong lolololol"), I don't see any signs that massive hyperinflation will arise in the coming years.

Agreed, somehow the libertarians missed the boat. Paul, Casey, and Rothbard have been predicting imminent hyperinflation for the last 30+ years, yet it hasn't materialized. I don't see any signs either. I am in Europe right now and everyday I see businesses folding and people holding back on purchases. People are worried about NOT having enough money. They are not worried about shortages. That being said, I do believe we'll see hyperinflation, but it will be after the debt bubble has collapsed.

Reason #1. Interest rates are low because central banks are printing new money and buying those treasuries. New money means gobbling up resources by the printer of the money with no previous production on his part. Net result: Decrease in the pool of resources. Ineveitable byproduct sooner or later: Higher prices.

Japan has done just what you've described for two decades, yet no inflation.

Central banks are in a catch-22 situation. While they don't want deflation, they are just as fearful of inflation, because it would force interest rates up. That would be suicidal, as just a small rise in rates would bankrupt governments along with the tens of trillions in unfunded liabilities. Ironically, that situation would end up being deflationary.

Re: Why the Next Crisis Will be Deflationary

cubfan296 — Tue, 07 Aug 2012 11:54:45 GMT

Central banks are generally impotent in creating inflation in a debt-deflation environment. Banks aren't lending because they are capital impaired and they don't have qualified borrowers. If anything has been proven in this recession, it has to be that the money multiplier is total bunk. Bank reserves, in and of themselves, simply do not create inflation.

I think you can make an argument during inflationary periods that reserves act as a catalyst, hence the punchbowl effect that other central bankers have discussed. But central bank/monetary policy has major limitations, and it has nothing to do with paying .25% interest on reserves. Commercial banks are insolvent and there are not enough qualified borrowers to create the amount of loans to cause any sort of tangible inflation.

In this type of environment(debt-deflation) the only way to create inflation is through fiscal policy or unorthodox political involvement in monetary policy. Hopefully things don't get that bad, and those idiots get involved.

Inflation may come in the future, but it won't be until the balance sheets of the public and commercial banks are repaired,. Then, and only then will the excess reserves become an issue for the Fed.

Re: Why the Next Crisis Will be Deflationary

Cortes — Tue, 07 Aug 2012 05:36:14 GMT

This is why I have trouble with Ron Paul's/Bob Murphy's predictions on imminent hyperinflation. Even if it's something like his haters taking his words out of context, which they usually are (ie "OMG he's predicted it since the 1970s but it didn't happen he's wrong lolololol"), I don't see any signs that massive hyperinflation will arise in the coming years.

Re: Why the Next Crisis Will be Deflationary

HamsterHuey — Tue, 07 Aug 2012 05:26:53 GMT

"the FED cannot keep this condition going in perpetuity."

why can't it?